[Senate Hearing 108-1013]
[From the U.S. Government Publishing Office]







                                                      S. Hrg. 108-1013

                 PIPELINE SAFETY AND THE IMPACT OF THE
                   KINDER MORGAN PIPELINE ACCIDENT ON
                 SAFETY, FUEL POWER, AND CONSUMER COST

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

                             FIELD HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 9, 2003

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation




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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South 
CONRAD BURNS, Montana                    Carolina, Ranking
TRENT LOTT, Mississippi              DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          JOHN D. ROCKEFELLER IV, West 
OLYMPIA J. SNOWE, Maine                  Virginia
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              JOHN B. BREAUX, Louisiana
PETER G. FITZGERALD, Illinois        BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  RON WYDEN, Oregon
GEORGE ALLEN, Virginia               BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
                                     MARIA CANTWELL, Washington
                                     FRANK R. LAUTENBERG, New Jersey
      Jeanne Bumpus, Republican Staff Director and General Counsel
             Robert W. Chamberlin, Republican Chief Counsel
      Kevin D. Kayes, Democratic Staff Director and Chief Counsel
                Gregg Elias, Democratic General Counsel
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on October 9, 2003..................................     1
Statement of Senator McCain......................................     1

                               Witnesses

Bannigan, Thomas A., President, Kinder Morgan Products Pipelines.    41
    Prepared statement...........................................    43
Bonasso, Samuel, Acting Administrator, Research and Special 
  Programs Administration, Department of Transportation; 
  accompanied by Stacy Gerard, Associate Administrator for 
  Pipeline Safety................................................    11
    Prepared statement...........................................    13
Cowley, David, Director, Public Affairs, AAA Arizona.............    69
    Prepared statement...........................................    70
Goddard, Terry, Attorney General, State of Arizona...............    19
    Prepared statement...........................................    22
Grijalva, Hon. Raul, U.S. Representative from Arizona............     5
    Prepared statement...........................................     7
Napolitano, Janet, Governor, State of Arizona....................     3
Olcott, Jonathan, Esq., Olcott & Shore, PLLC, on behalf of the 
  Silver Creek Homeowners Association............................    84
    Prepared statement...........................................    85
Spitzer, Marc, Commissioner, Arizona Corporation Commission......    25
    Prepared statement...........................................    28
Walkup, Hon. Bob, Mayor, City of Tucson..........................    30
    Prepared statement...........................................    32

                                Appendix

Cooper, Dr. Mark, Director of Research, Consumer Federation of 
  America, prepared statement....................................    91
Response to written questions submitted by Hon. John McCain to:
    Thomas A. Bannigan...........................................   150
    Terry Goddard................................................   149
    Jonathan Olcott..............................................   169
 
                 PIPELINE SAFETY AND THE IMPACT OF THE
                   KINDER MORGAN PIPELINE ACCIDENT ON
                 SAFETY, FUEL POWER, AND CONSUMER COST

                              ----------                              


                       THURSDAY, OCTOBER 9, 2003

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                       Phoenix, AZ.
    The Committee met, pursuant to notice, at 9:01 a.m. in City 
Hall, City Council Chambers, 200 West Washington Street, 
Phoenix, Arizona, Hon. John McCain, Chairman of the Committee, 
presiding.

            OPENING STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    The Chairman. Good morning. I'd like to begin this field 
hearing of the Senate Committee on Commerce, Science, and 
Transportation. Today we meet to consider issues related to 
pipeline safety, specifically the Kinder Morgan pipeline 
rupture and its impact on public safety, fuel supply, and 
gasoline prices.
    During the past several years I've chaired a number of 
hearings on pipeline safety. Last December, after three long 
years of debate, Congress passed legislation to reauthorize and 
strengthen Federal pipeline safety programs. While pipelines 
have historically been the safest way to transport fuel, 
serious and often preventable pipeline accidents with 
devastating consequences make clear that more still needs to be 
done to make them safer.
    The law enacted last year imposed many new mandates 
intended to improve pipeline safety and required every pipeline 
operator to develop comprehensive integrity management plans, 
imposed mandatory inspections and requirements, required 
operators to help educate the public about pipeline safety, and 
established whistleblower protections for pipeline employees. 
Enacting laws, however, is not in and of itself a solution to 
pipeline safety problems. Strong, swift, and consistent 
enforcement is also essential. It's unfortunate but true that 
it often takes a crisis to focus public interest on an issue.
    While the Kinder Morgan rupture thankfully did not result 
in any deaths or personal injuries, its economic consequences, 
compounded by many factors, including an understandable public 
run on gas stations and alleged price gouging, were dramatic. 
The rupture and subsequent shutdown of the pipeline for 16 days 
affected millions of Arizona residents and businesses, some of 
whom if they could find a station with fuel and had hours to 
spare waiting in line, paid over $4 for a gallon of gasoline.
    The Kinder Morgan rupture has been a wake-up call for many, 
including Kinder Morgan. The company's pipelines that run 
through Arizona are nearly 50 years old and its line from El 
Paso supplies about one-third of Phoenix's gasoline. The 
rupture has raised serious questions about the condition of 
Kinder Morgan's pipelines, our state's dependence on that 
company to transport fuel, the adequacy of safety regulations 
and their enforcement by Federal and State agencies, and the 
extent to which these agencies do or do not work together.
    Why, for example, did it take the Office of Pipeline Safety 
nearly a year to issue a compliance action order after 
receiving information from Kinder Morgan about serious external 
corrosion on its 6-inch jet fuel pipeline? Why, despite 
frequent inspections of Kinder Morgan's pipeline by the Arizona 
Corporation Commission and the identification of various 
``items of non-compliance'' does their seem to have been little 
or no follow up in enforcement by OPS? Why is it that OPS' 
orders following the July 30 rupture imposed less stringent 
requirements on Kinder Morgan than the company ultimately took 
itself? And why did it take a rupture and loss of 10,000 
gallons of fuel for Kinder Morgan to inspect and replace the 
pipeline instead of having taken action to identify the risks 
associated with this aging pipeline before an accident 
occurred?
    The questions that have arisen from this incident suggest 
that delayed, lax, or worse, non-existent oversight and 
enforcement by OPS and a company that reacts to safety problems 
after they occur instead of taking actions to prevent them. I 
hope that at today's hearings we will get answers to these 
questions that either correct this impression of real problems 
with both the private and public sectors, or answers that 
inform us about what more needs to be done to ensure that an 
accident of this sort and consequence does not happen again.
    Much of our Nation's energy infrastructure was built years 
ago in remote areas away from our population centers. The fact 
the Kinder Morgan rupture occurred in a housing development 
provides a good example of how the population centers have 
shifted, and highlights the problem of encroachment on pipeline 
rights of way. Clearly, we must ensure that local planning and 
zoning laws take into account public safety and the needs for 
such rights of way.
    I look forward to hearing from our witnesses, getting their 
accounts of what went wrong and who was responsible, and 
receiving their recommendations on what more can be done to 
further strengthen pipeline safety and employment. Our first 
witnesses today, we're glad to welcome Janet Napolitano, 
Governor of the State of Arizona, and the Honorable Raul 
Grijalva, who is a Congressman from Arizona. Would you please 
both come forward? And we will begin with Governor Napolitano. 
Welcome, Governor. Welcome, Congressman Grijalva.

           STATEMENT OF JANET NAPOLITANO, GOVERNOR, 
                        STATE OF ARIZONA

    Governor Napolitano. Thank you, Senator, and thank you for 
inviting me to testify today about pipeline safety and 
reliability. I commend the Committee for its attention to this 
important issue, and in particular I want to thank you, 
Senator, for your leadership, including your role in the recent 
passage of the Pipeline Safety Act for 2002.
    Arizona has learned a lot about this issue since July 30 
when the Kinder Morgan pipeline from Tucson to Phoenix 
ruptured. That rupture would splash over 10,000 gallons of 
gasoline on five newly constructed homes, exposed not only our 
state's vulnerability arising from its reliance on just two 
pipelines to supply gasoline for 5 million people, but also 
serious weaknesses in the Federal Government's investigations 
and enforcement of pipeline safety. My testimony today will 
focus on the latter issue.
    In my investigations to date into the cause of the rupture 
and its effects of Arizona, I have been perhaps most disturbed 
by the recent discovery that State regulators acting on behalf 
of the Federal Office of Pipeline Safety discovered and 
reported numerous instances of general corrosion problems on 
Kinder Morgan's east line, but OPS took no effective action to 
address it.
    As you may know, OPS contracts with certain State bodies, 
including the Arizona Corporation Commission, for inspections 
of the portions of interstate pipelines that run within a 
particular state. In the case of the Kinder Morgan east line, 
the Corporation Commission had inspected it no fewer than six 
times between 1996 and 2003. In every one of those inspections 
the Corporation Commission reported concerns about general 
corrosion along the line, including specific concerns about 
Kinder Morgan's failure to take adequate preventative 
maintenance measures.
    In one October 2001 violation report, the inspector warned 
that ``this pipeline has been in service for 50 years and has 
no coating problems.'' The inspector went on to say that lack 
of maintenance could ultimately result in ``pipeline failure, 
resulting in a loss of product, possible injury, loss of life, 
and severe damage to property and the environment.''
    Unfortunately, although OPS contracts out its investigative 
authority, it gives the Corporation Commission virtually no 
enforcement authority, and as a result, despite its findings 
and recommendations for compliance and corrective action, the 
Corporation Commission was powerless to effectively correct the 
situation.
    The problem was exacerbated by the fact that OPS itself 
brought only two enforcement actions in response to the 
Corporation Commission's reports and never sought a penalty of 
greater than $40,000 against the multi-million dollar carrier. 
This, coupled with the fact that Kinder Morgan had not 
inspected the portion of the line where the rupture occurred 
since 1996, despite the pipeline's age, contributed to the 
pipeline's failure.
    Kinder Morgan asserts that the July 30 rupture was caused 
by stress corrosion cracking as opposed to general corrosion 
reported each year by the Corporation Commission. Nevertheless, 
I can't help but think that at a minimum more aggressive 
enforcement by OPS would have fostered a more vigilant pipeline 
safety assessment by Kinder Morgan that could have averted the 
July 30 rupture.
    We must have more effective pipeline safety. If states are 
to be given investigative authority over the portions of 
interstate lines that cross their jurisdiction, they must also 
be given both the authority and resources necessary to enforce 
their findings and recommendations. In Arizona, we are willing 
to take the responsibility of enforcing pipeline safety, but we 
need the Federal funding and authority to do so effectively.
    I urge the Committee to reform the Federal pipeline safety 
laws in a manner that delegates both investigative and 
enforcement authority to states that are willing to undertake 
it and fully funds their ability to do so effectively. While 
we're on the subject of reform, I offer another thought. Does 
it still make sense to house the Office of Pipeline Safety 
within the Department of Transportation? Today critical energy 
infrastructure is a homeland security concern. Disruptions like 
the one we had here can bring our economy to a standstill, but 
more important, given the volume of fuel that flows through 
these lines, such ruptures are probably a significant risk to 
the safety of our citizens and environment. At a minimum, State 
and Federal Homeland Security officials must be much more 
knowledgeable about pipeline routes, security procedures, and 
threats. Operators of these lines should know how to reach 
relevant Homeland Security personnel 24 hours a day and should 
be required to report all ruptures and known threats 
immediately.
    By way of example, on August 8, 2003, when Kinder Morgan 
decided to shut down the east line completely, it notified only 
our State's Corporation Commission and the Department of 
Weights and Measures. They did not notify the Governor nor the 
Office of Homeland Security. I have since given Kinder Morgan 
numbers where they can reach my staff and our Director of 
Homeland Security 7 days a week on a 24-hour basis. Ultimately, 
I believe Congress should seriously consider moving OPS to the 
Federal Department of Homeland Security so that pipeline safety 
issues can be assessed at the outset from a public safety 
perspective.
    Finally, I'd like to address some actions that Arizona is 
taking on this issue. In the aftermath of the Kinder Morgan 
rupture, I have appointed a task force led by former Tosco CEO 
Robert Lavinia to review the July 30 rupture, recommend 
measures to prevent such occurrences in the future, and address 
Arizona's vulnerability to similar supply disruptions. I look 
forward to receiving the Lavinia Group's report and I am 
pleased to make it available to this Committee upon its 
completion.
    Arizona was lucky no one was injured in the July 30 
rupture. Nonetheless, the rupture justifiably alarmed a number 
of homeowners who live near the pipeline or send their kids to 
schools on the pipeline's right of way. In several instances, 
these homeowners never knew their property abutted the 
pipeline. For this reason, I have asked our Real Estate 
Commission to investigate whether developers of property near 
the pipeline had given adequate notice to purchasers of the 
location of the pipeline.
    Given the growth of communities, as you noted, through the 
country since the date many active pipelines were first 
installed, I would urge this committee to take similar reviews 
of the requirements for and enforcement of notification 
requirements to owners and new buyers of property located near 
pipelines.
    Last, the Arizona Department of Environmental Quality has 
issued a notice of violation to Kinder Morgan arising out of 
the rupture, including the proposed assessment of the maximum 
civil environmental penalty allowed by Arizona law. The 
Department's investigation of the July 30 rupture is continuing 
and will proceed until the Department is satisfied with Kinder 
Morgan that Kinder Morgan is in full compliance with the 
State's environmental laws.
    Again, we have learned a lot about this subject since July 
30. I promise the people of Arizona that I will do all I can to 
help prevent a repeat of what happened here this summer. I'm 
grateful the Committee is taking up this issue and for the 
opportunity to share with you my ideas for what the Federal 
Government can do to improve pipeline safety. Thank you.
    The Chairman. Thank you very much, Governor. Congressman 
Grijalva, welcome.

               STATEMENT OF HON. RAUL GRIJALVA, 
                U.S. REPRESENTATIVE FROM ARIZONA

    Mr. Grijalva. Thank you, sir. Thank you, Senator McCain, 
and the Committee for holding this very important hearing and 
for the opportunity to provide some testimony to your 
Committee. I think this hearing on Kinder Morgan is very 
important.
    The gasoline rupture occurred in Tucson on July 30, and one 
of the things I'd like to do, Senator, is respectfully request 
the Committee hold a hearing in Tucson where the pipeline 
rupture occurred as soon as possible. While Phoenix-area 
residents were inconvenienced, potentially gouged in terms of 
the price of gas and the economic impact statewide, the 
constituents that I represent in that area were subjected to 
serious environmental health and safety dangers as a result of 
the pipeline rupture, and now we face we must endure the 
reconstruction and/or realignment of the pipeline.
    And as you stated and as the Governor eloquently stated, I 
also am extremely concerned with the lack of diligent oversight 
by Federal agencies who are tasked with the monitoring, the 
safety, and security of gasoline pipelines and all other energy 
infrastructure in this country. These responsible agencies with 
jurisdiction in this matter quite frankly have failed to ensure 
the safety of citizens in the area, along with security of 
gasoline supply.
    Neither the public nor elected officials knew the extent of 
safety risks associated with the pipeline. Our preliminary 
information indicates the pipeline may have failed safety 
inspections as far back as 1995 and then on. However, this 
information was not made public nor made available to elected 
officials or emergency personnel. Thankfully, no one was 
injured during the rupture in July. However, many residents had 
their lives serious disrupted. The consequences of this event 
are still ripping through our community and will no doubt be an 
issue of great concern for a long time to come.
    Now that the current immediate danger has passed, plans for 
reconstruction or realignment of the pipeline are beginning to 
formulate. Recently the Tucson City Council was presented with 
two options for the pipeline: allowing Kinder Morgan to repair 
the line in its existing locale, or instead realign the 
pipeline to another route. The Tucson city council voted to 
allow reconstruction of the pipeline in the existing right of 
way with slight modifications. While under some circumstances 
this option may have seemed like the logical choice, 
reconstruction along the existing right of way is far from a 
positive solution to the problem.
    The existing pipeline passes close to parks, residences, 
hospitals, schools, and potentially endangering the safety of 
citizens. All told, it runs through 60 residential 
subdivisions, affecting 782 individual residences, eight parks, 
four schools, and seven public facilities. In addition, the 
right-of-way passes through the area of Tumamoc Hill. Tumamoc 
Hill is a highly valued and extremely important research area 
for the University of Arizona, who has conducted research on 
the hill for over 100 years.
    Using the existing right of way will perpetuate a dangerous 
situation for area residents and visitors. It will cause new 
disturbance on Tumamoc Hill because the old pipeline will have 
to be abandoned and a new trench dug to accommodate a larger 
pipe. The alternative for alignment, which was presented to the 
Tucson city council is unfortunately not much of an improvement 
to the existing route. The realignment proposal would also put 
the gasoline pipeline in close proximity to schools, homes, and 
public facilities.
    Kinder Morgan and the agencies involved have indicated that 
only two options are available for the location of the 
pipeline, but I do not believe adequate effort have been 
expended to determine a safe and environmentally responsible 
location for the pipeline. The community is now faced with a 
no-win situation, because both options have the adverse impacts 
on the community and on the natural resources of the area. 
Because neither of the proposed routes is a tenable solution, 
the community must be given a broader range of options. Kinder 
Morgan and the agencies involved in this issue should look 
again and look more closely this time to determine the safest 
location for both human health and the environment.
    Senator, I would strongly urge the agencies to initiate a 
broad public process that would take the community's interests 
and concerns into account and would closely examine the 
possible public health and environmental impacts on the 
pipeline's reconstruction wherever it occurs. A variety of 
alternatives should be proposed that would address the health 
and safety and environmental concerns associated with this 
project.
    It is a difficult issue and I have tried to narrow my 
testimony, sir, on the after-the-fact situation. As you stated 
in your opening comments, it's only in a crisis that makes 
people focus on the situation, and now I've narrowed the focus 
in this testimony to look at the realignment and/or relocation 
of this pipeline. It is of great concern to the people in 
Tucson, those both directly affected by the present alignment 
or any future alignments.
    I want to thank you for holding this hearing. It's very 
important to the people of the state and certainly to the 
people of my district, and I offer the support and assistance 
of myself and my staff, who is available to work with your 
office and all affected and interested parties. And again, my 
thanks for allowing me the time to present this testimony, 
Senator. Thank you.
    [The prepared statement of Hon. Grijalva follows:]

             Prepared Statement of Hon. Raul M. Grijalva, 
                    U.S. Representative from Arizona
    Thank you for holding a hearing on the Kinder Morgan gasoline 
pipeline rupture that occurred in Tucson on July 30. Thank you for 
allowing me to speak at the hearing and I submit this written statement 
on the record.
    I request that the Senate Committee on Commerce, Science, and 
Transportation hold a hearing in Tucson, where the pipeline rupture 
occurred, as soon as possible. While Phoenix residents were 
inconvenienced by long lines at gas stations, my constituents have been 
subjected to serious environmental, health and safety dangers as a 
result of the pipeline rupture, and now must endure reconstruction and/
or realignment.
    I am extremely concerned with the lack of diligent oversight by 
Federal agencies who are tasked with monitoring safety and security of 
gasoline pipelines and other energy infrastructure in this country. I 
admonish all responsible agencies with jurisdiction in this matter who 
should have been examining the line to ensure the safety of the 
citizens of the area, along with the security of the gasoline supply.
    Neither the public nor elected officials knew the extent of the 
safety risks associated with the pipeline. Our preliminary information 
indicates that the pipeline may have failed safety inspections from 
1995 on, however, this information was not made public, nor made 
available to elected officials or emergency personnel.
    Thankfully, no one was injured during the rupture in July; however, 
many residents had their lives seriously disrupted. The consequences of 
this event are still rippling through our community, and will no doubt 
be an issue of grave concern for a long time to come.
    Now that the current immediate danger has passed, plans for 
reconstruction or realignment of the pipeline are beginning to 
formulate. Recently, the Tucson City Council was presented with two 
options for the pipeline: allowing Kinder Morgan to repair the line in 
its existing locale, or instead realign the pipeline to another route. 
The Tucson City Council voted to allow reconstruction of the pipeline 
in the existing right of way with slight modifications. While under 
some circumstances, this option may have seemed like a logical choice, 
the reconstruction along the existing right of way is far from a 
positive solution to the problem.
    The existing pipeline route passes close to parks, residences, 
hospitals and schools, endangering the safety of citizens. All told it 
runs through 60 residential subdivisions, affecting 782 individual 
residences, 8 parks, 4 schools, and 7 public buildings. In addition, 
the right of way passes through the area known as Tumamoc Hill. Tumamoc 
Hill is a highly valued and extremely important research area for the 
University of Arizona, who has conducted research on the hill for over 
a hundred years.
    Using the existing right of way will perpetuate a dangerous 
situation for area residents and visitors, and will cause new 
disturbance on Tumamoc Hill because the old pipeline will have to be 
abandoned and a new trench dug to accommodate a larger pipe.
    The alternative for alignment which was presented to the Tucson 
City Council is, unfortunately, not much of an improvement to the 
existing route. The realignment proposal would also put the gasoline 
pipeline in close proximity to schools, homes and public facilities.
    Kinder Morgan and the agencies involved have indicated that only 
these two options are available for location of the pipeline, but I do 
not believe adequate effort has been expended to determine a safe and 
environmentally responsible location for the pipeline. The community is 
now faced with a no-win situation because both options will have the 
adverse impacts on the community and on the natural resources of the 
area.
    Because neither of the two proposed routes is a tenable solution, 
the community must be given a broader range of options. Kinder Morgan 
and the agencies involved in this issue should look again, and look 
more closely this time, to determine the safest location for both human 
health and the environment.
    I strongly urge the agencies to initiate a broad public process 
that would take the community's interests and concerns into account, 
and would closely examine the possible public health and environmental 
impacts of the pipeline's reconstruction, wherever this occurs. A 
variety of alternatives should be proposed that would address the 
health, safety and environmental concerns associated with this project.
    Thank you for holding this hearing. I offer the support and 
assistance of myself and my staff who are available to work with the 
Senator's office in order to address this complex issue.
                                 ______
                                 
                              Congress of the United States
                                   House of Representatives
                                    Washington, DC, October 8, 2003

Stacy Gerard,
Administrator,
Office of Pipeline Safety,
Department of Transportation,
Washington, DC.

Admiral James M. Loy,
Administrator,
Transportation Security Administration,
Department of Homeland Security,
Arlington, VA.

RE: Kinder Morgan Pipeline Rupture

Dear Ms. Gerard and Admiral Loy:

    I am writing to you with regard to the Kinder Morgan gasoline 
pipeline rupture that took place in Tucson, Arizona on July 30, 2003. 
This disaster is of extremely grave concern to me and to the 
constituents I represent in Arizona.
    The pipeline rupture subjected my constituents to serious 
environmental, health and safety risks. Thankfully, no one was injured 
in the rupture. Now that the immediate danger of the rupture has 
passed, however, residents will have to endure the impacts of the 
pipeline's reconstruction and potential realignment.
    Not only is this situation a danger to the health and safety of our 
citizens, it is also a tremendous risk to our country's security. When 
lines are not appropriately monitored for leaks, breakages, or 
weaknesses, it puts our citizens' lives at risk from potential 
accidents and from possible sabotage.
    Neither the public nor elected officials knew the extent of the 
safety risks associated with the pipeline. Our preliminary information 
indicates that the pipeline may have failed safety inspections from 
1995 on, however, this information was not made public, nor made 
available to elected officials or emergency personnel.
    I am dismayed that your agencies, who have jurisdiction over this 
matter, did not ensure that monitoring was taking place, and that you 
did not act upon reports of unsafe conditions on the pipeline. 
Monitoring and reporting of any problems were absolutely crucial in 
order to ensure the safety of the residents who live along the 
pipeline's route, and the security of the pipeline itself. I believe 
this incident could have been prevented had your agencies been more 
diligent in their duties.
    The two options that have been presented to the citizens and City 
Council of Tucson for reconstruction and/or realignment of the pipeline 
route are clearly inadequate. The existing route perpetuates a 
dangerous situation for area residents and will cause new disturbance 
on Tumamoc Hill, a unique and highly valued research area ofthe 
University of Arizona, because the old pipeline will have to be 
abandoned and a new trench dug to accommodate a larger pipe.
    The alternative for alignment which was presented to, and 
subsequently rejected by, the Tucson City Council is, unfortunately, 
not much of an improvement to the existing route. The realignment 
proposal would also put the pipeline in close proximity to schools, 
homes and public facilities.
    Kinder Morgan and your agencies have indicated that only these two 
options are available for location of the pipeline, but I do not 
believe adequate effort has been expended to determine a safe and 
environmentally responsible location for the pipeline. The community is 
now faced with a no-win situation because both options will have the 
adverse impacts on the community and on the natural resources of the 
area.
    Because neither of the two proposed routes is a tenable solution, 
the community must be given a broader range of options. Your agencies 
have a responsibility to look again, and look more closely this time, 
to determine the safest location for both human health and the 
environment.
    Your agencies must initiate a broad public process that would take 
the community's interests and concerns into account, and would closely 
examine the possible public health and environmental impacts of the 
pipeline's reconstruction, wherever this occurs. A variety of 
alternatives should be proposed that would address the health, safety 
and environmental concerns associated with this project.
    I look forward to working with you and your designees on finding 
common ground on this issue.
            Sincerely,
                                          Raul M. Grijalva,
                                                Member of Congress.
    cc: Norman Y. Mineta, Secretary of Transportation
    Tom Ridge, Secretary of Homeland Security

    The Chairman. Thank you very much, Congressman Grijalva, 
and we appreciate your input on this issue of location of the 
pipelines, and maybe we could discuss that just for a second.
    Governor, thank you for your recommendation of the shifting 
of the responsibility from OPS to Homeland Security. I think 
it's probably a very worthwhile consideration, not to mention 
that many view these pipelines as vulnerable to attacks from 
terrorists, and so perhaps it's something that should be given 
serious consideration and we'd suggest it.
    Could we discuss just for a minute, Governor and 
Congressman, this issue of the location of pipelines? They've 
got to go somewhere, right? They have to go somewhere. Where 
should they go? Through the national forests, through the 
wilderness areas? It seems to me we've got a classic nimbi 
problem here, and it also seems to me then that the people who 
would probably make those decisions or have a significant voice 
in those decisions are the people who are directly responsible 
in many respects, i.e., mayor and city council, county 
supervisors. What's your thoughts on that, Governor?
    Governor Napolitano. Senator McCain, two points. One is I 
agree with you this should be a matter within local control in 
terms of planning and zoning and also disclosure to property 
owners. But I think that underlying your question is the point 
that the pipelines have to go somewhere. They cross vast 
expanses of territory.
    Given particularly the Western States and the growth of 
population, it is hard to conceive how they can get gasoline to 
where it needs to go without going near a population center and 
so forth, which it why it is so that then says why it is so 
important that there be very strict maintenance schedules, that 
there be very aggressive oversight, that there be back-up plans 
should there be a rupture, that there be availability to keep 
the community on notice at times when an accident does occur.
    In other words, what I'm saying, Senator, is if the 
pipeline is to go where it will go, it will go near population 
centers, it will go near schools. If it is, that just increases 
the importance of effective oversight.
    Mr. Grijalva. Sir, I would associate myself with the 
comments that the Governor just made. I think the issue is 
appropriately a local control issue and elected representatives 
of a community bear that responsibility and they should retain 
that responsibility. But in terms of the local issue, the 
request for all involved parties to fully involve the community 
in the disclosure and the discussion I think would help take 
and alleviate much of the concern and much of the doubt that 
exists right now, in the sense that everybody is getting the 
information and everybody feels that they're participating in 
that information.
    Down the road there are some tough choices, and those 
choices are going to be made. Someone will be affected and 
impacted negatively, but the process is of great concern to me, 
and that is the more you leave people to advise their own 
conclusions as to what going on without having the direct input 
into it, the more this issue becomes divisive, and as it is now 
a great concern to the whole community. Maintenance, oversight, 
critical issues, and I would concur with the Governor that 
those have to be part of any long-term reform to this whole 
issue.
    The Chairman. Thank you very much. Before you go, Governor, 
I know we're going to hear more about this issue from the 
Attorney General. Do you want to comment on the gas price 
issue? And in those comments, do you think we ought to change 
the definition of price gouging?
    Governor Napolitano. I think you have to have an effective 
definition of price gouging, and I draw a contrast between what 
happened after 9/11 and what happened after the Kinder Morgan 
shut-down. After 9/11, I was the Attorney General and there 
were reports of gouging in other States, and we received 
complaints in the Attorney General's office and we sent 
investigators out, and in fact we didn't find any gouging going 
on in Arizona, in contrast to what happened this summer. There 
definitely was gouging. Even at the most intense point of the 
crisis there was no economic justification for charging $3.50 
and $4 a gallon for gasoline or requiring people in one 
instance, a car wash, gasoline station owner was requiring 
people to buy a $10 car wash in order to fill their tank when 
it was raining, and taking advantage that the market was out of 
whack.
    The Chairman. Doesn't that fit the definition then of 
gouging?
    Governor Napolitano. Well, Arizona does not have a gouging 
statute.
    The Chairman. But, apparently it doesn't fit the FTC's 
definition either because there has to be some proof of 
collusion. Is that----
    Governor Napolitano. That's the way I understand it, 
Senator, and I think in Arizona, the Attorney General and I are 
working so we would have a state gouging law, which would be 
triggered by the Governor having to make certain findings, but 
then would give you the opportunity to go after those who are 
taking unfair advantage of a natural shortage of supply.
    The Chairman. Well, again, I thank you. It just seems to me 
when there was, the instance you talked about that, I don't 
know why you would have to prove collusion. It just seems to me 
if it's a unreasonable pricing and unreasonable requirement 
such as getting a car wash that that in itself should be 
grounds for some kind of violation, but apparently that's not 
the case. And I'm sure we'll hear more from the Attorney 
General on this issue, but perhaps there needs to be some kind 
of change at the Federal level as well as at the State level.
    Governor Napolitano. We'll be happy to share with you our 
draft legislation.
    The Chairman. Thank you very much. I thank you both for 
coming today and I appreciate you being here.
    Mr. Grijalva. Thank you.
    Governor Napolitano. Thank you, Senator.
    The Chairman. Our next panel is Mr. Samuel Bonasso, who is 
the Acting Administrator, Research and Special Programs 
Administration of the Department of Transportation. He'll be 
accompanied by Ms. Stacy Gerard, who is the Associate 
Administrator for pipeline safety; the Honorable Terry Goddard, 
who is the Attorney General of the State of Arizona; Honorable 
Marc Spitzer, the Chairman of the Arizona Corporation 
Commission; and the Honorable Bob Walkup, the Mayor of the City 
of Tucson. I welcome you here and may I be corrected on the 
pronunciation of your name, sir?
    Mr. Bonasso. You have pronounced it just right, sir.
    The Chairman. Thank you. Please sit down and please 
proceed. Welcome, Mr. Bonasso.

STATEMENT OF SAMUEL BONASSO, ACTING ADMINISTRATOR, RESEARCH AND 
               SPECIAL PROGRAMS ADMINISTRATION, 
         DEPARTMENT OF TRANSPORTATION; ACCOMPANIED BY 
   STACY GERARD, ASSOCIATE ADMINISTRATOR FOR PIPELINE SAFETY

    Mr. Bonasso. Thank you, Mr. Chairman. I appreciate this 
opportunity to inform you of our progress to improve the safety 
of pipelines, to discuss our activities in connection with the 
Kinder Morgan accident of July 30, and to review some of our 
progress and plans for improving safety in the future.
    Much of the public discussion since the Tucson incident 
reflects confusion over: (A) what caused the pipeline failure, 
and (B) what might have prevented it from happening. I hope 
that this hearing will bring clarity to these questions and 
other concerns that the public has.
    Corrosion of the metal itself was not the cause of the 
pipeline failure in Tucson. This pipeline failure resulted from 
a cracking phenomenon that rarely occurs in liquid pipelines. 
Regretfully, science does not know much about this phenomenon, 
including how to detect it very well. The testimony I have 
submitted for the record covers this in detail and I am 
prepared to expand.
    The Nation's pipelines are essential to our way of life. 
The 2.3 million miles of natural gas and hazardous liquid 
pipelines carry near two-thirds of the energy consumed by our 
Nation. Pipelines are the safest way to support these enormous 
quantities of natural gas and hazardous liquids. The increased 
need for pipeline safety is rooted in demographic changes 
taking place in our country. Suburban development in previously 
rural areas has placed pipelines closer to people. This 
increases the risk that pipeline accidents, although 
infrequent, will have tragic consequences. The Tucson pipeline 
incident demonstrates what can happen when communities encroach 
on pipelines and a failure occurs. Expansion and development 
also means more construction activity, which is the leading 
cause of pipeline accidents.
    Pipeline safety is more than inspecting pipelines. It 
involves regulation, technology, information, State government 
partnerships, damage prevention, communication, and public 
education. We have strengthened all of these elements in just a 
few years thank to the attention of the Congress to pipeline 
safety, specifically by your Committee and the Administration.
    We are growing. Ten years ago, the Office of Pipeline 
Safety consisted of 70 employees with 28 inspectors. Today we 
are 143 employees and 85 inspectors. Our partnerships with the 
States, such as our agreement with the Arizona Corporation 
Commission, provide several hundred more inspectors. The growth 
of our program has enabled the Office of Pipeline Safety to 
clean up most of the 12-year backlog of outstanding mandates 
and recommendations from Congress, the National Transportation 
Safety Board, the DOT Inspector General, and the General 
Accounting Office.
    At the same time, the Pipeline Safety Improvement Act of 
2002, enacted just 10 months ago, has given us many new 
mandates. RSPA has aggressively responded and we are also 
addressing these new mandates. In addition, since 9/11, we have 
devoted considerable attention to national pipeline security. 
Mr. Chairman, following your lead with legislation 3 years ago, 
we took a new, more comprehensive, informed approach to 
identifying and managing risks that pipeline operators face and 
pipelines pose to our communities.
    Today we know more about pipelines, the worlds they 
traverse, and the consequences of a pipeline failure. We 
finalized 14 regulations and incorporated 30 international 
consensus standards into our safety regulations. We have 
awarded almost $8 million for three dozen research projects to 
improve pipeline safety. We have adopted a tough but fair 
approach to enforcement, making heavier use of large fines, 
while guiding pipeline operators to meet higher safety 
standards.
    Our inspections are much more rigorous. In 1996, a standard 
pipeline inspection took an inspector up to 3 days to perform. 
Today we spend 20 times that amount on a comprehensive 
inspection. We have strengthened our partnership with State 
pipelines--State safety agencies such as the Arizona 
Corporation Commission through increased training, information 
technology communications, and policy collaboration.
    We are achieving results. Comparing the last 5 years to the 
previous 5, hazardous liquid incidents have decreased by 28 
percent. Two years ago the volume of oil spilled decreased by 
33 percent from a 10-year average. Excavation accidents have 
decreased over the past 10 years by 59 percent. This is largely 
the result of work with our State partners and the more than 
900 members of the damage prevention organization we initiated 
called the Common Ground Alliance.
    Finally, helping communities to know how they can live 
safely with pipelines is a very important goal. We are moving 
on a number of fronts. Working with others, we created a new 
standard for public education to ensure community officials and 
citizens have essential safety information they need to make 
informed decisions. We have commissioned a study by the 
Transportation Research Board of the National Academy of 
Sciences to study issues of encroachment and maintenance on 
pipeline rights of way. We have enlisted the help of the 
Nation's fire marshals to bring information and guidance to 
communities to build understanding of pipeline safety and first 
responder needs.
    Similarly, to foster safety and environmental protection on 
tribal lands, we're working toward a partnership with the 
Council of Energy Resource Tribes. RSPA and the people of the 
Office of Pipeline Safety have the strongest possible 
commitment to improving safety, reliability, and public 
confidence in our Nation's pipeline infrastructure. Thank you, 
sir.
    [The prepared statement of Mr. Bonasso follows:]

 Prepared Statement of Samuel G. Bonasso, P.E., Acting Administrator, 
   Research and Special Programs Administration, U.S. Department of 
                             Transportation
    I would like to thank Chairman John McCain for the invitation to 
speak to the Committee today.
    My name is Samuel Bonasso and I am Acting Administrator of the 
Research and Special Programs Administration (RSPA), of the U.S. 
Department of Transportation. Accompanying me today is Stacey Gerard, 
Associate Administrator for the Office of Pipeline Safety (OPS).
    RSPA's Office of Pipeline Safety has been engaged in the past three 
years to rebuild the Nation's pipeline safety program. Today, I will 
speak to the considerable challenges to this effort, many of which we 
have surmounted, others which remain ahead. I will also address our 
oversight of the pipelines of Kinder Morgan Energy Partners, LLP, 
operators of the pipeline that failed in Tucson. Finally, I will 
discuss the pipeline failure that threatened a community in Tucson and 
led to gasoline shortages in the Phoenix area.
    The nation's pipelines are essential to our economy and our way of 
life and are a significant part of our Nation's critical 
infrastructure. The 2.3 million miles of natural gas and hazardous 
liquid pipelines carry two-thirds of the energy consumed by our Nation. 
As the people of Phoenix must understand, you cannot replace even an 
eight-inch pipeline with gasoline tank trucks. Moreover, there is no 
way to transport the enormous quantities of natural gas and hazardous 
liquids that is safer than pipelines.
    We are working aggressively to make pipelines safer, to attain a 
fundamental goal: that is, to build public confidence in the safety of 
the Nation's pipelines.
    We are here today because that public confidence was shaken in 
Tucson in the early afternoon of July 30. As you know, the pipeline 
that ruptured sprayed thousands of gallons of gasoline on homes under 
construction--some only 40 feet away. Fortunately, no one died; no one 
was injured. Certainly lives were disrupted and property was badly 
damaged, and we understand the fear that this incident has left in its 
wake.
    As many will learn today, pipeline safety is a very complex, 
technical matter. Much of the discussion we have heard in the weeks 
since the Tucson incident reflects confusion over what caused the 
failure of the pipeline and what might have been done differently to 
have prevented it from happening. I hope that the information presented 
by all witnesses today will bring clarity to the questions and concerns 
of the public.
    Safety is the top priority of the U.S. Department of 
Transportation. Secretary Norman Mineta has given us a simple but 
profoundly important goal: to improve safety and save lives.
    Safety is at the core of RSPA's mission. We are the Federal agency 
that regulates the movement of hazardous materials by all modes of 
transportation, including pipelines. RSPA also provides emergency 
support for transportation during emergencies. Also, across all modes 
of transportation, RSPA develops transportation technology and provides 
training for transportation professionals.
    To be clear, our pipeline mission is safety it does not encompass 
the regulation of energy supplies delivered by pipelines. While we 
consider the impacts safety activities can have on the supplies of 
natural gas or liquids delivered by pipeline, our sole focus is safety. 
That said, there is a direct correlation between pipeline safety and 
pipeline reliability; pipelines that fail do not deliver fuel.
    Pipeline safety is more than inspecting pipelines: it involves 
regulation, technology, information, state government partnerships, 
damage prevention, communication, and public education. All of these 
elements have been strengthened in only a few years, thanks to the 
attention that the Congress, specifically your committee and the 
Administration have devoted to improving pipeline safety. We have 
significantly improved our overall ability to oversee and enforce 
pipeline safety.
    The relatively new emphasis on pipeline safety has emerged from the 
confluence of a number of trends. Transmission pipelines were once 
found mostly in rural areas, away from population centers, people and 
activity. Until 1970, pipeline safety was not a Federal responsibility.
    However, as suburban sprawl has expanded, pipelines that were once 
in rural areas now pass along the edges of communities, increasing the 
risk that pipeline accidents, as infrequent as they are, will have 
tragic consequences. The Tucson pipeline incident is a clear example of 
what can happen when communities encroach on pipeline rights-of-way. We 
have seen worse examples of encroachment, with buildings and 
communities built right over pipelines. There are no Federal laws that 
govern land use in the areas near pipelines.
    The Chairman of the Federal Reserve Board noted earlier this year 
that domestic natural gas supplies are not expected to keep up with 
increases in demand and that the Nation will have to rely on increased 
imports of natural gas. This demand, combined with the expansion of our 
cities and suburban areas requires expansion of the pipeline 
infrastructure, although the increased construction activity can lead 
to pipeline accidents, as backhoes and other equipment dig into the 
ground, and the pipelines. The economic boom of the nineties brought 
greater risk of construction equipment striking pipelines. While the 
damage to pipelines by construction equipment often results in instant 
and deadly consequences, it is not always so. Damage to pipelines from 
construction may remain undetected and leave the potential for a future 
rupture.
    Our national appetite for energy has increased, and will continue 
to do so. There will be more pipelines.
    Increased demands for energy, along with a consolidation of the 
pipeline industry and increased competition over the past decade are 
putting more strain on the pipeline infrastructure. For example: 
changes in patterns of energy consumption of natural gas have led to 
decreased pipeline down-time for the natural gas industry. Operators 
once had six months a year of pipeline off-peak time to repair and 
maintain pipelines and to refill storage capacity. Today, electric 
power requirements for natural gas have reduced down-time to a maximum 
of two months a year. Gas operators must balance the need to fill up 
gas storage with time for testing and repair. Increased inspections and 
testing of pipelines will take more pipelines out of service and could 
impact the delivery of energy.
    Congressional reauthorizations of the pipeline safety program in 
the late eighties and nineties provided this very small agency with 
many complex tasks. Further, the Oil Pollution Act of 1990 provided new 
environmental responsibilities and in 1998, the One Call Notification 
Act added damage prevention tasks that extended RSPA's sphere of 
influence to the entire community of underground utilities. While RSPA 
successfully completed the mandates of the latter two statutes in a 
timely manner, a backlog of mandates from the reauthorizations of 1988 
and 1992 had built up.
    In March 2002, RSPA made a commitment to clean up our record. By 
May 2002, our actions led to the NTSB removing the Office of Pipeline 
Safety from its ``Most Wanted List of Safety Recommendations,'' for the 
first time in a dozen years. Today we have reduced the backlog by 63 
percent. As a result of recent emphasis on the need to improve pipeline 
safety, RSPA's Office of Pipeline Safety (OPS) has expanded. In 1994, 
the OPS consisted of 70 employees, including 28 inspectors; our budget 
was $17 million. Today, OPS has 143 employees, with 85 inspectors and a 
budget of $63 million. For 2004, we requested to increase the 
inspectors to 109 and a budget of $67 million. Moreover, our 
partnerships with states, such as our agreement with the Arizona 
Corporation Commission, expand our capabilities by hundreds of 
inspectors. In current day terms, we have better resources to address 
our responsibilities, and appreciate the Congress allocating increased 
funding.
    In addition to completing the mandates and recommendations of the 
past, RSPA is addressing the many new requirements and responsibilities 
of the Pipeline Safety Improvement Act of 2002 (PSIA) enacted almost 10 
months ago. We moved aggressively to respond to all the regulatory 
requirements:

   We completed operator qualification standards and expect to 
        meet the statutory deadline for completing inspections.

   We defined alternative mitigation measures when operators 
        cannot complete repairs in time with regulatory requirements.

   We presented a gas Integrity Management proposed rule to the 
        technical advisory committee in May, have acted on their 
        recommendations, and we expect to publish the final rule on 
        schedule.

   We assisted operators with meeting public education 
        requirements by providing workshops on a newly developed 
        consensus standard and an approach to self assessment.

   We enforced the mapping requirement and achieved 98 percent 
        compliance within 6 weeks of the statutory deadline.

    As to longer term program development requirements, we have begun 
all of the major studies and plans:

   We are meeting with operators on our plan to implement the 
        controller study.

   We drafted the required memorandum on research roles and a 
        five year plan, including the comments of many experts we 
        consulted.

   We continue to implement the damage prevention requirements 
        associated with the one-call provisions and have a new 
        cooperative agreement with the Common Ground Alliance.

   We petitioned the Federal Communications Commission to 
        establish 3-Digit dialing and the FCC is moving to the required 
        rulemaking.

   We continue to work with the Council on Environmental 
        Quality to improve the coordination of permits needed to repair 
        pipelines in accordance with our new Integrity Management 
        standards, and

   We have appointed an ombudsman as required by law.

    The rupture of the pipeline in Tucson was all the more dangerous 
because development had encroached so close to the pipeline right of 
way that houses were only about 40 feet away. One of the most 
significant aspects of the new law is the requirement to study land use 
practices, zoning ordinances and preservation of environmental 
resources.
    In conjunction with the Federal Energy Regulatory Commission, we 
have asked the Transportation Research Board of the National Academy of 
Sciences to begin a study to address issues of encroachment and 
maintenance on pipeline rights-of-way. Our goal is to identify 
promising approaches for local government for managing land use near 
pipeline rights-of-way-guidelines on what development is compatible 
with pipelines, and what development to avoid. The study we have 
commissioned brings together all key stakeholders--including 
representatives from local government, developers, pipeline companies, 
environmental groups and others.
    RSPA and our Office of Pipeline Safety are working diligently to 
improve pipeline safety, as societal and economic changes make the 
challenge more complex.
    To manage the risks inherent in pipeline transportation, we have 
been building a new, more comprehensive and informed approach to 
pipeline safety. Ours is a multi-phase strategy which leaves no stone 
unturned in identifying and addressing pipeline risks. Our efforts are 
consistent with legislation you proposed in 1999 and the Pipeline 
Safety Improvement Act of 2002.
    We believe this approach is working.
    Comparing the last five years to the previous five years, hazardous 
liquid incidents have decreased by 28 percent. Two years ago, the 
volume of oil spilled decreased by 33 percent from a ten-year average. 
Last year, saw a 57 percent decrease.
    Excavation accidents have decreased over the past ten years by 59 
percent, even while housing starts, which bring construction risk near 
pipelines, were on the rise.
    Over the past three years, we have built a more comprehensive 
approach to identifying and managing the risks that pipeline operators 
face and that pipelines pose to communities. Basing our efforts on the 
solid foundation of pipeline regulation:

   We revitalized our approach to oversight of compliance by 
        operators and Integrity Management efforts.

   We required better data about pipelines, the world they 
        traverse and consequences in the event of a pipeline failure.

   We raised the standards for safety in the testing and repair 
        of pipelines, corrosion control, operator qualification, public 
        education and damage prevention, both through promulgation of 
        regulations and adoption of national consensus standards.

    In three years:

   We finalized 14 regulations

   We incorporated about 30 new national consensus standards in 
        our regulations (and will shortly be finalizing six more 
        regulations); these join 80 national consensus standards 
        embodied in our regulations.

   We started a research program to improve technology for the 
        detection, diagnosis and remediation of safety problems;

     RSPA awarded more than $7.8 million for approximately 
            36 research projects.

     The General Accounting Office recently gave a 
            favorable review of our approach to research program 
            management.

    Central to RSPA's more comprehensive safety strategy is a more 
systemic management of risk: Integrity Management. In past regulatory 
and oversight practices, we prescribed specific measures for specific 
modes of pipeline failure. Today, we add another level of protection by 
requiring operators to address every way a pipeline could fail using 
the best tools and practices that apply.
    In our enforcement orders, we require operators to provide a plan 
of response that we evaluate for adequacy. In Integrity Management 
planning, we require operators to set priorities based on the 
consequences of failure. Operators must identify areas along their 
pipelines where consequences of a failure would be severe. In these 
areas, they must provide even further protection.
    Under Integrity Management, pipeline operators must make better use 
of new and existing information on pipeline operation, history, and 
potential failure. Higher standards for testing and repair are key 
components for Integrity Management.
    Integrity Management provides a sound scientific and technical 
basis for strengthening the pipeline system segment by segment, where 
people and important environmental resources cohabit with pipelines.
    Overseeing and enforcing Integrity Management poses a challenge to 
regulators to develop a much better understanding of the condition of a 
pipeline and the technologies and tools that are best suited to address 
conditions that may be unique to a pipeline system.
    Our new regulations have both prescriptive and performance aspects, 
so Federal and state regulators will need detailed training and 
inspection protocols. GAO gave RSPA a favorable review for our 
preparation to oversee the Integrity Management Program.
    Integrity Management is a concept that has evolved as the Office of 
Pipeline Safety has revamped enforcement policy over the past 13 years 
(1990-2003), through three major phases. Each phase corresponded with 
major program developments and built upon the lessons learned of the 
previous years. From 1990-1995, OPS focused on standard inspections 
that addressed compliance with the then prescriptive pipeline safety 
regulations. From 1995-2000, risk management principles were 
incorporated in the regulatory programs; oversight relied on more 
informal written communication about safety improvements.
    Following the Bellingham, Washington and Carlsbad, New Mexico 
accidents in 1999 and 2000, OPS returned to more traditional and formal 
enforcement tools, such as corrective action orders. Our current focus 
is system-wide improvement, evolving from risk management principles 
and emergence of new Integrity Management standards. OPS now makes 
heavier use of large fines as appropriate. Average penalties since 2000 
were ten times higher than the previous ten years.
    For example, within 100 days of the liquid Integrity Management 
regulation becoming effective, OPS inspected all66 major interstate 
operators for compliance with the initial regulatory requirements. We 
took enforcement actions on approximately 80 percent of the operators. 
Of these, Kinder Morgan was one in which OPS took a more serious 
enforcement action.
    OPS inspected Kinder Morgan in mid-January 2002. On May 2, 2002, we 
issued a Warning Letter and Notice of Amendment about deficiencies in 
their identification of High Consequence Areas. We received a response 
from the company within one month, in June 2002 that was satisfactory. 
In February 2003, we followed through with a site visit to the company, 
and in April conducted two weeks of comprehensive Integrity Management 
inspection. We conducted further follow-through Integrity Management 
review in June 2003. We issued a final order on the Notice of Amendment 
in August 2003. These actions were ongoing at the same time as OPS 
addressed enforcement in a separate matter with Kinder Morgan.
    When we are concerned about the potential for hazardous conditions 
discovered by tests or following pipeline accidents, we use formal and 
enforceable Corrective Action Orders (CAOs). Through CAOs, we can 
compel operators to reduce operating pressure in order to prevent 
additional failure, to determine the cause of an accident, to assess 
where similar conditions exist across the pipeline system and to 
develop and implement a plan for remediation. These actions often cost 
pipeline operators many million of dollars in assessment, testing, 
repair and replacement expenses. Since the Carlsbad accident in August 
2000, we have issued 29 CAOs as compared to 21 in the prior 11 years, a 
500 percent increase in the use of a formal enforcement tool.
    As another point of comparison, in 1996, a standard inspection took 
an inspector two and half to three days to perform. Today, a 
comprehensive inspection takes a team of four OPS staff and two 
contract experts two weeks each to execute, in addition to weeks of 
prior preparations and weeks of follow-on analysis-a twenty-fold 
increase in the resources applied. Extensive resources go into training 
our inspectors and provide the information support systems needed to 
track inspection and enforcement. For Integrity Management inspections, 
our enforcement tracking system, readily available through the Internet 
to and state regulators, captures all relevant information on an 
operator and our oversight process, critical to gauging progress during 
future inspections.
    A significant influence on our enforcement program has been the 
necessary focus on pipeline security that emerged quickly after the 
terrorist attacks of 9/11. We assessed the readiness of the most 
critical pipeline systems to withstand attack, prioritized the 
criticality of the individual pipeline systems, and then worked with 
industry and state agencies to develop security standards. We have 
developed a system that enables pipeline operators to increase their 
security in synchronization with the Homeland Security Advisory System. 
We executed our security measures jointly with the Department of 
Homeland Security.
    To more thoroughly understand and address pipeline integrity issues 
and regional concerns, we improved partnerships with state and local 
agencies. Through increased training, information technology, 
communications, and policy collaboration, we have strengthened our 
partnership with state pipelines safety agencies. They share oversight 
responsibilities with us and inspect over 90 percent of the pipeline 
infrastructure. By way of example, the Arizona Corporation Commission 
(ACC) has been in the pipeline safety program since 1983. ACC became an 
interstate agent in 1987, taking responsibility for inspecting 
interstate gas pipelines and interstate hazardous liquid lines in 1988. 
Our distribution of state grant funds is based on performance and 
Arizona has consistently received the highest possible rating--100 
percent. The ACC has always been in the forefront of pipeline safety 
policymaking, participating in the Local Distribution Company Risk 
Assessment Feasibility team, the System Integrity Inspection Program 
(the sole state participant) and as faculty to our training programs.
    RSPA added to this already good pipeline safety corps the more than 
900 members of the Common Ground Alliance (CGA), a voluntary damage 
prevention organization we initiated in 1999. With our state partners 
and the CGA, we share responsibility for preventing damage to pipelines 
and other utilities by advocating and adopting practices of the Common 
Ground Report, required by the Transportation Equity Act. This alliance 
provides the synergy of common safety actions in the ``underground'' by 
other utilities, railroads, insurance companies, public works and other 
municipal organizations. Through a new program with the National 
Association of State Fire Marshals, we add the capability of first 
responders to the ranks of allies helping us with damage prevention and 
community education. We are also working to establish a partnership 
with the Council of Energy Resource Tribes to foster safety and 
environmental protection on Tribal Lands, as well as improved 
communications between each of the tribes, OPS, the National 
Association of Pipeline Safety Representatives and the pipeline 
industry. This effort will help to identify high consequence areas on 
Tribal Lands and provide pipeline emergency response and inspection 
awareness training.
    We have energized our efforts to reach the public with messages 
about how citizens can protect themselves and the pipelines. Working 
with the pipeline industry and state agencies, we created a new public 
education standard for operators to acquaint citizens and public 
officials with the essential safety information and to make informed 
decisions about living safety with and minimizing damage to pipelines. 
This year alone, we have solicited public involvement in 15 public 
meetings addressing Integrity Management, operator qualification, 
public education, research, and mapping.
    The mapping of the Nation's pipelines has been a major endeavor of 
the Office of Pipeline Safety for several years. While submission of 
data by operators for the National Pipeline Mapping System (NPMS) had 
been voluntary, the PSIA made it mandatory. The NPMS, a multi-layered 
Geographic Information System (GIS), contains information about the 
pipelines as well as the locations of populated areas and unusually 
sensitive areas, such as sources of municipal drinking water. OPS 
collected these data over a period of years and created a unique 
national database. OPS launched the NPMS on the World Wide Web in April 
of 2001, offering a sophisticated resource to enable Federal, state, 
and local officials industry and others to understand the extent of the 
pipeline infrastructure and its relationship to environments.
    The terrorist attacks of 9/11 made clear that access to this 
database, which contains information that could facilitate terrorists' 
plans, could no longer be completely available to the public.
    We have now restructured the NPMS to make the information again 
available to officials with a need to know. Today, Federal, state and 
local officials can register to have access to pipeline data within 
their realm of responsibility. The public may also use a tool on the 
NPMS to obtain information on operators with pipelines in their 
vicinity. By searching within a county or Zip code, an individual is 
provided with contact information for the pipeline operator, so that 
information may be obtained, for example, on the proximity of a 
pipeline to a community. The NPMS is at http://www.npms.rspa.dot.gov/
    I will now discuss our enforcement of the pipelines of Kinder 
Morgan Energy Partners, LLP, operators of the pipeline that failed in 
Tucson.
    Kinder Morgan's 10,000 miles of pipelines transport more than two 
million barrels per day of gasoline and other petroleum products. We 
inspect Kinder Morgan's facilities on a rotational basis usually in a 
three-year cycle. The Arizona Corporation Commission and the California 
State Fire Marshall, our hazardous liquid interstate agents, assist in 
our inspection of Kinder Morgan's vast hazardous liquid pipeline 
infrastructure.
    OPS records show that Kinder Morgan has managed its hazardous 
liquid pipeline infrastructure as well as other companies with similar 
pipeline mileage. Besides Corrective Action Orders in 2001 and 2003, 
OPS has issued five enforcement letters to Kinder Morgan since 1996.
    Most of the problems on Kinder Morgan's hazardous liquid pipeline 
facilities in Arizona have been due to external corrosion. The 2001 
Corrective Action Order directed Kinder Morgan to manage the external 
corrosion on the 6-inch Phoenix to Tucson refined products pipeline. 
The 2003 Corrective Action Order, issued following the July 30 
accident, addressed stress corrosion cracking (SCC) on the Tucson to 
Phoenix refined products pipeline.
    There has been much public discussion and often-misleading 
speculation about corrosion following the July 30 accident. This has 
contributed to some concluding that external corrosion found on the 
pipeline was responsible for the rupture. It was not. Based on 
metallurgical analysis, the cause of the rupture was stress corrosion 
cracking.
    SCC on pipelines is a lesser-known phenomenon that is vastly 
different from galvanic corrosion and rarely found to cause failure in 
hazardous liquid pipelines. There have been only five reported sec 
failures on hazardous liquid pipelines since 1985.
    Galvanic corrosion, also known as pitting corrosion or general 
corrosion, is very easily distinguished from SCC. In galvanic corrosion 
there is metal loss in the form of small pits, much like rust. 
Traditional corrosion is very easily controlled with the application of 
cathodic protection, which applies electric current to the pipeline 
surface.
    Today, technologies enable discovery of pipeline sections that are 
not adequately protected, and our statistics have shown a gradual 
decrease in pitting corrosion. Most pipeline companies are now also 
using in-line inspection devices to assess the integrity of their 
pipelines to understand the nature of the resident and long-term 
corrosion threats on the infrastructure. Over the last decade, in-line 
inspection devices have proven their ability to recognize and measure 
pitting corrosion on the inside and outside surfaces of pipelines. 
Thus, it is now very easy to discover, control and manage general 
corrosion.
    SCC, also known as environmentally assisted cracking, is a 
relatively new phenomenon. Instead of pits, SCC manifests itself as 
cracks that are minute in length and depth. Over time, individual 
cracks coalesce with other cracks and become longer. The rate of growth 
of these cracks is very slow; in the neighborhood of one one-hundred-
thousandth (1x10-6) of an inch per year.
    SCC is caused by the union of three factors: stress regime, 
pipeline metallurgy and coating, and environment. Thus, SCC is cracking 
induced from the combined influence of tensile stress and a corrosive 
medium.
    In the pipeline industry, SCC first revealed itself in natural gas 
pipelines. In Canada, for example, the ratio of failures on natural gas 
pipelines versus failures on hazardous liquid pipelines is 4:1. The 
failures in hazardous liquid pipelines can be more random and more 
catastrophic because of the phenomenon known as cycling, pressure 
surges that cause cracks to grow.
    Currently, there are no tools or mechanisms available to 
confidently identify the susceptibility of pipeline sections to SCC. 
Science has not yet discovered the boundary conditions, or the 
intersection, at which the three factors interact to cause SCC.
    Questions have been raised about inspections of the six-inch 
pipeline now operated by Kinder Morgan. This pipeline has not ruptured, 
and is now being used to supplement the delivery of gasoline to 
Phoenix. Kinder Morgan started operating the six-inch Santa Fe Pacific 
Pipeline refined products pipeline that extends from Phoenix to Tucson 
in 1998.
    The ACC conducted inspections in 1996 and 1997. After another 
inspection in 1998, OPS directed Kinder Morgan to conduct a close-
interval survey on about 30 miles of pipeline. Because of persistent 
external corrosion problems, in 1999 Kinder Morgan launched an in-line 
inspection tool to understand the extent of external galvanic corrosion 
on the pipeline. In 2000 as a result of this inspection, Kinder Morgan 
decreased the operating pressure to about one-half of regular pressure.
    In 2001, Kinder Morgan also repaired about 52 locations and 
replaced about one-half mile of pipeline where the corrosion was 
extensive. During the repair and replacement process, OPS conducted 
inspections to review data from the internal inspection to assure that 
repairs were taking place at all the sites of major corrosion. We 
determined that Kinder Morgan was taking proper action. Following this 
remedial work, ACC's standard inspection revealed that this Kinder 
Morgan pipeline needed continued monitoring for galvanic corrosion.
    Immediately thereafter, OPS issued Kinder Morgan a Corrective 
Action Order (CPF No. 4-2001-5010H) to address the long-term integrity 
of the six-inch refined products pipeline. The hearing on this CAO was 
conducted in August 2001 and the Order was amended in March 2003. The 
delay in amending the Order never compromised public and environmental 
safety because the immediate threats on the six-inch pipeline were 
remedied by the close-interval survey and the repairs before the Order 
was issued. As well, the standards that Kinder Morgan used to repair 
the pitting anomalies exceeded requirements in the regulations at that 
time and subsequent regulations now in effect.
    OPS's interest was in the long-term health of the pipeline and our 
strategy was to maintain Kinder Morgan's attention on this facility. We 
intentionally keep orders open to continuously evaluate pipeline 
conditions until we are satisfied that the pipeline does not merit 
special attention.
    Regarding the Kinder Morgan refined products pipelines extending 
from Tucson to Phoenix (the pipeline that ruptured): we have revised 
the August 6, 2003 Corrective Action Order. We are now directing Kinder 
Morgan to conduct systemic tests on the extent of SCC on the 8-inch and 
12-inch pipeline using the most current knowledge and evaluation 
techniques. We are also broadening this evaluation include the six-inch 
pipeline, to ensure that sec has not migrated on to the six-inch 
pipeline in areas where it shares the same subsurface environment as 
the 8/12-inch pipeline. We have issued an industry-wide advisory on 
this matter. We will be conducting a public workshop on these 
techniques in December to assure broad dissemination and discussion of 
these issues.
    The RSPA effort to rebuild the pipeline safety program is well 
under way and the results of our strategy are evident in data and 
organizational improvements in the companies we regulate. Through 
expanded partnerships with state and local officials, we expect to 
strengthen the effectiveness of our safety and prevention efforts. We 
have requested additional resources to help enable us to execute our 
strategy and we are appreciative of the priority that Congress has 
placed on pipeline safety.
    RSPA continues to have the strongest possible commitment to 
addressing outstanding mandates and recommendations to us, and we 
believe that the record of our recent performance should serve as an 
indication of our resolve to improve the safety, reliability, and 
public confidence in our Nation's essential pipeline infrastructure.

    The Chairman. Thank you very much. Attorney General 
Goddard, welcome.

 STATEMENT OF TERRY GODDARD, ATTORNEY GENERAL, STATE OF ARIZONA

    Mr. Goddard. Mr. Chairman, thank you very much. It's a 
pleasure to be here and to speak about the disruption inflicted 
in our state just a very short while ago. I would like to 
concentrate on the part of your invitation to speak which 
emphasized, as you've already alluded to, the effect on 
consumers, the effect on prices, the effect on supply. The 
Governor has already spoken, I think, very eloquently about the 
safety aspects. I have a little bit to add but I'll leave those 
in my final comments.
    I think the disruption that we suffered showed a number of 
things about Arizona, many of which were disturbing, not only 
the danger posed by the oil pipeline, but the fragile nature of 
our economy, and how vulnerable we could be to this kind of a 
disruption. The future depends upon affordable, reliable, and 
safe supplies of both energy, fuel, electricity, and water. 
Those are our two critical elements and they're both in short 
supply. Arizona is in a particularly delicate position due to 
the scarcity of water and the lack of crude oil production in 
the gasoline refining in our State.
    Our gasoline supply in particular in Arizona depends, as 
has already been noted, on two pipelines, one through the west 
and one through the east, and I think it's the vulnerability 
that our economy in our state has that came into very sharp 
focus during this crisis. We didn't have adequate back-ups, we 
didn't have alternatives, we didn't have a competitive market 
in this State, and as a result we found when the pipeline broke 
and we suddenly had disruption that there wasn't, for example, 
storage in Maricopa County we can fall back on. There aren't 
tank farms except very short supply ones in this county. It 
appears that we have no refineries, that we have no alternative 
supply.
    The other thing that came in sharp relief was how hard it 
was to replace the pipeline and efforts were made gallant 
efforts were made to bring trucking supplies into Maricopa 
County, but it simply was inadequate as a result of the time 
limitations the truck drivers have to adhere to under Federal 
standards. Those were waived to a slight degree as a result of 
the crisis, but nonetheless, many trucks were left idle when 
they could have been producing gasoline for our central part of 
the state.
    There was talk about bringing the railroad into production, 
but that ultimately proved far too difficult with regulator 
barriers and in getting a supply of tank cars mobilized in 
time. And even the National Guard, our biggest tankers were in 
Iraq and the smaller ones turned out to not have qualified 
drivers for doing commercial deliveries and the nozzles used by 
commercial gasoline distributors would not work on our military 
trucks. So a lot was learned in that process and I think we'll 
be in better shape in the future, but still the vulnerability 
of the whole system was brought into sharp focus. And all that 
is in the context of the fact that our whole gasoline delivery 
is facing a major shift here in Arizona.
    California has provided approximately 70 percent of the 
gasoline supplies and we know that picture is changing. It's 
down to about 50 percent today and we believe in the next 4 or 
5 years it will go to almost 0. California's production is 
going to be used in California or we're going to have to pay 
incredible prices to get it back from them. So we see major 
changes coming in our market and we need to be better prepared 
for them.
    As Attorney General in charge of enforcing existing laws 
and representing State agencies, many of whom have been working 
tirelessly to ease the damage caused by the Kinder Morgan 
pipeline shutdown, Kinder Morgan has recently turned over 
voluminous documents relating to the spill clean-up to my 
office, and we're in the process of evaluating and studying 
those documents. Our antitrust principle of legal authority in 
this area is under the antitrust laws and Senator, as you've 
already described, it requires a conspiracy in restraint to 
trade or conspiracy to fix prices to bring an antitrust 
violation in cases like this, and we felt that at least so far 
our investigation has not shown such a conspiracy. However, we 
definitely
    The Chairman. Why do you think you should have to prove a 
conspiracy?
    Mr. Goddard. Because that's the only statutory authority we 
have, sir.
    The Chairman. But I mean, it doesn't make sense, does it?
    Mr. Goddard. Well, I believe given what happened in this 
case, where about a dozen stations out of 1,200 in Maricopa 
County took this opportunity to raise prices, as you and the 
Governor have noted, to exceptional levels $4, in one instance 
$4.96 was the highest recorded price that we have we've 
investigated our of our office, although we didn't have a 
legal--we didn't have a price gouging statute.
    Nonetheless, we investigated for the record incidents that 
had been complained of. We verified that it was a very small 
number of stations, rogue stations, who took advantage of this 
situation and took their prices to the highest possible level. 
Most stations did not. Most applied a modest surcharge over 
wholesale prices because we were monitoring the wholesale 
during this problem as well. And as I said, only about a dozen 
truly gouged the public.
    I am working very hard with legislators to try to have a 
gouging statute an anti-gouging statute in the next session, 
because I think that's a critical weapon, as the Governor has 
described, in times of emergency when we don't have a 
competitive market, when basically the public is the victim of 
whatever price is charged because they can not competitively 
shop, I believe some protections are in order.
    Now we also had, as you know, major supply interruptions. I 
did want to speak to prices though before I go on. We have a 
chart here, I hope you can see it, Senator, it's the one on the 
far right, which shows as the lower line national gas prices, 
and as the upper line central Arizona gas prices, reaching a 
high of $1 excuse me, $2.14 for a gallon of regular, clean-
burning fuel on August 26. Obviously we went from right about 
the national average just a few days before the disruption to 
an extraordinary peak, which we are still in an area which is 
above the national average. Our prices obviously have come down 
faster than the national, but what you see, I think, in stark 
relief from that particular diagram, is just how quickly and 
how severely Arizona consumers, and Arizona law enforcement, I 
would like to note, were affected by this shortage. Bay 
stations, in fact, ran out of gasoline during this problem and 
for approximately a week we had shortages within the market, 
and that is detailed in my filed remarks.
    I'm afraid that the August supply destruction could recur, 
absent improvements in our gasoline supply alternatives in 
Arizona. Additional gasoline supply may come from another 
pipeline, which is nearly complete in Texas. While this new 
pipeline might help bring additional product into Arizona and 
reduce our dependence on California gasoline, the physical 
capacity of limitations with the existing pipeline in Arizona, 
by that I mean the one from El Paso to Tucson, reduces the 
usefulness of this option. Furthermore, FERC has a pro-rata 
policy, which appears to suppress the opportunities for new 
entrance into this market.
    There's also a possibility of a new refinery here in 
Arizona, it has been widely discussed. Again, although this may 
appear to be a positive solution, I have serious concerns about 
the physical practicality, the time to completion, pollution 
controls, and environmental justice issues. My office will 
continue to assess and evaluate potential market manipulation 
in gasoline supply. If I discover illegal conduct, I will 
vigorously prosecute.
    I'd like to thank the Committee, Senator McCain, for the 
opportunity to speak here today.
    [The prepared statement of Mr. Goddard follows:]

Prepared Statement of Terry Goddard, Attorney General, State of Arizona
I. Introduction
    Thank you for the opportunity to present testimony on the important 
issues relating to gasoline in Arizona. I intend to focus my remarks on 
fuel supply and consumer costs, with a brief note about pipeline-
related public safety.
    Arizona's bright economic future depends on affordable, reliable 
and safe supplies of both energy (fuel and electricity) and water. 
Arizona is in a delicate position due to the scarcity of water and the 
lack of crude oil production or gasoline refining in our state. For 
gasoline supply in particular, Arizona depends on two pipelines, one 
from the West and one from the East. Affordability of gasoline is 
crucial for many Arizonans on fixed incomes and those workers with 
incomes lower than the national average who are hardest hit by rising 
gasoline prices. A reliable fuel supply is essential for maintaining a 
stable economy. Safety in supply is of the utmost importance for 
Arizonans' health and our environment. Fuel spills and other gasoline-
related pollution affect the air, water, and land.
    We have seen that increased fuel costs can also affect public 
safety. During the price spike of Spring 2003, several Arizona law 
enforcement agencies faced curtailing patrols and other activities 
because of budgetary constraints combined with gasoline price 
increases.
    Arizona is facing a major shift in gasoline supply. Where Arizona 
traditionally received seventy percent of its gasoline from California 
and thirty percent from Texas, in recent years the trend is towards an 
even fifty-fifty split.\1\ In the future, California's demand for 
gasoline will likely exceed its production capacity.\2\ Not only will 
Arizona no longer be able to receive gasoline from California, but 
California may begin to compete with Arizona for gasoline from 
Texas.\3\
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    \1\ Source: Arizona Departments of Commerce Energy Office and 
Weights and Measures.
    \2\ Some estimates show California's demand for gasoline exceeding 
production by 2007. Source: Stillwater Associates, April 2002, 
presented by AZ Dept. of Commerce Energy Office in May, 2003 report.
    \3\ See, e.g., ``Gulf Coast to California Pipeline Feasibility 
Study,'' California Energy Commission Committee Report, August 2003.
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    Even while Arizona, and Phoenix in particular, move towards 
improved mass-transit, energy conservation, and other fuel sources, 
Arizona's dependence on gasoline increases daily due to enormous 
population growth. Both government and industry must continue to 
address and plan for this growth.
    As Attorney General, I am charged with enforcing existing laws and 
representing state agencies, many of which have been working tirelessly 
to ease the damage caused by the recent Kinder Morgan pipeline 
shutdown. My office continues to work closely with the Governor's 
Office, the Governor's Gasoline Working Group, and other state agencies 
to evaluate what led to the gasoline shortage, and to develop long-term 
policy solutions.
    The Arizona Department of Environmental Quality (ADEQ) is 
investigating the July 30, 2003 gasoline spill in northwest Tucson. 
Kinder Morgan has recently turned over voluminous documents relating to 
the spill and clean-up. The Attorney General's Office and ADEQ's 
investigation into this matter is ongoing. ADEQ also worked with the 
Governor and the Environmental Protection Agency (EPA) to obtain a 
waiver allowing conventional fuel to be used in Maricopa County during 
the shortages.
    The Department of Weights and Measures has been instrumental in 
monitoring supply and fuel quality, with particular attention to the 
time period during the gasoline shortage.
    The Department of Commerce, Energy Office is working on long-term 
gasoline supply policy issues facing Arizona.
    The Department of Real Estate is investigating whether residential 
subdivision developers properly disclosed the location of the 
pipeline.\4\ If violations are found, these developers could face civil 
penalties and future difficulties in obtaining licenses to sell 
property. Further, home buyers who were not informed of pipeline 
proximity may have recourse either through private legal action or 
through the Department.
---------------------------------------------------------------------------
    \4\ Pursuant to Commissioner's Rule R4-28-Al203-4 and Arizona 
Revised Statutes (A.R.S.) Sec. 32-218l(A)(4).
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    The Attorney General's Antitrust Unit continually monitors the 
market for evidence of anticompetitive behavior, including price 
fixing, supply manipulation, and other antitrust violations.
    I am also working with legislators on proposed price gouging 
legislation to deter and punish those who would take advantage of 
consumers during a state of emergency. Prices as high as $4.96 per 
gallon of regular CBG were reported to and investigated by my office. 
Consumer feedback from about 1,000 complaints and inquiries 
demonstrated overwhelming popular support for price gouging 
legislation.
Background

   As the pipeline enters South Tucson, it carries fuel to 
        Phoenix through residential areas, past Mission View Elementary 
        School and within feet of the Salvation Army Adult 
        Rehabilitation Center on South Sixth Avenue.\5\ A smoking area 
        at the Salvation Army is located directly above the 
        pipeline.\6\ The pipeline travels along Starr Pass Boulevard 
        behind residential areas and angles to the north near Cholla 
        High School, the west side of Tumamoc Hill and ``A'' Mountain. 
        The pipeline passes within a quarter-mile of buildings on Pima 
        Community College's West Campus and residential areas along 
        North La Cholla Boulevard. As the pipeline heads north toward 
        Interstate 10, it runs along a wash that splits the Silver 
        Creek subdivisions, the site of the July 30 rupture.\7\
---------------------------------------------------------------------------
    \5\ Abayta, Oscar and Eric Sagara, ``Ruptured Confidence.'' Tucson 
Citizen. Sept. 4, 2003.
    \6\ Id.
    \7\ Id.

   July 30, 2003: The Kinder Morgan (KM) gasoline pipeline 
        between Tucson and Phoenix ruptured, and KM reported spilling 
        approximately 10,000 gallons of fuel in northwest Tucson over a 
        residential construction site. After an initial repair, 
        subsequent testing by KM revealed stress corrosion cracking, 
        leading KM to shut down the entire Tucson-Phoenix line on 
---------------------------------------------------------------------------
        August 8, 2003.

   Mid-August: Severe gasoline shortages developed in Maricopa 
        County as a direct result of the pipeline shutdown. Gasoline 
        prices skyrocketed. Independent dealers lobbied the Governor, 
        the EPA and ADEQ to waive the Clean Air Act requirements, 
        allowing the use of conventional gasoline in Maricopa County, 
        which normally requires Cleaner Burning Gasoline (CBG).

   From 1988 to 2001: The Arizona gasoline pipeline \8\ had 
        forty-six probable non compliance violations noted by the 
        Arizona Corporation Commission, including failures to comply 
        with rules concerning corrosion control (1991, 1992, 1995). 
        Since 1993, the Office of Pipeline Safety issued two non-
        compliance letters and one corrective action. The corrective 
        action was in response to the July 30, 2003, pipeline rupture.
---------------------------------------------------------------------------
    \8\ Formerly the Santa Fe Pipeline, bought by Kinder Morgan in 
1998.
---------------------------------------------------------------------------
II. Affordability of Fuel
    Gasoline (Cleaner Burning Gasoline, or ``CBG'' \9\ prices in 
Phoenix skyrocketed from an average of $1.54 \10\ per gallon of CBG 
regular on July 30, before the pipeline rupture, to a record-breaking 
average high of $2.14 per gallon on August 26. Phoenix prices are now 
at an average of $1.77 per gallon.
---------------------------------------------------------------------------
    \9\ Cleaner Burning Gasoline (CBG) is the fuel blend used in ``Area 
A'' to comply with Federal air quality requirements. Area A includes 
Maricopa County and a small section of Northern Pinal County.
    \10\ Average retail gasoline prices. Source: AAA Fuel Gauge Report.
---------------------------------------------------------------------------
    These dramatic price increases caused lost income to businesses and 
consumers. Hardest hit were the working poor, those on fixed incomes, 
and gasoline-dependant businesses.
    To address rising gasoline prices and severe price spikes, I 
recently sent surveys to every retail gasoline station in Arizona, 
requesting information on supply and pricing. As a result, we have a 
better understanding of the Arizona gasoline market structure and 
possible areas of further inquiry.
    My office continually monitors and maintains a database of Arizona 
gasoline prices \11\ as does the Department of Cornmerce \12\ I am 
working with other state Attorneys General, the Federal Trade 
Commission, and Arizona state agencies to deter and investigate market 
manipulation and to promote policies to ensure safe, reliable and 
affordable gasoline for Arizona's future.
---------------------------------------------------------------------------
    \11\ Pursuant to A.R.S. Sec. 41-191.02(0).
    \12\ Pursuant to A.R.S. Sec. 44-1561.
---------------------------------------------------------------------------
    As I discussed earlier, I also support a Price Gouging statute to 
protect consumers from exploitative pricing of gasoline (and other 
products) during a declared state of emergency.
III Reliability of Fuel Supply
    As a result of the July 30, 2003 Kinder Morgan pipeline shutdown, 
many gasoline stations ran out of gasoline. On August 19, sixty five 
percent of Maricopa County retail gasoline stations were without 
gasoline.\13\ These shortages began on August 17 and ended on August 
27.\14\
---------------------------------------------------------------------------
    \13\ Source: Arizona Department of Weights and Measures. August 19, 
2003 was the first day this survey was conducted.
    \14\ Id. August 27, 2003 was the first date reflecting 100 percent 
of surveyed gas stations open and supplied with gasoline. By August 24, 
though, 98 percent of stations were open with gasoline.
---------------------------------------------------------------------------
    The gasoline shortages resulted in lost revenues due in part to 
transportation difficulties. Working Arizonans could not get to work. 
Others did not drive for recreational purposes. Although difficult to 
quantify, Arizona likely experienced significant losses from tourism 
declines and event cancellations due to the instability the fuel 
shortage caused.
    The August supply disruption could reoccur absent improvements in 
gasoline supply alternatives to Arizona. Additional gasoline supply may 
come from another pipeline, which is nearly completed, from Texas. 
While this new pipeline may help bring additional product into Arizona, 
and reduce our dependence on California gasoline, the physical capacity 
limitations of the existing pipeline in Arizona reduces the usefulness 
of this option. Further, FERC pro-ration policy needs to be reviewed as 
it applies to new entrants.
    There is also the possibility of a new refinery here in Arizona. 
Again, although this may appear to be a positive solution, I have 
serious concerns about fiscal practicality, time to completion, 
pollution controls and environmental justice issues.
    I am investigating issues surrounding the gasoline supply shortage. 
My office is obtaining supply volumes from Kinder Morgan through a 
Civil Investigative Demand.\15\ That information is currently being 
evaluated. The confidential nature of the documents I am receiving 
precludes me from discussing this in detail.
---------------------------------------------------------------------------
    \15\ Pursuant to A.R.S. Sec. 44-1406.
---------------------------------------------------------------------------
    My office will continue to assess and evaluate potential market 
manipulation in gasoline supply. If I discover illegal conduct, I will 
vigorously prosecute, as in the El Paso Natural Gas case.
IV Pipeline Safety
    The Corporation Commission and the Federal Department of 
Transportation, Office of Pipeline Safety (OPS) share the 
responsibility of inspecting the pipeline and enforcing proper 
maintenance and repairs.
    Some sections of Arizona's KM pipeline are fifty-five years old 
\16\ and have numerous leaks and safety violations. I am concerned that 
improper inspection of this aging pipeline, coupled with lax to non-
existent enforcement put Arizonans at risk of serious injury.
---------------------------------------------------------------------------
    \16\ Kinder Morgan's Tucson-Phoenix 8" pipeline is 55 years old, 
while the El Paso-Tucson 8" and 12" lines were built starting in the 
1950s, and ``West Line'' from California, a 20" line, was constructed 
in the mid-1980s.
---------------------------------------------------------------------------
    As Arizonans have recently learned, the KM pipeline traverses 
highly populated areas, running near schools and homes. In addition to 
areas I previously outlined in the Tucson area, the pipeline runs close 
to two schools in Maricopa County. I am concerned about the loss of 
life, injuries, and severe damage experienced in Washington and New 
Mexico. I want to see that property owners near the pipeline are 
properly informed, and all feasible and reasonable steps are taken to 
minimize risk to our citizens.
    I am also concerned that there is inadequate pipeline security, 
including lack of physical barriers to protect the pipeline from 
inadvertent and intentional damage.
    My recommendations for the future include increased frequency and 
thoroughness of inspections, stronger enforcement of violations, 
increased Federal financial support for interstate pipeline 
inspections, increased authority for state inspectors, and a more 
aggressive approach to pipeline security.
V Conclusion
    My office continues to work with other state and Federal agencies 
to ensure pipeline safety, reliable gasoline supply and affordable 
pricing. I am optimistic that increased partnerships between the 
Federal and state pipeline enforcement authorities will aid in more 
effective inspections and corrective actions, as necessary. My office 
will continue to monitor and prosecute any illegal, anti-competitive 
behavior in the gasoline industry. I will continue to support price 
gouging legislation to protect Arizona's consumers. Thank you for the 
opportunity to testify about this important, far-reaching matter.

    The Chairman. Thank you very much. Commissioner Spitzer.

           STATEMENT OF MARC SPITZER, COMMISSIONER, 
                 ARIZONA CORPORATION COMMISSION

    Mr. Spitzer. Thank you, Mr. Chairman. I appreciate being 
here. As a preparatory remark, I would be in complete agreement 
with the comments of the Governor and the Attorney General, and 
what I think should be very clear for this hearing is that we 
are all working together as a team to protect Arizona 
interests, and again, I would indicate agreement with both the 
Governor's remarks and those of the Attorney General.
    I've divided my remarks into four separate areas. In a 
transmittal letter I have made eight specific proposals that I 
think would provide some solutions to this problem. The first 
item is, respect the Federal role for improved pipeline safety 
through State resources. When I teach government classes, I 
refer to the healthy tension created by our founding fathers 
between the branches of government as well as between the State 
and the national government. When this tension becomes 
unhealthy, government becomes dysfunctional.
    As a four-term State legislator and now as a State 
regulator, I have occasionally chafed under unfunded Federal 
mandates. However, as an elected official asserting State 
prerogatives, my efforts must be productive rather than 
destructive. Mindless rants against Washington, whether from 
the left or the right, and feigned ignorance of Article VI of 
the Constitution serve no purpose. One of our tasks today is to 
contribute in a meaningful way. The people whose homes were 
doused with gasoline do not care to hear us shout accusation. 
The mother who waited in a gas line does not want to hear us 
blame each other like children. The public expects solutions 
from us. I will offer my suggestions to that end in the hopes 
that they add to the discussion and perhaps help us all find 
resolution.
    The transportation of hazardous liquids through interstate 
pipelines is unquestionably interstate commerce. In the United 
States there is asserted jurisdiction within United States code 
Title 49. That does not mean that the exercise of Federal 
authority of interstate gasoline pipeline has always been wise. 
It has not. However, I will offer herein suggestions for the 
Federal Office of Pipeline Safety to work more openly and 
collaboratively with our commission's pipeline safety 
inspectors and other State agencies, but we must recognize 
Federal statutory authority and the chaos that would ensue if 
the states enacted 50 different interstate pipeline codes.
    For example, were California to mandate annual hydrostatic 
testing of all interstate pipelines, Arizona's perilous supply 
of vital commodities would be shut down. Such caprice is 
neither sound or necessary for the production for the 
protection of public safety. My proposals reflect the healthy 
tension between the Federal OPS and the State of Arizona to 
accommodate all interests, the most important being public 
safety and the free flow of goods in commerce.
    Next section is infrastructure challenges and systemic 
improvement, and both the Governor and the Attorney General 
have already alluded to the challenges our state faces. Arizona 
has virtually no crude oil production and refines no gasoline. 
Similarly, Arizona has no known deposits of natural gas and as 
of this date, no natural gas storage facilities. Arizona is 
dependent on two pipeline systems for natural gas and but one 
pipeline system for gasoline. These circumstances are 
unacceptable and all parties, State and Federal, public and 
private, and the people of Arizona must collectively resolve 
this problem.
    The Corporation Commission convened a series of workshops 
and public meetings to deal with our natural gas 
infrastructure, or more precisely, our lack thereof. For 
several years now, the Commission has spent time and resources 
seeking additional natural gas pipeline capacity. Arizona's 
Congressional delegation and you, Senator, have been extremely 
helpful in dealing with this capacity issue and with the FERC, 
including the pending litigated case over Arizona's allocation 
from the El Paso pipeline system.
    However, our Commission has zero regulatory authority with 
regard to gasoline prices and supply. Much more must be done to 
ensure redundancy of energy capacity and proper repair and 
maintenance of existing pipelines. The Federal Government, 
through its agencies, must recognize the need to enhance 
Arizona's energy infrastructure. Arizona's utter dependence on 
gasoline and natural gas pipelines and the imperative of public 
safety require that the commission's pipeline safety inspectors 
be allowed to participate more openly in the oversight and 
inspection of pipelines.
    The integrity management program, IMP, is an example where 
more could be done. Under IMP, states are permitted to observe 
the Federal OPS and the pipeline operator. Observation is not 
participation, as Teddy Roosevelt once famously pointed out. 
Each state has a cadre of trained experts at the ready prepared 
to assist and support the Federal OPS in its task of ensuring 
pipeline safety. The Federal OPS should integrate the states 
into the IMP. States submit detailed work plans to the Federal 
OPS every year, in which they propose a plan of action for the 
review and inspection of interstate pipelines within Arizona. 
More often than not, what is received back from the Federal OPS 
is an entirely different plan. This is not consultation, it is 
not cooperative to ask for a plan and respond with an entirely 
different proposal. Each state has a unique understanding of 
its geography, climate, soil, and development. The Federal OPS 
should base its work plans on the proposals submitted by the 
States, not adopting them blindly, but recognizing the merits 
therein and incorporating them into the Federal vision.
    Arizona's pipeline inspectors have acknowledged experience 
and expertise. I've attached to my remarks a summary of the 
intrastate and interstate pipeline inspections performed by 
commission employees. Between December 27, 1999, and August 31, 
2000, the Federal OPS revoked the Arizona Corporation 
Commission's agent status and undermined our inspection of 
interstate pipelines. I thank the Senator for his efforts at 
reinstating our commission status. The Federal OPS should 
enhance rather than undermine the agent status of State 
pipeline inspectors.
    Next issue, information sharing. The keeping of confidences 
is appropriate for doctors, lawyers, and priests, but there 
should be no secrets with pipeline safety. We can not ensure 
the safety of the public and protect the integrity of our 
Nation's pipelines if State and local officials are not 
provided timely information. Critical facts are too voluminous, 
the risks too great, and the potential impacts of terror too 
substantial not to insist on cooperation and a sharing of 
information. The Federal OPS and pipeline operators must share 
operational data with State officials and immediately notify 
those officials of any potential danger to public health and 
safety for pipeline operations.
    In two recent cases, Southwest Gas Corporation requested 
opinions from the United States Department of Transportation on 
interstate operations with Arizona. In neither case did the 
Federal agency notify or communicate with the Commission. The 
Federal OPS should timely notify the states when requests for 
opinions concerning pipelines within their boundaries are 
received. States must be allowed to submit their comments on 
those requests before the OPS renders its opinion.
    In the case of Kinder Morgan in 1996, the 8-inch and 12-
inch pipelines were inspected with what is known as a smart pig 
device that is run through the pipeline inspecting for cracks, 
obstructions, and evidence of corrosion. The Arizona 
Corporation Commission was never informed of that inspection 
and never received a copy of the results, solely because the 
pipelines were interstate. A Kinder Morgan 6-inch interstate 
pipeline was ``pigged'' at the same time and over 5,000 
anomalies were found in a 117-mile section. There is no 
justifiable reason for failing to share the results of 
inspections within a state. The Federal OPS should provide 
timely copies of all inspection reports to the states.
    Final issue is encroachment. Entitlements relative to real 
estate construction in the vicinity of intrastate and 
interstate pipelines are governed by county and local zoning 
authorities. However, public safety demands that we address 
this issue and not simply pass the buck to cities, towns, and 
counties. No residences should be built within 200 feet of a 
high-pressure 8-inch or 12-inch gasoline pipeline. In Tucson, 
the homes were 37 feet from the pipeline. Within minutes, over 
6,000 gallons of gasoline had soaked several residences. We can 
only thank God that the homes were unoccupied, but we must 
recognize the danger.
    Real estate construction involves the use of heavy 
machinery and excavation. Back hoes have been known to rupture 
or demolish even the sturdiest pipe. Heavy construction 
produces intense vibration and impacts soil composition, both 
of which jeopardize underground pipe. I understand that some 
real estate developers seek to squeeze every nickel out of 
entitled land, but residential development within 37 feet of a 
50-year-old gasoline pipeline is intolerable.
    The Federal and State governments must step forward with 
appropriate restrictions where counties and cities do not act. 
Federal OPS should work with the cities to develop excuse me--
work with the states to develop clear guidance for counties and 
cities on the dangers and locations of pipelines to preclude 
residential zoning within 200 feet thereof.
    In conclusion, Mr. Chairman, on behalf of the Commission 
and its very experienced and aggressive pipeline safety 
inspectors, I am grateful to the Senate for convening this 
hearing. The many public recriminations and press releases 
since August have not done much to protect public safety nor 
improve Arizona's energy infrastructure. Beginning with this 
hearing, Senator, the stakeholder process for solving these 
problems commences. My recommendations today are designed to 
address those solutions in collaboration with Federal, State, 
and local governments and the private sector. The needs are 
great and this moment is the time to act. Senator, thank you 
very much.
    [The prepared statement of Mr. Spitzer follows:]

             Prepared Statement of Marc Spitzer, Chairman, 
                     Arizona Corporation Commission
Respect the Federal Role but Improve Pipeline Safety through State 
        Resources
    When I teach government classes I refer to the ``healthy tension'' 
created by our Founding Fathers between the branches of government as 
well as between the States and the National Government. When this 
tension becomes unhealthy, government becomes dysfunctional. As a four-
term state legislator and now as a state regulator, I have occasionally 
chafed under unfunded Federal mandates. However, as an elected official 
asserting state prerogatives my efforts must be productive rather than 
destructive. Mindless rants against Washington, whether from the left 
or the right, and feigned ignorance of Article VI of the Constitution 
serve no purpose.
    One of our tasks today is to contribute in a meaningful way. The 
people whose homes were doused with gasoline do not care to hear us 
shout accusations. The mother who waited in a gas line does not want to 
hear us blaming each other like children. The public expects solutions 
from us. I will offer my suggestions to that end, in the hopes that 
they add to the discussion and perhaps help us all to find a 
resolution.
    The transportation of hazardous liquids through interstate 
pipelines is unquestionably interstate commerce, and the United States 
has asserted jurisdiction within United States Code Title 49. That does 
not mean that the exercise of Federal authority over interstate 
gasoline pipeline has always been wise-it has not. I offer herein 
suggestions for the Federal Office of Pipeline Safety to work more 
openly and collaboratively with our Commission's pipeline safety 
inspectors and other state agencies. But we must recognize Federal 
statutory authority and the chaos that would ensue if the states 
enacted fifty different interstate pipeline codes. For example, were 
California to mandate annual hydrostatic testing of all interstate 
pipelines, Arizona's perilous supply of vital commodities would be shut 
down. Such caprice is neither sound nor necessary for the protection of 
public safety. My proposals reflect the healthy tension between the 
Federal OPS and the State of Arizona to accommodate all interests, the 
most important being public safety and the free flow of goods in 
commerce.
Infrastructure Challenges and Systemmic Improvement
    Arizona has virtually no crude oil production and refines no 
gasoline. Similarly, Arizona has no known deposits of natural gas and, 
as of this date, no natural gas storage facilities. Arizona is 
dependent on two pipeline systems for natural gas and but one pipeline 
system for gasoline. These circumstances are unacceptable and all 
parties, state and federal, public and private, and the people of 
Arizona must collectively resolve this problem.
    The Corporation Commission convened a series of workshops and 
public meetings to deal with our natural gas infrastructure, or more 
precisely our lack thereof. For several years now the Commission has 
spent time and resources seeking additional natural gas pipeline 
capacity. Arizona's Congressional delegation has been extremely helpful 
in dealing with the FERC, including the pending litigated case over 
Arizona's allocation from the El Paso pipeline system. However, the 
Commission has zero regulatory authority with regard to gasoline prices 
and supply. Much more must be done to ensure redundancy of energy 
capacity and proper repair and maintenance of existing pipelines. The 
Federal Government through its agencies must recognize the need to 
enhance Arizona's energy infrastructure.
    Arizona's utter dependence on gasoline and natural gas pipelines, 
and the imperative of public safety, require that the Commission's 
pipeline safety inspectors be allowed to participate more openly in the 
oversight and inspection of pipelines. The Integrity Management Program 
(``IMP'') is an example where more could be done. Under IMP, states are 
permitted to observe the Federal OPS and the pipeline operator. 
Observation is not participation--as Teddy Roosevelt once famously 
pointed out. Each state has a cadre of trained experts at the ready, 
prepared to assist and support the Federal OPS in its task of ensuring 
interstate pipeline safety--The Federal OPS should integrate the states 
into the IMP.
    States submit detailed ``Work Plans'' to the Federal OPS every 
year, in which they propose a plan of action for the review and 
inspection of interstate pipelines in the state. More often than not, 
what is received back from the Federal OPS is an entirely different 
plan. This is not consultation--it is not cooperative to ask for a plan 
and respond with an entirely different proposal. Each state has a 
unique understanding of its geography, climate, soil and development--
The Federal OPS should base its work plans on the proposals submitted 
by the states, not adopting them blindly, but recognizing the merits 
therein and incorporating them into the Federal vision.
    Arizona's pipeline inspectors have acknowledged experience and 
expertise. Attached as Exhibit A is a summary of the intrastate and 
interstate pipeline inspections performed by Commission employees. 
Between December 27, 1999 and August 31, 2000 the Federal OPS 
``revoked'' the Arizona Corporation Commission's ``agent status'' and 
undermined our inspection of interstate pipelines. I thank the Senator 
for his efforts reinstating our Commission's status. The Federal OPS 
should enhance rather than undermine the agent status of state pipeline 
inspectors.
Information Sharing
    The keeping of confidences is appropriate for doctors, lawyers and 
priests, but there should be no secrets with pipeline safety. We cannot 
ensure the safety of the public and protect the integrity of our 
Nation's pipelines if state and local officials are not provided timely 
information. Critical facts are too voluminous, risks too great and 
potential impacts of terror too substantial not to insist on 
cooperation and a sharing of information. The Federal OPS and pipeline 
operators must share operational data with State officials, and 
immediately notify those officials of any potential danger to public 
health and safety from pipeline operations.
    In two recent cases, Southwest Gas Corporation and the City of Mesa 
requested opinions from the U.S. Department of Transportation on 
intrastate operations occurring in Arizona. In neither case did the 
Federal agency notify or communicate with the Commission. The Federal 
OPS should timely notify the states when requests for opinions 
concerning pipelines within their boundaries are received--states must 
be allowed to submit their comments on those requests before the OPS 
renders its opinion.
    In the case of Kinder Morgan, in 1996 the 8-inch and 12-inch 
pipelines were inspected with a ``smart pig'' device that is run 
through the pipeline inspecting for cracks, obstructions and evidence 
of corrosion. The Arizona Corporation Commission was never informed of 
that inspection and never received a copy of the results-solely because 
the pipelines were interstate. A Kinder Morgan 6-inch intrastate 
pipeline was 'pigged' in 1999--over 5,000 anomalies were found in a 
139-mile section. There is no justifiable reason for failing to share 
the results of inspections within a state--The Federal OPS should 
provide timely copies of all inspection reports to the states.
Encroachment
    Entitlements relative to real estate construction in the vicinity 
of intrastate and interstate pipelines are governed by county and local 
zoning authorities. However, public safety demands that we address this 
issue and not simply ``pass the buck'' to cities, towns and counties. 
No residences should be built within 200 feet of a high pressure 8-inch 
or 12-inch gasoline pipeline. In Tucson, the homes were 37 feet from 
the pipeline. Within minutes over 6,000 gallons of gasoline had soaked 
several residences. We can only thank God that the homes were 
unoccupied--but we must recognize the danger.
    Real estate construction involves the use of heavy machinery and 
excavation. Backhoes have been known to rupture or demolish even the 
sturdiest pipe. Heavy construction produces intense vibration and 
impacts soil composition, both of which jeopardize underground pipe. I 
understand some real estate developers seek to squeeze every nickel out 
of entitled land, but residential development within 37 feet of a 
fifty-year old gasoline pipeline is intolerable. The Federal and state 
governments must step forward with appropriate restrictions where 
counties and cities act irresponsibly. The Federal OPS should work with 
states to develop clear guidance for counties and cities on the dangers 
and locations of pipelines to preclude residential zoning within 200 
feet thereof
Conclusion
    On behalf of the Commission and its pipeline safety inspectors I am 
grateful to the Senator for convening this hearing. The many public 
recriminations and press releases since August have done nothing to 
protect public safety nor improve Arizona's energy infrastructure. 
Beginning with this hearing, Senator, the stakeholder process for 
solving these problems commences. My recommendations today are designed 
to address those solutions in collaboration with federal, state and 
local governments and the private sector. The needs are great, and this 
moment is the time to act.

    The Chairman. Thank you very much, Commissioner. Mayor 
Walkup, welcome.

      STATEMENT OF HON. BOB WALKUP, MAYOR, CITY OF TUCSON

    Mr. Walkup. Thank you. Mr. Chairman, thank you very much 
for the opportunity to testify on behalf of the City of Tucson 
and our over 500,000 city residents and some 900,000 residents 
of the greater Tucson area. The rupture of the Kinder Morgan 
pipeline on July 30, 2003, exposed a number of shortcomings in 
Arizona's fuel delivery system, regulatory system, and disaster 
preparedness system. The rupture itself placed adjacent 
residents in physical danger. We were very, very lucky that the 
escaping fuel did not ignite and no one was injured. A number 
of homes were doused with fuel and had to be demolished.
    I want to recognize the professionalism and dedication of 
the Tucson Fire Department, led by Chief Dan Newburn, who is 
here today with us. They helped avert a major catastrophe for 
the City of Tucson. Many residents in the vicinity of the 
pipeline were not aware of the pipeline's existence. There is 
no consistent or adequate form of disclosure that informed 
residents or homeowners in the proximity to the pipeline. Now 
some of these residents are demanding that Kinder Morgan build 
a new pipeline around the developed cities. The City of Tucson 
lacks the authority to require of Kinder Morgan a new pipeline 
in a remote location, so we request that our State and Federal 
governments work on our behalf.
    The inability of the Tucson Fire Department officials to 
have access to Federal or State inspection results prior to the 
pipeline rupture compromised public safety. The sudden and 
dramatic increase in gasoline prices in Tucson was caused in 
part by the traffic at the Tucson terminal. Both Phoenix and 
Tucson delivery trucks had to wait long periods of time to 
receive fuel. Therefore, the supply problem in Phoenix caused a 
supply problem in Tucson and a steep increase in prices.
    The realization of Tucsonans and many Arizonans that the 
state is mostly served by one major pipeline was and still is a 
cause of great concern. We now see that accidental or 
intentional shutdown of this one pipeline can disable our 
State.
    With these situations in mind, the following courses of 
action should be pursued. First, more disclosure of pipeline 
integrity test results between government agencies is needed. 
At the very least, local public safety agencies must be 
notified if Federal or State regulators discover anomalies in 
the condition of the pipeline. Disaster readiness plans that 
account for a variety of potential situations must be developed 
in partnership with regulatory agencies at various levels and 
with pipeline companies.
    Second, the relationship between Arizona Corporation 
Commission and the U.S. Department of Transportation should be 
clarified. Both entities should have access to test results and 
maintenance schedules regardless of which agency is doing the 
actual testing of the pipelines. The State Department of Real 
Estate should develop consistent and clear disclosure 
requirements of real estate transactions in proximity to the 
line.
    Fourth, local government must do more to impose land use 
restrictions that provide reasonable security to the area homes 
and businesses. In Tucson's case, the 8-inch pipeline was 
placed in 1955 in an area that was mostly undeveloped at the 
time. Since then, previous mayors and city councils allowed 
development in those area. Tucson's city council has now voted 
to look at land use restrictions for future development near 
pipelines, and the city council has expressed interest in the 
possibility of Kinder Morgan or other pipeline companies 
constructing new pipelines outside the city limits. We realize 
that this wasn't a reasonable, safe, or timely option with the 
existence pipeline in light of the crisis faced in the state 
and the immediate need to replace the deficient pipeline.
    However, the people of Tucson would like the State and 
Federal assistance in this matter. We understand that the 
existing pipeline must be replaced in its current location if 
the deficient pipeline is to be replaced at all. However, we 
hope that future pipelines will be constructed through 
undeveloped areas of our State. This may allow us to 
decommission existing pipelines through residential 
neighborhoods.
    And finally, and perhaps the most importantly, the 
construction and operation of more pipelines across the state 
is critical. Arizona can not be solely dependent on a single 
line. This is an economic reality and public safety reality and 
even a national security reality. Successful construction of 
new lines designed with sufficient security measures would 
provide more total fuel for the state and less dependency on 
one pipeline. In addition, we would hope and expect that new 
pipelines outside developed areas built with the sufficient 
capacity could make existing pipelines through the city 
neighborhoods obsolete.
    And in closing I would like to thank you, Senator, and the 
Members of this Committee again for this hearing. I want to 
also commend the work of Governor Napolitano and her staff in 
addressing the crisis as soon as it happened. Her quick and 
appropriate response to the crisis made a very difficult 
situation better for all Arizonans. The Governor's southern 
Arizona staff led by Jan Lesher, was always ready with 
information and assistance. I would also like to thank Tucson 
area State Representative Phil Lopez and Ted Downing and 
Councilman Steve Leal and other members of the Tucson city 
council. Together we have taken an active role in examining 
relevant issues. I also want to thank the Arizona Corporation 
Commission for its participation in a recent City of Tucson 
council meeting. Their staff did a good job in explaining the 
complexities of this issue.
    And last, I would like to thank Kinder Morgan for working 
closely with Tucson city staff and Fire Department officials. 
Now there will be more commissions and time between us to 
really improve this situation in Tucson and in the State of 
Arizona. This has been a very difficult situation for all of us 
that have been involved. However, everyone I have worked with 
on this issue has been forthright and determined to fix what 
needs to be fixed. Thank you very much.
    [The prepared statement of Hon. Walkup follows:]

      Prepared Statement of Hon. Bob Walkup, Mayor, City of Tucson
    Dear Senator McCain and Committee Members:

    Thank you for the opportunity to testify on behalf of the City of 
Tucson, our over 500,000 city residents and the 900,000 residents of 
the Greater Tucson area.
    The rupture of the Kinder Morgan pipeline on July 30, 2003 exposed 
a number of shortcomings in Arizona's fuel delivery systems, regulatory 
systems and disaster preparedness systems:

   The rupture itself placed adjacent residents in physical 
        danger. We were very, very lucky that the escaped fuel did not 
        ignite and no one was hurt. A number of homes were doused with 
        fuel and had to be demolished. I want to recognize the 
        professionalism and dedication of the Tucson Fire Department, 
        led by Chief Dan Newburn. They helped avert a major 
        catastrophe.

   Many residents in the vicinity of the pipeline were not 
        aware of the pipeline's existence. There was no consistent or 
        adequate form of disclosure that informed residents and 
        homeowners of their proximity to the pipeline. Now some of 
        these residents are demanding that Kinder Morgan build a new 
        pipeline around the developed city.

   The inability of Tucson Fire Department officials to have 
        access to Federal or state inspection results prior to the 
        pipeline rupture compromised public safety.

   The sudden, dramatic increase in gasoline prices in Tucson 
        was caused in part by the traffic at the Tucson terminal. Both 
        Phoenix and Tucson delivery trucks had to wait long periods of 
        time to receive their supply. Therefore, the supply problem in 
        Phoenix caused a supply problem--and steep price increase--in 
        Tucson.

   The realization for Tucsonans and many Arizonans that the 
        state is mostly served by one major pipeline was--and still 
        is--a cause of great concern. We now see that accidental or 
        intentional shutdown of this one pipeline can disable our 
        state.

    With these situations in mind, the following courses of action 
should be pursued:

   More disclosure of pipeline integrity test results between 
        government agencies is needed. At the very least, local public 
        safety agencies must be notified if Federal or state regulators 
        discover abnormalities in the condition of a pipeline. 
        Disaster-readiness plans that account for a variety of 
        potential situations must be developed in partnership with 
        regulatory agencies at various levels and pipeline companies.

   The relationship between the Arizona Corporation Commission 
        and the U.S. Department of Transportation should be clarified. 
        Both entities should have access to test results and 
        maintenance schedules regardless of which agency is doing the 
        actual testing of the pipelines.

   The State Department of Real Estate should develop 
        consistent and clear disclosure requirements on real estate 
        transactions in proximity to the line.

   Local governments must do more to impose land use 
        restrictions that provide reasonable security to area homes and 
        businesses. In Tucson's case, the 8-inch pipeline was placed in 
        1955 in an area that was mostly undeveloped at the time. Since 
        then, previous mayors and city councils allowed development in 
        the area. The Tucson City Council has now voted to look at 
        land-use restrictions for future development near pipelines. 
        And the entire City Council has expressed interest in the 
        possibility of placing new pipelines outside the city limits, 
        even though we realize that this wasn't a reasonable, safe or 
        timely option in light of the crisis facing the state.

   Finally, and perhaps most importantly, the construction and 
        operation of more pipelines across the state is critical. 
        Arizona cannot be solely dependent upon a single line. This is 
        an economic reality, a public safety reality and even a 
        national security reality. These new pipelines should be 
        constructed outside populated urban areas and should be 
        designed with sufficient security measures. Successful 
        construction of new lines would provide more total fuel for the 
        state and less dependence on any one pipeline. In addition, we 
        would hope and expect that new pipelines outside developed 
        areas could make existing lines through city neighborhoods 
        obsolete.

    In closing, I want to thank Senator McCain and the members of the 
Committee again for this hearing.
    I want to commend the work of Governor Napolitano and her staff in 
addressing the crisis as soon as it happened. Her quick and appropriate 
response to the crisis made a very difficult situation better for all 
Arizonans. And Governor Napolitano's Southern Arizona staff, led by Jan 
Lesher, was always ready with information and assistance throughout the 
most difficult periods.
    I want to thank Tucson area state representatives Phil Lopes and 
Ted Downing, Councilmember Steve Leal and all the members of the Tucson 
City Council. Together, we have taken an active role in discovering and 
examining the relevant issues.
    I also want to thank the Arizona Corporation Commission for their 
participation at recent Tucson City Council meetings. Their staff did a 
good job explaining the complexities of these issues to our governing 
body.
    And I would like to thank Kinder Morgan for working closely with 
Tucson city staff and Fire Department officials. Now there will be more 
communication between us, in addition to an improved pipeline.
    This has been a difficult situation for all involved. However, 
everyone I have worked with on this issue has been forthright and 
determined to fix what needs fixing. I would be happy to answer 
questions from the Committee at this time.

    The Chairman. Thank you very much, Mayor. Maybe we can 
start from the macro aspect of the issue, and maybe 
Commissioner Spitzer and Attorney General Goddard can enlighten 
us here. Is it obvious that Arizona needs a refinery?
    Mr. Goddard. Senator, I think it's obvious that we need, as 
many speakers have pointed out, some alternatives, some 
competition, some different ways to get gasoline supply into 
Arizona. A refinery is one of those answers. I think that would 
take some time to come online and the problem that I have, just 
off the top, is that if you're going to build a pipeline to 
Arizona, it seems to me you'd want to put refined gasoline in 
it, not crude oil, and the refinery would need the crude oil. 
But that's simply a personal opinion, I've not had a chance to 
run it by all of the various energy analysts, but I do believe 
it's absolutely necessary that the pipeline or some other--I 
know there's talk about bringing refined fuel from Mexico--the 
bottom line is that we have to have other ways to get critical 
energy resources into our State.
    Mr. Spitzer. Senator, for a politician redundancy is a bad 
thing, but in energy I've learned on the Commission redundancy 
is a good thing, and I think the analogy would be----
    The Chairman. I've never known a politician to practice 
redundancy.
    [Laughter.]
    Mr. Spitzer. Some of us, present company excluded. The way 
the Commission has worked on electricity in creating 
partnerships of all the stakeholders as well as consumer groups 
to ensure that the blackout that happened on the East Coast 
would not happen--we had an episode in August 1996, as you 
recall, and we created both within Arizona and outside entities 
to oversee reliability, and the key is redundancy, redundancy 
in production with power plants, redundancy in transmission, 
and we've done a good job in electricity. If one plant goes 
down or one transmission line goes down, we have back-ups. And 
we've sited power plants and high-voltage transmission lines, 
none of which anybody wants in their backyard, and there has 
been some controversy over some of those decisions, but 
ultimately the public interest was served.
    We have not had that discussion on redundancy that we've 
had in electricity in the area of natural gas, nor have we had 
it in the area of gasoline. We need to have that discussion and 
whether it's a--I think the Attorney General's right--it will 
be a collective decision.
    The Chairman. Do you agree?
    Mr. Spitzer. Whether it's a refinery or----
    The Chairman. Do you agree with his assessment that there 
will be less and less oil coming over from California?
    Mr. Spitzer. That is clear. There is no question that the--
--
    The Chairman. Well, our options then are more pipelines 
coming from the East or constructing our own facilities?
    Mr. Spitzer. That would be the choice.
    The Chairman. Those are our choice?
    Mr. Spitzer. In my judgment, yes.
    The Chairman. Do you agree, Mr. Goddard?
    Mr. Goddard. Mr. Chairman, yes sir.
    The Chairman. I mean, it just seems to me we ought to be 
aware of what our choices here are because I think we need to 
take a number of measures to prevent a recurrence of this 
problem, and I intend to get this catastrophe and I intend to 
get into that, but it seems to me we ought to look at the 
overall problem and that seems to be that we have some tough 
choices to make especially if--and I agree with the Attorney 
General that there are going to be scarcer supplies coming from 
the West. I don't know from the East, Commissioner Spitzer, but 
we've got some pretty high growth areas to the east of us as 
well, so I just thought we ought to lay that out, because I 
think our constituents deserve to know that we have some pretty 
tough choices to make.
    Mr. Goddard. And Senator, if you look at that chart, we 
have global problems nationally with regard to the supply of 
gasoline. Refineries have not been built anywhere, as I 
understand, in the last 20 years, and so it's a serious supply 
problem with increasing demand, and that when supply is flat 
and demand increases, we know what happens.
    The Chairman. Well, I'm straying from the subject of the 
hearing, but it also seems to me that then we ought to have 
another look at nuclear power, Palo Verde. I think you would 
agree, Commissioner, and I would be glad to hear your 
assessment, it seems to me it's been a resounding success. We 
still have the waste problem, but we've also developed 
technology that reduces that problem significantly, and I think 
that's one of the options that we ought to look at and I know 
that scares the daylights out of everybody, but the technology 
is there, and I wonder what your view is on that.
    Mr. Spitzer. Well, one of the aspects that we look at in 
electricity supply and generation is what they call a balance 
portfolio, so we're not dependent, if natural gas is curtailed, 
we have not put all our eggs in one basket. And I think you 
pointed out we have the nuclear, we have coal facilities in 
eastern Arizona, we have new gas-fired plants. That is this 
redundancy that we've been talking about, so you're not captive 
to one break, and I think the message from all speakers has 
been infrastructure, information, and somehow how to deal with 
this very difficult, challenging problem of siting pipelines.
    The Chairman. Well, hopefully--I receive a lot of 
suggestions and I appreciate all of them and maybe I could make 
a suggestion for this task force that the Governor has 
appointed that maybe they should look at the long-term energy 
requirements and challenges we face as well as the short-term.
    Mr. Bonasso--and I know Ms. Gerard may want to respond to 
some of these questions--how do you respond to the specifics 
that Commissioner Spitzer made, particularly sharing 
information and consultation and encroachment?
    Mr. Bonasso. We fully considered the views of the Arizona 
Corporation Commission. There's no question that they are our 
people on the ground in Arizona. We have delegated full 
responsibility to them for doing the inspections of pipelines, 
interstate pipelines in Arizona. We don't--I'm sort of--since 
we don't agree with what Mr. Spitzer said, we obviously have a 
breakdown in communication, so----
    The Chairman. What do you disagree with?
    Mr. Bonasso. Well, we are sharing information. Our people 
make contact. Our regional inspectors coordinate and 
communicate with the inspectors at the Arizona Corporation 
Commission. They've shared information extensively about this 
accident. The information--they have full authority to do 
inspections. Now, the question about enforcement and the 
levying of fines, that is something that OPS does.
    So I feel that we need to do a little better communicating 
here, and I would like to ask Ms. Gerard to add whatever she 
would like to that.
    Ms. Gerard. We certainly agree with the principles of 
everything that Commissioner Spitzer put forward, and there are 
certainly opportunities to improve communication. I think that 
there is a particular point as it regards the interpretation 
changes where we needed to make an improvement, we took action 
on that today to be able to immediately notify the state when 
there has been an interpretation made, and certainly there 
needed to be an improvement made in that area and that was 
correct.
    The Chairman. But up until today you never even would tell 
the Corporation Commission how you acted after violations are 
noted. Is that communications?
    Ms. Gerard. I'd have to disagree that that was totally 
correct. I think that there has been considerable information 
sharing and I think that we do act together and I think that we 
do----
    The Chairman. Well let me ask, let me ask Commissioner 
Spitzer if you've been told how OPS has acted after violations 
are noted?
    Mr. Spitzer. Senator, let me say that in fairness we've had 
some ups and downs between the Commission and OPS and you're 
aware of that period between 1999 and 2000 where it was a down 
period, it was prior to my tenure on the Commission. But in 
review of the record, there were serious problems. I think the 
OPS has improved since that time. They're not at the level that 
we would like, and there will be disagreements, there will be 
legitimate disagreements between our inspectors and OPS from 
time to time. I think our frustration was that we did not feel 
that our views were being it's one thing to, the difference 
between hearing and listening, and I guess that was our 
concern.
    The Chairman. Mr. Bonasso, in 1997, as a result of a 
standard inspection performed by the Arizona Corporation 
Commission, OPS issued a corrective order to Kinder Morgan for 
five items of regulatory noncompliance. Based on the 
information that you provided this Committee, it took over 5 
years for this order to finally be closed. Why? Ms. Gerard, if 
you feel more qualified to answer----
    Mr. Bonasso. Well, I'm going to incorporate her as well, 
but I also want to say that a--there are a number of corrective 
action orders out now that remain open and it's the policy of 
OPS to keep those orders open even though the specific issues 
that are identified in those orders are taken care of very 
early on. It's mainly a process that we use to monitor. Now, 
about the specific item I will ask Ms. Gerard to comment.
    Ms. Gerard. In this particular case there was 52 incidents 
of corrosion that were corrected by the company in the 1996/
1997 timeframe, and in the 5 years that followed our completing 
the writing of the amendment, at no time was the pipeline 
unsafe. We were fully aware of what the condition of the 
pipeline was and that the repairs that were needed to be made 
were done. We had at the same time 11 other corrective action 
orders that we were working on with other pipeline companies 
where there was a much more immediate hazard to the population 
than there was in this case. The immediate hazard had been 
remedied long before the amendment was formalized.
    In addition to that we were enforcing the integrity 
management regulations and had been inspecting Kinder Morgan 
under the new integrity management regulations and making 
enforcement actions in that case. It also was the time of 9/11. 
The hearing in question was the month before 9/11 and we had an 
enormous task to evaluate the protection of the critical 
infrastructure in all the other pipelines at the same time, so 
our point is that the immediate hazard was already remediated 
long before the amendment was written.
    The Chairman. Was Kinder Morgan's voluntary shutdown of the 
line solely due to safety concerns?
    Mr. Bonasso. It appears to us that it was. I know of no 
other reason why they would shut it down.
    The Chairman. If so, why did Kinder Morgan know--what did 
they know that the Office of Pipeline Safety didn't, since OPS 
only required the operator to reduce its operating pressure to 
80 percent?
    Mr. Bonasso. The requirement to reduce the operating 
pressure to 80 percent was when the initial concept of the 
failure was that it was a seam failure on the pipe. When it was 
discovered that the failure was not a seam failure due to 
corrosion, Kinder Morgan immediately decided to hydro-test 
pipe. Once they hydro-tested the pipe, they determined that 
there were other problems that were similar to this stress 
corrosion cracking that had occurred, and at that point is when 
the decision to shut down the pipeline and replace those 
sections took place. So they actually did some field testing of 
the equipment to determine whether or not it should be shut 
down.
    The Chairman. Thank you. Attorney General Goddard, I 
understand you have to leave to track down some criminals and 
we appreciate you being here.
    Mr. Goddard. Thank you very much, Mr. Chairman. I'll get 
right on it.
    The Chairman. Thank you very much for your participation 
and we appreciate very much all the work you've done. Mr. 
Bonasso, did Kinder Morgan meet the 30-day deadline for 
submitting a written plan with corrective measures as required 
by OPS' corrective action order?
    Ms. Gerard. No, they did not, but at the time the order was 
written, we did not know that stress corrosion was the 
phenomenon that caused the accident, and we contacted the 
president of the company orally and began to give him by phone 
the guidance that we wanted him to use to begin evaluation for 
stress corrosion cracking. At that time incidents of stress 
corrosion cracking were so rare on a pipeline of this type that 
we really had to consider what protocol should be used very 
thoroughly, because it is a relatively unknown phenomenon on 
hazardous liquid pipelines.
    The Chairman. Have they submitted it yet?
    Ms. Gerard. Yes, they have submitted it in pieces and we're 
still working to make sure the plan meets our standards.
    The Chairman. Has the plan been completed in its entirety?
    Ms. Gerard. Not entirely to our satisfaction.
    The Chairman. How can you decide whether it meets your 
standards if it hasn't been submitted?
    Ms. Gerard. They've submitted it. We find that it needs 
some adjustments still. They have submitted the plan.
    The Chairman. In reports issued in 2000 and 2001, the 
General Accounting Office criticized OPS' practice in the 1980s 
of issuing warning letters and letters of concern rather than 
issuing fines. In 1998, OPS decreased the proportion of 
enforcement action in which it proposed fines from 49 percent 
to 4 percent. What fines has Kinder Morgan been assessed by 
OPS?
    Ms. Gerard. I know that there have been four cases 
following Arizona inspections.
    The Chairman. Are there any fines been imposed on Kinder 
Morgan?
    Mr. Bonasso. There had been one $3,000 fine imposed in 
1998.
    The Chairman. Is the division of duties between OPS and the 
Arizona Corporation Commission identical to OPS' relationship 
with all states or do you have different arrangements with 
other States?
    Ms. Gerard. We have interstate agent states. There are 15 
of them. All of them have identical relationships with us, and 
the balance of the states have authority for inspecting the 
intrastate. They also the states that are in the intrastate 
program, which is the vast majority of them, also do the 
enforcement on the intrastate cases.
    The Chairman. Is it true that you have not issued an order 
required the dates certain replied and Kinder Morgan had not 
replied by the deadline and OPS didn't issue any further 
official document or impose a fine or anything? Is that true?
    Mr. Bonasso. Relative to this incident?
    The Chairman. Yes.
    Ms. Gerard. We amended we amended the corrective action 
order on the 6th to put in the guidance that we thought was 
necessary for the stress corrosion cracking evaluation.
    The Chairman. And no fine has been levied?
    Ms. Gerard. And we've given them a new deadline. No, no 
fine has been levied.
    The Chairman. Mayor, I want to thank you. I just want to 
mention just one other aspect of this problem though. I'm sure 
you have the same thing that I've seen here in the valley and 
that is the growth of the valley as it's going to take place 
similarly, it's going to happen in Tucson and Pima County. And 
you mentioned that a pipeline was laid in 1995, I believe.
    Mr. Walkup. 1955.
    The Chairman. 1955, excuse me, 1955, and it was in a remote 
area. How do you if you lay a pipeline now someplace in a 
remote area, 50 years from now it's not going to be in a remote 
area. How do you do this? Isn't it a little more reasonable to 
talk about Commissioner Spitzer's proposal that a 200-foot, 
400-foot, or whatever it is, boundary should be imposed as 
opposed to trying to find a remote area? Out of the pictures 
I've seen of this valley you're going to have to go a long, 
long way before you're in a remote area and that remote area is 
probably Federal land or a wilderness area.
    Mr. Walkup. There's kind of two emerging issues, that we 
have about 12 to 13 miles that are currently in the city. The 
vast majority of the pipeline runs through commercial areas 
along have sufficient right of ways to keep it away from 
residential areas. It's only as it gets over into the western 
side of our community does it really start bumping up against 
residents that are within 30 to 50 feet of it. I think----
    The Chairman. With all due respect, we used to have all the 
growth to the east too.
    Mr. Walkup.--I understand. But clearly to me and to the 
majority of the council, the first order of business is get the 
pipe repaired that is in the ground and you do that by hastily 
putting in the new pipe that is up to modern standards, 
adjusting the testing and maintenance procedure. At that point, 
that's why I say I think that it's important that we work with 
Kinder Morgan, we work with the State to see if there's an 
alternate location that is away from residential areas, not 
necessarily, Senator, in the Western desert. Maybe there's the 
possibility of running it along I-10. Rather than bringing it 
over west, maybe we can take it down I-10. So I haven't 
excluded personally the opportunity to look at a further 
location that keeps it out of the way of schools and 
residential areas, and in the process we also need to know what 
is the safe distance that any new construction that is going to 
be done in and around the existing pipeline is kept safe.
    So I think we've got a number of options, but the first and 
foremost is get the current 8-inch repaired either through 
repair of the pipe or the replacement of the pipe with the 12-
inch.
    The Chairman. Commissioner Spitzer, I know it's not it's 
out of the area of your present expertise----
    Mr. Spitzer. Lots of things are, Senator.
    The Chairman. Do you want to comment on that issue again?
    Mr. Spitzer. Well, our process for siting high-voltage 
transmission lines and power plants is one of attempting to 
provide as much notice in advance to the people where and we 
have this growth issue, so we have power lines that are needed 
in the north part of Phoenix and in the west part, and we mark 
those lines and give notice to the citizens as much as 
affordable.
    But in that context we still must make tough choices, and 
in those tough choices there--I think the folks that have lived 
in a community for 50 years are entitled to a little bit more 
respect in terms of their property rights and their aesthetic, 
even if it's not a health and safety issue, it's aesthetics, 
due matter. They're entitled to more protection of the law 
than, let's say, a real estate speculator who just wants to 
build the next Taj Mahal somewhere in the west valley and 
objects to a very necessary power line.
    This is a debate that's gone on for a long time, but the 
statutes in Arizona I think are instructive. We have a line 
siting committee, the Chair of which is the designee of the 
Attorney General of Arizona. There are a number of lay people 
as well as folks from State agencies that are in that panel, 
and the Commission reviews the deliberations of that Committee 
and we've been able to achieve our objectives. It requires some 
tough decisions, but notice in advance and participation from a 
wide universe of people has been able we've been able to get 
the necessary infrastructure in place, and that may be the 
model that we'd adopt.
    I'd also point out that my proposal is a balance. I'm not 
proposing that the Federal Government usurp the local zoning 
authority from the City of Tucson or from Pima County in this 
particular case. I'm suggesting that we establish baseline 
standards, and it doesn't have to be a formal regulation, it 
could be a notice that would be published that puts the zoning 
authorities and the developers on notice that building a house 
37 feet from a pipeline is not a good practice and if something 
goes wrong there is serious liability. That's the best 
deterrent I see.
    The Chairman. Mr. Bonasso and Ms. Gerard, what is your 
confidence that we will not see a repeat of this catastrophe 
here in the State of Arizona?
    Mr. Bonasso. Senator, we're learning more every day about 
what it takes to keep a pipeline safe. We're sharing that 
information. We're doing a study that will offer some guidance 
to public officials like Mr. Spitzer and the mayor on the 
issues that they're dealing with. I think that the enhanced 
level of inspection, the greater cooperation we have with 
Arizona, I believe that the inspection levels that we're--and 
the IMP, certainly the integrity management process that you 
acknowledged and pioneered I think is a very, very important 
tool in doing this. And I think that this is like any other 
aging piece of infrastructure: the more we know about, the more 
we're able to make sure that accidents don't occur with it.
    The Chairman. Is the pipeline--do you want to comment, Ms. 
Gerard?
    Ms. Gerard. Yes, I wanted to say that all the inspections 
in the world wouldn't have helped to stop this particular 
accident because the phenomenon is not one that we currently 
have a technology to be able to find. But as a result of the 
Pipeline Safety Act and the research program which is provided 
we are funding studies into this phenomenon already, and with a 
better ability to detect and a better ability to have criteria 
to be able to identify this in a risk study we'll be ahead of 
the game soon. The technology has to be there, it isn't just an 
inspection function.
    The Chairman. You're saying that the reason why all the 
inspections wouldn't have handled it is because the cause was a 
stress--was stress crack corrosion?
    Ms. Gerard. Yes.
    The Chairman. So what are we doing to make sure that we can 
detect?
    Ms. Gerard. We have three different projects underway prior 
to the accident--excuse me two prior to the accident to begin 
to look at modifying internal inspection devices to be able to 
find this kind of a phenomenon. So it's going to take us a 
little bit of time to get there but that research is necessary 
in order to improve the technology. A few years ago we couldn't 
accurately find the external corrosion that we can find today, 
so the technology is making a big difference and it's very 
important that it be funded and supported.
    The Chairman. Well, I did note we have dramatically 
increased the amount of Federal funding, maybe you might want 
to mention that, Mr. Bonasso.
    Mr. Bonasso. Well, I have in my testimony indicated that 
there has been a truly significant increase in funding for the 
Office of Pipeline Safety. It went from $60 million or $47 
million to $63 million in the last 5 years and there is an 
increase to $73 million in the 2004 budget. So the Office of 
Pipeline Safety is the fastest growing department in the 
Department of Transportation. It's--one of the things that 
we're challenged by is finding enough people to do the work 
that we've been funded to do.
    The Chairman. What's the average age of liquid pipelines in 
the United States?
    Ms. Gerard. Off the top of my head I'm going to say the 
majority of them are about the same age as Kinder Morgan, in 
that they were built in the 1950s to 1970s timeframe.
    The Chairman. Regulations for integrity management require 
that after completion of the initial baseline inspection liquid 
pipelines be internally inspected every 5 years. It seems to me 
that the intervals between integrity management inspections 
should be based on risk, including the age of the pipeline and 
other factors.
    Ms. Gerard. That's exactly what we think and that is how 
the regulation is written. The 5-year is a minimum threshold.
    The Chairman. All right. I want to thank the witnesses. 
Thank you for being here. Thank you. Please extend our 
condolences to the citizens of Tucson that experienced this 
catastrophe and our relief that it wasn't worse, Mayor Walkup.
    Mr. Walkup. I will certainly do that.
    The Chairman. Thank you all, thank you very much. Our last 
panel is Mr. Thomas Bannigan, President of Kinder Morgan 
Product Pipelines; Mr. David Cowley, the Director of Public 
Affairs, AAA Arizona; and Mr. Jonathan Olcott, Attorney at Law, 
Olcott and Shore, on behalf of the Silver Creek Homeowners 
Association. Welcome to the witnesses. We'll begin with you, 
Mr. Bannigan.

          STATEMENT OF THOMAS A. BANNIGAN, PRESIDENT, 
                KINDER MORGAN PRODUCTS PIPELINES

    Mr. Bannigan. Thank you, Mr. Chairman. I appreciate the 
opportunity to appear before the Committee today and address 
issues involving Kinder Morgan's pipeline operations in 
Arizona, including the July 30 release from our 8-inch Tucson-
Phoenix pipeline. I would also like to address our safety 
record and interaction with the Office of Pipeline Safety and 
the Arizona Corporation Commission. With your permission, Mr. 
Chairman, I will summarize my written testimony, which has been 
submitted for the record.
    Kinder Morgan owns and operates nearly 10,000 miles of 
products pipelines transporting 2 million barrels per day of 
refined petroleum products, including gasoline, diesel, and jet 
fuel, both commercial and military grades. We own or operate 
products pipelines in 21 states. Kinder Morgan is headquartered 
in Houston, Texas. We acquired the pipelines that serve Arizona 
markets in March 1998 as part of our acquisition of Santa Fe 
Pacific Pipelines Inc.
    Pipelines are the safest and most efficient means of 
delivering petroleum products from refineries to end users. The 
experience of Kinder Morgan and the companies which preceded it 
in the State of Arizona reinforces that fact. In the 48-year 
history of product pipelines serving Arizona, there have been 
no reported deaths or injuries to the public. In the 5 years 
and 6 months during which Kinder Morgan has owned and operated 
these pipelines, we have transported over 440 million barrels 
of petroleum products to Arizonans.
    During this period there have been three releases from our 
pipelines. Two were due to damage caused by third parties 
striking the pipelines, and the third the high pH stress 
corrosion cracking incident on July 30. With respect to that 
incident, the released was identified by our controller in 
Orange, California. The line was shut down within 3 minutes of 
receiving an indication of abnormal condition through our SCADA 
system. The volumes not recovered from the July 30 release 
represent one-ten-thousandth of 1 percent of the volumes Kinder 
Morgan has transported over these lines since acquiring them in 
1998. Nonetheless, one gallon out of our pipelines is one 
gallon too many. We take seriously our commitment to operate a 
safe and reliable pipeline system and we strive for operational 
excellence and incident-free operations.
    Protection of our employees, the public, and the 
environment in which we operate creates this drive. Moreover, 
our financial interests are best served by operating safely. 
Service disruptions cost our business, for we only make money 
if we can move products from point A to point B. Releases bring 
with them a host of unacceptable consequences, from response 
cost and environmental remediation expenditures to litigation, 
which more frequently these days can have both civil and 
criminal components. Injuries or death arising from an incident 
can undermine a company's reputation, its franchise to do 
business, as well as impede its ability to grow its business in 
states within which it operates.
    The decision to temporarily shut down the 8-inch pipeline 
on August 8 was the safe and prudent course of action. A 
fundamental principle that we constantly emphasize to our 
operations personnel is as follows: if in doubt, shut the 
pipeline down and restart the line only after the doubts have 
been eliminated. High pH stress corrosion cracking has never 
been experienced on a Kinder Morgan refined products pipeline 
and in our judgment the line had to be hydrostatically tested 
to ensure that it could be operated safely. Although the 
resultant service disruption inconvenienced consumers, far 
greater would have been the criticisms and consequences of 
continuing to operate the line and having another release such 
as the one on July 30.
    Kinder Morgan demonstrated its flexibility and 
responsiveness to the temporary shutdown of its 8-inch Tucson 
to Phoenix pipeline. During the weekend following the shutdown, 
we had modified terminal facilities in Tucson to allow Arizona 
CBG gasoline to be trucked to the Phoenix market. That same 
weekend our shippers were notified of the service disruption 
and we worked with them to reschedule additional products into 
Phoenix over the west line, which originates in California.
    In the week following the shutdown, Kinder Morgan's efforts 
allowed over 92 percent of the average daily demand in Phoenix 
to be met. Demand, however, had spiked during the service 
disruption and exacerbated the supply shortfall. Nonetheless, 
despite the service disruptions in August, Kinder Morgan 
actually transported 13 million more gallons of gasoline into 
the Phoenix market than it had transported the preceding 
August.
    Our commitment to safety is highlighted by our integrity 
management plan. This plan, which involves the assessment of 
pipeline integrity through internal inspection devices known as 
smart pigs was begun by Kinder Morgan's predecessor and 
continued by us. These pigs are very effective in detecting 
pipeline defects such as external corrosion and dents and 
gouges on a pipeline.
    Approximately 95 percent of Kinder Morgan's 3,325 miles of 
active pipelines in our Pacific operations have been internally 
inspected to date. Almost 94 percent of these miles were 
internally inspected before the effective date of DOT's 
integrity management program rules became effective in March 
2001.
    We were internally inspecting pipelines in Arizona before 
such actions were ever required by the Government. In fact, all 
Kinder Morgan pipelines in Arizona have been smart-pigged at 
least once before the effective date of the IMP rule and most 
have been smart-pigged at least twice. The 8-inch Tucson to 
Phoenix pipeline was inspected in 1996 and 1999 and the 6-inch 
Phoenix to Tucson pipeline in 1999 and again in 2003.
    It is important to note that while internal inspection 
tools used by Kinder Morgan can detect wall loss due to 
generalized corrosion, these tools are not yet capable of 
identifying high-pH stress corrosion cracking in small- 
diameter pipelines. The technology to detect SCC phenomenon 
exists for large-diameter pipelines, but it has not yet been 
miniaturized to accommodate smart pigs in pipelines with 
diameters as small as 6-inch as 8-inch.
    There has been testimony about the existence of generalized 
corrosion on pipelines and the responses of Federal and State 
agencies. Several facts bear noting. First, the evidence of 
generalized corrosion was identified by Kinder Morgan as part 
of its voluntary integrity management program just referenced. 
Operating pressures on the lines were reduced by the decision 
of the company until repairs were made.
    Second, the generalized corrosion identified was not the 
result of active ongoing corrosion, but rather the result of 
corrosion occurring in a 2-year period after construction in 
1956 and before appropriate cathodic protections were installed 
in that pipeline. Third, the absence of active corrosion was 
demonstrated in over 50 tests in research that was submitted to 
the Department of Transportation and the Office of Pipeline 
Safety.
    Fourth and finally, the history of corrosion releases on 
pipelines in Arizona provides compelling evidence of the 
effectiveness of the cathodic protection of our pipelines. 
There has not been a corrosion-related release on the 8-inch 
Tucson to Phoenix pipeline since 1980, on the 6-inch Phoenix to 
Tucson pipeline since 1988. There have been no reported 
corrosion releases in the history of the El Paso to Tucson 12-
inch and 8-inch pipelines, nor the Colton, California to 
Phoenix 20-inch pipeline.
    Although Kinder Morgan believes and understands the 
respective roles and responsibilities of the Office of Pipeline 
Safety and the Arizona Corporation Commission in regulating our 
interstate pipeline facilities, the company has been caught at 
times between the competing positions of staff members of ACC 
and the OPS. OPS clearly has primacy with respect to interstate 
pipelines and ensuring that a common nationwide framework of 
safety regulation exists. We encourage ACC's involvement with 
inspections, public education, siting, and notice requirements 
involving utilities, as well as promoting the excellent blue 
state damage prevention program in Arizona.
    All parties have a role to play in ensuring public safety. 
We believe we have an excellent safety record in the State of 
Arizona and we look forward to providing the citizens of 
Arizona with safe and efficient pipeline operations for many 
years to come. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Bannigan follows:]

  Prepared Statement of Thomas A. Bannigan, President, Kinder Morgan 
                Energy Partners L.P. Products Pipelines
Introduction
    Mr. Chairman, members of the Committee, my name is Tom Bannigan. I 
am President of Kinder Morgan Energy Partners Products Pipelines. 
Kinder Morgan owns and operates nearly 10,000 miles of products 
pipelines transporting 2,000,000 barrels per day (b/d) of refined 
petroleum products including gasoline, diesel and jet fuel (commercial 
and military). We own or operate products pipelines in 21 states. 
Kinder Morgan is headquartered in Houston, Texas.
    I appreciate the opportunity to appear before the Committee and 
address issues involving Kinder Morgan's pipeline operations in 
Arizona, including a July 30, 2003 release from our 8" Tucson to 
Phoenix pipeline, our safety record and interactions with the Office of 
Pipeline Safety (OPS) and the Arizona Corporation Commission (ACC).
Kinder Morgan Energy Partners, L.P.'s Assets in Arizona
    Kinder Morgan owns and operates interstate common carrier pipelines 
that serve the Arizona market. These assets were acquired from Santa Fe 
Pacific Pipeline, Inc. in March 1998. A map of our Pacific operations 
is included as Exhibit 1 of this testimony. Phoenix and Tucson are 
served by pipelines that originate at refining/import centers in the 
Los Angeles basin and West Texas and New Mexico. The West Line is a 20" 
diameter pipeline constructed in 1985, 1988 and 1989 which transports 
products from Kinder Morgan's Colton, CA tank farm to Phoenix, AZ. It 
has an average daily capacity of 204,000 b/d. A 6" pipeline begins in 
Phoenix and transports products originating in Southern California to 
the Tucson market. This line was constructed in 1956 and has an average 
daily capacity of 14,000 b/d. Two pipelines, 12" and 8" in diameter, 
originate in El Paso, Texas and deliver product to Tucson, AZ. The 8" 
line was constructed in 1955 and the 12" line in 1964. The lines have 
an average daily capacity of 94,000 b/d.
    The 8" line extends from Tucson to Phoenix and it was ``looped'' 
(expanded) in several segments so that it is comprised of both 8" and 
12" segments. The 12" segments were installed in 1992. Kinder Morgan 
also owns and operates pipelines that deliver military jet fuel to Yuma 
Marine Corps Air Station, Luke AFB and Davis-Monthan AFB.
    Kinder Morgan also owns and operates a petroleum terminal and truck 
rack at Phoenix and Tucson. Our market share in Phoenix (based on a 
percentage of products transported through the pipeline) is 28 percent. 
Five other oil companies own terminals in the Phoenix market. Our 
market share in Tucson is approximately 37 percent. Two other oil 
companies own terminals in the Tucson market.* \1\ Kinder Morgan only 
provides transportation and storage services. We do not market or sell 
petroleum products.
---------------------------------------------------------------------------
    \1\ On October 1, 2003, Kinder Morgan acquired the former Shell Oil 
Products U.S. terminals at Phoenix and Tucson.
---------------------------------------------------------------------------
    Kinder Morgan charges a tariff for transporting each barrel (42 
gallons) of petroleum products through its pipelines. The tariffs are 
subject to economic regulation by the Federal Energy Regulatory 
Commission. It costs a shipper approximately 2 cents per gallon to 
transport a gallon of gasoline from El Paso to Phoenix and 
approximately 3 cents from Los Angeles to Phoenix. The tariff charged 
is not linked to the price of gasoline. If retail prices are $1.50 per 
gallon or $2.25 per gallon, Kinder Morgan receives no more than the 2 
cents or 3 cents FERC tariff for each barrel transported. Kinder Morgan 
does not own the products it transports; it merely assumes custody of 
the refined product during its transportation. Each month, our shippers 
nominate volumes of product to be transported the following month 
through our various pipelines. In the case of the Arizona markets, 
shippers can nominate products from either, or both, California and 
West Texas/New Mexico sources. It is their choice.
    The average daily demand for all refined products in the Phoenix 
market is approximately 175,000 b/d. The average daily demand for the 
Tucson market is approximately 45,000 b/d. Because Phoenix is a non-
attainment area under the Clean Air Act, boutique gasoline fuels are 
used in the summer (March-October) and winter (October-March) to reduce 
ozone precursors. The summer grade gasoline is referred to as Arizona 
CBG (Clean Burning Gasoline) and the winter grade is called AZRBOB 
(Arizona reformulated blendstock for oxygenate blending). Ethanol is 
the oxygenate used in the Phoenix market in the winter. It is 
transported by rail or truck to the terminals and blended into the 
gasoline at the local terminals. Tucson is not a non-attainment area 
under the Clean Air Act, so this market uses conventional gasolines. 
(Conventional gasoline is also delivered to the Phoenix market for use 
outside of Maricopa County.)
    Approximately 70 percent of all products delivered into Phoenix are 
transported through the West Line. The remainder (30 percent) is 
transported through the East Line. Exhibit 2 provides the percentages 
of boutique gasolines (CBG and AZRBOB) and conventional gasolines 
transported to Phoenix from the West Line and East Lines. As the table 
illustrates, refineries in both California and West Texas/New Mexico 
have produced boutique and conventional fuels for Phoenix.
Safety Regulation and Safety Record
    Kinder Morgan is proud of our safety and compliance record. Safety 
and compliance are integral to every decision we make. We take 
seriously our commitment to operate a safe and reliable pipeline 
system, and we strive for operational excellence and incident-free 
operations.
    Kinder Morgan's track record in Arizona has been outstanding since 
we acquired these pipelines in March 1998. During this time, we have 
transported more than 440 million barrels of fuel into the state, and 
the recent product release in Tucson was the first time we have 
experienced an incident with one of our Arizona pipelines that was not 
a result of third party damage. We have had two releases due to third 
party damage and the July 30 release, which was due to high pH stress 
corrosion cracking (SCC). There were no injuries or fatalities as a 
result of any of these incidents.
    Research conducted by Allegro Energy Partners and sponsored by the 
American Petroleum Institute and Association of Oil Pipe Lines (Exhibit 
9) demonstrates that pipelines are the safest and most efficient form 
of transportation for refined products. Experience in Arizona reflects 
these national statistics. For example, for the five year period 1996-
2000, there were 1104 highway hazardous material incidents, 102 rail 
hazardous material incidents, and 2 hazardous liquid pipeline related 
releases in Arizona. (Source: Bureau of Transportation Statistic; 
Arizona Transportation Profile; http://www.bts.gov/publications/
transportation_profile/arizona/). In the last year of this period 2000, 
there were two fatalities and four injuries from non-pipeline 
transportation modes. There has never been a death or injury to a 
member of the public as a result of a release from a pipeline owned or 
operated by Kinder Morgan's products pipeline group. Moreover, to our 
knowledge, there has never been a fatality or injury to the public as a 
result of pipeline operations in the state of Arizona since such 
accident records have been kept.
    Our safety track record in Arizona is exemplary. Following the July 
30 release we acted decisively in the interests of pipeline safety as 
demonstrated by our decision to temporarily shutdown service on the 8" 
Tucson to Phoenix pipeline after we became aware of the high pH SCC, a 
phenomenon never previously experienced on our refined products 
pipelines.
    Our commitment to regulatory compliance is equally as strong. 
Kinder Morgan has a pipeline safety staff that actively participates in 
regulatory rulemaking, tracks all new regulations and ensures that our 
plans and procedures comply with pipeline safety regulations. We have a 
management of change process that ensures that changes are communicated 
to operations personnel. We have a separate internal auditing division 
that conducts audits of our field operations to ensure that we are 
complying with all applicable safety regulations.
    We are routinely inspected by the U.S. DOT Office of Pipeline 
Safety (OPS) and State Pipeline Safety Agencies, such as the Arizona 
Corporation Commission (ACC) and the California State Fire Marshall's 
office. In Arizona, alone, we have been inspected four times by the ACC 
since 1998 (1998, 1999, 2001 and 2003; in 1999 the OPS participated in 
the Arizona Audit). The Southwest Region has also audited the pipeline 
section between New Mexico and Texas twice. In addition, we have been 
subject to audits of our Procedural Manuals, Integrity Management Plan 
and Operator Qualification Program by OPS. These audits have not 
uncovered any major compliance issues.
    A specific example of our commitment to safety and compliance is 
one of the elements of our preventive maintenance program--our 
Integrity Management Program (IMP). Kinder Morgan Energy Partners (and 
its predecessor SFPP) have been inspecting pipelines with Magnetic Flux 
Leakage (MFL) in-line inspection tools (``smart pigs'') since the early 
1970s. Approximately 95 percent of Kinder Morgan's 3,325 miles of 
active pipelines in our Pacific operations have been internally 
inspected to date; almost 94 percent of these miles were internally 
inspected prior to the effective date of DOT's IMP rule (March 2001). 
As part of our ongoing preventive maintenance programs, we were 
internally inspecting pipelines in Arizona before such actions were 
ever required by the Federal or state government. In fact, all Kinder 
Morgan pipelines in Arizona had been smart pigged at least once before 
the effective date of the IMP rule and most had been smart pigged at 
least twice. The 8" Tucson-Phoenix pipeline was inspected in 1996 and 
1999 and the 6" Phoenix to Tucson pipeline in 1999 and 2003.
    Our overall philosophy is that internal inspection is very 
effective in detecting pipeline defects, such as external and internal 
metal loss, dents, and gouges, allowing us to repair potentially 
detrimental defects before they result in a release. By combining 
information found during the in-line inspections, cathodic protection 
surveys and coating surveys, we can identify areas along the pipeline 
where recoating may be necessary and where more cathodic protection 
rectifiers might be needed. We are then able to focus our resources and 
take the appropriate remedial measures. We believe the existence of 
such a proactive program is why there has not been a leak due to 
generalized metal loss corrosion on these pipelines in Arizona in the 
last 15 years.
    It is important to note that while internal inspection tools used 
by Kinder Morgan can detect wall loss due to generalized corrosion, 
these tools are not yet capable of identifying high-pH stress corrosion 
cracking in small diameter pipelines. The technology to detect SCC 
exists for larger diameter pipelines, but it has not yet been 
miniaturized to accommodate smart pigs in pipelines with diameters as 
small as 6" and 8".
    Our current IMP has been updated to incorporate DOT's 2001 
regulations. Our response, repair and mitigation strategies did not 
require any major revisions as a result of the 2001 DOT regulations; 
however, as most of the new regulatory requirements were already a part 
of our previous IMP program.
July 30 Incident
    On July 30, 2003, Kinder Morgan's 8" pipeline from Tucson to 
Phoenix failed during normal pipeline operations. The shutdown of the 
pipeline followed our emergency response procedures. The controller at 
our Orange, California control center initiated the line shut down 
within three minutes of receiving first indication of an abnormal 
condition from our SCADA system. We contacted the National Response 
Center, Arizona Corporation Commission, Arizona Department of Public 
Services, Arizona Department of Environmental Quality and The Tucson 
Fire Department. (In a post-response debriefing held with state and 
local agencies on October 2, Kinder Morgan received high marks for its 
response.)
    Kinder Morgan and OPS originally believed the cause of the release 
was an ERW pipe seam failure. Based on the March 8, 1989, Pipeline 
Safety Alert Notice (ALN-89-01) and discussion with the Department of 
Transportation Office of Pipeline Safety Southwest Region (DOT), the 
pipeline was repaired and restarted on August 1, 2003, based on the 
following operating parameters:

   Operate the pipeline at 50 percent maximum operating 
        pressure (MOP) for five (5) days

   Operate the pipeline at 60 percent MOP for one (1) day

   Operate the pipeline at 70 percent MOP for one (1) day

   Operate the Pipeline at 80 percent MOP until further notice.

    As part of Kinder Morgan's on-going integrity program, the joint of 
pipe from the July 30, 2003, incident was sent to an independent lab 
for metallurgical analysis. On August 8, 2003, Kinder Morgan received 
the metallurgical report. The report concluded that the cause of the 
rupture was high pH SCC. Kinder Morgan had never experienced SCC before 
on one of its refined petroleum pipelines. Given this information and 
the pipeline's location near populated areas in the City of Tucson, 
Kinder Morgan determined that the only safe option was to shut down the 
pipeline (which was still operating at 50 percent MOP) and conduct 
further testing. When the line was shut down on August 8, we advised 
the DOT/OPS--Southwest Region, the ACC and the Arizona Department of 
Weights and Measures. Additionally, on August 9, we left messages for a 
contact person within the Arizona Department of Commerce.
    Kinder Morgan immediately began developing hydrostatic test 
procedures for a pipeline that experienced an SCC failure. We used both 
internal engineering support and consultants with SCC and hydrostatic 
testing expertise to develop the plan. On August 13, 2003, this plan 
was submitted to OPS. We received initial approval of our plan from the 
DOT on August 14. We immediately began work to prepare the testing of 
approximately 12 miles of 8-inch line pipe. Testing would be done in 
two pipe segments--an 8-mile and 4-mile segment respectively. We 
received final approval of our test plan on August 19. The time between 
the initial and final DOT approvals was fully utilized to prepare this 
pipeline for hydrostatic testing. On August 20, the 8-mile segment was 
successfully tested. However, that same day the 4-mile segment failed 
the hydrostatic test. During the hydrostatic test, we experienced an 
SCC failure approximately 40 feet from the original release on July 30. 
Based on the second SCC failure, Kinder Morgan decided to bypass this 
section of pipe by temporarily using a portion of its Phoenix to Tucson 
6" pipeline. This plan was the fastest way to return gasoline 
deliveries to normal levels in the Phoenix market.
    After successfully putting the 8" Tucson to Phoenix line back in 
service through the 6" bypass on August 24, we continued our efforts to 
restore normal pipeline services. This was accomplished on September 
12, by installing 4,600 feet of new 12-inch pipe through the area where 
the 8" pipe originally failed. Additionally, all of the 8-inch pipe 
through Tucson has been successfully hydrostatically tested. Our 
current plan is to replace all the 8-inch pipe through Tucson with new 
12-inch pipe by February 2004.
Responses to Market Disruption
    Immediately after we decided to temporarily take the 8" Tucson to 
Phoenix line out of service because of the SCC failure mode, we 
initiated steps to mitigate the impact of the shutdown. Throughout the 
weekend of August 9-10, modifications were made to our Tucson terminal. 
These modifications involved converting several tanks from conventional 
service to CBG service and connecting a truck rack lane to these tanks. 
These modifications allowed our shippers to transport by truck volumes 
of CBG gasoline from the East that otherwise would have moved over the 
closed 8" pipeline. Approximately 12,000 b/d were trucked to the 
Phoenix market as a result of these facility modifications while the 8" 
pipeline was out of service.
    Kinder Morgan schedulers were also called to work the weekend of 
August 9-10 to contact our shippers and initiate the process of 
nominating additional volumes over the West Line to make up for volume 
shortfalls on the temporarily closed line between Tucson and Phoenix. 
During the week following the shutdown of the 8" pipeline, Kinder 
Morgan's West Line and barrels trucked from Phoenix, were meeting over 
92 percent of the average daily demand (175,000 b/d) in the Phoenix 
market. (See Exhibit 3 which shows total products delivered by day to 
the Phoenix market in August.) For just over half the days in the month 
of August, deliveries to Phoenix exceeded the average daily demand in 
Phoenix.
    Kinder Morgan's deliveries, however, do not tell the entire story. 
We do not know the inventory levels at the five other Phoenix terminals 
at the start of the month of August or for any day thereafter. That 
information is not in our possession and can only be obtained from the 
owners of those terminals. We do know, however, that nationally the 
trend is to maintain inventories at levels only necessary to meet 
anticipated demand and avoid the holding costs of excess inventory. 
When you combine the temporary shutdown of the 8" pipeline with current 
inventory management practices and the spike in demand triggered by 
panic buying and ``topping-off'' of tanks, there were resultant 
shortages of gasoline. Further complicating the supply/demand picture 
were logistical difficulties in accommodating increased trucking of 
products from Tucson terminals and outside of the state. (This problem 
in turn was exacerbated by weekly driving hour limits on truck drivers 
in Arizona. These restrictions were later relaxed.)
    It should be reiterated, however, that the flexibility and 
responsiveness of Kinder Morgan's employees to the service disruption 
and the round-the-clock efforts to restore service on the 8" pipeline, 
allowed us to cover over 92 percent of the average daily demand in 
Phoenix. Two facts have special note: Kinder Morgan's West and East 
Lines delivered 8.4 million more gallons of total products into Phoenix 
in August of 2003 than it did in August of 2002. Looking solely at 
gasoline volumes in 2003 over 2002 for the month of August, Kinder 
Morgan actually transported 13 million more gallons of gasoline. Again, 
a reflection both of the flexibility of our pipeline operations in 
Arizona and the extraordinary demand conditions in the Phoenix market.
    Kinder Morgan is not a marketer or retailer of gasoline. 
Consequently, the Committee should seek guidance from economists or 
experts from within those industry segments on the pricing consequences 
of the temporary supply/demand imbalance.
Stress Corrosion Cracking
    The July 30, 2003, failure was not the result of generalized metal 
loss corrosion. Kinder Morgan has not had a metal loss corrosion 
release on an Arizona pipeline since 1988 and on the 8-inch pipeline 
since 1980. The July 30 failure was caused by high pH SCC, a phenomenon 
that is new to the refined products pipeline industry and involves 
cracking and not wall loss due to corrosion.
    SCC must be distinguished from generalized petroleum corrosion. 
Generalized corrosion is the progressive conversion of steel to iron 
oxide (i.e., rust). This metal loss can either be localized pitting or 
a more widespread uniform corrosion. The rate of general corrosion is 
independent of the pressure (i.e., stress) in the pipe. Generalized 
corrosion can be controlled and eliminated through the application of 
cathodic protection currents.
    In contrast, SCC is dependent on the pressure in the pipe. If the 
stress is too low, SCC will not occur. Similarly, the presence of 
cathodic protection does not control the rate of SCC damage. SCC does 
not involve metal loss corrosion. SCC is a cracking phenomenon. The 
damage involves cracks that propagate at the microstructure level 
between and through the grains in the steel.
    The high pH SCC identified with the July 30 failure is also 
different from near neutral pH SCC in several ways. Foremost is that 
high pH SCC does not occur in the presence of metal loss corrosion. In 
most cases of high pH SCC, very little to no surface corrosion can be 
observed. For high pH SCC to occur, a very specific set of conditions 
must coexist. For pipeline steels, a specific stress state in a 
specific environment must be present. Our research indicates that prior 
to our July 30, 2003, high pH SCC failure, there were no published 
failures related to high pH SCC in hazardous liquid pipelines. Our 
integrity and maintenance activities will now include plans and 
procedures for investigating both near neutral pH and high pH SCC.
    A comprehensive stress corrosion cracking evaluation was conducted 
including 100 percent non-destructive examination by magnetic particle 
inspection of over 5,400 feet of pipeline removed from the immediate 
area of the release. Only two areas exhibited surface SCC indications. 
The first was in the pipe joint immediately downstream of the initial 
release. The other was a few thousand feet upstream. All of the initial 
investigation data from the removed pipe is currently being analyzed by 
the SCC contractor and we expect results in a few weeks. Identifying 
only two sites in almost 5,400 ft of pipe support the belief that the 
SCC issues are a localized phenomena related to specific environmental 
conditions. Based on the data gathered to date, we do not suspect SCC 
to be a widespread issue.
    Kinder Morgan submitted its Stress Corrosion Cracking (SCC) Field 
Investigation Protocol to DOT on September 29, 2003. This document 
outlined an analytical method for identifying areas along the pipeline 
system with the potential for SCC. Plans for a field inspection program 
were presented in which direct knowledge from the 1-mile area 
encompassing the July 30, 2003, release site will be used to delineate 
the severity of SCC and establish the contributing characteristics to 
locate other areas along the pipeline system with the potential for 
SCC.
    Kinder Morgan will use a predictive modeling process to enable the 
integration of physical characteristics and operating history of a 
pipeline segment with the results of inspection, examination and 
evaluation in order to determine the integrity of the pipeline 
regarding SCC.
    The key steps in this process are as follows:

   Gather and integrate pipeline data such as pipe 
        characteristics, construction practices, soils/environmental 
        characteristics, corrosion protection, pipeline operations, and 
        historical data. Specialized investigations include a series of 
        cathodic protection surveys, soil characterization activities 
        using specialized terrain classifications and extensive data 
        integration, as well as the non-destructive examination of the 
        5,400 feet of removed pipe discussed above.

   Develop an algorithm to predict SCC likelihood in this 
        system.

   Complete the case study on the removed pipe to delineate the 
        severity of damage and provide a reference for refining the SCC 
        predictability model.

   Predict terrain conditions conducive to SCC on this 
        pipeline.

   Conduct the geotechnical survey of the entire Tucson to 
        Phoenix system identifying locations containing SCC susceptible 
        zones. Follow-up with supplemental close interval surveys and 
        potential current mapping in these newly identified areas.

   Conduct field excavations using industry proven SCC 
        investigation methods.

   Reintegrate the excavation findings and calculate the 
        validity of the SCC prediction model. Prepare a report 
        summarizing the findings.

    The key to the success of this approach will be the collection, 
alignment, and integration of all necessary data into a database such 
that common characteristics can be accurately observed. Using the 
series of data techniques we propose in the immediate vicinity of the 
known release, together with the identification of other regions 
meeting similar criteria elsewhere along the Tucson--Phoenix pipeline, 
we believe we will be able to establish the safe operating parameters 
for this system. In the meantime, we are operating the Tucson to 
Phoenix 8" pipeline system at 50 percent maximum operating pressure and 
below 40 percent specified minimum yield strength (SMYS) of the pipe.
    The plan we submitted to the DOT/OPS makes use of known experts in 
the field of pipeline SCC. Mr. Jim Marr of Marr Associates has been 
selected to conduct our SCC field investigation. Mr. Marr is the 
Chairman of the National Association of Corrosion Engineers (NACE) 
committee drafting the recommended practice on SCC. The proposed plan 
exceeds the minimum requirements for field inspection and data 
integration identified in the ASME B31.8S standard. We are testing pipe 
operating at stress levels as low as 40 percent SMYS, whereas the 
Advisory and B31.8S suggest 60 percent SMYS. In addition, we are 
testing pipe operating with product whose temperatures are much below 
100F+.
    The protocol involves a complete surface environmental 
characterization in which we will identify the soil type, resistivity, 
pH, drainage potential, slope instability and other geotechnical 
features. We will follow this examination with a close interval survey 
in which we are measuring the effectiveness of cathodic protection 
system and the condition of the external coating system. In parallel, 
we will integrate all of our integrity management data into a 
specialized SCC predictive model that, together with our specific field 
results, will identify the combinations of stress, materials and 
environment that could contribute to SCC.
Department of Transportation/Arizona Corporation Commission/Kinder 
        Morgan's 6" Pipeline Phoenix to Tucson
    Testimony has been presented about regulatory actions surrounding 
generalized corrosion on the 6" Phoenix to Tucson pipeline and a 
Correction Action Order (CAO) issued by OPS. Kinder Morgan requested a 
hearing to contest some of DOT's initial requirements of the CAO. 
Nonetheless, Kinder Morgan took all appropriate steps to operate and 
maintain a safe pipeline, prior to the CAO, during the CAO review 
process, following the CAO hearing and after the issuance of the 
amended CAO.
    This is evident by Kinder Morgan taking the initiative to have an 
Integrity Management Program in place prior to DOT's implementation of 
its Integrity Management Program. This program led to the November 1999 
smart pig run. Kinder Morgan had completed repairs of all anomalies 
that required a pressure reduction by February 16, 2001, before DOT/OPS 
issued its initial CAO. Kinder Morgan followed all the DOT reporting 
requirements for a Safety Related Condition, and during the repairs, 
Kinder Morgan was in contact with both OPS-Southwest Region and ACC, 
keeping them abreast of progress. We implemented an active corrosion 
testing procedure. During the repairs of the 1999 pig run, Kinder 
Morgan performed specialized active corrosion tests and not a single 
test indicated that active corrosion was present on LS 53/54. Kinder 
Morgan also contracted two third-party consultants to review Kinder 
Morgan findings based on the gathered data from anomaly repairs and 
active corrosion tests. Dr. John Kiefner of Kiefner and Associates Inc. 
and Mr. Kevin Garrity of CC Technologies Inc. reviewed Kinder Morgan 
data and provided testimony at Kinder Morgan's CAO hearing. Mr. Garrity 
testified that he believed that the corrosion on LS-53/54 occurred 
within the first two years after its initial construction and before 
its then owner applied cathodic protection to the system. Dr. Kiefner 
validated the accuracy of the ILI tool such that the anomalies 
identified by the tool were within 95 percent accuracy of those 
identified in the field. Further, even before receiving the amended CAO 
dated March 17, 2003, Kinder Morgan ran another smart pig through this 
line. Kinder Morgan had already done so by March 1 2003. Throughout the 
adjudication process at DOT/OPS, Kinder Morgan continued to conduct 
cathodic protection tests and its weekly rectifier aerial surveys and 
quarterly physical inspections.
    In November 1999 Kinder Morgan conducted an in-line inspection of 
the 6" pipeline between Phoenix and Tucson, Line Section 53/54 as part 
of its preventive maintenance and integrity management program. This 
in-line inspection predates the Federal pipeline safety regulation's 
integrity management requirements. This was the first time that an in-
line inspection was conducted on LS 53/54, however; it was not the 
first time in-line inspections had been conducted on pipelines in 
Arizona. The preliminary report received from the in-line inspection 
vendor was received by Kinder Morgan on February 28, 2000, and 
indicated several anomalous conditions that had the potential to affect 
the safe operation of the pipeline. Kinder Morgan engineers reviewed 
and analyzed the report data and the safe working pressure of the 
pipeline was calculated based on the indicated anomalies. When these 
calculations were completed the next day, February 29, 2000, the 
pressure was immediately reduced. (See Exhibit 8 for chronological 
sequence of events of LS 53/54.)
    We took appropriate action in the interest of public safety. 
Maintenance crews were dispatched to begin excavating and investigating 
the anomalies. On March 2, 2000, maintenance crews discovered a segment 
of pipeline that had three corroded areas close to each other and as 
such was classified as generalized corrosion. The pipeline was repaired 
and on March 8, a Safety Related Condition report was submitted via fax 
to the OPS and the ACC. A duplicate was filed with the ACC because 
Kinder Morgan was unaware that the ACC was no longer an interstate 
agent of the Office of Pipeline Safety. (LS 53/54 are part of the 
interstate pipeline that transports refined products from California to 
Phoenix and Tucson.) Kinder Morgan would later learn that OPS had not 
renewed the interstate agent agreement with ACC. ACC responded to the 
Safety Related Condition and began a special investigation of the 
event.
    On March 28, 2000, another area of generalized metal loss corrosion 
was found and Kinder Morgan's maintenance manager on-site requested 
that the pipeline be shut down while the pipe was inspected and 
repaired as a precautionary safety measure. This was done. Meanwhile, 
ACC notified Kinder Morgan that they considered LS 53/54 ``intrastate'' 
and based on its state authority dictated that the pipeline could not 
be restarted without its approval. Although Kinder Morgan did not 
accept ACC's position regarding the intrastate classification of the 
pipeline, we received concurrence from ACC to restart the pipeline at a 
reduced pressure of 52 percent of the MOP. The ACC would later attempt 
to cite Kinder Morgan for violations of the Arizona pipeline safety 
regulations and, under its state authority, conduct a routine safety 
evaluation of this pipeline. The ACC subsequently dropped both of these 
endeavors. Subsequently OPS wrote an opinion letter clearly identifying 
these pipelines as interstate.
    During this time, Kinder Morgan understood that OPS granted the ACC 
temporary interstate agency status and requested that it investigate 
the Safety Related Condition. OPS personnel also participated in the 
investigation. We cooperated completely with this investigation and 
complied with every request made by the ACC or the OPS.
    By September 15, 2000, Kinder Morgan had addressed all anomalies 
that required a reduction in operating pressure and which were 
discovered during its November 1999 in-line inspection of LS 53/54. The 
only outstanding anomaly after this date was one that was located under 
a concrete embankment under Interstate 10 and adjacent to a railroad 
right of way. This anomaly did not require a reduction in operating 
pressure, but because of its location, Kinder Morgan decided to replace 
it with new pipe. The delay in making this repair was due to delays in 
obtaining permits from the Arizona Department of Transportation. The 
replacement of this pipe was completed on February 16, 2001.
    On March 14, 2001, OPS issued a Corrective Action Order (CAO) 
requiring Kinder Morgan to:

  1.  Maintain the pressure on the line that is less than or equal to 
        80 percent of the MOP (Maximum Operating Pressure).

  2.  Get OPS approval before increasing the operating pressure on the 
        line above 80 percent.

  3.  Develop and implement a work plan and schedule for performing 
        coating evaluation on line LS 53/54.

  4.  Develop and implement a work plan and schedule for re-coating, 
        repairing or replacing sections of LS 53/54 that are determined 
        by the coating evaluation to require remedial measures.

  5.  Develop a work plan and schedule for conducting internal 
        inspection tests using the same or similar technology which 
        identified the extensive metal loss referred to in the 
        preliminary finding.

  6.  Submit a report to OPS on all internal inspections that had been 
        conducted on pipeline systems within the states of Arizona, New 
        Mexico, and Texas since January 1997.

    The basis for these corrective actions were the preliminary 
findings of OPS and the conclusions it drew relative to the role the 
pipeline coating played in the corrosion indicated on the in-line 
inspection report. Kinder Morgan disagreed with the technical basis of 
the preliminary finding, the proposed corrective action and thus 
requested a hearing. A hearing was granted and held on August 14, 2001.
    Our disagreement primarily focused on two issues; first, the 
corrosion discovered by the in-line inspection and second, the effect 
of the coating on the adequacy of the cathodic protection. As stated 
earlier, this was the first in-line inspection conducted on this 
pipeline. This pipeline was constructed in 1956 without cathodic 
protection. It was approximately two years later before cathodic 
protection was applied. Based on cathodic protection surveys, more 
anode ground beds and rectifiers--the current source for cathodic 
protection, were installed along the pipeline. This is important 
because, although the in-line inspection indicated a number of 
locations of corrosion, there was no way to identify from the report 
when the corrosion took place. In an effort to determine if the 
corrosion was active or on-going corrosion, electrical and chemical 
test were conducted at each location excavated. These tests 
demonstrated that the line was receiving adequate cathodic protection 
and that there was no active corrosion taking place at the anomaly 
locations. These tests demonstrated that the corrosion that was 
indicated on the in-line inspection report was probably corrosion that 
occurred in the years prior to cathodic protection being installed.
    OPS's preliminary findings addressed coating, current density 
requirements and rectifier spacing. It concluded that coating 
degradation was a ``major contributing factor in the development of 
corrosion and external metal loss''. As demonstrated by the electrical/
chemical tests, however, there was no evidence of active on-going 
corrosion on this line. The annual monitoring of the cathodic 
protection system indicated that the pipeline was adequately 
cathodically protected. While the condition of the coating increases 
the current requirements and impacts rectifier spacing, tests 
demonstrated that the cathodic protection was effective. More pertinent 
to the adequacy of the cathodic protection is the fact that a corrosion 
leak has not occurred on this pipeline since 1988.
    Kinder Morgan retained the services of Kevin C. Garrity, PE of CC 
Technologies Service Inc and Dr. John Keifner of Keifner and Associates 
Inc., two leading experts in their respective fields, to assist us in 
the review and analysis of the tests.
    Specifically, Kinder Morgan retained CC Technologies Services, Inc. 
(CC Technologies) to conduct an integrity and corrosion control review 
of LS 53/54 and provide a critical assessment of the practices and 
procedures that Kinder Morgan has employed to establish the integrity 
of this section of 6" diameter pipeline. Specific emphasis was placed 
on the analysis of in-line inspection anomaly data; analysis of 
corrosion digs inspection data; and analysis of cathodic protection 
practices.
    CC Technologies analysis concluded that we could continue to safely 
manage the integrity of the LS53/54 piping through the existing 
procedures included in the Kinder Morgan integrity plan and that we 
should not proceed with costly and ill advised procedures to satisfy a 
corrective action order that failed to acknowledge the preponderance of 
evidence demonstrating that LS53/54 have been safely managed against 
corrosion integrity threats.
    Dr. John Keifner was retained to review the analysis of the anomaly 
data, perform a probability analysis of the pipeline corrosion data and 
a review of the proposed plan of remedial action. Dr. Kiefner concluded 
that the metal loss anomalies that were tested did not appear to be 
actively corroding and did not appear to be associated with MIC. 
Further, his analysis indicated that effective cathodic protection was 
being achieved and that the majority of the metal loss on this pipeline 
occurred during the first few years after construction prior to the 
establishment of effective cathodic protection. He further concluded 
that the review of the analysis of anomaly data indicated that the 
anomalies that met the conservative dig criteria chosen by Kinder 
Morgan were repaired or replaced, the remedial actions taken to address 
the anomalies that were detected were conservative and adequate to 
reduce the potential for a pipeline failure due to a detected metal 
loss or deformation anomaly and that future in-line inspections should 
be scheduled in accordance with the Kinder Morgan IMP.
    The above information was presented at the DOT hearing on August 
14, 2001. On March 17, 2003, Kinder Morgan received an amended CAO that 
indicates that the Hearing Examiner agreed with our position relative 
to the need for coating evaluation. The amended order removed the 
requirements for performing the coating evaluation; the requirement to 
re-coat, repair or replace coating based on the coating evaluation and 
the requirement to submit a report to OPS on all internal inspections 
that had been conducted on pipeline systems within the states of 
Arizona, New Mexico, and Texas since January 1997.
    The only requirements in the amended CAO were to limit the 
operating pressure to 80 percent of MOP, develop a work plan and 
schedule for conducting an internal inspection test using the same or 
similar technology used previously; and submit the findings of the in-
line inspection to OPS.
    By the time Kinder Morgan received the amended order on March 17, 
2003, we had already completed the subsequent run of the in-line 
inspection and were waiting on the inspection report. We received the 
report in May 2003 and began to take the appropriate remedial measures. 
We furnished a report of the findings to OPS. In fact, during the 2003 
ACC audit of the Arizona pipelines, ACC visited one of the repair 
sites.
    The 2003 in-line inspection report indicated that:

   There were no ``Immediate'' repairs as defined by DOT's IMP 
        regulation.

   There were two ``60-day'' repair conditions. The first was a 
        3.5 percent dent at 1:10 o'clock position. The second was a 4.7 
        percent dent at 11:51 o'clock position. Repairs were made.

   There were no ``180-day'' repair conditions reported in the 
        Final report.

    We believe that we have fully complied with the amended CAO and are 
operating this pipeline and our other pipelines in Arizona in a safe 
and reliable manner.
Conclusion
    Pipelines are the safest and most efficient means of delivering 
petroleum products from refiners to end-users. The experience of Kinder 
Morgan and the companies which preceded it in Arizona is no exception. 
In the 48-year history of products pipelines serving Arizona, there 
have been no deaths or injuries to the public. In the five years and 
six months during which Kinder Morgan has owned and operated these 
pipelines, we have transported over 440 million barrels of petroleum 
product to Arizonans. During that period there have been 3 releases 
from our pipelines. Two were due to damage caused by third parties 
striking the pipeline and the third was the high-pH SCC-incident on 
July 30.
    The volumes released from the July 30 incident represented 1/
10,000th of 1 percent of the volumes Kinder Morgan has transported over 
these lines since acquiring them in March 1998. Nonetheless, one barrel 
out of our pipelines is one barrel too many. The simple fact is that 
Federal or state regulations do not animate our interest in safety. 
Protection of our employees, the public upon whose lands we operate and 
the environment creates the drive for operational excellence and 
incident-free operations. Moreover, our financial interests are best 
served by operating safely. Service disruptions cost us business, for 
we only make money if we can move products from origin to destination. 
Releases also bring with them a host of unacceptable consequences from 
cleanup costs and environmental remediation expenditures to litigation, 
which, more frequently these days, can have both civil and criminal 
components. Injuries or death arising from an incident can undermine a 
company's reputation and its franchise to do business or grow its 
business in those states in which it operates. These are all compelling 
reasons for operating our pipelines safely.
    The decision to temporarily shut down the 8" pipeline on August 8 
was the safe and prudent course of action. A fundamental principle that 
we constantly emphasize to our operations personnel is: ``If in doubt, 
shut the pipeline down and restart the line only after the doubts have 
been eliminated.'' High pH SCC has never been experienced on a Kinder 
Morgan refined products pipeline and we believed the line had to be 
hydrostatically tested to ensure it could be operated safely. Although 
the resultant service disruption inconvenienced consumers, far greater 
would have been the criticisms and consequences of continuing to 
operate the line and having another release. Moreover, our flexibility 
and responsiveness were key to providing petroleum products to Phoenix 
during the service disruption, a task complicated by the surge in 
demand as ``panic buying'' set in.
    Testimony has been entered about generalized corrosion issues on 
the 6" pipeline between Phoenix and Tucson. The OPS/ACC relationship 
and the length of time OPS took to issue its amended corrective action 
order cannot obscure several fundamental facts: First, the internal 
inspection Kinder Morgan ran on the 6" pipeline was part of a voluntary 
program began in the early 1970s by SFPP and carried on by Kinder 
Morgan to assess the integrity of its pipelines. This program predated 
the mandatory OPS management plan program by approximately 30 years. 
Operating pressures on the 6" line were reduced first to a level 
acceptable to OPS and again to a lower level requested by the ACC 
despite the lack of authority for ACC to order the reduction. Kinder 
Morgan contested the OPS order because it disagreed with the assessment 
that the pipeline was not adequately protected from generalized 
corrosion. Nationally renowned experts, who provide their expertise to 
government and industry alike, demonstrated the pipeline was adequately 
protected from generalized corrosion. Moreover, the March 17, 2003, 
amended corrective action order implicitly recognizes the effectiveness 
of the cathodic protection on the 6" pipeline when it removed the 
requirement to recoat the pipeline. Additionally, the primary action 
which OPS requested be taken in its amended corrective action order 
(e.g., another internal inspection of the 6" line), was completed by 
Kinder Morgan prior to the order being issued. Here too, it was 
undertaken because it was the prudent and sensible course of action.
    Although Kinder Morgan believes it understands the respective roles 
and responsibilities of OPS and the ACC in regulating our interstate 
pipeline facilities, the company has been caught between the competing 
positions of certain staff members at ACC and the OPS. OPS clearly has 
primacy with respect to interstate pipelines and ensuring that a common 
nationwide framework of safety regulations exists. We encourage ACC's 
involvement with public education, siting and notice requirements 
involving utilities as well as promoting the excellent ``blue stake'' 
damage prevention program in Arizona. All parties have a role to play 
in ensuring public safety.
    Kinder Morgan has built an excellent safety record in the state of 
Arizona. We look forward to providing the citizens of Arizona with safe 
and efficient pipeline operations for many years to come.
                                 ______
                                 
                  Exhibit 1--Pacific Region System Map

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       Exhibit 2--Phoenix Gasoline Distribution (East/West Line)

 
 
 
                            2003 January-July
                     Phoenix Total Gasoline Volumes
 
East Line                                        11,020,535      47.3%
West Line                                        12,279,044      52.7%
                                               -------------------------
Total                                            23,299,579     100.0%
 
                            2003 January-July
                  Phoenix Conventional Gasoline Volumes
 
East Line                                         2,154,359      60.8%
West Line                                         1,387,466      39.2%
                                               -------------------------
Total                                             3,541,825     100.0%
 
                            2003 January-July
                   Phoenix CBG/AZBOB Gasoline Volumes
 
East Line                                         8,866,176      44.9%
West Line                                        10,891,578      55.1%
                                               -------------------------
Total                                            19,757,754     100.0%
 

             Exhibit 3--Phoenix Barrels Delivered in August

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           Exhibit 4--Tucson to Phoenix Temporary Bypass Line

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      Exhibit 5--East Line Expansion/Maximum East Line Capacities
                          East Line Expansion
    SFPP is considering installing approximately 160 miles of 16" pipe 
between El Paso and Tucson and replacing the remaining 84 miles of 8" 
pipe between Tucson and Phoenix with 12" pipe. Sixty miles of 16" pipe 
would be installed downstream of El Paso and 100 miles downstream of 
Deming. This would result in one 16"/l2" line at El Paso and one 12"/8" 
line between El Paso and Tucson and pump stations--with new pumps--at 
El Paso and Deming on both lines. New pumps would also be required at 
Tucson but initially it would not be necessary to run Toltec.
    Phase I would increase the current East Line capacity by about 56 
percent (from 94,000 BPD to 147,000 BPD). If the 16" line were 
eventually completed all the way from El Paso to Phoenix (Phase II), 
the capacity of the 12" line to Tucson would be 77,000 BPD and the 
capacity in the 16" line feeding the 12" TU-PX line would be 120,600 
BPD. With Toltec Booster (Phase III) this capacity would increase to 
155,600 BPD.
    This proposal would include a break-out facility west of El Paso to 
gather product from various shippers and pump to Tucson and Phoenix. 
Several operational and design issues have to be resolved to finalize 
the cost estimate and evaluate the feasibility of the break-out 
facility. Because of the level of detail required to prepare an 
accurate scope of work, these issues will not be finalized in time to 
include in the feasibility study. Estimated budget for the break-out 
facility is $30,000,000.
    A cost estimate for this proposal (Phase I only) is $180MM.
 
 
 
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                                ______
                                 
                     Tucson to Phoenix 8" Timeline

July 30, 2003--Initial Release

August 1, 2003--Pipeline Repaired and Line Restarted

August 6, 2003--DOT Corrective Action Order Issued on Initial Release

August 8, 2003--Received Metallurgical Report and Shutdown Pipeline--
    DOT/ACC Notified

August 9, 2003--Additional Discussions with DOT/ACC re Line Shutdown

August 9, 2003--Initiated discussions with Shippers on nominating 
    additional Phoenix grade gasoline from the LA Refineries

August 11, 2003--First discussions with Governor's Office regarding 
    Line Shutdown

August 12, 2003--Completed Tucson Terminal tank and loading rack 
    modifications for loading of Phoenix grade gasoline

August 13, 2003--Submission of Hydrostatic Test/SCC Investigation Plan

August 14, 2003--Received Initial Approval from DOT on Hydrostatic 
    Test/SCC Investigation Plan

August 15-19, 2003--Prepare line for hydrostatic test in advance of DOT 
    Final Approval

August 19, 2003--Received Final Approval from DOT on Hydrostatics Test 
    Plan

August 20, 2003--Section 1 Hydrotest Complete

August 20, 2003--Section 2 Hydrotest Unsuccessful

August 24, 2003--Start-up of Tucson to Phoenix Pipeline with Bypass

September 12, 2003--Completed installation of 4,600 feet of new 12" 
    pipeline. Tucson to Phoenix line operating normally at 50 percent 
    maximum operating condition. Phoenix to Tucson 6" pipeline 
    operating normally.
                                 ______
                                 
                               Exhibit 7
                     LS 53/54 Phoenix to Tucson 6" 
                  1999 Internal Inspection and Repairs

   November 24, 1999--Ran a high resolution smart pig through 
        LS 53/54. This was the first in line inspection for LS 53/54.

   February 28, 2000--Received ``Preliminary Report'' listing 
        anomalies having an indicated maximum pit depth greater than or 
        equal to 50 percent of wall thickness.

   February 29, 2000--After analysis on the preliminary report, 
        operating pressure was lowered to 1735 psi from 2000 psi.

   March 2, 2000--Anomaly at MP 71.52 was excavated and 
        evaluated. No additional pressure reduction was required at 
        this time.

   March 3, 2000--Installed three full encirclement split steel 
        reinforcement sleeves over areas of general corrosion.

   March 28, 2000--LS 53/54 was shutdown to replace 120-feet of 
        pipe at MP 47.06 in which generalized corrosion was identified.

   April 3, 2000--Further reduced operating pressure to 1050 
        psig, 52.5 percent of MOP in order to restart pipeline.

   September 15, 2000--All pressure affecting anomalies found 
        by the November 1999 In Line Inspection of LS 53/54 are 
        repaired.

   February 16, 2001--The last outstanding anomaly (not 
        pressure affecting) was replaced with new pipe. The delay in 
        making this repair was due to delays in obtaining permits from 
        the Arizona Department of Transportation.
                                 ______
                                 
   Exhibit 8--LS 53/54 CAO, History & Timeline from 1999-May 29, 2003

   1)  On November 24, 1999, as part of KM's Integrity Management 
        Program, KM ran a high-resolution smart pig through LS-53/54. 
        This was the first In Line Inspection (ILI) for LS-53/54.

   2)  On February 28, 2000, KM's ILI vendor submitted a ``Preliminary 
        Report'' to KM.

   3)  After doing an analysis on the preliminary report for Safe 
        Operating Pressure, it was determined that the pressure should 
        be lowered to 1735 psi from its original operating pressure of 
        2000 psi. The pressure was lowered on February 29, 2000.

   4)  On March 2, 2000, an anomaly at MP 71.52 was excavated and 
        evaluated. No additional pressure reduction were required.

   5)  On March 8, 2000, KM submitted a Safety Related Condition (SRC) 
        report to DOT per the requirements of 49 CFR 195.56. A copy of 
        this report was also faxed to the ACC. The SRC was submitted 
        because KM classified one of the anomaly areas as general 
        corrosion. This classification along with the pressure 
        reduction met the definition of a SRC under 49 CFR 195.55(a)(1) 
        which states: ``General corrosion that has reduced the wall 
        thickness to less than that required for the maximum operating 
        pressure''. It was determined ``general'' because 3 different 
        in areas in close proximity were affected.

      a)  KM indicated on their SRC that the discovery date was March 
            2, 2000, and the repair completion date was March 3, 2000. 
            KM installed 3 full encirclement split steel reinforcement 
            Sleeves (26", 21" and 12") over areas of general corrosion.

   6)  On March 28, 2000, KM shutdown LS-53/54 at the request of the 
        Maintenance Manager in order to safely replace 120-feet of pipe 
        at MP 47.06 in which generalized corrosion was identified.

   7)  By letter dated March 29, 2000, ACC informed KM that LS-53/54 
        was an intrastate pipeline and that KM could not restart the 
        line without first obtaining ACC's approval.

   8)  On March 31, 2000, KM responded to ACC's Letter dated March 29, 
        2000 informing the ACC of KM's belief that all their pipeline 
        operations within the state of Arizona are interstate as none 
        of the commodity is transported through these lines originates 
        in Arizona. KM also stated ``. . . in an effort to work 
        cooperatively with Arizona, we have agreed to take certain 
        steps to ensure the safety of the line in exchange for 
        Arizona's concurrence that we may restart and continue to 
        operate the line. In addition, ACC was informed that the line 
        pressure on LS-53/54 would be maintained at 1500 psi, which 
        would produce an additional safety factor above the original 
        1735 psi.

   9)  On April 3, 2000, KM further reduced it operating pressure to 
        1050 psig (52.5 percent of MOP).

  10)  On April 7, 2000, Kinder Morgan (KM) submitted a letter to DOT 
        requesting their assistance in clarifying with ACC the 
        interstate/intrastate delineation for LS-53/54.

  11)  By letter dated April 11, 2000, ACC informed KM that they would 
        be inspecting KM facilities on May 15, 2000. ACC wanted to 
        conduct this audit under their intrastate authority.

  12)  By letter dated May 4, 2000, the ACC informed KM that during a 
        ``Specialized audit of a Safety Related Condition on the six 
        inch (6") hazardous liquid pipeline from Phoenix to Tucson'' 
        the ACC noted seven (7) probable non-compliances during the 
        audit.

      a)  195.214(b) Each welding procedure must be recorded in detail 
            including the results of the qualified tests. Finding: ACC 
            indicated that ``The specifics for rods or rod size to be 
            used to make the weld are not correct. Procedures use two 
            (2) different schedules''. Their note was that this 
            probable noncompliance is common throughout the welding 
            procedures submitted.

      b)  195.222: Each welder must be qualified in accordance with 
            section 3 of API Standard 1104. Finding: ACC indicated that 
            ``The welder using KM welding procedures are not qualified. 
            All welders must be re-qualified because the welding 
            procedures are not qualified. All welders must be qualified 
            after procedures have been qualified. All new welders must 
            be qualified under the 18th edition of API 1104.

      c)  195.244: Test leads used for corrosion control or 
            electrolysis testing must be installed at intervals 
            frequent enough to obtain measurements indicating adequacy 
            of cathodic protection. ``Findings: The potentials measured 
            on the pipeline exposed on March 29, 2000 do not meet the 
            requirements of the -850 mV criteria. The current applied 
            potential was -1.184 volts and -0.750 volts (current off). 
            Potential measured at MP 60.63 were -.634 volt current 
            applied and -.608 volt current off. KM failed to confirm 
            the adequacy of CP.

      d)  195.402: A manual of written procedures shall be developed 
            for conducting normal operations and maintenance. Findings: 
            The KM procedure titled: Administrative Policy for CP 
            Rectifier Quarterly Maintenance located in the KM Corrosion 
            Manual fails to instruct employees to inspect rectifiers 
            six times each calendar year not to exceed two and one half 
            months. The current KM procedure requires that the 
            rectifiers be inspected at least four times a year at 
            intervals not to exceed four months (see exhibit No. 2).

      e)  195.416(c): Each rectifier must be inspected at least six 
            time each calendar year at intervals not to exceed two and 
            one half months. Findings: Records indicate that rectifiers 
            were not inspected six times a year at intervals not 
            exceeding two and one half months.

      f)  Arizona Administrative Code R-14-5-202(J): Cathodic 
            protection systems must meet -850 mV criteria. Findings: KM 
            is currently utilizing an alternative criteria and must 
            apply for a waiver to continue to use any criteria other 
            that the -850 mV criteria.

      g)  Arizona Administrative Code R-14-5-202(Q): All welding 
            procedures and welder qualifications will be in accordance 
            with API 1104. Findings: KM is using API 1107 when making 
            repairs to the pipeline. State code does not allow any 
            other standard then API 1104 with out a waiver authorizing 
            the use.

  13)  By letter dated May 19, 2000, ACC informed Mr. Jay Shapiro of 
        Fennemore Craig, Phoenix, AZ, outside legal counsel for KM, 
        that the intrastate code compliance audit scheduled for June 
        15, 2000 was indefinitely postponed. In addition, the request 
        for response to the non-compliance items listed in their May 4, 
        2000 letter was rescinded. However, KM is put on notice that 
        these non-compliances have been identified.

  14)  KM received a carbon copy letter, dated June 1, 2000, of an 
        inspection report from the ACC addressed to Mr. Rod Seeley with 
        the U.S. Department of Transportation, Houston, TX. Within this 
        letter, ACC indicated that KM violated the following 
        regulations: (NOTE: the following violation are the same as 
        cited in the May 4, 2000 letter excluding the Arizona 
        Administrative Code violations)

      a)  195.222 Welder Qualifications: ACC indicated that welder were 
            qualified to a procedure that was not qualified. ACC 
            position is that procedures need to be qualified in 
            accordance with API 1104. 49 CFR 195.214 Welding General 
            does not require welding procedures to be qualified in 
            accordance with API 1104. This section just requires that 
            the procedures must be qualified. ACC intrastate regulation 
            do stipulate that welding procedures need to be qualified 
            in accordance with API 1104 but since KM in an interstate 
            operator, this restriction does not apply. KM believes that 
            all its welding procedure, which were previously qualified 
            under the supervision of an ACC inspector, continue to meet 
            the Federal requirements.

      b)  195.244 Test Leads: ACC indicated that corrosion control test 
            leads must be installed at intervals frequent enough to 
            obtain electrical measurements indicating the adequacy of 
            the cathodic protection. KM could not achieve adequate 
            cathodic protection between test stations. ACC related the 
            low potentials list below as the cause of ``The thousands 
            of anomalies identified by the pipeline inspection tool 
            clearly indicate a lack of cathodic protection test 
            stations used to determine the adequacy of cathodic 
            protection on the pipeline. ACC indicated that on March 29, 
            2000, the pipe to soil potentials at

                      i)  MP 71.52 were -1.184 volts, current applied 
                and -0.740 volts current off.

                      ii)  MP 60.63 were -0.634 volts current applied 
                and -0.608 volts current off.

      c)  195.402 Procedural Manual for Operations, Maintenance and 
            Emergencies: ACC indicated KM rectifier inspection 
            procedure fails to instruct employees to inspect rectifiers 
            six times each calendar year not to exceed two and one half 
            months. KM procedure requires that the rectifiers be 
            inspected at least four times a year not to exceed four 
            months. The ACC did not take into account KM's practice of 
            evaluating rectifiers on a weekly bases based on utilizing 
            aerial patrols that observe aerial indicators that KM has 
            installed on its rectifiers. These aerial indicators 
            monitor the output of the rectifier. When the output of the 
            rectifier drops a certain predetermined percentage, the 
            aerial indicator stops operating. This in turn is observed 
            by our aerial pilots which fly KM pipelines on a weekly 
            bases. These pilots then inform ground personnel to go and 
            inspect the rectifier in question. KM believes that this 
            practice far exceeds the minimum requirement of six 
            inspection. Under the Federal requirement, a rectifier can 
            stop operating the day after one of our inspection and 
            would not be aware of this situation until the next 
            inspection two and one half months later. Under KM's 
            current practice, the longest time period a rectifier can 
            go with out operator is approximately one week. The four 
            inspections that ACC referenced are KM physical inspections 
            of the rectifier and the calibration inspections of the 
            aerial indicators.

      d)  195.416(c) External Corrosion Control: ACC indicated that KM 
            records indicated that rectifiers were not inspected six 
            times. Based on item c) above, this is correct since our 
            physical inspections are conducted quarterly and our aerial 
            inspections are conducted weekly. We believe this practice 
            goes above and beyond the six inspection requirement of the 
            Federal regulation.

  15)  By letter dated, June 9, 2000, OPS responded to KM request for 
        interpretation of jurisdictional delineation. OPS concurred 
        with KM position that LS-53 should be considered interstate. 
        The following people were sent a carbon copy of this letter:

      a)  ACC Robert J. Metli and Terry Fonterhouse and

      b)  OPS-SW, Rod Seeley.

  16)  By September 15, 2000, KM had addressed all anomalies requiring 
        pressure reduction found by its November 1999 In Line 
        Inspection of LS-53/54. The only outstanding anomaly after this 
        date was one that was located under a concrete embankment under 
        Interstate 10 and adjacent to a railroad right of way. This 
        anomaly was not pressure related but because of its location, 
        KM decided to replace it with new pipe. The delay in making 
        this repair was due to delays in obtaining permits from the 
        Arizona Department of Transportation. The replacement of this 
        pipe was completed on February 16, 2001.

  17)  By letter dated March 14, 2001, OPS issued KM a Corrective 
        Action Order, CPF 4-2000-5010-H.

      a)  The Order placed a 80 percent of MOP pressure restriction on 
            two line segments (LS-53 & LS-54) of Phoenix-Tucson 
            pipeline, and

      b)  The Order proposed additional corrective measures with 
            respect to the Phoenix to Tucson line, and required 
            additional information about the condition of KM's entire 
            pipeline system in Arizona, New Mexico, and Texas. On LS-53 
            and LS 54, KM was required to:

                      i)  Develop and implement a work plan and 
                schedule for performing coating evaluations on the line 
                using Coating Mapper or Direct Current Voltage 
                Gradient. The plan was to be submitted to OPS within 15 
                days of receipt of the amended CAO. KM was also 
                required to submit a report of the data collected and 
                findings made as a result of the work plan within 15 
                days of the completion date established by the approved 
                work plan.

                      ii)  Develop and implement a work plan and 
                schedule for re-coating, repairing or replacing 
                sections of the line that are determined by the coating 
                evaluation to require remedial measures. The work plan 
                and schedule was to be submitted to OPS within 15 days 
                of submission of the report required by (b)(i) above. 
                KM was to submit a progress report of all remedial 
                actions taken 120 days after approval of the work plan 
                and then every 120 days thereafter until the work plan 
                was completed. KM was to submit a final report on all 
                remedial actions taken under the plan within 30 days of 
                completion of the final action required by the work 
                plan.

                      iii)  Develop a work plan and schedule for 
                conducting internal inspection tests of the line using 
                the same or similar technology used in the 1999 
                internal inspection. KM was to submit the work plan to 
                the OPS within 30 days of receipt of the amended CAO. 
                KM was to implement the work plan upon completion of 
                the final action described in item (b)(ii) above, and 
                submit a report on the results of the internal 
                inspection tests within 30 days of completion of the 
                testing.

      c)  With respect to lines in Arizona, New Mexico, and Texas, KM 
            was required to submit a report to the OPS on all internal 
            inspection tests that had been performed on lines in 
            Arizona, New Mexico, and Texas since January 1, 1997 within 
            60 days of receipt of the amended CAO. The report was to 
            include the final results of all internal inspection tests, 
            the repair criteria established for each internal 
            inspection test conducted, and all other information 
            relevant to repairs made including a complete description 
            of the repair criteria and repair methods.

  18)  By letter dated March 28, 2001, KM clarified the receipt date of 
        the Corrective Action Order CPF 4-2000-5010-H as being March 
        26, 2001. There were some mail routing problems in getting the 
        CAO to Bill White. DOT's original letter went to Orange, CA 
        when Bill White was in Houston. KM wanted to clarify this 
        because of response time constraints that were stated in the 
        CAO.

  19)  By letter dated April 3, 2001, KM requested a hearing with DOT 
        to discuss CAO for LS-53/54.

  20)  By letter dated April 26, 2001, OPS informed KM that CPF 4-2000-
        5010-H was renumbered to CPF 4-2001-5010-H.

  21)  By letter dated August 9, 2001, KM provided OPS an advance copy 
        of our written response to the CAO.

  22)  On August 14, 2001, the CAO hearing was held in the OPS-SW 
        Region Office in Houston, Texas. By revised letter dated August 
        14, 2001 and hand carried to the hearing, KM responded to OPS 
        Corrective Action Order, CPF 4-2000-5010-H. KM requested DOT to 
        rescind the Corrective Action Order. KM believed that it was in 
        full compliance with all DOT regulations and that the proposed 
        requirements of the CAO were not supported by relevant facts or 
        applicable regulations. KM was represented by outside counsel 
        from Bracewell & Patterson.

  23)  By letter dated August 27, 2001, KM outside counsel, Bracewell & 
        Patterson, relayed information to DOT's Hearing Examiner 
        addressing the request for additional information made during 
        the hearing.

  24)  By letter dated September 7, 2001, DOT's Presiding Officer 
        submitted a request for additional information.

  25)  By letter dated September 28, 2001, KM outside counsel responded 
        to DOT's September 7, 2001 request for more information. The 
        information was submitted to DOT through our outside counsel, 
        Bracewell & Patterson, LLP.

  26)  By letter dated March 17, 2003, DOT issued KM an Amended CAO. 
        The amended CAO requires the following from KM:

      a)  Maintain reduced operating pressure on its Phoenix--Tucson -
            Davis Monthan AFB line

      b)  Develop a work plan and schedule for conducting internal 
            inspection tests using the same or similar technology which 
            identified the extensive metal loss instances referred to 
            in preliminary Finding 2

                      i)  Submit the work plan described in this action 
                item to the Director, Southwest Region, for approval 
                within 30 days of receipt of an amendment to this 
                Order.

                      ii)  Submit a report on the results and findings 
                of the internal inspection tests to the Director, 
                Southwest Region, within 30 days of completion of the 
                testing.

  27)  By letter dated April 14, 2003, KM acknowledges to DOT the 
        receipt of their Amended CAO:

      a)  KM makes some information corrections such as Davis Monthan 
            AFB pipeline is a separate line and is not directly 
            connected to LS-53/54..

      b)  KM informs DOT that LS-53/54 had been subsequently internally 
            inspected utilizing a Electronic Geometry Pig (EGP) and a 
            Corrosion Detection Pig (CDP). These runs were completed on 
            March 1, 2003, and that the final report was to be received 
            around May 2003 and that a report would be submitted to DOT 
            within 30 days of receiving the final report. KM believed 
            this met the requirements of the Amended Corrective Action 
            Order, dated March 17, 2003 to internally inspect this 
            line.

  28)  By letter dated May 29, 2003 (date error on letter), KM informed 
        OPS-SW that is was complying with the requirement of the 
        Amended CAO dated March 17, 2003 and informs DOT that KM 
        received a Final report on April 29, 2003, KM informs DOT of 
        the Following findings:

      a)  There were no ``Immediate'' repairs as defined by DOT's IMP 
            regulation.

      b)  There were two ``60-day'' repair conditions. The first was a 
            3.5 percent dent at 1:10 o'clock position. The second was a 
            4.7 percent dent at 11''51 o'clock position. KM projects to 
            have both anomalies investigated and necessary repairs 
            before the end of June 2003.

      c)  There were no ``180-day'' repair conditions reported in the 
            Final report

      d)  KM continues to review the Final Report to determine if 
            additional excavations are warranted.

      e)  KM addressed ``two corrosion anomalies from the Final report.

      f)  This update met the requirements of the Amended CAO.
                                 ______
                                 
                  Exhibit 9--Safety Record Statistics
                  
                  
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    The Chairman. Thank you, Mr. Bannigan. Mr. Cowley.

     STATEMENT OF DAVID COWLEY, DIRECTOR, PUBLIC AFFAIRS, 
                          AAA ARIZONA

    Mr. Cowley. Thank you, Senator. Thank you for the 
opportunity to testify. AAA Arizona's role in the automotive 
and transportation arena is familiar to most people. We have 
over 600,000 members in Arizona alone. AAA advocates with the 
Government and the automotive industry on behalf of the 
motoring public. We also strive to educate motorists about the 
transportation, automotive, and oil industries. Our goal is to 
provide clarity, common sense, and balance to these issues.
    For many years, AAA has tracked and reported gasoline 
supplies and prices. The media and public turn quickly to AAA 
for explanations whenever gasoline issues arise as with the 
August pipeline closure. We've learned that Americans react 
strongly to bad news about gas prices and availability. What's 
more, the public is quick to assume that price hikes are the 
result at the greed at the supplier or retail level and are 
skeptical about the legitimacy of external pressures forcing 
gas prices up. Communicating promptly and clearly about unusual 
supply or pricing issues is critical.
    We learned of the pipeline's situation from a media contact 
on August 11, 3 days after the actual closure, hardly an 
example of prompt communication from the pipeline industry. 
There was some initial confusion about the nature of the 
disruption, again due to an absence of information, but once 
that was cleared up we issued our first press release 
explaining the closure. We stated that gas supplies were 
plentiful, it would take just a little longer to get gasoline 
into the valley by truck. That was on a Monday.
    We issued press releases on Tuesday, August 12, and 
Wednesday, August 13, each time reporting the price of gas and 
assuring the public that supplies were plentiful, it was a 
transportation disruption. Parenthetically, Senator, let me say 
that the difference between a gasoline shortage and a 
transportation disruption was more than merely semantics. We 
felt it was very important to assure the public that gasoline 
inventories were normal, this was not another 1973. On 
Thursday, August 14, we issued our weekly fuel gauge report, 
again calling on motorists to conserve fuel and offering tips 
on doing so. During this time, my staff and I had held many 
interviews with the television, radio, and print media, always 
with that same message.
    The panic buying that led to long lines and station 
closures began Sunday afternoon, August 18, as motorists 
attempted to refuel after their weekend activities. Stations 
began running out of gas. Panicked motorists searched for open 
stations and eventually even motorists who didn't need to fill 
up joined lines to top off their tanks. Why did it happen? Why, 
when the disruption had been no more than an inconvenience for 
almost a week did it suddenly escalate into panic buying? In 
AAA's view there are two reasons. First, we, and by that I mean 
those in the oil industry, AAA, and the Government, should have 
cautioned the public to curtail their weekend activities in 
order to accommodate the gasoline supply problem. In my 
recollection, no one specifically said that.
    Second, we who had been in the media all week explaining 
the situation took the weekend off. Although my staff held half 
a dozen interviews on Saturday and Sunday that was not close to 
the number we had been doing and we had not issued a press 
release since our Thursday fuel gauge report. Now could we have 
prevented a run on gas stations had we been out there in the 
media more heavily? I can't say. But I can say that 
communication, the lack thereof, contributed to the severity of 
this gas crisis.
    What have we learned? First, it's time to acknowledge that 
gasoline is an essential commodity similar to utilities. The 
principles of free enterprise and competition should be allowed 
to establish gas pricing, but we also believe the refining 
industry has an obligation to practice restraint in pricing, 
especially during emergencies.
    Third, as has been said before, we need to take steps to 
ensure adequate supplies of gasoline to our state with 
redundancy built into the system. Third, the industry should 
have practical, practical back-up plans in the event of 
infrastructure problems. Fourth, if the industry won't speak to 
the public about supply or pricing issues as seems to be the 
case, they should at least speak candidly to AAA and the 
Government. We can then inform the public.
    That said, I must point out that AAA will not act as a 
public relations firm for the oil or any other industry. We 
value our reputation as a balanced source of information for 
motorists, and if we think it is necessary we won't hesitate to 
point out inconsistencies.
    Finally, AAA believes all Americans should recognize that 
fossil fuels are a finite energy resource. We should practice 
conservation, including the use of carpooling and mass 
transportation, and we should buy the most energy efficient 
vehicles that are practical for our needs.
    Senator, hearings such as these are an important means of 
assessing the pipeline closure and subsequent events and 
preventing a recurrence. AAA hopes there will be a 
communications component in your recommendations, encouraging 
managers of essential infrastructure to speak candidly about 
disruption.
    Thank you, Senator McCain. That concludes my statement.
    [The prepared statement of Mr. Cowley follows:]

Prepared Statement of David Cowley, Public Affairs Manager, AAA Arizona
    Senator McCain. Members of the Committee.

    I am David Cowley, Public Affairs Manager at AAA Arizona. Thank you 
for the opportunity to testify.
    AAA Arizona's role in the automotive and transportation arena is 
familiar to most people--we have 600,000 members in Arizona alone. AAA 
advocates with the government and the automotive industry on behalf of 
the motoring public. We also strive to educate motorists about the 
transportation, automotive and oil industries. Our goal is to provide 
clarity, common sense and balance to these issues.
    For many years, Triple A has tracked and reported gasoline supplies 
and prices. The media and public turn quickly to AAA for explanations 
whenever gasoline issues arise, as with the August pipeline closure.
    We've learned that Americans react strongly to bad news about gas 
prices and availability. What's more, the public is quick to assume 
that price hikes are the result of greed at the supplier or retail 
level, and are skeptical about the legitimacy of external pressures 
forcing gas prices up. Communicating promptly and clearly about unusual 
supply or pricing issues is critical.
    We learned of the pipeline situation from a media contact on August 
11, three days after the actual closure--hardly an example of prompt 
communication from the pipeline industry. There was some initial 
confusion about the nature of the disruption--again due to an absence 
of information--but once that was cleared up, we issued our first press 
release explaining the closure. We stated that gas supplies were 
plentiful--it would just take a little longer to get gasoline into the 
Valley by truck. That was on a Monday.
    We issued press releases on Tuesday, August 12, and Wednesday, 
August 13, each time reporting the price of gas and assuring the public 
that supplies were plentiful--it was a transportation disruption. 
(Parenthetically, let me say that the difference between a gasoline 
shortage and a transportation disruption was more than merely 
semantics--we felt it important to assure the public that gasoline 
inventories were normal--this was not another 1973.) On Thursday, 
August 14, we issued our weekly Fuel Gauge Report, again calling on 
motorists to conserve fuel and offering tips on doing so. During this 
time, my staff and I held many interviews with the television, radio 
and print media . . . always with that same message.
    The panic-buying that led to long lines and station closures began 
Sunday afternoon, August 18. As motorists attempted to refuel after 
their weekend activities, stations began running out of gas, panicked 
motorists searched for open stations, and eventually, even motorists 
who didn't need to fill up joined the lines to top off their tanks.
    Why did it happen? Why, when the disruption had been no more than 
an inconvenience for almost a week, did it suddenly escalate into 
panic-buying?
    In AAA's view, there are two reasons:

  1.  First, we--by that I mean those in the oil industry, Triple A, 
        and the government--should have cautioned the public to curtail 
        their weekend activities in order to accommodate the gasoline 
        supply problem. In my recollection, no one specifically said 
        that.

  2.  Secondly, we who had been in the media all week explaining the 
        situation, took the weekend off. Although my staff held half-a-
        dozen interviews on Saturday and Sunday, that was not even 
        close to the number we had been doing. And, we had not issued a 
        press release since our Thursday Fuel Gauge report.

    Could we have prevented the run on gas stations had we been `out 
there' in the media more heavily? I can't say. But, I can say 
communication--the lack thereof--contributed to the severity of the gas 
crisis.
    What have we learned?

   First, it is time to acknowledge that gasoline is an 
        essential commodity, similar to utilities. The principles of 
        free enterprise and competition should be allowed to establish 
        gasoline pricing, but we also believe the refining industry has 
        an obligation to practice restraint in pricing, especially 
        during emergencies.

   Secondly, we need to take steps to insure adequate supplies 
        of gasoline to our state, with redundancy built into the 
        system.

   Third, the industry should have practical--practical--backup 
        plans in place in the event of infrastructure problems.

   Fourth, if the industry won't speak to the public about 
        supply or pricing issues--as seems to be the case--they should, 
        at least, speak candidly to Triple A and the government. We can 
        then inform the public. (That said, I must point out that 
        Triple A will NOT act as a Public Relations firm for the oil, 
        or any other, industry. We value our reputation as a balanced 
        source of information for motorists. And, if we think it is 
        necessary, we won't hesitate to point out inconsistencies.)

   Finally, AAA believes all Americans should recognize that 
        fossil fuels are a finite energy resource. We should practice 
        conservation, including the use of carpooling and mass 
        transportation. And, we should buy the most energy efficient 
        vehicles that are practical for our needs.

    Senator; Members of the Committee; hearings such as this are an 
important means of assessing the pipeline closure and subsequent events 
. . . and preventing a recurrence. AAA hopes there will be a 
communication component in your recommendations encouraging managers of 
essential infrastructure to speak candidly about disruptions.
    That concludes my statement. I'll be happy to answer your 
questions.
                                 ______
                                 
                       Pipeline Closure Timeline
July 31, 2003--Kinder Morgan pipeline ruptures. Line is closed, Federal 
authorities and the Arizona Corp. Commission is notified. Phoenix 
unleaded: $1.541

August 1, 2003--Kinder Morgan reopens the pipeline and runs it at 
reduced capacity.

August 6, 2003--Federal Office of Pipeline Safety determines the 
pipeline can be run safely at 80 percent capacity. A failed seam 
thought to be the origin of the problem.

August 8, 2003--Kinder Morgan decides the problem is more serious and 
shuts the line down completely. Phoenix unleaded: $1.536

August 11, 2003--AAA Arizona learns of closure from a media contact. 
AAA issues first press release explaining the closure. AAA stated that 
gas supplies were plentiful, transportation issues were holding up 
supplies, motorists should conserve gas. Phoenix unleaded: $1.558

August 12, 2003--Extensive media interviews. AAA Arizona sends an 
update on the closure to the media. Phoenix unleaded: $1.613

August 13, 2003--Napolitano holds a news conference and predicts no 
widespread outages based on information from Kinder Morgan. AAA attends 
this news conference by invitation from the governor's office. AAA 
Arizona sends another press release update to the media. Phoenix 
unleaded: $1.639

August 14, 2003--Kinder Morgan delivers testing plan to the Office of 
Pipeline Safety. AAA sends pipeline update press release. Phoenix 
unleaded: $1.684

Sunday, August 17, 2003--Gas lines form at stations in afternoon. AAA 
Emergency Road Service reports a spike in members asking for fuel 
service. Flurry of media interviews in afternoon and early evening. 
Phoenix unleaded: $1.767

Monday, August, 18, 2003--Gov. Napolitano meets with Valley mayors and 
other public officials. AAA issues press release calling for calm and 
advising motorists not to buy gas unless it is needed. Phoenix 
unleaded: $1.767

Tuesday, August 19, 2003--Government approves Kinder Morgan's plan to 
start testing. Napolitano asks for, receives a temporary waiver to the 
Valley's CBG requirement. AAA sends an update press release. Phoenix 
unleaded: $1.866

Wednesday, August 20, 2003--Pipeline fails hydrostatic test. Lines at 
gas stations start to subside. Fuel is being delivered to the Valley by 
truck. Phoenix unleaded: $1.926

Thursday, August 21, 2003--Kinder Morgan announces plans to bypass 
section of pipeline that failed test, gas should be flowing to Phoenix 
by the weekend. Unleaded gas in Phoenix: $2.038

Sunday, August 24, 2003--Kinder Morgan completes bypass of the closed 
section of pipeline. Gas begins flowing toward Phoenix. Phoenix 
unleaded: $2.098

Thursday, August 28, 2003--AAA issues Fuel Gauge Report, noting that 
high gas prices are not expected to deter motorists from traveling over 
Labor Day. Phoenix unleaded: $2.125
August 2003 Gas Prices During Pipeline Closure
AAA Arizona, 2003
    AAA's Fuel Gauge reports are usually done weekly, on Thursdays. 
When we became aware of the pipeline situation, webegan keeping a daily 
report. The green rows are weekly reports done before and after the 
pipeline was closed.Where prices for a particular grade are missing, it 
is because we generally base our discussions with the press on regular 
unleaded.Thus, we often skip other grades in our notes. For purposes of 
discussion during the crisis, we used Phoenix as the benchmarkprice, 
rather than going into all the different prices around the Valley.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                              Statewide                               East Valley                                Phoenix
                              --------------------------------------------------------------------------------------------------------------------------
                                Regular  Mid-Grade   Premium   Diesel    Regular  Mid-Grade   Premium   Diesel    Regular  Mid-Grade   Premium   Diesel
--------------------------------------------------------------------------------------------------------------------------------------------------------
8/7/03                            1.570      1.636     1.731     1.625     1.513      1.578     1.670     1.622     1.536      1.602     1.694     1.638
8/11/03                           1.550                                    1.546      1.612     1.705     1.617     1.558      1.625     1.718     1.636
8/12/03                           1.550                                    1.591      1.659     1.755     1.621     1.613      1.682     1.779     1.643
8/13/03                           1.640                                    1.633      1.704     1.802     1.635     1.639      1.709     1.808     1.654
8/14/03                           1.650                                    1.679      1.751     1.852     1.643     1.684      1.756     1.857     1.662
8/15/03                           1.709                                    1.708      1.781     1.884     1.668     1.726      1.801     1.904     1.681
weekend
8/18/03                           1.741                                    1.754      1.830     1.935     1.687     1.767      1.843     1.949     1.698
8/19/03                           1.813                                    1.843      1.922     2.033     1.715     1.866      1.946     2.058     1.709
8/20/03                           1.855                                    1.906      1.988     2.103     1.736     1.926      2.009     2.125     1.728
8/21/03                           1.885                                    1.961      2.045     2.163     1.778     1.981      2.066     2.185     1.747
8/22/03                           1.928                                    2.041      2.129     2.252     1.781     2.038      2.125     2.248     1.762
weekend
8/25/03                           1.966                                    2.117      2.208     2.335     1.787     2.098      2.188     2.314     1.770
8/26/03                           2.008                                    2.120      2.211     2.339     1.783     2.146      2.238     2.367     1.782
8/27/03                           2.005                                    2.130      2.221     2.349     1.779     2.131      2.222     2.350     1.797
8/28/03                           1.998                                    2.124      2.215     2.342     1.775     2.125      2.216     2.344     1.793
8/29/03                           1.994                                    2.118      2.209     2.337     1.785     2.111      2.202     2.329     1.788
weekend
9/3/03                            1.980                                    2.076      2.165     2.289     1.759     2.070      2.159     2.284     1.734
9/4/03                            1.980      2.065     2.184     1.757     2.080      2.170     2.295     1.760     2.081      2.170     2.295     1.769
9/11/03                           1.927      2.010     2.125     1.730     2.008      2.094     2.214     1.713     2.012      2.098     2.219     1.745
9/18/03                           1.882      1.963     2.076      1.69     1.956      2.040     2.157     1.665      1.96      2.043     2.161     1.723
--------------------------------------------------------------------------------------------------------------------------------------------------------


--------------------------------------------------------------------------------------------------------------------------------------------------------
                              Scottsdale                                                 Tucson                                 Flagstaff
--------------------------------------------------------------------------------------------------------------------------------------------------------
                Regular                  Mid-Grade   Premium   Diesel    Regular  Mid-Grade   Premium   Diesel    Regular  Mid-Grade   Premium   Diesel
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.582                                        1.650     1.745     1.675     1.513      1.578     1.670     1.651
1.610                                        1.679     1.776     1.666     1.549      1.616     1.709     1.694     1.691      1.768     1.864     1.622
1.660                                        1.731     1.831     1.695     1.563      1.630     1.724     1.685     1.690      1.763     1.863     1.644
1.673                                        1.745     1.845     1.651     1.572      1.640     1.734     1.682     1.722      1.797     1.899     1.668
1.709                                        1.782     1.885     1.688     1.608      1.677     1.773     1.699     1.728      1.805     1.906     1.658
1.774                                        1.851     1.957     1.691     1.630      1.700     1.798     1.703     1.736      1.813     1.914     1.668
1.814                                        1.892     2.001     1.703     1.648      1.718     1.817     1.710     1.760      1.838     1.941     1.701
1.887                                        1.968     2.081     1.695     1.710      1.783     1.886     1.749     1.783      1.863     1.966     1.735
1.952                                        2.036     2.154     1.703     1.722      1.795     1.899     1.723     1.856      1.937     2.047     1.739
1.994                                        2.079     2.199     1.761     1.728      1.802     1.906     1.732     1.863      1.945     2.055     1.780
2.069                                        2.158     2.282     1.800     1.750      1.825     1.930     1.731     1.862      1.946     2.054     1.773
2.134                                        2.226     2.354     1.797     1.766      1.842     1.948     1.733     1.889      1.973     2.082     1.776
2.165                                        2.258     2.388     1.838     1.809      1.887     1.995     1.757     1.919      2.005     2.117     1.807
2.187                                        2.281     2.412     1.820     1.824      1.902     2.011     1.746     1.949      2.035     2.149     1.800
2.173                                        2.267     2.397     1.785     1.826      1.904     2.014     1.732     1.938      2.024     2.137     1.786
2.147                                        2.239     2.368     1.786     1.819      1.897     2.006     1.735     1.927      2.013     2.124     1.802
2.137                                        2.228     2.357     1.751     1.821      1.899     2.008     1.739     1.880      1.960     2.073     1.839
2.127                                        2.218     2.346     1.784     1.819      1.897     2.006     1.738     1.901      1.985     2.096     1.822
2.047                                        2.135     2.258     1.813     1.794      1.871     1.979     1.729     1.865      1.947     2.057     1.764
1.981                                        2.066     2.185     1.700     1.763      1.838     1.944     1.687     1.807      1.887     1.993     1.741
--------------------------------------------------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                  Yuma                                                   National
----------------------------------------------------------------------------------------------------------------
                 Regular                  Mid-Grade   Premium   Diesel    Regular  Mid-Grade   Premium   Diesel
----------------------------------------------------------------------------------------------------------------
1.528                                         1.594     1.686     1.578     1.542      1.637     1.697     1.533
1.583                                         1.651     1.746     1.569
1.605                                         1.674     1.771     1.565
1.607                                         1.676     1.773     1.589
1.668                                         1.739     1.840     1.600     1.571      1.667     1.728     1.556
1.708                                         1.781     1.884     1.638
1.758                                         1.834     1.939     1.654
1.812                                         1.890     1.999     1.649
1.820                                         1.898     2.008     1.659
1.835                                         1.914     2.024     1.666     1.635
1.883                                         1.963     2.077     1.666     1.648
1.903                                         1.985     2.100     1.680     1.664
1.988                                         2.073     2.192     1.667     1.718
1.993                                         2.079     2.199     1.670     1.733
1.964                                         2.049     2.167     1.670     1.735
1.944                                         2.028     2.144     1.683     1.736
1.945                                         2.028     2.145     1.661     1.731
1.947                                         2.031     2.148     1.689     1.730      1.837     1.903     1.580
1.929                                         2.012     2.128     1.657     1.693      1.797     1.862     1.566
1.870                                         1.951     2.063     1.630     1.673      1.775     1.840     1.554
----------------------------------------------------------------------------------------------------------------

                                 ______
                                 
                                                AAA Arizona
                                                        Phoenix, AZ
For Immediate Release

 AAA Reports: Fuel Prices Holding Steady at the Midpoint of the Summer 
                             Driving Season

    Phoenix, AZ--July 31, 2003--Gasoline prices have held steady as the 
summer driving season continues. The statewide average price for self-
serve unleaded gasoline inched 1.3 cents lower from last week to $1.570 
per gallon, according to AAA Arizona's Weekly Fuel Survey. The current 
average price is 11.8 cents higher than a year ago when the average was 
$1.452 per gallon. However, this week's average is 9 cents cheaper than 
last month's average of $1.660 per gallon.
    The national average for gasoline remained unchanged at $1.523 per 
gallon. OPEC's meeting earlier today helped pin crude oil prices to 
$28.43 per barrel, following their decision to maintain current 
production levels. OPEC's decision will help keep gasoline prices 
stable unless major refinery or pipeline problems occur in the U.S. 
Meanwhile, U.S. gasoline inventories are returning to normal levels 
following the aftermath of Hurricane Claudette.
    AAA found the most expensive average price in California at $1.747, 
followed by Nevada, $1.684 and Montana: at $1.662 per gallon. The least 
expensive states to fill up are: South Carolina: $ 1.386, Georgia: 
$1.401 and New Jersey: $1.413 per gallon.
    Arizona pump prices are in concert with the rest of the Nation and 
are holding ground. Gasoline prices in the southwest region of the 
state held steady with the exception of Yuma where the average pump 
price plunged 2.3 cents to $1.552 per gallon. Prices in the Valley 
experienced the highest decreases than the rest of the state. Gasoline 
prices in the West Valley and Scottsdale edged 2.5 cents lower to 
$1.525 and $1.578 per gallon, respectively. This week's survey shows 
the East Valley's average fuel price as the cheapest in the state at 
$1.508 per gallon. Other Arizona prices are shown below. Motorists can 
visit AAA's website at www.aaa.com, then click on News for the latest 
fuel price information.

------------------------------------------------------------------------
                                Unleaded   Mid-Grade   Premium   Diesel
------------------------------------------------------------------------
Phoenix (city)                     1.541       1.607     1.700     1.632
------------------------------------------------------------------------
East Valley                        1.508       1.572     1.663     1.616
(Mesa,Gilbert, Chandler,
 Tempe, Ahwatukee, Apache
 Queen Crk.)
------------------------------------------------------------------------
West Valley                        1.525       1.591     1.682     1.637
(Peoria, Glendale, Sun City)
------------------------------------------------------------------------
Scottsdale                         1.578       1.646     1.741     1.663
(Scottsdale, Fountain Hills)
------------------------------------------------------------------------
Tucson (city)                      1.523       1.588     1.680     1.650
------------------------------------------------------------------------
Pima County                        1.530       1.595     1.687     1.656
------------------------------------------------------------------------
Flagstaff                          1.685       1.760     1.858     1.626
------------------------------------------------------------------------
Yuma                               1.552       1.618     1.711     1.541
------------------------------------------------------------------------
Statewide                          1.570       1.637     1.731     1.618
------------------------------------------------------------------------
National                           1.523       1.617     1.675     1.520
------------------------------------------------------------------------

    AAA continues to advise motorists to practice fuel conservation and 
continue to maintain their normal fuel purchasing patterns. AAA Arizona 
recommends the following fuel conservation tips to motorists:

   If you own more than one car--especially if one of your 
        vehicles is a less fuel-efficient truck or SUV--use the more 
        energy-conserving vehicle as often as possible.

   Car pools, van pools and public transit are other potential 
        ways to cut driving expenses and fuel consumption.

   Consolidate trips and errands.

   Find one location where you can take care of all banking, 
        grocery shopping and other chores.

   Slow down. The faster a vehicle travels, the more gas it 
        burns.

   Avoid quick starts and sudden stops, this wastes fuel.

   Routinely maintain your vehicle.

   Lighten the load. A heavier vehicle uses more gasoline, so 
        when packing for a road trip--pack light--and try to pack 
        everything inside the vehicle if possible. Strapping items to 
        the top of a vehicle can create wind resistance.

   Check your vehicle owner's manual. If your vehicle does not 
        require premium or mid-grade fuel, then buy regular unleaded 
        gasoline.

    These and other fuel conservation tips and information can be found 
in AAA's Gas Watcher's Guide. These guides are free to the public and 
can be picked up at any AAA Arizona office throughout the state.
                                 ______
                                 
                                                AAA Arizona
                                                        Phoenix, AZ
For Immediate Release

             AAA Reports: Gasoline Retail Prices Unsettled

    Phoenix, AZ--August 7, 2003--Gasoline prices inched upward in many 
regions of the state this week, sliding downward in others, and ending 
with the statewide average price for self-serve unleaded gasoline 
unchanged from last week at $1.570 per gallon, according to AAA 
Arizona's Weekly Fuel Survey. This week's average price is 12.9 cents 
higher than a year ago when the average was $1.440 per gallon.
    The national average cost for gasoline rose to $1.542 per gallon, 
1.9 cents higher than last week. Crude oil prices moved above $32 per 
barrel earlier this week due to recent terrorist attacks that bolstered 
worries among the oil industry. This recent turn of events has created 
a run-up in wholesale gasoline prices, which will eventually lead to 
higher retail prices. There are several theories behind the sudden 
price hike including recent terror attacks in Indonesia and the 
cancellation of a summit meeting between Israeli and Palestinian 
leaders.
    AAA found the most expensive average price in California at $1.743, 
followed by Nevada, $1.690 and Montana: at $1.674 per gallon. The least 
expensive states to fill up are: South Carolina: $1.395, Georgia: 
$1.404 and New Jersey: $1.418 per gallon.
    Locally, pump prices in Southern Arizona inched downward 
marginally. Tucson's average price dropped by a penny to $1.513 per 
gallon, from last week. Prices in the Valley climbed upward with the 
exception of Phoenix where the average price barely budged by dropping 
.5 cents to $1.536 per gallon. Other Arizona prices are shown below. 
Motorists can visit AAA's website at www.aaa.com, then click on News 
for the latest fuel price information.

------------------------------------------------------------------------
                                Unleaded   Mid-Grade   Premium   Diesel
------------------------------------------------------------------------
Phoenix (city)                     1.536       1.602     1.694     1.638
------------------------------------------------------------------------
East Valley                        1.513       1.578     1.670     1.622
(Mesa,Gilbert, Chandler,
 Tempe, Ahwatukee, Apache
 Queen Crk.)
------------------------------------------------------------------------
West Valley                        1.528       1.593     1.685     1.642
(Peoria, Glendale, Sun City)
------------------------------------------------------------------------
Scottsdale                         1.582       1.650     1.745     1.675
(Scottsdale, Fountain Hills)
------------------------------------------------------------------------
Tucson (city)                      1.513       1.578     1.670     1.651
------------------------------------------------------------------------
Pima County                        1.522       1.587     1.678     1.660
------------------------------------------------------------------------
Flagstaff                          1.713       1.790     1.890     1.630
------------------------------------------------------------------------
Yuma                               1.528       1.594     1.686     1.578
------------------------------------------------------------------------
Statewide                          1.570       1.636     1.731     1.625
------------------------------------------------------------------------
National                           1.542       1.637     1.697     1.533
------------------------------------------------------------------------

    AAA continues to advise motorists to practice fuel conservation and 
continue to maintain their normal fuel purchasing patterns. AAA Arizona 
recommends the following fuel conservation tips to motorists:

   If you own more than one car--especially if one of your 
        vehicles is a less fuel-efficient truck or SUV--use the more 
        energy-conserving vehicle as often as possible.

   Car pools, van pools and public transit are other potential 
        ways to cut driving expenses and fuel consumption.

   Consolidate trips and errands.

   Find one location where you can take care of all banking, 
        grocery shopping and other chores.

   Slow down. The faster a vehicle travels, the more gas it 
        burns.

   Avoid quick starts and sudden stops, this wastes fuel.

   Routinely maintain your vehicle.

   Lighten the load. A heavier vehicle uses more gasoline, so 
        when packing for a road trip--pack light--and try to pack 
        everything inside the vehicle if possible. Strapping items to 
        the top of a vehicle can create wind resistance.

   Check your vehicle owner's manual. If your vehicle does not 
        require premium or mid-grade fuel, then buy regular unleaded 
        gasoline.

    These and other fuel conservation tips and information can be found 
in AAA's Gas Watcher's Guide. These guides are free to the public and 
can be picked up at any AAA Arizona office throughout the state.
                                 ______
                                 
                                                AAA Arizona
                                                        Phoenix, AZ
For Immediate Release

            AAA Advises Motorists on Temporary Disruptions 
                     to the Phoenix Gasoline Supply

    Phoenix, AZ.--August 11, 2003--Today, Kinder Morgan, the company 
operating an 8-inch pipeline between Tucson and Phoenix, temporarily 
shut down the pipeline as a precautionary measure in connection with an 
ongoing investigation into a recent rupture. The company is working to 
get the line back up and running as quickly as possible.
    There will be adequate supplies of fuel to meet demand in the 
Tucson area. In Phoenix, supplies of regular unleaded gasoline will not 
be impacted in the short term, but there may be temporary shortages of 
premium gasoline. Motorists are advised not to panic--gasoline is in 
plentiful supply at the company's Tucson terminal and can be trucked 
into Phoenix. It is also important to note that the pipeline from 
Tucson only carries about 30 percent of the Valley's gas. Seventy 
percent of Kinder Morgan's gasoline volume to Phoenix will continue 
normally.
    AAA says, don't rush out to buy gas. The surest way to shortages is 
panic buying. The disruption may well be over before many Phoenicians 
need to fill up.
    Here are some tips on fuel conservation:

   If you own more than one car--especially if one of your 
        vehicles is a less fuel-efficient truck or SUV--use the more 
        energy-conserving vehicle as often as possible.

   Consolidate trips and errands.

   Find one location where you can take care of all banking, 
        grocery shopping and other chores.

   Slow down. The faster a vehicle travels, the more gas it 
        burns

   Avoid quick starts and sudden stops--this wastes fuel.

   Routinely maintain your vehicle.

   Lighten the load. A heavier vehicle uses more gasoline.

   Check your vehicle owner's manual. If your vehicle does not 
        require premium or mid-grade fuel, then buy regular unleaded 
        gasoline.

    Remember, gas conservation should be practiced even when there is 
no disruption in gasoline supplies.
                                 ______
                                 
                                                AAA Arizona
                                                        Phoenix, AZ
For Immediate Release

                  Update from AAA On Pipeline Closure

    Phoenix, AZ.--August 12, 2003--The Kinder Morgan pipeline that runs 
between Tucson and Phoenix is still shut down. 30 percent of the fuel 
that comes into Phoenix every day is transported through this pipeline. 
Despite the closure, gasoline is still being distributed to Valley gas 
stations by fuel trucks. David Cowley, director of AAA Public Affairs 
says, ``A slow down in distribution does not mean we are facing a 
gasoline shortage. It's just taking longer to get here.''
    Because of the closure, consumers are seeing price increases at the 
pump. AAA Arizona reports an average price hike of 5 to 6 cents at 
Valley gas stations. In the Phoenix metro area, the average price of 
regular unleaded is $1.61 compared to $1.55 yesterday. East Valley gas 
prices shot up 5 cents from $1.54 to $1.59. Scottsdale gas prices 
jumped 5 cents from $1.61 to $1.66 compared to yesterday. Flagstaff gas 
prices remain unaffected by the pipeline close because gasoline has 
always been trucked into this area.
    Gasoline is now being trucked into Phoenix from Tucson. However 
this is slower and more expensive. More trucks are being devoted to the 
transportation of regular unleaded fuel because it is more widely used. 
If there is a `shortage', premium fuel will be harder to find because 
it is used less than regular.
    Kinder Morgan has not been able to determine when the pipeline from 
Tucson to Phoenix will be operational again but AAA predicts gas prices 
will continue to increase the longer it is down. Here are some fuel 
saving tips for motorists:

   If you own more than one car--especially if one of your 
        vehicles is a less fuel-efficient truck or SUV--use the more 
        energy-conserving vehicle as often as possible.

   Consolidate trips and errands.

   Find one location where you can take care of all banking, 
        grocery shopping and other chores.

   Slow down. The faster a vehicle travels, the more gas it 
        burns

   Avoid quick starts and sudden stops--this wastes fuel.

   Routinely maintain your vehicle.

   Lighten the load. A heavier vehicle uses more gasoline.

   Check your vehicle owner's manual. If your vehicle does not 
        require premium or mid-grade fuel, then buy regular unleaded 
        gasoline.
                                 ______
                                 
                                                AAA Arizona
                                                        Phoenix, AZ
For Immediate Release

               Pipeline Closure Fuels Pump Price Increase

    Phoenix, AZ. August 13, 2003--The pipeline between Tucson and 
Phoenix remains closed with no indication from Kinder Morgan as to when 
it will be repaired. AAA Arizona has received numerous calls from angry 
motorists about the price of gas, but AAA predicts pump prices will 
continue to climb the longer the pipeline is down.
    Gas prices have skyrocketed since last week. Since last week, the 
average price increase rose 9 to 12 cents in the Phoenix area. However 
some gas station's prices have gone beyond that, increasing the price 
per gallon as much as 20 cents since last week. Since yesterday, gas 
prices have jumped 3--9 cents around Phoenix. Today, AAA reports that 
Phoenix and the East Valley have an average price of $1.63 per gallon. 
Scottsdale drivers are paying about $1.67 a gallon and Tucson is up to 
$1.57 a gallon.
    Flagstaff and other parts of northern Arizona may also see their 
prices start to rise. Yesterday the average price in Flagstaff was 
$1.69 a gallon. However it's jumped three cents to $1.72. With the 
pipeline closed, gasoline distribution is slower throughout the state 
and some gas stations are raising prices. Although there is NO gasoline 
shortage, transporting fuel by truck is slower and more expensive. This 
is one of the contributing factors to the price increase around the 
state. To meet demand, the amount of fuel being pumped into Arizona has 
increased by 15 percent since Tuesday.
    Kinder Morgan, owner of the closed pipeline, is meeting with 
regulators this week to present a plan to fix the pipeline. Until the 
pipeline is repaired, AAA advises drivers to practice fuel conservation 
and give suppliers time to work out these transportation problems.
                                 ______
                                 
                                                AAA Arizona
                                                        Phoenix, AZ
For Immediate Release

 AAA Weekly Fuel Gauge Report: Fuel Prices Soar After 6 Weeks of Price 
                               Stability

    Phoenix, AZ--August 14, 2003--Gasoline prices skyrocketed this 
week, ending a six-week honeymoon of downward trickling gas prices. 
This week's statewide average for regular unleaded gasoline hit $1.646 
per gallon, 7.6 cents higher than last week. This is the highest price 
in the last six weeks since July 2nd when prices were $1.650 per 
gallon. Prices a year ago this month averaged $1.434 per gallon, 21.2 
cents lower than the current price.
    The temporary shutdown of an 8-inch pipeline between Tucson and 
Phoenix by Kinder Morgan Partners is partially to blame for the recent 
rise in prices. The pipeline was closed after a rupture on July 30th 
spewed 10,000 gallons of gasoline near a new housing development in 
Tucson. The shutdown has forced KMP to distribute gasoline by truck, 
which is slower and more expensive. KMP officials are scheduled to meet 
today with the Office of Pipeline Safety and the Arizona Corporation 
Commission to present a plan to fix the pipeline.
    Prices have also been influenced by recent events on the national 
front. The national average price for gasoline rose to $1.571 per 
gallon, 2.9 cents higher than last week. The recent surge in retail 
prices reflect crude oil prices that have remained above $31 per 
barrel, some refinery problems in the mid-west, and a drop in European 
gas exports to the U.S.
    Gas prices have risen in other parts of the country. AAA found the 
most expensive average price in California at $1.808, followed by 
Nevada, $1.729 and Washington: at $1.696 per gallon. The least 
expensive states to fill up are: South Carolina: $ 1.420, Georgia: 
$1.445 and New Jersey: $1.446 per gallon.
    Locally, average prices in the state shot up 1.5 to 16.7 cents. 
Average prices in the East Valley jumped to $1.680 per gallon, up 16.7 
cents from last week. Pump prices in Phoenix rose by 14.8 cents to 
$1.684 per gallon. Tucson's average price is $1.608 per gallon, 9.5 
cents higher than last week. Other Arizona prices are shown below. 
Motorists can visit AAA's website at www.aaa.com, then click on News 
for the latest fuel price information.

------------------------------------------------------------------------
                                Unleaded   Mid-Grade   Premium   Diesel
------------------------------------------------------------------------
Phoenix (city)                     1.684       1.756     1.857     1.662
------------------------------------------------------------------------
East Valley                        1.680       1.751     1.852     1.643
(Mesa,Gilbert, Chandler,
 Tempe, Ahwatukee,Apache
 Queen Crk.)
------------------------------------------------------------------------
West Valley                        1.680       1.752     1.853     1.664
(Peoria, Glendale, Sun City)
------------------------------------------------------------------------
Scottsdale                         1.709       1.782     1.885     1.688
(Scottsdale, Fountain Hills)
------------------------------------------------------------------------
Tucson (city)                      1.608       1.677     1.773     1.700
------------------------------------------------------------------------
Pima County                        1.611       1.681     1.777     1.700
------------------------------------------------------------------------
Flagstaff                          1.728       1.805     1.906     1.658
------------------------------------------------------------------------
Yuma                               1.668       1.740     1.840     1.600
------------------------------------------------------------------------
Statewide                          1.646       1.717     1.816     1.641
------------------------------------------------------------------------
National                           1.571       1.667     1.728     1.556
------------------------------------------------------------------------

    AAA continues to advise motorists to practice fuel conservation and 
continue to maintain their normal fuel purchasing patterns. AAA Arizona 
recommends the following fuel conservation tips to motorists:

   If you own more than one car--especially if one of your 
        vehicles is a less fuel-efficient truck or SUV--use the more 
        energy-conserving vehicle as often as possible.

   Car pools, van pools and public transit are other potential 
        ways to cut driving expenses and fuel consumption.

   Consolidate trips and errands.

   Find one location where you can take care of all banking, 
        grocery shopping and other chores.

   Slow down. The faster a vehicle travels, the more gas it 
        burns.

   Avoid quick starts and sudden stops, this wastes fuel.

   Routinely maintain your vehicle.

   Lighten the load. A heavier vehicle uses more gasoline, so 
        when packing for a road trip--pack light--and try to pack 
        everything inside the vehicle if possible. Strapping items to 
        the top of a vehicle can create wind resistance.

   Check your vehicle owner's manual. If your vehicle does not 
        require premium or mid-grade fuel, then buy regular unleaded 
        gasoline.

    These and other fuel conservation tips and information can be found 
in AAA's Gas Watcher's Guide. These guides are free to the public and 
can be picked up at any AAA Arizona office throughout the state.
                                 ______
                                 
                                                AAA Arizona
                                                        Phoenix, AZ
For Immediate Release

  AAA Advises Motorists to Conserve Fuel as Gasoline Shortages Leave 
                     Phoenix Motorists in Disarray

    Phoenix, AZ--August 18, 2003--The recent pipeline closure has led 
to temporary disruptions in gasoline supplies to the Phoenix area 
causing many gas stations to temporarily run out of fuel. There is an 
adequate supply of gasoline being delivered into the state, but it must 
be trucked from a Tucson terminal into Phoenix. Trucking gas is slower 
and more expensive.
    Kinder Morgan, the owners of the pipeline, presented a plan for 
testing it to the Office of Pipeline Safety. They estimate that testing 
will take 7-10 days from the time they get approval on their plan. The 
pipeline that runs between Tucson and Phoenix supplies about 30 percent 
of the fuel used in Phoenix.
    Gasoline prices have pushed upward by the closure. The statewide 
average has jumped nearly ten cents within the last week to $1.741 per 
gallon. Average prices in the Valley have soared between 7 to 10 cents 
higher than last week. Some gasoline stations in Phoenix have reported 
prices above $2.00 per gallon. Flagstaff gas prices have risen slightly 
to $1.760 per gallon as tank trucks are redirected from there to the 
Phoenix area. The average price in Tucson rose 4 cents from $1.608 to 
$1.648 per gallon.
    ``This situation has prompted motorists to hurry to their local gas 
station in fear that supplies are dwindling,'' said David Cowley, AAA 
Public Affairs Manager. ``But, that's not what is happening. We have 
plenty of gas. Trucking into Phoenix is the bottleneck.''
    AAA's advice:

   If you have more than half a tank, don't buy gas. Panic 
        buying or constantly topping off your tank puts undue stress on 
        gasoline supplies and makes the supply problem worse.

   Conserve fuel and stay calm.

   Don't drive unless you absolutely must.

   Carpool with neighbors (do your grocery shopping together, 
        start a carpool to get the kids to school. . .or walk them to 
        school, etc.)

   Combine errands. Run as many errands as possible in one 
        trip.

   Drive the most fuel-efficient car you have.

    ``We are not running out of gas,'' said Cowley. ``Such fears are 
unjustified. If folks will calmly go about their business, conserve 
fuel, and buy gas only when they need it, we'll get through this 
situation without serious problems. But, folks have got to calm down.''
                                 ______
                                 
                                                AAA Arizona
                                                        Phoenix, AZ
For Immediate Release

 AAA Arizona Reports: Gas Shortages Continue to Plague Valley But Not 
                               Statewide

    Phoenix, AZ--August 19, 2003--Gasoline shortages are plaguing 
motorists in Phoenix, largely due to an unpredicted upsurge in gas 
buying that began last Sunday night. Today, motorists are lining up at 
gasoline stations as soon as a tank truck delivers gas.
    ``We are not running out of gas,'' said David Cowley, Public 
Affairs Manager at AAA Arizona. ``Such fears are unjustified. If folks 
will calmly go about their business, conserve fuel, and buy gas only 
when they need it, we'll get through this situation.''
    Motorists in other parts of the state should not experience gas 
shortages in their area, although they will see higher gas prices. Gas 
supplies are plentiful in rural Arizona and there is no reason not to 
travel there. Sedona, Flagstaff, and the White Mountains all report 
adequate gas supplies.
    The pipeline closure has sent the statewide price of regular 
unleaded soaring up 7 cents since the weekend with Arizona's average 
hitting $1.813 per gallon. The average price in Tucson jumped 6 cents 
from yesterday to $1.710 per gallon. Average prices in Flagstaff 
climbed 2.3 cents at $1.783 per gallon from yesterday. Fuel prices in 
Nogales and Sierra Vista remained stable at $1.732 and $1.789 per 
gallon, respectively. Gas prices in Phoenix have surged 9.9 cents to 
$1.866 per gallon from yesterday.
    Price hikes are partially blamed on the shutdown of the pipeline 
that has created distribution bottlenecks throughout the state. The 
pipeline has been temporarily down since August 8th and normally 
supplies 30 percent of fuel shipped into Phoenix. Kinder Morgan 
officials reported they will begin testing the pipeline tonight with 
hopes to restart the line as early as this weekend, pending government 
approval. Testing involves pumping pressurized water through the 
pipeline and checking for leaks.
    AAA's advice:

   If you have more than half a tank, don't buy gas. Panic 
        buying or constantly topping off your tank puts undue stress on 
        gasoline supplies and makes the supply problem worse.

   Conserve fuel and stay calm.

   Don't drive unless you absolutely must.

   Carpool with neighbors (do your grocery shopping together, 
        start a carpool to get the kids to school. . .or walk them to 
        school, etc.). Check out Valley Metro's Ride Matching site: 
        www.ShareTheRide.com

   Combine errands. Run as many errands as possible in one 
        trip.

   Drive the most fuel-efficient car you have.
                                 ______
                                 
                                                AAA Arizona
                                                        Phoenix, AZ
For Immediate Release
    AAA Arizona: More Gas Headed for Arizona as Motorists Reduce 
Consumption
    Phoenix, AZ--August 20, 2003--Lines are easing at Phoenix area gas 
stations upon news from Governor Napolitano that additional gasoline is 
now reaching the Valley. The Governor also announced yesterday that the 
EPA has granted a 30-day waiver allowing Phoenicians to use ordinary 
unleaded gas until the supply crunch ends. That, plus additional 
gasoline arriving in the pipeline from Southern California, means the 
supplies expected to reach Phoenix in the next few days are much closer 
to normal.
    Kinder Morgan officials are optimistic that gas will begin to flow 
in their shut-down pipeline by the weekend--this in spite of a failed 
test yesterday. A 4-mile section of the pipeline suffered a leak during 
yesterday's testing, but it is expected that the additional repairs 
will be completed quickly. There was also news of damage to the Western 
Pipeline when a truck fell on it. That pipeline, which delivers gas to 
Arizona from Southern California, has been closed but is expected to 
re-open later tonight. No disruptions are expected from this minor 
closure.
    ``The best news is that motorists are taking the gas conservation 
message seriously,'' said David Cowley, Public Affairs Manager at AAA. 
''Governmental agencies and businesses, including AAA, have employees 
telecommuting. Traffic is reduced on city streets and, while there are 
gas lines, they are shorter and fewer. We are getting a handle on 
this.''
    The supply slow-down has affected prices statewide, however. Here 
are the latest average prices for regular unleaded gasoline throughout 
the state:


 Arizona          Phoenix East     Sierra Vista
 Statewide $1.85          Valley $1.90             $1.81
 Tucson $1.72     Flagstaff        Scottsdale
 Phoenix $1.92    $1.85                    $1.95
                          Nogales $1.76    Yuma $1.82
 

    AAA is continuing to ask motorists to conserve gas by following 
these basic tips:

   If you have more than half a tank, don't buy gas. Panic 
        buying or constantly topping off your tank puts undue stress on 
        gasoline supplies and makes the supply problem worse.

   Don't drive unless you absolutely must.

   Carpool with neighbors (do your grocery shopping together, 
        start a carpool to get the kids to school. . .or walk them to 
        school, etc.). Check out Valley Metro's Ride Matching site: 
        www.ShareTheRide.com

   Combine errands. Run as many errands as possible in one 
        trip.

   Drive the most fuel-efficient car you have.
                                 ______
                                 
                                                AAA Arizona
                                                        Phoenix, AZ
For Immediate Release

                AAA Says Conservation Key to Gas Crunch

    Phoenix, AZ. August 21, 2003--AAA notes that gas prices continue to 
rise as the state ends week two of the pipeline closure. Arizona had 
the third highest gas prices in the Nation this week, with an average 
of $1.885 for regular unleaded. The increase, just over 31 cents in two 
weeks is largely due to the pipeline problem. At a news conference on 
Wednesday, Governor Napolitano said Kinder Morgan, the pipeline's 
owners, assured her they would ``move heaven and earth'' to get the 
pipeline up and running by Sunday night. Furthermore, additional gas 
supplies are being brought to the Valley by Kinder Morgan's second 
pipeline and by truck.
    Even so, AAA Arizona strongly urges motorists to practice fuel 
conservation throughout the weekend.
    ``This might be a good weekend to stay home by the pool,'' said 
David Cowley, Public Affairs Manager at AAA Arizona. ``We all need to 
save gas any way we can to let distributors build gas inventories back 
up.''
    Gas prices have risen in other parts of the country, as well. AAA 
found the most expensive average price in California at $2.022, where 
prices were driven upward by Arizona's problems. In Oregon, regular 
unleaded was selling for $1.889. Prices rose slightly in the Eastern 
U.S. as well, in part due to refinery outages caused by the Northeast's 
power blackout.

------------------------------------------------------------------------
                       A. Unleaded  B. Mid-Grade  C. Premium   D. Diesel
------------------------------------------------------------------------
Phoenix (city)               1.981         2.066       2.185       1.747
------------------------------------------------------------------------
East Valley                  1.961         2.045       2.163       1.778
(Mesa,Gilbert,
 Chandler, Tempe,
 Ahwatukee,Apache
 Queen Crk.)
------------------------------------------------------------------------
West Valley                  1.970         2.055       2.174       1.718
(Peoria, Glendale,
 Sun City)
------------------------------------------------------------------------
Scottsdale                   1.994         2.079       2.199       1.761
(Scottsdale, Fountain
 Hills)
------------------------------------------------------------------------
Tucson (city)                1.728         1.802       1.906       1.732
------------------------------------------------------------------------
Pima County                  1.732         1.806       1.910       1.742
------------------------------------------------------------------------
Flagstaff                    1.863         1.945       2.055       1.780
------------------------------------------------------------------------
Yuma                         1.835         1.914       2.024       1.666
------------------------------------------------------------------------
Statewide                    1.885         1.966       2.079       1.739
------------------------------------------------------------------------
National                     1.635         1.736       1.799       1.569
------------------------------------------------------------------------

    It is difficult to predict when Arizona's gas supply will 
stabilize, so it is essential that drivers continue to conserve fuel:

   If you have more than half a tank, don't buy gas. Panic 
        buying or constantly topping off your tank puts undue stress on 
        gasoline supplies and makes the supply problem worse.

   Don't drive unless you absolutely must.

   Combine errands. Run as many errands as possible in one 
        trip.

   Drive the most fuel-efficient car you have.
                                 ______
                                 
                                                AAA Arizona
                                                        Phoenix, AZ
For Immediate Release

        Gas Prices Expected to Hold Steady for Labor Day Weekend

    Phoenix, AZ. August 28, 2003--Gasoline prices around the state are 
holding steady, as motorists prepare for the Labor Day weekend. 
Although the pipeline was reopened Sunday, Arizona continues to have 
the third highest gas prices in the Nation this week, with an average 
of $1.998 for regular unleaded. Arizona hit record highs earlier this 
week when the average price hit $2.008 per gallon, according to AAA 
Arizona.
    Prices are rising rapidly all throughout the country due to ongoing 
refinery outages caused by the electrical blackout two weeks ago. AAA's 
weekly report shows a nationwide average price of $1.735 per gallon, 
the highest recorded price in AAA history. Refineries serving Chicago, 
Detroit and San Francisco were reported shutdown. AAA believes that if 
the United States would address the insufficient domestic gasoline 
refining capacity and the need for gasoline companies to maintain 
higher reserve inventories then it would be able to minimize the 
exorbitant price spikes that have adversely affected consumers and the 
economy for several years.
    But high prices are not expected to deter motorists from traveling 
during the Labor Day Holiday. In fact, AAA projects 33.4 million 
Americans to travel this weekend with 84 percent traveling by car. AAA 
Arizona urges motorists to drive carefully and remember these tips in 
case of a breakdown:

   Carry extra water for your radiator and drinking water for 
        passengers.

   Bring a light blanket and jacket -the desert is cold after 
        the sun goes down.

   Carry a first aid kit, flashlight, flares, jumper cables, 
        duct tape for short-term repairs and a cell phone.

    Motorists preparing for a Labor Day trip can expect these prices 
across the country; Las Vegas: $1.962, Denver: $1.653, San Diego: 
$2.177, Los Angeles: $2.137, Dallas: $1.605 and Santa Fe: $1.762 per 
gallon.
    Other regional prices are shown below.

------------------------------------------------------------------------
                                Unleaded   Mid-Grade   Premium   Diesel
------------------------------------------------------------------------
Phoenix (city)                     2.125       2.216     2.344     1.793
------------------------------------------------------------------------
East Valley                        2.124       2.215     2.342     1.775
(Mesa,Gilbert, Chandler,
 Tempe, Ahwatukee,Apache
 Queen Crk.)
------------------------------------------------------------------------
West Valley                        2.124       2.215     2.343     1.758
(Peoria, Glendale, Sun City)
------------------------------------------------------------------------
Scottsdale                         2.173       2.267     2.397     1.785
(Scottsdale, Fountain Hills)
------------------------------------------------------------------------
Tucson (city)                      1.826       1.904     2.014     1.732
------------------------------------------------------------------------
Pima County                        1.836       1.915     2.025     1.740
------------------------------------------------------------------------
Flagstaff                          1.938       2.024     2.137     1.786
------------------------------------------------------------------------
Yuma                               1.964       2.050     2.167     1.670
------------------------------------------------------------------------
Statewide                          1.998       2.084     2.204     1.763
------------------------------------------------------------------------
National                           1.735       1.842     1.910     1.582
------------------------------------------------------------------------


    The Chairman. Thank you very much. Mr. Olcott, welcome.

 STATEMENT OF JONATHAN OLCOTT, ESQ., OLCOTT & SHORE, PLLC, ON 
             BEHALF OF THE SILVER CREEK HOMEOWNERS 
                          ASSOCIATION

    Mr. Olcott. Thank you, Senator. I am a homeowner 
association attorney and I represent the Silver Creek 
community. It's a community of approximately 288 homes. There 
are 240-some in the phase one, which has been completed. The 
closest home in phase one is about 300 feet from the pipeline. 
Phase two is not yet completed and not yet occupied, especially 
the homes that are adjacent to the pipeline. Mr. Spitzer 
testified that the homes were 37 feet, and that's approximately 
correct for the building envelope for the actual structures on 
the lot, but the block wall, the back yard of those homes, is 
only about 10 feet from that pipeline.
    The builder is Monterey Homes, and there has been a lot of 
discussion today about disclosure and the pipeline was not 
disclosed in the subdivision public report for phase one. It 
was disclosed in the subdivision public report for phase two. 
Who can guess how many people read them? It's a thick document 
but it is required by the Department of Real Estate.
    Shortly after the rupture occurred we had a board meeting 
and invited the residents to come and discuss the rupture. I 
met with Kinder Morgan representatives on the site before that 
meeting and they were frankly rather candid about what had 
occurred. They didn't try to blame Monterey's grading or any of 
the dirt movement that had occurred shortly before the rupture. 
It was interesting at the first meeting that no homeowners in 
phase one came to discuss the rupture. There was press at this 
meeting, but no homeowners came. We had a later meeting in 
September and Kinder Morgan attended this meeting and also 
representatives from ADEQ. We hand-delivered invitation cards 
to all of the homeowners and only 35 to 40 chose to come, and 
Kinder Morgan at this second meeting explained pipeline safety 
and disclosures. ADEQ talked about the contamination reporting 
and remediation plans.
    So I can--I can say in my opinion I was quite surprised at 
the reaction of the residents. I can divide them into two 
categories. The majority is not overly concerned, and it may be 
the proximity of these people to the pipeline. Let's keep in 
mind that the area of phase two is completely unoccupied and 
those homes that were sprayed with the gasoline have been 
demolished but no one lived in them. The minority is concerned. 
They're concerned about property values. There was no 
disclosure again in phase one. They're concerned about safety 
and the overall feeling I would say is relief that nobody was 
in the homes that were doused and having a barbeque when it 
occurred.
    There is an ingress and egress issue at Silver Creek. 
There's only one means of getting in and out of the community 
and if there were a calamity and emergency vehicles were coming 
into the community, it may be difficult for people in the 
community to leave, and there is a concern and we're working 
with the board and with Monterey in trying to address that.
    I've talked about the disclosure. I'm not aware of any 
regulations relating to the proximity of structures to gasoline 
pipelines. Here the block walls are only 10 feet. There were 
obviously large grading construction equipment right next to 
the pipeline and in one of the written comments that's been 
submitted and I also have anecdotal corroboration that there 
are structures built right over pipelines in certain instances 
and some in Tucson, so the encroachment issue as a homeowner 
association attorney representing all these homeowner 
associations all over the state is something I think that 
absolutely should be addressed. Thank you, Senator.
    [The prepared statement of Mr. Olcott follows:]

 Prepared Statement of Jonathan Olcott, Esq., Olcott & Shore, PLLC; on 
           behalf of the Silver Creek Homeowners Association
    My law firm is known as Olcott & Shore, PLLC. We are located in 
four cities in Arizona: Tucson, Oro Valley, Phoenix and Goodyear. We 
represent the Silvercreek Homeowners Association (``Silvercreek''). 
That is the community in which the rupture of Kinder Morgan's pipeline 
occurred.
    A contractor quickly began removing the contaminated dirt. Some of 
the dirt was piled on the Association's common area. Kinder Morgan is 
working with us to ensure the soil is remediated. Silvercreek does not 
own the tract in which the pipeline is located.
    The reaction by the community has been surprising. I can divide the 
community into two classes: (1) the majority is not overly concerned 
about the rupture and the fact they live near a gasoline pipeline; and 
(2) the minority are concerned about safety, and a decline in property 
values.
1. Majority
    On August 19, the Board of Directors of Silvercreek (``Board'') 
held a Board meeting. In the notice of the meeting to the community, 
the Board indicated that a topic of deliberation would be the rupture. 
The media attended the meeting, but the only homeowners who attended 
did not comment on the rupture.
    I met with Kinder, Morgan personnel before the meeting. The Kinder, 
Morgan representatives invited themselves to the impending Board 
meeting. We declined the invitation as premature. They were open and 
cooperative. They accepted full responsibility for the rupture. They 
did not blame any other entity for the rupture. They promised to 
cooperate with Silvercreek to ensure the remediation would be 
effective. I requested Kinder Morgan to forward to me a copy of the 
contamination report. I have yet to receive it. Kinder, Morgan has 
otherwise been cooperative in providing literature on the pipeline 
location, testing procedures and hazards of living near a gasoline 
pipeline.
    Later we invited Kinder, Morgan to attend another community meeting 
to update the community on Kinder, Morgan's activities. It occurred in 
September. Invitation cards were hand-delivered to each household. 
Silvercreek has 288 households. Approximately 35 to 40 homeowners chose 
to attend. Many were husband and wife; so less than 35-40 households 
were represented.
    Kinder, Morgan continues to stay in contact with Silvercreek.
    The President of Silvercreek is Ramie Fisher. She indicated that 
the majority of the community appears to accept the rupture of, and 
proximity to, the pipeline as an acceptable hazard of modern living. 
Many have indicated to me that they understand that there are hazards 
involved with the proximity of natural gas and electrical utilities 
throughout the community. They have seen the signs that disclose the 
presence of the gasoline pipeline.
2. Minority
    Silvercreek is a relatively new community. Most homeowners are 
original owners. The minority has expressed frustration with the lack 
of disclosure of the pipeline in the Subdivision Public Report. The 
second phase of Silvercreek is adjacent to the pipeline, and closer to 
the pipeline than Phase I. The homes in Phase II are still under 
construction. The Developer did disclose the pipeline in the public 
report for Phase II.
    The Committee should know that the homes that are immediately 
adjacent to the pipeline are in Phase II and are not occupied. Were 
they occupied, I suggest the homeowners would have substantial concerns 
about the pipeline.
    It is possible that the minority are those who live closest to the 
pipeline in Phase I.
    The minority has expressed concern about safety. Silvercreek has 
only one roadway access. The Board is crafting an evacuation plan in 
the event of a calamity. The minority has also expressed concern that 
their property values have declined. They are probably correct. I have 
not confirmed this proposition with an appraiser.
Additional Observations
    I maintain households in both Tempe and Oro Valley. I was traveling 
back and forth frequently after the rupture. When the shortage and gas 
lines occurred in Phoenix, I filled my tank in Tucson, Eloy or Casa 
Grande. The pipeline rupture had little effect on the public in Tucson. 
Because I am counsel to Silvercreek, I followed the media coverage 
closely. The rupture received substantially more media coverage in 
Phoenix than in Tucson.

    The Chairman. Thank you, Mr. Olcott. Do you think that we 
ought to do whatever we can to increase the regulations that we 
have concerning disclosure?
    Mr. Olcott. I think so based on the reaction of the people 
that, oh my goodness, my property values have decreased, I 
wouldn't have purchased here had I known it been so close to 
the gasoline pipeline.
    The Chairman. In other words, how obscure is that 
information?
    Mr. Olcott. It's in the public report. I think most people 
read it, but it certainly did not indicate that the pipeline is 
10 feet from your house. The public report says there is a 
pipeline, see the plat, if the consumer wants to bother to do 
that. I frankly doubt that anyone really did.
    The Chairman. Maybe we ought to work on getting regulations 
so that it's far more prominent. Would you agree, Mr. Cowley?
    Mr. Cowley. Yes. I think we have to accept human nature and 
it happens--with this whole thing we've accepted things the way 
that they've been for many years, and when this event occurred 
we all learned something, and we discovered that we should have 
read what we didn't read or we should have prepared for 
something that we didn't prepare for. And I think those are the 
very kinds of conversations that we ought to be having here in 
the state subsequent to this event.
    The Chairman. Mr. Cowley, do you believe that there was do 
you agree with the Attorney General's assessment that there was 
like only a dozen cases of price gouging?
    Mr. Cowley. Yes. Once again I point out that we don't have 
a price gouging statute, but had we had one there are probably 
no more cases than that that would have qualified for it.
    The Chairman. And that's--most of the gas station owners 
and operators ought to be appreciated for that, for the small 
number. There must be thousands.
    Mr. Cowley. Well, at AAA we--with the amount of information 
that we have is somewhat limited. Of course, we have no 
information on wholesale margins and so on but I agree there's 
no indication that most retailers were doing anything except 
reacting to the normal price hikes that were coming to them. 
Now it's true that margins--it's true that margins rose during 
that period of time. They started at about 6 cents
    The Chairman. I can see that.
    Mr. Cowley. But that's part of the--in AAA's view, that's 
also part of the pricing problem of gasoline nationwide. It 
becomes very volatile and it does that because of the nature of 
things like OTQs and regulations and so on. Anything that could 
calm that would perhaps make it easy for us and for consumers 
to accept these price changes.
    The Chairman. Mr. Bannigan, serious questions can be raised 
about the continuity of OPS' oversight of your operations, but 
to me it's clear that for a number of years Kinder Morgan has 
been aware of corrosion issues that raise serious concerns on 
both of its pipelines that transport fuel between Tucson and 
Phoenix. Why did it take until now for you to move 
expeditiously to replace the problem pipe?
    Mr. Bannigan. Well, let me address that in several pieces. 
First, with regard to the general corrosion issues that you 
reference, on two separate occasions with regard to both the 6-
inch pipeline and the 8-inch pipeline we had presented 
information to the Department of Transportation Office of 
Pipeline Safety with respect to the effectiveness of the 
cathodic protection on both those systems. Those reports were 
delivered to the Government and they were discussed and in 
fact, with regard to the 6-inch pipeline action order that was 
received, the Government concurred with our opinion with regard 
to the effectiveness of the cathodic protection.
    Now, with regard to the replacement of the pipeline, Kinder 
Morgan has been looking at expanding its capacity from the east 
since well over a year and a half ago. In October of last year 
we submitted to the Federal Energy Regulatory Commission a 
petition for a declaratory order that would allow us to charge 
a regulatory structure, rate structure that we could use to 
fund this investment, which would be somewhere between $180- 
and $200 million in cost. So that effort was well under way, 
Mr. Chairman, before this incident occurred. We decided that in 
light of the fact we were moving forward with this project and 
the nature of the incident that occurred on July 30, that we 
would proceed with replacing the 8-inch pipe in the Tucson area 
with 12-inch pipe. But I will add that all that pipeline has 
been hydrostatically tested, so there is not a safety issue 
with that 8-inch pipeline.
    The Chairman. You conducted an internal inspection on a 
portion of your 6-inch jet fuel pipeline in November 1999 but 
the results, which revealed significant corrosion, were not 
known until the following March. Why would it take so long?
    Mr. Bannigan. The answer to that is very simple. The 
information that you get from a smart pig run has to be 
processed and you take the download from the smart pig and it 
goes to technicians that we retain through our consultants that 
actually do that effort. That is not uncommon to have a 2- to 
3-month lag between the time that a smart pig is run and the 
time that the data is made available to the company.
    The Chairman. Well, it seems to me some bad things could 
happen in the interim.
    Mr. Bannigan. Well, sir, I think as the record demonstrates 
we have not had bad things happen with regard to generalized 
corrosion issues on any of our pipelines in the State of 
Arizona.
    The Chairman. You publicly committed to replacing the 
remaining 8-inch line between Tucson and Phoenix. It's my 
understanding that you have yet to provide OPS with a plan to 
ensure the overall public safety of the pipeline as required by 
OPS' corrective action order that they issued on August 6. When 
do you intend to provide OPS with a plan?
    Mr. Bannigan. Let me clarify for the record exactly that 
time sequence. You are correct we did receive the corrective 
action order from the Office of Pipeline Safety on August 6. We 
responded to that on August 13, and in our response on August 
the 13th, we made clear to the Office of Pipeline Safety that 
the nature of the problem we were dealing with was no longer a 
seam failure but rather it was stress corrosion cracking 
incident and that we were going to have to modify our plans, 
including a hydrostatic test of the pipeline.
    That plan was submitted and approved by the DOT on the 14th 
of August. The smart pig run was conducted on the 19. Following 
that, on September 29, we submitted to the Department of 
Transportation Office of Pipeline Safety our plan with regard 
to stress corrosion cracking. We received from them on October 
6, the amended corrective action order with regard to stress 
corrosion cracking. So as a matter of fact our plan was in the 
hands of the Federal Government before they sent us the amended 
order.
    The Chairman. How many miles of pipeline do you own?
    Mr. Bannigan. We own or operate about 10,000 miles of 
pipeline in the United States.
    The Chairman. How secure is that?
    Mr. Bannigan. Are you talking from a terrorist threat? 
Candidly, Senator, there are miles and miles of open stretches 
of pipeline in this country and it's very difficult to survey 
all those lines on a constant basis. I think that fact of the 
matter is is that if there were to be a problem from the 
terrorist incident, the industry can respond very quickly to 
restoring service. Most service disruptions can be responded to 
in anywhere from an 18- to a 36-hour time period.
    As you may be aware, there's a crude oil line in the Nation 
of Colombia that gets attacked by terrorists some 200 times a 
year and they have crews that just run up and down that 
pipeline responding to those terrorist threats.
    The Chairman. I want to thank the witnesses. Thank you very 
much for being here. Mr. Cowley, thank you for everything that 
AAA does. A lot of our citizens not only here in the valley but 
throughout America are very much assisted by your good works, 
including me. Mr. Olcott, thank you very being here. Thank you, 
Mr. Bannigan. This hearing is adjourned.
    [Whereupon, at 10:55 a.m., the hearing was adjourned.]

                            A P P E N D I X

     Prepared Statement of Dr. Mark Cooper, Director of Research, 
                     Consumer Federation of America
    Mr. Chairman and Members of the Committee,

    My name is Dr. Mark Cooper. I am Director of Research of the 
Consumer Federation of America. The Consumer Federation of America 
(CFA) is a non-profit association of 300 pro-consumer groups, which was 
founded in 1968 to advance the consumer interest through advocacy and 
education. I greatly appreciate the opportunity to appear before you 
today to discuss the problem of rising gasoline prices and gasoline 
price spikes.
The Upward Spiral of Gasoline Prices
    Although gasoline prices have traditionally risen during the summer 
driving months of June-August, in the past three years the seasonal 
upswing has turned into a much more violent price spiral--a sharp price 
spike followed by a modest decline with stabilization at a higher level 
than previous years. We have also had out of season price spikes, which 
exhibit the same roller coaster and ratchet.
    A refinery fire here, a pipeline break there, a blackout somewhere 
else, and prices go through the roof and stay high, because stocks are 
low and capacity is constrained. Stockpiles and capacity are determined 
by business decisions, not Mother Nature. How many times does this have 
to happen before policy makers do something about it? Perhaps policy 
cannot prevent accidents, although safety regulations could lower their 
likelihood, but it can definitely diminish the negative impact these 
accidents have on the public when they happen.
    The underlying driver of this gasoline price ratchet has been an 
increase in the refiner/marketer share of the pump price, called the 
domestic spread, not foreign crude oil price increases. The domestic 
price ratchet has resulted from a combination of inadequate capacity 
and inadequate competition in the industry. The underlying tight market 
condition is the result of both increasing demand and business 
decisions that slowed the growth of long-term capacity. The price 
spiral occurs because suppliers who face weak competition find they can 
take unilateral actions in tight markets to quickly increase prices and 
do not have to respond quickly to increase supplies that might lower 
prices. The result is an increase in profits and an upward spiral of 
prices.
    Energy markets are highly complex. Their volatility poses 
particular challenges for policy and economic analysis. The key 
elements are the supply-side difficulties of inadequate competition, 
insufficient production, transportation and storage interacting with 
the demand side challenges of providing for a continuous flow of energy 
to meet inflexible demand, which is subject to seasonal consumption 
patterns. Public policy must recognize all three factors--supply, 
demand and competition, if the price ratchet is to be broken in a 
consumer-friendly fashion.
Supply-Side Fundamentals
    On the supply side of the gasoline market, because of the nature of 
the underlying molecules, the production, transportation and 
distribution networks are extremely demanding, real time systems. 
Energy is handled at high pressure, high temperature and under other 
physical conditions that are, literally, explosive. These systems 
require perfect integrity and real time balancing much more than other 
commodities.
    Transportation and distribution infrastructure is extremely capital 
intensive and inflexible. Many sources of energy are located far from 
consumers, requiring transportation over long distances. The 
commodities are expensive to transport and store delivered over a 
network that is sunk in place with limited ability to expand in the 
short and medium term.
    Refineries and pipelines, two key parts of the gasoline 
distribution chain, are not only capital intensive, but they take long 
lead times to build. They have significant environmental impacts. In 
the short term, their capacity is relatively fixed. Refineries must be 
reconfigured to change the yield of products. Although oil pipelines 
have largely depreciated their historic, sunk costs, expansion would be 
capital intensive. Thus, pipeline capacity is generally fixed capacity.
    Accidents have a special role in networks such as these. Because of 
the demanding physical nature of the network, they are prone to happen. 
Because of the volatile nature of the commodity, accidents tend to be 
severe. Because of the integrated nature of the network and demanding 
real time performance, accidents are highly disruptive and difficult to 
fix.
    Given the basic infrastructure of supply in the industry, the 
availability of stocks to meet changes in demand is the critical factor 
in determining the flexibility of supply. Under all circumstances, 
since output is slow to respond to price changes because of its 
inelasticity, stockpiles, storage and importation of product become a 
critical element of the gasoline market. Stocks are the key factor in 
policy responses to market power where supply is inelastic.
    Every investigation of every product price spike in the past 
several years' points to ``unusually low stock'' as a primary driver of 
price shocks. Who decides how much capacity to build, how much product 
to refine and how much gasoline to have on hand? Oil companies. They 
make those decisions to maximize their profits, given the industry 
fundamentals that they face.
Business Decisions Keep Markets Tight
    There are two clearly identifiable trends affecting the supply side 
of the gasoline market--a reduction in capacity relative to demand and 
an increase in concentration.
    In 1985 refinery capacity equaled daily consumption of petroleum 
products. By 2000, daily consumption exceeded refinery capacity by 
almost 20 percent. The problem is not simply that no new refineries 
have been built, but that in the past 15 years about 75 refineries were 
closed. Reductions in storage capacity and the number of gasoline 
stations of over ten percent have also taken place in just the past 
half-decade.
    These reductions in capacity have been driven in part by a merger 
wave that has resulted in a significant increase in the concentration 
of ownership of refinery capacity and gasoline outlets. Four-fifths of 
regional refinery markets have reached levels of concentration that 
trigger competitive concerns, even by the standards adopted by the 
antitrust division of the Reagan administration's Department of 
Justice. In these markets, the largest four firms account for at least 
one-half and as much as three quarters of the refined product output. A 
similar trend has been in evidence at the level of gasoline stations.
    Even more ominous for short-term price volatility is the fact that 
stockpiles have declined dramatically. Storage capacity has been 
reduced and economic reserves--reserves above what is needed just to 
keep the system running--have been slashed. The industry now typically 
has no more than a day or two of gasoline supplies above its 
operational minimum, compared to a week or so in the 1980s. Thus, there 
is little reserve capacity to dampen price increases.
    The previous discussion focuses on horizontal concentration. 
Vertical integration between the segments of the industry may have an 
impact as well. Vertical integration by dominant firms may create a 
barrier to entry requiring entry at two stages of production, or 
foreclosing critical inputs for competitors in downstream markets. 
Vertical arrangements may restrict the ability of downstream operators 
to respond to local market conditions,
    Vertical integration not only removes important potential 
competitors across stages of production, but also may trigger a wave of 
integrative mergers, rendering small independents at any stage 
extremely vulnerable to a variety of attacks.
    Gasoline markets are vulnerable to these negative effects of 
vertical integration. Product must move downstream from the refinery or 
the tanker to the pump. Vertically integrated operations are closed to 
independent sources of supply. They may impose zonal pricing formulas 
or restrictions of sources of supply on their distribution outlets.
    With vertical integration the market may be less responsive than it 
could be both in the short term, since competing product has difficulty 
getting into individual markets at the end of a vertically integrated 
chain and in the long term because new competitors in any market may 
have to enter at several stages of the business. The FTC found this to 
have had a substantial impact on the market in its study of the 
midwestern gasoline market.
    The mergers and reduction of capacity have been driven by business 
decisions. Larger, more vertically integrated companies may be more 
efficient, but they can also exploit tight markets. Gasoline markets 
have been slow to respond to price increases. The price differentials 
that build up before product imports are used to increase supplies are 
far larger than the transportation cost of imports.
    The tightening of supply reflects private business decisions in 
other ways. As suggested by the Federal Trade Commission report, 
individual companies now may have pricing power, not through collusion 
but through individual action. That is, with supply and demand tight 
and a small number of suppliers in each market, individual suppliers 
recognize that they can influence the price, at least for short periods 
of time, by withholding supplies. They are no longer the price takers 
we find in competitive markets; they become price makers in 
oligopolistic markets.
Demand
    The demand side of the market creates additional pressures and 
vulnerabilities to price spirals. The demand for gasoline does not 
respond quickly to price in the short term. When demand is 
``inelastic'' as it is in the gasoline market, suppliers have a better 
chance of making price increases stick when there is little spare 
capacity. Increasing demand has reduced spare capacity.
    The continuous flow of large quantities of product to meet highly 
seasonal demand is the central characteristic of the demand side of the 
market. Many discussions of the gasoline market start from the premise 
that people drive a lot, perhaps too much. But in order to design 
proper policies to deal with gasoline demand and how it affects the 
market, we must have an appreciation for why people drive as much as 
they do. Examining price and income elasticities leads to the 
conclusion that energy is a necessity of daily life. Recognizing this 
fact leads to policy choices that can have the greatest impact while 
imposing the least cost and inconvenience on consumers.
    Gasoline consumption is determined by the physical and economic 
structure of daily life. People need to drive on a daily basis because 
of the way our communities are built and our transportation systems 
designed. Stores are far from homes. Homes are far from work. Social 
and after-school activities are dispersed. In most communities, mass 
transit is scarce and inconvenient. It is necessary to drive to get 
from here to there. We own more cars and drive more miles on a 
household basis over time. These trends and patterns have become 
stronger and more deeply entrenched as our society has become wealthier 
and the tendency for two-earner households has grown. For the past 
three decades there has been an almost perfect, one-to-one 
correspondence between economic growth and the growth of total miles 
driven.
    The result of the underlying socioeconomic determinants of 
automobile travel is to render demand ``inelastic.'' The low elasticity 
of demand is the critical factor in rendering the gasoline market 
volatile and vulnerable to abuse. When demand is inelastic, consumers 
are vulnerable to price increases, since they cannot cut back on or 
find substitutes for their use of the commodity. When the most 
important market force in disciplining market power, demand elasticity, 
is as low as observed for gasoline, there are many opportunities to 
exercise market power.
    Over the 1990s, gasoline consumption grew by a total of almost 20 
percent, compared to the 1980s when it grew by only 10 percent. The 
number of drivers and passenger vehicles increased, as the driving age 
population expanded. Gasoline consumption per passenger vehicles grew 
by about 7 percent. About three quarters of that increase was caused by 
an increase in the number of miles driven and one quarter was caused by 
the shift to SUVs.
    While the shift to SUVs was one striking feature of the 1990s, an 
equally striking and more important feature of the demand side was the 
failure of fuel efficiency to improve. If the fuel efficiency of autos 
had increased as rapidly in the 1990s as it did in the 1980s, autos 
would have been 20 percent more efficient, getting about 4 miles per 
gallon more, in 2000. (If there had not been a shift to SUVs, the 
average fleet efficiency would have been about 1 mile per gallon 
higher.)
Consumer-Friendly Policies to Break the Price Spiral
    In summary, this analysis demonstrates that gasoline markets are 
volatile and suffer competitive problems. Market fundamentals 
(inadequate capacity and inelastic supply and demand), market 
structures (ownership concentration and vertical integration), 
corporate conduct (capacity and production decisions), and market 
performance (price and profits) all point toward the potential for the 
abuse of market power.
    Vigorous and broad based public policies should be pursued to 
implement permanent institutional changes that reduce the chances that 
markets will be tight and reduce the exposure of consumers to the 
opportunistic exploitation of markets when they become tight. To 
achieve this reduction of risk, public policy should be focused on 
achieving five goals.
    Restore reserve margins by developing both efficiency and 
production.

   (1)  Increasing fuel efficiency at the rate achieved in the 1980s in 
        the decade ahead would save about 1.5 million barrels per day. 
        That rate of progress could be sustained over several decades.

   (2)  Increasing refinery capacity by 10 percent, either through 
        expansion at existing refineries or redevelopment of less than 
        one half the refineries closed in the past decade, would add 
        another 1.5 million barrels per day.

   (3)  To the extent investments to meet clean air standards are a 
        barrier to capacity expansion, public policy should find a way 
        to lower the cost of compliance, directly through subsidies or 
        indirectly through research on new technologies, rather than 
        lower the standards.

    Increase market flexibility.

   (4)  Expand stockpiles with tax incentives to hold and draw down 
        supplies in the face of price increases, and/or mandatory 
        stocks requirements as a percentage of sales, and/or government 
        owned/privately operated supplies could add to existing 
        stockpiles.

   (5)  Larger, more uniform product markets should be developed to 
        expand to increase supply responsiveness, without lowering 
        clear air standards.

    Promote a more competitive industry

   (6)  Further concentration of the petroleum industry should be 
        resisted by vigorous enforcement of the Department of Justice 
        Merger Guidelines.

   (7)  Restrictive marketing practices, such as zonal pricing and 
        franchise restrictions on supply acquisition should be 
        investigated and discouraged.

    Deter private actions that make markets tight or exploit market 
disruptions.

   (8)  Withholding of supply should draw immediate and intense public 
        and governmental scrutiny through a joint Federal state task 
        force of attorney's general.

   (9)  The task force or some other entity should develop ongoing 
        databases and information for evaluating industry structure and 
        conduct.

  (10)  The incentives to manipulate markets can be reduced by imposing 
        a windfall profits tax that triggers when specific 
        circumstances raise prices and profit sharply.

  (11)  Ultimately, market manipulation could be made illegal.

    Provide adequate energy assistance for low-income households.

  (12)  Assistance policies directly targeted at transportation 
        expenditures should be considered.

  (13)  Energy assistance programs should be indexed to energy prices.
                               Attachment
                               
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                                 ______
                                 
    Response to Written Questions Submitted by Hon. John McCain to 
                             Terry Goddard
    Question 1. Was your office notified that Kinder Morgan was 
planning to voluntarily shut down the pipeline or did you find out 
after the fact?
    Answer. The Attorney General's Office was not contacted directly by 
Kinder Morgan about the shut down. We were informed by other government 
agencies afterwards.

    Question 1a. What recommendations can you offer to ensure 
sufficient communication regarding a matter of this significance is 
adequately communicated to all of the state and local authorities that 
should be apprized of such an event?
    Answer. The Governor created an Essential Services Task Force that 
is addressing this question, and we support the direction of the Task 
Force. As long as those agencies that must be notified immediately are 
so notified by industry, and other agencies are informed promptly on an 
intra-governmental basis, we believe this will be sufficient.

    Question 2. What type of communication efforts currently exist 
between the Arizona Corporation Commission and your office?
    Answer. Both the Attorney General's Office and the Arizona 
Corporation Commission are members of the Governor's Gasoline Working 
Group. This facilitates some communication on gasoline and pipeline 
issues. The Commission is not regularly represented by this office, but 
other communication on a variety of issues is conducted on an ad hoc 
basis.

    Question 3. All of us are familiar with the horror stories of long 
lines and exorbitant gas prices in August. Has your office found any 
evidence that consumers where subject to price gouging by gas station 
operators following the shutdown of the Kinder Morgan pipeline?
    Answer. Yes. We received approximately one thousand inquiries and 
complaints mostly relating to pricing, shortages, and tying 
arrangements (in which gasoline retailers were demanding the purchase 
of additional products/services, e.g., a carwash before consumers could 
purchase gasoline). There were some extremely high retail gasoline 
prices in the Phoenix area (up to $4.97 per gallon regular CBG).

    Question 3a. Does your office currently have the authority to 
protect consumers and take action against those suspected of price 
gouging? If not, what specific authority is needed and what actions is 
your office taking to be provided such authority?
    Answer. Arizona does not have a price gouging statute. While over 
twenty states have laws protecting consumers, the Arizona Attorney 
General does not currently have the authority to prosecute those 
suspected of price gouging.
    The Attorney General supports a state price gouging statute, and is 
working with state legislators to propose price gouging legislation in 
the upcoming legislative session.

    Question 4. While Arizona currently has no regulation or law to 
address the alleged price-gouging during the pipeline shutdown, the 
Federal Trade Commission (FTC) does have some authority to protect 
consumers against price fixing. The FTC requires evidence of collusion 
or coordinated effort in order to begin a formal investigation. What 
actions has your agency taken to coordinate with other state and 
Federal agencies to determine whether collusion or coordinated efforts 
existed?
    Answer. The Antitrust Unit at the Attorney General's Office is 
constantly monitoring the gasoline industry in Arizona for evidence of 
antitrust violations, such as price fixing or other market 
manipulations, pursuant to Arizona Revised Statutes sections 44-1401 et 
seq.
    The Attorney General's Office, Antitrust Unit, issued a Civil 
Investigative Demand to Kinder Morgan for information on gasoline 
deliveries and inventories, through both the pipeline and in their 
storage facilities, from July--October 2003. That information is being 
analyzed. The Attorney General's Office, Antitrust Unit has information 
from this and other antitrust investigations that can be shared with 
government employees upon receiving a written confidentiality agreement 
pursuant to Arizona Revised Statutes Sec. 44-1406 (F).
    The Antitrust Unit participates with the FTC's Gasoline Price 
Monitoring Project, by regularly sending the FTC data on consumer 
complaints received by the Attorney General's Office relating to 
gasoline prices.
    The Antitrust Unit participates in the Governor's Gasoline Working 
Group to monitor the gasoline industry in Arizona. In particular, the 
Antitrust Unit works closely with the Governor's Office, the Department 
of Weights and Measures, the Department of Commerce--Energy Office, and 
the Department of Transportation.
    The Attorney General's Office has been in contact with the FTC 
specifically relating to the August 2003 pipeline shutdown. The FTC has 
offered technical support (economic analysis) as needed. We have not 
yet requested that support on the pipeline shutdown issue since we have 
an in-house economist in the Antitrust Unit examining these issues. The 
Attorney General's Office is unaware of any independent investigation 
by the FTC on the pipeline shutdown and gasoline shortages.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. John McCain to 
                           Thomas A. Bannigan
    Question 1. There appear to have been problems with the pipeline 
used to transport gasoline since at least 1997. According to 
documentation provided to the Committee, an inspection conducted in 
July 1997 by the Office of Pipeline Safety (OPS) revealed numerous 
instances of external corrosion. OPS followed up on August 15, 1997, by 
requesting that then owner Santa Fe Pacific Pipeline Partners (SFPP) 
submit a plan for recoating the line. A second request for the plan was 
sent in October 1997. Yet it does not appear Santa Fe Pacific Pipeline 
ever submitted a plan.
  (a) What did OPS do to enforce its request?
  (b) Was the line recoated?
  (c) What, if any, action did OPS take regarding this requirement when 
        the pipeline changed ownership?
    Answer. In December 1997, the OPS Southwest Regional Director met 
with SFPP to evaluate corrosion on the 8-inch gasoline pipeline and 
determine a corrosion protection plan. Through his evaluation, the OPS 
Southwest Regional Director satisfied concerns over whether the 
pipeline was operating in a safe condition and approved the SFPP 
corrosion protection plan. Safety is often managed by keeping the 
pipeline at an operating pressure that will maintain an adequate safety 
margin even if there are instances of corrosion. Pipelines are designed 
in accordance with conservative standards to provide for safe operation 
with some corrosion. The approved plan was based on cathodic 
protection, monitoring and internal inspection, rather than a general 
recoating of the pipeline. We enforced the plan by ensuring through 
inspections, both by the OPS and the Arizona Corporation Commission 
(ACC), that the operator managed corrosion within acceptable levels 
through corrosion protection, corrosion monitoring, maintenance and 
pipeline repair.
    After Kinder Morgan Energy Partners (KMEP) assumed ownership of the 
gasoline pipeline, it followed the plan established by SFPP and 
approved by OPS. The OPS Southwest Region and ACC continue to monitor 
KMEP corrosion protection of the gasoline pipeline during standard 
inspections. The ACC inspects the pipeline in Arizona and OPS inspects 
the pipeline in New Mexico. There have been no significant corrosion 
issues identified in these inspections.

    Question 2. According to records supplied to the Committee, an 
internal inspection by Kinder Morgan on March 2, 2000, of its 6-inch 
jet fuel pipeline from Phoenix to Tucson revealed significant external 
corrosion, significant enough in fact that Kinder Morgan reduced the 
pipeline's operating pressure to 87 percent of the line's maximum 
operating pressure. OPS was made aware of KMEP's report 6 days later, 
on March 8. By April 15, OPS was aware that corrosion had eaten away 
over 50 percent of the pipe wall in some locations. Why, then, did take 
OPS until March 14, 2001--a full year after it was notified of what 
sound like significant safety concerns--to issue a Corrective Action 
Order?
    Answer. After KMEP informed OPS of the significant external 
corrosion on its 6-inch jet fuel pipeline from Phoenix to Tucson, OPS 
met with KMEP and reviewed its inspection data, corrosion protection 
system and its plans to address the external corrosion issues. As a 
result of this meeting, and the OPS determination of necessary 
protection actions to provide a greater level of safety, KMEP reduced 
operating pipeline pressure further to 50 percent maximum allowable 
operating pressure. OPS agreed to the KMEP plan to correct significant 
corrosion defects. The plan was based on a very high safety standard 
for repair that included criteria more stringent than the industry 
standard. Because KMEP had taken responsible action, OPS did not issue 
a corrective action order at that time. In February 2001, KMEP 
completed repair of the pipeline in 52 locations and the replacement of 
one-half mile of pipeline. This completed the correction of all 
significant corrosion defects. At no time did OPS allow the operator to 
operate the pipeline in an unsafe manner.

    Question 3. Why was the Corrective Action Order issued after Kinder 
Morgan had made 52 repairs to the line?
    Answer. OPS issued the corrective action order (CAO) on the 6-inch 
jet fuel pipeline to address the long-term corrosion protection of the 
pipeline. OPS took this action because of concerns with KMEP long-term 
corrosion protection and management plan for this pipeline.

    Question 4. What additional protective measures were taken by 
Kinder Morgan as a result of the Corrective Action Order?
    Answer. The CAO placed the pipeline under a pressure restriction, 
required a coating evaluation and a plan to recoat, repair or replace 
sections shown by the coating evaluation to require remedial measures. 
Among other requirements, the CAO also required KMEP to again conduct 
internal inspection of the pipeline.

    Question 5. Why did it take OPS two years after the Corrective 
Action Order was issued to issue an amended Order? What happened during 
these two years to improve the safety of the pipeline?
    Answer. During the period of time before the CAO was amended, OPS 
was satisfied that the pipeline was in a safe condition as a result of 
the repairs and replacements completed in 2001 and the operator's 
implementation of provisions of the original CAO. The process evolved 
as follows: KMEP requested a hearing on the CAO. OPS/RSPA held the 
hearing and amended the CAO in consideration of new information offered 
by KMEP. In the amendment, OPS eliminated the recoating requirement 
because the pipeline was adequately protected from corrosion by 
aggressive cathodic protection. Further, OPS added to the amended CAO 
inspection and analysis requirements to verify that corrosion on the 
pipeline was not active. KMEP has performed a second in-line corrosion 
inspection of the pipeline and is working on the analysis of the state 
of active corrosion on the pipeline.
    OPS's top priority is to first assure the public safety and 
security and to subsequently complete the necessary administrative 
activities in as timely a manner as possible, which was the case in 
this circumstance

    Question 6. In 1997, as a result of a Standard Inspection performed 
by the Arizona Corporation Commission (ACC), OPS issued a Corrective 
Order to Kinder Morgan for 5 items of regulatory non-compliance. Based 
on the information OPS has provided the Committee, it took over 5 years 
for this Order to finally be closed. Why?
    Answer. RSPA legal staff finalize orders in as timely a manner as 
possible. In recent years, the rapidly growing number of inspectors has 
led to a significant increase in the number of cases proposed.

    Question 7. Almost every year since 1994, the Arizona Corporation 
Commission has performed a Standard Inspection of Kinder Morgan's 
Arizona pipelines. And almost every year, the Commission has found the 
company in ``probable non-compliance'' with respect to certain Federal 
requirements. Yet it appears that OPS has routinely dismissed ACC's 
findings as not valid.
    Question 7a.. How do you explain this pattern? Dismissing ACC's 
inspection results gives the appearance that OPS is letting Kinder 
Morgan off the hook for violations of Federal safety regulations.
    Answer. As with OPS' inspectors, the ACC inspectors propose 
findings of violations as the first step in the enforcement process. 
The OPS Regional Director reviews proposed violations and supporting 
evidence to determine if a violation has occurred, if the case is 
adequately documented, and if there are extenuating circumstances, such 
as a waiver or interpretation in effect. OPS processed some violations; 
and, some ACC proposed findings did not prove to be valid. For example, 
ACC proposed a violation for not reading cathodic protection devices in 
accordance with a schedule specified in the regulation. However, KMEP 
was using an alternate process that provided a greater level of safety 
and is allowed by regulatory interpretation. OPS' Southwest Region 
orally informed ACC that the KMEP alternate process was not a 
violation. In the future, OPS will use a written procedure to provide 
information in a form more useful to all of our state partners.

    Question 7b. Are the ACC's inspections being conducted with more 
scrutiny than OPS?
    Answer. No, to assure a consistent quality of inspection, OPS had 
gone to considerable effort to provide Federal and state inspectors the 
same training, procedures and information systems. We take state input 
in the development of these procedures and materials to harmonize our 
approach. Our goal is for inspections to be uniform across the Nation, 
whether performed by an OPS or state inspector.

    Question 7c. Given this pattern, do state inspectors need 
additional training to better understand OPS' inspection criteria?
    Answer. Yes, training for state and OPS inspectors is a continual 
process. As new regulations and programs are developed, new training 
programs are prepared and delivered to each inspector. OPS routinely 
meets with state program directors to communicate information on new 
policies and programs. OPS has made much of this information available 
to state inspectors via the Internet and computer based training to 
provide more flexible learning opportunities.

    Question 7d. I can't understand how violations can be subjective 
determinations--they should be black or white. How does OPS decide what 
is and is not a safety violation and how is this communicated to ACC 
and the pipeline owner?
    Answer. Pipeline systems vary in complexity, design, operations and 
maintenance so many pipeline safety regulations are written as 
performance standards and require judgment to determine compliance. OPS 
provides training and guidance to inspectors to prepare them to make 
these judgments. OPS also makes interpretations available to inspectors 
and industry to guide them in compliance with the regulations. In 
addition, OPS routinely meets with state program directors to 
communicate information on new policies and programs and sponsors 
seminars across the Nation to keep inspectors and operators current on 
program changes.

    Question 8. According to the time line developed using OPS data, 
there are extended gaps between actions taken by OPS to address the 
safety concerns identified with Kinder Morgan's pipelines in Arizona. 
It appears that OPS is often lax in follow-up enforcement on identified 
safety problems. For example, it took OPS a year and seven months just 
to revise its corrective action order against Kinder Morgan following 
an August 2001 hearing on safety issues. No action was taken in the 
interim. How do you explain these enforcement gaps?
    Answer. As explained in Q/A5 above, OPS places its greatest 
priority on assuring that protections are put in place to assure safety 
and security and subsequently undertakes the appropriate administrative 
actions. OPS has placed priority on investigating pipeline accidents, 
developing corrective action orders to manage pipelines that present a 
hazard to the public and on developing, implementing and enforcing the 
new operator qualification and integrity management regulations that 
have a great potential to substantially improving pipeline safety.
    During the period of time before the CAO was amended, OPS was 
satisfied that the pipeline was in a safe condition as a result of the 
repairs and replacements completed in 2001 and the operator's 
implementation of provisions of the original CAO. The process evolved 
as follows: KMEP requested a hearing on the CAO. OPS/RSPA held the 
hearing and amended the CAO in consideration of new information offered 
by KMEP. In the amendment, OPS eliminated the recoating requirement 
because the pipeline was adequately protected from corrosion by 
aggressive cathodic protection. Further, OPS added to the amended CAO 
inspection and analysis requirements to verify that corrosion on the 
pipeline was not active. KMEP has performed a second in-line corrosion 
inspection of the pipeline and is working on the analysis of the state 
of active corrosion on the pipeline.

    Question 9. Was Kinder Morgan's voluntary shut down of the line due 
solely to safety concerns? If so, what did Kinder Morgan know that the 
Office of Pipeline Safety did not, since OPS only required the operator 
to reduce its operating pressure to 80 percent?
    Answer. Once the preliminary metallurgical analysis on the cause of 
failure was completed, and pointed to an exceedingly rare instance of 
stress corrosion cracking (SCC), Kinder Morgan shut down the Tucson-
Phoenix hazardous liquid pipeline. As was evident in our testimony, SCC 
is not a very well understood phenomenon on hazardous liquid pipelines. 
Therefore, Kinder Morgan took the cautious approach and shut down the 
pipeline to enable them to draft a plan to better respond to OPS' 
Corrective Action Order and prevent a recurrence of the July 30 
failure.
    For pipelines that rupture suddenly, the cause unknown, or the 
suspicion exists that other potential flaws reside in the pipeline, OPS 
normally directs operators to reduce operating pressure 20 percent 
below the pipeline pressure at the time of failure. This has been 
proven by pipeline engineers and scholars to provide an adequate safety 
margin and prevent failures, while the operator prepares and implements 
a plan to prove the integrity of the pipeline segment that failed. The 
terms in our Corrective Action Orders are the minimum that a company 
has to adhere to; pipeline operators are free to take a more 
conservative approach. Often an operator will operate at a lower 
pressure sufficient to meet its market demands.

    Question 9a. Is it typical for an operator to shutdown a line even 
though OPS has only required Kinder Morgan to reduce the operating 
pressure to 80 percent of maximum pressure?
    Answer. To comply with OPS' Corrective Action Orders, operators 
resort to a variety of options as long the safety factors that OPS 
prescribes are upheld. Operators must at least reduce the pressure to 
the amount mandated in the Order; they sometimes reduce it further, or 
shut down the pipeline, depending on conditions of the failure. There 
have been occasions when some pipeline operators have entirely shut 
down the affected segment because supply to their markets can be 
serviced by another pipeline. End user contracts, nominations, needs, 
and the weather conditions determine strategies for operators. As long 
as public and environmental safety is not compromised, OPS has not 
intervened in these decisions.

    Question 10. Once Kinder Morgan shut down its line, why did it take 
5 days--from August 14 to August 19, 2003--for OPS to approve Kinder 
Morgan's plan for hydro-static testing?
    Answer. The Corrective Action Order required Kinder Morgan to 
submit a plan to mitigate the effects of the stress corrosion cracking-
failure before returning the pipeline to normal operation, i.e., 
lifting the pressure restriction on the Tucson-Phoenix gasoline 
pipeline. At a meeting on Thursday, August 14, to discuss the terms of 
the Order, Kinder Morgan submitted its hydrostatic test plan to OPS. 
OPS gave KMEP the approval to start preparing the pipeline for 
hydrostatic test; a process that often takes 3 to 4 days.
    OPS evaluated Kinder Morgan's proposed hydrostatic test plan and 
found it inadequate to remove the ordered pressure restriction for a 
stress corrosion cracking failure. On Friday, August 15, OPS notified 
Kinder Morgan that OPS would not grant approval to remove the pressure 
restriction only on the basis of a successful hydrostatic test at the 
pressure proposed. Because SCC is exceedingly rare on hazardous liquid 
pipelines, there was little precedent for determining the pressure 
level for a hydrostatic test.
    In a meeting on the morning of Tuesday, August 19, Kinder Morgan 
explained to OPS that the purpose of the proposed hydrostatic test was 
only to allow the pipeline to operate at 80 percent of the failure 
pressure, as described in OPS' Order and not return to full operating 
pressure. This had not been clear in Kinder Morgan's proposed 
hydrostatic test plan. OPS' Order already permitted operation at 80 
percent of failure pressure; there was no requirement for KMEP to 
submit a plan. OPS considered the test as an additional mitigation 
effort that increased confidence that the pipeline could operate safely 
at 80 percent of the pre-failure pressure and immediately approved 
Kinder Morgan's hydrostatic test. Kinder Morgan began hydrostatically 
testing the pipeline segment late in the evening on August 19. The 
Tucson-Phoenix pipeline is now operating at 50 percent of the pre-
failure pressure.

    Question 11. Did Kinder Morgan meet the 30-day deadline for 
submitting a written plan with corrective measures as required by OPS' 
Corrective Action Order? [no]
    Answer. By the 30-day deadline, KMEP had submitted its hydrostatic 
test plan, a pipeline replacement plan and portions of its stress 
corrosion cracking (SCC) plan to OPS. Because the cause of the pipeline 
failure was determined to be SCC, a rare cause of failure for hazardous 
liquid pipelines, the operator and OPS had additional considerations to 
address in completing a comprehensive SCC plan within 30 days.

    Question 11a. Did OPS take any official action when the plan was 
not submitted and if so, when?
    Answer. Yes, OPS continuously communicated with KMEP during this 
period of time. On September 12, 2003. OPS' leadership team had a 
conference call with the president of Kinder Morgan Liquid Pipelines to 
discuss its plan. During that meeting, OPS notified Kinder Morgan that 
it had not met the 30-day deadline on its SCC plan and that OPS had 
issues with parts of the plans that had been submitted. Kinder Morgan 
conveyed the complexity of the SCC issue and the need for more time to 
develop a comprehensive SCC plan. Each CAO has a provision that allows 
the OPS Regional Director to grant additional time for compliance with 
the CAO for good cause. On October 3, OPS amended the CAO to 
specifically address SCC, grant additional time to develop a SCC plan, 
and to require the SCC plan to address the 6-inch jet fuel line as well 
as the gasoline pipeline.

    Question 11b. What signal does that send Kinder Morgan, let alone 
the public, about OPS' commitment to strong and unwaivering 
enforcement?
    Answer. We see our enforcement policy as, ``tough, but fair.'' We 
believe our policy sends the message to operators and the public that 
OPS is focused on safety, the enforcement of the pipeline safety 
regulations and justice.

    Question 12. I understand that a metallurgical exam by Kinder 
Morgan showed that the cause of the rupture in Tucson was stress crack 
corrosion, which is more commonly found in gas pipelines, not liquid 
pipelines. Does OPS or Kinder Morgan or even the ACC know what caused 
the corrosion in this case?
    Answer. Stress Corrosion Cracking, an environmentally assisted 
cracking phenomenon, is a generic term that describes all types of 
cracking in pipelines where the surrounding environment, the pipe 
material, and stress act together to reduce the strength or load-
carrying capacity of a pipe. Other types of environmentally assisted 
cracking have been found in other industries: boilers have developed 
caustic cracking, nuclear reactor carbon steel coolant piping systems 
have developed stress corrosion cracking, and stainless steel piping in 
ammonia units in chemical plants have cracked, as have down-hole pipes 
in sour oil wells.
    None of the parties, OPS, ACC or Kinder Morgan, know exactly what 
caused the stress corrosion cracking in the Tucson-Phoenix pipeline. It 
is known that the union of environment, material, temperature and 
stress play a role in stress corrosion cracking; but at what 
concentration and what exactly was the catalyst for this failure is 
unknown. This is why OPS' Corrective Action Order plainly states that 
Kinder Morgan's plan must provide for the verification of the integrity 
of the affected segment, must address all known or suspected factors in 
the July 30 failure, and must include description of the assessment 
criteria and methods that will be used in the evaluation and 
prioritization of any integrity threats that are identified in the 
pipeline section. Furthermore, Kinder Morgan must also evaluate the 
adjacent Phoenix-Tucson hazardous liquid pipeline to ensure that stress 
cracking corrosion signatures are not evident on the other pipeline. 
This will enable OPS, Kinder Morgan, and ACC determine the stimuli for 
the stress corrosion cracking on the Tucson-Phoenix pipeline.

    Question 12a. Are older liquid pipelines more susceptible to 
problems associated with stress crack corrosion?
    Answer. Pipeline age, alone, is not a factor in the formation of 
stress corrosion cracking. The formation of stress corrosion cracking 
depends upon the proper combination of pipeline material, soil 
condition (environment), temperature and local stress. Various 
inquiries into the stress cracking phenomenon show that stress 
corrosion cracking in not a widespread problem. OPS is sponsoring 
research and hosting a public workshop in Houston on December 2, 2003 
to share information between experts and practitioners about how to 
better understand and manage stress corrosion cracking.

    Question 12b. What actions do Kinder Morgan and other pipeline 
operators need to take to halt stress corrosion cracking and prevent 
future ruptures?
    Answer. As mentioned previously, stress corrosion cracking is a 
relatively new and evasive phenomenon on hazardous liquid pipelines. 
The factors associated with SCC are known, but the relationship among 
these factors has not been scientifically established. On October 2, 
2003, OPS issued an Advisory Bulletin to pipeline operators on how to 
evaluate their pipeline systems for stress corrosion cracking. 
Replacement of long sections of pipeline to stave off SCC would be 
economically impractical, but pipeline operators can try to reduce the 
stresses or change the environment immediately in or adjacent to the 
pipeline. For example, SCC is a more common phenomenon in natural gas 
pipelines, and it has been found that stress corrosion cracking usually 
occurs within 20 miles of a compressor station where operating 
temperature are the highest. So, natural gas operators have reduced the 
discharge temperatures of the natural gas to reduce the risk that SCC 
will form.
    Pipeline operators that have already experienced stress corrosion 
cracking can perform predictive soil modeling to understand the soil 
characteristics that promoted stress corrosion cracking. Questions to 
be answered include: Are those soil properties unique to that region 
where stress corrosion cracking was manifested? What processes can be 
implemented to improve the drainage characteristics of soil enveloping 
the pipeline? What role does the topography play in contributing to 
stress corrosion cracking? OPS is prodding pipeline companies to answer 
these questions to curb the role that soil plays in contributing to 
stress corrosion cracking.
    As stresses imparted into the pipeline during installation may 
promote SCC, operators should also be cognizant of the construction 
practices. They must also be familiar with the flaws in their 
pipelines, because stress corrosion cracking has been shown to occur in 
areas, such as dents, where stresses increase. Pipeline companies must 
also be familiar with the geometry of their pipeline throughout its 
route to enable them to better identify areas susceptible to stress 
corrosion cracking as a result of pipeline stress. Stress 
irregularities can be caused by internal operating pressure, residual 
stress during manufacture, bending stresses during installation or out-
of-roundness and secondary stresses which can be due to soil settlement 
or land slides, and stresses due to temperature differences.
    Hazardous liquid pipeline operators should re-evaluate the pipeline 
operations to minimize pipeline cycling. By reducing pressure and 
fatigue cycling, the likelihood of growing existing stress corrosion 
cracks is reduced. Thus, there is a very large range of operations, 
maintenance, and integrity enhancement activities that pipeline 
operators can take to stem the growth of stress corrosion cracking.

    Question 12c. What actions are being taken by OPS to ensure 
pipeline operators take the appropriate steps to address the increased 
risk of ruptures due to stress corrosion cracking?
    Answer. At this time, OPS does not believe that there is an 
increased risk of ruptures due to stress corrosion cracking relative to 
other modes of failure. Latent flaws resulting from third-party damage 
continue as the major cause of failure, followed by external galvanic 
corrosion, internal corrosion, operator error, and other factors.
    From 1985-2001, there were only two instances of stress corrosion 
cracking failures in hazardous liquid pipelines: 1998 in Missouri and 
2001 in Kansas. Both these failures occurred on pipeline facilities 
owned by Mid-America Pipeline Company. Metallurgical reports revealed 
that the 1998-accident was caused by circumferentially-oriented SCC and 
the 2001-accident was caused by longitudinally oriented SCC.
    Since those two failures, RSPA/OPS has learned of three more 
longitudinally oriented stress corrosion cracking failures that 
occurred in 2003: July 10 on a CITGO pipeline in Cook County, Illinois; 
July 16 on a Dome Pipeline Corporation pipeline in Barnes County, North 
Dakota; and July 30 on the KMEP pipeline in Pima County, Arizona.
    OPS has also seen indications of SCC on facilities of Enbridge 
Pipelines, Inc. in Minnesota and Wisconsin. But Enbridge Pipelines, 
Inc. has not experienced a failure due to stress corrosion cracking.
    Even given the scarcity of pipeline ruptures due to stress 
corrosion cracking, OPS has taken significant action to ensure that 
pipeline operators take the appropriate steps to discover, manage, 
mitigate, and remedy stress corrosion cracking indications on their 
pipelines.
    On October 2, 2003, OPS issued an Advisory Bulletin to alert 
natural gas and hazardous liquid pipeline operators about the threats 
from SCC, and to fully consider SCC when developing and implementing 
integrity management plans. OPS advised operators to determine whether 
their pipelines are susceptible to SCC and assess the impact of SCC on 
pipeline integrity. Based on this evaluation, an operator should 
prioritize additional in-line inspection and hydrostatic testing and 
take actions to re-mediate problem areas.
    During the week of October 6, 2003, OPS senior engineers convened 
to discuss the threats posed by SCC and to revise the Hazardous Liquid 
Integrity Management Plan protocols and guidance to enable inspectors 
to better evaluate SCC risks. OPS is also preparing a strategy to 
tackle this issue on natural gas pipelines.
    OPS senior inspectors and corrosion specialists have also begun 
developing a series of questions as an addendum to the standard 
inspection forms. These forms will be available early next calendar 
year and will complement OPS' suite of inspection protocols.
    Because SCC detection technology is not yet fully adequate OPS 
initiated two R&D programs directed toward identifying and 
quantitatively measuring SCC:

   BAA #1 award announcement on November 15, 2002 to Southwest 
        Research Institute, San Antonio, TX, and Pipeline Research 
        Council International, Inc., Washington, DC, to modify in-line 
        inspection tools to detect stress measurements that identify 
        corrosion, mechanical damage, cracks, wrinkles, etc. (OPS 
        $80,000 Industry $80,000)

   BAA#3 Award announcement on September 8, 2003 to Battelle 
        Corporation of Columbus, Ohio, and Pipeline Research Council 
        International, Inc., Washington, DC, to develop quantitative 
        measures to assess corrosion defect severity and determine 
        failure pressure of pipelines (OPS $196,000, Industry $221,000)

    OPS also commissioned a technical stress corrosion cracking study. 
OPS is currently preparing a synthesis study that will be informed by 
the wide range of work currently underway within OPS, companies and 
trade associations, and research organizations. The purpose of the 
synthesis study is to publicly develop a consensus that accurately 
characterizes what is known (e.g., frequency and consequence of SCC, 
susceptibility parameters, technological/procedural approaches to 
detecting and characterizing it, best practices in managing SCC, 
consensus standards development, regulatory approaches to SCC in the 
U.S. and elsewhere, appropriate post-SCC failure event response, etc.) 
and identify knowledge gaps. The results of the study will be made 
public for researchers and for pipeline companies and regulators to use 
in controlling risks from SCC.
    To complement the technical study on stress corrosion cracking, OPS 
is also hosting a technical workshop on December 2, 2003, in Houston, 
Texas to address this important safety issue. The experts in the 
workshop will review the framework and draft contents of OPS' technical 
stress corrosion cracking study. Any deficiencies identified within the 
workshop with the study framework will be fixed and the currency of all 
information will be validated. This workshop will be hosted by the OPS 
and its State pipeline safety partners, as well as by standards 
organizations and pipeline trade associations.

    Question 12d. I understand that several other recent liquid 
pipeline ruptures have been attributed to stress corrosion cracking. 
How serious is this rise in cases and should we be concerned that 
liquid pipelines nationwide are going to rupture from stress corrosion 
cracking?
    Answer. OPS is concerned about stress corrosion cracking, although 
is has not been a major cause of pipeline failure to date. During the 
past five years, only five of 740 reported accidents on hazardous 
liquid pipelines were caused by stress corrosion cracking. The recent 
set of pipeline failures caused by SCC is an alert to OPS, state 
pipeline safety agencies, and the pipeline industry that SCC is a 
viable threat to pipeline safety. As described above, OPS' strategy to 
improve the management of SCC is to increase our understanding of SCC, 
improve detection technology and expand the emphasis on SCC management 
in integrity management programs.

    Question 13. Following the shut down of the Kinder Morgan pipeline, 
I asked the Secretary of Transportation, Norman Mineta, to work to 
ensure the operational safety of the pipeline as soon as possible and 
to take any appropriate Administrative action to address the obstacles 
to the timely transportation of available gas supply throughout the 
affected Arizona communities. I also asked him what, if any, additional 
action Congress should take now to further address this important 
public safety issue. In his response, the Secretary indicated that the 
population encroachment is a major issue for pipeline safety 
nationwide.
    Question 13a. What is your office doing to address the safety 
problems associated with population encroachment?
    Answer. OPS is providing leadership in managing the public risks of 
encroachment of communities and other development on pipeline rights-
of-way. In conjunction with the Federal Energy Regulatory Commission, 
OPS asked the Transportation Research Board (TRB) of the National 
Academy of Sciences to begin a study to address issues of encroachment 
and maintenance on pipeline rights-of-way. OPS's goal is to identify 
promising approaches for local government for managing land use near 
pipeline rights-of-way--guidelines on what development is compatible 
with pipelines, and what development to avoid. The study we have 
commissioned brings together all key stakeholders--including 
representatives from local government, developers, pipeline companies, 
environmental groups and others.
    In enacting the Pipeline Safety Improvement Act of 2002 (PSIA), 
Congress also recognized the need for this information and mandated 
that we complete this study, and that we also include consideration of 
how best to preserve natural resources (i.e., trees) that can pose a 
problem for thorough monitoring of activity or problems along the 
pipeline.
    The TRB met on this issue for the first time in September 2003 and 
expects to deliver its draft report to OPS by March 2004. This study is 
an important step in informing local officials and others involved in 
managing the risks of encroachment and in assessing the feasibility of 
developing better guidance. OPS is committed to advancing the work done 
by TRB in this short time-frame in a follow-up study.
    In the meantime, to further our objective to educate communities 
adjacent to pipelines about the consequences of pipeline releases, OPS 
has hired a completely new cadre of engineers, called Community Action 
and Technical Support (CATS) engineers. Their primary task is to meet 
with community representatives to listen to their concerns and provide 
information about:

   the hazards posed by pipelines,

   operators, and the commodities their pipelines transport

   what measures exist in our Code of Federal Regulations for 
        their protection; and,

   how to prevent damages to pipelines and how to respond to 
        pipeline accidents.

    Question 13b. Does OPS have any authority to stop encroachment? If 
not, what Federal or state agency does?
    Answer. OPS does not have authority to stop encroachment. The 
Federal Energy Regulatory Commission (FERC) is responsible for the 
siting of interstate gas transmission lines. Aside from the interstate 
gas pipeline siting, decisions about land use are primarily under the 
control of local governments.

    Question 14. In reports issued in 2000 and 2001, the U.S. General 
Accounting Office (GAO) criticized OPS' practice in the 1990s of 
issuing warning letters and letters of concern rather than issuing 
fines. From 1990 to 1998, OPS decreased the proportion of enforcement 
actions in which it proposed fines from about 49 percent to about 4 
percent. What fines has Kinder Morgan been assessed by OPS?
    Answer. OPS has fined Kinder Morgan for violations ranging from 
failure to inspect and test relief valves to failure to establish a 
written anti-drug plan. Since 1990, OPS has assessed Kinder Morgan a 
total of $176,700 in fines. In 1998, OPS fined Kinder Morgan (Santa Fe) 
$3,000 for failure to install valves on its 6-inch and 8-inch pipelines 
in Tucson, Arizona where the pipeline crosses the Santa Cruz River. OPS 
also fined Kinder Morgan (Santa Fe) $12,700 in 1994 for failing to 
provide adequate cathodic protection on their 8-inch pipeline that 
extends from Steins Pass, Arizona to Tucson.

    Question 14a. Has OPS changed its policy of issuing warnings and 
started imposing fines? Why or why not?
    Answer. Since 2000, OPS has refocused its efforts to achieve 
compliance with the pipeline safety regulations through enforcement 
actions and use of civil penalties. We take a ``tough, but fair'' 
approach in dealing with operators. In the years 1995-1999 prior to our 
change in policy, the yearly average number of civil penalties was 19 
and the average penalty was $19,000. In 2000-2003, the years our new 
policy has been in effect, the average number of civil penalties was 42 
and the average penalty was $45,000. These numbers do not include the 
very large proposed civil penalties as a result of the Olympic and El 
Paso pipeline accidents. Including the proposed civil penalties for 
Olympic and El Paso pipelines, the average propose civil penalty for 
the 2000-2003 period would be $91,000.

    Question 14b. The new pipeline safety law, enacted last year, 
requires that GAO issue a report on OPS' assessment of the impact on 
pipeline safety of issuing warning letters rather than assessing fines. 
Since this study is on-going, I am concerned that OPS may still not 
know how to judge the impact of different approaches on safety. Does 
OPS have a clear understanding of the safety impact from warnings 
versus fines?
    Answer. OPS does have qualitative understanding of the value of 
each of our enforcement tools, which range from a warning letter, to a 
notice of probable violation with a civil penalty, to a corrective 
action order. Each tool has a valid purpose and use. To better quantify 
our understanding of the impacts of enforcement tools and to improve 
enforcement policy, OPS has created the position of enforcement policy 
director. This director will develop enforcement policy, guidance 
material and performance measures for enforcement. This is intended to 
provide, for example, more detailed guidance on some inspection types, 
penalty-setting, and on collecting and presenting evidence.

    Question 14c. When OPS issues a warning letter or letter of 
concern, what does it do to follow up if the pipeline owner does not 
respond?
    Answer. Warning letters, letters of concern and other enforcement 
action are recorded in OPS enforcement records. A standard procedure in 
OPS' compliance manual requires an inspector to prepare through review 
the history of the operator e.g., accidents, enforcement actions, 
including warning letters and letters of concern. During the 
inspection, the inspector is required to follow up on warning letters 
and letters of concern and to prepare a notice of probable violation 
and civil penalty if the operator has not corrected the issue. We 
specifically look for instances of repeated violations in targeting our 
inspections.

    Question 15. OPS' regulations for integrity management require 
that, after completion of the initial baseline inspection, liquid 
pipelines be internally inspected every five years. Why 5 years and not 
2 or 3 or 7?
    Answer. The maximum interval allowed in regulation is the five-year 
interval within which pipelines must be re-inspected in high 
consequence areas. Based on the risk factors pipelines experience, some 
pipelines may have to be re-inspected more frequently.
    In setting this interval, OPS considered the rate of growth of 
corrosion, technology and expertise available to detect corrosion, and 
the current rate of inspection of pipeline ongoing prior to our 
issuance of regulation. OPS set an aggressive goal that more than 
doubled the rate of inspections at the time. We knew that most pipeline 
operators whose pipelines can be internally inspected with an 
intelligent tool (pig) prefer to deploy pigs for inspection because 
they cull more information from the pipe body. Pigging, however, is a 
complex operation requiring careful preparation and scheduling. 
Operators must consider such factors as availability of pigging 
equipment, weather conditions, and whether service interruptions to 
perform the test can be tolerated. In considering testing frequency, 
OPS considered availability of inspection tools and especially skilled 
personnel for interpreting test data. Our consultation with pigging 
experts in the industry revealed that the five year interval was the 
most aggressive standard we could realistically set, based on available 
capacity to serve the market. Many of the pipelines in high consequence 
areas are operated by smaller companies. If the demand for internal 
inspection tools exceeds available supply, the smaller companies will 
not be able to compete with the larger companies who can offer larger 
contracts to the pigging vendors.

    Question 15a. It seems to me that the intervals between integrity 
management inspections should be based on risk, including the age of 
the pipeline and other factors that affect the integrity of the 
pipeline. Are these factors that OPS takes into consideration?
    Answer. Yes. The intervals between integrity management inspections 
must take risk into consideration. The five-year re-inspection 
frequency is an upper limit that pipeline operators must adhere to on 
pipelines in high consequence areas. In many cases OPS expects pipeline 
operators to re-inspect their facilities more frequently with different 
tools to ensure that all risks are covered and mitigated.
    OPS's integrity management rule clearly states that an operator 
must base the frequency of evaluation on risk factors specific to each 
pipeline segment and must consider the results of the baseline and 
periodic integrity assessments, information analysis, and decisions 
about remediation, preventive, and mitigative actions to arrive at a 
re-inspection interval. The risk factors that a pipeline operator must 
consider are results of the previous integrity assessment, defect type 
and size that the assessment method can detect, defect growth rate, 
pipe size, metallurgy, coating type, seam type, age, leak history, 
cathodic protection history, commodity transported, and the terrain's 
susceptibility to geo-technical hazards, to name a few.

    Question 15b. What is the average age of liquid pipelines in the 
U.S.?
    Answer. OPS does not collect data on the age of liquid pipelines, 
but we have worked with the American Petroleum Institute (API) to 
sponsor studies on age. OPS is in rulemaking on a requirement for 
hazardous liquid pipeline operators to provide information on integrity 
management program performance measures. This effort will be realized 
through the collection of data from Hazardous Liquid Pipeline Operators 
via the Annual Report (RSPA Form 7000.1). Collection of miles of pipe 
by nominal pipe size by location will commence in FY05 for calendar 
year 2004, and will lend itself to review and analysis of age of pipe 
issues.
    Based on the API work, in 2001, Trench & Kiefner reported in Oil 
Pipeline Characteristics and Risk Factors: Lessons From the Decade of 
Construction, that pre-1930 pipe represents 2 percent of the share; 
pipe constructed in 1930-1939 represents 7 percent; 13 percent was 
constructed between 1940-1949; 22 percent in 1950-1959; 23 percent from 
1960-1969; 17 percent from 1970-1979; 9 percent from 1980-1989; and 8 
percent was constructed in 1990 or later.
    Thus the majority of hazardous liquid pipeline is between 23 and 53 
years old. The characteristics of the pipe vary by the manufacturing 
and construction techniques in use at the time of construction. The 
``average'' age therefore, would not necessarily provide a clear 
indicator for understanding pipeline performance.

    Question 16. You indicate in your statement that OPS inspects 
Kinder Morgan's facilities about every three years. How does an OPS 
inspection compare with the inspections performed by ACC?
    Answer. OPS' goal is to perform a standard inspection on each 
pipeline unit every two to three years. These inspections are performed 
by either OPS or state inspectors. A pipeline unit is an identifiable 
section of pipeline such as Kinder Morgan's pipelines in Arizona. ACC 
and OPS inspections should be essentially the same. OPS provides state 
and OPS inspectors with the same training, procedures and guidance 
materials. Our goal is for inspections to be uniform across the Nation 
whether performed by an OPS or state inspector.

    Question 17. In your opinion, should older pipelines such as Kinder 
Morgan pipelines in Arizona be subject to more stringent requirements 
or more frequent inspections?
    Answer. OPS's integrity management rule clearly states that an 
operator must base the frequency of evaluation on risk factors, 
including age, specific to each pipeline segment and must consider the 
results of the baseline and periodic integrity assessments, information 
analysis, and decisions about remediation, preventive, and mitigative 
actions to arrive at a re-inspection interval. The risk factors that a 
pipeline operator must consider are results of the previous integrity 
assessment, defect type and size that the assessment method can detect, 
defect growth rate, pipe size, metallurgy, coating type, seam type, 
age, leak history, cathodic protection history, commodity transported, 
and the terrain's susceptibility to geo-technical hazards, to name a 
few.

    Question 18. In background information provided to the Committee 
prior to this hearing, your office stated that hazardous liquid 
pipelines tend to be located in rural areas. That is certainly not true 
in this case. What action is being taken at the Federal level to 
identify where pipelines pose the greatest risk to public safety?
    Answer. To protect communities and the environment from pipelines, 
OPS published the integrity management rules that apply to and increase 
testing and safety standards for all hazardous liquid pipelines. The 
integrity management regulations apply to high consequence areas that 
include commercially navigable waterways, high population areas, other 
populated areas, and unusually sensitive areas like drinking water or 
ecological areas that are unusually sensitive to environmental damage 
from a hazardous liquid pipeline spill. These regulations also require 
pipeline operators to develop and follow a safety program including 
continuous evaluation of pipelines including mandatory testing with a 
five-year interval for retesting.
    As a joint government-industry effort between the OPS, other 
Federal and state agencies, and the pipeline industry, the National 
Pipeline Mapping System (NPMS) is a full-featured geographic 
information system database that contains the locations and selected 
attributes of natural gas transmission lines, hazardous liquid trunk 
lines, and liquid natural gas facilities operating in onshore and 
offshore territories of the U.S. The NPMS is created from mandatory 
submissions of pipeline and LNG facility data by pipeline operators. 
The NPMS National Repository is responsible for collecting, processing, 
and building a national seamless pipeline database from the submitted 
data.
    OPS maps, maintains, and updates these areas periodically on the 
National Pipeline Mapping System (NPMS). Nonetheless, pipeline 
operators are responsible to ensure that they have identified all high 
consequence areas that could be affected by a pipeline segments. 
Operators are also responsible for periodically evaluating pipeline 
segments to look for population or environmental changes that may have 
occurred around their pipelines and to keep programs current with this 
information. The rule also requires operators to include a process for 
identifying which pipeline segments could affect high consequence 
areas, and to take measures to prevent and mitigate the consequences of 
a pipeline failure that could affect a high consequence area. Thus, 
operators need to consider how each of their pipeline segments could 
affect high consequence areas.

    Question 18a. Do different safety standards apply to pipelines 
depending on where they are located?
    Answer. Yes, different safety standards apply to pipelines 
depending on where they are located. Pipelines in areas defined as 
unusually sensitive areas, that include populated areas and 
ecologically sensitive areas, must be maintained according to more 
stringent standards than other pipelines. NPMS maps are a starting 
point to determine sensitivity, but operators are required to look 
further. Operators must account for the impact of the commodity, the 
topography, and geological conditions of the terrain it traverses and 
ascertain if a spill ``could affect'' a high consequence area. In this 
``could affect'' analysis, operators must also consider the amount of 
product that could be released, possibility of a spillage in a farm 
field following the drain tile into the waterway, ditches or ruts 
parallel or perpendicular to the pipeline that assist the migration of 
a spill into farther reaches, and exposure of the pipeline segment to 
operating pressure exceeding established maximum operating pressure.
    The regulation requires that operators of pipelines in, and that 
could affect, high consequence areas must:

   Conduct a baseline assessment plan meeting very stringent 
        requirements, and must perform an analysis that integrates all 
        available information about the integrity of the entire 
        pipeline and the consequences of a failure;

   Perform an analysis that integrates all available 
        information about the integrity of the entire pipeline and the 
        consequences of a failure;

   Develop criteria for remedial actions to address integrity 
        issues rated by the assessment methods and information 
        analysis;

   Create a continual process of assessment and evaluation to 
        maintain a pipeline's integrity;

   Identify preventive and mitigative measures to protect the 
        high consequence area

   Develop methods to measure the program's effectiveness; and,

   Create a process for the review of integrity assessment 
        results and information analysis.

    Question 18b. Should there be a greater focus placed on pipelines 
in populated areas?
    Answer. Yes. There is a greater focus placed on pipelines in high 
consequence areas that include populated areas, other populated areas, 
and ecologically sensitive areas. Moreover, the integrity management 
rule, for example, requires pipeline operators to incorporate newly 
identified high consequence areas into their baseline assessment plans. 
Pipeline operators are also required to have communication systems with 
fire, police, and other public officials during emergency conditions 
including natural disasters. Liquid pipeline operators, for example, 
are required to patrol their pipelines at least 26 times per year. Our 
analyses of patrolling procedures show that in populated areas, 
pipeline operators patrol their systems much more frequently.

    Question 19. The Pipeline Safety Improvement Act of 2002, which 
reauthorized Federal pipeline safety programs through Fiscal Year 2006, 
contains several new initiatives to improve pipeline safety. One such 
initiative requires the Secretary of Transportation to study land use 
practices, zoning ordinances, and preservation of environmental 
resources with regard to pipeline rights-of-way and their maintenance.
    Question 19a. What is the status of this study?
    Answer. RSPA/OPS established a cooperative agreement with the 
National Academy of Science's Transportation Research Board (TRB) to 
conduct a study of encroachment risks and how they can be managed. This 
agreement was finalized on September 26, 2002. The TRB met on this 
issue for the first time in September 2003 and expects to deliver its 
draft report to OPS by March 2004. This study is an important step in 
informing local officials and others involved in managing the risks of 
encroachment and in assessing the feasibility of developing better 
guidance.

    Question 19b. Why has it taken DOT so long to initiate and complete 
this important study as required by Congress?
    Answer. OPS actually finalized an agreement with the TRB to perform 
the study prior to the signing of the Pipeline Safety Improvement Act 
of 2002. The TRB experienced some delay in initiating the study because 
of a turnover of key staff. The TRB has worked very carefully with 
congressional staff and stakeholders to define the study and select a 
study committee. The committee established to conduct this study is 
comprised of senior representatives with national-level expertise from 
interested organizations including all levels of government, 
environmental organizations, pipeline companies, academia, and 
technical consultants. Further, the Committee has set forth three 
public meetings for which presentations have been solicited from other 
interests, experts and others who share responsibility for ensuring the 
protection of communities (e.g., emergency responders) and reliability 
of critically needed energy supplies.

    Question 19c. When will it be completed?
    Answer. The TRB plans to deliver a draft report to OPS by March of 
2004.

    Question 20. How many violations of Federal pipeline safety laws 
and regulations have been identified by OPS or its state partners in 
the last year?
    Answer. Between October 2002 and October 2003, OPS initiated 109 
enforcement actions against operators for violating minimum Federal 
pipeline safety regulations as promulgated by 49 CFR Part 190 thru Part 
199 and Part 40. Typically, each enforcement action will address one to 
five violations.

    Question 20a. How many of those violations resulted in the issuance 
of a corrective action order by OPS? How many fines were issued as a 
result of these violations?
    Answer. OPS does not typically issue violations as part of a 
Corrective Action Order (CAO). A CAO is an enforcement tool that allows 
OPS to manage actively the risk of a pipeline that may be a hazard to 
the public. A CAO allows OPS to impose certain restrictions on an 
operator's pipeline, including a reduction in operating pressure, and 
generally requires the operator to take corrective action on their 
pipeline.
    OPS does however, issue Compliance Orders (CO) to operators as a 
result of a violation. Between October 2002 and October 2003, OPS 
initiated one CO against an operator for violating the minimum Federal 
pipeline safety regulations. OPS did not issue a fine as a result of 
this CO.
    As a result of the 109 enforcement actions initiated, OPS fined 
operators a total of $863,500.

    Question 20b. Has OPS ever fined Kinder Morgan, and if so, what 
violation was involved? Has Kinder Morgan ever been fined for problems 
associated with the two pipelines that run between Tucson and Phoenix?
    Answer. OPS has fined Kinder Morgan for violations ranging from 
failure to inspect and test relief valves to failure to establish a 
written anti-drug plan. Since 1990, OPS has assessed Kinder Morgan a 
total of $176,700 in fines. In 1998, OPS fined Kinder Morgan (Santa Fe) 
$3,000 for failure to install valves on its 6-inch and 8-inch pipelines 
in Tucson, Arizona where the pipeline crosses the Santa Cruz River. OPS 
also fined Kinder Morgan (Santa Fe) $12,700 in 1994 for failing to 
provide adequate cathodic protection on its 8-inch pipeline that 
extends from Steins Pass, Arizona to Tucson.

    Question 21. OPS has established an on-line system for residents 
nationwide to use to determine what pipelines are operated in the 
vicinity of their homes. The site asks for your zip code and then 
provides a list of operators in your area and how to contact them for 
additional information. However, a recent test by Committee staff 
showed the information was in several cases incomplete or non-existent. 
One zip code within the Nation's capital showed no pipeline data 
available. Another showed no contact information available for BP 
Pipeline North America, even though Committee staff was able to get 
contact information on-line from BP within minutes. Do you believe this 
system is adequate to inform the general public on the risk associated 
with living near a major pipeline?
    Answer. OPS does believe that the public access tool will be 
sufficient in meeting its goal of providing operator contact 
information to the public. The tool is based on contact information for 
pipeline operators that is required by law to be submitted by operators 
to the National Pipeline Mapping System (NPMS). The database of 
pipeline operator contact information is not yet complete. While nearly 
99 percent of all pipeline mileage under OPS jurisdiction has been 
submitted to the NPMS, approximately 45 percent of pipeline operators 
have not submitted their contact information. Any current deficiencies 
in the public access tool are due to noncompliance on the part of 
pipeline operators. OPS believes that pipeline operators have 
overlooked the requirement to submit contact information. OPS is 
pursuing compliance orders against operators that have not submitted 
their contact information.

    Question 21a. What actions are you going to take to address the 
problems identified by Committee staff?
    Answer. OPS has made concerted efforts to contact pipeline 
operators regarding their statutory requirement to submit pipeline and 
operator contact data to the NPMS. OPS posted an Advisory Bulletin for 
all jurisdictional pipeline operators (http://ops.dot.gov/notices/
AdvisoryBulletin/03-2449.pdf) on February 3, 2003, which appeared in 
the Federal Register (i.e., FR, Vol. 68, No. 22, Monday, February 3, 
2003, page 5338). OPS also conducted NPMS public meetings and operator 
conferences via various industry groups and forums. Two weeks before 
the submission deadline date of June 17, 2003, OPS e-mailed operators 
to remind them of the approaching deadline for submission of pipeline 
and operator contact data. Unfortunately, most operators have focused 
on submitting their pipeline data and many neglected to submit their 
operator contact information.
    OPS is preparing notices proposing compliance orders to order 
operators who have not provided the mapping and contact information 
required by Section 15 of the Pipeline Safety Improvement Act of 2002, 
to submit the information. This is the limit of authority granted to 
OPS under the PSIA. The PSIA does not allow OPS to assess penalties for 
violations of the statutory requirements added by the Pipeline Safety 
Improvement Act of 2002. In addition, administrative civil penalties 
are not available to enforce the requirements to review the 
effectiveness of public education programs (Section 5), to have an 
employee qualification program meeting statutory requirements in the 
absence of standards regulations (Section 13), and the requirements for 
gas integrity management programs (Section 14).
    The compliance order will also provide instructions for accessing 
an online form where operators can submit their contact information. 
OPS will aggressively work with the pipeline operators to ensure that 
they are in compliance. Additionally, OPS is pursuing the ability of 
states to similarly enforce compliance by intrastate pipeline 
operators.

    Question 22. Please describe the relationship between the Office of 
Pipeline Safety and the state pipeline safety officials, in this case, 
the Arizona Corporation Commission. In particular, please explain which 
agency is responsible for what, including inspections and the 
subsequent enforcement against violations of safety regulations.
    Answer. OPS administers the national regulatory program to assure 
safe transportation of natural gas, petroleum, and other hazardous 
materials by pipeline. The Federal/State partnership is the cornerstone 
for assuring uniform implementation of the pipeline safety program 
nationwide. Most states have supported the concept of common 
stewardship in pipeline safety. The Federal/State partnership allows 
leveraging of resources to deliver a cost-effective program that has 
one of the best safety records in transportation. OPS and their state 
partners regularly participate in joint government-industry-public 
committees and task forces to discuss and address concerns related to 
risk management, compliance, emerging technology, damage prevention, 
and environmental protection.
    While the Federal Government is primarily responsible for 
developing, issuing, and enforcing pipeline safety regulations, the 
pipeline safety statutes provide for state assumption of the intrastate 
regulatory, inspection, and enforcement responsibilities under an 
annual certification. Federal pipeline statutes, on the other hand, 
provide for exclusive Federal authority to regulate interstate 
pipelines. But, OPS may authorize a state to act as its agent to 
inspect interstate pipelines, but retains responsibility for 
enforcement of the regulations.
    The ACC, along with five other states, participates in the 
interstate hazardous liquid program. Similarly, Arizona is one of 13 
``certified'' states with the authority to inspect and enforce 
regulations on intrastate hazardous liquid pipeline facilities.
    For natural gas pipelines, Arizona is one of nine ``agreement'' 
states with the authority to inspect and report on interstate natural 
gas pipeline facilities. Arizona is also one of 50 ``certified'' states 
with the authority to inspect and enforce regulations on intrastate 
natural gas pipeline facilities.
    Since this incident in Arizona, we have learned that there were 
opportunities to improve communication which would have increased the 
efficiency of our oversight. We are taking many actions to improve 
communications through increased written follow-up in enforcement 
actions, more immediate distribution of interpretations, more informal 
group interaction, and tracking state by state involvement in policy 
making activities.

    Question 23. Is the division of duties between OPS and ACC 
identical to OPS' relationship with all states or does each state have 
a different agreement?
    Answer. OPS's relationship with each state and the division of 
duties between OPS and its agents are similar to the one with ACC. The 
agreements OPS crafts with the states are also the same based on the 
type of certifications that each state possesses.

    Question 24. When was the last time the KM pipelines that run 
through AZ were inspected? When will KM's baseline inspections, as 
required by the integrity management requirements, be completed? Have 
you considered expediting this inspection given the rupture and the 
other problems that OPS had been concerned about on the six inch line?
    Answer. The last time ACC requested to inspect Kinder Morgan's 
pipelines in Arizona was in 2001. In 2002, ACC requested to inspect 
Kinder Morgan's facilities once again. In 2003, ACC continued 
inspection on all safety-related condition reports that Kinder Morgan 
had submitted to OPS.
    In 2002 and 2003, OPS and ACC also conducted the integrity 
management inspections on Kinder Morgan's pipeline facilities. This 
series of inspection began in January 2002. The ``quick-hit'' 
inspection was performed from January 15-17, followed by two weeks of 
comprehensive inspections that were conducted from April 7-11 and April 
21-25. The California State Fire Marshal and Virginia State Corporation 
Commission also participated in these two weeks of comprehensive 
inspections. On July 24 and 25, 2003, OPS continued with the 
comprehensive inspections to review records.
    Kinder Morgan has subdivided their pipelines in Arizona into eight 
sections for purpose of inspection. This year Kinder Morgan completed 
the baseline inspections on the Yuma Marine Corps Air Station lateral, 
the Luke Air Force Base in Phoenix, and the 6-inch Phoenix to Tucson 
line. In 2004 Kinder Morgan plans to complete the baseline inspections 
on the eight-inch pipeline south of Tucson and the 8-inch line from 
Tucson to Phoenix. Another 12-inch line south of Tucson was initially 
scheduled for baseline inspections in 2007, but after the July 30-
incident OPS directed Kinder Morgan to schedule it sooner, and we 
expect baseline assessment of this line to be completed in 2004.
    The 12-inch Phoenix to Tucson line and the 20-inch Yuma to Phoenix 
line were installed within the past 20 years. Therefore, its baseline 
inspections are planned to occur in 2006 and 2007. OPS will determine 
if these two pipelines baseline inspections need to be expedited based 
on the findings on the other lines that will have a completed baseline 
inspection by 2004.

    Question 25. Should inspection results or potential public safety 
concerns be disclosed to the public?
    Answer. OPS believe that plans for inspection, the technology used 
and the progress with those inspections should be shared, including 
repairs identified and completed. New regulations will be issued soon 
to address required performance reporting and additional regulation on 
other communication requirement may follow.

    Question 26. How many corrective action orders has OPS issued this 
year? What accountability features are included in these orders? For 
example, I understand that many times they do not have a date certain 
for responding to the order. Further, and I believe it was with the 
very case we are discussing today, even though OPS' order required a 
date certain reply, KM had not replied by that deadline and OPS did not 
issue any further official document or impose a fine or anything. What 
signal do you think such lax oversight sends to pipeline operators, let 
alone, the public?
    Answer. OPS has issued 18 Corrective Action Orders (CAO) this year, 
more than three times the combined total for the previous three years.
    All CAOs issued by OPS have time limits within which the pipeline 
operator must respond to the Regional Director. A provision of each CAO 
gives the OPS regional directors the authority to grant an extension of 
time for compliance with the term of the CAO for good cause. The 
regional directors are given this authority to provide flexibility 
because CAOs deal with unknown causes of failure, complex technical 
issues that often do not have immediate solutions, complex testing and 
inspection, and lengthy state and local permit processes needed for 
testing and repair. The plan must provide for the verification of the 
integrity of the affected segment, and must address all known or 
suspected factors in the failure. All of these factors can add 
substantial time to completing the requirement of a CAO. Pipeline 
operators have an incentive to submit and execute their remedial action 
plans promptly because the pressure restriction prevents them from 
meeting their contractual delivery volumes. Granting additional time 
for good cause is not lax oversight. It is necessary to achieving 
quality in resolving safety issues.
    We do not agree that a delay in the submittal or execution of the 
remedial action plan sends a signal of lax oversight to the operator or 
the public. First, OPS, through the pressure restriction, eliminates 
the immediate hazard to the public and the environment. The pressure 
restriction is not lifted until all elements of the remedial action 
plan are completed and reports are made available to OPS and its state 
partners within whose jurisdiction the failure occurred. Second, OPS 
and its agent, if any, follow up closely on all the activities that the 
operator is implementing on its pipeline.
    OPS's record in issuing CAOs and resolving safety issue sends a 
strong message that we are applying thorough oversight over the 
pipeline industry. We are achieving results. Comparing the last five 
years to the previous five, hazardous liquid incidents have decreased 
by 28 percent. Two years ago, the volume of oil spilled decreased by 33 
percent from the ten-year average. Last year there was a 57 percent 
decrease.

    Question 27. Following the initial rupture of your pipeline in a 
residential area of Tucson, the OPS ordered Kinder Morgan to reduce the 
operating pressure to 80 percent of maximum pressure. However, instead 
of reducing the operating pressure, Kinder Morgan chose to shut down 
operations for repairs. Why did you take the extreme action of shutting 
down all operations of the pipeline, which was counter to OPS's 
recommendations?
    Answer. On July 30, 2003, Kinder Morgan's 8" pipeline from Tucson 
to Phoenix failed during normal pipeline operations. Kinder Morgan and 
OPS originally believed the cause of the release was an ERW pipe seam 
failure. Based on the March 8, 1989, Pipeline Safety Alert Notice (ALN-
89-01) and discussion with the Department of Transportation Office of 
Pipeline Safety Southwest Region (DOT), the pipeline was repaired and 
restarted on August 1, 2003, based on the following operating 
parameters:

   Operate the pipeline at 50 percent maximum operating 
        pressure (MOP) for five (5) days

   Operate the pipeline at 60 percent MOP for one (1) day

   Operate the pipeline at 70 percent MOP for one (1) day

   Operate the Pipeline at 80 percent MOP until further notice.

    As part of Kinder Morgan's on-going integrity program, the joint of 
pipe from the July 30, 2003, incident was sent to an independent lab 
for metallurgical analysis. On August 8, 2003, Kinder Morgan received 
the metallurgical report. The report concluded that the cause of the 
rupture was high pH SCC. Kinder Morgan had never experienced SCC before 
on one of its refined petroleum pipelines. Given this information and 
the pipeline's location near populated areas in the City of Tucson, 
Kinder Morgan determined that the only safe option was to shut down the 
pipeline (which was still operating at 50 percent MOP) and conduct 
further testing.

    Question 27a. What factors did you consider in deciding to shut 
down the pipeline?
    Answer. Kinder Morgan considered public safety, the pipeline's 
location near populated areas in the City of Tucson and the uniqueness 
of the SCC phenomenon on a refined products pipeline. These were the 
driving factors in making the decision that the only safe option was to 
shut down the pipeline and conduct further testing to ensure the 
integrity of the pipeline.
    As stated above, Kinder Morgan originally thought the failure was 
an ERW seam failure, and restarted the pipeline at a reduced MOP. 
However, on August 8, 2003, Kinder Morgan received a metallurgical 
report indicating that the cause of the failure was high pH Stress 
Corrosion Cracking (SCC), a failure mode never before experienced on a 
Kinder Morgan liquids pipeline. The metallurgical report and subsequent 
conversations between our technical staff and the third party 
metallurgical consultant did not provide technical justification for 
allowing our line to operate at reduced pressure without further 
testing. Given this information and the pipeline's location near 
populated areas in the city of Tucson, Kinder Morgan determined that 
the only safe option was to shut down the pipeline (which was still 
operating at 50 percent MOP) and conduct hydrostatic testing of the 
pipeline.

    Question 27b. Was Kinder Morgan's voluntary shut down of the line 
due solely to safety concerns? If so, what did Kinder Morgan know that 
the Office of Pipeline Safety did not, since OPS only required the 
operator to reduce its product to 80 percent?
    Answer. Yes. Kinder Morgan decided that in order to ensure public 
safety, the line needed to be hydrostatically tested before service 
resumed.

    Question 27c. Considering that you believed shutting down the 
pipeline was the best course of action, and OPS believed the pipeline 
could continue to operate at reduced pressure, should one assume that 
OPS should have ordered you to shut down the pipeline? Was OPS wrong?
    Answer. OPS's original corrective action order was premised on the 
assumption that the failure mode was due to an ERW seam failure. The 
order's timeline for gradual resumption of operating pressure reflects 
that fact. As the owner and operator of these pipelines, it is Kinder 
Morgan's ultimate responsibility to operate its' system safely.

    Question 27d. Considering the overall impact on safety and gas 
supply, did Kinder Morgan take the right course of action by shutting 
down the pipeline?
    Answer. The decision to temporarily shut down the 8" pipeline on 
August 8 was the safe and prudent course of action. A fundamental 
principle that we constantly emphasize to our operations personnel is: 
``If in doubt, shut the pipeline down and restart the line only after 
the doubts have been eliminated.'' High pH SCC has never been 
experienced before on a Kinder Morgan refined products pipeline and we 
believed the line had to be hydrostatically tested to ensure it could 
be operated safely. Although the resultant service disruption 
inconvenienced consumers, far greater would have been the criticisms 
and consequences of continuing to operate the line and having another 
release. Moreover, our flexibility and responsiveness were key to 
providing petroleum products to Phoenix during the service disruption, 
a task complicated by the surge in demand as ``panic buying'' set in.
    Kinder Morgan is proud of our safety and compliance record. Safety 
and compliance are integral to every decision we make. We take 
seriously our commitment to operate a safe and reliable pipeline 
system, and we strive for operational excellence and incident-free 
operations. Kinder Morgan's track record in Arizona has been 
outstanding since we acquired these pipelines in March 1998. During 
this time, we have transported more than 440 million barrels of fuel 
into the state, and the recent product release in Tucson was the first 
time we have experienced an incident with one of our Arizona pipelines 
that was not a result of third party damage. We have had two releases 
due to third party damage and the July 30 release, which was due to 
high pH stress corrosion cracking (SCC). There were no injuries or 
fatalities as a result of any of these incidents.
    Immediately after we decided to temporarily take the 8" Tucson to 
Phoenix line out of service because of the sec failure mode, we 
initiated steps to mitigate the impact of the shutdown. Throughout the 
weekend of August 9-10, modifications were made to our Tucson terminal. 
These modifications involved converting several tanks from conventional 
service to CBG service and connecting a truck rack lane to these tanks. 
These modifications allowed our shippers to transport by truck volumes 
of CBG gasoline from the East that otherwise would have moved over the 
closed 8" pipeline. Approximately 12,000 b/d were trucked to the 
Phoenix market as a result of these facility modifications while the 8" 
pipeline was out of service.
    Kinder Morgan schedulers were also called to work the weekend of 
August 9-10 to contact our shippers and initiate the process of 
nominating additional volumes over the West Line to make up for volume 
shortfalls on the temporarily closed line between Tucson and Phoenix. 
During the week fo11owing the shutdown of the 8" pipeline, Kinder 
Morgan's West Line and barrels trucked from Phoenix, were meeting over 
92 percent of the average daily demand (175,000 b/d) in the Phoenix 
market. For just over half the days in the month of August, deliveries 
to Phoenix exceeded the average daily demand in Phoenix.
    Kinder Morgan's deliveries, however, do not tell the entire story. 
We do not know the inventory levels at the five other Phoenix terminals 
at the start of the month of August or for any day thereafter. That 
information is not in our possession and can only be obtained from the 
owners of those terminals. We do know, however, that nationally the 
trend is to maintain inventories at levels only necessary to meet 
anticipated demand and avoid the holding costs of excess inventory. 
When you combine the temporary shutdown of the 8'' pipeline with 
current inventory management practices and the spike in demand 
triggered by panic buying and ``topping-off' of tanks, there were 
resultant shortages of gasoline. Further complicating the supply/demand 
picture were logistical difficulties in accommodating increased 
trucking of products from Tucson terminals and outside of the state. 
(This problem in turn was exacerbated by weekly driving hour limits on 
truck drivers in Arizona. These restrictions were later relaxed.)
    It should be reiterated, however, that the flexibility and 
responsiveness of Kinder Morgan's employees to the service disruption 
and the round-the-clock efforts to restore service on the 8" pipeline, 
allowed us to cover over 92 percent of the average daily demand in 
Phoenix. Two facts have special note: Kinder Morgan's West and East 
Lines delivered 8.4 million more gallons of total products into Phoenix 
in August of 2003 than it did in August of 2002. Looking solely at 
gasoline volumes in 2003 over 2002 for the month of August, Kinder 
Morgan actually transported 13 million more gallons of gasoline. Again, 
a reflection both of the flexibility of our pipeline operations in 
Arizona and the extraordinary demand conditions in the Phoenix market.

    Question 28. It is clear from information provided to the Committee 
by OPS that Kinder Morgan should have been aware of corrosion problems 
on both the 6-inch and 8-inch pipeline prior to purchasing the lines in 
1998.What was the condition of Santa Fe Pacific's pipelines in Arizona 
when they were acquired by Kinder Morgan in 1998?
    Answer. Santa Fe Pacific had internally inspected the following 
lines prior to Kinder Morgan's acquisition: the EP-TU 8" in 1988 and 
1996 (approximately 304 miles), the EP-TU 12" in 1995 (approximately 
165 miles) and the TU-Weymouth 8" in 1996 (approximately 12 miles). 
There had been no generalized corrosion leaks on the TU-PX 8" pipeline 
since 1980, on the PX-TU 6" since 1988, and no recorded corrosion leaks 
on the EP-TU 12" and EP-TU 8" pipeline. In addition, there were no 
outstanding DOT Corrective Action Orders on these pipelines.

    Question 28a. What repairs and safety improvements has Kinder 
Morgan made to the lines since acquiring them?
    Answer. Kinder Morgan's track record in Arizona has been 
outstanding since we acquired these pipelines in March 1998. Our 
commitment to regulatory compliance is equally as strong. Kinder Morgan 
has a pipeline safety staff that actively participates in regulatory 
rulemaking, tracks all new regulations and ensures that our plans and 
procedures comply with pipeline safety regulations. We have a 
management of change process that ensures that changes are communicated 
to operations personnel. We have a separate internal auditing division 
that conducts audits of our field operations to ensure that we are 
complying with all applicable safety regulations.
    We are routinely inspected by the U.S. DOT Office of Pipeline 
Safety (OPS) and State Pipeline Safety Agencies, such as the Arizona 
Corporation Commission (ACC) and the California State Fire Marshall's 
office. In Arizona, alone, we have been inspected four times by the ACC 
since 1998 (1998, 1999, 2001 and 2003; in 1999 the OPS participated in 
the Arizona Audit). The Southwest Region has also audited the pipeline 
section between New Mexico and Texas twice. In addition, we have been 
subject to audits of our Procedural Manuals, Integrity Management Plan 
and Operator Qualification Program by OPS. These audits have not 
uncovered any major compliance issues.
    A specific example of our commitment to safety and compliance is 
one of the elements of our preventive maintenance program-our Integrity 
Management Program (IMP). Kinder Morgan Energy Partners (and its 
predecessor SFPP) have been inspecting pipelines with Magnetic Flux 
Leakage (MFL) in-line inspection tools (``smart pigs'') since the early 
1970s. As part of our ongoing preventive maintenance programs, we were 
internally inspecting pipelines in Arizona before such actions were 
ever required by the Federal or state government. In fact, all Kinder 
Morgan pipelines in Arizona had been smart pigged at least once before 
the effective date of the IMP rule and most had been smart pigged at 
least twice. The 8" Tucson-Phoenix pipeline was inspected in 1996 and 
1999 and the 6" Phoenix to Tucson pipeline in 1999 and 2003. In each 
case, we took appropriate action in the interest of public safety. 
Maintenance crews were dispatched to excavate and investigate the 
anomalies, and where necessary, appropriate repairs were made.
    Our overall philosophy is that internal inspection is very 
effective in detecting pipeline defects, allowing us to repair 
potentially detrimental defects before they result in a release. By 
combining information found during the in-line inspections, cathodic 
protection surveys and coating surveys, we can identify areas along the 
pipeline where recoating may be necessary and where more cathodic 
protection rectifiers might be needed. We are then able to focus our 
resources and take the appropriate remedial measures. We believe the 
existence of such a proactive program is why there has not been a leak 
due to generalized metal loss corrosion on these pipelines in Arizona 
in the last 15 years.
    Another example of our commitment to safety and compliance is 
Kinder Morgan's corrosion control program. This program conforms to DOT 
and National Association of Corrosion Engineers (NACE) Standards. 
Cathodic Protection inspection tests in include

  1.  Annual inspections of all CP test leads and rectifiers

  2.  Six times per year inspection of all rectifiers, bonds & other 
        devices

  3.  Minimum 26 times per year aerial patrol of rectifier indicator 
        systems (in most cases this is weekly)

  4.  Inspection of pipe coating and pipe, if coating is removed, 
        whenever the pipe is uncovered

    Our current IMP has been updated to incorporate DOT's 2001 
regulations. Our response, repair and mitigation strategies did not 
require any major revisions as a result of the 2001 DOT regulations; 
however, as most of the new regulatory requirements were already a part 
of our previous IMP program.

    Question 28b. Why has it taken so long, and I note only after a 
rupture that put the lives of local residents at risk, for you to 
replace some of the pipeline?
    Answer. As stated above, Kinder Morgan is proud of our safety and 
compliance record. Safety and compliance are integral to every decision 
we make. Kinder Morgan's track record in Arizona has been outstanding 
since we acquired these pipelines in March 1998. The recent product 
release in Tucson was the first time Kinder Morgan experienced an 
incident with one of our Arizona pipelines that was not a result of 
third party damage.
    The decision to replace some of the pipeline follows on the heels 
of the favorable outcome of a petition filed by Kinder Morgan at the 
FERC regarding an overall expansion project involving our East Line. 
This filing was necessary to ensure that an economically acceptable 
rate methodology would be approved in advance of spending approximately 
$200 million on this project. Included in that project is the 
replacement of the 8" pipeline between Tucson and Phoenix.

    Question 29. When the Office of Pipeline Safety issued a Corrective 
Action Order on Kinder Morgan's jet fuel line, Kinder Morgan objected 
to recoating the line, arguing that cathodic protection was sufficient 
to prevent corrosion. Had Kinder Morgan made improvements to the 
cathodic protection since it was initially installed in 1957?
    Answer. In our review of the cathodic protection history for LS-53/
54, Kinder Morgan believes that actions were taken in the past to 
enhance the cathodic protection system for these pipeline systems. LS-
53/54 was constructed in 1956 without cathodic protection. It was 
approximately two years later before cathodic protection was applied. 
Based on cathodic protection surveys, more anode ground beds and 
rectifiers--the current source for cathodic protection, were installed 
along the pipeline.
    This is important because, although the November 1999 in-line 
inspection indicated a number of locations of generalized corrosion, 
there was no way to identify from the report when the corrosion took 
place. In an effort to determine if the generalized corrosion was 
active or on-going corrosion, electrical and chemical tests were 
conducted at each location excavated. These tests demonstrated that the 
line was receiving adequate cathodic protection and that there was no 
active generalized corrosion taking place at the anomaly locations. 
These tests demonstrated that the generalized corrosion that was 
indicated on the in-line inspection report was most likely generalized 
corrosion that occurred in the years prior to cathodic protection being 
installed.

    Question 30. Kinder Morgan conducted an internal inspection on a 
portion of its 6-inch jet fuel pipeline in November 1999, yet the 
results, which revealed significant corrosion, were evidently not known 
until the following March. Why does it take so long to get the results 
of these inspections? It would seem that there could be some serious 
pipeline accidents while pipeline operators are awaiting inspection 
results.
    Answer. Internal inspection surveys are performed by electronic 
devices called ``smart pigs'', which are inserted into the pipeline and 
conveyed by the moving product through the pipeline. Kinder Morgan 
typically uses two types of ``smart pigs'' in these inspection surveys. 
The most common type is the Magnetic Flux Leakage (MFL) pig.
    MFL pigs contain powerful magnets that saturate the steel pipe 
walls with magnetic flux. MFL pigs also contain numerous sensing 
elements spaced around the circumference of the inside diameter of the 
pipeline. If the pipe wall contains a defect the magnetic field in the 
pipe wall will change, and this change will be detected by the sensing 
elements in the pig. The smart pig records the 0' Clock position of the 
pipe defect, as well as the lineal distance along the pipeline -by use 
of odometer wheels located on the pig. The length of each joint of pipe 
is also recorded, along with the location of valves, tees, shop bends, 
etc. All of this data, which is recorded and stored in electronic 
format in the memory module of the smart pig, is later down-loaded to a 
computer for thorough analysis.
    In addition to MFL pigs, Kinder Morgan typically runs an Electronic 
Geometry pig (EGP) that uses the vendor's proprietary eddy current 
technology to identify changes in the pipeline diameter and geometry. 
With this data, the vendor can infer the existence of possible dents 
and other pipeline features.
    Smart pig vendors have developed algorithms to assist in converting 
the raw MFL and EGP signals to determine what type of defect exists and 
the size of the defect. The process of converting the raw MFL and EGP 
data signals is a phased approach. Initially, the MFL data is analyzed 
to provide a preliminary report that identifies areas of immediate 
concern but lacks much of the detailed analysis found in the final 
report. For the final report, MFL data is combined with EGP data to 
identify the location of possible dents and other pipeline features. In 
addition, detailed calculations are performed to grade the discovered 
features and provide additional information of use to the operator. 
More thorough analysis is performed, and the EGP data is incorporated 
to provide a very detailed report of the pipeline condition.

    Question 31. While you have publicly committed to replacing the 
remaining 8-inch line between Tucson and Phoenix, it is my 
understanding that you have yet to provide OPS with a plan to ensure 
the overall public safety of the pipeline as required by OPS's 
Corrective Action Order issued on August 6, 2003.
    Answer. We have been in communications with OPS and ACC since the 
initial release and have been coordinating with them our plans of 
initial repairs and subsequent investigation and corrective actions. We 
have submitted several plans to OPS and are currently reviewing and 
revising our field investigation plan based on their review and amended 
corrective action order. Moreover, the 8'' pipeline continues to 
operate at 50 percent of its maximum allowable operating pressure and 
will do so until the sec investigation is completed.
    KMEP submitted our first investigation plan to OPS on August 14, 
2003. On September 5, 2003, we submitted an overview of our plans to 
replace the 8 inch pipeline within Tucson. On September 29, 2003, we 
submitted our initial version of our field investigation protocol for 
the remainder of our Tucson to Phoenix pipeline. In October 3, 2003 OPS 
issued KMEP an amended corrective action order. In response, we 
modified our September 5, 2003 plan and submitted it on November 3, 
2003. OPS reviewed this plan and requested some additional information 
on November 14, 2003. We are currently working on modifications per 
their request that will be submitted by December 19, 2003. Meanwhile, 
we have been actively implementing the SCC investigation plan for the 
8'' pipeline.

    Question 31a. When do you intend to provide OPS with a plan for 
review?
    Answer. Kinder Morgan submitted its Stress Corrosion Cracking (SCC) 
Field Investigation Protocol to DOT on September 29, 2003. This 
document outlined an analytical method for identifying areas along the 
pipeline system with the potential for SCC. Plans for a field 
inspection program were presented in which direct knowledge from the 1-
mile area encompassing the July 30, 2003, release site will be used to 
delineate the severity of SCC and establish the contributing 
characteristics to locate other areas along the pipeline system with 
the potential for sec.

    Question 32. While published reports indicate that Kinder Morgan 
has committed to replacing the remaining 8-inch sections of the 
gasoline pipeline between Tucson and Phoenix, I would like know what 
actions Kinder Morgan is taking to ensure the safety of the 12-inch 
portions of that line, as well as the safety of the 6-inch product 
line, that has been subject to the same corrosion problems.
    Answer. The July 30, 2003, failure in an 8" portion of the pipeline 
between Tucson and Phoenix was not the result of generalized metal loss 
corrosion. Kinder Morgan has not had a metal loss corrosion release on 
an Arizona pipeline since 1988 and on the 8-inch pipeline since 1980. 
The July 30 failure was caused by high pH Stress Corrosion Cracking 
(SCC), a phenomenon that is new to the refined products pipeline 
industry and involves cracking and not wall loss due to corrosion. As 
noted elsewhere, our pipelines are effectively protected from corrosion 
by cathodic protection systems. Moreover, these pipelines are also 
incorporated into our Integrity Management Plan which is discussed in 
answers to questions 2, 3 and 4.

    Question 32a. Is Kinder Morgan going to replace that line as well?
    Answer. The currently proposed East Line Expansion would not affect 
the 6" pipeline. The 6" pipeline is connected to the 20" West Line 
bring product to Arizona from west coast refineries.

    Question 32b. How can the citizens of Arizona be assured that 
Kinder Morgan is acting with their safety in mind?
    Answer. The decision to temporarily shut down the 8" pipeline on 
August 8 reflects the company's commitment to public safety. In the 
face of a unique failure mode on a line operating in a metropolitan 
area, we shut the line down for additional testing. Public safety 
trumps public wrath. We regret, and have apologized publicly, for the 
inconveniences occasioned by this incident, and we took immediate and 
decisive steps to address the temporary shortfall and to get the line 
back up and operating. This focus on safety is part of our operating 
philosophy and as our safety record demonstrates, the citizens of 
Arizona can expect that we will continue to operate our facilities 
safely and reliably.

    Question 33. Recent reports have indicated the Federal Energy 
Regulatory Commission (FERC) has already approved a special tariff to 
pay for improvements in Kinder Morgan's El Paso to Phoenix pipeline. 
How much will the tariff cost your customers and the consumers of 
Arizona? When did Kinder Morgan ask FERC to approve a special tariff to 
improve the pipeline?
    Answer. On September 19, 2002, Kinder Morgan (SFPP, L.P.) submitted 
a ``Petition for Declaratory Order'' to the FERC requesting the 
``Commission issue a Declaratory Order that (1) SFPP will be permitted, 
pursuant to 18 C.P.R. 342(a) (2001), to charge cost-of-service tariff 
rates on its East Line in the event its proposed expansion described in 
the Petition (the ``East Line Expansion'') goes into service, provided 
that there is a difference of 20 percent or more between such cost-of-
service tariff rates and tariff rates calculated pursuant to 18 C.F.R. 
342.3 (2001), the Commission's indexing regulation; and (2) if, in 
response to a protest concerning the level of the tariff rates, the 
Commission suspends East Line cost-of-service tariff rates filed by 
SFPP following the East Line Expansion, those rates will be accepted 
for filing and made effective as of the date proposed by SFPP, subject 
to refund.''
    The Petition was assigned Docket No. OR02-13-000, Timely 
interventions and protests were filed by Chevron Products Company, 
Tosco Corporation, Valero Marketing and Supply Company and the Navajo 
Refining Company.

    Question 33a. Do you know why it took FERC so long to act on your 
application for a special tariff?
    Answer. In its Petition, SFPP requested ``that the Commission issue 
an expedited decision on this Petition no later than the end of 
December 2002.''
    On January 30, 2003, the FERC issued an ``Order on Petition for 
Declaratory Order'' in Docket No. OR02-13-000. The Order said that 
cost-of-service rates should be not be incremental, that a Declaratory 
Order is appropriate and that a minimal suspension is appropriate. 
Thus, FERC had granted the relief requested.
    Navajo Refining Company filed a request for rehearing of this 
Order, which caused the FERC to review its January 30, 2003 Order.
    On July 12, 2003, the FERC issued a draft ``Order on Rehearing'' 
which was then officially issued on August 1, 2003. TI1e Order denied 
Navajo's request for rehearing and ``affirmed the assurances requested 
by SFPP to facilitate construction of the needed expansion of its East 
Line.''

    Question 33b. Do you believe FERC would have approved the tariff if 
the rupture had not occurred?
    Answer. As the above time line indicates, FERC's decisions were in 
no way the result of, or influenced by, the July 30 incident in Tucson.

    Question 34. While serious questions can be raised about the 
continuity of OPS's oversight of your operations, it is very clear that 
for a number of years Kinder Morgan has been aware of corrosion issues 
that raise serious safety concerns on both of its pipelines that 
transport fuel between Tucson and Phoenix. Why did it take you until 
now, after a rupture that put the residents of Tucson in harms way, to 
move expeditiously to replace the problem pipe?
    Answer. Again, it is important to note that the July 30, 2003, 
failure was not the result of generalized metal loss corrosion. Kinder 
Morgan has not had a metal loss corrosion release on an Arizona 
pipeline since 1988 and on the 8-inch pipeline since 1980. The July 30 
failure was caused by high pH SCC, a phenomenon that is new to the 
refined products pipeline industry and involves crackjng and not wall 
loss due to corrosion. As for the replacement of the 8-inch pipe within 
the City of Tucson, this project had been in the planning phase prior 
to this incident.

    Question 35. It was recently announced that Kinder Morgan is 
purchasing a number of refined petroleum product terminals from Shell 
Oil, including terminals in Tucson and Phoenix. Given what we have 
learned regarding the maintenance and operations of your existing 
pipelines in Arizona, what assurances can you give the residents of 
Tucson and Phoenix regarding the continued safe operation of these 
facilities?
    Answer. We take seriously our commitment to operate a safe and 
reliable pipeline and terminal system and please refer to the answer to 
the third subpart of question 6.

    Question 35a. The Pipeline Safety Improvement Act, enacted last 
December, requires operators to carry out a public education effort. 
What, specifically, has Kinder Morgan done in meeting this statutory 
requirement? What additional actions to you plan to take based on what 
you learned following the rupture?
    Answer. Kinder Morgan has had a public education program in place 
that met all of the requirements of the applicable regulation and meets 
the majority of the elements now specified in the Act. We utilize a 
direct mail out campaign to mail safety brochures to the general 
public, schools, hospitals, and a pre-selected group public officials 
identified by SIC codes, and any entity that receives mail located 
within l/8 of mile radius of our pipeline at two year intervals. We 
also mail these brochures to emergency response organizations and 
persons involved in excavation. In addition, we offer to meet with the 
emergency response organizations and have met with many of them. Our 
safety brochure instructs recipients how to: notify us if they intend 
to dig, identify our pipelines, recognize a leak, take appropriate 
steps if they notice a leak, and immediately report a leak. It also 
outlines emergency action procedures for public Safety Officials.
    Kinder Morgan has been an active participant in the API Task Force 
developing RP 1162 ``Public Awareness Programs for Pipeline Operators'' 
the guidance document referenced by the OPS: OPS was also on this task 
force. In addition, we participated in the OPS Workshop, as a 
presenter, on September 16 and 17, 2003 in Baltimore Maryland.
    We began reviewing our Plan shortly after the enactment of the act. 
We attended the Public Workshop in Houston, Texas on September 4 and 5, 
2003. We have completed the self assessment and filed the certification 
with the OPS. Based on the assessment, we are adding Mayors and School 
District Administration officials in areas that we traverse to our list 
of recipients, and adding verbiage regarding the benefit of pipelines 
to our brochure.
    Regarding additional actions, we have participated in numerous 
public meetings discussions the July 30 incident and our current pipe 
replacement project.
                                 ______
                                 
     Response to Written Question Submitted by Hon. John McCain to 
                            Jonathan Olcott
    I am the attorney for the Silvercreek Homeowners Association in 
Tucson, Arizona. You have asked me to comment on five questions. My 
answers follow:

    Question. Were the residents of Silver Creek aware of the Kinder 
Morgan pipeline before the rupture?
    Answer. For the most part, the residents were not aware of the 
pipeline. Phase 1 of the development is approximately 400 feet from the 
pipeline. The existence of the pipeline was not disclosed in the 
Subdivision Public Report. There are 288 households in Phase 1. There 
are signs that indicate the presence of the pipeline. The residents of 
Phase 1 would have little reason to observe the signage. Only one 
homeowner in Phase 1 indicated she saw the signage.
    Phase 2 immediately adjoins the pipeline easement. Phase 2 consists 
of only approximately 40 households. Phase 2 is still under 
construction. Only a few homes are occupied. The pipeline is disclosed 
in the Public Report for Phase 2. Whether any purchaser read and 
understood the document is doubtful. No purchaser in Phase 2 has 
indicated whether the purchaser knew the location of the pipeline 
before the rupture.
    To summarize the answer to this question, only one homeowner 
indicated she was aware of the pipeline before the rupture.
    2. Evacuation. There was no evacuation. The homes that were doused 
with gasoline were under construction, and not occupied. Were the homes 
occupied, there would have been evacuations.
    3. Legal Action. This subject is privileged. Only my client can 
waive the privilege.
    I am concerned about two elements of damage. The first is the 
contamination to the common area. A contractor dumped contaminated dirt 
on the common area. Kinder Morgan has yet to provide us with 
contamination reports. Neither has Kinder Morgan provided us with 
remediation plans. Next, the recent revelation of leaking is a concern. 
I have previous experience with gasoline pipeline cases. Old pipelines 
leak. We are evaluating the extent of the contamination in the aquifer 
and groundwater.
    4. On-line Information. No homeowners indicated they were aware of 
the pipeline through a website. It strains credulity that a purchaser 
would scour the Internet for that information. I represent more than 
1,000 homeowners associations in Arizona. I cover at least 300,000 
households. I have been doing this for 16 years.
    The vast majority of homeowners do little investigation before they 
purchase. They rarely read the Public Report, Declaration of Covenants, 
Conditions and Restrictions, or the other 12 inches of papers they are 
provided in connection with the purchase. There is little possibility 
they would search the Internet for proximate utility pipelines.
    I do not believe a website could ever provide adequate disclosure 
of a pipeline that conveys hazardous materials.
    5. Recommendations for Proper Disclosure. If a new subdivision 
encroaches on a formally remote haz mat pipeline, there should be 
conspicuous signage. The signage should be located such that 
prospective purchaser would view it before the sale. In the 
alternative, developers should be required to display a conspicuous 
disclosure on sales materials.
    6. Caveats. The homes that were doused were not occupied. There was 
little reaction in the community from the rupture. The reaction would 
likely have been terror had the homes been occupied. Kinder, Morgan is 
fortunate that the homes were not occupied. Kinder, Morgan is fortunate 
that a homeowner was not barbequing a steak when the rupture occurred.
    The feeling in the community is that the rupture is more of an 
issue of pipeline safety, rather than encroachment. The community 
understands that utilities are proximate and necessary for modern life. 
With proper testing, I do not believe the thousands of households I 
represent would be concerned about proximate haz mat pipelines. Of 
course that feeling would dramatically change were a rupture to occur 
that caused fatalities.

                                  [all]

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