[Senate Hearing 108-953]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-953

 
  NATURAL GAS: THE DOMESTIC SUPPLY AND COST FOR THE APPROACHING PEAK 
                             WINTER MONTHS

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

                                HEARING

                               before the

   SUBCOMMITTEE ON COMPETITION, FOREIGN COMMERCE, AND INFRASTRUCTURE

                                 of the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                            OCTOBER 6, 2004

                               __________

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




                  U.S. GOVERNMENT PRINTING OFFICE
81-470                    WASHINGTON : 2013
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202ï¿½09512ï¿½091800, or 866ï¿½09512ï¿½091800 (toll-free). E-mail, [email protected].  


       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
                                 ------                                

   SUBCOMMITTEE ON COMPETITION, FOREIGN COMMERCE, AND INFRASTRUCTURE

                   GORDON H. SMITH, Oregon, Chairman
CONRAD BURNS, Montana                BYRON L. DORGAN, North Dakota, 
SAM BROWNBACK, Kansas                    Ranking
PETER G. FITZGERALD, Illinois        BARBARA BOXER, California
JOHN ENSIGN, Nevada                  BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire        MARIA CANTWELL, Washington
                                     FRANK R. LAUTENBERG, New Jersey


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on October 6, 2004..................................     1
Statement of Senator Lautenberg..................................     4
Statement of Senator Smith.......................................     1
Statement of Senator Stevens.....................................     2

                               Witnesses

Caruso, Guy F., Administrator, Energy Information Administration, 
  U.S. Department of Energy......................................     5
    Prepared statement...........................................     7
Hauter, Wenonah, Director, Public Citizen's Energy Program.......    25
    Prepared statement...........................................    28
Huss, Gary D., President, Hudapack Metal Treating, Inc. on behalf 
  of the National Association of Manufacturers...................    21
    Prepared statement...........................................    23
Wilkinson, Paul, Vice President, Policy Analysis, American Gas 
  Association....................................................    32
    Prepared statement...........................................    34


                    NATURAL GAS: THE DOMESTIC SUPPLY
                      AND COST FOR THE APPROACHING
                           PEAK WINTER MONTHS

                              ----------                              


                       WEDNESDAY, OCTOBER 6, 2004

                               U.S. Senate,
Subcommittee on Competition, Foreign Commerce, and 
                                    Infrastructure,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:40 p.m. in 
room SR-253, Russell Senate Office Building, Hon. Gordon Smith, 
Chairman of the Subcommittee, presiding.

          OPENING STATEMENT OF HON. GORDON H. SMITH, 
                    U.S. SENATOR FROM OREGON

    Senator Smith. I'd like to call this Subcommittee hearing 
to order, the Committee on Commerce, Science, and 
Transportation. I want to thank the witnesses who have agreed 
to testify before the Subcommittee today. We are here to 
discuss the supply and price forecast for natural gas and the 
impact of continued high prices on residential consumers and 
industrial customers.
    This hearing is timely for several reasons. The demand for 
natural gas has traditionally followed a seasonal pattern, 
peaking in the winter heating months. In the Northwest, 
consumers are going into this winter paying significantly more 
for natural gas than they were just a year ago. Last week, the 
Oregon Public Utilities Commission approved steep rate 
increases for three natural gas companies that serve Oregon 
homes and businesses. These rate increases have been driven by 
the skyrocketing wholesale cost of natural gas. The rate 
increases for residential customers will range from 12 to 18 
percent. The business customers of the state's largest gas 
utility will face increases of almost 20 percent. Needless to 
say, this will further strain the family budgets of Oregonians, 
particularly seniors on fixed incomes and low-income residents. 
In addition, the consequences of these increases will be dire 
for the state's Low Income Energy Assistance Program, which 
helped over 54,000 Oregonians last year before running out of 
money. The impact on businesses will be no less dire.
    Today, we will hear from Mr. Gary Huss, on behalf of the 
National Association of Manufacturers, about the toll that high 
gas prices are having on his business and businesses like his 
that rely on gas for direct heat or as a feed stock.
    The Industrial Energy Consumers of America estimates that 
U.S. businesses have paid an extra $90 billion in natural gas 
costs since June 2000. Since that time, an estimated 90,000 
jobs have been lost in the U.S. chemical manufacturing sector.
    With respect to foreign competition, the American Chemistry 
Council projects that the U.S. chemical industry has lost 50 
billion in business to foreign competition. They also claim 
that prior to 2000, affordable gas helped make the chemical 
industry the Nation's largest exporter and a low-cost producer. 
Now it is a net importer and a high-cost producer, largely due 
to high natural gas prices.
    The Energy Information Agency will be represented here 
today by Mr. Gary Caruso. It released its projection for the 
cost of heating fuel this winter. Essentially, regardless of 
where you live or the type of fuel you use to heat your home, 
you're going to pay significantly more this winter. Across the 
nation, across every energy sector--be it natural gas, oil, 
gasoline, or electricity--prices will remain high.
    That is another reason why this hearing is so timely. The 
108th Congress still has time to pass national energy 
legislation before we adjourn. We must also pass the FISC-ETI 
Conference Report that includes an expansion of the types of 
renewables that are eligible for the electricity-production tax 
credit and important provisions relating to the proposed Alaska 
North Slope natural gas pipeline. This pipeline is expected to 
begin transporting Alaskan gas to the Lower 48 states in 2018, 
with total Alaskan gas production forecast to be 2.7 trillion 
cubic feet by 2025.
    I want to thank my colleagues from Alaska for their 
tireless efforts to make this pipeline a reality. This pipeline 
will be an important new domestic source of natural gas in the 
years ahead. Until the late 1980s, the United States was self-
sufficient in natural gas. Since that time, production has not 
kept pace with demand and net imports as the share of 
consumption tripled between 1989 and 2000. Until now, the gap 
between supply and demand has been met by imports through 
pipelines from Canada and Mexico and by imports of liquified 
natural gas, LNG, to the existing LNG import terminals.
    In the future, LNG will play a much bigger role in meeting 
import needs. Expansions are planned at existing LNG import 
terminals, and more than 44 LNG import terminals have been 
proposed in the U.S., British Columbia, and Mexico, including 
ten along the West Coast of the United States. The siting and 
security issues related to these import terminals can and must 
be resolved in order to move forward with this needed 
infrastructure to meet our energy needs.
    I look forward to hearing from our witnesses today, and I 
will first turn to the Chairman of the Appropriations 
Committee, the next Chairman of this Committee, Senator 
Stevens, and then Senator Lautenberg, for their opening 
statements.

                STATEMENT OF HON. TED STEVENS, 
                    U.S. SENATOR FROM ALASKA

    Senator Stevens. Thank you very much, Mr. Chairman.
    I come today to thank you for holding the hearing and to 
tell you I'm going to review the statements. I have to go back 
to the current involvement we have with the intelligence bill. 
But I do hope that we can have an impact on this problem 
greater than is predicted. I heard about the predictions from 
the Federal agencies and the gas association.
    I'm one who believes that if you look at the map of the 
world and look at the production in Russia and that part--the 
eastern portion of that continent, and look at Canada, and then 
look at our state and realize that we're between those two 
areas of production, and realize that two thirds of the outer 
continental shelf of the United States is off Alaska, in 
addition to our land mass, which is one fifth the whole United 
States, I think there's a great deal of gas in Alaska. We've 
only drilled for gas once, to my knowledge, with any intensity, 
and that's in the Cook Inlet, and we've been very successful. 
We really have not drilled for gas in the Arctic. The gas we 
have there was associated with the oil production. And there 
has been no incentive to drill for gas in the areas where there 
might be substantial potential, because there has been no 
transportation system.
    Now, we've just started the initial--thanks to you, Mr. 
Chairman; you've been very forceful, I understand, in the 
conference on the bill to start the tax provisions, and we hope 
to get the balance of that authorization that was in the energy 
bill in something before it passes this year. Because I think 
if we announce to the industry that we're going to do 
everything we can as a government to give incentive to build 
this gas pipeline, that will stir up the industry and bring 
people back looking for gas in Alaska.
    There's going to be some drilling under the old Naval 
Petroleum Reserve Number 4 this next spring, and that will 
cause 25 million acres that President Harding withdrew right 
after Teapot Dome scandal to be drilled; it has really never 
been drilled. In the area where it was drilled during World War 
II, there were some shallow gas and oil wells, but that's never 
been totally drilled. And the area that is south of the Brooks 
Range, where the gas came in once, we've never gone back to 
drill that. Some of that may be off limits now because of 
withdrawals, but a portion of it is still available for 
drilling.
    I do believe that the land mass and the area off of our 
land mass in the outer continental shelf, if we explore it, 
there is substantial gas--and probably oil, too--potential out 
there.
    So I congratulate you for helping us getting this started 
as far as the gas pipeline is concerned, but I also 
congratulate you for getting some of these basic estimates 
online.
    I'm not arguing with your near-term projection, Mr. Caruso, 
I just think the far term really is too speculative right now 
to say that we'll only produce, by 2025, that percentage. I 
think we'll be up equal to Canada by the time we start drilling 
out the Arctic and the South Slope of Alaska, as far as the gas 
potential is concerned.
    But thank you very much for what you're doing----
    Senator Smith. You're welcome, Senator Stevens, and----
    Senator Stevens. If you'll excuse me----
    Senator Smith. You bet.
    Senator Stevens.--I'm going to FedEx your statements, 
gentlemen, to my friends up north. There's two who are very 
anxious to build this pipeline.
    Thank you very much.
    Senator Smith. Thank you, sir.
    Senator Lautenberg, opening statement?

            STATEMENT OF HON. FRANK R. LAUTENBERG, 
                  U.S. SENATOR FROM NEW JERSEY

    Senator Lautenberg. Thanks, Mr. Chairman.
    You know, when one hears Senator Stevens talk about Alaska, 
you realize the size and excitement that surrounds Alaska. When 
Senator Stevens says that Alaska comprises one fifth of the 
land mass of the United States--and I don't know what the 
percentage of the land mass is that we have in New Jersey, but 
it's pretty darn small; however, we have a significant part of 
the national population, about eight million people there, and 
we're concerned, Mr. Chairman, about the things that everybody 
worries about.
    The first thing that hits is the increase in prices that 
has come along, and moving at a very fast pace, upward. And 
then the other side of the coin is the falling supplies.
    Now, the government has--I think, wisely--promoted the use 
of natural gas at every turn as a clean, abundant energy 
source. But in less than a decade, the average price of natural 
gas has tripled in the United States, and the Energy 
Information Administration--we welcome you, Mr. Caruso--is 
forecasting that heating a home with natural gas this winter 
will cost nearly 50 percent more than it did prior to the year 
2000. This is an unacceptable situation. Hundreds of thousands 
of lower-income households have already been disconnected from 
the gas company, or soon will be. And what are these families 
going to do this winter? How will they keep their homes heated?
    In my home state of New Jersey, natural gas accounts for 
about 30 percent of the energy production that we use. The 
steep increases in price and uncertainty about our future 
supplies have created real hardships for New Jersey families 
and businesses, just as it is in many other states.
    It's clear that we need policies for the future to manage 
our natural gas supplies, and I think the best way to extend 
them, perhaps, is on the demand side of the equation, through 
energy efficiency improvements. And I understand, Mr. Chairman, 
that there were--that we're hearing about liquified natural gas 
as part of the solution to our current supply-and-demand 
dilemma.
    I look forward to this discussion. And I have, in the 
traditional energy--or environmental concerns that I have had 
about the safety and the environmental impacts of LNG, a new 
facility has been proposed in Logan Township in my state, and 
we're still weighing the advantages and disadvantages of that. 
And I'm concerned that we may be moving a little too fast 
toward LNG as the solution to our problem without having 
sufficient regulations in place. And I think that we need to 
think through this option very carefully and make sure we have 
strong safety and environmental protections before we commit to 
increase the number of our LNG ports. I understand these are 
big vessels to carry the quantity that makes economic sense; 
and we welcome them, but we want to know exactly what we're 
getting ourselves into or, rather, what we're bringing into our 
country.
    And I commend you, Mr. Chairman, for having this hearing.
    Senator Smith. Thank you, Senator. We appreciate your 
comments.
    And we will turn to our first panel, Mr. Gary Caruso, 
Administrator of the Energy Information Agency--Administration. 
And we welcome you, sir.

 STATEMENT OF GUY F. CARUSO, ADMINISTRATOR, ENERGY INFORMATION 
              ADMINISTRATION, U.S. DEPARTMENT OF 
                             ENERGY

    Mr. Caruso. Thank you.
    Senator Smith. I said Gary, I'm sorry. It's Guy. I 
apologize.
    Mr. Caruso. Thank you, Mr. Chairman and Senator Lautenberg, 
for being here this afternoon and allowing me to present the 
Energy Information Administration's Winter Fuel Outlook, which 
we released this morning, as you noted. And I'd be pleased to 
submit that full report for the record, if that was desirable.
    Senator Smith. We will receive it, happily.
    Mr. Caruso. And I will also go into a little bit of detail 
about our longer-term forecast that Senator Stevens referred 
to, as well, and be happy to go into more detail, as you 
desire, on that.
    But, in the short run, which is the focus of the Winter 
Fuels Outlook Report, Senator Lautenberg is correct, and that 
is that we are going to see substantially higher fuel prices 
this winter based on the outlook that we published this 
morning. For natural gas, the typical consumer will be paying 
about 15 percent more this winter than they did last winter. 
That is----
    Senator Smith. Fifteen percent or----
    Mr. Caruso. One-five. For this winter, compared with last 
winter. If one goes back to 2000 or prior to that, the 
percentage increase is even higher, as can be seen in this 
chart. [All charts submitted follow Mr. Caruso's prepared 
statement, herein.]
    Heating oil and propane will also--consumers of heating oil 
and propane will also see higher prices this winter--for 
heating oil, about 28 percent compared with last year; and 
propane, about a 22 percent increase. So, indeed, consumers 
will be feeling the pinch because of the tight crude markets 
and tight gasoline--natural gas markets that have led to these 
higher prices. And, of course, when Hurricane Ivan hit, there 
was a considerable impact on our Gulf of Mexico offshore 
production, which has exacerbated both the supply and the price 
situations.
    The one piece of good news that I can report in the Winter 
Fuel Outlook is that inventories of natural gas have been built 
up quite strongly during the summer months, and we are now at 
the top end, as shown in the second chart, of our normal 
working gas and inventory levels, which should enable us to 
meet the demand of our households and businesses this winter, 
even in the extremely cold winter scenario which we have 
modeled. Nevertheless, the prices will be, as mentioned, 
higher.
    Over the longer run, gas will continue to play an important 
role in our energy picture, an increasingly important role; 
but, as was noted, production will not keep pace with 
consumption, and we see a growing need for imports in this 
country. In 2003, we imported about 15 percent of our gas, and 
we see that growing substantially by 2025, to more than--almost 
as much as 25 percent in the--in our long-term outlook. And we 
also see prices coming down from these recent highs by 2010 
because of the--what we believe will be a substantial increase 
in LNG imports, and some improvement in domestic production 
from unconventional sources, as well. Nevertheless, prices will 
be higher, even in the long run, than they were in--previous to 
this runup since the year 2000, as can be seen in the chart 
before you, showing wellhead prices and prices to various 
consumers, from the electric generation through to the 
residential consumer.
    Where will our supply come from? As I mentioned, one of the 
major increases in the supply will be in net LNG imports, and 
we expect there will be a considerable number of new LNG 
regasification terminals built to supplement the four existing 
terminals that are currently in operation.
    The other large increase in our long-term outlook is from 
Alaska. We do expect the Alaska natural gas pipeline to be 
built. We see it coming on in the year 2018 in our latest model 
runs, and this varies based on price and the supply/demand 
picture.
    The third major increase will come from unconventional 
sources of natural gas, mainly in the Iraqi mountain area, and 
that would be tight sands and coalbed methane. But, indeed, for 
the traditional sources of Lower 48 production of natural gas, 
whether it be onshore or offshore, we see the depletion rates 
there leading to declines in production in the Lower 48 so that 
we will a need substantial increase in imports, whether they be 
from Canada or via LNG.
    The next chart shows how the role of Canada will diminish 
over the next 20 years as a supplier of gas to the United 
States. Canada was supplying most of our imports just as 
recently as 2002, with only 2 percent being LNG. By 2025, 
Canadians' natural gas exports to the U.S. will be 
substantially less than LNG, and, indeed, there are other 
forecasts, such as the National Petroleum Council, which 
believe that LNG will be an even--will play an even more 
important role. In this case, we're assuming about 15 percent 
of our gas will be LNG by 2025, and the NPC study, for example, 
indicated about 25 percent.
    So, clearly, the role of LNG will increase dramatically 
over this forecast period, and the 44 proposed projects that 
Senator Lautenberg mentioned, certainly we expect a substantial 
number of those will come to fruition and will be an important 
part of our long-term natural gas picture.
    With that very brief overview of our winter outlook and 
longer-term outlook for natural gas, Mr. Chairman, I'd be very 
pleased to answer any questions you or other Members may have.
    [The prepared statement of Mr. Caruso follows:]

Prepared Statement of Guy F. Caruso, Administrator, Energy Information 
               Administration, U.S. Department of Energy
    Mr. Chairman and Members of the Committee:

    Thank you for the opportunity to appear before you today to discuss 
the Winter Fuels Outlook and the short and longer-run forecasts for 
natural gas supplies and prices.
    The Energy Information Administration (EIA) is the independent 
statistical and analytical agency within the Department of Energy. We 
are charged with providing objective, timely, and relevant data, 
analysis, and projections for the Department of Energy, other 
government agencies, the U.S. Congress, and the public. We do not take 
positions on policy issues, but we do produce data and analysis reports 
that are meant to help policymakers determine energy policy. Because 
the Department of Energy Organization Act gives EIA an element of 
independence with respect to the analyses we publish, our views are 
strictly those of EIA. They should not be construed as representing 
those of the Department of Energy or the Administration.
Overview
    Concerns about crude oil supplies, low excess production capacity, 
volatility in crude-oil prices, and tightness in natural gas markets 
are expected to keep nominal crude oil and wellhead natural gas prices 
well above historical levels for the near term. Higher prices combined 
with a projected slightly colder-than-normal winter season 
(particularly in regions with major heating needs) mean that most 
households and businesses will be spending more for heating fuels 
natural gas, heating oil, propane, and electricity--than they did last 
winter.
    Natural gas currently is, and will remain, a primary source of 
energy in the United States. In the long term, we expect to meet 
growing demand through increased domestic production and through 
expanded imports of liquefied natural gas (LNG). After declining from 
near-term high levels, end-use natural gas prices are expected to trend 
downward through 2010 before beginning to gradually increase through 
2025.
Heating Fuels, by Type and Region
    Heating fuel consumption varies by type of end user, such as 
households or commercial buildings, and by Census region, as well as by 
variations in price and weather. In 2001, the most recent year for 
which we have detailed data, of the 106 million households who use 
heating fuel, 56 percent or 59.1 million households used natural gas as 
their main space-heating fuel, while 29 percent or 30.9 million 
households used electricity, 8 percent or 8.0 million used fuel oil, 
and 5 percent or 4.9 million used liquefied petroleum gases (LPG), 
primarily propane.



    Note: Three percent of U.S. households use kerosene for main space 
heating, primarily in the South.
    Source: Energy Information Administration, 2001 Residential Energy 
Consumption Survey.

    While natural gas is used heavily in all four Census regions, 
electricity is used as the main space-heating fuel by more than half of 
the households in the South (19.3 million households). Fuel oil use is 
heavily concentrated in the Northeast. Almost 78 percent of LPG use is 
in the South and Midwest. LPG is concentrated in rural areas (3.5 
million households out of 4.9 million households nationally). Heating 
fuel use in the commercial buildings sector generally follows similar 
patterns.

Winter Fuels Outlook
    For the near term, our outlook is for crude oil and natural gas 
prices to remain higher than historical levels. Higher prices combined 
with a projected slightly colder-than-normal winter season (base case) 
mean that most households and businesses will be spending more for 
fuels than they did last winter.



    Consumption based on typical per household use for regions noted. 
Prices are retail national averages.
    *thousand cubic feet.

   Last winter, per-household natural gas expenditures in the 
        Midwest rose more than 8 percent despite a weather-induced 7 
        percent decline in consumption. This winter, expenditures are 
        projected to rise 15 percent due to a 4 percent increase in 
        consumption and an 11 percent increase in prices.

   Last winter, heating oil expenditures for a typical 
        Northeast household declined slightly as a 2 percent decline in 
        consumption offset a small increase in prices. This winter, 
        expenditures are projected to rise by 28 percent with higher 
        prices accounting for almost all of the increase.

   Last winter, expenditures for the average household in the 
        Midwest using propane as a heating fuel rose slightly as an 8-
        percent price increase negated a 7-percent consumption decline. 
        This winter, expenditures are projected to rise by about 22 
        percent due to a 4 percent increase in consumption and a 17 
        percent increase in prices.

    While these calculations illustrate recent and projected trends in 
heating expenditures, actual expenditures for an individual household 
can vary significantly depending on local factors as weather variation 
and price differences among fuel suppliers serving a given region, and 
due to individual home characteristics such as size, heating equipment 
efficiency, the effectiveness of insulation, and thermostat settings.

Natural Gas
    High crude oil prices and strong economic growth put upward 
pressure on natural gas prices this year until mid-summer, when cooler-
than-expected temperatures kept peak electricity demands down, reducing 
summer natural gas demand below expectations. Prices began easing in 
July then fell to a September average of about $5.00 per million Btu at 
the Henry Hub, a decline of about $1.30 from the June average. The 
relatively weak demand and low prices resulted in very strong storage 
injections from mid-to late summer. Hurricane Ivan disrupted at least 2 
billion cubic feet per day of natural gas production in the Gulf of 
Mexico during the second half of September. Operations in the Gulf may 
take a number of weeks to return to normal.
    As of October 1, working gas inventories, estimated at 3.072 
trillion cubic feet, were close to the upper bound of the normal range 
and 222 billion cubic feet above last year's level. Also, given 
continued net injections during October, working gas inventories by 
October 31 are expected to be the highest they have been since 1990. 
The April-to-September rate of stock additions was well above the 
average refill rate of the previous 5-years, brought about by weak 
summer demand from cooler-than average weather. As a result, end-of-
season (March 31, 2005) working-gas inventories are projected to be 
about 200 billion cubic feet above the year-ago level and about 530 
billion cubic feet above the all-time low of 730 billion cubic feet at 
the end of the winter of 2003.
    Although underground storage levels are high, other factors, such 
as production losses in the Gulf of Mexico, modest growth in both U.S. 
production growth and imports, and increased winter demand, contribute 
to natural gas prices (wellhead and retail levels), which are expected 
to be above those of the previous winter season, particularly during 
the fourth quarter of 2004. The base case wellhead price is projected 
to average $6.04 per thousand cubic feet up nearly 23 percent from last 
winter's average of $4.92 per thousand cubic feet. Residential prices, 
which reflect wellhead prices with a lag and also include cost of 
transmission and local distribution, are projected to average $10.86 
per thousand cubic feet, up 11 percent from the average $9.77 per 
thousand cubic feet last winter.
    Total winter-season natural gas demand is expected to average about 
1.5 percent higher than last winter due to cooler weather in regions 
with large concentrations of gas-heated homes and continued increased 
demand in the commercial and power-generation sectors. Not only is the 
typical residential and commercial customer expected to increase gas 
consumption during this heating season compared to last winter, but the 
number of such customers is expected to increase as well.
    Domestic dry natural gas production during the upcoming winter is 
expected to remain flat compared to last winter, somewhat less than 
would have been expected had Hurricane Ivan not disrupted Gulf of 
Mexico production. The lagged effects of continued high prices in 2004, 
which induced additional drilling activity, are expected to raise 
winter output above last winter levels despite the above-average levels 
of gas in storage available to meet winter demand.
    Net imports are projected to provide 9.55 billion cubic feet per 
day this winter in the base case, higher than last winter's average of 
9.26 billion cubic feet per day. The bulk of net imports are shipped 
via pipeline from Canada. Last winter, imports from Canada declined by 
about 0.7 billion cubic feet per day from the previous winter but were 
more than offset by increased LNG imports. Pipeline imports from Canada 
are expected to decline again this year by an amount that will not be 
entirely offset by higher LNG imports. Meanwhile, gradual increases in 
natural gas exports to Mexico are expected to continue.

Heating Oil
    Last winter season, the average household's consumption of heating 
oil fell by 6 percent--due to warmer-than-normal weather--while the 
average per-gallon heating oil price increased by 2 percent. As a 
result, the average heating oil consumer saw little change in total 
heating expenditures.
    This winter season, tight global oil markets and elevated world and 
domestic oil prices are expected to raise heating oil prices and 
expenditures considerably. Retail heating oil prices in the base case 
are projected to average $1.75 per gallon, up 29 percent from last 
winter's average. Per-household heating oil demand is projected to be 
slightly below last winter's demand, but per-household heating 
expenditures are expected to rise 28 percent compare to last winter. 
This is the largest projected increase of all the fuels.
    Distillate fuel inventories (as of the end of September) are 
estimated to total 126.4 million barrels compared to the 131.3 million 
barrels last year, within the normal range of 121.1 to 141.4 million 
barrels. Moreover, inventories in the Northeast, the main consuming 
region of heating oil, are reasonably comfortable, standing at 51.5 
million barrels, which is slightly less than the 52.6 million barrels 
at the beginning of the previous winter and within the normal range of 
45.4 to 62.9 million barrels. Total end-of-season stocks are projected 
to be 102.1 million barrels, slightly lower than the 104.0 million 
barrels seen at the end of last winter.
    Net imports are expected to play a slightly smaller role in meeting 
the winter distillate requirement compared to last winter. Often the 
swing supplier of heating oil, net imports are expected to average just 
245,000 barrels per day, down from 269,000 barrels per day last winter, 
and well below the record winter average of 335,000 barrels per day. On 
a short-term basis, net imports have been as high as 722,000 barrels 
per day.

Propane
    Spot propane prices are primarily determined by crude oil and 
natural gas wellhead prices. Retail propane prices are influenced by 
heating oil and natural gas prices and alternative petrochemical 
feedstocks. Because of projected increases in crude oil, natural gas, 
and heating oil prices, residential propane prices for the upcoming 
winter season are expected to average $1.53 per gallon compared to 
$1.30 per gallon last winter.
    Despite last winter's mild weather, propane demand averaged a 
record 1.48 million barrels per day, 3.2 percent above the previous 
heating season, in part due to strong petrochemical feedstock demand 
and a record corn crop (propane is used the agricultural sector to dry 
corn after harvest to prevent spoilage). Continued economic growth, an 
even larger corn crop, and increased heating degree-days are expected 
to account for much of the projected 1.8 percent demand growth in the 
upcoming winter season.
    Propane inventories began the last winter at the lowest level since 
2000 (at 62.5 million barrels) and declined by 34.6 million barrels 
during the heating season. This was slightly less than the average draw 
rate due, in part, to the relatively mild winter conditions. As a 
result, end-of-season inventories were 27.9 million barrels, well 
within the normal range. During the summer, stockholders added 38.6 
million barrels bringing beginning-of-season stocks to 66.5 million 
barrels. End-of-season (March 31, 2005) stocks are projected to be 29.0 
million barrels.
    While small in volume, propane imports are critical when demand 
exceeds available supply. Through the first half of 2004, propane 
imports averaged 188,000 barrels per day, up more than 27 percent from 
that of the first half of 2003. Imports from Canada and other sources 
are expected to maintain their strong year-over-year growth rates 
during this winter season, assuming U.S. propane prices remain 
attractive to foreign suppliers.

Electricity
    This winter, residential electricity prices are projected to 
average 8.50 cents per kilowatthour (kWh), slightly below the average 
8.65 cents per kWh last winter. Retail electric prices are not very 
sensitive to demand surges or fuel price shocks that may occur in the 
winter. Increased costs of fuel and wholesale electricity would tend to 
be smoothed out in retail prices over a period of several months.
    The prospects of colder weather in regions where electricity is 
used heavily for heating combined with continued economic growth will 
likely result in increased residential as well as total electricity 
demand for the winter. Growth in total electricity demand is projected 
to be 3.1 percent. Residential consumption is projected to increase 3.4 
percent, commercial demand is expected to grow 2.9 percent, and 
industrial demand is expected to grow by 4.3 percent.

Cold Winter Case
    An alternative cold-weather case estimates the potential impacts of 
energy supply, demand, and prices, assuming base case values for real 
gross domestic product (GDP) and other key macroeconomic drivers. The 
cold weather case assumes a 10 percent increase in aggregate heating 
degree-days from the base case level. Based on winter-season heating 
degree-day data from 1974 to 2004, the probability of a winter at least 
10 percent colder than that projected for the base case is 4.2 percent. 
A winter that is 10 percent colder throughout the season is assumed to 
result in an additional 10-percent increase in heating-related demand 
across fuels.
    In the 10 percent colder case, retail prices for the three primary 
fuels would be expected to rise, reflecting higher marginal costs 
associated with the incremental demand. Heating oil prices would 
average $1.84 per gallon, 4.9 percent above those in the base case. As 
a result, the average total expenditure for a heating oil household 
would rise about 15 percent above the base case. Residential natural 
gas prices would rise by about 6 percent from the base case. Some of 
the increased cost of natural gas that would stem from colder weather 
would be rolled into future natural gas bills extending beyond the 
heating season. Changes in propane prices, which are highly related to 
changes in natural gas prices, would result in residential propane 
prices averaging $1.59 per gallon, up about 4 percent from the base 
case. As a result, total per-household propane expenditures would rise 
more than 14 percent from base case projections.

Long-Term Natural Gas Supply and Price Projections
    The United States is the largest natural gas consuming country in 
the world. U.S. domestic production is also large relative to current 
world production, with only Russia supplying more natural gas. However, 
the United States historically has also met up to 16 percent of 
consumption with net imports of pipeline natural gas. Imports by 
pipeline declined sharply in 2003 and are expected to show a decline 
again in 2004. Recent and likely further expansion of international 
trade involves importing LNG.
    Over the longer term, average annual natural gas wellhead prices in 
the lower 48 states are projected to decline from recent highs between 
now and 2010 and then increase gradually, reaching $4.40 per thousand 
cubic feet in 2025, in constant 2002 dollars.



    Price increases are held in check somewhat by increased LNG 
imports, technology improvements, and domestic production from 
unconventional sources and Alaska, but these are unable to fully offset 
the impacts of resource depletion and increased demand. Prices are 
projected to increase unevenly as major new, large-volume supply 
projects--specifically new LNG terminals and an Alaska pipeline--
temporarily depress prices when initially brought online. In nominal 
dollars, the 2025 price is the equivalent of almost $8.50 per thousand 
cubic feet.
    For the most part end-use prices track the wellhead prices. 
However, EIA projects declines in average transmission and distribution 
margins, as a larger proportion of the natural gas delivery 
infrastructure becomes fully depreciated and fixed costs are spread 
over a larger base. In addition, some of the higher growth areas are in 
regions that are closer to supply sources.
    End-use natural gas prices are expected to increase gradually 
starting in about 2010 as a result of increasing wellhead prices. The 
average end-use price is expected to increase by 78 cents per thousand 
cubic feet between 2010 and 2025 (in constant 2002 dollars), compared 
with an increase of 98 cents per thousand cubic feet in the average 
wellhead price of domestic and imported natural gas supplies over the 
same period. Part of this difference is attributable to an increasing 
share of natural gas sold to electric generators, the sector with the 
lowest prices.
    By 2010, residential natural gas prices in inflation-adjusted terms 
are expected to decline from current levels. From 2010 to 2025, 
residential natural gas prices are expected to rise 68 cents per 
thousand cubic feet in real terms, reaching $8.56 per thousand cubic 
feet in 2025. Because of increases in efficiency and conservation, 
however, annual natural gas expenditures per household are projected to 
increase by only 1 percent, to $632. Industrial natural gas prices are 
expected to decline from $5.76 per thousand cubic feet in 2003 to $4.16 
per thousand cubic feet by 2010 and gradually increase by 97 cents to 
$5.13 by 2025, in real terms.
    Changes in prices over the forecast period reflect changes in both 
supply sources and consumption patterns. By 2025 total U.S. natural gas 
consumption is expected to increase to 31 trillion cubic feet, while 
production is expected only to reach 24 trillion cubic feet. Increasing 
use of imports makes up the 7-trillion-cubic-feet difference between 
consumption and production.



    Net imports are projected to rise from 3.5 trillion cubic feet in 
2002 to 7.2 trillion cubic feet by 2025. Nearly all of the increase is 
expected to come from LNG, with a 4.6-trillion-cubic-feet increase 
expected over 2002 levels. This is nearly a 16 percent annual growth 
rate. By 2025, we expect net LNG imports to equal 15 percent of total 
U.S. gas consumption, compared to less than 1 percent in 2002. Net LNG 
imports are expected to rise from 5 percent of net imports in 2002 to 
66 percent in 2025. By 2025 we expect expansion at the four existing 
terminals and construction of new LNG terminals along the Gulf Coast, 
in the Bahamas, along the East Coast, and in Baja California, Mexico.
    Imports from Canada are expected to peak at 3.7 trillion cubic feet 
in 2010, after a pipeline from the Mackenzie Delta begins service in 
2009. Production off the eastern coast of Canada and unconventional 
production are expected to be increase supply, but they are not 
expected to make up for the anticipated rapid decline in conventional 
production from western Canada and Canadian demand increases. LNG 
becomes the largest source of U.S. imports in 2015, as Canadian 
production declines.
    Mexico is projected to continue to be a net importer of U.S. 
natural gas. Expected new LNG import terminals on Mexico's east and 
west coasts will be important contributors to Mexican supply. Net 
exports to Mexico are forecast to decline after 2006 as LNG imports 
into Baja California begin to supply both the U.S. and the Mexican 
markets.
    Increases in U.S. natural gas production come primarily from 
unconventional sources and from Alaska. Unconventional gas production 
is expected to increase by 3.2 trillion cubic feet over the forecast 
period--more than any other source, largely because of expanded tight 
sands gas production in the Rocky Mountain region. Annual production 
from unconventional sources is expected to account for 38 percent of 
production in 2025, compared to 31 percent in 2002.



    * Includes total associated-dissolved, supplemental 
natural gas production, and Mexico imports.

    Alaska gas production is expected to increase by 2.3 trillion cubic 
feet over the forecast period from 0.4 trillion cubic feet in 2002 to 
2.7 trillion cubic feet in 2025. It accounts for most of the growth in 
domestic conventional gas production. Alaska gas production begins 
flowing to the lower 48 states in 2018, with 3.9 billion cubic feet per 
day delivered to the lower-48 States in 2019. Expansion of the Alaska 
gas pipeline raises lower 48 deliveries to 4.8 billion cubic feet per 
day in 2025.
    Conventional onshore non-associated production decreases by 310 
billion cubic feet over the forecast period, as traditional sources of 
natural gas are depleted, even with continued technological 
improvement. Non-associated offshore production declines by 210 billion 
cubic feet, as shallow water production declines.
    Electric generators, not including commercial and industrial 
combined heat and power facilities, lead the increase in consumption 
over the forecast. Consumption in this sector is expected to increase 
by about 50 percent over the forecast, from 5.6 trillion cubic feet in 
2002 to 8.4 trillion cubic feet in 2025. Demand by electricity 
generators is expected to account for 27 percent of total natural gas 
consumption in 2025.
    Most new electricity generation capacity is expected to be fueled 
by natural gas; consequently, natural gas consumption in the 
electricity generation sector is projected to grow rapidly throughout 
the forecast. Although average coal prices to electricity generators 
are projected to fall throughout the forecast, natural gas-fired 
generators are expected to have advantages over coal-fired generators, 
including lower capital costs, higher fuel efficiency, shorter 
construction lead times, and lower emissions.
    The industrial sector, excluding lease and plant fuel, remains the 
largest gas-consuming sector, with significant amounts of gas used in 
the bulk chemical, refining, and mining sectors. Industrial consumption 
is expected to increase by 3.0 trillion cubic feet over the forecast 
period, driven primarily by macroeconomic growth, which rises 3 percent 
annually as measured by GDP. The chemical and metal-based durables 
sectors show the largest growth.
    Combined consumption in the residential and commercial sectors is 
projected to increase by 2.1 trillion cubic feet from 2002 to 2025, 
driven by increasing population, healthy economic growth, and slowly 
rising prices in real terms. Natural gas will remain the overwhelming 
choice for home heating throughout the forecast period, with the number 
of natural gas furnaces rising by 17 million units.
    Thank you, Mr. Chairman and members of the Committee. I will be 
happy to answer any questions.














    Senator Smith. Thank you, Guy. It's a very helpful 
presentation.
    Just a few questions. How much have heating fuel costs 
increased since 2000?
    Mr. Caruso. Let me--sorry--I'll have to read it off the 
chart. Sorry.
    The actual cost of natural gas for a typical consumer in 
2001/2002 was $600-per-household, and we're projecting, this 
year, about $1,000. So that's a $400-per-household increase in 
just 4 years.
    Senator Smith. Substantial. And how much will the average 
family, then, spend to heat their home this winter? It must 
vary quite a bit from region to region, but----
    Mr. Caruso. It does, considerably. We have used, in our 
chart here, as a typical household, a natural gas household 
using natural gas to heat their home in the Midwest, and that's 
about a thousand. But, for example, heating oil, let's say, in 
New Jersey, the average consumer would probably be closer to 
$1,200 because of the higher price of heating oil. And propane 
is used to a large degree in the Midwest and the South for 
heating, and that will be almost $1,400 per family for that 
source of fuel.
    It turns out that electricity in the--which is mainly 
favored by the--in the southern states of this--for heating, 
will actually have the smallest increase in price to the 
consumer this particular winter.
    Senator Smith. Obviously, natural gas has to be delivered 
through pipelines, unless it's LNG. Are there areas of the 
country that don't have the pipeline infrastructure and have 
inadequate infrastructure, in terms of pipelines? And, if so, 
what are those regions? And are their prices substantially 
higher?
    Mr. Caruso. Well, the infrastructure issue, including 
natural gas pipelines, is clearly what is an important part of 
why we have such a very tight natural gas supply/demand picture 
in this country. In the Rocky Mountain area, where we expect 
substantial increases in unconventional gas, there is a need 
for continuing to build new pipelines to deliver that gas to 
consumers, particularly in the West Coast. There's clearly the 
need for the Alaska natural gas pipeline system that Senator 
Stevens mentioned. So we have built a lot of new natural gas 
pipelines in the last decade or so, but the need is to build 
even more. And in New England is the one area--another area 
where there was a substantial build in the last decade or so, 
but remains relatively limited in its access to natural gas 
because of its long distance from the main producing areas of 
Texas, Louisiana, Oklahoma, and the Gulf of Mexico.
    Senator Smith. Guy, one of the things I have observed--and 
this'll be my last question; I'll turn it over to Senator 
Lautenberg for his questions--but one of the things I've 
observed during the last energy crunch for electricity is that 
lots of gas--natural gas generators were put in. I've got about 
three of them I can think of within 50 miles of my home in 
Oregon. What's that done to prices of natural gas? And, you 
know, frankly, it just strikes me as a very inefficient way to 
create electricity through natural gas, as opposed to heating 
homes directly with natural gas. But it has to have had a 
tremendous impact, in terms of driving these prices up. Is that 
your understanding?
    Mr. Caruso. Well, it's certainly the area within the 
natural gas demand structure that has grown the fastest in the 
last 10 years. Most of the new electric power generation has 
been combined-cycle gas turbines, and that has been a major 
factor in the increase in demand. And, to that extent, of 
course, that has put upward pressure on prices. And it has been 
pure economics. These combined-cycle gas turbines have been--
capital cost has been--the lowest per-kilowatt-hour generated 
has been relatively quick to build, and they've been relatively 
small in size, so that the risk to the utility was so--it was a 
natural and, I think, the correct business decision----
    Senator Smith. But maybe not any longer, if the price of 
natural gas keeps going up.
    Mr. Caruso. Well, that was when price of the gas was two 
dollars, or even lower.
    Senator Smith. What is the percentage of natural gas going 
to electrical generation?
    Mr. Caruso. If you include cogeneration, it's in the low 
20s. It's about 21 or 22 percent. But I'll certainly get the--
--
    Senator Smith. But it's the biggest increase----
    Mr. Caruso. Oh, by far, yes.
    Senator Smith.--in the use of natural gas.
    Mr. Caruso. In the last decade or so, more than 95 percent 
of new electric generation has been natural gas fired.
    Senator Smith. Thank you.
    Senator Lautenberg?
    Senator Lautenberg. Thanks, Mr. Chairman.
    Mr. Caruso, one of the things in--I'm going to ask a couple 
of fairly elementary questions just so that I'm sure about my 
familiarity with natural gas and LNG and--propane is derived 
from where?
    Mr. Caruso. Propane can be either a derivative from natural 
gas or from petroleum at the refinery. There's two ways of 
producing propane, and so it can come from either one.
    Senator Lautenberg. So there--is there a cost of processing 
that adds to the cost of propane that makes it higher? And the 
appeal for propane, I guess, is that it can be relatively 
easily put into containers and shipped that way.
    Mr. Caruso. It's most useful for those areas that aren't 
served by pipeline--as the Chairman mentioned, for rural areas 
and those where the final--the distribution of natural gas has 
not reached the local community. So propane is often used in 
those areas.
    Senator Lautenberg. Is propane a more volatile substance 
than natural gas?
    Mr. Caruso. Um----
    Senator Lautenberg. In terms of flammability or----
    Mr. Caruso. I don't think it's any more--you know, if it's 
handled properly, I think it is--it's not any more or less.
    Senator Lautenberg. No. The----
    Mr. Caruso. It's under pressure, so, therefore, to that 
extent, it might be a little bit more----
    Senator Lautenberg. Because I know there are restrictions 
in a lot of communities where propane gas tanks can be put, 
whether or not they have to be subsurface, or shouldn't be. I'm 
not really sure about it. I just know that I had to pay for it. 
So----
    [Laughter.]
    Senator Lautenberg. And is natural gas--they use the term--
I hear ``stored.'' ``Stored'' means in its natural environment? 
Just leave it in the ground? Is that----
    Mr. Caruso. Yes.
    Senator Lautenberg.--is that the best way to----
    Mr. Caruso. Storage is a critically important component in 
the natural gas peak heating season, because production is 
pretty flat, year--month to month in the U.S. We don't see a 
great deal of variation from month to month. So during the 
summer months, what the industry does is re-injects natural gas 
into salt domes and other natural cavities that are placed 
strategically around the United States--there are around at 
least 400 of these sites--that we monitor on a weekly basis. 
And during the winter, it's pulled out of those storage and put 
into distribution pipelines to reach the final consumer. In 
fact, in the typical winter season, we will consume, say, 70 
bcf per day, billion cubic feet per day, of which about 20 of 
that would come from storage. So it's critically important.
    Senator Lautenberg. Storage, though, is a process; it's not 
just lying in the ground waiting to be brought out. There has 
to be a system for storage. Do they build tanks for storing 
natural gas, or is the volume so great that to be efficient 
that it just wouldn't pay to do anything like that?
    Mr. Caruso. That would be--that is among the more--the most 
costly. And although there are some at local utilities, that's 
a much smaller component. Most of it is--there's large storage 
in salt domes and other natural cavities underground.
    Senator Lautenberg. Does Department of Energy get a lot of 
environmental concerns expressed about LNG, in terms of any 
potential environmental damage? And if you get those kinds of 
concerns, how do you deal with them? How do you address those 
concerns?
    Mr. Caruso. Well, the Federal Energy Regulatory Commission 
is the body within the government that regulates, of course, 
the interstate commerce, so they're very much involved in the 
issues with respect to safety and the movement of LNG, as well 
as the Coast Guard for safety. And DOE, in its Office of Fossil 
Energy, also has participated in studies with respect to the 
safety of LNG. And EIA, my organization, has not been directly 
involved, but I know that the Office of Fossil Energy has 
recently been involved in studies of the safety of LNG and----
    Senator Lautenberg. Well, there are two issues. One is 
safety. And New Jersey had a very bad experience with 
explosions in the natural gas pipeline in fairly densely 
populated areas. And, as a result of that, it's very hard to 
plan pipeline service around, because people are afraid to have 
these pipes too near their homes. And I think there are fairly 
fundamental protections that could be installed--sectioning off 
power--pressure measurements and things of that nature. So the 
safety factor, why they can't easily convince people to have 
pipes running under the schoolhouse or under their own home. 
But what are the environmental concerns that are expressed that 
you deal with?
    Mr. Caruso. Well, EIA, of course, is--being a statistical 
agency, we don't----
    Senator Lautenberg. Right.
    Mr. Caruso.--get directly involved----
    Senator Lautenberg. But you get----
    Mr. Caruso.--but certainly we----
    Senator Lautenberg.--you get the current concerns expressed 
through you.
    Mr. Caruso. I think in terms of environmental issues, you 
know, natural gas, because of its cleaner burning qualities 
with lesser emissions of CO2 than, let's say, other 
fuels--coal or oil--one of the reasons that there has been such 
a rush to use more gas, particularly in electric power 
generation, has been that it is among the fossil fuels 
considered the more environmentally friendly. So, to that 
extent, natural gas actually is--there are concerns, of 
course--use of the fossil fuels, more generally; but natural 
gas, among the fuels, has been, as I say, one we receive less 
concern about.
    Senator Lautenberg. Are you familiar with what--the 
problems that arise from trying to develop the transportation 
system--the ships, et cetera, that--to carry LNG and what 
conditions that imposes on the waterways or ports, et cetera?
    Mr. Caruso. Not in a specific sense, but, clearly, this 
whole issue of the energy infrastructure of this country 
requires--and I think it has been addressed in the discussions 
on the conference energy bill--that there is the need to have 
enhanced infrastructure from--not only from the tankers, but 
the port facilities, as well as the pipelines that you 
mentioned earlier. So I'm aware that there will be a need to 
build a substantial number of new facilities to handle the LNG, 
and, of course, the tankers, to bring it in, but I think the 
industry, best of my knowledge, is prepared to do that, and in 
a way that's--I think would satisfy the demands in the--that we 
project.
    Senator Lautenberg. Now, the LNG, the rush to increase the 
number of LNG ports suggests that we are prepared to be further 
dependent--and I don't know that that's such a bad thing with 
such a precious commodity--on foreign imports, because it just 
makes the supply that's available, that's further away, able to 
reach our shores. So we have to look fairly closely at that.
    You know, Mr. Chairman, very quickly, and I'll close, 
before I was in the Senate, I've always been interested in the 
environment, as I know our Chairman is, and when I heard that 
there was consideration of a trans-Canada pipeline, trans-
Alaska, et cetera, being put in place, I thought, ``Wow, that's 
really a threat to the environment.'' And then we turned to the 
ships, and Valdez, Exxon Valdez, et cetera, appeared, and you 
say, ``Well, you won't get that out of a pipeline.'' So I think 
we have to get as much as we can, safely and quickly, available 
through our own sources and through a system of piping that can 
help us deliver that--the material.
    Thank you, Mr. Caruso.
    Mr. Caruso. Thank you.
    Senator Lautenberg. Thanks, Mr. Chairman.
    Senator Smith. Thank you very much, Senator. And thank you, 
Mr. Caruso.
    We may have a few other questions we'll submit in writing.
    Senator Smith. But, in the interest of time, because I know 
there are a series of votes scheduled shortly, probably no 
later than 4 o'clock, I want to hear from our second panel.
    So we'll call up Mr. Paul Wilkinson, Vice President, Policy 
Analysis of the American Gas Association; Mr. Gary Huss, 
President, National Association of Manufacturers; and Ms. 
Wenonah Hauter, Director, Critical Mass Energy and 
Environmental Program, Public Citizen.
    Gary Huss, I understand you may have a plane to catch or a 
time limitation. Shall we take you first?
    Mr. Huss. Whichever your preference. It doesn't matter.
    Senator Smith. Why don't we start with you, just in case 
you might? So we appreciate your traveling here and being part 
of this.

STATEMENT OF GARY D. HUSS, PRESIDENT, HUDAPACK METAL TREATING, 
                INC. ON BEHALF OF THE NATIONAL 
                  ASSOCIATION OF MANUFACTURERS

    Mr. Huss. Thank you, I appreciate it.
    Chairman Smith and Mr. Lautenberg, I am Gary Huss, 
President of Hudapack Metal Treating in Elkhorn, Wisconsin. 
It's a great honor, as a member of the National Association of 
Manufacturers, to have an opportunity to address you regarding 
our concerns about the huge impact of energy costs, especially 
natural gas, on our company in the manufacturing industry.
    At the outset, Mr. Chairman, I would like to thank you for 
your solid voting record in supporting manufacturing in 
America. This morning, the NAM released its voting record for 
the 108th Congress, and we greatly appreciate your voting to 
support our 23 key manufacturing votes on an 87 percent basis.
    Senator Lautenberg, on behalf of the NAM we look forward to 
working with you more so in the coming year. Thank you.
    Hudapack Metal Treating has been heat treating steel and 
stainless steel parts for almost 20 years. Heat treating is a 
process where heat, requiring considerable use of natural gas, 
is applied to steel parts and then fast-cooled to 
metallurgically change the structure of the parts. Without heat 
treating, steel is relatively soft and pliable, and does not 
last in its ultimate use.
    We operate two plants in Wisconsin and one in Illinois, and 
provide our 160 employees with relatively high-paying jobs with 
good health, life, short-term, disability, and retirement 
plans. Maintaining these levels of benefits and employment has 
been very difficult since the natural gas prices skyrocketed 
upward in 2000.
    As is the case with all energy-intensive manufacturers, 
during the past 4 years Hudapack Metal Treating has been faced 
with major cost increases that threaten our survival as a 
company. In fact, the results of a poll taken in last week's 
meeting of the Board of the National Association of 
Manufacturers revealed that 93 percent of the Directors from 
small and medium manufacturing companies believe that higher 
energy prices are having a negative impact on their bottom 
lines.
    At Hudapack, we have struggled with increases in group 
insurance, workers comp insurance; but these increases pale by 
comparison to our cost of natural gas. We have experienced 
substantial runups in natural gas prices up at City Gate since 
2000. Natural-gas prices are now averaging 75 percent higher 
than the 2002 price. For the first time in our history, the gas 
prices are higher this summer than last winter. I respectfully 
recommend that a study be undertaken to determine the extent to 
which pure speculation and market manipulation created this 
summer's price runup.
    These escalating natural gas prices have become a real 
negative impact on my company. Although the economy has 
improved greatly and we are currently producing and shipping at 
a record pace, our pre-tax profit will be a very modest 2 to 3 
percent of sales this year, compared with 15 percent we should 
achieve with the sales level we're at now.
    As an employer, one of the biggest kicks I get out of being 
an employer, I enjoy issuing bonus checks. In 2000, we 
disbursed an average bonus check of a thousand dollars per 
employee. Since then, we haven't been able to pass out any 
bonus checks.
    Senator Smith. Are you saying, Gary, that 13 percent of 
your profit is lost that you could attribute directly to the 
price of natural gas?
    Mr. Huss. Very easily.
    Senator Smith. Interesting.
    Mr. Huss. We have also been limited in the cost increases 
we can charge our customers, because they have access to 
imported parts which may already be heat treated and compete 
with the ones that we produce. When our customers buy less-
expensive imported parts, we not only lose the business, but so 
do the fabricator or the metal forger who sent the parts to us 
for the heat-treating process. In other words, natural gas 
prices not only affect the jobs in the heat-treating industry, 
but the high prices are also ``outforcing'' jobs in the 
businesses above me in the supply chain.
    Since there is no real substitute for natural gas in most 
our processes, we are fully engaged in energy efficiency 
recuperation. It costs between $75,000 and $100,000 per 
furnace, depending on size, to accomplish this improvement. I 
have 10 to 15 furnaces that require this upgrade. With lower 
profits due to high gas costs, I can only do one or two of them 
per year.
    Last year, last December, the NAM released a study which 
concluded that overall domestic manufacturers face at least a 
22 percent price disadvantage as compared with our foreign 
competitors because we in this country face higher energy 
costs, higher healthcare and pension costs, a more punitive 
corporate tax structure, and a more costly regulatory burden, 
especially environmental, and a wildly out of control legal 
system. The cumulative effect of these factors and Congress' 
unwillingness to address them is ``outsourcing'' manufacturing 
jobs to foreign workers.
    With respect to our disadvantage in high energy cost, 
Congress must face up to its responsibility to facilitate 
increases in natural gas supply. Congress needs to allow 
drilling in new fields. We need to get the gas where it is and 
facilitate the construction of the Alaska Pipeline. Congress 
also needs to help with the siting and permitting of new 
liquified natural gas facilities.
    In summary, Congress needs to pass comprehensive energy 
legislation that will increase the supply in affordable--will 
increase the supply of affordable energy, facilitate 
improvement to the natural gas and electricity infrastructure, 
and provide incentives for additional energy efficiency 
investments. Please do so, because I would like to continue 
providing value to my customers and a quality of life to my 
workers here in the United States.
    Thank you.
    [The prepared statement of Mr. Huss follows:]

Prepared Statement of Gary D. Huss, President, Hudapack Metal Treating, 
      Inc. on behalf of the National Association of Manufacturers

    Chairman Smith and members of the Committee, I am Gary Huss, 
President of the Hudapack Metal Treating company in Elkhorn, Wisconsin. 
It is a great honor, as a member of the National Association of 
Manufacturers, to have the opportunity to address you regarding our 
concerns about the huge impact of energy costs, especially natural gas 
on our company and the manufacturing industry. The National Association 
of Manufacturers is the Nation's largest industrial trade association, 
representing small and large manufacturers in every industrial sector 
and in all 50 states.
    Hudapack Metal Treating has been treating steel and stainless steel 
parts for almost 20 years. Metal treating is a process where heat, 
requiring considerable use of natural gas, is applied to 
metallurgically change the structure of the metal parts, thereby giving 
them strength and wear resistance. Without heat treating, metal is 
relatively soft and pliable. Using the spring as an example: the steel 
needs to be soft to be formed into the shape of the spring. The heat 
treat process, which in this case is called ``austemper,'' gives the 
material the strength and resiliency to be a ``spring.''
    We operate two plants in Wisconsin and one in Illinois and provide 
our 160 employees with relatively high paying jobs, good health, life, 
short-term disability and retirement plans. However, maintaining these 
levels of benefits and employment has been very difficult since natural 
gas prices skyrocketed upward in 2000!
    As is the case with all energy intensive manufacturers during the 
past four years, Hudapack Metal Treating has been faced with major cost 
increases that threaten our survival as a company. High energy cost 
increases have historically driven the economy into recession, by 
reducing orders for capital equipment, and lowering consumer 
confidence. I must give the Federal Reserve Board and the President's 
three tax relief bills over the past three years credit for keeping the 
economy afloat in the face of unprecedented natural gas and oil costs.
    In addition, credit must be given to the continuous improvements in 
energy efficiency in the manufacturing sector in particular, which has 
led the country to be 46 percent more efficient in energy use per unit 
of GDP versus 30 years ago. Despite these general improvements, high 
energy prices are still devastating to manufactures. In fact, the 
results of a poll taken at last week's meeting of the board of the 
National Association of Manufacturers, revealed that 93 percent of the 
directors from small and medium manufacturing companies believe that 
higher energy prices are having a negative impact on their bottom 
lines.
    At Hudapack Metal Treating, we have struggled with increases in 
group insurance and workers comp insurance, but these increases pale by 
comparison to our cost increases for natural gas. We experienced a 
substantial run up in natural gas prices at the Northern Illinois City 
Gate during 2000 and 2001, and while prices did moderate in 2002, they 
were still 40 percent above 1999 levels. However, during the past two 
years, natural gas prices have skyrocketed, and have been averaging 
about 75 percent higher than the 2002 price.
    More specifically, during the four winters ending with the winter 
of 1999/2000, natural gas prices at the Northern Illinois City Gate 
averaged $2.65 cents per thousand Btu's. However, the average of the 
past two winters' prices has been $5.55 cents per thousand Btu's, more 
than doubling of the late 1990s price. Worse, for the first time in our 
history, the prices were higher for this summers' gas at the city gate 
than the preceding winter's prices. This summer, natural gas averaged 
$5.94 per thousand Btu's or about 150 percent more than the average 
summer prices for the four years ending in the summer of 1999. In fact, 
this summer's prices have jumped 82 percent just since 2002. This is 
despite about a 10 percent reduction in natural gas use in the 
electricity sector this summer compared to 2002.
    In my view, this summer's natural gas prices may well have been 
exacerbated by large investors, such as hedge funds and commodity-
trading advisers, as suggested in an article on oil trading in The Wall 
Street Journal on September 2 of this year. I respectfully recommend 
that a study be undertaken to determine the extent to which pure 
speculation and market manipulation created this summer's price run-up. 
However, even if commodity market activities were a substantial 
influence on prices this summer, the core problem remains the same 
because tight gas markets invite investor influence on prices. The 
nation needs adequate natural gas supplies to reduce both price spikes 
and volatility.
    These escalating natural gas prices are having a real negative 
impact on my company. Although we at Hudapack Metal Treating are 
currently producing and shipping at a record pace, our pre-tax profit 
will only be very modest at approximately 2-3 percent of sales, 
compared with the 15 percent we should achieve at these sales levels. 
As an employer, I enjoyed issuing extra bonus checks. In 2000, we 
disbursed over $50,000 in bonuses. Since then, we have been unable to 
do any bonuses.
    Although we are now passing a portion of our increased gas costs 
through, we are limited in the cost increases we can charge our 
customers. Our customers have access to imported metal products and 
parts that are already heat-treated and compete with the ones we 
produce. When our customers buy the less-expensive imported parts, not 
only do we lose business, but so do the part fabricator and the metal 
forger who sent their metal to us to heat-treat.
    In other words, high natural gas prices not only affect the jobs in 
the heat-treating industry, but the high prices also are ``outforcing'' 
jobs in the businesses above me in the supply chain. Still worse, the 
more our foreign competitors take advantage of their lower cost 
structure, the more experience they will develop in matching our 
quality and our supply chain efficiency. Thus, just as foreign 
competition with low natural gas prices hurts jobs in my industry and 
those companies above me in the supply chain, so do imports put 
increasing pressure on my domestic customers as foreign competitors 
increase the complexity and the value-added of the products they sell 
to the U.S. market.
    In the face of these higher natural gas costs, Hudapack Metal 
Treating has been trying to maintain its profitability and keep all of 
our workers fully employed. Since natural gas is critical to our whole 
business, and since there are no real substitutes for natural gas in 
most of our treating, we are fully engaged in energy efficiency 
measures. We have undertaken the task of adding recuperation of all of 
our burners for the furnaces. It costs between $75,000 and $100,000 per 
furnace, depending on size, to accomplish this upgrade. I have about 
10-15 furnaces in two plants that need this upgrade. With lower profits 
due to the high gas costs, I can only do one or two upgrades per year. 
I would add that making these energy efficiency investments would be 
less difficult if there were more favorable corporate taxation and 
capital cost recovery rules.
    Last December, the National Association of Manufacturers and the 
Manufacturing Alliance released a study entitled ``How Structural Costs 
Imposed on Manufacturers Harm Workers and Threaten Competitiveness,'' 
which concluded that overall, domestic manufacturers face at least a 22 
percent price disadvantage as compared with our major foreign 
competitors. This is because, compared to our trading partners, we have 
higher energy prices, higher health care and pension costs, a more 
punitive corporate tax structure, a more costly regulatory burden--
especially environmental--and a wildly out-of-control legal system. In 
the past, U.S. manufacturing has been able to compete with imports made 
by low-wage competitors because of our extraordinary productivity. 
However, the cumulative effect of these other factors--and Congress' 
unwillingness to address them--is ``outforcing'' manufacturing jobs to 
foreign workers.
    The U.S. manufacturing sector lost almost 3 million jobs during the 
period when natural gas prices started increasing in 2000, until we 
started adding jobs in the spring of this year. If Congress does not 
aggressively address these factors of energy costs, health care and 
pension costs, punitive taxes, regulatory burden and scandalous 
product-liability judgments, then it is pretty clear that most of these 
3 million jobs lost over the past four years will not be coming back to 
the United States. For my company and others in the metal-treating 
industry, the recent run-up in natural gas prices has had a more acute 
impact than these other factors, but the natural gas cost increases 
have been piled onto the other structural cost disadvantages and caused 
some in my industry to close their doors.
    The persistent high prices during this past summer, when natural 
gas prices are usually lower, underscore a number of changes that have 
occurred in the natural gas supply/demand balance. First, during the 
1990s, natural gas became the overwhelming choice for new electric 
generation. Second, the natural gas domestic supply ``bubble'' shrank 
and disappeared during the 1990s, and Canadian imports grew every year 
to pick up the gap between domestic demand and supply. However, in 
2003, Canadian gas imports began to drop. Despite active drilling in 
some areas of the United States, domestic production has been at its 
best level. Meanwhile, the industrial economy has been recovering. 
Consequently, there has not been enough gas to meet demand at 
reasonable prices.
    In addition to creating a more favorable climate for energy 
efficiency investments for manufactures--such as my own investments in 
recuperation--Congress must face up to its responsibility to facilitate 
increases in natural gas supply. The very modest production response to 
the past four years of high natural gas prices is a clear indication 
that just drilling more holes in the same old fields is not a 
sustainable solution. Congress needs to allow drilling in new fields, 
especially in the Rocky Mountains and offshore. If more gas were 
available in Texas or Oklahoma, we would be getting it with these high 
prices. We need to get the gas where it is.
    In addition, Congress needs to help with the siting and permitting 
of new liquefied natural gas facilities, which are a vital component of 
any natural gas supply strategy. Congress should also pass legislation 
that will facilitate the construction of the Alaska Gas Pipeline. Many 
of the predictions of environmental disasters from an Alaskan pipeline 
have proven to be false; and with state-of-the-art materials and 
technology, construction of a new natural gas pipeline will be safer 
and cleaner. It is the responsibility of Congress to protect our jobs, 
our economy and our Nation by ensuring that these initiatives are put 
on a fast track, without fear of lengthy litigation.
    Unfortunately, none of the energy bills that have passed either 
body during the past two congresses have done enough to increase 
natural gas supplies. Nevertheless, Congress can help by recognizing 
that we need more of every type of energy supply including, coal, 
nuclear and affordable renewables.
    Electric generators must be able to increase their use of other 
sources if natural gas is to be affordable for manufactures and 
homeowners. And affordable electricity is the key, because overall, 
manufacturers use more electricity than any other energy input. Clean 
coal technology has become better, nuclear technology has become safer. 
Still, Congress must avoid command and control approaches to limit 
carbon dioxide emissions, to force use of expensive renewables and to 
impose draconian mercury reductions, any one of which would drive 
electricity prices through the roof and compound manufacturing's 
structural cost disadvantage.
    I applaud the majorities of both houses for supporting H.R. 6, the 
Energy Policy Act. Most Members of Congress have it right--we need 
improvements in every energy area. Congress needs to pass comprehensive 
energy legislation that will increase the supply of affordable energy, 
facilitate improvements to the natural gas and electricity 
infrastructure, and provide incentives for additional energy efficiency 
investments. Please do this as a first order of business next congress, 
because I want to continue providing value to my customers and quality 
lives for my workers, here in the United States of America. Thank you.

    Senator Smith. Thank you, Mr. Huss. That was a very real-
life testimony you gave as to what this natural gas cost spike 
is doing to your company, the jobs you provide, and we're very 
sensitive--we want to move sensitive to that.
    Mr. Huss. Thank you.
    Senator Smith. Ms. Wenonah Hauter--am I pronouncing that 
right?
    Ms. Hauter. Yes.
    Senator Smith. Very good. We'll hear from you next.

            STATEMENT OF WENONAH HAUTER, DIRECTOR, 
                PUBLIC CITIZEN'S ENERGY PROGRAM

    Ms. Hauter. OK. Mr. Chairman, Senator Lautenberg, I 
appreciate the opportunity to testify.
    I am Wenonah Hauter, and I'm Director of Public Citizen's 
Energy Program. Public Citizen is a 30 year old consumer 
advocacy organization with 160,000 members nationwide.
    I'm going to spend my time discussing market manipulation 
and speculation that has led to rising gas prices. Beginning in 
2000, natural gas companies exploited energy deregulation to 
engage in one of the largest consumer ripoffs in history. 
Despite moderately rising demand, which grew only 4.2 percent 
from 1999 to 2000, natural gas prices increased 245 percent 
from 1999 to 2001. This increase was not justified by the 
underlying market conditions of adequate supply matching 
moderately growing demand.
    During the past 2 years, Federal agencies and the State of 
California have authorized $2 billion in fines, penalties, 
refunds, and other enforcement actions against the natural gas 
companies for manipulating domestic natural gas markets. These 
fines represent only a fraction, though, of the total amount 
that consumers have been price-gouged. For example, California, 
alone, estimates that it is owed $9 billion for energy market 
overcharging. This has occurred because of inadequate 
regulation of the industry which engages in two types of abuse. 
The first is manipulation of energy trading markets where 
prices are set. And the second manipulation is of storage data 
which influences prices.
    I want to look at five areas that we believe need to be 
reformed.
    The first is the regulation of over-the-counter markets. 
The Commodities Futures Trading Commission is directly 
responsible for regulating commodities trade on futures 
exchanges such as the New York Mercantile Exchange, or NYMEX. 
But it also has the power to intervene against under-regulated 
over-the-counter markets. The Commodities Futures Trading 
Commission should use its authority and be given additional 
regulatory power to require transparency. Natural-gas futures 
trading only began in November 1989. And since that time, the 
market has been plagued with volatility. Contracts representing 
billions of Btu's of natural gas are traded every day. But, 
increasingly, a large share of this trading has been moved off 
the regulated exchanges, like NYMEX, and onto unregulated over-
the-counter exchanges. The Bank of International Settlements 
estimates that in 2003 the global over-the-counter market has 
grown to $2 trillion, 150 percent increase since 1998. Traders 
operating on exchanges like NYMEX are required to disclose 
details of their trades to Federal regulators, but traders in 
over-the-counter exchanges are not required to disclose such 
information, allowing energy companies, investment banks, and 
hedge funds to escape Federal oversight and more easily engage 
in manipulation strategies.
    Energy trading on these over-the-counter exchanges was 
greatly expanded at the beginning of 1993, when the CFTC 
granted an exemption requested by Enron and eight other 
companies for energy contracts that included natural gas from 
exchange-trading requirements and anti-fraud provisions of the 
Commodity Exchange Act. By doing so, the CFTC voluntarily 
limited its ability to police energy trading markets. The 
growth of these over-the-counter exchanges exploded in 2000, 
when Congress passed the Commodity Futures Modernization Act, 
which, among other things, largely exempted trading of energy 
commodities on these over-the-counter exchanges from any 
Federal Government oversight. As a result, many investment 
banks and energy companies opened their electronic exchanges, 
where the bulk of their activities were unregulated. Since the 
law took effect, the industry has been plagued by dozens of 
high-profile scandals attributed to the lack of the adequate 
regulatory oversight over traders' operations.
    We've identified over 200 hedge funds with significant 
positions in natural gas trading markets. Given the sheer size 
of these funds and the investment banks that run them, they 
need to be regulated so that we have more transparency over 
their actions. The government needs to be able to track 
shenanigans going on by having access to information. Companies 
engaging in futures trading should be required to report the 
details of their contracts, the prices, and who they are 
dealing with.
    The second area that needs to be reformed is the NYMEX 
natural gas trading price limits. Trading exchanges can impose 
a price limit on dialing trading as a way to protect consumers. 
For example, with the ``mad cow'' scare, the Chicago Mercantile 
Exchange imposed a price limit on cattle of three cents per 
pound so that if the price fluctuates more than that amount, 
trading in cattle is stopped until the next day. That's about 
.4 percent of the current trading price of cattle. This is a 
very low threshold that protects against volatility. The same 
type of suspension is used in other commodity trading, such as 
milk and lumber.
    But NYMEX has very weak price limits. If the price changes 
three dollars per Btu during a daily session, trading is 
suspended for just 5 minutes. This three dollar limit is 
roughly half the current price of natural gas, as compared to 
the much smaller range used in other commodities. We believe 
NYMEX needs to set stricter price limits.
    The third area that needs to be addressed is the area 
regulated by the Energy--or by the Federal Energy Regulatory 
Commission, FERC, which is in charge of regulating pipeline 
activities, storage, LNG facility construction, and natural gas 
transportation issues, among others. FERC has a legal mandate 
to ensure that electricity prices under its jurisdiction are 
just and reasonable. And the same should be true for natural 
gas.
    The Ninth Circuit Court of Appeals recently ruled that FERC 
has broader power than it currently exercises to force energy 
companies to provide refunds to consumers. The ability of FERC 
to order such refunds, however, is contingent upon the 
existence of the just and reasonable standard enshrined in the 
Federal Power Act. We need a similar standard for natural gas.
    The fourth area that needs to be regulated are natural gas 
storage requirements. Lack of regulation in energy trading 
markets allows market gaming to set natural gas prices. It 
allows published natural gas storage levels to influence the 
price. If natural gas levels are high, the market will 
typically lower the price of natural gas. This correlation has 
resulted in the natural gas industry keeping less product in 
storage.
    Although at this time we do have adequate storage, it is 
important to note that the correlation between storage levels 
and price is weaker today than it used to be historically, and 
that's because the industry is relying on futures trading more 
than storage as a hedging tool. Nevertheless, to be prudent, we 
need a federally controlled and regulated natural gas storage 
system to make sure that demand can be met at a reasonable 
price.
    Last, I will mention the need to improve local control over 
the siting of liquified natural gas import facilities. FERC has 
recently denied states the right to adequately regulate LNG 
import facilities which are already built or are proposed. 
Considering the threat from terrorism, security concerns for 
LNG tankers and marine terminals are justified because of the 
sheer magnitude of the fuel involved. Legislation has already 
been introduced in the House on this issue, and we believe this 
type of legislation is necessary to clarify FERC's jurisdiction 
over the facilities.
    Rather than increasing our dependence on foreign sources of 
energy, we need to do everything we can to reduce projected 
natural gas demand through improvements in energy efficiency 
and encouragement of alternative energy.
    In conclusion, Congress can restore accountability to 
natural gas markets and protect consumers by regulating over-
the-counter natural gas trading exchanges, ordering trading 
exchanges to reform natural gas trading price limits, 
establishing a just and reasonable standard for natural gas, 
mandating natural gas storage requirements, and improving local 
control over LNG siting.
    [The prepared statement of Ms. Hauter follows:]

            Prepared Statement of Wenonah Hauter, Director, 
                    Public Citizen's Energy Program

Consumer Concerns with Natural Gas and LNG
    Thank you, Mr. Chairman and members of the Senate Subcommittee on 
Energy Policy, Natural Resources and Regulatory Affairs for the 
opportunity to testify on the issue of natural gas markets. My name is 
Wenonah Hauter and I am Director of Public Citizen's Energy Program. 
Public Citizen is a 30 year old public interest organization with over 
160,000 members nationwide. We represent consumer interests through 
research, public education and grassroots organizing.
    I last testified before the Senate Commerce Committee in April 
2002, when I documented how Enron exploited deregulation to manipulate 
West Coast energy markets.
    Since I gave that testimony, Federal and state governments have 
authorized over $4.1 billion in fines, penalties, refunds and other 
enforcement actions against natural gas companies for manipulating 
domestic natural gas markets--an amount far less than the amount by 
which natural gas companies are alleged to have manipulated prices. 
Anti-competitive actions by the handful of natural gas companies--made 
possible by inadequate regulation over the industry--are a determining 
factor in the 155 percent increase in natural gas prices for consumers 
since 1999.
    In the wake of Enron's collapse, Congress recognized that 
strengthening regulations over corporations was necessary to protect 
consumers and investors. In the summer of 2002, Congress wisely passed 
the Sarbanes-Oxley Act, imposing regulations on the accounting industry 
and the auditing process for corporations. The majority of recent 
corporate accounting scandals have been concentrated in the energy 
industry. But the Sarbanes-Oxley Act addresses what is arguably the 
``secondary'' problem: natural gas and power companies primarily 
engaged in accounting fraud as a means to hide the enormous revenues 
they were earning from price-gouging consumers. Congress has thus far 
ignored the glaring need for a Sarbanes-Oxley-type reform of energy 
regulations.
    The two main types of abuse by natural gas companies are 
manipulation of energy trading markets (where prices are set) and 
storage data (which influence prices). Congress can restore 
accountability to natural gas markets and protect consumers by 
supporting Public Citizen's 5-point reform plan:

   Re-regulate natural gas trading exchanges to restore 
        transparency.

   Order trading exchanges to reform natural gas trading price 
        limits.

   Establish a ``just and reasonable'' standard for natural 
        gas.

   Mandate natural gas storage requirements.

   Improve local control over LNG siting.

Restore Transparency of Natural Gas Trading Exchanges
    Beginning in 2000, natural gas companies exploited energy industry 
deregulation to engage in one of the largest consumer rip-offs in 
history. Despite only moderately rising demand (which grew only 4.2 
percent from 1999 to 2000), natural gas prices increased 245 percent 
from January 1999 to January 2001. This increase was not justified by 
the underlying market conditions: adequate supply matching moderately 
growing demand. This market manipulation trend may be continuing since 
Congress and the two Federal regulatory commissions with jurisdiction 
have not reformed the rules that allowed the manipulation to occur.
    Over the last two years, two Federal agencies (the Commodity 
Futures Trading Commission and the Federal Energy Regulatory 
Commission) have obtained $4.1 billion in settlements against natural 
gas companies for market manipulation. These fines cover manipulation 
of energy trading markets, but only represent a fraction of the total 
amount by which consumers have been price-gouged. For example, 
California alone estimates that it is owed $9 billion for energy market 
overcharging. This wide discrepancy between what consumers are owed and 
what the government has forced natural gas companies to pay exists 
because the Federal government, through legislative and regulatory 
action, has severely limited its ability to effectively oversee the 
industry.
    Both the CFTC and FERC have been negligent in policing these 
markets effectively. The CFTC is directly responsible for regulating 
commodities trade on futures exchanges (such as the New York Mercantile 
Exchange), but also has the power under the Commodity Exchange Act to 
intervene against traders in the under-regulated over-the-counter (OTC) 
markets. FERC is responsible for most non-exchange natural gas market 
issues.
    Natural gas futures trading only began in November 1989, and it is 
clear that the significant problems that continue to plague these 
trading markets do not warrant the weak Federal oversight. Contracts 
representing billions of BTUs of natural gas are traded every day on 
NYMEX. An increasing share of this trading, however, has been moving 
off regulated exchanges like NYMEX and into unregulated OTC exchanges. 
The Bank of International Settlements estimates that in 2003, the 
global OTC market has grown to over $2 trillion, a 150 percent increase 
from 1998.
    Traders operating on exchanges like NYMEX are required to disclose 
details of their trades to Federal regulators. But traders in OTC 
exchanges are not required to disclose such information, allowing 
energy companies, investment banks and hedge funds to escape Federal 
oversight and more easily engage in manipulation strategies. The need 
for stronger consumer protections is more urgent as powerful new 
players--led by hedge funds and investment banks--now dominate natural 
gas trading.
    Energy trading on these OTC exchanges was greatly expanded at the 
beginning of 1993 when the CFTC, under the chairmanship of Dr. Wendy 
Gramm, granted an exemption requested by Enron and eight other 
companies for energy contracts (including natural gas) from exchange-
trading requirements and anti-fraud provisions of the Commodity 
Exchange Act. By doing so, the CFTC voluntarily limited its ability to 
police energy trading markets.
    The growth of these OTC exchanges exploded in 2000 when Congress 
passed the Commodity Futures Modernization Act which, among other 
things, largely exempted trading of energy commodities on OTC exchanges 
from Federal government oversight. As a result, many investment banks 
and energy companies opened their own electronic exchanges where the 
bulk of their activities were unregulated. Since the law took effect, 
the industry has been plagued by dozens of high-profile scandals 
attributed to the lack of adequate regulatory oversight over trader's 
operations.
    Public Citizen has supported efforts to re-regulate energy trading 
by subjecting OTC markets to tougher oversight and enhanced consumer 
protections. But the latest such effort, an amendment to the energy 
bill, was rejected by the Senate by a vote of 55-44 in June 2003 
(Amendment 876 to S.14). The amendment would largely repeal the 1993 
CFTC and 2000 Congressional deregulation acts.
    The measure was defeated after a public spat between Warren 
Buffett, chairman of Berkshire Hathaway, and Federal Reserve chairman 
Alan Greenspan, over the danger posed by under-regulation of 
derivatives. Buffett called the underreguated derivatives markets 
``weapons of mass destruction'' in March 2003, and Greenspan took the 
unusual step of publicly disputing Buffett's assertions.
    As if deregulation by the CFTC and Congress were not bad enough, 
the CFTC has experienced a troublesome streak of ``revolving door'' 
appointments and hiring which may further hamper the ability of the 
agency to effectively regulate the energy trading industry. In August 
2004, CFTC chairman James Newsome left the Commission to accept a $1 
million yearly salary as president of NYMEX, the world's largest energy 
futures marketplace. Just weeks later, Scott Parsons, the CFTC's chief 
operating officer, resigned to become executive vice-president for 
government affairs at the Managed Funds Association, a hedge-fund 
industry group that figures prominently in energy derivatives markets. 
Such prominent defections may hamper the CFTC's ability to protect 
consumers.
    It is prudent to enhance regulatory oversight over natural gas 
trading markets considering the new breed of trader that is beginning 
to dominate these markets. Public Citizen research has identified more 
than 200 hedge funds that have developed significant positions in 
natural gas trading markets. In addition, investment banks--led by 
Goldman Sachs and Morgan Stanley--have already firmly established 
themselves as dominant players in natural gas trading. Given the sheer 
size and political muscle behind these hedge funds and investment 
banks, greater transparency over their actions is needed now more than 
ever.

Reform NYMEX Natural Gas Trading Price Limits
    Trading exchanges can impose price limits on daily trading as a way 
to protect consumers. For example, in response to the Mad Cow scare, 
the Chicago Mercantile Exchange (CME) imposed a price limit on cattle 
of 3 cents per pound--so if the price fluctuates more than that amount, 
trading on cattle is stopped until the next day. The 3 cents limit is 
about 0.4 percent of the current trading price of live cattle--a very 
low threshold that protects consumers and producers from volatility. 
Even commodities unafflicted with Mad Cow-like ``scares'' have strict 
price limits. Trading in milk futures contracts is suspended until the 
following day if the price changes more than 75 cents (about 5 percent 
of the current price). Trading in lumber futures is halted for the day 
if the price swings more than $10.00 per thousand board feet (3 percent 
of the current price). These severe price limits help control 
volatility and reduce damaging speculation. The CME implemented these 
strict price limits typically at the request of producers, since many 
of the price swings were hurting their bottom line.
    But NYMEX has weak price limits on natural gas trading. If the 
price changes by $3/Btu during a daily session, then trading is 
suspended for only 5 minutes. This $3 limit is roughly half the current 
price of natural gas (compared to the much smaller range of 0.4 percent 
to 5 percent listed in the above agricultural commodities). This means 
that NYMEX tolerates more volatility in natural gas trading markets, 
making it a more attractive market for speculators to profit at the 
expense of consumers. But, unlike agricultural products with tough 
price limits, the natural gas producers and speculators are making 
billions of dollars off these volatile natural gas markets.
    Public Citizen urges the Senate Commerce Committee to pass a law 
forcing NYMEX to set stricter price limits for natural gas in order to 
better protect consumers.

Establish a ``Just and Reasonable'' Standard for Natural Gas
    While the CFTC regulates the natural gas futures markets, the 
Federal Energy Regulatory Commission is in charge of regulating other 
aspects of natural gas markets. While FERC has a legal mandate to 
ensure that electricity prices under its jurisdiction are ``just and 
reasonable,'' it has no such ``fair price'' standard for natural gas. 
As natural gas continues to have a bigger impact on the U.S. economy--
not to mention setting the de facto price of electricity due to its use 
as fuel for power--Public Citizen strongly urges the Senate Commerce 
Committee to support legislation that would establish a ``just and 
reasonable'' standard for all natural gas production.
    The 9th Circuit Court of Appeals recently ruled that FERC had 
broader power than it currently exercises to force energy companies to 
provide refunds to consumers for overcharging. The ability of FERC to 
order such refunds, however, is contingent upon the existence of the 
``just and reasonable'' standard enshrined in the Federal Power Act. 
Without such a standard for natural gas, consumers are left 
unprotected.

Mandate Natural Gas Storage Requirements
    While under-regulation of energy trading markets allows market 
gaming to set natural gas prices, published natural gas storage levels 
influence the price. If natural gas storage levels are at historically 
high levels, the market typically will lower the price of natural gas, 
since more natural gas is available to release in response to demand 
fluctuations.
    For years there has been a strong correlation between the amount of 
working gas in storage and the wellhead price of natural gas. But in 
recent years, the natural gas industry has kept less product in 
storage, which in turn has sent strong signals to markets to help drive 
the price of natural gas higher. Acknowledging that there may be flaws 
in allowing natural gas companies to set storage levels by themselves, 
Public Citizen recommends the creation of a ``Strategic Natural Gas 
Reserve,'' perhaps modeled on the Strategic Petroleum Reserve. A 
federally-controlled and regulated natural gas storage system would 
help ensure that natural gas storage levels are adequate to meet 
demand.
    It is important to note that in recent years, the correlation 
between storage levels and prices has become less strong. This trend 
may be attributable to an over-reliance of natural gas users on futures 
trading, rather than physical storage, as a hedging tool. In addition, 
the less-transparent natural gas trading markets since 2000 may also be 
contributing to this deviation from standard correlations, as market 
manipulation--rather than true supply and demand--sets prices.

Improve Local Control Over LNG Siting
    Last year, Federal Reserve chairman Alan Greenspan called on the 
U.S. to quickly approve a ``major'' increase in Liquefied Natural Gas 
(LNG) import facilities, claiming that domestic supply and demand 
trends require increases in natural gas importation.
    Such an analysis, however, ignores the benefits of reducing 
projected natural gas demand through improvements in energy efficiency 
and the encouragement of alternative energy.
    The Department of Energy projects that natural gas demand will grow 
at a rate of 1.4 percent a year from now through 2025, with domestic 
production growing at a rate of 1.0 percent a year. But the DOE 
projections assume little to no improvements in natural gas consumption 
efficiency, and only limited development of alternative electricity 
generation during that time. If America's energy policies are 
prioritized to reduce demand and increase renewable fuels, the need to 
import LNG will greatly diminish.
    Indeed, one of the biggest debates in energy policy is reducing 
America's dependence on foreign sources of energy. But importing LNG 
will make us more dependent on such imports, particularly from volatile 
regions of the world.
    In 2003, we obtained 98 percent of our natural gas needs from 
domestic production and pipeline shipments from Canada and Mexico (83 
percent of our natural gas needs are derived from domestic production). 
The reminder come from LNG imports, with 23 percent of those imports 
coming from OPEC nations (Algeria, Qatar and Nigeria). Increasing 
reliance on LNG will result in the U.S. becoming more dependent on 
OPEC.
    Nonetheless, even assuming the need for an expansion of LNG 
facilities, the Senate Commerce Committee should make sure that such an 
expansion contains new protections for states to have adequate 
jurisdiction over safety, environmental and consumer protections. Given 
the concerns raised by state officials and at least 20 U.S. Senators 
regarding improper FERC assertion of jurisdiction over traditional 
state domains on electricity markets, it would seem that Congressional 
action asserting the rights of states on LNG siting may be required.
    In March 2004, FERC denied California (and other states) the right 
to adequately regulate LNG import facilities located or proposed in the 
state. In July, the California Public Utilities Commission voted to 
appeal FERC's ruling. Public Citizen feels FERC has overstepped its 
authority under the Natural Gas Act. This is probably why a bill has 
been introduced in the U.S. House of Representatives (HR 4413) that 
would clarify FERC's exclusive jurisdiction over such LNG facilities. 
If FERC were on stronger ground, such proposed legislation would be 
unnecessary.
    Finally, FERC has not provided adequate guarantees regarding the 
security concerns of LNG import facilities. LNG tankers and LNG marine 
terminals pose significant terrorist targets due to the sheer magnitude 
of the amount of fuel carried by LNG tankers (they carry up to ten 
times the amount of fuel in a typical crude oil ship) and the risk of 
fires and subsequent thermal radiation associated with the heating of 
the LNG at the marine terminals. States have already raised serious 
questions about the adequacy of FERC's security assessments. This is 
particularly important given assertions by the United State's former 
deputy counterterrorism czar that Al Qaeda operatives trained in 
Afghanistan came to the U.S. smuggled aboard LNG tankers from Algeria 
and considered Boston a ``logistical hub'' for the terror network's 
activities in the U.S. prior to the September 11 attacks. This, and the 
fact that Al Qaeda has already demonstrated the capacity to strike at 
sea, with the boat bombing of the USS Cole in 2000 and the oil tanker 
Limburg in 2002.




    Senator Smith. Thank you very much.
    Mr. Wilkinson?

         STATEMENT OF PAUL WILKINSON, VICE PRESIDENT, 
           POLICY ANALYSIS, AMERICAN GAS ASSOCIATION

    Mr. Wilkinson. Good afternoon. I am Paul Wilkinson, Vice 
President of Policy Analysis at the American Gas Association.
    Natural gas is a safe, reliable, clean energy source, and 
it remains the most economical form of residential home 
heating. AGA members want what our customers want: adequate 
supplies at reasonable prices.
    Gas utilities do not profit from higher gas prices. They 
offer a delivery service, like UPS or FedEx. Higher prices only 
serve to reduce the demand for their service and also to 
increase their uncollectible accounts.
    In terms of our outlook for the impending winter, we feel a 
bit better about the supply situation this year, but only 
marginally so. Well completions were up 23 percent in the first 
8 months of this year, but production remains flat. The volume 
of gas in storage, which accounts for about 15 to 20 percent of 
our winter-season supply, is very strong. As of September 24, 
storage fields were already 90 percent full. We expect an 
increase in LNG imports this year of about 20 percent over 
2003, but LNG still only provides 3 percent of our total 
supply.
    The supply situation in Canada, from where we get about 13 
percent of our gas, is similar to that in the U.S. Drilling 
activity is strong, although production is relatively flat, and 
storage levels are well ahead of normal. Our imports of gas 
from Canada were down 2.6 percent for the first 6 months of 
2004, but we expect them to be up slightly this winter, 
relative to last.
    When you add all of these factors together, we think the 
gas supply situation is improving, but very slowly. In most of 
the 1980s and 1990s, we were in a situation of surplus 
deliverability; however, demand continues to increase more 
rapidly than supply, and there was no longer that flexibility 
in the market. Unfortunately, gas demand has the ability to 
move dramatically and quickly on the basis of weather and 
economic conditions. Because demand can change more rapidly 
than supply in the short run, we have seen a higher level of 
price volatility since 2000.
    The early winter of 2000/2001 was the coldest on record, 
and gas prices spiked to over $10 per million Btu. But the 
2000/2001 winter was not an anomaly. We have now seen 
significant price spikes in three of the past four winters.
    In addition to this volatility, price levels have been 
significantly higher than they were historically. For example, 
well-head gas prices have been in the five to six dollar range 
for most of this year, in contrast to the two dollar 
equilibrium of the 1980s and 1990s. We believe prices will 
remain higher and more volatile until there is significant 
action on the supply side to improve the overall supply/demand 
balance.
    Efforts to improve our gas supply must begin with a focus 
on production in the lower 48 states. Lower 48 production 
provides 84 percent of our gas today, and it will provide the 
lion's share of our gas for years to come. Unfortunately, lower 
48 production continues to struggle. Many traditional producing 
areas are on the decline, and a migration to new areas is 
essential. Since gas demand is likely to increase by 40 percent 
by 2020, it is most disturbing that gas exploration and 
production is prohibited off the East Coast, off the West Coast 
of the U.S., in the eastern Gulf of Mexico, and throughout much 
of the inter-mountain West. We cannot continue to drill the 
same areas over and over again and expect increasing returns. 
Gas production technology and practices have changed 
dramatically over time, and gas production can be compatible 
with environmental protection.
    Going beyond the lower 48, it is imperative that the vast 
resources of Alaskan gas, estimated at 250 trillion cubic feet, 
be made available to the market. Unfortunately, the magnitude 
and financial risk of the pipeline required has delayed it for 
many years. We strongly believe that Federal action to reduce 
the financial risk of this project is in the public interest.
    Looking beyond our national borders, increased LNG imports 
are critical to the well-being of the gas industry and to gas 
customers. LNG is a proven, safe, and reliable form of gas 
supply, and it gives us access to 93 percent of the world's gas 
reserves that lie outside of North America. LNG can now be 
landed in the U.S. at a price well below current market levels, 
but no new receiving terminals have been built in the U.S. for 
many years. Thirty or forty new terminals have been discussed, 
a number have fallen to NIMBY concerns, a few are moving 
through the regulatory process, but no ground has yet been 
broken for a new terminal. It is likely that a true easing of 
tight market conditions will not be accomplished until there 
are new LNG terminals operational.
    I have spoken mostly about the supply side of the equation, 
but energy efficiency certainly has a role to play, as well. 
Our members firmly support and promote energy efficiency. But 
this is not new. Gas customers have become more and more 
efficiency-conscious over time. In fact, the average 
residential gas consumer consumed 22 percent less gas in 2001 
than in 1980. This pattern of declining use per customer, 
attributable primarily to tighter homes and better appliances, 
has been very steady and very significant. It is not, however, 
the entire answer. In addition to their support of energy 
efficiency measures, natural gas utilities attempt to ease the 
burden of volatile prices on their customers through a variety 
of physical and financial mechanisms, such as gas storage, 
hedging, levelized billing, and long-term fixed-price 
contracts. But these measures are, at best, partial solutions. 
True relief will require substantive action on the supply side.
    Finally, in light of our expectation of continued higher 
and more volatile prices, we stress the need for increased 
LIHEAP funding. Only about 15 percent of eligible recipients 
are receiving LIHEAP assistance, and we urge an increase in 
appropriations to $3.4 billion. We know the need for assistance 
is greater than ever, and we must respond to that need.
    The winter heating season starts in less than 4 weeks. Gas 
utilities and their customers have had to deal with a very 
difficult market for 4 years now. We, at AGA, appreciate the 
opportunity to come here once again to stress the vital 
importance of congressional action on a long-term energy plan 
that emphasizes the benefits--to the consumer, the economy, and 
the environment--of increased natural gas supplies.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. Wilkinson follows:]

Prepared Statement of Paul Wilkinson, Vice President, Policy Analysis, 
                        American Gas Association

              Examining Natural Gas Markets--October 2004

Executive Summary
    The American Gas Association represents 192 local energy utility 
companies that deliver natural gas to more than 53 million homes, 
businesses and industries throughout the United States. Natural gas 
meets one-fourth of the United States' energy needs and it is the 
fastest growing major energy source. As a result, adequate supplies of 
competitively priced natural gas are of critical importance to AGA and 
its member companies. Similarly, ample supplies of reasonably priced 
natural gas are of critical importance to the millions of consumers 
that AGA members serve. AGA speaks for those consumers as well as its 
member companies.
    The key points of our testimony can be summarized as follows:

   Natural gas demand has been increasing more rapidly than 
        supply and the resultant tight market has exhibited higher and 
        more volatile gas prices.

   The short-term gas supply situation is better this year than 
        last, but only marginally.

   Without aggressive action by government and private 
        industry, this unstable situation will persist.

   Increasing our national gas supply is necessary for economic 
        growth and consumer well-being, and it can be compatible with 
        environmental protection.

   The Lower-48 has provided about 85 percent of the total U.S. 
        gas supply in recent years. This percentage likely will decline 
        over time, but it will continue to provide the majority of our 
        gas for the foreseeable future. Increasing or even maintaining 
        current Lower-48 production levels without increased access is 
        problematic.

   New sources of gas supply, including Alaska and imported 
        liquefied natural gas (LNG), must account for a larger share of 
        our gas supply portfolio in the future. The longer these 
        sources are delayed, the longer U.S. consumers will face market 
        instability.

   There are market mechanisms, such as hedging and long-term 
        fixed price contracts, that can reduce price volatility to some 
        extent and they should be encouraged. However, these measures 
        do not solve the fundamental market imbalance.

   In light of the expectation of continued difficult market 
        conditions, low-income consumers must be provided greater 
        relief in the form of increased LIHEAP funding. Only 15 percent 
        of eligible recipients currently receive LIHEAP funds, and the 
        appropriation level should be increased to $3.4 billion.

    The natural gas industry is at a critical crossroads. Natural gas 
prices were relatively low and very stable for most of the 1980s and 
1990s. Wholesale natural gas prices during this period tended to 
fluctuate around $2 per million Btus (MMBtu). But the balance between 
supply and demand has been extremely tight since then, and even small 
changes in weather, economic activity or world energy trends have 
resulted in significant wholesale natural gas price fluctuations. 
Market conditions have changed significantly since the winter of 2000-
2001. Today our industry no longer enjoys prodigious supply; rather, it 
treads a supply tightrope, bringing with it unpleasant and undesirable 
economic and political consequences--most importantly high prices and 
higher price volatility. Both consequences strain natural gas 
customers--residential, commercial, industrial and electricity 
generators.
    Since the beginning of 2003, the circumstances in which our 
industry finds itself have become plainly evident through significantly 
higher natural gas prices. Natural gas prices have consistently hovered 
in the range of $5-6 per thousand cubic feet in most wellhead markets. 
In some areas where pipeline transportation constraints exist, prices 
have skyrocketed for short periods of time to $70 per thousand cubic 
feet. Simply put, natural gas prices are high, and the marketplace is 
predicting that they will stay high. At this point there is no debate 
among analysts as to this state of affairs.
    As this committee well knows, energy is the lifeblood of our 
economy. More than 60 million Americans rely upon natural gas to heat 
their homes, and high prices are a serious drain on their pocketbooks. 
High, volatile natural gas prices also put America at a competitive 
disadvantage, cause plant closings, and idle workers. Directly or 
indirectly, natural gas is critical to every American.
    The consensus of forecasters is that natural gas demand will 
increase steadily over the next two decades. This growth will occur 
because natural gas is the most environmentally friendly fossil fuel 
and is an economic, reliable, and homegrown source of energy. It is in 
the national interest that natural gas be available to serve the 
demands of the market. The Federal government must address these issues 
and take prompt and appropriate steps to ensure that the Nation has 
adequate supplies of natural gas at reasonable prices.
    Many of the fields from which natural gas currently is being 
produced are mature. Over the last two decades, technological advances 
have greatly enhanced the ability to find natural gas as well as to 
produce the maximum amount possible from a field. While technology will 
undoubtedly continue to progress, technology alone will not be 
sufficient to maintain or increase our domestic production.
    As Federal Reserve Chairman Alan Greenspan noted before the House 
Energy and Commerce Committee in 2003, today's tight natural gas 
markets have been a long time in coming but there are still numerous 
unexploited sources of gas in the United States. We are not running out 
of natural gas; we are not running out of places to look for natural 
gas; we are running out of places where we are allowed to look for gas. 
The truth we must confront now is that, as a matter of policy, this 
country has chosen not to develop much of its natural gas resource 
base.
    Today and for the coming winter heating season the supply picture 
is improving. Underground storage is strong. Inventories exceed the 
prior 5-year average by more than six percent. On the domestic natural 
gas production front, our current view is that gas production is 
stabilizing given the high levels of drilling experienced in the last 
18-24 months. But the longer-term faces many challenges.
    Without prudent elimination of some current restrictions on U.S. 
natural gas production, producers will struggle to increase, or even 
maintain current production levels in the lower 48 states. This likely 
would expose 63 million homes, businesses, industries and electric-
power generation plants that use natural gas to unnecessary levels of 
price volatility--thus harming the U.S. economy and threatening 
America's standard of living.
    If America's needs for energy are to be met, there is no choice 
other than for exploration and production activity to migrate into new, 
undeveloped areas. There is no question that the Nation's natural gas 
resource base is rich and diverse. It is simply a matter of taking E&P 
activity to the many areas where we know natural gas exists. 
Regrettably, many of these areas--largely on Federal lands--are either 
totally closed to exploration and development or are subject to so many 
restrictions that timely and economic development is not possible. As 
we contemplate taking these steps, it is important that all understand 
that the E&P business is--again as a result of technological 
improvements--enormously more environmentally friendly today than it 
was 25 years ago. In short, restrictions on land access that have been 
in place for many years need to be reevaluated if we are to address the 
Nation's current and future energy needs.
    This year, like last year, the most important next step the entire 
Congress can take to address these pressing issues is to enact a 
comprehensive energy bill with provisions ensuring that lands where 
natural gas is believed to exist are available for environmentally 
sound exploration and development. Additionally, it is appropriate to 
create incentives to seek and produce this natural gas. These steps are 
necessary to help consumers and the economy.

Recommendations
    To promote meeting consumer needs, economic vitality, and sound 
environmental stewardship, the American Gas Association urges Congress 
as follows:

   Current restrictions on access to new sources of natural gas 
        supply must be re-evaluated in light of technological 
        improvements that have made natural gas exploration and 
        production more environmentally sensitive.

   Federal and state officials must take the lead in overcoming 
        the pervasive ``not in my backyard'' attitude toward energy 
        infrastructure development, including gas production.

   Interagency activity directed specifically toward expediting 
        environmental review and permitting of natural gas pipelines 
        and drilling programs is necessary, and agencies must be held 
        responsible for not meeting time stipulations on leases, lease 
        review, and permitting procedures.

   Federal lands must continue to be leased for multi-purpose 
        use, including oil and gas extraction and infrastructure 
        construction.

   Both private and public entities should act to educate the 
        public regarding energy matters, including energy efficiency 
        and conservation. Federal and state agencies, with private 
        sector support and involvement, should strive to educate the 
        public on the relationship between energy, the environment, and 
        the economy. That is, energy growth is necessary to support 
        economic growth, and responsible energy growth is compatible 
        with environmental protection.

   Economic viability must be considered along with 
        environmental and technology standards in an effort to develop 
        a ``least impact'' approach to exploration and development but 
        not a ``zero impact.''

   The geologic conditions for oil and gas discovery exist in 
        the U.S. mid-Atlantic area, the Pacific Offshore area, and the 
        eastern portion of the Gulf of Mexico.

     Although some prospects have been previously tested, 
            new evaluations of Atlantic oil and gas potential should be 
            completed using today's technology--in contrast to that of 
            20 to 30 years ago.

     The Federal Government should facilitate this activity 
            by lifting or modifying the current moratoria regarding 
            drilling and other activities in the Atlantic Offshore, in 
            the Pacific Offshore, and in the Gulf of Mexico to ensure 
            that adequate geological and geophysical evaluations can be 
            made, and that exploratory drilling can proceed.

     The Federal Government must work with the states to 
            assist--not impede--the process of moving natural gas 
            supplies to nearby markets should gas resources be 
            discovered in commercial quantities. Federal agencies and 
            states must work together to ensure the quality of the 
            environment, but they must also ensure that infrastructure 
            (such as landing an offshore pipeline) is permitted and not 
            held up by multi-jurisdictional roadblocks.

   The Federal Government should continue to permit royalty 
        relief where appropriate to change the risk profile for 
        companies trying to manage the technical and regulatory risks 
        of operations in deepwater.

   Tax provisions such as percentage depletion, expensing 
        geological and geophysical costs in the year incurred, Section 
        29 credits, and other credits encourage investment in drilling 
        programs, and such provisions are often necessary, particularly 
        in areas faced with increasing costs due to environmental and 
        other stipulations.

   The Coastal Zone Management Act (CZMA) is being used in ways 
        not originally intended to threaten or thwart offshore natural 
        gas production and the pipeline infrastructure necessary to 
        deliver natural gas to markets. Companies face this impediment 
        even though leases to be developed may be 100 miles offshore. 
        These impediments must be eliminated or at least managed within 
        a context of making safe, secure delivery of natural gas to 
        market a reality.

   The U.S. Government should work closely with Canadian and 
        Mexican officials to address the challenges of supplying North 
        America with competitively priced natural gas in an 
        environmentally sound manner.

   Renewable forms of energy should play a greater role in 
        meeting U.S. energy needs, but government officials and 
        customers must realize that all forms of energy have 
        environmental impacts.

   Construction of an Alaskan natural gas pipeline must begin 
        as quickly as possible.

     Construction of this pipeline is possible with 
            acceptable levels of environmental impact.

     The pipeline project would be the largest private 
            sector investment in history, and it would pose a huge 
            financial risk to project sponsors. Many believe the 
            project may not be undertaken without some form of Federal 
            support.

   The Federal Energy Regulatory Commission (FERC) announced in 
        December of 2002 that it would not require LNG terminals to be 
        ``open access'' (that is, common carriers) at the point where 
        tankers offload LNG. This policy will spur LNG development 
        because it reduces project uncertainty and risk.

     Other Federal and state agencies should review any 
            regulations that impede LNG projects and act similarly to 
            reduce or eliminate these impediments.

     The siting of LNG offloading terminals is generally 
            the most time-consuming roadblock for new LNG projects. 
            Federal agencies should take the lead in demonstrating the 
            need for timely approval of proposed offloading terminals, 
            and state officials must begin to view such projects as a 
            means to satisfy supply and price concerns of residential, 
            commercial and industrial customers.

     Some new LNG facilities should be sited on Federal 
            lands so that permitting processes can be expedited.

   Congress should increase LIHEAP funding. Low-income energy 
        assistance is currently provided to roughly 4 million 
        households, only 15 percent of those eligible. The financial 
        burden on needy families certainly will increase this winter, 
        and LIHEAP appropriations should be increased to $3.4 billion--
        up from $1.9 billion of total assistance in 2004.

   States should be encouraged to authorize local utilities to 
        enter into fixed-price long-term contracts and/or natural gas 
        hedging programs as a means of dampening the impact of natural 
        gas price volatility upon consumers.

Written Statement
    AGA is grateful for the opportunity to share its views on the 
critical importance to the Nation of ensuring ample natural gas 
supplies at competitive prices. Doing so is necessary for the nation--
both to protect consumers and to address the energy and economic 
situations we currently face.
    The American Gas Association represents 192 local energy utility 
companies that deliver natural gas to more than 53 million homes, 
businesses and industries throughout the United States. Natural gas 
meets one-fourth of the United States' energy needs and is the fastest 
growing major energy source.
    AGA members are charged with the responsibility, under local law or 
regulation, of acquiring natural gas for the majority of their 
customers and delivering it in a safe and reliable manner. Having an 
ample supply of natural gas at reasonable prices is a critical issue 
for AGA and its members. AGA members and the natural gas consumers they 
serve share both an interest and a perspective on this subject.
    It is important to understand that the bread-and-butter business of 
AGA members is acquiring and delivering natural gas to residential, 
commercial, and, in some cases, industrial and electric generation 
consumers across America. Our members remain economically viable by 
delivering natural gas to consumers at the lowest reasonable price, 
which we do by operating our systems--over a million miles of 
distribution lines--as efficiently as possible. Exploring for and 
producing natural gas is the business of our energy-industry colleagues 
in oil and gas exploration companies, whether they are super-major, 
major, independent, or ``Mom and Pop'' operators. We do not speak for 
them, but their continued success in providing natural gas to America's 
consumers is of the utmost importance to us as well. AGA and its 
members stand in the shoes of consumers who want reasonable heating 
bills and good jobs.
    AGA has three objectives in this statement: first, to explain 
briefly why natural gas prices have increased over the past several 
years; second, to describe the magnitude of the natural gas supply 
challenge facing this country over the next two decades; and third, to 
recommend a number of steps that Congress can take to help bring 
natural gas prices down in the long term.
    AGA remains encouraged that Congress continues to address this 
critical issue. The House of Representatives and the Senate each passed 
a version of the Energy Policy Act of 2003. The House and Senate bills 
each contained a wide array of provisions designed to bring forth more 
of America's prodigious supply of natural gas to benefit consumers. 
Notwithstanding the inability of both houses to agree upon a 
comprehensive energy bill, AGA remains encouraged that Congress will 
address the issues surrounding the Nation's need for a secure supply of 
ample quantities of natural gas at reasonable prices.
    Adequate natural gas supply is crucial to all of America for a 
number of reasons. It is imperative that the natural gas industry and 
the government work together to take significant action in the very 
near term to assure the continued economic growth, environmental 
protection, and national security of our Nation. The tumultuous events 
in energy markets over the last several years serve to underscore the 
importance of adequate and reliable supplies of reasonably priced 
natural gas to consumers, to the economy, and to national security.
    There has been a crescendo of public policy discussion with regard 
to natural gas supply since the ``Perfect Storm'' winter of 2000-2001, 
when tight supplies of natural gas collided with record-cold weather to 
yield record natural gas home-heating bills. Nevertheless, over the 
course of the last year the volume and the tenor of this discussion 
have increased dramatically. Simply put, this issue continues to become 
more critical with every passing day.
    For the past two years, natural gas has been trading in wellhead 
markets throughout the Nation at prices often floating between $5 and 
$6 per thousand cubic feet. This has not been a ``price spike'' of the 
sort that has occurred in times past, lasting several days or weeks. 
Rather, it has been sustained for nearly two years. Moreover, there is 
no sign that it will abate in the near future. Indeed, quotes for 
futures prices on NYMEX over the next several years have been 
consistent with these levels.
    Over the last year or more, business consumers of natural gas have 
been raising a cry of concern over natural gas prices. This concern has 
touched businesses of all stripes. Since natural gas prices began 
rising in 2000, an estimated 78,000 jobs have been lost in the U.S. 
chemical industry, which is the Nation's largest industrial consumer of 
natural gas, both for generation of electricity at manufacturing plants 
and as a raw material for making medicine, plastics, fertilizer and 
other products used each day. Similarly, fertilizer plants, where 
natural gas can represent 80 percent of the cost structure, have closed 
one facility after another. Glass manufacturers, which also use large 
amounts of natural gas, have reported earnings falling by 50 percent as 
a result of natural gas prices. In our industrial and commercial 
sector, competitiveness in world markets and jobs at home are on the 
line.
    Of course, when families pay hundreds of dollars more to heat their 
homes, they have hundreds of dollars less to spend on other things. 
Many families are forced to make difficult decisions between paying the 
gas bill, buying a new car, or saving for future college educations. 
There are, of course, state and Federal programs such as LIHEAP to 
assist the most needy. But LIHEAP only provides assistance to about 15 
percent of those who are eligible, and it does not provide assistance 
to the average working family. These price increases have affected all 
families--those on fixed incomes, the working poor, lower-income 
groups, those living day to day, and those living comfortably.
    America received its first wake-up call on natural gas supply in 
the winter of 2000-2001 when a confluence of events--a cold winter, a 
hot summer and a surging economy--created the so-called ``perfect 
storm.'' This jump in demand sent natural gas prices soaring. Drilling 
boomed, supply grew (slightly), demand fell, and gas prices retreated--
just what one would expect from a competitive, deregulated natural gas 
market. Falling natural gas prices predictably led to a slowdown in 
drilling. The industry drilled 30 percent fewer gas wells in 2002 than 
in 2001. This downturn in drilling in 2002 set the stage for another 
run-up in prices in the 2002-2004 time frame.
    Today and for the coming winter heating season the supply picture 
is improving. With higher wellhead prices, nearly 20,000 new gas wells 
were drilled in 2003 and will be drilled in 2004. Regarding domestic 
production, AGA's current view is that gas production is stabilizing 
given the high levels of drilling experienced in the last 18-24 months 
and may even increase slightly in 2004 over 2003. Many of the wells 
drilled have been in coal seams, tight sands and shales, adding to the 
contribution of unconventional sources of gas to the supply mix.
    In addition, underground storage injections have been strong. By 
mid-September 2004, storage inventories were the second highest they 
have been in ten years even with the interruption of significant 
hurricane activity in the Gulf of Mexico. National storage volumes 
exceed the prior 5-year average by more than six percent, with the 
Producing Region over 11 percent greater than the five-year average.
    However, the longer-term still faces many challenges. It is harmful 
to individual families and to the entire U.S. economy for natural gas 
price volatility to persist. Unless we make the proper public policy 
choices--and quickly--we will be facing many more difficult years with 
regard to natural gas prices. The natural gas industry is presently at 
a critical crossroads. The question before this body today is: What 
will that crossroads look like? Will it look like a brand new 
interstate highway? Or will it look like a 100-car collision on a Los 
Angeles freeway? It is important to remember that at the heart of this 
intersection are America's consumers.
    For the past five years, natural gas production has operated full-
tilt to meet consumer demand. The ``surplus deliverability '' or ``gas 
bubble'' of the late 1980s and 1990s is simply gone. No longer is 
demand met while unneeded production facilities sit idle. No longer can 
new demand be met by simply opening the valve a few turns. The valves 
have been, and presently are, wide open.
    The supply tightrope has brought with it several inexorable and 
unpleasant consequences--prices in wholesale markets have risen 
dramatically, and that market has become much more volatile. During the 
2000-2001 heating season, for example, gas prices moved from the $2 
level to approximately $10 and back again to nearly $2. Such volatility 
hurts consumers, puts domestic industry at a competitive disadvantage, 
closes plants, and idles workers. The winter of 2000-2001 made it 
abundantly clear to natural gas utilities (and to legislators as well) 
that consumers dislike these price increases and the market volatility 
that has now become an everyday norm. Unless significant actions are 
taken on the supply side, gas markets will remain tumultuous, and 63 
million gas customers will suffer the consequences. Today's recurrent 
$5 price levels appear to represent a regular, level of natural gas 
prices for the foreseeable future, although this prospect can be 
moderated somewhat with aggressive and enlightened public policy.
    Gas utilities have in place a number of programs to insulate 
consumers, to some extent, from the full impact of wholesale price 
volatility. Nevertheless, consumers must ultimately pay the price that 
the market commands. There has been, and will be, considerable economic 
and political pushback from natural gas prices stabilizing at the 
current $5 level. That pushback can be expected to continue as the 
impacts of these price levels trickle through the economy. Energy 
prices are undoubtedly a factor in what some have called a ``jobless'' 
recovery from the last several years of economic malaise.
    Some would suggest that current natural gas conditions are not the 
result of market fundamentals. Continued high and volatile natural gas 
prices have, for example, resulted in charges of market manipulation 
and calls for investigation. While AGA has not performed an independent 
evaluation regarding these assertions, others-including the CFTC, FERC 
and various analysts--have. These evaluations consistently identify 
supply and demand as the explanatory variables regarding natural gas 
prices. Certainly any substantiated market irregularities should be 
dealt with aggressively and with certainty. However, the burden of high 
and unpredictable natural gas prices on consumers will not be eased 
until we as a nation address the supply/demand imbalance in the natural 
gas market. It would be ill advised to embrace the notion that that 
aggressive investigation and law enforcement will remedy the 
underlying, fundamental imbalance in supply and demand.
    The role of supply and demand in natural gas markets has been 
plainly evident over the last two years. Very cold weather in January 
and February of 2003 resulted in gas consumption that was 18 percent 
higher than the previous year. This strong demand resulted in 
aggressive natural gas storage withdrawals, and storage inventories 
were 50 percent below the five-year average at the end of the 2002-2003 
winter. Despite concern that storage could not be refilled to adequate 
levels prior to the 2003-2004 winter, gas utilities injected gas at 
record levels in order to ensure winter reliability. In late December 
2003, storage levels marginally exceeded the five-year average, 
although much of this gas was purchased in periods of high prices and 
the need to refill storage contributed to market tightness. Natural gas 
prices fluctuated around $6 per thousand cubic feet for the first half 
of the year (with a spike over $9 during the February cold snap) 
declining to about $5 late in the year. For most of 2004, wellhead 
acquisition prices have remained above $5 dollars.
    The primary reason for high and volatile natural gas prices is the 
tightness in the marketplace. While law enforcement agencies must 
continue to be alert for manipulative actions, Federal policy changes 
must lead the way in reducing this tightness. Not until we increase 
supply, reduce demand and streamline relevant energy regulations will 
63 million gas consumers see more reasonably priced and more stable 
natural gas prices.
    Moreover, the problem that we face today is not simply one of 
finding means to meet current demands in the market for natural gas. 
Rather, with a growing economy we are in a growing market, and the 
demand for natural gas in the U.S. is expected to increase steadily. 
Growth seems inevitable because natural gas is a clean, economic, and 
domestic source of available energy. It does not face the environmental 
hurdles of coal and nuclear energy, the economic and technological 
drawbacks of most renewable energy forms, or the national security 
problems associated with imported oil.
    The U.S. natural gas market may grow by nearly 2 percent per year 
over the next twenty years. Much of this growth in natural gas demand 
will occur as a result of power generation needs. In fact, the U.S. now 
has two hundred thousand megawatts of new gas-fired power plants on 
line that did not exist in the summer of 1999--the equivalent of 
several scores of Diablo Canyon nuclear power plants.
    If the market was to grow by 2 percent per year, gas supply would 
need to increase, in terms of average daily supply, from about 60 
billion cubic feet per day today to about 95 billion cubic feet per day 
in 2025--a 35 billion-cubic-foot-per-day increase in deliverability. 
(To place this potential increase in perspective, current production 
from the entire Gulf of Mexico is only about 14 billion cubic feet per 
day, and imports from Canada are about 10 billion cubic feet per day.)
    The challenge for both government and industry is quite 
straightforward: to ensure that both the current and future needs for 
natural gas are met at reasonable and economic prices. There is no 
question that facilitating this result is sound public policy. Natural 
gas is abundant domestically and is the environmentally friendly fuel 
of choice. Ensuring adequate natural gas supply will lead to reasonable 
prices for consumers, will dampen the unacceptable volatility of 
wholesale natural gas markets, will help keep the economy growing, and 
will help protect the environment.
    America has a large and diverse natural gas resource; producing it, 
however, can be a challenge. Providing the natural gas that the economy 
requires will necessitate: (1) providing incentives to bring the 
plentiful reserves of North American natural gas to production and, 
hence, to market; (2) making available for exploration and production 
the lands--particularly Federal lands--where natural gas is already 
known to exist so gas can be produced on an economic and timely basis; 
(3) ensuring that the new infrastructure that will be needed to serve 
the market is in place in a timely and economic fashion.
    Natural gas--our cleanest fossil fuel--is found in abundance 
throughout both North America and the world. It currently meets one-
fourth of the United States' energy needs. Unlike oil, about 99 percent 
of the natural gas supplied to U.S. consumers originates in the United 
States or Canada.
    The estimated natural gas resource base in the U.S. has actually 
increased over the last several decades. In fact, we now believe that 
we have more natural gas resources in the U.S. than we estimated twenty 
years ago, notwithstanding the production of approximately 300 trillion 
cubic feet of gas in the interim. This is true, in part, because new 
sources of gas, such as coalbed methane, have become an important part 
of the resource base. Nonetheless, having the natural gas resource is 
not the same as making natural gas available to consumers. That 
requires natural gas production.
    Natural gas production is sustained and grows only by drilling in 
currently productive areas or by exploring in new areas. Over the past 
two decades a number of technological revolutions have swept across the 
industry. We are able today to drill for gas with dramatically greater 
success and with a significantly reduced environmental impact than we 
were able to do twenty years ago. We are also much more efficient in 
producing the maximum amount of natural gas from a given area of land. 
A host of technological advances allows producers to identify and 
extract natural gas deeper, smarter, and more efficiently. For example, 
the drilling success rate for wells deeper than 15,000 feet has 
improved from 53 percent in 1988 to over 82 percent today. In addition, 
gas trapped in coal seams, tight sands, or shale is no longer out of 
reach, and today it provides a major source of supply.
    While further improvements in this regard can be expected, they 
will not be sufficient to meet growing demand unless they are coupled 
with other measures. Regrettably, technology alone cannot indefinitely 
extend the production life of mature producing areas. New areas and 
sources of gas will be necessary.
    Notwithstanding the dramatic impact of innovation upon the natural 
gas business, the inevitable fact today is that we have reached a point 
of rapidly diminishing returns with many existing natural gas fields. 
This is almost entirely a product of the laws of petroleum geology. The 
first ten wells in a field may ultimately produce 60 percent of the gas 
in that field; yet it may take forty more wells to produce the balance. 
In many of the natural gas fields in America today, we are long past 
those first ten wells and are well into those forty wells in the field. 
In other words, the low-hanging fruit have already been picked in the 
orchards that are open for business.
    Drilling activity in the U.S. has moved over time, from onshore 
Kansas, Oklahoma and Arkansas to offshore Texas and Louisiana, and then 
to the Rocky Mountains. Historically, we have been quite dependent on 
fields in the Gulf of Mexico. But recent production declines in the 
shallow waters of the Gulf of Mexico have necessitated migration of 
activity to deeper waters to offset this decline. These newer, more 
expensive, deepwater fields tend to have short lives and significantly 
more rapid rates of decline in production than onshore wells.
    The sobering reality is that America's producers are drilling more 
wells today than they were five years ago. Nevertheless, domestic 
supply is struggling to be sustained. U.S. gas producers are on an 
accelerating treadmill, running harder just trying to stay in place. 
For reasons that are partly due to technology, and partly due to the 
maturing of the accessible natural gas resource base, a typical well 
drilled today will decline at a faster rate than a typical well drilled 
a decade ago. Moreover, because up to half of this country's current 
natural gas supply is coming from wells that have been drilled in the 
past five years, this decline trend is likely to continue.
    Before we can meet growing gas demand, we must first replace the 
perennial decline in production. The U.S. natural gas decline rate will 
be in the range of 26-28 percent this year. In practical terms, if all 
drilling stopped today, in twelve months U.S. natural gas production 
would be 26-28 percent lower than it is today. The accelerating decline 
rate helps explain why U.S. gas deliverability has been stuck in the 
52-54 billion cubic feet per day range for the past eight years, 
notwithstanding an increase in gas-directed drilling.
    In short, America's natural gas fields are mature--in fact many are 
well into their golden years. There is no new technology on the horizon 
that will permit us to pull a rabbit out of a hat in these fields. 
These simple, and incontrovertible, facts explain why we are today 
walking a supply tightrope. High and volatile natural gas prices have 
become the norm and will become increasingly accentuated as the economy 
returns to its full vigor. There is no question that high and volatile 
natural gas prices are putting a brake on the economy, once again 
causing lost output, idle productive capacity, and lost jobs.
    If we are to continue to meet the energy demands of America and its 
citizens and if we are to meet the demands that will they make upon us 
in the next two decades, we must change course. It will not be enough 
to make a slight adjustment or to wait three or four more years to make 
necessary policy changes. Rather, we must change course entirely, and 
we must do it in the very near future. Lead times are long in our 
business, and meeting demand years down the road requires that we begin 
work today.
    We have several reasonable and practical options. It is clear that 
continuing to do what we have been doing is simply not enough. In the 
longer term we have a number of options:
    First, and most importantly, we must work to sustain and increase 
natural gas production by looking to new frontiers within the United 
States. Further growth in production from this resource base is 
jeopardized by limitations currently placed on access to it. For 
example, most of the gas resource base off the East and West Coasts of 
the U.S. and the Eastern Gulf of Mexico is currently closed to any 
exploration and production activity. Moreover, access to large portions 
of the Rocky Mountains is severely restricted. The potential for 
increased production of natural gas is severely constrained so long as 
these restrictions remain in place.
    To be direct, America is not running out of natural gas, and it is 
not running out of places to look for natural gas. America is running 
out of places where we are allowed to look for gas. The truth that must 
be confronted now is that, as a matter of policy, this country has 
chosen not to develop much of its natural gas resource base. We doubt 
that that many of the 63 million American households that depend on 
natural gas for heat are aware that this choice has been made on their 
behalf.
    In this vein, the Rocky Mountain region is expected to be a growing 
supplier of natural gas, but only if access to key prospects is not 
unduly impeded by stipulations and restrictions. Two separate studies 
by the National Petroleum Council and the U.S. Department of the 
Interior reached a similar conclusion--that nearly 40 percent of the 
gas resource base in the Rockies is restricted from development, in 
some cases partially and in some cases totally. On this issue, the 
Department of the Interior noted that there are nearly 1,000 different 
stipulations that can impede resource development on Federal lands.
    One of the most significant new gas discoveries in North America in 
the past ten years is located just north of the US/Canada border in 
eastern Canadian coastal waters on the Scotian shelf. Natural gas 
discoveries have been made at Sable Island and Deep Panuke. Gas 
production from Sable Island already serves Canada's Maritimes 
Provinces and New England through an offshore and land-based pipeline 
system. This has been done with positive economic benefits to the 
region and without environmental degradation. This experience provides 
an important example for the United States, where we believe that the 
offshore Atlantic area has a similar geology.
    In some areas we appear to be marching backward. The buy-back of 
Federal leases where discoveries had already been made in the Destin 
Dome area (offshore Florida) of the eastern Gulf of Mexico was a 
serious step backward in terms of satisfying consumer gas demand. This 
action was contrary to what needs to be done to meet America's energy 
needs. With Destin Dome we did not come full about, as we need to do; 
rather, we ran from the storm.
    Geographic expansion of gas exploration and drilling activity has 
for the entirety of the last century been essential to sustaining 
growth in natural gas production. Future migration, to new frontiers 
and to new fields, in both the U.S. and Canada, will also be critical. 
Without production from geographic areas that are currently subject to 
access restrictions, it is not at all likely that producers will be 
able to continue to provide increased amounts of natural gas from the 
lower-48 states to customers for longer than 10 or 15 years. We believe 
that the same is true in Canada as well.
    Quite simply, we do not believe that there is any way, other than 
exploring for natural gas in new geographic areas, to meet America's 
anticipated demand for natural gas unless we turn increasingly to 
sources located outside North America.
    In the middle of the 20th century, when the postwar economy had 
begun its half-century climb and when natural gas became the fuel of 
choice in America, our colleagues in the producing business opened one 
new natural gas field after another in the mid-continent. In this era, 
it was not that difficult to produce a triple or a home run virtually 
every inning. As those fields developed, producers continued to hit a 
regular pattern of singles and doubles, with the occasional triple or 
home run in new discovery areas. This same pattern in the mid-continent 
was repeated in the Gulf of Mexico. Today, however, it is extremely 
difficult to find the new, open areas where the producing community can 
continue to hit the ball. As things are today, America has confined 
them to a playing field where only bunts are permitted. The Yankees did 
not get to the World Series playing that kind of game.
    AGA does not advance this thesis lightly. Over the past several 
years both the American Gas Association and the American Gas Foundation 
have studied this important issue vigorously. We have believed for 
several years that it is necessary for policy makers to embrace this 
thesis so that natural gas can continue to be--as it has been for 
nearly a century--a safe and reliable form of energy that is America's 
best energy value and its most environmentally benign fossil fuel. We 
think that events in gas market in 2003-2004 underscore that our 
concerns have been on the mark.
    When the first energy shock transpired in the early 1970s, the 
Nation learned, quite painfully, the price of dependence upon foreign 
sources of crude oil. We also learned, through long gasoline lines and 
shuttered factories, that energy is the lifeblood of our economy. 
Nevertheless, thirty years later we are even more dependent upon 
foreign oil than we were in 1970. Regrettably, the Nation has since 
failed to make the policy choices that would have brought us freedom 
from undue dependence on foreign-source energy supplies. We hope that 
the Nation can reflect upon that thirty-year experience and today make 
the correct policy choices with regard to its future natural gas 
supply. We can blame some of the past energy problems on a lack of 
foresight, understanding, and experience. We will not be permitted to 
do so again.
    Meeting our Nation's ever-increasing demand for energy has an 
impact on the environment, regardless of the energy source. The 
challenge, therefore, is to balance these competing policy objectives 
realistically. Even with dramatic improvements in the efficient use of 
energy, U.S. energy demand has increased more than 25 percent since 
1973, and significant continued growth is almost certain. Satisfying 
this energy demand will continue to affect air, land, and water. A 
great American success story is that, with but five percent of the 
world's population, we produce nearly one-third of the planet's 
economic output. Energy is an essential--indeed critical--input for 
that success story both to continue and to grow.
    It is imperative that energy needs be balanced with environmental 
impacts and that this evaluation be complete and up-to-date. There is 
no doubt that growing usage of natural gas harmonizes both objectives. 
Finding and producing natural gas is accomplished today through 
sophisticated technologies and methodologies that are cleaner, more 
efficient, and much more environmentally sound than those used in the 
1970s. It is unfortunate that many restrictions on natural gas 
production have simply not taken account of the important technological 
developments of the preceding thirty years. The result has been 
policies that deter and forestall increased usage of natural gas, which 
is, after all, the Nation's most environmentally benign and cost-
effective energy source.
    Natural gas consumers enjoyed stable prices from the mid-1980s to 
2000, with prices that actually fell when adjusted for inflation. 
Today, however, the balance between supply and demand has become 
extremely tight, creating the tightrope effect. Even small changes in 
weather, economic activity, or world energy trends result in wholesale 
natural gas price fluctuations. We saw this most dramatically in the 
winters of 2000-2001, 2002-2003, and 2003-2004. Most analysts believe 
that we will continue to see it on a longer-term basis.
    In the 1980s and 1990s, when the wholesale (wellhead) price of 
traditional natural gas sources was around $2 per million British 
thermal units, natural gas from deep waters and Alaska, as well as LNG, 
may not have been price competitive. However, most analysts suggest 
that these sources are competitive when gas is in a $3.00 to $4.00 
price environment. Increased volumes of natural gas from a wider mix of 
sources will be vital to meeting consumer demand and to ensuring that 
natural gas remains affordable.
    Increasing natural gas supplies will boost economic development and 
will promote environmental protection, while achieving the critical 
goal of ensuring more stable prices for natural gas customers. Most 
importantly, increasing natural gas supplies will give customers--ours 
and yours--what they seek: reasonable prices, greater price stability, 
and fuel for our vibrant economy. On the other hand, without policy 
changes with regard to natural gas supply, as well as expansion of 
production, pipeline and local delivery infrastructure for natural gas, 
the natural gas industry will have difficulty meeting the anticipated 
40 percent increase in market demand. Price increases, price 
volatility, and a brake on the economy will be inevitable.
    Second, we need to increase our focus on non-traditional sources, 
such as liquefied natural gas (LNG). Reliance upon LNG has been modest 
to date, but it is clear that increases will be necessary to meet 
growing market demand. Today, roughly 97 percent of U.S. gas supply 
comes from traditional land-based and offshore supply areas in North 
America. Despite this fact, during the next two decades, non-
traditional supply sources such as LNG will likely account for a 
significantly larger share of the supply mix. LNG has become 
increasingly economic. It is a commonly used worldwide technology that 
allows natural gas produced in one part of the world to be liquefied 
through a chilling process, transported via tanker, and then re-
gasified and injected into the pipeline system of the receiving 
country. Although LNG currently supplies less than 3 percent of the gas 
consumed in the U.S., it represents 100 percent of the gas consumed in 
Japan.
    LNG has proven to be safe, economical and consistent with 
environmental quality. Due to constraints on other forms of gas supply 
and increasingly favorable LNG economics, LNG is likely to be a more 
significant contributor to U.S. gas markets in the future. It will 
certainly not be as large a contributor as imported oil (nearly 60 
percent of U.S. oil consumption), but it could account for 15-20 
percent of domestic gas consumption 15-20 years from now if pursued 
aggressively and if impediments are reduced.
    It is unlikely that LNG can solve the entirety of our problem. A 
score of new LNG import terminals have been proposed, some with 
capacities in excess of 2.5 billion cubic feet per day. However, given 
the intense ``not on our beach'' opposition to siting new LNG 
terminals, a major supply impact from LNG may be a tall order indeed.
    Third, we must tap the huge potential of Alaska. Alaska is 
estimated to contain more than 250 trillion cubic feet of natural gas--
enough by itself to satisfy U.S. gas demand for more than a decade. 
Authorizations were granted twenty-five years ago to move gas from the 
North Slope to the Lower-48, yet no gas is flowing today nor is any 
transportation system under construction. Indeed, every day the North 
Slope produces approximately 8 billion cubic feet of natural gas that 
is reinjected because it has no way to market. Alaskan gas has the 
potential to be the single largest source of price and price volatility 
relief for U.S. gas consumers. Deliveries from the North Slope would 
not only put downward pressure on gas prices, but they would also spur 
the development of other gas sources in the state as well as in 
northern Canada.
    Fourth, we can look to our neighbors to the north. Canadian gas 
supply has grown dramatically over the last decade in terms of the 
portion of the U.S. market that it has captured. At present, Canada 
supplies approximately 14 percent of the United States' needs. We 
should continue to rely upon Canadian gas, but it may not be realistic 
to expect the U.S. market share for Canadian gas to continue to grow as 
it has in the past or to rely upon Canadian new frontier gas to meet 
the bulk of the increased demand that lies ahead for the United States.
    The pipelines under consideration today from the Prudhoe Bay area 
of Alaska and the Mackenzie Delta area of Canada are at least 5-10 
years from reality. They are certainly facilities that will be 
necessary to broaden our national gas supply portfolio. We must 
recognize, however, that together they might eventually deliver up to 8 
billion cubic feet per day to the lower 48 States-less than 10 percent 
of the natural gas envisioned for the 2025 market.
    There is much talk today of the need for LNG, Alaska gas, and 
Canadian gas. There is no question that we need to pursue those 
supplies to meet both our current and future needs. Nonetheless, it is 
equally clear that, in order to meet the needs of the continental 
United States, we will need to continue to look to the lower 48 States.

    Senator Lautenberg. I have a question. Will the record be 
kept open for questions and----
    Senator Smith. We will keep it open, Senator.
    Senator Lautenberg.--for written questions? I have to go.
    Senator Smith. OK, You've got to go.
    Senator Lautenberg. Yes.
    Senator Smith. OK, you bet.
    Mr. Wilkinson, for the audience and anyone who may be 
interested in this--LNG, liquid natural gas, that is produced 
just by cooling the natural gas to condense it.
    Mr. Wilkinson. That's correct.
    Senator Smith. And it's warmed, and, therefore, turned back 
into a gas when utilized.
    Mr. Wilkinson. That's correct.
    Senator Smith. Where is most of it produced now?
    Mr. Wilkinson. There are natural gas fields all over the 
world. The Mideast and the former Soviet Union are the two 
largest----
    Senator Smith. But the LNG----
    Mr. Wilkinson.--sources in reserve.
    Senator Smith.--condensing factories----
    Mr. Wilkinson. Excuse me?
    Senator Smith. The LNG factories that condense----
    Mr. Wilkinson. The facilities are in the Mid-East, are in 
Trinidad and Tobago. They're in Australia. They're even in 
Norway.
    Senator Smith. And that process and shipment here can be 
done at a price much lower than the current natural gas----
    Mr. Wilkinson. Yes.
    Senator Smith.--that people have utilized through 
pipelines.
    Mr. Wilkinson. Yes. That's a--the price spike that we've 
seen in three of the past 4 years--we've seen a $10 spike, a $9 
spike, and about a seven-fifty spike in 3 of the past 4 years. 
Those were the peaks.
    Senator Smith. Now, the reason why----
    Mr. Wilkinson. Natural gas can be delivered to this 
country, estimated at $3.50 to $4 per million Btu.
    Senator Smith. Now, the reason why we can't get it here, 
literally, is, there's no places to receive it. There are----
    Mr. Wilkinson. That's right.
    Senator Smith.--lots of things on the drawing boards. 
What's the impediment to building the receiving areas? Is it 
regarded as incredibly dangerous or environmentally sensitive 
to the point where people are just opposed?
    Mr. Wilkinson. I think the primary impediment is a lack of 
understanding. People fear what they don't understand. There 
are natural--liquified natural gas has been shipped worldwide 
for half a century. There have been almost no incidents of 
significance in that 50-year timeframe. Japan gets virtually 
100 percent of its natural gas in the form of LNG. There's 
never been a significant action in Japan.
    Senator Smith. Why can't we produce--if it's produced in 
the Middle East, why can't we produce LNG from our natural gas 
here?
    Mr. Wilkinson. LNG is no different than natural gas.
    Senator Smith. Right.
    Mr. Wilkinson. We produce natural gas here. We could 
liquify it, but that wouldn't do us any good.
    Senator Smith. It wouldn't do us any good because we have 
the pipeline----
    Mr. Wilkinson. Because we consume it----
    Senator Smith.--infrastructure.
    Mr. Wilkinson.--here. Well, we need to consume--well, it--
there's an additional cost to LNG. You don't----
    Senator Smith. Right.
    Mr. Wilkinson.--you don't want to liquify it and then 
regasify it, and----
    Senator Smith. Exactly.
    Mr. Wilkinson.--then put it in your pipeline system.
    Senator Smith. Exactly.
    Mr. Wilkinson. That would just be an added cost.
    Senator Smith. But it is interesting that it can be done in 
the Middle East and brought here for less than the cost of 
natural gas in our pipelines.
    Mr. Wilkinson. That's correct.
    Senator Smith. That shows you how bizarre--to Mrs. Hauter's 
point--how high these prices have spiked.
    Mr. Wilkinson. Well, I think it gets more to the point 
that--as I've pointed out, we have huge gas resources in this 
country, but you cannot drill for gas in many of the places 
that we have those resources. We have 250 trillion cubic feet 
in Alaska. We can't do any of that. We can't drill off the East 
or the West Coast. We can't drill in the Gulf of--Eastern Gulf 
of Mexico. We can't drill in much of the Rocky Mountains.
    Senator Smith. Would it make sense to do LNG in Alaska, as 
opposed to----
    Mr. Wilkinson. That has been proposed. In fact, that was 
proposed 30 years ago, when the first pipeline discussions were 
seriously made 30 years ago. It was determined, at that time, 
that the pipeline route was the more economical alternative. 
And I think most people feel that it is more economical to move 
that gas by pipe. It could be done by LNG, by shipping it. You 
could ship it by pipe, parallel to the oil pipeline down to 
Valdez, and then liquify it and send it probably to the West 
Coast of the U.S.
    Senator Smith. There are hundreds of small LNG storage 
facilities in this country that are receiving, but----
    Mr. Wilkinson. That's correct.
    Senator Smith.--storing. And do they have a good safety 
record?
    Mr. Wilkinson. They have an exemplary safety record.
    Senator Smith. Gary, the National Association of 
Manufacturers estimated how many U.S. manufacturing jobs have 
been lost due to high cost of natural gas? Do you have any kind 
of figure like that?
    Mr. Huss. I'm sorry, I don't. I don't have that number.
    Senator Smith. Where are your main foreign competitors 
located in your industry?
    Mr. Huss. It has been the Asian countries. It's--with China 
growing, you know, very much so. In today's markets, many 
manufacturers are going to China, not only to manufacture over 
there on behalf of China, but they're also doing it because of 
the lower cost. They are probably the largest concern of 
manufacturing right now.
    Senator Smith. And how are they getting their natural gas, 
to compete with you?
    Mr. Huss. Many of the furnaces over there run with 
electricity. And then natural gas has--I don't know if they--
and you may be able to answer it better than I--I'm not sure if 
they have the pipeline infrastructure yet which is necessary 
for the natural gas.
    As far as the heating industry, the heat-treating industry, 
it is not growing as greatly over in China as the manufacturing 
itself is. Heat treating is, kind of, a sidelight, like the 
plating industry or something like that, which is not--it's 
necessary, as far as the manufacturing process, but usually 
comes a little bit after-the-fact, after the manufacturers are 
there in the first place.
    Senator Smith. But you--I would assume, as a 
manufacturing--energy costs are probably at least a third of 
your costs. Would that be accurate?
    Mr. Huss. I would say closer to 20 to 25 percent.
    Senator Smith. Twenty to 25 percent. And how does that 
compare with your competitors in China? Do you have a sense of 
that?
    Mr. Huss. No. That, I don't know.
    Senator Smith. Wenonah, I was the lone Republican to join 
with Senator Feinstein in calling for many things you 
identified, in terms of the West Coast energy markets; 
specifically, getting FERC to step up to their authorities that 
I believe are existing. I'm a real free-marketer, but I felt 
like the California energy crisis had nothing to do with the 
free market. It was, at best, a broken market; at worst, a 
rigged market. And I fear more rigged and certainly broken.
    But I wonder, does Public Citizen think that new supplies 
don't need to be developed in the coming decades or are you 
okay with developing more supplies? Because I think that--at 
least my perception was, part of it was a broken regulatory 
system in California, but also was an increasing demand and a 
supply that had been choked off from expanding.
    Ms. Hauter. Well, I think that we believe, before we 
drastically seek new supplies, and so so in very delicate areas 
where there could be lasting environmental damage, that we need 
to explore all of the avenues for being more energy efficient, 
and that we just haven't done what needs to be done to make our 
homes more efficient, our office buildings more efficient; 
simple things like double-pane glasses and--for office 
buildings. And those things need to be approached very 
seriously.
    Of course we will always need to find more supplies. But to 
simply say it's a supply problem, I think, is the easy way out. 
And I know that since the natural gas market has been 
deregulated, we were promised lower prices, fewer problems with 
supply. And, instead, we've seen increasing volatility. And 
when you look at a chart from between 1989 and today, prices 
have just continued to go up. So I think that we need to look 
below the surface at some of the underlying causes.
    Senator Smith. Just for my own recollection, I think the 
numbers I heard you state in your testimony had to do with the 
market that existed from the mid 1990s to the year 2000. But 
the California energy spikes were in 2001, were they not?
    Ms. Hauter. Right. The number that I used, the 245 percent, 
was between 1999 and 2001. If you look between 1999 and today, 
it's 155 percent increase in pricing.
    Senator Smith. OK. Did consumers benefit, Wenonah, from 
your--in your view, from the restructured natural gas market in 
the 1990s, when prices were stable?
    Ms. Hauter. Prices were stable for a while. But with the 
futures trading and the deregulation that occurred in the early 
1990s, I think that the benefits that were gained have been 
lost.
    Senator Smith. Well, we have, clearly, a very real problem 
in our country. I think your testimony really does speak to it. 
On the one hand, we want to grow our economy, we want jobs. And 
those jobs are dependent upon energy first. If you don't have 
energy, you can't increase your employment, can you, Gary?
    Mr. Huss. No, it's very difficult.
    Senator Smith. And you've got to have competitive energy. 
And so if everybody's clammering for jobs, clearly we need to 
do more on both sides of the equation, conservation and 
production. You just have to--you have to produce more. The 
question is whether--Which one comes first? And that is really 
what we're debating, I suppose, in Congress, when we ought to 
have an energy bill this Congress; we don't, because there 
seems to be just a real gridlock of feelings as to which one 
should come first. One side wants all conservation, the other 
side wants all production, or at least a priority for those.
    But that's why we have a democracy. And we've got an 
election coming up, and who knows how it'll turn out. But I 
come down on the side of: We need both, we've got to do both. 
And we can't be shy about it, because if we don't figure out 
how to conserve more, we're going to continue our dependence 
upon foreign sources too much, and that affects our national 
security, not just our energy security. But if we're so 
hamstrung here from utilizing our resources in ways that are 
renewable, sensitive to the environment, then we will forever 
be dependent upon foreign places. And that is bad policy, too.
    So that's the balance we're weighing, and you all have 
helped us understand more what we're facing. I thank you all.
    Do any of you all have a closing comment you would like to 
make?
    [No response.]
    Senator Smith. If not, we're grateful. We got this in 
before the vote started. I was worried about that, but we've 
done it. We thank you for your time, your testimony, and your 
participation.
    We're adjourned.
    [Whereupon, at 3:50 p.m., the hearing was adjourned.]

                                  
