[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




                    NATURAL GAS AND HEATING OIL FOR
                             AMERICAN HOMES

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 2, 2005

                               __________

                           Serial No. 109-58

                               __________

       Printed for the use of the Committee on Energy and Commerce


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

                               __________


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                             WASHINGTON: 2005        

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                    COMMITTEE ON ENERGY AND COMMERCE

                      JOE BARTON, Texas, Chairman

RALPH M. HALL, Texas                 JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida             Ranking Member
  Vice Chairman                      HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 FRANK PALLONE, Jr., New Jersey
ED WHITFIELD, Kentucky               SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia             BART GORDON, Tennessee
BARBARA CUBIN, Wyoming               BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ANNA G. ESHOO, California
HEATHER WILSON, New Mexico           BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING,       ALBERT R. WYNN, Maryland
Mississippi, Vice Chairman           GENE GREEN, Texas
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania        JIM DAVIS, Florida
MARY BONO, California                JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon                  HILDA L. SOLIS, California
LEE TERRY, Nebraska                  CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey            JAY INSLEE, Washington
MIKE ROGERS, Michigan                TAMMY BALDWIN, Wisconsin
C.L. ``BUTCH'' OTTER, Idaho          MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee

                      Bud Albright, Staff Director

        David Cavicke, Deputy Staff Director and General Counsel

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

                                 ______

                 Subcommittee on Energy and Air Quality

                     RALPH M. HALL, Texas, Chairman

MICHAEL BILIRAKIS, Florida           RICK BOUCHER, Virginia
ED WHITFIELD, Kentucky                 (Ranking Member)
CHARLIE NORWOOD, Georgia             MIKE ROSS, Arkansas
JOHN SHIMKUS, Illinois               HENRY A. WAXMAN, California
HEATHER WILSON, New Mexico           EDWARD J. MARKEY, Massachusetts
JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING,       ALBERT R. WYNN, Maryland
Mississippi                          GENE GREEN, Texas
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
GEORGE RADANOVICH, California        LOIS CAPPS, California
MARY BONO, California                MIKE DOYLE, Pennsylvania
GREG WALDEN, Oregon                  TOM ALLEN, Maine
MIKE ROGERS, Michigan                JIM DAVIS, Florida
C.L. ``BUTCH'' OTTER, Idaho          HILDA L. SOLIS, California
JOHN SULLIVAN, Oklahoma              CHARLES A. GONZALEZ, Texas
TIM MURPHY, Pennsylvania             JOHN D. DINGELL, Michigan,
MICHAEL C. BURGESS, Texas              (Ex Officio)
JOE BARTON, Texas,
  (Ex Officio)

                                  (ii)




                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Castelli, Brian, Executive Vice President and COO, Alliance 
      to Save Energy.............................................   133
    Davidson, Charles D., Chairman, President and CEO, Noble 
      Energy, Inc................................................   112
    Ewing, Stephen E., Vice Chairman, DTE Energy, Incoming 
      Chairman, American Gas Association.........................    72
    Horvath, R. Skip, President, Natural Gas Supply Association..   116
    Jeffery, Hon. Reuben, III, Chairman, Commodity Futures 
      Trading Commission.........................................    27
    Kelliher, Hon. Joseph T., Chairman, Federal Energy Regulatory 
      Commission.................................................    21
    Maddox, Mark R., Principal Deputy Assistant Secretary, Office 
      of Fossil Energy, Department of Energy.....................    35
    Manoogian, Mary Ann, Director, New Hampshire Office of Energy 
      and Planning...............................................    77
    Mason, Donald R., Commissioner, Public Utilities Commission 
      of Ohio....................................................    40
    Slaughter, Bob, President, National Petrochemical and 
      Refiners Association.......................................   120
    Stibolt, Robert D., Senior Vice President, Strategy, 
      Portfolio, and Risk Management, Suez Energy North America, 
      Inc........................................................    68
    Tucker, Dorothy Elizabeth....................................    97
    Wright, Phillip D., Senior Vice President, Gas Pipeline, 
      Williams Pipeline Company, on behalf of Interstate Natural 
      Gas Association of America.................................   125

                                 (iii)



 
             NATURAL GAS AND HEATING OIL FOR AMERICAN HOMES

                              ----------                              


                      WEDNESDAY, NOVEMBER 2, 2005

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1 p.m., in 
room 2123 of the Rayburn House Office Building, Hon. John 
Shimkus presiding.
    Members present: Representatives Shimkus, Wilson, Shadegg, 
Radanovich, Rogers, Burgess, Barton (ex officio), Boucher, 
Waxman, Markey, Engel, Wynn, Green, Allen, and Solis.
    Also present: Representative Bass.
    Staff present: Mark Menezes, chief counsel for energy and 
the environment; Maryam Sabbaghian, majority counsel; Elizabeth 
Stack, policy coordinator; Peter Kielty, clerk; Sue Sheridan, 
minority senior counsel; and Bruce Harris, minority 
professional staff.
    Mr. Shimkus. If we can get the doors closed in the back, we 
will get this hearing to begin. Thank you for coming. I am 
sitting in for Chairman Hall, who is going to be returning this 
afternoon, so I am glad to have this opportunity.
    I would like to start with my opening statement. Please let 
me start by submitting a letter regarding our Nation's current 
energy supply situation in the record on behalf on Noble 
Energy.
    Mr. Shimkus. Noble has been very active in Illinois over 
the last several years, accounting for as much as 15 percent of 
the drilling activity in the State over the last 3 years. I 
believe their current production is more than 3,000 barrels per 
day, making them the largest producer in the State of Illinois. 
Much of their production takes place in Wayne, White Clay, 
Richland, and Jasper Counties in my southern Illinois district.
    Many of you who have been here have heard me talk numerous 
times about the diversity of Illinois's energy resources, and 
we forget that we still are an oil-producing region. We have 
all seen the reports with the speculation of significant 
increase in dollars spent by American families this winter for 
natural gas and heating oil. In the Midwest, we are expecting 
to see a 61-percent increase in the costs this winter. One 
statistic recently showed that, overall, 56 percent of American 
families with incomes of $50,000 or less, which totals about 63 
million families, will spend 20 percent of their pretax income 
on energy in 2005. There are ways to bring these burdensome 
consumer costs down by increasing supply and creating more 
competition, we can lower the cost to the American families.
    Congress has recently acted upon legislation that creates 
an atmosphere to make this possible. Specifically, in July of 
this year, we passed the Energy Policy Act of 2005, which 
recognized the need for fuel supply increases to make energy 
more affordable. This country has a 250-year supply of coal 
located in every region of the country, and industrial coal 
gasification technology exists now that would combust coal into 
a gas to produce electricity. The Energy Policy Act gives us an 
opportunity to utilize this technology, which is called 
integrated gasification combined cycle, IGCC, creating an 
alternative to natural gas for electricity production, and 
creating more competition in the gas market to bring the price 
down for consumers.
    The Energy Policy Act also recognizes nuclear power as a 
clean and efficient means of generating electricity. By 
generating, to create an atmosphere where this type of power 
generation looks attractive to investors. Also included in that 
same bill were provisions to help increase our domestic natural 
gas supply by streamlining burdensome permitting and process 
issues, giving regulatory certainty along with tax and royalty 
incentives and greater access and liquefied natural gas.
    These are all logical steps increasing supply and lowering 
costs. In addition to making natural gas pipeline 
infrastructure a safer investment, so that the product can be 
transported in an efficient manner. Just last week, we passed a 
budget reconciliation bill out of this committee that increases 
Low Income Heating Energy Assistance Program, commonly known as 
LIHEAP, by $1 billion, to make sure that the very young and the 
elderly do not go cold this winter.
    Finally, H.R. 3893, the GAS Act, gives us an opportunity to 
expand and build new refineries by implementing several 
incentives to bring outside investors into the crude oil 
refining business, creating more supply and competition to 
bring the price of gas at the pump down. And also, one 
provision of the bill, which I know my colleague is very 
excited about, is coal to liquid definition as a refinery.
    I look forward to hearing from our panelists today to get 
an idea of how and what Congress has done this far, and what we 
can do to make energy costs more affordable, along with what we 
can do in the future. And with that, I will yield to the 
ranking member, my friend Mr. Boucher.
    Mr. Boucher. Well, thank you very much, Mr. Chairman, for 
convening this timely hearing, and thank you also for those 
thoughtful opening remarks. You will find portions of mine to 
be remarkably similar to the themes you have addressed.
    Across our Nation, gasoline prices at the pump have been 
declining from post-hurricane highs, as hurricane-damaged 
production and refining facilities have come back into 
operation. But a major energy concern is on the immediate 
horizon, as cold weather arrives, and as Americans turn on 
their furnaces. Due to the unhealthy reliance by electric 
utilities on natural gas to fuel electricity generation, our 
Nation has become highly vulnerable to any disruption in 
natural gas production or distribution, and the hurricane-
related disruptions will drive natural gas costs for home 
heating to truly stressful levels during the course of this 
winter.
    More than one half of all Americans heat their homes with 
natural gas, and under current estimates, the cost to the 
homeowner who heats with natural gas will, on average, be 48-
percent higher this winter than the winter before. And last 
year's cost to the homeowner was significantly higher than the 
year before that. Those who heat with oil will experience an 
increase of 32 percent this year, while the cost of heating 
with electricity will increase somewhat more modestly.
    Over the longer term, one obvious strategy to address the 
unsustainable price of natural gas is to encourage electric 
utilities to rely more on coal and less on natural gas for 
electricity generation. As the chairman mentioned in his 
remarks, with the advent of technologies such as integrated 
gasification combined cycle, the utility industry is now 
showing renewed interests in coal and new orders are, for the 
first time in a long time, being placed for coal-fired 
facilities.
    EPACT 2005, which this committee originated and which the 
President in August signed into law, contains incentives that 
were originated on the House side to encourage more reliance on 
coal and less reliance on natural gas for electricity 
generation. Those incentives will help, and I think the renewed 
interest we have seen from some electric utilities in employing 
technologies, such as integrated gasification combined cycle, 
have been driven to some extent by the presence of those 
incentives. Going forward, this committee and the Congress in 
general should seize every opportunity to further encourage 
this shift from natural gas to coal on the part of electric 
utilities.
    For home heating oil, the concept of a strategic refinery 
reserve similar to the strategic petroleum reserve, is also an 
appealing long-term strategy. It can easily be established, and 
it would provide the same shock absorber benefits for refined 
products that the strategic petroleum reserve provides so 
effectively with respect to crude oil.
    In the near term, a major new infusion of Federal dollars 
into the Low Income Home Energy Assistance Program is essential 
for all low-income homeowners and renters. People are going to 
be in genuine need this winter. The Congress has an obligation 
to address their plight and fund LIHEAP adequately to assure 
that people are not put to the choice of having heat, of having 
food, or of having medicine.
    I look forward to the comments by our witnesses this 
afternoon on the strategies that I have suggested in these 
remarks, and on other strategies that they may want to suggest, 
whether they are short term, intermediate term, or longer term 
in nature, in order to address the very real problems our 
Nation now confronts with respect to home heating prices.
    Mr. Chairman, I thank you very much, and I look forward to 
the witnesses' testimony.
    Mr. Shimkus. Thank you. Now, the Chair recognizes the 
chairman of the full committee, Chairman Barton, for an opening 
statement.
    Chairman Barton. Thank you, Mr. Chairman.
    I would like to begin today by welcoming our witnesses, 
thanking them for their time today, especially Chairman Joe 
Kelliher, who is the Chairman of the FERC. I have known 
Chairman Kelliher for a number of years, and at one point in 
time, he even had to say yes, sir to me, because he worked for 
me, so I am glad to have him back where he can say now, no, 
sir, go jump in the lake, Mr. Barton. I am glad to have him 
here.
    I also want to welcome Chairman Jeffery from the Commodity 
Futures Trading Commission. We don't often have your agency 
before this committee, and I am glad that you could find time 
to appear today.
    Two weeks ago, we heard from the EIA, the Energy 
Information Administration, about their projections for the 
outlook for winter fuels this coming winter. According to EIA, 
households that rely on natural gas and home heating oil are 
expected to spend approximately $350 per household more this 
winter for heating than they did last winter.
    Today, we are going to look specifically at home heating 
oil and natural gas, to get a better understanding of supply, 
availability, and price. And like we did with gasoline, we have 
invited representatives along the entire natural gas supply 
chain. We are going to hear from Federal and State regulators, 
producers, pipelines, local distribution companies, and of 
course, the consumer. Many of our witnesses are experts in 
their fields. I am anticipating that what they are going to 
tell us is that high prices are driven by a relatively low 
supply and lack of availability. Supply and demand, just as in 
Economics 101.
    It is with great concern that I view the list of energy 
projects that could help on the supply side, and find that they 
have been stalled or killed in the very areas of the country 
where the prices will probably be the highest. In the 
Northeast, for example, 51 percent of our households rely on 
natural gas for their heating, but projects that would have 
provided more natural gas to heat Northeastern homes have been 
stopped cold, no pun intended.
    For example, the Logan Township New Jersey Liquefied 
Natural Gas Terminal would provide warmth to about 5 million 
homes in the Northeast, but it is bogged down in a lawsuit. New 
Jersey actually wants this project, but Delaware doesn't. While 
the terminal would be located in New Jersey, the pier would 
touch the Delaware River, and Delaware won't allow development 
along that river. The Millennium Pipeline project would supply 
much needed natural gas to the people of New York City. The New 
York Algonquin natural gas trading prices are among the highest 
in the country because of supply bottlenecks. The project's 
original application was filed with the FERC in 1997, 8 years 
ago. The project would have been finished and bringing natural 
gas to the city today, but local officials apparently have just 
said no. Back in the 1990's, the pipeline was named Millennium, 
because it was intended to supply natural gas in the next 
century, which is now this century. Maybe it should be called 
Millennium, because that is how long, apparently, it is going 
to take to get it built.
    In the Northeast, 30 percent of the households use heating 
oil as their primary heating fuel. However, 50 percent of the 
Northeast distillates consumption, which is where home heating 
oil comes from, now comes from overseas, from countries like 
Venezuela, and yet, even as we face dramatic price increases at 
the beginning of what appears to be a cold winter, I am not 
aware of any refinery projects, new or expanded, in the 
Northeast. Why is that? You oppose a refinery in your back 
yard, but apparently, it is okay to let America-haters like the 
President of Venezuela gain more control over our supplies.
    Now, I am sure that some are going to be tempted to say 
well, Venezuela only hates our President, not our people. Well, 
I am not so sure about that. Put me down as skeptical. 
Investing faith in a snarling foreign country dictator seems 
unlikely to keep heating oil flowing into the U.S. at prices 
people can afford to pay even in our coldest, bluest States.
    The expected continuing high natural gas prices and home 
heating oil prices will be a hardship this winter for everyone. 
We know that. We know that there are many members on both sides 
of the aisle that want to do as much as we can, and we have a 
low income heating assistance program, called LIHEAP. This 
committee last week increased it by $1 billion, $1 billion real 
dollars that will be available if we get reconciliation done in 
the House and the Senate to help heat homes, not just in the 
Northeast, but all over our country this winter. That is an 
increase of 50 percent. It is not subject to appropriation, and 
it is direct help today.
    LIHEAP, however, is only a caulking for a loose window. If 
we want warmer homes and more affordable heating bills, we need 
more natural gas and more heating oil, which means we need more 
infrastructure and more projects. As the chairman of this 
committee, I stand committed to work with people on both sides 
of the aisle, with the other body, and with the President of 
the United States, and with officials like those that are here 
before us today, to come up with projects that are 
environmentally friendly, economically make sense, and can be 
built in a reasonable amount of time.
    I hope that this hearing today helps us begin that process, 
and that very soon, and again, in a bipartisan, bicameral 
basis, we can begin to move forward, so that we are not just 
talking about Band Aid approaches, we are talking about long 
term solutions that help our country and help our citizens, not 
just in the wintertime, but all the time.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. Joe Barton follows:]
 Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy 
                              and Commerce
    I would like to begin by welcoming our witnesses and thanking them 
for their time today. I would especially like to welcome Chairman Joe 
Kelliher, the Chairman of the Federal Energy Regulatory Commission. I 
have known Chairman Kelliher for many years from his work on this very 
Committee and I hold his views and perspectives in great regard. Joe, 
welcome back to the Energy and Commerce Committee, thank you for being 
here, and good luck with your Chairmanship.
    I would also like to specifically welcome Chairman Reuben Jeffrey 
from the Commodities Futures Trading Commission. I look forward to your 
testimony regarding natural gas and home heating oil futures trading.
    Two weeks ago, we heard from the Energy Information Administration 
regarding their winter fuel outlook. According to their projections, 
households that rely on natural gas and home heating oil are expected 
to spend approximately $350 more this winter in fuel expenditures.
    Today, we look specifically at home heating oil and natural gas to 
get a better understanding of supply availability and price. And like 
we did with gasoline, we have invited representatives along the entire 
natural gas supply chain. We will hear from federal and state 
regulators, producers, pipelines, local distribution companies and the 
ultimate consumers.
    Many of our witnesses are experts in their fields, and I'm 
anticipating that they will tell us that high prices in home heating 
oil and natural gas are driven by the relatively low supply. Supply and 
demand, just like in economics 101. So it's with great concern that I 
review the list of energy projects stalled or killed in the very areas 
of the country where prices will be the highest.
    In the Northeast, 51% of the households rely on natural gas. But 
projects that would have provided more natural gas to heat Northeastern 
homes have been stopped cold. For example:

 The Logan Township, New Jersey LNG terminal would provide warmth to 
        about five million American homes, but it is bogged down in a 
        lawsuit. New Jersey wants the heat, but Delaware doesn't want 
        the project. While the terminal would be located in New Jersey, 
        the pier would touch Delaware River waters and Delaware won't 
        allow development along the river.
 The Millennium Pipeline Project would have supplied much needed 
        natural gas directly to the people of New York City. The New 
        York Algonquin natural gas trading hub prices are among the 
        highest because of supply bottlenecks. The project's original 
        application was filed with the FERC in 1997. That's 8 years 
        ago. This project could have been finished and bringing heat to 
        the city today, but local officials just said, ``No.'' Back in 
        the 1990s, the pipeline was named "Millennium" because it was 
        intended to supply natural gas into the next century, which is 
        now this century. Maybe it should be called ``Millennium'' 
        because that's how long it will take to build it.
    In the Northeast, 30% of households use heating oil as their 
primary heating fuel. However, 50% of the Northeast's distillate 
consumption, which is where home heating oil comes from, now comes from 
other areas of the country or overseas, from countries like Venezuela. 
And yet even as we face dramatic price increases at the beginning of a 
cold winter, I am unaware of any refinery projects, new or expanded, on 
the Northeast's drawing boards. Why is that? You oppose a refinery in 
your backyard, but apparently think it's okay to let America-haters 
like the president of Venezuela gain more control over our supplies.
    Now, I'm sure that some will be tempted to say, ``Well, Venezuela 
only hates our President, not our people. Why, they'll never cut off 
Massachusetts.''
    Put me down as skeptical. Investing faith in a snarling foreign 
country seems unlikely to keep heating oil flowing into U.S. homes at 
prices people can afford, even in the blue states.
    The expected continuing high prices of natural gas and home heating 
oil will be a hardship this winter for everyone we know. I know there 
are many members on the other side of the aisle that will blame this 
hardship on Low Income Energy Assistance Program funding. First of all, 
as a direct help to those with low-incomes, last week this Committee 
increased the Low Income Energy Assistance Program by $1 billion 
dollars. That's an increase of 50%, not subject to appropriations and 
it's direct help today. LIHEAP, however, is only a caulking for a loose 
window. If we want warmer homes and affordable heating bills, we need 
more natural gas and more heating oil.
    I stand committed to more energy at prices working people can 
afford. I stand opposed to those who spend their energies killing the 
very projects that would help their own people. If you want your 
constituents to freeze in the dark, the way to do it is to kill energy 
projects here at home and rely on more heat from President Chavez.

    Mr. Shimkus. The Chair thanks the chairman. And now, I 
recognize my colleague from Massachusetts, Mr. Markey, for 3 
minutes.
    Mr. Markey. Thank you, Mr. Chairman.
    Mr. Chairman, we are holding today's hearings less than a 
week after the full Energy and Commerce Committee voted to 
defeat an amendment sponsored by Representative Rush and Green 
and myself, which would have provided $3 billion for the low-
income, heating-assistance program, which, in addition to the 
$2 billion in funding for the program that is contained in the 
appropriations bills, would have actually funded this heating 
program at the $5.1 billion authorization level that the 
committee voted for in the Energy Policy Act of 2005 that the 
President signed into law in August.
    I believe that the committee's decision to reject 
additional funding for this program was fundamentally wrong. It 
is inconceivable to me that this Congress would give higher 
priority to protecting tax cuts for millionaires than to 
providing consumers with some help in addressing the home 
heating crisis that we will be facing in the Northeast and 
Midwest this winter. And we know that this crisis is coming. 
Just 3 weeks ago, the Department of Energy's Energy Information 
Administration released its short-term energy outlook and 
winter fuels outlook. This report projected that home heating 
oil prices are likely to rise 31 percent this winter compared 
to prices paid last winter. That translates into an additional 
$378 over this coming winter for seniors, for poor people, for 
everyone. In the event of a colder than normal winter, 
consumers could face an even worse situation. Home heating oil 
expenditures could rise $774 this winter, if we have a colder 
than normal winter, which many prognosticators are predicting. 
These expenditures are a lot higher than seniors have been 
forced to pay in past winters.
    But the crisis we are facing goes beyond just the question 
of how to help low income seniors that qualify for Federal 
programs. With price increases on the order of what we are 
going to be seeing, even seniors that consider themselves to be 
comfortably middle class will be facing difficult choices. 
Today, we will be hearing from Dorothy Elizabeth Tucker of 
Medford, Massachusetts, about the pressures she and other 
seniors in Massachusetts are facing this winter, as a result of 
high energy prices. And this is all about choices, moral 
choices: who needs help and who doesn't need help?
    Mrs. Tucker and seniors like her are sitting around the 
kitchen right now trying to make tough decisions about whether 
to pay for more medicine or heat or for groceries. Our 
constituents all across the Northeast and Midwest are being 
squeezed in this way, as Conoco and Exxon Mobil and others 
report astronomical profits, so this is a moral choice. Should 
we, in fact, have tax breaks of $70 billion for mostly the 
millionaires in our country, or should we put more money into 
programs to help the seniors, to help the needy, pay for their 
home heating bills this winter. That is a moral choice, not a 
political choice, a moral choice, and I am afraid that this 
committee and this Republican Congress and this Republican 
President is failing this test.
    I yield back the balance.
    Mr. Shimkus. The gentleman yields back his time. The Chair 
recognizes the gentleman from Michigan, Mr. Rogers.
    Mr. Rogers. Thank you, Mr. Chairman. My friend neglected to 
inform us that we had the single largest increase in LIHEAP 
funding ever, a 50-percent increase over last year's funding. I 
am sure that is in the bottom of your notes there.
    I just wanted to, and I look forward to hear our panelists, 
but welcome Steve Ewing--he is on the second panel--who is not 
only a great leader and CEO and, certainly, someone who cares 
about his community. He is a great corporate citizen. He is 
involved in so many activities in southeast Michigan. Thank you 
for not only being a great leader of a great company, but 
taking of the time that you do to give so much back to our 
local community around Detroit, Michigan. I just wanted to 
thank you for that, and I look forward to hearing the 
statements of the panelists.
    And with that, Mr. Chairman, I will yield.
    Mr. Shimkus. The gentleman yields back. The Chair 
recognizes the gentleman from New York, Mr. Engel, for an 
opening statement.
    Mr. Engel. Thank you, Mr. Chairman, for holding this 
important hearing on natural gas and home heating oil prices. 
As we move toward the fall and winter, I am very concerned 
about the welfare of my constituents back home in New York, and 
of people all over the country.
    Two weeks ago, our subcommittee heard from the Energy 
Information Administration on their short term energy outlook 
and winter fuels outlook. Their findings were grim. Home 
heating oil prices are likely to rise by 31.5 percent this 
winter compared to last winter, and prices for households 
heating their homes with natural gas are expected to rise by 48 
percent. In September, the NYMEX market prices for natural gas 
had moved from an average of 6.81 per decatherm in the winter 
of 2004-2005, to the current price of 14.64 for the period 
between November 2005 and March 2006. It is expected that on 
average, people will pay a minimum of more than $350 each on 
heating costs this winter, money that is needed to be spent on 
food, electricity, gas, prescription drugs, you name it. 
Clearly, tradeoffs will have to be made on these basic 
necessities for living, but they shouldn't have to be.
    I am terribly, like my colleagues, disturbed by the failure 
of the Administration and Republican leadership here in 
Congress to promote policies that will have significant impact 
on stabilizing energy prices, and protect consumers from price 
gouging. Just last week, as Mr. Markey pointed out, in the 
reconciliation bill, an amendment offered by Mr. Rush, Mr. 
Green, and Mr. Markey to increase LIHEAP funding to $5.1 
billion, as authorized under the Energy Policy Act, which 
everyone on this committee initially voted for, was rejected on 
a party line vote, with all Democrats voting for it and all 
Republicans voting against it.
    As you know, most LIHEAP recipients have a family member 
living with them that is elderly, disabled, or a minor child. 
Simply put, in light of the colder than average temperatures 
expected this winter, current funding for the program is simply 
inadequate. The Administration has also declined, so far, to 
make releases from the Northeast Home Heating Oil Reserve, 
which would help address the soaring energy prices of those 
living in the Northeast, despite the sustained high prices 
reaching the trigger margin for using the reserve. I know my 
colleagues and I hope to hear back from them on when such a 
release will be made.
    So not only has the majority rejected granting low income 
constituents necessary help with their heating bills, but they 
won't even offer them comprehensive protection from price 
gouging. The Democratic substitute to the GAS Act had a price 
gouging amendment that authorized the FTC to punish 
unscrupulous companies charging unfair prices for gasoline, 
heating oil, propane, and natural gas. By contrast, the 
majority bill was weaker, in that it failed to offer consumers 
any protections for natural gas and propane gouging.
    In the meantime, the oil companies are making out like 
bandits. Just a few days ago, Exxon Mobil announced that its 
third quarter net income jumped 75 percent to $9.92 billion. 
The Washington Post noted that this set an industry record, and 
that Exxon's sales of $107.2 billion were the highest in any 
quarter, according to Standard & Poor's. So the rich get richer 
and the poor get poorer, and the Administration and the 
Republican majority offers only tax breaks for the wealthy, not 
help for low and middle income people.
    Now, the chairman of the Finance Committee said yesterday 
that oil and gas companies reaping record profits from soaring 
prices--I just need 10 more seconds, Mr. Chairman--should give 
10 percent of those profits to supplement a Federal program to 
help the poor. I agree. While oil executives are jumping for 
joy over their third quarter profits, families across the 
country are worrying about how to make ends meet, and how to 
stay out of the cold. It is just wrong. We have to make 
companies accountable for their profits, and we must help our 
constituents in this very real time of need.
    And I yield back. Thank you.
    Mr. Shimkus. The gentleman's time has expired. The Chair 
recognizes the gentleman from Texas, Mr. Burgess, for an 
opening statement.
    Mr. Burgess. Thank you, Mr. Chairman. I appreciate the 
opportunity to deliver an opening statement, and I thank you 
and Chairman Barton for holding this important hearing today.
    I think this hearing today will do a good job of providing 
a good deal of information about the natural gas and home 
heating oil supply chains. Chairman Barton did something 
similar following Hurricane Katrina and Rita, to break down the 
supply chain for gasoline, and I found it extremely useful.
    As we discussed here last week during our hearing, the EIA 
expects home heating costs to soar next year, and people can 
expect to pay an additional $300 to $400 this winter for 
heating costs. This committee and this Congress have already 
taken steps to help address home heating needs for the future. 
When President Bush signed the Energy Policy Act of 2005 into 
law, it included several important provisions intended to boost 
supply and to hold down costs for consumers. It incentivized 
the domestic production of both ultra-deep wells in the Gulf of 
Mexico and onshore marginal wells. It streamlined permitting 
for natural gas projects on Federal lands, and it clarified the 
Federal Government's role in siting liquefied natural gas 
facilities to reduce red tape.
    The Energy Policy Act also provided loan guarantees for the 
construction of the Alaska Gas Pipeline. In Alaska, the problem 
is not so much of having the gas, but transporting the existing 
gas in an economical way to the lower 48 states. That is why, 
in the Energy Bill, Congress provided loan guarantees for the 
construction of the natural gas pipeline when we passed Energy 
Bill II, just a few weeks ago, we sunsetted some of these 
provisions to spur companies to action. At least one company in 
my area of north Texas was listening, and just last week, the 
Challenger Capital Group in Dallas announced that it will take 
the lead in arranging financing for the Alaska Natural Gas 
Pipeline. The project is expected to cost between $13 billion 
and $20 billion when it is finished in the year 2012, and 
provide a significant amount of natural gas.
    We are in this situation, Mr. Chairman, because some 
members of this panel have consistently opposed measures that 
would increase both the supply of natural gas and oil. I 
frankly do not understand how members can be opposed to 
policies that will bring relief to their constituents from high 
heating costs. In north Texas, we are geologically blessed with 
the Barnett Shale that provides us with natural gas. In fact, 
an article in the Fort Worth Star-Telegram from last Sunday 
says that drilling companies are flooding into the area, 
putting up every rig they can find, because it is now 
economical to break the Barnett Shale and capture its gas.
    We have all the gas we need in Texas. In fact, we export it 
to our friends in the Northeast and the Midwest. North Texas is 
clearly playing its role in providing the country with safe and 
secure domestic energy. It is time for those who would stand in 
the way of increasing the energy supply to realize that it is 
partly their tactics that are causing the high heating costs 
that the EIA is predicting this winter for their constituents.
    I will yield back.
    [The article referred to follows:]

                      Posted on Sun, Oct. 30, 2005

                     Pricey Gas Has A Silver Lining
           By Mitchell Schnurman, Star-Telegram Staff Writer
    It's natural to complain about high energy prices, especially after 
Exxon Mobil posted nearly $10 billion in quarterly profit last week. 
Even the top-ranking Republican senator called for public hearings on 
oil, while others urged a replay of the windfall-profits tax.
    Tarrant County should shudder at the thought. Companies are 
investing billions of dollars here to extract natural gas, and we don't 
need government spoiling the party.
    Many people will say: ``So what? Haven't they made enough 
already?''
    Enough profits maybe, but not enough gas. And isn't that what we 
should focus on--increasing the supply of these limited resources?
    It's hard to imagine energy companies putting more money into 
finding oil and gas if we cut their profit motive.
    The Barnett Shale, the massive natural-gas field surrounding Fort 
Worth, has become an economic juggernaut, in large part because of 
higher gas prices.
    Four years ago, natural gas sold for $2.78 per thousand cubic feet; 
last year, it was $5.45. In October, the average price topped $14.
    Consumers across the country will be shocked by their winter 
heating bills, and there will be an outcry.
    But if we impose extra taxes or price controls, producers might 
never invest in the new technologies that make the Barnett Shale work.
    Companies are flooding into the area, putting up every rig they can 
find, because it's now economical to break the Barnett Shale rock and 
capture its gas.
    ``At $13 [per thousand cubic feet], a lot of things are possible,'' 
oilman Mike Patman told the Star-Telegram's Dan Piller this month.
    Patman has leases on 75,000 acres in the Barnett Shale, and that 
helped him bring energy giant Shell Exploration to the game, as well as 
Boone Pickens. Shell and Pickens are big names, but they're just the 
latest to tap into a gas field that runs under 10 counties, including 
Tarrant.
    How big is the local natural-gas play?
    Ross Perot Jr., whose company is drilling 19 wells in the Barnett 
Shale, says it's the economic equivalent of three or four Dallas/Fort 
Worth Airports.
    About 125 rigs are working there today, which translates into more 
than 5,000 jobs. After six years, the Barnett Shale is generating more 
gas than any other field in Texas. It's likely to produce 400 million 
cubic feet of gas this year and roughly $4 billion in revenue.
    One local economist, Bernard Weinstein of the University of North 
Texas, says the local economic impact could approach $3 billion a year.
    Huge investments are being made in equipment and people; property-
tax revenue is surging; many cities and families are earning royalties 
from gas leases; and Weinstein says the trickle-down effects are 
reaching home builders, landscapers, even sign-makers.
    That means we have a silver lining in the cloud of high energy 
prices.
    The Texas economy as a whole still gains more than it loses when 
prices rise, says the Dallas Fed.
    The upside is not as great as in the past, because the economy is 
more diverse, but the industry remains a force in the state.
    Of course, the positive effects are concentrated in limited 
locations, and the pain of high prices hits everyone. The Barnett Shale 
puts us in the select company.
    My colleague Piller has chronicled the growing activity in the 
Barnett Shale, comparing it to the great energy strikes that created 
past booms in Texas.
    Some examples:
    Since 2002, Devon Energy of Oklahoma City has drilled almost 2,000 
wells in the Barnett Shale and may drill 1,000 more in the area. It's 
the No. 1 player.
    XTO Energy jumped in last year and increased its bet with an 
acquisition. CEO Bob Simpson says the Fort Worth company plans to drill 
an average of 20 wells a month for the next six years.
    Quicksilver Resources expects to be getting 30 million cubic feet a 
day from its Barnett Shale wells by the end of 2005. It's opened a 
pipeline to serve the sector and plans a natural-gas-processing plant 
near Granbury.
    EOG Resources of Houston has drilled 18 wells in Johnson County. 
Chesapeake Energy, which started drilling here last year, says it has 
99 wells--and the potential for 500 to 750.
    Energy Transfer Partners of Dallas recently said it's expanding its 
264-mile pipeline from near Cleburne through East Texas and into 
Louisiana. The total cost is $535 million. The company is also adding a 
$32 million loop to handle extra gas from Johnson and Parker counties.
    As you'd expect, natural-gas production here is climbing. It's up 
19 percent in the first eight months of the year, while the statewide 
total declined.
    The Barnett Shale alone may not lead to lower natural-gas prices, 
because older fields in Texas now produce less, while utilities are 
using much more gas to make electricity. The supply of natural gas 
peaked three decades ago, while demand is growing, a recipe for soaring 
prices.
    The question is: What's the best way to improve the situation--with 
government dictates or market adjustments?
    Stephen Brown, director of energy economics and microeconomic 
policy analysis at the Dallas Fed, points to the market's response 
after Hurricane Katrina.
    Within two months, gasoline prices had nearly returned to pre-storm 
levels, despite some refineries still shut down today.
    Many factors contributed to the improvement, including gasoline 
supplies that were shipped from Europe to the United States. Higher 
prices made that a profitable proposition.
    ``Price controls or new taxes would prevent the market from self-
correcting,'' Brown says.
    In the 1980s, the Reagan administration effectively ended price 
controls on natural gas, which led to a boom in exploration and falling 
prices.
    ``The history of intervention is that it discourages development 
and slows the pace,'' Brown says.
    Experts have predicted that we'd run out of oil many times in the 
past.
    But innovations keep leading to new supplies and making it 
economical to get them out of the ground.
    Deep underwater drilling and Canadian oil sands represent promising 
options, but only if prices are high enough to justify the risk.
    The Barnett Shale has emerged because higher prices and new 
technology make it attractive.
    That happens to be very good for the North Texas economy, but it's 
also the fastest way to get more gas for everyone.

    Mr. Shimkus. The gentleman's time has expired. The Chair 
now recognizes the gentleman from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman, and like my colleagues, 
I am glad you are holding this hearing on natural gas and 
heating oil for this winter, and I want to welcome both this 
panel and our future panel.
    Along with the war in Iraq, energy prices are the highest 
concern for my constituents. This Congress passed the Energy 
Bill that I supported, and to address our medium term and long-
term energy future, and I remain confident that bipartisan bill 
will deliver. However, many of the important new provisions of 
that bill will not bring benefits this winter, because the 
energy infrastructure takes many billions of dollars and 
several years to expand. If we could build five new LNG plants 
between now and December 1, my Northern friends would rest a 
lot easier and a little warmer this winter. But these projects 
cannot be built that fast, and the fact that we will have 
cheaper gas in the future is little consolation for this 
winter.
    Since today is focused on the immediate crisis coming down 
the road, I will focus on two policies that I believe would 
help heat homes affordably this winter: full funding for LIHEAP 
and economic dispatch. Our committee last week, in a 16-hour 
markup, increased funding for LIHEAP $1 billion, which was 
great. The problem is now we hear that that reconciliation bill 
may not be passed by the full Congress until next year, so it 
will not help us at all this winter. Maybe we should have done 
it earlier in the original Energy Bill, but as many observers 
of this committee know, I have serious problems with the 
outdated and nonsensical current Tier I LIHEAP formula, and I 
would be interested to know what some of our witnesses think 
about this formula, and if they can defend it. However, since 
the formula gets fairer as the funding increases in the short 
term, we do have a solution where the rising tide lifts all 
boats. That is why I was disappointed that we, last week in the 
budget reconciliation, we only did $1 billion instead of the 
full $5 billion that was authorized in the Energy Bill that 
passed in July for LIHEAP, which is really .002 percent of the 
Federal budget, would show that Congress is responding to high 
energy prices, which would have the most severe impacts on the 
needy.
    I hope that Congress will continue to consider increasing 
LIHEAP funding, such as the Katrina supplemental, and that 
Congress will put all funding in the base account, as opposed 
to the emergency account, that shortchanges warm weather 
States, and is controlled by the Office of Management of 
Budget. Over 15 years, we have had a trigger in our LIHEAP 
formula that $2 billion, after which funds are allocated more 
evenly nationwide. Unfortunately, we rarely, if ever, pass that 
trigger. This year, it looks like we certainly will, so it is 
extremely important that we do not use accounting tricks, like 
emergency accounts, to avoid the $2 billion trigger. If we do, 
I think we will see continuous warm-weather-State rebellions on 
LIHEAP funding. Northern members cannot expect us to sympathize 
with their constituents during the winter if we don't get any 
sympathy for our constituents who have heart attacks, 
dehydration, heatstroke and exhaustion, and other health 
impacts from hot weather. If we want to put our differences 
aside for the 2006 fiscal year, we must put all LIHEAP funding 
in the base account, not the emergency account.
    The second strategy we could use to save natural gas, and 
lower prices this winter, is economic dispatch. This is a 
complex electricity policy issue which I withdrew my amendment 
during the Energy Bill, but I think the committee needs to 
start to pay attention to this issue. The Federal Energy 
Regulatory Commission has convened joint FERC-State boards to 
study economic dispatch in the various regions of the country. 
But the bottom line is it does not make economic sense to run 
inefficient power plants while our more efficient ones are 
idle. Competitive power markets bring competition for lower 
prices for consumers, and one big way is a more competitive 
price is to use your expensive natural gas more efficiently. 
Many areas of the country are already doing economic dispatch, 
since they are part of the independent system operators----
    Mr. Shimkus. The gentleman's time----
    Mr. Green. And thank you, Mr. Chairman, and I will briefly 
say Texas and ERCOT use economic dispatch, and we have saved 
the country 15 billion cubic feet in just 4 years of natural 
gas. That is a 10-percent efficiency improvement in gas use, 
and I hope our committee will look at that.
    Thank you, Mr. Chairman.
    Mr. Shimkus. The gentleman's time has expired. The Chair 
recognizes the gentleman from Arizona, Mr. Shadegg, for an 
opening statement.
    Mr. Shadegg. I thank you, Mr. Chairman, and I thank you for 
holding this hearing. I think it is indeed important.
    I would like to associate myself with one of the remarks by 
colleague, Mr. Green of Texas, and that is my colleagues are 
deeply concerned about the price of energy today, and they want 
us to act on it, and they want us to look at the issue very 
carefully. But I also want to associate myself with my 
colleague from Texas's remarks to my right who said, as I 
pointed in a hearing a week ago, it is time for those who have 
stood in the way, in the past, of increasing energy supplies, 
and those who stand in the way today of increasing energy 
supplies, to realize that it is their obstructionist tactics 
that are causing the high heating costs that are being 
predicted for this winter. I am deeply concerned about those 
costs, although I share Mr. Green's concern about the high air 
conditioning costs that some people in the Southwestern part of 
the United States, where I live, confront, and the program does 
not deal, I think, in a fair fashion, with the problems they 
confront.
    I am deeply concerned about this issue. I would like to 
know if, indeed, there was price gouging, but I am saddened 
that we continue to go along the line of the rhetoric of well, 
the Republicans don't care. This is just about tax cuts for the 
rich. What we really need is more programs, more programs, more 
programs, more programs, and more money from the government. 
Unfortunately, that money from the government has to come from 
somewhere. What we need to look at in this discussion is why is 
the price of natural gas so high, and what can we do about it. 
Let us talk about not just the effect that has on homes and 
home heating and home heating oil, for example, and the ability 
of people to keep their homes warm this winter. But let us talk 
about it in terms of the long term economy. We have got a 
serious problem confronting this Nation and confronting our 
economy. Natural gas in Canada is $9.25 per million BTU; 
Australia, it is $3.85; China, it is $4.85; Britain, it is 
$5.65; and in the United States, it is $14.67. We simply cannot 
remain viable in a world economy where natural gas is that much 
more expensive here than it is anywhere else.
    You want to talk about tax cuts. John F. Kennedy is the one 
who cut tax rates, as a Democrat President, and who said that a 
rising tide lifts all ships. What he meant by that was that 
when you lower tax rates, and the economy improves, every 
American does better. We need to be looking at what policies 
will improve the lives of every single American, and I would 
suggest that having natural gas prices 3 or 4 or 5 times as 
high as they are anywhere else in the world is not going to 
help our economy. The Federal Government estimates that on the 
outer continental shelf, there are 406 trillion cubic feet of 
natural gas, and yet, this Congress has locked away 85 percent 
of that oil, making it impossible to reach, even with platforms 
that are completely out of sight, and even with the fact that a 
natural gas platform has never caused, so far as I know, any 
environmental damage.
    Sure, we should be doing something about LIHEAP, and we 
have done that. This year, we added $1 billion additional 
dollars to LIHEAP. That will take the program to its highest 
level ever, since the program was created in 1981. But more 
important than more government programs which take from some 
and give to others is the obligation we have to find out why 
gas prices are so high, and what we can do to make them lower, 
and I would suggest improving the competitiveness of American 
economies, improving our ability to build refineries and to 
explore in places like the outer continental shelf, hold much 
more for the American economy than decrying the lack of 
additional LIHEAP funding.
    Mr. Shimkus. The gentleman's time has expired. The Chair 
recognizes the gentleman from California, Mr. Waxman, for an 
opening statement.
    Mr. Waxman. Today, we are going to examine the expected 
impact of the Administration's energy policy on Americans 
trying to heat their homes this winter.
    Energy costs have been steadily increasing over the last 4 
years, and for consumers, it is going to get worse before it 
gets better. Home heating costs are expected to go through the 
roof this winter. The Energy Information Administration 
projects that residential natural gas costs will skyrocket 61 
percent in the Midwest. Home heating oil is expected to cost 
more than 30 percent more than last year.
    As we would expect, the big oil companies are reaping the 
benefits of these prices. I have a chart behind me. It shows 
the profits of the six biggest oil companies from 2002 through 
2005.
    [Chart.]
    In 2004, Exxon Mobil earned more profits than any 
corporation in the history of the planet, totaling some $25 
billion. Last week, we learned that in only three quarters so 
far this year, Exxon Mobil's profits have already exceeded the 
2004 record. They have gone up by 75 percent. This remarkable 
increase in profits is not unique among oil companies. Each of 
the big oil companies have enjoyed major increases in their 
profits, and this didn't occur in a vacuum.
    Upon assuming the office, Vice President Cheney began 
meeting in secret with big oil companies to craft a national 
energy policy. The Vice President didn't want any advice from 
consumers or environmental advocates. We still don't know what 
the big energy companies requested in the secrecy of the White 
House, but the prices that consumers are paying today may be 
the best indication of what happened behind those closed doors.
    Upon the Vice President's announcement of the policy, the 
President started putting it into place. According to Energy 
Secretary Bodman, 75 percent of the Administration's energy 
policy was implemented during the President's first term. By 
March 2005, he reported that 95 percent of the energy policy 
was implemented, before Congress even passed the Energy Policy 
Act of 2005. At every step of the way, as this program has been 
implemented, energy prices have been increasing. The 
Administration got the energy policy it wanted, and now, the 
American people are bearing the costs.
    We need to promote energy efficiency and renewables, and 
address the Nation's dangerous dependence on oil. I hope that 
day will come soon, but it is ironic to hear the Republicans 
crying about obstructionists. They control the House. They 
control the Senate. They control the White House. If they 
wanted any bill to pass, if they had their own members lined up 
for it, it would pass. But the fact of the matter is, they 
couldn't get the bill passed in the House without twisting arms 
of Republican members who had to hold their nose and vote for a 
very bad bill just a week or 2 ago, and in the Senate, they 
have got the same problems. It was a Republican that lined up 
with the Democrats to defeat that bill in the committee.
    They have got their policy. The American people are paying 
for it. Now, all we can do is hope government programs will 
keep people from going without heat in the winter.
    Mr. Shimkus. The gentleman's time has expired. The Chair 
recognizes the gentleman from New Hampshire, Mr. Bass.
    Mr. Bass. No opening statement.
    Mr. Shimkus. No opening statement. Mr. Allen from Maine is 
recognized.
    Mr. Allen. Thank you, Mr. Chairman, and thank you to the 
many witnesses who are here today. This is another in a series 
of hearings in this subcommittee to explain that yes, fuel 
prices are high, and yes, they will continue to be high this 
winter.
    What else will be high this winter? Oil company profits. I 
won't go into all the statistics. I mean Exxon-Mobil's $10 
billion is startling. It is twice the domestic product of 
Kuwait. But it is the case, it absolutely is the case that 
this----
    Mr. Shimkus. Now to you, my friend, would the gentleman 
suspend? Your mic is still not on, and maybe, you can just move 
over until we figure out why. Everyone else is on. Now, try it.
    Mr. Allen. I did do that. My apologies. Mr. Chairman, if I 
can have a little time back, I have lost whatever dramatic 
effect I was striving for, so----
    Mr. Shimkus. We will give you your minutes back. Go ahead.
    Mr. Allen. I did want to say that I believe it is hard to 
deny the link between the enormous gas company profits, oil 
industry profits, and then, what is happening to people back 
home. This is a rising tide that is sinking small business 
boats in Maine. Our loggers, our fishermen, our building owners 
and others. There are a few isolated examples of price gouging 
at the local level, but in Maine, we have enough pricing 
information to know that our oil dealers are not the problem. 
The problem is Exxon Mobil and companies like it, and those 
profits.
    There are two critical questions. Why are the prices so 
high, and what can we do about it? The answer to the first 
question is that the Administration, its allies in Congress, 
and its supporters in the oil industry have made little effort 
to reduce demand in order to create downward pressure on price. 
Just a few years ago, the Vice President famously said that 
conservation was a personal virtue, but not an energy policy. 
In March 9 of this year, Secretary Bodman said, and I quote: 
``During his second week in office, the President put together 
a taskforce to address America's energy challenges. The 
taskforce sent back more than a hundred recommendations as part 
of a new national energy policy, and over the last 4 years, we 
have implemented 95 percent of those recommendations.'' So 
essentially, the Administration got exactly what it wanted, and 
the result is a national crisis. The Energy Policy Act approved 
in July provided extensive subsidies and tax breaks to the oil 
and gas industry, and those simply cannot be defended. What we 
need to do in the short term--there are a multitude of things. 
I will mention LIHEAP. When you don't talk about authorization 
levels, but you talk about actual funding levels, here is the 
truth. In fiscal year 1982, LIHEAP was funded at $1.87 billion. 
In fiscal year 2005, LIHEAP was funded at $1.88 billion, a $100 
million increase. The purchasing power of that program has 
simply evaporated.
    Now, I have legislation I just want to mention briefly, 
H.R. 3944, the Small Business Fuel Cost Relief Act, to give 
small businesses a tax credit for the increase in price between 
diesel, gasoline, and heating oil and natural gas from Labor 
Day 2004 to Labor Day 2005. Those are the people who need 
relief, not the people who got the tax relief in the Energy 
Policy Act that was signed by the President in July. We can do 
a whole lot better in this country, but not without changing 
course.
    Mr. Chairman, I thank you.
    Mr. Shimkus. The gentleman yields back his time. The Chair 
now recognizes the gentlewoman from California, Ms. Solis.
    Ms. Solis. Thank you, Mr. Chairman, and thank you, ranking 
member, and also the witnesses that are here today. I 
appreciate the fact that we are having a hearing on this very 
important issue, natural gas and heating oil for American 
homes.
    Mr. Chairman, the retail cost of heating oil is expected to 
increase another 32 percent this winter. The increase will not 
only impact the Northeastern part of the United States, but 
will impact thousands of homes across the country. In Northern 
California, Pacific Gas & Electric estimated heating bills for 
its customers to be at least 70-percent higher, and in Los 
Angeles, the Southern California Gas Company, my 
representative, expects gas bills that could rise above 50 
percent.
    Working class Americans, in my opinion, can't afford these 
increases. And the Department of Labor reported that the 
average weekly pay for production workers took its biggest fall 
in 10 years. These workers are earning almost 3-percent less 
than the cost of inflation, and facing a 50 to 70-percent 
increase in their heating bills. We should have looked at these 
issues long before President Bush decided to implement the GAS 
for America Security Act.
    On March 9, 2005, the Energy Secretary, Samuel Bodman, 
stated that the Department of Energy has implemented 95 percent 
of the Administration's energy policy. If 95 percent of the 
Bush Administration's energy policy is implemented, why are 
Americans, working class families, continuing to suffer? 
Companies like Exxon Mobil, who have generated $9.92 billion in 
a third quarter profit are better off than working class 
Americans. But how is America's working class better today 
because of the Bush energy policy?
    Democrats had a plan to protect consumers. We supported a 
price gouging amendment that would have authorized the Federal 
Trade Commission to punish companies that price gouge customers 
for gasoline, heating oil, natural gas, and propane. But my 
colleagues across the aisle only supported a very weak version, 
price gouging language, which does not include natural gas. 
That doesn't help California.
    So under the weak Republican price gouging language, 73 
percent of California consumers depend on natural gas, 
including 20 percent of families in Los Angeles County that 
fall below the poverty line, and they would have no 
protections, no legal recourse, no rights, and no relief.
    Adding insult to injuries, my colleagues last week moved to 
cut $10 billion from the Medicaid program, and refused to fully 
fund the LIHEAP program. So I find it ironic that after 
refusing to protect customers, consumers from price gouging 
after cutting aid to working families, and after refusing to 
fund the program to help the people who will be suffering the 
most this winter, we are here today talking about protecting 
consumers. The priorities of the Congress and this 
Administration are wrong. It is well, long overdue that we 
start really working on working class family issues, and that 
is to reduce the cost of high fuels in our country.
    Yield back the balance of my time.
    Mr. Shimkus. The gentlelady yields back. Does the gentleman 
from Maryland wish to make an opening statement?
    Mr. Wynn. Thank you, Mr. Chairman. I would like to thank 
you for calling this very important hearing on natural gas and 
home heating oil.
    On October 19, we met to discuss the Energy Information 
short term energy outlook and winter fuels outlook. The report 
illustrated the critical need for Congress and this 
Administration to act now, in order to protect our most 
vulnerable citizens from exorbitant energy prices this winter. 
As I stated at that time, and I have restated, increased 
funding for the Low Income Home Energy Assistance Program, 
LIHEAP, is essential. Home heating bills for the 60 million 
U.S. households that use natural gas will increase by about 50 
percent, translating to about a $350 increase in home heating 
over last year's prices.
    In my Maryland district, 60 percent of residents use 
natural gas to heat their homes. They could face an increase in 
their heating bills from last year's average of $750 to $1,100 
this year. Heating bills for the 8.5 million U.S. homes that 
are using heating oil will increase about 32 percent, 
translating to a $378 increase in home heating expenses over 
the last year. For the almost 7 percent of my district's 
residents that use home heating oil, including myself, this 
means last year's average spending of about $1,200 could be as 
high as $1,600 this year.
    These increases in home heating energy costs 
disproportionately our low income, fixed income, and elderly 
citizens. Low income households spend a whopping 14 percent of 
their annual income on energy expenditures, compared to non-low 
income households, which spend only about 3.5 percent. In fact, 
two thirds of the families that utilize LIHEAP assistance have 
annual incomes of $8,000, forcing them to choose between 
heating their homes and putting food on the table. The National 
Energy Assistance Directors Association's most recent survey on 
the impact of rising energy costs on poor families illustrates 
this case in point with troubling data: 32 percent of the 
families interviewed said that they sacrificed medical care; 24 
percent failed to make rent or mortgage payments; 20 percent 
went without food for at least a day; and 44 percent said they 
skipped paying or pay less than their full home energy bill in 
the last year.
    There is a great need for increased funding, and in fact, 
my State of Maryland is going to need almost $84 million in 
Federal fuel assistance, more than twice the amount 
anticipated, to help our low income residents heat their homes 
this winter. The Maryland Energy Assistance Program, which 
distributes LIHEAP funds locally, is expected to receive $32 
million from the Federal Government. However, the program will 
need $51 million more to cover rising costs based on EIA's home 
heating price projections this winter.
    Unfortunately, my colleagues on the other side of the aisle 
are not doing enough to address this troubling situation. We 
missed a critical opportunity last week to increase LIHEAP 
funding during the budget reconciliation markup. While I 
recognize that they made a significant effort in this regard, 
we still need to do more. LIHEAP is working with a limited 
budget of $2 billion, serving only 20 percent of those eligible 
for assistance. I urge my Republican colleagues to increase 
LIHEAP funding and provide true relief for our low income, 
fixed income, and elderly citizens. I look forward to hearing 
the panels today, and I hope that they will bring greater 
attention to this very pressing problem.
    Thank you.
    [The prepared statement of Hon. Albert R. Wynn follows:]
Prepared Statement of Hon. Albert R. Wynn, a Representative in Congress 
                       from the State of Maryland
    Chairman Barton, thank you for holding this hearing on natural gas 
and home heating oil. On October 19th we met to discuss the Energy 
Information Administration's (EIA) Short Term Energy Outlook and Winter 
Fuels Outlook. The report illustrated the critical need for Congress 
and the Administration to act now in order to protect our most 
vulnerable citizens from exorbitant energy prices this winter. As I 
have stated time and time again, increased funding for the Low Income 
Home Energy Assistance Program (LIHEAP) is essential.
    Home heating bills for the 60 million U.S. households that use 
natural gas will increase by about 50 percent, translating into a $350 
increase in home heating over last year. In my Maryland district, 60 
percent of residents use natural gas to heat their homes. They could 
face an increase in their heating bills from last year's average of 
$750 to $1,100 this year.
    Heating bills for the eight-and-a-half million U.S. homes that use 
heating oil will increase by about 32 percent, translating into a $378 
increase in home heating expenses over last year. For the almost seven 
percent of my district's residents that use home heating oil, including 
myself, this means that last year's average spending on home heating of 
$1,200 could be as high as $1,600 this year.
    These increases in home heating energy costs disproportionately 
impact our low income, fixed-income and elderly citizens. Low-income 
households spend a whopping 14 percent of their annual income on energy 
expenditures, compared to non-low-income households that only spend 3.5 
percent. In fact, two-thirds of the families that utilize LIHEAP 
assistance have annual incomes of $8,000, forcing them to chose between 
heating their homes and putting food on the table. The National Energy 
Assistance Directors' Association's most recent survey on the impact of 
rising energy costs on poor families illustrates this case in point 
with troubling data: 32 percent of families in the survey sacrificed 
medical care; 24 percent failed to make a rent or mortgage payment; 20 
percent went without food for at least a day; and 44 percent said they 
skipped paying or paid less than their full home energy bill in the 
past year.
    There is a great need for increased funding. In fact, my state of 
Maryland is going to need almost $84 million in federal fuel 
assistance, more than twice the amount anticipated, to help our low-
income residents heat their homes this winter. The Maryland Energy 
Assistance Program, which distributes LIHEAP funds locally, is expected 
to receive $32.1 million from the federal government. However, the 
program will need $51.5 million more to cover rising costs based on the 
EIA's home heating price projections for this winter.
    Unfortunately, my colleagues on the other side of the aisle are not 
doing enough to address this troubling situation. We missed a critical 
opportunity last week to increase LIHEAP funding during budget 
reconciliation markup. Now, we are currently in a position of begging 
the industry for handouts; we should be in a better position than this. 
Senator Grassley, the chairman of the Senate Finance Committee, 
suggested that companies contribute 10 percent of their third-quarter 
profits to LIHEAP. In the absence of a voluntary industry give back, we 
should give some consideration to the option of a windfall profits tax 
to fund the necessary support for LIHEAP. Given that there will be no 
new natural gas coming online for at least the next three years, the 
outlook is bleak for the next few winters.
    LIHEAP is working with a limited budget of $2 billion, serving only 
20 percent of those eligible for assistance. I urge my Republican 
colleagues to increase LIHEAP funding and provide true relief for our 
low-income, fixed-income and elderly citizens.
    I look forward to the panels we have lined up for today.

    Mr. Shimkus. The Chair thanks the gentleman.
    [Additional statements submitted for the record follow:]
Prepared Statement of Hon. Sherrod Brown, a Representative in Congress 
                         from the State of Ohio
    Thank you, Mr. Chairman, for scheduling today's hearing and for 
affording me an opportunity to submit this statement for the record.
    Gasoline prices spiked nationwide after Hurricane Katrina 
interrupted gas supplies. They've been on the evening news, on the 
front page of our newspapers--and high gasoline prices have been a key 
topic at every one of our town meetings.
    But tomorrow--or next week, or no later than a month from now when 
the winter heating bills start rolling in--what everyone will be 
talking about is natural gas prices.
    According to the Energy Information Administration (EIA), natural 
gas prices will average more than 50% higher this winter than last. And 
EIA tells us that residents of Ohio and other Midwestern states could 
see their natural gas bills jump more than 70%.
    You can talk to any energy economist out there and he or she will 
tell you that the energy bill we passed this year will do little or 
nothing to stabilize natural gas prices.
    We talked to Ken Costello, a Senior Institute Economist at Ohio 
State University's National Regulatory Research Institute. And he 
confirmed that the only way we can really get at the problem in the 
near term is by addressing the demand side of the equation.
    But you do not have to be a PhD to know that, in a market economy, 
both supply and demand matter in setting the price. American motorists 
know that intuitively.
    When gasoline prices spiked after Katrina, motorists responded 
immediately. Demand for gas-guzzlers dropped, and demand for super-
efficient hybrids increased.
    We ought to take a hint from our constituents and advance policies 
that manage the demand side of the natural gas price equation.
    We missed an opportunity during the Energy and Commerce Committee's 
markup of the energy bill. One of the amendments we considered would 
have required electric power generators to increase their investment in 
renewable energy sources.
    This approach makes energy security sense, because a diverse fuel 
mix makes our electricity supply less vulnerable to interruptions in 
the delivery of any particular fuel.
    But more importantly for the present debate, investing in renewable 
energy makes sense as a way to stabilize and moderate natural gas 
prices.
    Electric power generation now accounts for 20-25% of America's 
natural gas demand. And according to the EIA, demand from the electric 
power will be the fastest-growing component of total natural gas demand 
during the next 20 years.
    Last year, the Union of Concerned Scientists used an EIA analysis 
tool to quantify the price benefits of renewables. UCS found that 
increasing the fraction of America's electric power generated from 
renewable sources to 20% by 2020 would save consumers nearly $27 
billion.
    And by the way, UCS also found that diversifying the fuel supply 
would also lower electric bills by more than $10 billion over the same 
timeframe.
    When it comes to natural gas, the energy bill was by no means a 
complete loss. Though I felt the liquefied natural gas siting 
provisions were insufficiently responsive to homeland security 
concerns, enhancing our access to LNG will eventually bolster supplies.
    And the conference bill's emphasis on coal gasification and 
hydrogen fuel cell development offer promise as tools to reduce natural 
gas demand.But on natural gas, the energy bull was certainly a missed 
opportunity.
    This committee and the Congress embraced a renewable fuel standard 
for gasoline for good public policy reasons. We failed to adopt a 
renewable energy standard for electricity because we chose to ignore 
those same good public policy reasons.
    But it is not too late to make next winter better than this one. We 
ought to embrace demand-side solutions that could make a real 
difference for consumers. That means not only Investing in renewable 
sources for electric power generation. But considering a wide range of 
sensible demand-management tools, like:

 Cash rebates to help consumers--especially low- and moderate-income 
        consumers--buy energy-efficient appliances;
 Increasing our investment in the Energy Department's Industrial 
        Technologies program, which helps energy-intensive 
        manufacturing businesses save energy and money;
 Incentives for states and local governments to adopt energy-efficient 
        building codes.
    We must also take a close look at the ability of federal regulators 
to fulfill their mandate to protect consumers from natural gas market 
manipulation.
    Companies like Dynegy and El Paso Energy manipulated California's 
natural gas market during that state's 2001 energy crisis. We should 
not be so naive as to expect that the tight natural gas market that 
exists nationwide today will not attract the same unscrupulous element.
    If these corporate wrongdoers fool us once, shame on them. But if 
we allow them to fool us time after time, shame on us.
    This winter will be costly for American consumers in part because 
Congress failed to consider policy tools that might have blunted the 
effects of Hurricane Katrina on natural gas prices.
    This hearing should begin a new effort to ensure that we do more to 
protect consumers next winter.
    Thank you again for the opportunity to participate in today's 
hearing.

   Prepared Statement of Hon. George Radanovich, a Representative in 
                 Congress from the State of California
    Mr. Chairman, I would like to thank you for holding this important 
hearing today on Natural Gas and Heating Oil for American Homes.
    As we are all aware, the expected continuing high prices of natural 
gas and home heating oil will be a hardship on all of our constituents 
this winter. Residential space-heating expenditures are projected to 
increase for all fuel types compared to year-ago levels. On average, 
households heating with natural gas are expected to spend about 48% 
more in fuel expenditures and households heating primarily with heating 
oil can expect to pay on average 32% more this winter.
    Today's hearing is important because it will provide our 
constituents with a complete understanding of the elements that 
determine the price they will pay for natural gas, specifically natural 
gas itself (the gas charge or gas commodity charge); long-haul pipeline 
transmission charges; and local distribution and storage charges. In 
addition, what effects hurricanes Katrina and Rita have had on supply 
and price along the full natural gas supply chain; As well as what is 
being done to bring the costs of natural gas down.
    The House passage of HR 3893, which I supported, is the first of 
many steps in the right direction. Increasing the number of refineries 
and relaxing environmental standards is only the beginning, we will 
continue to make every effort to do everything we can to allow our 
constituents to heat their homes at reasonable costs.
    Thank you I look forward to hearing from our witness.

    Mr. Shimkus. Now, we are ready for our first panel. We 
welcome you. We have the Chairman of the Federal Energy 
Regulatory Commission, Mr. Kelliher, who was introduced 
earlier. We also have with us Mr. Jeffery, Reuben Jeffery III, 
who is the Chairman of the Commodity Futures Trading 
Commission; Mr. Mark Maddox, Principal Deputy Assistant 
Secretary, Office of Fossil Energy; and Mr. Donald Mason, 
Commissioner of Public Utilities Commission of Ohio.
    Welcome. All your statements are inserted in the record. We 
ask for around a 5 minute opening statement, and then, we will 
follow up with questions after the whole panel has testified.
    With that, Joe, would you like to begin?

    STATEMENTS OF HON. JOSEPH T. KELLIHER, CHAIRMAN, FEDERAL 
    ENERGY REGULATORY COMMISSION; HON. REUBEN JEFFERY III, 
CHAIRMAN, COMMODITY FUTURES TRADING COMMISSION; MARK R. MADDOX, 
PRINCIPAL DEPUTY ASSISTANT SECRETARY, OFFICE OF FOSSIL ENERGY, 
  DEPARTMENT OF ENERGY; DONALD R. MASON, COMMISSIONER, PUBLIC 
                  UTILITIES COMMISSION OF OHIO

    Mr. Kelliher. Thank you, Mr. Shimkus. Good afternoon, Mr. 
Shimkus, Mr. Barton, Mr. Boucher, and members of the 
subcommittee.
    I thank you for the opportunity to address the challenges 
from high natural gas prices this coming winter, FERC's role in 
the pricing of natural gas and home heating oil, and 
development of the U.S. energy infrastructure. It is good to be 
back at this subcommittee.
    As my formal statement details, the Commission has 
responsibilities in many areas of the energy sector, including 
regulation of interstate natural gas transportation rates and 
services, and crude oil and petroleum product pipelines. The 
Commission has limited jurisdiction over natural gas sales, and 
does not regulate home heating oil prices or natural gas 
wellhead prices.
    Hurricanes Katrina and Rita have caused the loss of a 
significant portion of our domestic oil and natural gas supply. 
Twenty percent of U.S. gas supply comes from the offshore Gulf, 
and most of this production has been shut in since the 
hurricanes. We will not be able to offset this loss of domestic 
gas production through higher imports from Canada, due to 
Canada's flattening production and increasing demand, nor will 
liquefied natural gas imports be able to offset the loss of 
domestic production. Most LNG is locked up in long term 
contracts, and the U.S. market competes for short term supplies 
with Europe, and we have been losing this competition.
    Gas prices were already high before the hurricanes. Because 
of the loss of domestic production, gas prices will be higher 
this winter. The key variables on how high prices will rise are 
the rate of recovery of offshore gas production in the Gulf, 
the weather, and the effectiveness of conservation efforts. 
Effective conservation must start with consumer awareness and 
appreciation of the high level of gas prices. Normally, 
consumers receive a price signal after consumption, when they 
receive their monthly bill, and it is important they recognize 
it before consumption this winter. The effectiveness of State 
conservation programs will be critical in moderating natural 
gas prices this winter.
    The Commission has encouraged its counterparts at the State 
level to make a maximum effort to strengthen their conservation 
programs, and we met recently with State regulators from 
regions that will be most affected by high natural gas prices 
to discuss best practices in State programs.
    I particularly want to commend Secretary Bodman for his 
efforts to promote conservation this winter, and his leadership 
has been impressive. Now, clearly natural gas prices will be 
higher this winter, as a result of the loss of domestic 
production caused by the hurricanes. However, the Commission, 
FERC, is acting to assure prices do not go higher still because 
of market manipulation. The Commission actively monitors 
natural gas markets to determine whether price movements are 
the result of market manipulation or market fundamentals. To 
assist this effort, the Commission recently entered into a 
memorandum of understanding with the Commodity Futures Trading 
Commission to assure the smooth flow of information between the 
two agencies, and to improve our ability to identify market 
manipulation. Under the Energy Policy Act, the two agencies 
were directed to enter into an MOU within 6 months of 
enactment. We accomplished it in 2 months, in part, because the 
two agencies want to be in a position to better monitor gas 
markets this winter.
    Importantly, FERC is acting to exercise the new anti-
manipulation authorities in the Energy Policy Act. The 
Commission recently issued proposed rules to prevent market 
manipulation with respect to jurisdictional natural gas and 
electricity sales and transportation. And we intend to issue 
final rules by the end of the year. The new rules, in 
conjunction with the new penalty authority in the Energy Policy 
Act, will provide a strong deterrent to market manipulation.
    Now, the Commission has limited jurisdiction over the price 
of natural gas paid by consumers. Through the natural gas----
    Mr. Shimkus. You can suspend for a minute. We are just 
going into session now.
    Mr. Kelliher. [continuing] through the Natural Gas Policy 
Act of 1978 and the Natural Gas Wellhead Decontrol Act of 1989, 
Congress deregulated most sales of natural gas.
    The Commission regulates the interstate transportation 
rates for natural gas and crude oil and petroleum products. 
This regulation involves the rate to be paid for the 
transportation component of the delivered product, rather than 
the commodity price. The regulated transportation rate is a 
very small portion of delivered cost.
    The Commission stands ready to act on emergency filings to 
authorize a more efficient use of our existing gas 
infrastructure. The Commission has already acted quickly to 
authorize exemptions and waivers for Discovery Gas Transmission 
and Stingray pipeline that allowed shut-in gas to flow to 
consumers. In both instances, the Commission issued orders the 
same day the emergency filings came in, and that is a testament 
to the professionalism and dedication of the Commission staff, 
and it shows that we know what is at stake this winter.
    Now, the Commission plays a critical role in strengthening 
the U.S. energy infrastructure. Since the year 2000, the 
Commission has certificated over 8,400 miles of gas pipelines. 
We have steadily improved our regulatory process, and the 
average length of a major pipeline proceeding at the Commission 
is now less than a year. The Commission's Hackberry policy, 
which ceased economic regulation of LNG terminals, has resulted 
in a significant increase in proposals to construct LNG import 
facilities. In the last few years, the Commission has approved 
eight new LNG terminals, a new pipeline from the Bahamas, and 
expansions at two existing terminals that will more than 
quadruple our LNG import capability.
    Now, the Commission is also exploring opportunities to 
provide greater incentives to expand natural gas storage 
capacity through pricing reform. Since 1988, gas storage 
capacity has expanded only 1.4 percent, while demand has 
increased 24 percent. Greater storage capacity may help 
mitigate gas price volatility. Pricing reform can promote 
storage capacity expansion at both existing and new facilities, 
although it will not bring relief this winter.
    Now, in closing, the Commission is working diligently 
within its authorities to prevent market manipulation and 
authorize the most efficient use of our existing gas 
infrastructure. We will closely monitor gas markets in the 
coming winter in conjunction with the CFTC, and take 
appropriate steps within our authorities to protect customers 
to the maximum extent possible. We are encouraging our State 
colleagues to promote effective conservation programs, and we 
will continue our efforts to promote a strong U.S. energy 
infrastructure.
    And with that, I will be happy to answer any questions you 
might have.
    [The prepared statement of Hon. Joseph T. Kelliher 
follows:]
Prepared Statement of Hon. Joseph T. Kelliher, Chairman, Federal Energy 
                         Regulatory Commission
    Mr. Chairman and Members of the Subcommittee: Good afternoon, 
Chairman Hall and members of the Committee. My name is Joseph T. 
Kelliher, and I am Chairman of the Federal Energy Regulatory Commission 
(FERC or Commission). I want to thank the Subcommittee for the 
opportunity to address expected high gas prices this coming winter, 
FERC's role in the pricing of natural gas and home heating oil, and the 
development of energy infrastructure.
    The Commission has responsibilities in many areas of the energy 
sector. In the natural gas area, the Commission authorizes the 
construction of interstate natural gas pipelines and storage 
facilities, as well as import/export facilities including liquefied 
natural gas (LNG) import terminals, and it is responsible for the 
operation and safety of LNG facilities. It also regulates natural gas 
transportation rates and services in interstate commerce and has 
limited authority (discussed below) over sales in interstate commerce 
of natural gas for resale. In the area of electricity, the Commission 
regulates public utility sales for resale of electric energy in 
interstate commerce as well as wholesale and unbundled retail 
transmission rates and services in interstate commerce. It also has 
authority over certain corporate transactions involving public 
utilities. In addition, the Commission is responsible for non-federal 
hydroelectric licensing, administration, and safety. Finally, the 
Commission regulates the interstate transportation rates and services 
of crude oil and petroleum products pipelines. The Commission does not 
regulate home heating oil prices. With these general jurisdictional 
parameters in mind, let me begin by briefly reviewing the damage to 
energy infrastructure and domestic natural gas production in the Gulf 
of Mexico caused by Hurricanes Katrina and Rita, and then discuss steps 
the Commission is taking in response, including infrastructure issues.
    As of October 31, 2005, the Minerals Management Service (MMS) 
reported that two months after Hurricane Katrina, approximately 68 
percent of the daily oil production and 54 percent of the daily natural 
gas production in the Gulf of Mexico remains shut-in. According to the 
Energy Information Administration (EIA), as of October 28, 2005, 
petroleum refinery shutdowns in the Gulf of Mexico totaled 
approximately 991,000 barrels per day. A number of natural gas 
processing plants in Louisiana and Texas, with capacities equal to or 
greater than 100 million cubic feet per day, are not active. Recent 
industry press reports indicated that 45 percent of oil and gas 
pipelines in the Gulf were operational; while 30 percent needed repairs 
and 25 percent were undamaged but could not be used due to onshore 
bottlenecks. The Association of Oil Pipelines reported that as of 
October 14, 2005, all onshore petroleum pipelines have resumed 100 
percent normal operation capacity. However, some systems continued to 
experience reduced availability of products to transport.
    The hurricanes have caused the loss of a significant portion of our 
natural gas supply. It is much greater than the loss last year 
resulting from Hurricane Ivan, and the recovery of offshore production 
has been much slower. We will not be able to offset this loss of 
domestic gas production through higher imports from Canada due to 
Canada's flattening production and increasing demand. Nor will LNG be 
able to offset the production loss. Most LNG is locked up in long-term 
commitments, while the U.S. market, at existing terminals, tends to 
trade in the short-term or spot market. The U.S. may be losing out on 
these short-term supplies due to European competition, where prices are 
expected to be close to our prices this winter, and shipping costs are 
lower due to shorter distances, thus keeping additional LNG supplies 
away from the U.S. in the short term.
    In testimony before both the House and the Senate, the 
Administrator of the EIA stated that domestic dry natural gas 
production in 2005 is expected to decline by 3.0 percent, due in large 
part to the major disruptions to infrastructure in the Gulf of Mexico. 
Gas prices, prior to the hurricanes, were already high due to the 
strain of a hot summer and the anticipation of tight supplies. EIA 
estimates that the average consumer's natural gas bill may be as much 
as 48 percent higher this winter than last, if there is an average 
winter. Natural gas prices will be higher this winter because of this 
loss of supply. Of course, other variables can affect winter gas 
prices, either negatively or positively. These factors include the 
timing of the recovery of offshore Gulf of Mexico production. The 
sooner the recovery occurs, the less upward pressure there will be on 
prices. Another factor, and the least controllable, is the weather. A 
mild winter can buy the industry time to repair or replace 
infrastructure and to get gas production back on line by reducing 
demand and dampening price levels. And, conversely, a colder than 
normal winter will drive up prices even higher.
    One more factor that is controllable is conservation. Effective 
conservation must start with consumer awareness and an appreciation of 
the high level of gas prices. Under most circumstances, the consumer 
receives a price signal after consumption, that is, when the bill from 
the gas utility is delivered. If the consumers understand ahead of time 
that gas prices will be high this winter, they are more likely to 
conserve. The effectiveness of state conservation programs will be 
critical in moderating natural gas prices this winter. The Commission 
has encouraged its counterparts at the state level to make a maximum 
effort to strengthen their conservation programs. Hedgingcan also 
reduce the exposure of consumers to price volatility. The Commission 
recently met with state regulators from regions that will be most 
affected by high natural gas prices to discuss best practices in state 
conservation and hedging programs.
    Natural gas prices will be higher this winter as a result of the 
loss of domestic production caused by Hurricanes Katrina and Rita. Just 
how much higher prices will go will be driven largely by these 
variables--rate of recovery of offshore production, weather and 
conservation.
    The Commission is acting to assure prices do not go higher still 
because of market manipulation. Even though the majority of sales of 
natural gas are not subject to the Commission's jurisdiction, the 
Commission actively monitors natural gas markets to determine whether 
any price spikes are the result of market manipulation or the laws of 
supply and demand. To assist this effort, the Commission recently 
entered into a Memorandum of Understanding (MOU) with the Commodity 
Futures Trading Commission (CFTC) to assure the smooth flow of 
information between the two agencies. The MOU formalizes a close 
working relationship between the two agencies that has developed over 
the last five years. The MOU will improve the ability of the Commission 
to identify market manipulation. Under the Energy Policy Act of 2005, 
the two agencies were directed to enter into an MOU within six months 
of enactment. We accomplished this in two months, in part because we 
want to be in a position to better monitor gas markets this winter.
    Importantly, with respect to the new anti-manipulation authorities 
the Congress gave the Commission in the Energy Policy Act of 2005, the 
Commission recently issued a notice of proposed rulemaking to prevent 
market manipulation with respect to Commission-jurisdictional natural 
gas and electric services. The Commission issued rules two years ago to 
help prevent the manipulation of gas and electric markets, but the new 
proposed rule, in conjunction with the new Natural Gas Act civil 
penalty authority in EPAct 2005, will provide a strong deterrent to 
market manipulation. The proposed rule, following the new statutory 
language, would make it unlawful for any entity, directly or 
indirectly, in connection with the purchase or sale of natural gas or 
transportation service subject to Commission jurisdiction, to:

 Use or employ any device, scheme, or artifice to defraud;
 Make material false statements or omit material facts; or
 Engage in any act, practice, or course of business that operates or 
        would operate as a fraud or deceit upon any person.
    As noted earlier, the Commission has limited jurisdiction over the 
price of natural gas. Through the Natural Gas Policy Act of 1978 and 
the Natural Gas Wellhead Decontrol Act of 1989, Congress deregulated 
most sales of natural gas, including imports from countries with which 
the United States has a free-trade agreement. The Commission's 
jurisdiction over wholesale sales is limited to sales of gas in 
interstate commerce by interstate pipelines, intrastate pipelines, 
local distribution companies (LDCs) and the affiliates of those 
entities (including marketers) for resale, so long as they do not 
produce the gas they sell. The Commission's regulation of such sales is 
through blanket certificates that were issued to entities that fall in 
these categories, authorizing them to make sales in interstate commerce 
(to anyone that is not a pipeline) for resale at negotiated rates.
    As I mentioned at the beginning of my testimony, the Commission 
does regulate the interstate transportation rates for natural gas as 
well as crude oil and petroleum products. This regulation involves the 
rate to be paid for the transportation component of the delivered 
product, not the price of the commodity. Regarding natural gas, of the 
total delivered charge of approximately $17.00 per thousand cubic feet 
estimated by EIA to the Mid-Atlantic this winter, the interstate 
transportation portion from the production area would be about one 
dollar, or about 6 percent. For petroleum products, the amount that 
transportation contributes is approximately 1 percent of the total 
delivered cost.
    In addition to setting rates for transportation of natural gas and 
monitoring for market manipulation in the commodity markets, the 
Commission stands ready to act on emergency filings to authorize more 
efficient use of our existing gas infrastructure in the Gulf of Mexico. 
For instance, the Commission received an emergency filing from 
Discovery Gas Transmission on October 11 at 10:30 AM requesting an 
exemption and waivers that would expedite the transportation of up to 
300 million cubic feet per day of offshore natural gas. This gas supply 
was shut in as a result of hurricane damage to a Dynegy Inc. processing 
plant in Venice, Louisiana. This authorization, which was approved by 
the end of the same day, allows Discovery to re-route gas flows from 
offshore production fields that previously went to the Venice 
Processing Plant. Without such an innovative request and a quick 
response by the Commission, this gas supply would continue to be 
unavailable to gas consumers. The Commission also received an emergency 
filing from Stingray Pipeline for a tariff waiver to allow shut-in gas 
to flow and approved it by the end of the same day it was filed.
    Since 2000, the Commission has recognized that there was a growing 
gap between the demand for natural gas and the gas supply of the North 
American continent. In this regard, the Commission has taken steps to 
reduce the processing time for its analysis and consideration of 
infrastructure projects, most notably through its pre-filing process, 
that actually commences Commission analysis prior to the filing of a 
formal application. This has resulted in major projects being approved 
and constructed to deliver gas from the Rockies region to markets in 
California and the Midwest.
    Since the beginning of 2000, the Commission has certificated over 
8,400 miles of pipeline. Also, the Commission's adoption of the 
``Hackberry Policy'', which ceased economic (i.e., rate) regulation of 
LNG terminals, resulted in a significant increase in proposals to 
construct LNG terminals to received imported LNG. In the past few 
years, the Commission has approved eight new LNG terminals with 12 
billion cubic feet per day of deliverability and expansions at two 
existing terminals that will increase deliverability by 1.3 billion 
cubic feet per day. The Commission has also approved 1.7 billion cubic 
feet per day of pipeline capacity that would transport Bahamian LNG to 
Florida. In total, FERC has approved 15.0 billion cubic feet per day of 
deliverability from LNG. Still, there are proposals pending at FERC for 
16.7 billion cubic feet per day of deliverability at new and existing 
terminals. Also, there is another 0.5 billion cubic feet per day of 
pipeline capacity pending to transport Bahamian LNG.
    Our ability to provide the country with the necessary natural gas 
infrastructure has been greatly improved by Congress' passage of the 
Energy Policy Act of 2005. Specifically, this legislation simplifies 
and streamlines the processes for considering natural gas 
infrastructure projects filed with the Commission. For this I would 
like to thank Congress and Chairman Barton, in particular, for his 
leadership in helping to guide this bill to passage. I note that almost 
immediately after passage of the Act, the Commission and the California 
Public Utilities Commission (CPUC) filed a joint petition to dismiss 
the litigation associated with the CPUC's assertion that it should be 
the decisional agency for the siting of an LNG terminal in California.
    The Commission is exploring opportunities to provide greater 
incentives to expand natural gas storage through pricing reform. More 
natural gas storage capacity will increase the flexibility of the 
industry to manage available supplies and may help dampen peak prices. 
Since 1988, our total underground natural gas storage capacity has 
increased by only 1.4 percent, while total national natural gas 
consumption has increased by over 24 percent. Additional storage 
capacity will not bring price relief this winter but over the long term 
pricing reform can promote storage capacity expansion, at both existing 
and new facilities. Congress did supply additional tools to promote gas 
storage, by allowing gas storage to be priced at market-based rates 
even if the project sponsor cannot prove that it does not possess 
market power. It is now up to the Commission, in light of the new 
authority in EPAct 2005, to implement pricing reforms that expand 
storage capacity while protecting consumers.
    Even with this progress, there is a danger that we will not be able 
to meet our expected growing demand for natural gas in the near term. 
Existing natural gas production has been flattening--and this was 
before the effects of Hurricanes Katrina and Rita. Also, the newly 
approved LNG terminals that will fill the gap between domestic (and 
imported Canadian) production will not be available until 2008 at the 
earliest. Further, new projects to extract gas from the Rocky Mountains 
and bring it to market are slated to begin in 2008. Given these 
potential shortages, there are still regional interests that make it 
difficult to site the needed infrastructure, especially in the 
Northeast, which is most dependent upon gas supplies from outside of 
its region. Inability to strengthen the energy infrastructure will 
likely result in higher prices and greater price volatility.
    In closing, the Commission is working diligently within its 
authorities to promote adequate and reliable infrastructure and to 
prevent market manipulation. We will closely monitor gas markets in the 
coming winter and take appropriate steps within our authorities to 
protect customers to the maximum extent possible. I would be happy to 
answer any questions that members of the subcommittee may have.
                               APPENDIX A
    The following is a list of major projects approved by the 
Commission, but not built due to various reasons.

------------------------------------------------------------------------
          Project Name                Dispostion           Comments
------------------------------------------------------------------------
Georgia Straits Crossing          Authorized 9/20/02  Canadians found a
 Pipeline                                              less expensive
  CP01-176-000                                         way to get the
                                                       gas they needed.
Islander East Pipeline Company    Authorized 9/19/02  Held up due to
  CP01-384-000                                         negative Clean
                                                       Water Act funding
Algonquin Gas Transmission
 Company
  CP01-384-000
Independence Pipeline             Authorized 7/12/00  No market. Could
  CP97-315                          Order vacated      not meet in-
                                                       service date.
ANR Pipeline Co. (Supply Link)
  CP97-319-000
Millenium Pipeline                Authorized 9/19/02  Held up due to
  CP98-150                                             lack of CZMA
                                                       consistency
                                                       finding. Sponsors
                                                       now reworking
                                                       project to avoid
                                                       Hudson River
                                                       crossing.
Red Lake Gas Storage Co           Proceeding          Terminated due to
  CP02-420-000                      terminated 6/4/    denial of market
                                   03                  based rates.
Greenbrier Pipeline Company       Approved 4/9/03     Could not fulfill
  CP02-396-000                                         requirement to
                                                       get 90 percent of
                                                       firm contracts
                                                       for the gas.
Weaver's Cove                     Approved 7/15/05    Congressional
  CP04-36-000                                          opposition to LNG
                                                       terminal causing
                                                       the expenditure
                                                       of federal funds
                                                       to maintain a
                                                       bridge (that was
                                                       scheduled to be
                                                       torn down) that
                                                       needs to be
                                                       removed to allow
                                                       access for LNG
                                                       tankers.
------------------------------------------------------------------------

    One of the many goals of the Energy Policy Act of 2005 was to 
strengthen the nation's natural gas infrastructure. The provisions in 
the legislation could possibly result in more approved projects 
reaching fruition. Those provisions include making the FERC the lead 
agency in processing all applications filed under Sections 3 and 7 of 
the Natural Gas Act. As lead agency, the FERC is tasked with setting a 
processing schedule by which all other permitting agencies with input 
into an infrastructure application must adhere. Further, the FERC is 
charged with establishing one federal record that is to be used in all 
appeals and rehearing of permitting actions. The Commission took a step 
towards implementing this provision in late September with a policy 
statement on the development of consolidated federal administrative 
records for judicial review of proceedings involving authorization of 
interstate natural gas pipelines and LNG facilities. Also, judicial 
appeals of FERC actions are to be heard in the federal appeals court 
where the proposed facility is located and, if any permitting agency 
does not comply with the FERC-established schedule, appeals can be made 
to the U.S. Court of Appeals for the District of Columbia. In addition, 
the FERC was named as the sole decisional agency regarding the siting 
and construction of LNG terminals and project sponsors of LNG terminals 
are now required to participate in the pre-filing program. Further, 
natural gas storage project sponsors can qualify for market-based rates 
even if they cannot prove that they do not have market power. These 
provisions, among other will serve to strengthen our natural gas 
infrastructure in a timely manner without compromising the environment.

    Mr. Shimkus. Thank you. The Chair now recognizes the 
Honorable Reuben Jeffery III, Chairman of the Commodity Futures 
Trading Commission. You have 5 minutes, sir.

              STATEMENT OF HON. REUBEN JEFFERY III

    Mr. Jeffery. Okay. Chairman Barton, Vice Chairman Shimkus, 
Ranking Member Boucher, members of the committee. I appreciate 
the opportunity to testify on behalf of the Commodity Futures 
Trading Commission concerning our oversight of energy futures 
markets.
    The CFTC has been paying particularly close attention to 
futures trading in energy commodities, both before and since 
the recent hurricanes, given the importance of energy prices to 
every American. Based upon our surveillance and market 
oversight to date, we believe that the heating oil and natural 
gas futures markets that we regulate have been accurately 
reflecting the underlying fundamentals of these markets. In my 
testimony today, I will try to describe how the CFTC works to 
ensure that energy futures markets are free from manipulation, 
and will also share some observations concerning the current 
state of the futures markets for natural gas and heating oil.
    Futures markets provide risk management tools that 
producers, distributors, commercial users of commodities such 
as natural gas and heating oil can use to protect themselves 
from unpredictable price changes. They also play a price 
discovery function, as participants in other markets look to 
futures markets for accurate information on supply, demand, and 
other factors. The CFTC's mission, under the Commodity Exchange 
Act, the so-called CEA, is to ensure that commodity futures 
markets operate in an open and competitive way, free of 
manipulation or price distortions. Our focus is primarily on 
the regulated futures exchanges, such as with respect to 
energy, the New York Mercantile Exchange, known as NYMEX. The 
CFTC fulfills its obligation through a comprehensive program 
designed to identify and mitigate the potential for 
manipulation and other market abuses, and to ferret out and 
punish illegal behavior.
    On every trading day, CFTC staff closely monitor trading 
activities on the exchanges to detect unusual activity or price 
aberrations that may indicate actual or attempted manipulation. 
The cornerstone of the CFTC's market surveillance, oversight of 
the markets, is their market surveillance program, as 
implemented through the Large Trader Reporting System. This 
requires traders to file confidentially with the CFTC daily 
reports concerning their positions in a particular contract.
    On the enforcement side, the CFTC's Enforcement Division 
investigates and, as appropriate, prosecutes those who violate 
the Act, the CEA, through manipulation, false reporting, and 
trade practice abuses. Enforcement investigations are often 
conducted in cooperation with the Exchange and other 
regulators, such as FERC. In recent years, in the energy area 
alone, the CFTC has filed 32 enforcement actions against nearly 
50 defendants, which have thus far resulted in civil penalties 
totaling approximately $300 million.
    Now, turning to the current state of the futures markets 
for heating oil and natural gas, recent experience has shown 
that even small disruptions in production, refining capacity, 
or transportation networks can significantly affect prices in 
the face of high demand for energy. Given the scale of the 
disruptions caused by the various hurricanes, prices for 
heating oil and natural gas, as we are all painfully aware, 
have risen significantly. It is precisely during times when the 
overall market environment is volatile that the risk management 
and price discovery functions of futures markets are needed 
most by commercial users of energy markets and energy products.
    Now, let me share some of our observations about the 
futures markets, specifically for heating oil and natural gas. 
First, with respect to a category of traders we hear about a 
lot, noncommercial traders, so-called speculators. This group, 
in the markets, has most recently held net short positions in 
both heating oil and natural gas futures markets. That is, they 
would benefit from falling, not rising, heating oil and natural 
gas futures prices. Second, a recent study by Commission 
economists of crude oil and natural gas, regarding the 
relationship between commercial and noncommercial users, so-
called speculators and hedgers, is consistent with the view 
that speculators respond to price changes, that is, they are 
not the cause of price changes, per se.
    Third, high futures prices and price volatility for heating 
oil and natural gas since the hurricane are signals of market 
fundamentals, reflecting expectations of the market 
participants, both commercial and non-commercial, in a time of 
very tight demand/supply balances, combined with the impact of 
damage caused to the energy infrastructure by the hurricanes. 
In other words, futures prices, when futures markets are 
working properly, free of manipulation, reflect underlying 
fundamentals.
    Finally, the actual delivery experience in heating oil and 
natural gas futures contracts over the past 2 years has not 
displayed unusual patterns consistent with any market 
manipulative corners or squeezes. Now, in light of the costs 
and impacts that heating oil and natural gas prices have on all 
consumers, we are very conscious of our responsibility at the 
CFTC to ensure that futures markets are fair, competitive, and 
free of manipulation. To that end, we will continue to conduct 
active oversight and close surveillance of these markets to 
ensure that they continue to function properly.
    Thank you for having me here today and represent the 
Commission, and I look forward to your questions.
    [The prepared statement of Hon. Reuben Jeffery III 
follows:]
Prepared Statement of Hon. Reuben Jeffery III, Chairman, U.S. Commodity 
                       Futures Trading Commission
    Chairman Barton, Ranking Member Dingell, Chairman Hall, Ranking 
Member Boucher and Members of the Subcommittee: I appreciate the 
opportunity to testify on behalf of the Commodity Futures Trading 
Commission (CFTC) concerning the CFTC's oversight of energy futures and 
options markets. I am pleased to testify alongside Chairman Joseph 
Kelliher of the Federal Energy Regulatory Commission and Assistant 
Secretary Mark Maddox of the Department of Energy. Each of our agencies 
has a distinct and important function in the markets for energy 
products and we, at the CFTC, are committed to continuing inter-agency 
cooperation and coordination in order to ensure an effective and 
efficient regulatory oversight regime.
    The CFTC has been paying particularly close attention to futures 
trading in energy commodities, both before and since the recent 
hurricanes, because of the importance of energy prices and supplies to 
the U.S. economy and to every U.S. citizen. Both the level and the 
volatility of prices will react to new information. If such reactions 
are based on accurately reported information about market fundamentals, 
such as short- or long-term changes in supply or demand, then the 
markets are performing their proper price discovery function. Based on 
our surveillance so far, we believe that heating oil and natural gas 
futures markets have been accurately reflecting the underlying 
fundamentals of these markets.
    In my testimony today, I will describe the CFTC's oversight of the 
energy futures markets. I will also share my observations on the 
current state of the futures markets for natural gas and heating oil.
       a. the commodity futures trading commission's core mission
    Futures markets play a critically important role in the U.S. 
economy. They provide risk management tools that producers, 
distributors, and commercial users of commodities (such as natural gas 
and heating oil) utilize to protect themselves from unpredictable price 
changes. The futures markets also play a price discovery role as 
participants in related cash and over-the-counter (OTC) markets look to 
futures markets to discover prices, which accurately reflect 
information on supply, demand, and other factors. Both functions would 
be harmed by manipulation of prices.
    The CFTC's primary mission under the Commodity Exchange Act (the 
CEA) is to ensure that the commodity futures and options markets 
operate in an open and competitive manner, free of price distortions. 
The CFTC fulfills this obligation through a comprehensive, multi-
faceted program that is designed to identify and mitigate the potential 
for manipulation and other market abuses, and to ferret out and punish 
illegal behavior.
                 b. the cftc's market oversight program
    To the extent possible, the CFTC attempts to proactively identify 
and mitigate the potential for price manipulation. When any new futures 
or options contract is listed for trading on a futures exchange, the 
CFTC staff reviews the terms and conditions of the contract to 
determine if it is readily susceptible to manipulation. For example, 
although most futures contracts are ultimately cash-settled (meaning 
participants offset their positions through the exchange by paying or 
receiving money rather than by making or taking delivery of the actual 
commodity), the CFTC carefully examines those contracts that permit 
physical delivery (as do key energy contracts on the New York 
Mercantile Exchange, or NYMEX) to ensure that the deliverable supply of 
the commodity is sufficient to facilitate orderly deliveries and 
liquidations at contract expiration dates, and to prevent any would-be 
manipulator from cornering or squeezing the market.
    Every trading day, CFTC staff closely monitors trading activities 
on the exchanges to detect unusual activity or price aberrations that 
may indicate actual or attempted manipulation. The cornerstone of the 
CFTC's market surveillance program is the Large Trader Reporting 
System. The Large Trader Reporting System requires clearing members, 
futures commission merchants, and foreign brokers to file daily reports 
with the CFTC concerning their own and customer positions in a 
particular contract. This reporting requirement is triggered when a 
trader holds a position at or above specific reporting levels set by 
CFTC's regulations. Through Large Trader Reports, the CFTC becomes 
aware of concentrated and coordinated positions that might be used by 
one or more traders to attempt manipulation.
    In addition to the daily Large Trader Reporters, the CFTC may issue 
a ``special call'' to a reportable trader or firm. Through these 
special calls, the CFTC can obtain additional, more detailed 
information on a participant's trading and delivery activity, and on 
the trader's positions and transactions in the underlying commodity.
    Market surveillance is not conducted exclusively by the CFTC. Each 
futures exchange is required under the CEA to affirmatively and 
effectively supervise trading, prices, and positions. The CFTC examines 
the exchanges to ensure that they have devoted appropriate resources 
and attention to fulfilling this important responsibility. The CFTC 
staff's findings from these rule enforcement reviews are reported to 
the CFTC, and are publicly posted on the CFTC web site (www.cftc.gov). 
Furthermore, exchanges must impose position limits, where appropriate, 
to guard against manipulation. For example, NYMEX imposes spot month 
speculative limits on its energy futures contracts.
    When the CFTC's surveillance staff identifies a potential problem 
situation, the CFTC engages in an escalating series of regulatory steps 
to work to correct the problem. Typically, the CFTC's staff consults 
and coordinates its activities with exchange staff. CFTC staff contacts 
the largest long- and short-side traders to obtain information on, 
among other things, their delivery intentions and capability, and their 
price objectives in liquidating trades. The traders are advised of the 
CFTC's concern regarding the orderly expiration of the futures 
contract, and reminded that they are expected to trade in a responsible 
manner. This ``jawboning'' activity by CFTC staff and the exchanges is 
usually quite effective in resolving most potential problems. However, 
when staff is not satisfied that it has been successful, a more formal 
warning will be issued to the trader in writing of the CFTC's concern 
about the possibility of manipulation.
    Given the CFTC's statutory role as an oversight regulator, and the 
exchanges' statutory responsibility to monitor trading to prevent 
manipulation, the CFTC expects that the exchanges will take the lead in 
resolving problems in their markets, either informally or through 
emergency action. If an exchange fails to take actions that the CFTC 
deems necessary, the CFTC has broad emergency powers to direct the 
exchange to take such action as in the CFTC's judgment is necessary to 
maintain or restore orderly trading in, or liquidation of, any futures 
contract. Such actions could include limiting trading to liquidating 
transactions, imposing or reducing limits on positions, requiring the 
liquidation of positions, extending a delivery period, or closing a 
market. Fortunately, most issues are resolved without the need for the 
CFTC's emergency powers. The fact that the CFTC has had to take 
emergency action only four times in its history demonstrates its 
commitment not to intervene in markets unless all other efforts have 
been unsuccessful.
                   c. the cftc's enforcement program
    The CFTC aggressively pursues any individual or entity that 
intentionally seeks to disrupt or undermine the integrity of markets 
for trading commodity futures and options contracts. The CFTC's 
Division of Enforcement investigates and, as appropriate, prosecutes 
individuals and entities for violations of the CEA or CFTC regulations, 
including manipulation, false reporting, and trade practice abuses 
(e.g., wash sales and accommodation trading) involving trading on 
markets subject to CFTC oversight. The proposed sanctions sought in the 
CFTC's enforcement actions serve the dual purposes of obtaining redress 
for the charged violations and acting as a deterrent for would-be 
violators by sending a clear message that improper conduct will not be 
tolerated.
    The CFTC's Division of Enforcement may receive referrals from 
several sources: the CFTC's own market surveillance staff; the 
Division's interaction with compliance staff at the relevant exchange; 
market participants and complaints from members of the public; and 
other State, Federal, and international regulatory authorities. Upon 
determining that further inquiry concerning the referral is warranted, 
Enforcement staff immediately gathers information internally available 
within the CFTC and from the exchanges, and conducts relevant 
interviews. The CFTC may grant formal administrative subpoena 
authority, which enables its Division of enforcement to obtain 
documents (for example, audio recordings, e-mail and trade data), and 
testimony from third parties.
    The investigation may be conducted in cooperation with the 
applicable exchange and other regulators such as the Federal Energy 
Regulatory Commission (FERC). On October 12, 2005, the CFTC and FERC 
executed a Memorandum of Understanding, pursuant to provisions of the 
Energy Policy Act of 2005, to ensure that information requests to 
markets within the respective jurisdiction of each agency are properly 
coordinated to minimize duplicative information requests, and to 
address the confidential treatment of proprietary energy trading data. 
It will enable both the CFTC and FERC to work actively to assure the 
price integrity of the energy markets.
    If warranted at the conclusion of its investigation, the Division 
of Enforcement will recommend that the CFTC initiate a civil injunctive 
action in Federal district court or an administrative proceeding. The 
CFTC may obtain temporary statutory restraining orders and preliminary 
and permanent injunctions in Federal court to halt ongoing violations, 
as well as civil monetary penalties, appointment of a receiver, the 
freezing of assets, restitution to customers, and disgorgement of 
unlawfully acquired benefits. Administrative sanctions may include 
orders suspending, denying, revoking, or restricting registration; 
prohibiting trading; and imposing civil monetary penalties, cease and 
desist orders, and orders of restitution.
    The CFTC also may refer an enforcement matter to the Department of 
Justice. Criminal activity involving commodity-related instruments can 
result in prosecution for criminal violations of the CEA and for 
violations of federal criminal statutes, such as mail fraud or wire 
fraud.
    Not all investigations necessarily lead to the filing of a CFTC 
enforcement action. For example, in July 2003, the CFTC and FERC issued 
a joint statement of the results of investigations into a price spike 
in natural gas that occurred in late February 2003. The CFTC's 
investigation focused on exchange-traded futures and options trading in 
natural gas, including obtaining and listening to numerous audiotapes 
of conversations between clerks on the NYMEX floor and the customers 
who were using the markets. The CFTC found nothing in its analysis to 
suggest any manipulative activity in the natural gas futures and 
options market at that time.
    Similarly, in August 2004, the CFTC issued a statement that it had 
completed its investigation of the sharp upward movement in prices in 
the natural gas market that occurred in late 2003. The investigation, 
which was conducted in full cooperation with FERC and enhanced by the 
cooperative effort of NYMEX, did not uncover evidence that any entity 
or individual engaged in activity that violated the CEA with respect to 
natural gas trading in late 2003. The CFTC's investigation included the 
extensive review of documents and audio recordings produced by numerous 
companies and individuals in the natural gas markets, including 
physical and financial traders, industry analysts, and operators of 
natural gas storage facilities, as well as testimony and interviews of 
dozens of individuals.
    In recent years, the CFTC's Enforcement program has conducted an 
extensive investigation of alleged abuses in energy-related markets. 
This investigation has focused on energy trading firms that allegedly 
have engaged in: 1) reporting false, misleading or knowingly inaccurate 
market information to natural gas reporting firms (including price and 
volume information) which affects or tends to affect the market price 
of natural gas, including futures prices as traded on NYMEX; and 2) 
manipulation or attempted manipulation which could affect prices of 
NYMEX natural gas futures contracts. The CFTC's enforcement actions in 
the energy sector reflect an approach to market oversight that 
emphasizes tough enforcement actions against proven wrongdoers. As a 
result of its efforts in investigating wrongdoing in the energy 
markets, the CFTC has filed 32 enforcement actions charging 27 
companies and 22 individuals. These enforcement actions, which are 
identified more fully in the Appendix, have thus far resulted in civil 
monetary penalties totaling nearly $300 million, among other sanctions.
   d. current state of futures markets for heating oil & natural gas
    Having described the process the CFTC uses to ensure that futures 
markets are operating in an open and competitive manner, I will now 
describe what CFTC staff has recently observed in the futures markets 
for heating oil and natural gas. These observations are directed at the 
following: 1) participation rates of non-commercial traders, the so-
called ``speculators''; 2) current futures market prices for contracts 
with delivery dates during the upcoming winter heating season; 3) 
recent delivery experience; and 4) the relationship between crude oil 
futures prices and heating oil futures prices.
1. Participation Rates of Non-Commercial Traders
    Data from the CFTC's Large Trader Reporting System help answer 
questions about the role of non-commercial traders in futures markets 
for heating oil and natural gas. A weekly summary, called the 
Commitments of Traders (COT) Report, is based on information gathered 
through the Large Trader Reporting System. The CFTC publicly releases 
the COT Report every Friday afternoon via its web site (www.cftc.gov).
    A snapshot of positions in the futures markets for heating oil and 
natural gas, current as of October 25, 2005, shows that as a group, 
non-commercial traders--that is, those who are commonly labeled as 
speculators - have most recently held net short positions in both 
heating oil and natural gas futures markets. In other words, non-
commercial traders have held positions that will gain in value if 
prices for heating oil or natural gas futures fall. In the heating oil 
futures market, non-commercial traders hold approximately 10 percent of 
the open long positions and 14 percent of the open short positions. 
These numbers reflect a net short position since the total number of 
long positions must equal the total number of short positions in the 
overall market. In the natural gas futures market, non-commercial 
traders hold approximately 12 percent of the open long positions and 15 
percent of the open short positions. In other words, as of October 25, 
2005, non-commercial traders would benefit from falling--not rising--
heating oil and natural gas futures prices.
    Positions in both heating oil and natural gas futures are held 
predominately by commercial traders - that is, producers, refiners, and 
retailers, who are commonly known as hedgers. In the heating oil 
futures market, nearly 59 percent of outright long positions (i.e., 
positions that will gain value if prices rise) are held by commercial 
traders compared to 10 percent for non-commercial traders. In the 
natural gas futures market, approximately 44 percent of outright long 
positions are held by commercial traders compared to 12 percent for 
non-commercial traders.1
---------------------------------------------------------------------------
    \1\ A large percentage of the remaining long positions are held by 
traders whose positions are too small to meet the reporting size 
threshold for inclusion in the Commission's Large Trader Report. The 
remaining long positions are held as part of so-called ``spread'' 
positions across contract months. A spread position is established by 
simultaneously taking a long position in one futures contract and 
taking a short position in a related contract. Although spread 
positions are generally regarded as speculative, the speculation is 
based on relative price differences between contracts. Spread 
strategies do not depend on, and are therefore unrelated to, the 
overall level or direction of the market.
---------------------------------------------------------------------------
    Managed money traders, including those called hedge funds, fall 
into the category of non-commercial traders because they do not have a 
commercial interest in the product upon which the futures contract is 
written. As a group, managed money traders represent a significant 
portion of the relatively small percentage of non-commercial positions 
in both heating oil and natural gas futures markets. On average, 
managed money traders make up approximately 61 percent of the non-
commercial long positions and 92 percent of the non-commercial short 
positions in the natural gas futures markets. In the heating oil 
futures market, managed money traders make up 85 percent of the non-
commercial long positions and 69 percent of the non-commercial short 
positions.
    Figures 1 and 2 provide a snapshot of participation by managed 
money traders in the November 2005 heating oil futures contract and the 
December 2005 natural gas futures contract traded at NYMEX. The net 
positions of managed money traders as a group are displayed by the 
vertical columns. These positions are reported, in thousands of 
contracts, for all futures and options combined (defined as ``AFOC'' in 
Figures 1 and 2). Each heating oil contract is written on 1,000 barrels 
(equivalent to 42,000 gallons) of heating oil. Each natural gas 
contract is written on 10,000 million British Thermal Units (mmBTU) of 
natural gas. The continuous line on each chart shows the end-of-day 
price for the nearby futures contract. Both charts show that managed 
money traders have most recently held net short positions in both 
markets, and they would benefit from falling--not rising--futures 
prices. The charts also show that while the positions of managed money 
traders and prices generally move together, there are several instances 
where prices move independently from the positions of managed money 
traders. A conclusion that can be drawn from this chart is that managed 
money traders, and speculators in general, do not have perfect 
foresight.
    The role of non-commercial traders in futures markets has been 
studied extensively, both by the CFTC's economists and others. One 
lesson from these studies is that non-commercial traders are necessary 
in order for futures markets to facilitate the needs of hedgers. In 
order for hedgers to reduce the risk that they face in their day-to-day 
commercial activities, they need to trade with someone willing to 
accept the risk the hedger is trying to shed. Therefore, both hedgers 
and speculators are necessary for the futures markets to perform their 
vital role of transferring risk to those who are willing to accept it 
for a price.
    A recent study by the CFTC's economists demonstrates the 
relationship between speculators and hedgers. The study shows that when 
a commercial trader sells, it will often be a managed money trader who 
takes the other side of the transaction; when a commercial trader buys, 
it will often be a managed money trader who is the seller. This 
observation is consistent with the notion that managed money traders 
respond to price changes; they are not the cause of price changes.
2. A Snapshot of Current Futures Market Prices
    As I mentioned earlier, the futures markets serve an important 
price discovery function. As a general policy, the CFTC refrains from 
predicting prices. However, futures market prices can be viewed as 
reflecting the markets' aggregate expectation of future spot market 
prices. Each table below displays current (as of 10/31/2005) futures 
prices for contracts expiring during the upcoming winter heating 
season. These futures prices show, based on current information, that 
the futures markets expect spot market prices to remain close to 
current levels. These prices and expectations are revised continuously 
by the market as new information becomes available.

                       Heating Oil Futures Prices
                    U.S. dollars and cents per gallon
------------------------------------------------------------------------
                                                               Futures
                       Delivery Date                        Price  as of
                                                              10/31/2005
------------------------------------------------------------------------
December 2005.............................................        1.824
January 2006..............................................        1.870
February 2006.............................................        1.889
March 2006................................................        1.871
------------------------------------------------------------------------


                       Natural Gas Futures Prices
    U.S. dollars and cents per million British thermal units (mmBtu).
------------------------------------------------------------------------
                                                               Futures
                       Delivery Date                        Price  as of
                                                              10/31/2005
------------------------------------------------------------------------
December 2005.............................................       $12.14
January 2006..............................................       $12.55
February 2006.............................................       $12.56
March 2006................................................       $12.28
------------------------------------------------------------------------

    Here I should briefly mention what are, in our opinion, the primary 
causes of the recent high prices and price volatility for heating oil 
and natural gas. In recent years, demand for petroleum products and 
natural gas has risen faster than have supplies of these commodities. 
This has created very tight demand/supply balances in these markets. In 
economists' jargon, both supply and demand for heating oil and natural 
gas are price inelastic in the short run. Therefore, changes in supply 
or demand can, in the short run, have disproportionately large effects 
on price. In addition, futures markets are by their nature 
anticipatory; they incorporate into prices a probabilistic estimate of 
possible future changes in supply and demand. For example, early summer 
weather forecasts of an unusually active hurricane season this year, 
and memories of the damage caused last year by Hurricane Ivan, had 
already caused the natural gas futures market to price-in some possible 
damage from summer hurricanes well before Hurricane Katrina hit the 
Gulf Coast. Of course, when Katrina did hit, it did substantially more 
damage to the energy infrastructure than the futures market had 
anticipated, and prices increased further. The impact of these storms 
has significantly changed the fundamentals of these markets. Hurricanes 
Katrina and Rita have caused cumulative losses of Gulf production of 
74.7 million barrels of crude oil (equivalent to about 5 days of crude 
inputs into U.S. refineries) and 381 billion cubic feet of natural gas 
(equivalent to about 7 days of U.S. consumption). Shut-ins of Gulf 
production of crude oil and natural gas remain at relatively high 
levels. In addition, outages of crude oil refineries and natural gas 
processing facilities continue to impact the markets. Nevertheless, 
heating oil and natural gas prices have recently fallen from their 
post-Katrina highs in response to declining crude oil prices and 
apparent declines in demand in response to high prices and generally 
mild weather.
    The direction of heating oil and natural gas prices this winter 
will be substantially determined by how quickly the energy 
infrastructure comes back on-line and by winter weather. Current 
heating oil and natural gas prices, while down a bit from their highs, 
are by historical standards at high levels.
3. Recent Delivery Experience
    Figures 3 and 4 show deliveries for heating oil and natural gas 
futures contracts since the beginning of 2004. The vertical columns 
depict the number of contracts delivered. The number of contracts 
corresponds with numbers displayed on the left-hand axis of the 
figures. The continuous line, corresponding to the right-hand axis, 
shows the size of the deliveries as a percentage of the maximum number 
of open positions established for each contract month. For example, if 
the maximum number of open positions over a contract's life was 100,000 
contracts, and 4,000 positions were settled by delivery, the continuous 
line would represent 4 percent. The remaining open positions are 
settled by offset, that is, by taking an equal and opposite futures 
position that brings the trader's net position to zero.
    Since futures contracts are primarily risk management contracts, 
positions are almost always settled by offset. Across all futures 
markets, less than one percent of open futures positions are settled by 
delivery. In physically settled futures contracts, such as heating oil 
and natural gas futures, close scrutiny of the delivery process is 
vitally important for preventing corners or squeezes. This process is 
watched closely by the CFTC surveillance staff and the exchanges. A 
trader holding a large long position into the delivery process can 
expect that his actions will be closely monitored. The CFTC 
surveillance staff looks at many sources of information in addition to 
actual deliveries. The actual delivery experience in heating oil and 
natural gas does not display any unusual patterns consistent with a 
corner or squeeze during this period. (Note: Each heating oil contract 
is written on 1,000 barrels (equivalent to 42,000 gallons) of heating 
oil. Each natural gas contract is written on 10,000 million British 
Thermal Units (mmBTU) of natural gas.)
4. The Relationship between Crude Oil Futures Prices and Heating Oil 
        Futures Prices
    A common trading strategy is to simultaneously establish offsetting 
positions between crude oil futures contracts and futures contracts for 
the products refined from crude oil, such as heating oil traders 
commonly call this trading strategy the ``crack spread,'' referring to 
the cracking process of turning crude oil into refined products. The 
chart below displays the heating oil crack spread, using nearest-to-
delivery futures contracts, over the past year. This chart shows that 
the value of the crack spread increased significantly following 
Hurricanes Katrina and Rita. In other words, prices for heating oil 
have moved much higher, on a percentage basis, than prices for crude 
oil. A conclusion that can be drawn from the behavior of the heating 
oil crack spread is that the increase in heating oil prices immediately 
following Hurricanes Katrina and Rita were driven primarily by 
disruptions to the refining process, and not as much from increases in 
the level of crude oil prices. In recent weeks, the heating oil crack 
spread has fallen, but still remains higher than the normally 
prevailing level.
                             e. conclusion
    In U.S energy markets, recent experience has shown that even small 
disruptions in production, refining capacity, or transportation 
networks can significantly affect prices in the face of high demand for 
energy products. Therefore, given the scale of disruptions caused by 
Hurricanes Katrina and Rita, it is not surprising that current prices 
for heating oil and natural gas, as well as other energy products have 
risen significantly. It is precisely during times when the overall 
market environment is volatile that the risk-management and price-
discovery features of futures markets are needed most by commercial 
users of energy products. All the evidence that we have seen is 
consistent with the notion that futures markets for heating oil and 
natural gas and other energy products have been properly performing 
their risk management and price discovery roles. The staff of the 
Commission will continue to conduct very close surveillance of these 
markets to ensure that they continue to function properly. Finally, 
improper conduct will not be tolerated, and the CFTC will continue to 
pursue aggressive enforcement actions against those who break the 
rules.
    This concludes my remarks. I look forward to your questions.

    Mr. Shimkus. Thank you. Now, the Chair recognizes Mr. Mark 
Maddox, Principal Deputy Assistant Security of the Office of 
Fossil Energy. Thank you.

                    STATEMENT OF MARK MADDOX

    Mr. Maddox. Mr. Shimkus, members of the committee, 
subcommittee. I am pleased to be here today to discuss the 
supply and demand for heating oil this winter. I will also 
discuss the natural gas situation and its relationship to the 
heating oil market.
    America's homes and businesses are heated predominantly by 
three fuels: heating oil, natural gas, and electricity, the 
last of which is used for heat pumps and resistance heating. 
Heating oil provides heat to only about 7 percent of the fuel 
consumed by residences on a national basis, but the demand is 
not uniformly distributed. The Northeast consumes about 73 
percent of all the heating oil used in this country.
    Heating oil and natural gas each have economic and security 
of supply advantages. Heating oil supplying the Northeast comes 
from a number of sources. This diversity of supply has the 
obvious advantage of increased security. It would be rare for 
more than one source of supply to falter at the same time. The 
disadvantage is that most of these sources are distant from 
consumers, and they are subject to interruptions due to 
shipping problems.
    Unusual conditions can bring to light weaknesses in any 
system. In the late winter of 1999-2000, for example, the 
country suffered a severe cold spell. Just as demand was rising 
to record levels, domestic natural gas production slumped in 
the producing regions, harbors froze, North Atlantic storms 
kept ships at sea, and barges could not move. Heating oil 
availability became spotty. Dealers were rationing supplies and 
prices surged.
    In response to that incident, the State and Federal 
Governments have taken several actions to improve the security 
of supply. Coordination between the States and Federal 
Government has been improvement, and the State energy offices 
are in close contact with the Department of Energy. The Coast 
Guard has dedicated the necessary resources to assure that 
ports and rivers in the Northeast remain ice-free and open to 
ship and barge movements. We also created a 2 million barrel 
inventory of heating oil, called the Northeast Home Heating Oil 
Reserve, which is stored in New York Harbor, New Haven, 
Connecticut, and Providence, Rhode Island. Since 2000, despite 
some severe winters, these measures have helped assure that the 
Northeast has not suffered from any shortages of heating fuel.
    The situation going into the winter of 2005 and 2006 will 
be different from what we have grown to expect. Crude oil 
prices have been rising, and this year, we realized the excess 
capacity had shrunk to a minimum level. In late August, 
Hurricane Katrina devastated the central Gulf Coast. A week 
later, Hurricane Rita did the same to the western Gulf Coast. 
The impact on the domestic oil industry was significant. At its 
worst point, virtually all of the production of oil and gas in 
the Gulf of Mexico was halted.
    The Administration responded immediately to the hurricanes 
by taking a number of crucial measures to minimize the impact 
of the storm on the Nation's energy supply, and they are 
outlined in my submitted testimony. Today, the heating oil 
situation is less clear. While inventories of other products 
have been rising over the last several weeks, inventories of 
distillates have dropped, but are comparable to last year's 
levels. However, the outlook is not bleak. The high prices 
occasioned by the hurricanes have caused refineries all over 
the world to put available capacity to work. Furthermore, based 
on our conversations with industry, we expect that distillates 
will continue to enter the U.S. from overseas.
    The other factor that makes the heating oil situation 
unclear is that our supplies of natural gas from the Gulf of 
Mexico were so thoroughly disrupted. However, we still project 
that we will meet or exceed the predicted 3.2-tcf goal. Whether 
that inventory will be adequate will depend on the rates of 
production from domestic fields going forward.
    Prices for natural gas are expected to remain high. 
According to the Energy Information Administration, Henry Hub 
natural gas prices are expected to average around $9.00 per 
thousand cubic feet, or mcf, in 2005, and $8.70 in 2006.
    The Administration has taken every action available to the 
government. The Strategic Petroleum Reserve sites are all 
operating and capable of drawing down and selling oil as 
quickly as may be required. The Northeast Home Heating Oil 
Reserve stands at its maximum authorized volume of 2 million 
barrels. To encourage reduced energy consumption, the 
Administration has launched an energy efficiency and 
conservation campaign, and is educating consumers on steps they 
can take to reduce their utility bills.
    I would like to conclude by saying that the Department of 
Energy stands ready to make the heating oil reserve available 
immediately in the event of a supply disruption.
    That concludes my prepared testimony. I will be happy to 
answer questions.
    [The prepared statement of Mark Maddox follows:]
     Prepared Statement of Mark Maddox, Principal Deputy Assistant 
        Secretary, Office of Fossil Energy, Department of Energy
    Mr. Chairman and members of the Subcommittee. I am pleased to be 
here today to discuss the Nation's energy supply and especially the 
supply and demand for heating oil this winter. I will also discuss the 
natural gas situation and its relationship to the heating oil market.
    America's homes and businesses are heated predominantly by three 
fuels, heating oil, natural gas and electricity, the last of which is 
used for heat pumps and resistance heating. Heating oil provides heat 
to only about 7 percent of the fuel consumed by residences on a 
national basis, but the demand is not uniformly distributed; the 
Northeast consumes the about 73 percent of all the heating oil used in 
the country.
    Heating oil and natural gas each have economic and security of 
supply advantages. Heating oil supplying the Northeast comes from a 
number of sources:

 Oil refined along the Gulf of Mexico is transported by water and by 
        the Colonial Pipeline to the New York City gate;
 Refiners in New Jersey, Pennsylvania and Delaware ship their 
        production to the Northeast by pipeline and by water;
 Imports mainly from Canada, the Caribbean, and Europe arrive by ship.
    This diversity of supply has the obvious advantage of increased 
security: It would be rare for more than one source of supply to falter 
at the same time. The disadvantage is that most of these sources are 
distant from consumers and they are subject to interruptions due to 
shipping problems. Historically, we have been concerned that severe 
winter weather could freeze ports and delay ship movements at exactly 
the time that demand would be surging.
    Unusual conditions can bring to light weaknesses in any system. In 
the late winter of 1999-2000, for example, the country suffered a 
severe cold spell. Just as demand was rising to record levels, domestic 
natural gas production slumped in the producing regions, harbors froze, 
North Atlantic storms kept ships at sea and barges could not move. 
Heating oil availability became spotty; dealers were rationing supplies 
and prices surged.
    In response to that incident, the state and Federal governments 
have taken several actions to improve the security of supply. 
Coordination between the states and the Federal government has been 
improved, and the state energy offices are in close contact with the 
Department of Energy. The Coast Guard has dedicated the necessary 
resources to assure that ports and rivers in the Northeast remain ice 
free and open to ship and barge movements. We also created a 2 million 
barrel inventory of heating oil called the Northeast Home Heating Oil 
Reserve, which is stored in New York Harbor, New Haven, Connecticut and 
Providence, Rhode Island. Since 2000, despite some severe winters these 
measures have helped assure that the Northeast has not suffered from 
any shortages of heating fuel.
    The situation going into the winter of 2005-06 will be different 
from what we have grown to expect. Recent world economic growth caused 
a surge in oil demand that outstripped forecasts. Worldwide investment 
in oil exploration and production over the last ten years has been 
insufficient to maintain the wide margin of production capability above 
current demand that we have been used to. In addition, investment in 
refining has lagged demand growth, in large part because of the low 
returns on capital that beset the industry for many years. As a result, 
crude oil prices have been rising, and this year we realized that 
excess capacity had shrunk to a minimal level, and that Saudi Arabia 
and other member countries of the Organization of Petroleum Exporting 
Countries no longer had the ability to increase production and rapidly 
stabilize or reduce oil prices. During the summer of 2005, everyone 
realized that fuels for heating would be expensive this winter. 
However, inventories were building and we expected to go into the 
winter with the best inventory picture that we have had in years.
    Hurricane season changed that. In late August, Hurricane Katrina 
devastated the Central Gulf Coast. A week later Hurricane Rita did the 
same thing to the Western Gulf Coast. The impact on the domestic oil 
industry was significant. At its worst point, virtually all production 
of oil and gas from the Gulf of Mexico was halted.
    The Administration responded immediately to the hurricanes by 
taking a number of crucial measures to minimize the impact of the storm 
on the nation's energy supply:

 The Department worked to get power to the interstate pipelines that 
        were essential to ensuring adequate supplies of refined 
        products to the southeast and east coast.
 We authorized loans from the Strategic Petroleum Reserve to refiners 
        in the Gulf region and the Midwest whose scheduled deliveries 
        had been disrupted.
 The President authorized the sale of oil from the Strategic Petroleum 
        Reserve to help keep markets well supplied at a time when there 
        were widespread fears of looming shortages.
 We reached an agreement with the International Energy Agency for its 
        members to release an additional 30 million barrels of crude 
        oil and refined products to world markets.
 The Environmental Protection Agency provided temporary waivers 
        allowing the early use of winter blend gasoline.
 The Department of Homeland Security rescinded legal restrictions on 
        tanker transportation of fuel supplies.
 The Department of the Interior's Minerals Management Service 
        immediately began to streamline processes for various permit 
        approvals to resume production and expedited reviews of 
        requests for temporary barging of oil until pipelines could be 
        repaired.
 The Treasury Department increased the flexibility available to fuel 
        distributors to meet diesel fuel demand by waiving penalties 
        for highway use of ``dyed'' diesel fuel normally restricted to 
        off-highway use.
 The Navy and Coast Guard worked to clear shipping channels in the 
        Gulf and the Lower Mississippi River.
 And we worked with European allies to provide extra cargo tankers, as 
        well as refined product to help supply the American gasoline 
        market. These steps had a positive effect and helped calm the 
        markets.
    We do, however, want to note that additional facilities were shut-
in due to Hurricane Wilma, resulting in an approximately four percent 
increase in shut-in production. These facilities did not sustain any 
damage and therefore, are expected to come back on line in the next few 
days. Nevertheless, as of early this week, 223 production platforms and 
6 drilling rigs were still evacuated--the equivalent of 27 percent and 
4 percent, respectively, of all platforms and rigs. Approximately 100 
platforms and rigs were destroyed by the storms. Shut in oil production 
still exceeds one million barrels of oil per day, or 68 percent of 
expected daily production from the Gulf. Similarly, shut in gas 
production from the Gulf is 5.6 billion cubic feet per day, equal to 54 
percent of expected production. So far the country has foregone the 
production of 71 million barrels of oil and 360 billion cubic feet of 
gas during this time.
    On shore, the damage to refineries, gas processing plants, and 
power lines was equally serious. Over two million barrels of daily 
refining capacity was shut down. While onshore pipelines were not 
damaged, the lack of power meant drastically reduced operations. And 
when the pipelines came back into service there was not enough refined 
product to keep them operating at capacity.
    To a large extent the U.S. petroleum industry is making tremendous 
progress in recovering from the hurricanes, and it is a tribute to the 
workers in the Gulf region, many of whom have lost their homes and 
possessions, that they have done so much to restore electricity, 
pipelines, refineries and producing operations to service. At this time 
there are still four refineries with about one million barrels of 
capacity that have not returned to production, but two of these are 
expected to come back on line in November.
    The product pipeline problems that created shortages of gasoline 
along the East Coast have been corrected. While crude oil production in 
the Gulf of Mexico is still seriously hampered, imports are more than 
sufficient to meet demand, and inventories of crude oil are high and 
increasing. Furthermore, as refineries have come back on line and 
gasoline imports have continued at a high rate, gasoline is in ample 
supply. Inventories are rising and prices are declining from their 
peak.
    The heating oil situation is less clear. While inventories of other 
products have been rising over the last several weeks, inventories of 
distillates have dropped. To some degree that is because the U.S. 
economy is still strong and the demand for diesel fuel has not abated, 
and refineries as they have come back on line are emphasizing gasoline 
production. However, the outlook is not bleak. The high prices 
occasioned by the hurricanes have caused refineries all over the world 
to put all available capacity to work. Contrary to recent talk about 
the growth in demand for distillates in Europe, and many predictions 
that there will be no imports this winter, imports surged last week. 
Furthermore, based on our conversations with industry we expect that 
distillates will continue to enter into the U.S. from all over the 
world, but especially from Asia.
    As we actually go into winter, the demand for distillates will 
increase everywhere. However, that demand will be offset by the 
increase in domestic supply of distillates as refineries continue to 
come back on line.
    The other factor that makes the heating oil situation unclear is 
that our supplies of natural gas from the Gulf of Mexico were so 
thoroughly disrupted. Natural gas and distillates compete in many 
applications, and in the case of a disruption in supply for one 
product, a demand increase for the still available product can be 
nearly instantaneous. Prior to the hurricanes, industry observers 
believed that the target inventory level of 3.2 trillion cubic feet of 
natural gas entering the heating season would be achieved, and we still 
project that we will meet or exceed that goal, despite the disruption 
caused by the hurricanes. Whether that inventory will be adequate will 
depend on the rates of production from domestic fields, which in turn 
will be largely dependent upon the recovery of production and treatment 
facilities in the Gulf of Mexico and along the coast. It will also 
depend on the severity of the weather and the increased demand it could 
create.
    Prices for natural gas are expected to remain high. According to 
the Energy Information Administration's October Short-Term Energy 
Outlook, under the baseline weather case, Henry Hub natural gas prices 
are expected to average around $9.00 per thousand cubic feet, or mcf, 
in 2005 and around $8.70 per mcf in 2006.
    Total natural gas demand is projected to fall by 1.2 percent from 
2004 to 2005 due mainly to higher prices, but recover by 3.0 percent in 
2006 due to an assumed return to normal weather and a recovery in 
consumption by the industrial sector, which is projected to increase by 
about 6 percent over 2005 levels. Residential demand is projected to 
decline slightly from 2004 to 2005 mostly because of relatively weak 
heating-related demand during the first quarter, while industrial 
demand is estimated to decline by nearly 8 percent over the same period 
due to the much higher prices for natural gas as a fuel or feedstock.
    By 2006, both end-use sectors recover somewhat with residential 
demand estimated to increase 2.6 percent from 2005 levels and 
industrial demand increasing by 6 percent. The industrial rebound in 
2006 is partly because of assumed reactivation of damaged industrial 
plants in the Gulf of Mexico region but also reflects renewed fuel 
demand growth as domestic industrial plants adjust to higher prices. 
Power sector demand growth continues through the forecast period along 
with electricity demand growth. The pace is slower than the 5.7-percent 
rate projected for 2005 because an unusually hot summer and high 
cooling demand boosted 2005 growth significantly.
    Domestic dry natural gas production in 2005 is expected to decline 
by 3.0 percent, due in large part to the major disruptions to 
infrastructure in the Gulf of Mexico from both Hurricanes Katrina and 
Rita, but increase by 4.2 percent in 2006. Working gas in storage as of 
October 7 was estimated at 2.99 trillion cubic feet, a level 162 
billion cubic feet below 1 year ago but still 1.2 percent above the 5-
year average.
    About 15 percent of our natural gas comes from Canada via pipeline. 
Otherwise, there is not much opportunity to import gas, and the 
possibility for a surge of Canadian gas this winter is diminished 
because the expanding Alberta oil sands industry is a very heavy 
consumer of natural gas. Liquefied natural gas is a valuable but still 
relatively minor element in our natural gas supply. While it is an 
integral and essential part of the market, especially in Boston, the 
spot market for that product is so small that we cannot count on it for 
measurable relief in the event of shortages due to weather.
    Faced with this situation, the Administration has taken every 
action available to the Government. First, the supply of crude oil 
appears to be ample, in part due to the decision by the President and 
the Department to use the Strategic Petroleum Reserve. Since the 
hurricanes we have loaned 10.8 million barrels of oil and sold 11 
million barrels. In addition, the sale of oil was coordinated with the 
other member countries of the International Energy Agency. The United 
States has been able to import so much refined product during the last 
month in large part because the release of those products from 
strategic storage in Europe and Asia created the necessary price 
differentials for traders to export the products to the United States.
    The Strategic Petroleum Reserve storage sites are all operating and 
capable of drawing down and selling oil as quickly as may be required. 
Further, we have made it clear to industry that if any individual 
company is having trouble finding feedstock for its refineries, we 
stand ready to make loans as necessary to assure the refineries operate 
at maximum capacity. We do not foresee shortages this winter due to 
shortages of crude oil.
    The only program directly affecting the availability of heating oil 
is the Northeast Home Heating Oil Reserve. The Reserve stands at its 
maximum authorized volume of 2 million barrels. The companies holding 
the oil for the Government are contractually bound to complete delivery 
of all the oil within 10 days of the Government contracting to sell the 
inventory. Our method for selling the heating oil is an internet-based 
interactive auction system, and we are ready to make the oil available, 
conduct an auction and award contracts within 48 hours of a declaration 
by the President of a severe petroleum supply interruption and 
subsequent authorization by the Secretary.
    Beyond these efforts, it is our belief that the markets are acting 
to make the best of what has been a severely disrupted fall season. 
Nevertheless, now that the Hurricane season is coming to a close, fears 
are diminishing and prices are receding. The wholesale price of heating 
oil peaked at about $2.20 per gallon early in October, and is down 
about $0.30 per gallon from that point. While low inventories for 
distillates present the possibility of volatility, and the price of 
natural gas, heating oil and distillates in general will be high 
throughout the winter, the awareness that high prices brings will cause 
people to use natural gas and oil more sparingly and to take what 
measures they can to reduce consumption.
    To encourage reduced energy consumption, the Administration has 
launched an energy efficiency and conservation campaign aimed at 
educating consumers on steps they can take to reduce their utility 
bills. Senior Department of Energy officials, led by Secretary Bodman, 
have been traveling the country to encourage consumer conservation 
efforts. We are also working with energy-intensive businesses and 
industries on ways to conserve. And the President has called on the 
Federal government to lead by example and conserve its own energy use.
    Additionally, the Department has published the Energy Saver$ 
booklet, an informative guide for your constituents with helpful tips 
on saving energy and money at home. Both the President and Secretary 
Bodman have encouraged Federal agencies and employees to use these 
reference guides in their daily activities. Many Members have requested 
copies for their constituents and an on-line version has been emailed 
to your offices.
    I would like to conclude by saying that the Department of Energy is 
in continual contact with state and local governments to monitor our 
heating fuel supplies, and that the Department stands ready to make the 
heating oil reserve available immediately in the event of a supply 
disruption.
    This concludes my prepared testimony and I will be happy to answer 
any questions you may have.

    Mr. Shimkus. Thank you. Now, the Chair recognizes 
Commissioner Mason from the Public Utilities Commission of 
Ohio. Welcome.

                STATEMENT OF HON. DONALD L. MASON

    Mr. Mason. Thank you Chairman Barton, Chairman Shimkus, 
Ranking Member Boucher, members of the committee. I am pleased 
to be here to represent the united views of the National 
Association of Regulatory Utility Commissioners, but I would 
also like to represent views of the State of Ohio and the 
Public Utilities Commission.
    In the State of Ohio, we are concerned, as Congress is, 
with the energy prices on our consumers. Our State economy, 
regional economy, and national economy all are important to us, 
and we know the difficulties will be meeting with this coming 
winter heating season. I will touch particularly on issues 
relative to what State regulators can do this present winter 
heating season.
    For example, in Ohio, the Public Utilities Commission 
issued an order directing utilities to reconnect gas and 
electricity customers who have been disconnected from last 
year's high energy prices. As long as those customers continue 
to make payments toward last year's balances, they will not be 
disconnected. Our objective is to ensure that customers are not 
disconnected during the winter heating season. It is my 
understanding over 217,000 customers were disconnected last 
year, of which only 77,000 were on what we call the Percent of 
Income Plan program.
    Second, we strongly encourage consumers to take advantage 
of budget billing, so that their payments could be spread 
evenly over a 12 month period. However, this means utility 
commissions must work with local distribution companies on 
carrying the costs associated with the LDCs holding those 
balances. Now, in Ohio, additionally, we instituted a bad debt 
rider, whereby the uncollectibles accrued from the previous 
quarter are placed into a rider for purposes of spreading the 
uncollectible costs over the gas consumer customers who are 
paying their bills.
    Presently, the PUCO, the Public Utilities Commission of 
Ohio, is in discussions with one local gas company regarding 
abandoning the traditional regulatory structure, and 
implementing a demand-side management program, in conjunction 
with a decoupling of rates from the throughput movement of 
natural gas. This would better enable the company, the PUCO, 
and the State's Consumer's Counsel to work together on reducing 
demand. The result is that the LDC would not make more money 
just because customers used more natural gas.
    Fifth, legislators in Ohio are presently preparing to 
introduce bills which would encourage timely review of 
proposals to explore for and develop mineral interests under 
our State's properties. One proposal being considered is to 
create a board of review for such proposals.
    In Ohio, as in many other States, the natural gas 
distribution company is unbundled from the supplying of natural 
gas. As a result, marketers in the State of Ohio, at least, are 
providing natural gas to consumers sometimes on fixed price 
contracts. Therefore, those customers do not feel the effects 
of the $14 gas we are now seeing.
    The Public Utilities Commission of Ohio, in 2001, began to 
encourage the use of financial hedges by LDCs. The best example 
of success has resulted in a $3.00/mcf savings to customers in 
the Dayton area, by Vectren of Ohio. The benefits derived from 
hedging and long term fixed contracts are evident in the price 
of natural gas increases in the marketplace. In the case of 
Vectren of Ohio, the company has committed to a hedging program 
in which 75 percent of its winter volumes are known and locked 
in prior to November 1. VEDO, as they are known as, is able to 
lock in 75 percent of its winter volumes through a combination 
of hedged prices, locking in future prices in forward months, 
and contractual storage, where the gas is injected into storage 
during the non-winter months, typical from April through 
October, and then withdrawn during the winter months of 
November through March. VEDO has a near equal split of winter 
volumes between hedging and this contractual storage.
    There is also success story in a very small company, maybe 
15,000 customers, Pike, Eastern, and Southeastern Natural Gas 
Companies presented the Commission in 2001 a fully hedged 
program in which all volumes were known or locked in in advance 
of delivery. This allowed the companies to offer their 
customers fixed burner-tip commodity pricing. The companies 
utilized an asset manager who managed the companies' pipeline 
entitlements, and secured fixed commodity pricing through the 
use of NYMEX strips and straddle provisions. Additionally, a 
holding company of a small rural LDC used fixed rate contracts, 
which benefited those customers by having a GCR under $10.00 an 
mcf through this last quarter.
    And finally, though not Ohio specific, the NARUC Committee 
on Gas, on which I serve as the Chairman, has adopted 
resolutions in past meetings encouraging utility commissions to 
work with local gas companies to encourage the proper hedging 
strategy for each. In addition, NARUC and the Interstate Oil 
and Gas Compact Commission, and that was chaired presently by 
Governor Freudenthal of Wyoming. The past Chairman is Governor 
Murkowski of Alaska, and the past Chairman before that was 
Governor Richardson of New Mexico. We have cooperated in 
creating a taskforce with the purpose of exploring whether long 
term contracts, as a supply strategy, would benefit consumers. 
After taking comments from interested parties, holding a 
workshop, and reviewing filed comments, the taskforce did issue 
a report which is attached to my testimony. The taskforce is 
recommending that public utility commissions work with the LDCs 
in understanding and implementing a proper contracting strategy 
for their respective needs.
    Mr. Chairman, members of the subcommittee, I thank you for 
your time, and look forward to any questions you may have.
    [The prepared statement of Hon. Donald L. Mason follows:]
   Prepared Statement of Hon. Donald L. Mason, Commissioner, Public 
 Utilities Commission of Ohio on Behalf of the National Association of 
                    Regulatory Utility Commissioners
    Good Afternoon Mr. Chairman and Members of the Subcommittee.
    I am Donald L. Mason, a commissioner at the Public Utilities 
Commission of Ohio (PUCO). I have served in that capacity since 1998. I 
also serve as the Chair of the Committee on Gas for the National 
Association of Regulatory Utility Commissioners (NARUC). As Chairman of 
the NARUC Committee that focuses directly on some of the issues that 
are the subject of today's hearing, I am testifying today on behalf of 
that organization. In addition, my testimony reflects my own views and 
those of the PUCO. On behalf of NARUC and the PUCO, I very much 
appreciate the opportunity to appear before you this morning. The 
issues that you are addressing in this oversight hearing are very 
important to NARUC's membership and the natural gas consumers in my 
State, and I am grateful to have this opportunity to present our views 
on the nation's supply and demand for natural gas.
    NARUC is a quasi-governmental, non-profit organization founded in 
1889. Its membership includes the State public utility commissions 
serving all States and territories. NARUC's mission is to serve the 
public interest by improving the quality and effectiveness of public 
utility regulation. NARUC's members regulate the retail rates and 
services of electric, gas, water, and telephone utilities. We are 
obligated under the laws of our respective States to ensure the 
establishment and maintenance of such utility services as may be 
required by the public convenience and necessity and to ensure that 
such services are provided under rates and subject to terms and 
conditions of service that are just, reasonable, and non-
discriminatory.
    Today, I will cover a variety of areas ranging from encouraging 
additional domestic production, to increasing conservation efforts and 
personal finance. I will be covering some of these issues in a generic 
national overview and some of these issues will be addressed 
specifically from an Ohio perspective.
    NARUC believes that any Federal policy on natural gas will be 
sustainable only if that policy includes ``the triad'' of: conservation 
and efficiency; increasing supply; and diversification of energy 
sources. Any policy must include all three dimensions or the goal of 
energy security will not be met. In addition, any successful Federal 
policy must respect and preserve the States' traditional roles in 
regulating distribution systems, planning, siting approval, reliability 
assurance, and consumer protection.
                 increasing domestic natural gas supply
    Natural gas is an important North American commodity, and the 
availability of abundant supplies of natural gas is a critical part of 
the energy security of the United States. The United States Congress, 
through enactment of the Natural Gas Policy Act of 1978, implemented 
phased-in decontrol of gas prices at the wellhead; and through the 
Natural Gas Wellhead Decontrol Act of 1989, eliminated wellhead price 
controls for sales of natural gas. The result was a decrease in natural 
gas prices that lasted many years. Recent increases in natural gas 
prices are, in part, a result of a substantial increase in demand for 
natural gas, especially in the electric generation and industrial 
sectors of the economy, coupled with a less than corresponding increase 
in supplies. This rise in natural gas prices is a cause for concern to 
all industry participants, including producers, suppliers, marketers, 
and especially consumers.
    Technological advances have improved the economics of natural gas 
exploration and production activities. New domestic natural gas 
production should improve supply reliability, and therefore, government 
policies that foster increased supplies of natural gas could benefit 
consumers by exerting downward pressure on natural gas prices. 
Substantial volumes of natural gas may lie beneath lands that are not 
available for exploration and production because of economic reasons or 
land-use policies and restrictions.
    NARUC believes that increasing domestic supplies of natural gas 
requires the coordination and cooperation of both State and Federal 
governments. NARUC has encouraged State Public Utility Commissions 
(PUCs) to support environmentally sound natural gas exploration and 
production activities and to communicate that support to their State 
legislators, executive branch officials, and U.S. Congressional 
delegations. NARUC supports the need for Federal legislation that 
institutes a comprehensive national energy policy that recognizes and 
encourages environmentally sound development and production of new 
domestic natural gas supplies where appropriate.
    The nation possesses large untapped deposits of both oil and 
natural gas in the State and Federal waters of the Atlantic and Pacific 
Oceans and Gulf of Mexico. If developed, these deposits could increase 
energy supplies and thereby both mitigate rising energy prices and 
reduce our nation's dependence on foreign energy sources. Regulatory 
and tax barriers currently exist that inhibit offshore oil and natural 
gas exploration and production in the United States. NARUC recognizes 
the particular concerns of States affected by offshore drilling and 
NARUC encourages Federal policy makers to:

1. Consider removing existing moratoriums to oil and gas exploration 
        and production in both State and Federal coastal waters off the 
        coast of the States that agree to such removal, while also 
        urging State and Federal policy makers to ensure that offshore 
        oil and gas production practices are environmentally sound.
2. Consider expanding State boundaries seaward from the current three 
        miles and giving each State the right to control all resource 
        development within their expanded boundary.
3. Consider providing enhanced royalties to States that choose to allow 
        new production off their shores, thereby providing a 
        significant new revenue source for coastal States.
4. Encourage domestic exploration and production of new natural gas 
        supplies and expansion of natural gas transmission and delivery 
        infrastructure in an environmentally sound manner at reasonable 
        costs, but avoid an over-reliance on natural gas for new 
        electric generation.
                      liquefied natural gas (lng)
    Because of changes in the costs of producing gas from domestic 
resources, the United States and North America will turn increasingly 
to imported LNG to sustain gas markets. LNG offers access to an 
additional option for a source of supply as an alternative to 
increasingly more costly domestic production. Domestic growth in gas 
consumption is being driven, in part, by the use of gas for power 
generation. Without LNG, gas and electricity prices can be expected to 
increase.
    With over 40 LNG import facilities announced or proposed, there is 
great concern and debate about the effect of LNG on gas markets, public 
safety and the environment. State PUCs have a key role in this 
conversation and in the decision making on individual LNG facilities as 
well as on purchases of LNG by the Local Distribution Companies (LDC) 
they regulate.
    Both Federal and State governments have roles in approving the 
construction and operation of LNG facilities. Additionally, State and 
Local permitting are necessary for most proposed LNG projects. The 
ambiguities created by this overlap of authorities have contributed, in 
part, to LNG siting difficulties and controversies. There has not been 
a case to date where FERC has approved a project over Local and State 
objections--indeed, FERC's pre-filing approach to LNG certification 
encourages the resolution of differences early in the process.
    Safety concerns have attracted the most attention in individual LNG 
siting controversies. The long record of safe operations by the LNG 
industry reflects purposeful decisions to implement conservative design 
standards and operational safety procedures. Recent technical 
disagreements about the adequacy of current regulations governing LNG 
safety center on three questions: whether the studies of LNG accidents 
to date adequately take into account terrorist capabilities; whether 
the models used to measure the effects of LNG accidents are adequate; 
and whether LNG facilities should be sited remotely. These issues are 
still under discussion and no final resolution has been reached.
    There are currently concerns about whether gas supplies from 
domestic production will be adequate to meet projected increases in 
demand for natural gas. In response many developers of LNG have 
proposed building regasification terminals in North America to help 
bridge the potential supply gap. In order for new LNG terminals to be 
expeditiously approved and in service, cooperation in the permitting 
process between Local, State and Federal authorities is essential. 
NARUC recognizes that LNG is an important future source of energy for 
the United States and encourages coordination among State agencies that 
oversee permitting for regasification, and between Local, State and 
Federal government agencies, in order to facilitate and streamline 
regasification terminal permitting. Additionally, NARUC encourages 
States to hold public hearings to educate consumers and stakeholders on 
the safety issues, costs, and benefits of LNG.
    The economics of the LNG trade are dominated by the large 
investment in capital equipment necessary to liquefy the gas, transport 
and re-gasify the LNG. As such, the industry is dominated by large 
international energy companies, state oil and gas companies, and 
trading houses. The web of contract commitments among these firms is 
designed to ensure security of both supply and markets and to cover 
large investments. A characteristic of the LNG contracts has been long-
term contracts with take-or-pay provisions. This is not unlike the 
contracting practices that dominated the U.S. gas industry while it was 
under development. Trends underway in the LNG trade suggest a more 
flexible system and a growth of spot-type trading, yet long-term 
contracting will remain a backbone element of the industry.
    In September 2003, then Secretary of Energy Spencer Abraham 
announced the Department of Energy/NARUC Liquefied Natural Gas (LNG) 
Partnership as a means to assist in the education and outreach of 
critical energy decision-makers on the opportunities as well as the 
impediments related to the increased development of LNG Resources. The 
LNG Partnership sponsored two reports: an LNG white paper for State 
public utility commissioners and a model communication plan for State 
officials. The purpose of the white paper is to provide an overview of 
LNG policy issues facing State public utility commissions, State 
environmental officials and State legislators. The model communication 
plan is intended for State officials that have determined that building 
or expanding an LNG facility is in the best interest of the ratepayers. 
A critical goal of the communication plan includes encouraging better 
stakeholder involvement (and early resolution of stakeholder issues) in 
relation to LNG facility siting and operation. You may access both of 
these documents on the NARUC website at: http://www.naruc.org/
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articlenbr=313
                       natural gas infrastructure
    U.S. demand for natural gas is projected to increase by 50% or more 
during the next 20 years, including significant growth in the use of 
natural gas for electric power generation. The expected increase in 
demand for natural gas will necessitate construction of significant 
amounts of new distribution pipeline capacity, as well as investment in 
gas utility facilities, operational and maintenance changes, additional 
storage capacity and upgrading ability to serve changing load profiles. 
(Even before the terrorist attacks of September 11, 2001, the National 
Petroleum Council estimated that the natural gas distribution utilities 
will need to invest $100 billion to upgrade and expand their systems 
over the next two decades.)
    With regard to pipeline activity, NARUC is pleased that the 108th 
Congress began the process to efficiently transport Alaska North Slope 
gas to domestic markets by passing legislation to encourage 
construction of a pipeline. Such a pipeline can free stranded Alaska 
North Slope gas reserves by linking those reserves to the Lower 48 
natural gas transportation and distribution grid. However, this is only 
a first step.
    To ensure that the nation's gas distribution system is adequate in 
the future, NARUC supports Congressional legislation establishing an 
R&D funding program for gas distribution utilities to ensure essential 
research for distribution delivery systems in the amount of 
approximately $65 million per year. Additionally, NARUC has similar R&D 
funding concerns for other energy sectors.
    Annual funding would be collected through a legislatively designed, 
volumetric or per-therm equivalent charge designed to collect 
approximately $1 per year from residential customers, with a cap of 
approximately $250 per year for very-large-volume customers. Funds 
collected for this research would be directed by a governing body and 
would be focused on improving gas system reliability and integrity; 
enhanced health, safety and environment; and reduced operating and 
maintenance costs for local natural gas distribution companies. Funds 
would not be dedicated to end-use applications so that the research 
program's efforts would be devoted entirely to enhancing distribution 
service operations as demand for those services continues to increase.
    NARUC believes that security of existing and new facilities is a 
vital component to improving and increasing the nation's natural gas 
delivery infrastructure. Individual utility services do not function 
without support from other industry sectors and are therefore 
interdependent. Due to this interdependency, a disruption or outage in 
one utility sector can have a profound impact on other critical 
services, including information systems, healthcare, national defense, 
finance, shipping, and manufacturing. The vast majority of the Nation's 
utilities and services are owned and operated by the private sector, 
and these businesses continue to develop, implement and update response 
and recovery plans for all critical service elements, including 
business continuity and contingency plans. Robust response and recovery 
plans must be applied to our Nation's critical infrastructures so that 
each sector has a recovery plan that clearly defines sector 
responsibilities, articulates interdependencies and provides for 
communications with other critical sectors, as appropriate.
    NARUC strongly recommends that the States participate in private/
public and cross-sector collaborative efforts that promote the Nation's 
economic stability, national security and infrastructure integrity. 
Further ensuring the security and reliability of the Nation's critical 
infrastructures is of the highest public interest due to the risk of 
terrorism, as well as other natural and technological hazards. NARUC 
has formed the Ad Hoc Committee on Critical Infrastructure to identify 
the appropriate role(s) of regulatory commissions with respect to the 
security of the Nation's electric, natural gas, petroleum, water and 
telecommunications infrastructure. NARUC has strongly encouraged 
coordinated security efforts by Federal, State and Local authorities.
    NARUC recommends that State Commissions address the matter of how 
critical infrastructure or systems are being protected, how this 
protection is being financed and sensitive information is protected 
from disclosure. To accomplish this goal, NARUC member Commissions 
initiated a dialogue in 2004 with stakeholders to address these issues. 
NARUC urges the U.S. Department of Energy, the U.S. Department of 
Homeland Security, the Federal Energy Regulatory Commission, the 
Federal Communications Commission, Environmental Protection Agency and 
other key Federal agencies to support State actions by providing 
assistance and guidance in protection of critical infrastructure.
    DOE should establish a single point of contact, either an office or 
an individual, in the event of a disruption or emergency. NARUC 
recommends that DOE work with NARUC, the National Association of State 
Energy Officials (NASEO), other State level stakeholders, and industry 
to develop communication protocols where States would identify contacts 
in State government, by fuel type, and set up an internal State level 
communication mechanism which would be supported by DOE in order to 
assure that information is rapidly shared with key participants and to 
avoid misinterpretation of information. Existing, not new, industry/
government information sharing efforts should provide the foundation 
for this exchange of information. NARUC urges assistance with regional 
coordination and exercises to avoid one State taking action contrary to 
actions taken by others and to ensure federal/regional/State and 
industry coordination.
    NARUC encourages DOE to assist in developing State and regional 
models on critical infrastructure policies and practices that will 
focus on various approaches for meeting States' needs on items such as 
information disclosure, cost recovery and prudence of investments, 
emergency natural gas allocations, and to assist with dissemination of 
this information to States. NARUC supports DOE-sponsorship of meetings 
to examine the outlook for energy supply for the summer and winter as 
an opportunity for States to meet with DOE and the industry to discuss 
the potential for supply disruptions and actions to mitigate the risk.
    Mr. Chairman, due to the effects of Katrina and Rita on the natural 
gas infrastructure, I have concerns that the national infrastructure 
will not be 100% reliable in serving all the natural gas needs this 
winter 24 hours a day 7 days a week as is necessary. I encourage the 
appropriate officials at the Federal and State levels of government to 
consider temporary environmental air quality waivers in selective 
States to encourage the use coal in lieu of natural gas for electricity 
generation. Such a move would allow more natural gas for home heating 
and reduce the price to residential consumers.
    Additionally, I believe that port authorities and federal officials 
should consider temporary measures to increase the delivery of LNG to 
coastal terminals. There are bottlenecks at the delivery level meant to 
provide additional measures of security and safety. I believe it would 
be prudent to inquire, investigate and possibly implement any measure 
that could deliver additional supplies of LNG. Of course, this should 
be done consistent with all the appropriate safeguards and security 
measures that the US Coast Guard and other agencies have instituted.
              efficiency, conservation and diversification
    NARUC believes that increased use of alternative energy sources 
that minimize the environmental impacts of energy generation, delivery 
and use coupled with increases in efficiency can play a part in any 
effort to remedy the environmental challenges of increased gas supply. 
If we need less gas, we would be able to reduce the expansion of gas 
production, and likewise limit the associated environmental challenges.
    Conservation and efficiency must both be integral parts of any 
policy to improve the nation's natural gas situation. NARUC does not 
believe that increasing domestic supply alone is a logical or 
sustainable solution for energy security. NARUC believes that State and 
Federal regulatory commissions should revisit, review and reconsider 
the level of support and incentives for existing gas and electric 
utility programs designed to promote and aggressively implement cost-
effective conservation, energy efficiency, weatherization, and demand 
response in both gas and electricity markets. We recognize that the 
best approach towards promoting gas energy efficiency programs and 
electric energy efficiency programs for any single utility, State or 
region may likely depend on local issues, preferences and conditions.
    The National Petroleum Council (NPC), in its September 25, 2003, 
report on Balancing Natural Gas Policy--Fueling the Demands of a 
Growing Economy, also found that greater energy efficiency and 
conservation are vital near-term and long-term mechanisms for 
moderating price levels and reducing volatility and recommended all 
sectors of the economy work toward improving demand flexibility and 
efficiency. The NPC, in its report, identified key elements of the 
effort to maintain and continue improvements in the efficient use of 
electricity and natural gas, including (but not limited to):

1. Enhanced and expanded public education programs for energy 
        conservation, efficiency, and weatherization,
2. DOE identification of best practices utilized by States for low-
        income weatherization programs and encouragement of nation-wide 
        adoption of these practices,
3. A review and upgrade of the energy efficiency standards for 
        buildings and appliances (to reflect current technology and 
        relevant life-cycle cost analyses) to ensure these standards 
        remain valid under potentially higher energy prices,
4. Promotion of the use of high-efficiency consumer products including 
        advanced building materials, Energy Star appliances, energy 
        ``smart'' metering and information control devices,
5. On-peak electricity conservation to minimize the use of gas-fired 
        electric generating plants, and
6. Clear natural gas and power price signals
    Further, the American Council for an Energy-Efficient Economy 
(ACEEE), the Natural Resources Defense Council (NRDC), and the American 
Gas Association (AGA) have adopted a Joint Statement noting that 
traditional rate structures often act as disincentives for natural gas 
utilities to aggressively encourage their customers to use less gas. 
Therefore, the NRDC, AGA, and the ACEEE have urged public utility 
commissions to align the interests of consumers, utility shareholders, 
and society as a whole by encouraging conservation. Among the 
mechanisms supported by these groups are the use of automatic rate 
true-ups to ensure that a utility's opportunity to recover authorized 
fixed costs is not held hostage to fluctuations in retail gas sales.
    NARUC has encouraged State commissions and other policy makers to 
support the expansion of natural gas energy efficiency programs and 
electric energy efficiency programs, including those designed to 
promote consumer education, weatherization, and the use of high-
efficiency appliances, where economic, and to address regulatory 
incentives to address inefficient use of gas and electricity. NARUC has 
also supported State and Federal policy makers efforts to: (i) review 
and upgrade the energy efficiency standards for buildings and 
appliances, where economic, and to ensure these standards remain valid 
under potentially higher energy prices, and (ii) promote the use of 
high-efficiency consumer products, where economic, including advanced 
building materials, Energy Star appliances, and energy ``smart'' 
metering and information control devices.
    NARUC has urged DOE to expeditiously promulgate and implement new 
national standards for commercial air conditioners, heat pumps, 
residential furnaces and boilers, and electric distribution 
transformers so as to achieve the greatest level of cost-effective 
energy savings. We have also encouraged DOE to establish an updated 
national standard for residential furnaces and boilers that takes into 
account both the equipment's electricity use and its fossil fuel 
consumption, and to establish a voluntary standard more stringent than 
the national minimum standard that is designed to be cost-effective in 
cold climates and which cold-weather States could elect to implement in 
place of the national minimum.
    History has taught us the economic and environmental risk of over-
reliance on a single source of fuel for new electric generating 
capacity. Since the early 1990s, new electric generating facilities 
have been predominately gas-fired. According to the Energy Information 
Administration, of the capacity added to the electric power grid in the 
United States between 2000 and 2004, over 90 percent was gas-fired, and 
over the next several years, most of the new electric generating 
facilities that will become operational also will be gas-fired. This 
has led many regions of the country to significantly increase their 
dependence on natural gas for electric generation.
    While natural gas-based generation technologies have made 
significant advances in efficiency and environmental performance, and 
are a necessary part of the overall generation mix, natural gas prices 
have continued to climb, relative to price levels in the 1990s, and are 
expected to continue to reflect a tight natural gas market over the 
next several years. Fuel diversity, therefore, is increasingly being 
advocated by industry stakeholders and policy makers as desirable for 
resource planning in the electric industry.
    The choice of fuel mix for electric generation, takes into account 
several factors, including long-term economic costs, environmental 
effects, power system reliability, and price volatility. However, 
market incentives alone would be unlikely to achieve the most reliable 
long-term fuel mix for electric generation. Evidence from various 
studies sponsored by both government and industry, including the 
September 2003 National Petroleum Council study requested by the 
Secretary Abraham, has shown the decline in recent years of gas-fired 
generating facilities with dual-fuel capability. At the same time, 
these same studies have also shown the economic benefits of gas-fired 
generating facilities with dual-fuel capability, including the 
dampening of both electricity prices and natural-gas demand during peak 
periods.
    These studies have identified the need to consider the use of 
alternative fuels in the electric generation industry, in order to 
provide for a balanced fuel mix. They have also identified the 
important role that State commissions can play in affecting the 
capabilities of new gas-fired generating facilities, when considering 
building with dual-fuel capability or considering the ability of 
existing gas-fired generating facilities, to switch to an alternate 
fuel where economic. NARUC encourages State commissions and other 
policy makers to support the concept of fuel diversity for electric 
generation. NARUC recognizes that the appropriate diversity of fuel 
sources for electric generation for any single utility or region likely 
depends on local issues, preferences and conditions. Additionally, 
NARUC urges Congress or the Administration to increase the efficiency 
for licensing and relicensing processes of hydroelectric and nuclear 
facilities, without compromising substantive environmental and safety 
standards.
                          an ohio perspective
    In my State of Ohio we are concerned, as is this Congress, about 
the effects of energy prices on our consumers, our State economy, our 
regional economy, and our national economy, and we have taken some 
actions that we hope will help the consumers of our State through this 
difficult time.
    In Ohio, the Public Utilities Commission issued an order directing 
utilities to reconnect gas and electricity customers who had been 
disconnected from last years high energy prices. As long as those 
customers continue to make payments toward the last years balances, 
they can not be disconnected. Our objective is to ensure that customers 
are not disconnected during the winter months.
    We strongly encourage our consumers to take advantage of budget 
billing so that payments are spread over 12 months. However, this means 
that our utility commission must work with Local Distribution Companies 
(LDCs) on carry costs associated with the LDC holding the balances. 
Additionally, we instituted a bad debt rider whereby the uncollectible 
accrued of the previous quarter are placed into a rider for purpose of 
spreading the uncollectible costs over all gas consumer customers.
    Presently, the PUCO is in discussions with one local gas company 
regarding abandoning the traditional regulatory structure and 
implementing a demand side management program in conjunction with a 
decoupling of rates from throughput movement of natural gas. This will 
better enable the company, the PUCO, and the State's Consumer's Counsel 
to work together on reducing customer demand. The result would be that 
the LDC would not make more money just because customers used more 
natural gas.
    Legislators in Ohio are preparing to introduce bills which would 
encourage the timely review of proposals to explore for and develop 
mineral interest on our under State properties. One proposal is 
considering creating a board to review such proposals.
    In Ohio, as in many other States, the national gas distribution is 
unbundled from the supplying of the natural gas. As a result, marketers 
in the State are providing natural gas to consumers, including fixed 
rate contracts.
    The Public Utilities Commission of Ohio began in 2001 to encourage 
the use of financial hedges by LDCs. The best example of success has 
resulted in a $3.00/mcf savings to customers in the Dayton area 
(Vectren of Ohio). The benefits derived from hedging and long term 
fixed contracts are evident as the price of natural gas increases in 
the market place. In the case of Vectren Energy Delivery of Ohio 
(VEDO), the Company has committed to a hedging program in which 75% of 
its winter volumes are known/locked in prior to November 1st. VEDO is 
able to locked in 75% of its winter volumes through a combination of 
hedged prices (locking in future prices in forward months) and 
contractual storage, where the gas is injected into storage in the non-
winter months (April to October) and then withdrawn during the winter 
months (November to March). VEDO has a near equal split of winter 
volumes between hedging and contractual storage.
    Pike, Eastern and Southeastern Natural Gas Companies (Companies) 
presented to the PUCO in 2001, a fully hedged program in which all 
volumes were known/locked in advance of delivery, which allowed the 
Companies to offer to its customers fixed burner-tip commodity pricing. 
The Companies utilized an asset manager who managed the Companies 
pipeline entitlements and secured fixed commodity pricing through the 
use of NYMEX strips and straddle provisions. Additionally, a holding 
company of small rural LDCs used fixed rate contracts which benefited 
consumers by providing a gas costs recovery of under $10.00 a mcf.
    Though not Ohio specific, the NARUC Committee on Gas, on which I 
serve as Chair, has adopted resolutions at past meetings encouraging 
utility commissions to work with local gas companies to determine the 
proper hedging strategy for each. In addition, NARUC and the Interstate 
Oil and Gas Compact Commission (IOGCC) cooperated in creating a task 
force for the purpose of exploring whether long term contracts as a 
supply strategy would benefit consumers. After taking comments from 
interested parties, holding a workshop and reviewing filed comments, 
the task force issued a report which is attached to my testimony. The 
Task Force is encouraging PSC/PUCs to work with LDCs in understanding 
and implementing the proper contracting strategy for their respective 
needs.
    Finally, for your information and review, I have attached a joint 
letter, to which NARUC was a signatory, regarding energy emergency 
appropriations that was sent on September 15, 2005, in anticipation of 
high winter energy costs.
    Mr. Chairman, and members of the Subcommittee, thank you for your 
time and attention. I look forward to answering any questions you may 
have.

    Mr. Shimkus. Now, the Chair would like to recognize the 
chairman of the full committee, Chairman Barton, for opening 
the round of questions.
    Chairman Barton. Thank you, Mr. Chairman, and let me say 
you are doing an excellent job in Chairman Hall's absence. Some 
of you may wonder why Chairman Hall is not here. His wife is 
ill, and he is having to attend to her, but she is doing 
better, and Ralph, Congressman Hall does expect to be back 
later this afternoon. I don't know if you announced that or 
not.
    Mr. Shimkus. Not in totality.
    Chairman Barton. Okay.
    My first question is to Chairman Kelliher. The LNG projects 
that the FERC has already permitted, I think you said, eight. 
Is that correct?
    Mr. Kelliher. Yes.
    Chairman Barton. How many of those do you expect to 
actually be completed?
    Mr. Kelliher. I don't know. I mean we have approved----
    Chairman Barton. Do you have----
    Mr. Kelliher. [continuing] in some cases, multiple sites, 
in fairly close to the same proximity. I would not expect all 
of them to be completed.
    Chairman Barton. Do you think 50 percent will be completed? 
Or 20 percent?
    Mr. Kelliher. I really don't know. It will end up the 
market will decide how many of them can be financed and how 
many can acquire contracts for supply.
    Chairman Barton. Well, let me try it another way. Let us 
assume they all were completed.
    Mr. Kelliher. Right.
    Chairman Barton. You said that it would quadruple----
    Mr. Kelliher. Yes.
    Chairman Barton. [continuing] the capacity. What would that 
take the capacity to, in terms of billions or trillions of 
cubic feet per year----
    Mr. Kelliher. Okay.
    Chairman Barton. [continuing] if they were to all be 
permitted, all be constructed and go into operation.
    Mr. Kelliher. And I believe my number included the pipeline 
from the Bahamas, because there is a proposal to site LNG 
import terminals in the Bahamas, and then have a pipeline 
coming to Florida, so my estimate includes that, and also 
expansions at existing facilities. If you include the eight new 
facilities we have approved, the expansions, and the pipeline, 
current import capability is at four bcf a day. Those projects 
combined would increase that from 4 to 19. It would be an 
addition of 15.
    Chairman Barton. 15 billion----
    Mr. Kelliher. Cubic feet.
    Chairman Barton. [continuing] cubic feet a day.
    Mr. Kelliher. Yes.
    Chairman Barton. All right. Convert that to trillion cubic 
feet per year.
    Mr. Kelliher. This is where I am not going to follow. Do 
you want to know what the ultimate amount of LNG might provide 
of U.S. gas supply? Or----
    Chairman Barton. Well, how much natural gas do we use a 
year in the United States? We use about 22 trillion cubic feet, 
or is it more than that?
    Mr. Kelliher. I am consulting my staff.
    Mr. Shimkus. The Chairman is usually pretty close.
    Mr. Kelliher. I don't have any reason to dispute your 
figure, Mr. Chairman.
    Chairman Barton. Okay. Well, let us say it is 20 trillion 
cubic feet.
    Mr. Kelliher. Okay.
    Chairman Barton. And let us say we get 20 billion cubic 
feet a day, 300 days times 20 is, I want to say, 6 trillion 
cubic feet a year. Actually, it is 360, but I am just kind of 
rounding it up, so if every LNG facility that is permitted were 
to actually be constructed, it would be a sizable increase in 
natural gas availability, and let us assume that my number is 
right. It is probably not right, but it is good enough for 
committee work. We would probably, if you increase the gas 
supply by about 30 percent, which I think that is what that is, 
yeah, I think that is exactly 30 percent, we would expect 
natural gas prices to come down considerably, wouldn't we, as 
long as they increased larger than the demand?
    Mr. Kelliher. Are you assuming demand is a constant, or 
now?
    Chairman Barton. No, I am assuming demand is going up about 
3 percent a year.
    Mr. Kelliher. You just get into other variables, what will 
the increase production from the Rockies in the U.S. be, will 
an Alaska gas pipeline be built?
    Chairman Barton. No, I am not.
    Mr. Kelliher. Oh. Now. Okay.
    Chairman Barton. I am just assuming the only thing that we 
get is what you just testified that you have permitted.
    Mr. Kelliher. That domestic production remains constant.
    Chairman Barton. Yeah, it doesn't go down.
    Mr. Kelliher. It remains constant, and the Canadian imports 
remain constant, and the only delta is----
    Chairman Barton. That is right. That is right.
    Mr. Kelliher. Projecting some reasonable increase in 
demand.
    Chairman Barton. Right, 3 percent a year.
    Mr. Kelliher. And the question is what, how much will----
    Chairman Barton. Where is our price going to go to? It is 
going to go down. If we have increased supply 30 percent and 
demand is only going up 3 percent a year----
    Mr. Kelliher. But it is a small base, LNG imports right now 
are 3 percent of gas supply.
    Chairman Barton. Well, but it is 6 trillion cubic feet, on 
the 20 trillion cubic feet demand, that is going up 3 percent a 
year.
    Mr. Kelliher. Right.
    Chairman Barton. I am not trying to pin you down. All I 
want is an answer that if everything you have permitted----
    Mr. Kelliher. At some point----
    Chairman Barton. [continuing] gets built, natural gas 
prices will go down.
    Mr. Kelliher. Sure. Also, there are other proposals.
    Chairman Barton. I would say they are going to go down $5 
or $6 an mcf, but that is just me.
    Mr. Kelliher. There are other proposals as well that are 
pending on the Commission. These were just the ones that we 
have approved, but there is others pending.
    Chairman Barton. Now, see, when he worked for me----
    Mr. Kelliher. At some point, LNG imports----
    Chairman Barton. [continuing] he couldn't give me this 
runaround. Now he exercises his----
    Mr. Kelliher. I agree with you that at some point, LNG 
imports will start depressing prices. I don't think we are at 
that point yet.
    Chairman Barton. All right. Let me ask one final question, 
because I had a bunch for the other people, but my time is 
already gone. Are any of these projects that have been 
permitted actually under construction?
    Mr. Kelliher. Yes, three of them are under construction 
right now.
    Chairman Barton. And what is your estimated completion of 
those that are under construction? How many----
    Mr. Kelliher. 2008.
    Chairman Barton. 2008. So we are in 2005.
    Mr. Kelliher. Yes.
    Mr. Kelliher. Yes.
    Chairman Barton. So it takes, you said in your testimony--
the average permitting time is about 1 year. Is that right?
    Mr. Kelliher. That was for pipelines. For LNG projects, it 
is about 15 months, so it is close to a year.
    Chairman Barton. Okay. So 15 months to permit it, and then 
3 years to build it?
    Mr. Kelliher. Typically, 3 years to build. Yeah.
    Chairman Barton. Okay. So no help is on the way for all 
these good things you are doing at FERC, really, for another 3 
years.
    Mr. Kelliher. Infrastructure tends to be long term in 
effect.
    Chairman Barton. All right.
    Mr. Kelliher. Yes.
    Chairman Barton. Mr. Chairman, my time has expired. I am 
going to provide some questions that I would have asked the 
witnesses to answer as expeditiously as possible on underground 
storage, pipeline capacity constraints, localized as to where 
the bottlenecks are, and what, if anything, needs to be done 
legislatively to help de-bottleneck some of those.
    I thank the indulgence of the Chair to give me extra time.
    Mr. Shimkus. The Chair now recognizes the gentleman from 
Virginia.
    Mr. Boucher. Well, thank you very much, Mr. Chairman, and I 
want to say thank you to our witnesses for their excellent 
presentations here this afternoon.
    Mr. Chairman, before asking my questions, I ask unanimous 
consent that the opening statement of Mr. Brown from Ohio be 
made a part of the record.
    Mr. Shimkus. Without objection, so ordered.
    Mr. Boucher. Thank you, Mr. Chairman.
    Well, let me pick up on a subject that was mentioned during 
Chairman Barton's questions, and that is, the natural gas 
pipeline from Alaska. This is a project that enjoys broad 
bipartisan support, and I think there is an acknowledged need 
to construct this. We placed in EPACT 2005 a Federal loan 
guarantee to assure the economic nature of this pipeline, and 
yet, I now am hearing that the pipeline is not moving forward. 
In fact, there was some debate in the recent refinery specific 
legislation we reported from this committee and that was passed 
on the floor, of sunsetting that loan guarantee, in the 
expectation that perhaps this pipeline would not be built.
    So would anyone care to give us a status report today of 
where this pipeline stands? Perhaps an indication of any 
problems that it is encountering, and some kind of projection 
of what we can anticipate?
    Mr. Mason. I can speak from the Commission's point of view. 
Our role is to be ready to act when and if an application comes 
in the door, and we are ready to act, but we can't compel an 
application. We monitor the status of the negotiations in 
Alaska, and we are hopeful, but you know, we are focusing our 
efforts on being prepared to act in the event there is an 
application, that we can act in a timely manner to----
    Mr. Boucher. I am confident that you could, and that is 
obviously not in dispute here today. Based on your monitoring 
of the negotiations that are underway, can you report anything 
about the progress of those, and what is anticipated? Do we 
really think this project is going to move forward?
    Mr. Mason. I think it is inevitable that a pipeline will be 
built at some point. I think we do need that natural gas. The 
variable is when a deal is struck sufficient to support an 
application to the Commission.
    Mr. Boucher. Mr. Maddox, would you care to comment?
    Mr. Maddox. Yeah. Currently, the negotiations are very 
intense, ongoing. There has been a lot of discussion over 
guarantees and what happens when and if the price of gas goes 
down. Complicating factors are several. One of them is the fact 
that this is the world's most expensive construction project, 
which by definition, creates a lot of financial risks even to 
the healthiest of companies. Second is the history of 
relationship, I think, between the State and the parties, the 
producing parties, in trying to develop a level of trust. As 
you know, with any financial deal of this magnitude, there is 
always some questions, and the history between the two parties 
has not encouraged a lot of trust, and that trust has to be 
developed throughout these negotiations.
    My sense is, in talking to all the parties involved, is 
that everyone believes one, that they need to get this done, 
two that they are getting close, and that they will see a deal 
some time, or an agreement some time in the next several 
months.
    Mr. Boucher. Well, that is encouraging. Thank you very much 
for that report. In the time I have remaining, Mr. Mason, let 
me ask a couple of questions of you. For electricity consumers, 
who are concerned about higher than normal electricity prices 
generally this winter, as a consequence of buying their 
electricity from an electric utility that is gas-fired, one way 
that they could save money on their electricity bills is 
through the use of smart meters, and I noticed a reference to 
smart metering technology in your remarks. I strongly share the 
desire to see smart meters and demand-side pricing deployed 
across this country in every State, and in fact, authored a 
provision in EPACT 2005 that is designed to achieve that 
result. What we do is encourage the State PUCs to establish 
rulemakings, in fact, we require that that happen, to consider 
whether or not, within their State, a rule should be employed 
requiring electric utilities to offer time of use pricing, and 
in turn, deploy smart meters.
    A couple of questions for you. Do you have any sense of, at 
this early stage, after that bill has become law, of what 
States may be moving quickly in order to put these proceedings 
in place? They have a 2-year period within which to do it, but 
obviously, some will start sooner. So do you have any report 
for us on what is being done there? And do you have any 
recommendations for us as to what follow-on measures we might 
consider to encourage smart metering more broadly, more 
uniformly?
    Mr. Mason?
    Mr. Mason. Mr. Chairman and ranking members of the 
committee, thank you for that comment. And one of the reasons 
we filed comments is so we can give you a lot more information 
than we can in our remarks.
    I chair the Natural Gas Committee, and I deal with the 
electricity issues as they affect Ohio, and of course, in Ohio, 
we have deregulated generation. We thought we would be at a 
point by now where we would have smart metering taking place, 
because customers would be advantaged from it. We have yet to 
get to that place. But I do know there are at least three or 
our other States that are looking at smart metering. I think we 
are looking to take our lead from other Federal agencies at 
this time. We will be meeting in about two to 3 weeks from now, 
actually, in California, and that will be a subject matter we 
will be discussing.
    But on the issue of this decoupling that you are talking 
about, it really takes a change of mentality by regulators as 
they approach not just gas, but also electricity utilities, 
that you actually have to change the entire regulatory paradigm 
that we have been dealing with, you know, the old standard ROE, 
and the company makes money based on how much either 
electricity they push through the system or gas, and once we 
start moving more aggressively on those, then the smart 
metering actually makes sense for consumers.
    Mr. Boucher. Well, it strikes me that NARUC would be an 
appropriate forum for these conversations, and perhaps, for 
information about the new Federal statute, to be shared among 
all State utilities regulators. Do you know if there is any 
such plan on the part of NARUC at this point?
    Mr. Mason. I wouldn't say a written plan, but we have had 
discussions on that, and we are moving in that direction. What 
I will do for you is we will provide additional information 
specifically as to which States are more aggressive in that, 
for you.
    Mr. Boucher. Well, let me just encourage you, finally, to 
bring the issue up at NARUC, and see if you can get NARUC 
involved in encouraging the States to implement this Federal 
requirement at the earliest possible time. Thank you, Mr. 
Mason.
    Mr. Mason. Thank you.
    Mr. Boucher. Thank you, gentlemen.
    Mr. Shimkus. Thank you. I now recognize myself for, I 
think, 5 minutes.
    And thanks for your testimony. What I would like to talk 
about is that energy is really a fungible commodity. You really 
can't talk about natural gas, and how the demand is based upon 
it, and not talking about electricity generation or fuels, and 
they all are interrelated. We know a couple things. We know the 
projection, especially by the Energy Information Agency, the 
projected demand for natural gas continues to go up, and I have 
a chart here, you can't see it, but I mean, we are going to be, 
by 2020, into the over 8,000 billion cubic feet is what is 
projected.
    Natural gas goes for home heating, as we are talking about 
today, but we have also used it for electricity generation over 
the past decade. We are using it for fueling vehicles. Also, it 
is a major product for manufacturing, and when we use the other 
types of charts that I always carry around with me, talking 
about how can the manufacturing sector stay competitive, when 
we are paying $14 per whatever cubic feet, versus $0.95 in 
Russia, and what does that do with our farmers and the 
fertilizers. So this is a big debate, but it is tied to 
everything else. So because I have limited time, I am going to 
focus, first, I want to go to Mr. Maddox, and he is probably 
not surprised about these two questions: what is the Department 
of Energy doing on FutureGen, and what is it doing to 
incentivize Fischer-Tropsch coal-to-liquid technologies, which 
was part of the refinery bill that we just passed? Of course, 
FutureGen is a DOE initiative on electricity generation.
    Mr. Maddox. Quickly, FutureGen is moving forward. The 
private sector alliance has been formed, and we are in 
negotiations, and hopefully, we will be concluding negotiations 
very soon, do the first tier of contracts, which will allow us 
to move out quickly on our NEPA work, and begin the siting 
process hopefully in early 2006.
    We have had numerous meetings now with foreign governments 
who have expressed interest in participating. As you will 
recall, part of the program requires or expects foreign 
financial support. We just last week had a Chinese coal 
generation company join the private alliance. We also have 
members from Australia, so on the private side, we are already 
getting extensive international interest.
    We have also seen some important policy things. Recently, 
the IPCC, which looks at technology in terms of Kyoto, made a 
very substantial statement in terms of viability of 
sequestration as possibly meeting 15 to 50 percent of the 
carbon reduction requirements to 2050. So we are seeing 
extensive interest internationally in FutureGen and the 
technology we are trying to lay forward.
    Mr. Shimkus. The rest is on Fischer-Tropsch coal-to-liquid 
stuff.
    Mr. Maddox. We are moving out on that. We are looking at 
how to support the loan guarantee program that was part of 
EPACT. There are a number of loan programs throughout the 
Department of Energy, and we are trying to develop the 
expertise, and figure out the best way to implement those as 
expeditiously as possible.
    Mr. Shimkus. Thank you. Now, I would like to move quickly 
to Chairman Kelliher. And you mentioned the Bahama pipeline, 
which is one of the most enjoyable things I like to talk about. 
Why a pipeline from the Bahamas to Florida?
    Mr. Kelliher. I think it recognized the difficulty of 
siting an import terminal on the Florida coast, on the Atlantic 
coast.
    Mr. Shimkus. And so when we have an LNG facility in the 
Bahamas, obviously, the construction jobs that built that 
refinery are being employed by Bahamans.
    Mr. Kelliher. Bahamians.
    Mr. Shimkus. I am a Midwesterner. And the tax base, then, 
would go to Bahama. Again, the jobs in operating the LNG 
terminal would go to that location, and not to Floridians. I 
think it highlights the problem with our public policy. When we 
are excited about a pipeline to import natural gas to a 
terminal in the Bahamas, and then pipe it into Florida, because 
of the siting problems, and the other issue that I will try to 
end on, the other chart I like to always carry around is that 
Congress has placed over 85 percent of outer continental shelf 
off limits for exploration, and we are the only developed 
Nation in the world to cutoff access to our offshore energy 
reserves, and we are going to have people testifying from New 
England, and I think they would probably be surprised that off 
their cost, where we have some available resources, that they 
are off limits. So I would go back to Mr. Maddox, what is the 
Department of Energy doing to try to help the Interior 
Department open up some of these access areas?
    Mr. Maddox. Well, from my own gas program, we work very 
extensively to help minimize the footprint of any oil and gas 
exploration activity. That is kind of the basis of our program. 
We work very directly with the Department of the Interior to 
identify technologies and methods to minimize that impact, 
develop rules that will expedite permitting. We give some 
grants to EPA to help them streamline their permitting process, 
in terms of travel money, in work with IOGCC, among others, to 
certify the protection of the programs. Obviously, in the 
Energy Bill, we supported the OCS inventory, among other 
provisions.
    Mr. Shimkus. Thank you, and my time has expired. I would 
like to turn now to my colleague from Massachusetts, Mr. 
Markey.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    Mr. Kelliher, welcome back.
    Mr. Kelliher. Thank you.
    Mr. Markey. What investigations do you currently have 
underway to ensure that today's high prices are not at least in 
part the result of manipulative activities by gas companies, 
oil companies, or traders in the related commodities markets?
    Mr. Kelliher. Well, we have an office at the Commission, 
Office of Market Oversight and Investigations, and they, on a 
daily basis, monitor gas markets.
    Mr. Markey. Do you have specific investigations underway 
right now of specific companies and specific activities?
    Mr. Kelliher. We do not have a formal investigation right 
now. If OMOI identifies anomalous behavior, that is not 
explained by some kind of market fundamental, and they make a 
recommendation to the Commission to initiate an investigation.
    Mr. Markey. So you have not found any suspicious behavior 
in the market?
    Mr. Kelliher. No. None.
    Mr. Markey. Mr. Jeffery, do you have any ongoing 
investigations?
    Mr. Jeffery. We have investigations going back, that are 
ongoing, going back to issues that occurred----
    Mr. Markey. Could you turn on the microphone, I am sorry.
    Mr. Jeffery. Sorry about that. Excuse me.
    Mr. Markey. I am talking about the last 6 months. Do you 
have any----
    Mr. Jeffery. Yes.
    Mr. Markey. Do you have any new investigations that you 
have begun of----
    Mr. Jeffery. Related to----
    Mr. Markey. [continuing] manipulative conduct, given the 
sky high prices that are being charged to consumers in the 
marketplace?
    Mr. Jeffery. I would like to come back to you with, for the 
record, with the answer to that question, sir. Not to the best 
of my knowledge. What we are doing, and have done, and continue 
to do, is monitor, on as active and a real-time basis, the 
actual trading flows in the futures markets----
    Mr. Markey. You don't know of any----
    Mr. Jeffery. No, sir.
    Mr. Markey. You don't have any new investigations of 
manipulative behavior. How about you, Mr. Maddox? Do you know 
at the Department of Energy of any new investigations in the 
last 6 months, since these prices have skyrocketed, of new 
investigations of manipulative behavior in the oil or gas 
marketplace?
    Mr. Maddox. The Department does not have any investigatory 
enforcement authority in this area.
    Mr. Markey. Okay. Thank you. Mr. Maddox, a few weeks ago, 
the price trigger for releasing oil from the Northeast Home 
Heating Oil Reserve was reached, and yet, the Administration, 
your Administration, failed to use the reserve to help provide 
price relief to New England and Northeast consumers.
    Why did the Bush Administration decide not to release that 
home heating oil, given the fact that the price trigger had 
been reached, where the government could have acted to help to 
keep prices down?
    Mr. Maddox. The threshold you represent, the 60-percent 
threshold, is a threshold for triggering our looking at it, and 
monitoring it closely, and identify the reasons behind that 
threshold, but the Act requires there to be a shortage or 
disruption, and none existed at that time. We have made 
numerous calls. We talked repeatedly to State heating 
officials, to identify if there was truly a shortage of----
    Mr. Markey. But doesn't your mandate also allow you to make 
that determination based upon price considerations?
    Mr. Maddox. It does. It also requires us to look, be 
prudent with these reserves. They are very limited.
    Mr. Markey. No, but why did you exclude that from your 
answer to me? Why did you give the other two reasons, but not 
price considerations? Do you consider that not to be as 
important?
    Mr. Maddox. It is important, and it is a threshold, but it 
is not a sole decisionmaker. You asked specifically about the 
threshold, and why we didn't respond as part of the threshold. 
It should be noted that the differential has declined, and that 
currently, that that threshold is not being reached, because it 
requires two consecutive increases. We have actually had two 
consecutive decreases in that threshold.
    Mr. Markey. But you could have given consumers help over 
that run-up period, that would have sent a signal to the 
marketplace that you were going to be serious, the government. 
In other words, my feeling is that the home heating oil 
consumer doesn't feel that the Bush Administration is on their 
side. The ordinary consumer feels that the Bush Administration 
is on the side of the oil and gas companies, and they expect--
--
    Mr. Maddox. The Bush----
    Mr. Markey. [continuing] the Bush Administration, when 
these prices are skyrocketing, to move in on the side of 
consumers, and yet, they stand on the sidelines----
    Mr. Maddox. No, the Bush Administration views that it is 
best for the consumers to make certain they have heating oil in 
January, if there is some sort of infrastructure disruption. 
This is a small reserve that can cover about 2 days worth of 
total supply for the Northeast, or a partial disruption for 
many 10 days, 200,000 barrels.
    Mr. Markey. Do you believe that----
    Mr. Maddox. If we emptied that reserve now, we would have 
no ability to help consumers, indeed, in January----
    Mr. Markey. Do you believe the size of the reserve should 
be increased, Mr. Maddox, so you have more capacity to be able 
to use, rather than having to wait until the middle of January? 
Would you prefer that we, for example, increased it from 2 
million barrels to 5 million barrels, so that you could use it 
in October or November?
    Mr. Maddox. I am not prepared to say that at this point. 
One of the key parts of the market right now is that we are 
seeing a lot of supplies coming into the United States by ship, 
due to the differential with Europe. There is a shipping time, 
there is an ordering time, and if we create a situation where 
we can undercut the market, and European shipments are not sent 
to the United States----
    Mr. Markey. No, but you do have----
    Mr. Maddox. [continuing] we will have significant issues, 
because we don't have refining capacity to make our own heating 
oil----
    Mr. Markey. You seem to indicate, Mr. Maddox, that you want 
to save the home heating oil that the government has stored, 
because there is not much of it, so we should save it until 
January, but the problem for home heating oil consumers all 
across the Northeast and Midwest, is that they have been 
whacked in October and November, and they are going to be 
whacked in December, and you seem to be saying, well, let me 
just, we already passed a bill through the House of 
Representatives, increasing the size of it from 2 million to 5 
million barrels, does the Administration have a view on that 
bill that has already passed the House?
    Mr. Shimkus. And we will let the Chairman, the gentleman 
answer his question, and this will be the last question.
    Mr. Maddox. Quickly, the Administration has not taken, does 
not take positions until bills generally reach conference. 
There has been no Administration position. Second, that----
    Mr. Markey. Can I say this? That is absolutely not true. 
The Administration has spoken on every single refinery issue, 
LNG issue, as a matter of fact, this is the only issue on which 
the Administration has not spoken. That is where you have to 
decide----
    Mr. Shimkus. The Chairman, I----
    Mr. Markey. And that is it. You have to----
    Mr. Shimkus. I am being more than generous to the gentleman 
and my colleague from Massachusetts.
    Mr. Maddox. If I could quickly reply to the other part.
    Mr. Shimkus. If Mr. Maddox would like to answer the 
question.
    Mr. Maddox. Yeah. What I would like to point out, and here 
is the conundrum we are in. The Northeast gets a large amount 
of its heating oil imported. If we start releasing heating oil 
because of prices, especially early in the season, we will lose 
confidence for someone to say I want to ship oil, it takes 10 
days to get to the United States, and we will lose our access 
to that market, because people won't have confidence to import 
here, because by the time it lands, they could be looking at a 
loss. So we are running a very, very tight market, and one of 
these problems is because we had no ability to create heating 
oil in the United States. We don't have the refinery capacity 
to make our heating oil. So we are----
    Mr. Markey. But you could----
    Mr. Shimkus. The gentleman's time has----
    Mr. Markey. [continuing] you could store oil.
    Mr. Shimkus. The gentleman's time has expired. The Chair 
now recognizes--the gentleman will suspend. Very similar to 
what happened with the SPRo, prior to the hurricane, we had 
released the SPRo early because of price concerns, then when we 
really needed it, because of disruptions, a lot of it would 
have already been released. So it is a tough decision. Now, I 
would like to recognize the gentlewoman from New Mexico.
    Ms. Wilson. Thank you, Mr. Chairman. I have got a couple of 
things that I wanted to ask about, and I am not sure I am 
directing the right question to the right people. So I think 
this is a question for Mr. Maddox, but in 2003, Secretary 
Abraham came up and we had a copy of a letter that he sent to 
the State public utility commissions that talked about what can 
be done with respect to natural gas. And one of his 
recommendations was taking offline the most inefficient 
electricity generating plants first. And we had asked, I think, 
in H.R. 6, for a study to be done on this. Does the 
Administration still support, and is still pushing that 
approach, and what is the status of this study that was 
mandated under the Energy Bill?
    Mr. Maddox. I am sorry. That is actually not part of my 
portfolio, and so I couldn't really give you any hard answers, 
but I would be happy to get an answer for the record for you.
    Ms. Wilson. If you could, because I think when we look at 
the use of natural gas, and I am more and more concerned about 
our increasing reliance on natural gas for the generation of 
electricity, getting rid of the inefficient plants strikes me 
as something that we have to put on the table as a priority, 
because there is a significant difference in the efficiency of 
these plants, and when, you know, when you have one plant that 
uses 10,000 BTUs per kilowatt, to create a kilowatt of 
electricity, and another plant that uses 7,000 BTUs to create a 
kilowatt of energy, that is a 30-percent difference in 
efficiency, and it will have a huge impact on the demand for 
natural gas, and I would like to see the Administration 
continue to push that matter.
    Mr. Kelliher, and this, again, I am not sure whether you 
are the right guy, but you may be. With respect to permitting 
for new plants, new electricity generation, what percentage of 
the plants out there on the drawing board are natural gas-
fired?
    Mr. Kelliher. I am not sure what the current projections 
are, and the siting of generation facilities is done at the 
State level, not at the Federal level, but there have been some 
references to the Administration's national energy policy, and 
that was one of the issues the Administration was looking at 
when it developed the national energy policy. When it came in, 
the Clinton Administration had projections that 93 percent of 
all new generation added between the year 2000 and 2020 would 
be gas-fired. The Administration wanted to lower that number. 
It didn't want to bet everything on one fuel, because it was 
concerned about volatility of gas supplies, and also, possibly, 
the adequacy of gas supplies. So the national energy policy was 
designed in part to increase other sources, other primary fuels 
used for electric generation, coal, nuclear, renewables.
    Ms. Wilson. Is that happening is what I am asking?
    Mr. Kelliher. That, I don't know. I know there has been, 
there is more interest now in fuel diversity, with the increase 
in gas prices. It is something the Administration was concerned 
about almost 5 years.
    Ms. Wilson. Mr. Mason, are you seeing it in Ohio, or do you 
have any plants on the drawing boards in Ohio that you are 
familiar, and are they looking at other than natural gas-fired?
    Mr. Mason. Mr. Chairman, Congresswoman. Chairman Kelliher 
is, I think, right on the point that State utility commissions 
do regulate. We have actually seen, at one point, in the later 
1990's, the generation from natural gas being permitted, though 
not constructed, and a couple that were constructed, not in 
use. We now have an application pending before us that the 
ranking mentioned, the IGCC, which is a gas-fired facility, is 
actually before the Ohio Public Utility Commission, so I cannot 
comment on that in particular. But we have also seen Synergy 
look at constructing one in Indiana, so to answer your question 
shortly, we are seeing the new electricity generation proposals 
coming at us, using clean coal technologies, rather than 
natural gas. The gas-fired technologies I saw proposed in Ohio, 
and in the Midwest, in the later 1990's, were all based on $4 
to $6 natural gas to be economic. Obviously, those prices are 
behind us by some great degree, so it does look like coal does 
have a future, and I might say my father is a retired United 
Mine Worker, whenever I see a coal application, I am somewhat 
excited by that.
    Ms. Wilson. Thank you. Thank you, Mr. Chairman. I 
appreciate it.
    Mr. Shimkus. I thank the gentlelady. The Chair recognizes 
the gentleman from Maryland, Mr. Wynn.
    Mr. Wynn. Mr. Chairman, I don't know whether this should go 
to you, Mr. Kelliher, or you, Mr. Maddox, but earlier, our 
committee chairman was asking about the impact of new license, 
and I think you said that actually, 3 of 8 projects were under 
construction, best estimate that they would take about 3 years 
before we would see them online. And so my question is this. We 
have established about 3-percent annual growth, so we have got 
to say in the next 3 years, we will have a 9-percent increase 
in demand, growth in demand, 3 years out.
    Do you make projections on prices that would give guidance 
to Congress and the American public, as to what we could expect 
in terms of natural gas prices over the next 3 to 5 years, in 
light of these factors?
    Mr. Kelliher. We don't make projections. The Department of 
Energy's Energy Information Administration makes some 
projections. We----
    Mr. Wynn. So you are handing it off to Mr. Maddox.
    Mr. Kelliher. I think that is correct.
    Mr. Wynn. Right. Okay. Mr. Maddox.
    Mr. Maddox. Who will happily kick this can down the field. 
As Joe said, EIA does act as an independent agency. I don't 
have their long term forecasts. I think most folks would say 
they were, probably will decline, but not dramatically. You 
know, I would guess, I would be happy to get you the EIA 
forecast for the record, but I know the next 2 years, we are 
looking at $8.70 in 2006, so----
    Mr. Wynn. So pretty much consistent levels of pricing for 
the next couple of years. Beyond that, maybe a slight decrease, 
but are you projecting a decrease?
    Mr. Maddox. Yeah, a moderation, yes. A decrease----
    Mr. Wynn. About how much would you say you are going to 
project?
    Mr. Maddox. I don't have those numbers in front of me. I 
would guess they would probably be in that $8 range, give or 
take. I would be happy to, you know, give you a full answer for 
the record, and get the EIA projections.
    [The following was received for the record:]

    The November 2005 Short Term Energy Outlook (STEO) projects 
that the lower-48 average natural gas wellhead price in nominal 
dollars will be $7.62 per thousand cubic feet (Mcf) in 2005 and 
$7.86 per Mcf in 2006. Current longer-term projections will be 
available in December, when the Annual Energy Outlook 2006 is 
issued.

    Mr. Wynn. Okay. I certainly would appreciate that. The 
other question, Mr. Kelliher, you were saying that one of the 
things you do is monitor State conservation programs. Have you 
identified best practices by State governments, in terms of 
conservation?
    Mr. Kelliher. Well, yes. We had Commissioner Mason 
participate in the Commission meeting on October 12, looking at 
the gas infrastructure, the damage that the hurricanes caused 
to the existing infrastructure, and also, the need to develop 
infrastructure over the long term. And then, the Commission 
meeting----
    Mr. Wynn. Well, I don't want to cut in on you. I just want 
to know what the best practices are.
    Mr. Kelliher. We heard from a number of States on the 20th 
at the Commission meeting. California has a huge conservation 
program, a $2 billion conservation program, that is just very 
impressive.
    Mr. Wynn. What does it do? How does it work?
    Mr. Kelliher. I can't say I am familiar with--we can supply 
that for the record, but we heard from New York, Massachusetts, 
Iowa, and California.
    Mr. Wynn. If you would submit for the record, and also, if 
you would submit to me the State best practices, I think that 
would be very helpful.
    Mr. Kelliher. Okay.
    Mr. Wynn. Okay. Thank you. I relinquish the balance of my 
time, Mr. Chairman.
    Mr. Shimkus. The gentleman yields back, and the Chair 
thanks the gentleman. The Chair now recognizes the gentleman 
from Texas, Mr. Burgess.
    Mr. Markey. Mr. Chairman. Mr. Chairman. May I? Before you 
do it, I have the statement of Administration policy on the 
bill that Mr. Maddox said the Administration doesn't state 
their policies on, that has now just passed the House, and I 
would like to have this inserted in the record, where Mr.----
    Mr. Shimkus. Okay. If we could see it, and then, we will--
--
    Mr. Markey. Okay. Sure.
    Mr. Shimkus. Why don't you pass it down, and we will----
    Mr. Markey. It is the statement of President Bush's 
position.
    Mr. Shimkus. Well, if we could see it, and we will take a 
look at it.
    Mr. Markey. Okay. Sure.
    Mr. Shimkus. And we will make a ruling. The Chair 
recognizes the gentleman from Texas.
    Mr. Burgess. And I thank the chairman.
    Chairman Kelliher, you mentioned that, and I apologize for 
being out of the room, so if I am asking anything that has 
already been covered, my apologies. But you mentioned that the 
Commission has jurisdiction over natural gas transmission 
rates, as well as petroleum pipeline products. You state that 
these costs are 6 percent of the delivered cost for natural 
gas, and 1 percent for the delivered cost of petroleum 
products. Can you tell us what accounts for that difference?
    Mr. Kelliher. Why is it 6 percent in one instance, and one 
in the other?
    Mr. Burgess. Why is it so much higher for natural gas?
    Mr. Kelliher. Sure. The 6 percent is a rough rule of thumb. 
I think 1 percent is a little bit more accurate barometer of 
the typical transportation component of oil and petroleum 
products. The 6-percent figure will vary, because the commodity 
price varies sharply, so it might be 6 percent on one gas 
pipeline; it might be 10 percent on another. It really is, in 
large part, a factor of the commodity price volatility.
    Mr. Burgess. Does storage factor in as being an issue in 
pricing, the cost of storage of natural gas?
    Mr. Kelliher. In that 6-percent estimate?
    Mr. Burgess. Yes.
    Mr. Kelliher. No. To my knowledge, no. No.
    Mr. Burgess. And what about the amount of storage capacity 
this year, as compared to last year?
    Mr. Kelliher. Storage levels, right now, are actually above 
the 5 year average. That is one of the few bright spots of the 
current picture, is that the amount of gas in storage was 
slightly above the 5 year average before the hurricanes, and it 
still is slightly above the 5 year average. So we are in fair 
shape when it comes to storage. But I personally think that 
there is a need to explore pricing reforms to expand total 
storage capacity.
    Mr. Burgess. Well, if that is the case, why were the prices 
higher before Katrina and Rita, and then even higher after the 
hurricanes hit, if we have more storage this year than last 
year?
    Mr. Kelliher. Well, we saw some of that last year. Last 
year, we saw record levels of gas in storage. We saw very high 
levels of volatility. I mean, to me, that suggests that the 
total gas storage capacity is inadequate, and should be 
expanded. At least, that is one inference.
    Mr. Burgess. The total storage capacity is inadequate, and 
should be expanded?
    Mr. Kelliher. Yes.
    Mr. Burgess. Okay. Thank you. With your Commission, what do 
you have at your disposal? What sort of stick do you have at 
your disposal to prevent people from taking advantage of price 
in markets when they are distressed?
    Mr. Kelliher. First of all, we now have, for the first 
time, some strong enforcement tools, something the Commission 
has lacked for 70 years. We asked Congress at the beginning of 
the year, for strong enforcement authority and penalty 
authority, something that other regulatory bodies, the CFTC has 
it, the SEC has it. We asked for comparable enforcement tools. 
For most violations of the Natural Gas Act, for example, we had 
no ability to impose a civil penalty, and civil penalty really 
is the basic enforcement tool available to en economic 
regulatory body. We had no civil penalty authority whatsoever.
    Now, we can impose a penalty of up to $1 million per day 
per violation. On October 20, we issued an enforcement policy 
statement to explain how we will seek to apply that penalty 
authority, and our approach is modeled on the SEC's approach, 
and the CFTC's approach, as well as Justice Department 
guidelines for prosecution of business organizations. So we 
have tried to study how other regulatory bodies and enforcement 
agencies use, exercise their penalty authority. But we do now 
have strong enforcement tools.
    Mr. Burgess. Well, and I am grateful for that. How many 
companies, or how many cases do you have under review right 
now?
    Mr. Kelliher. I don't know how many we have under review 
right now. Some may be nonpublic investigations that I 
shouldn't discuss. But we, even before this new grant of 
enforcement, we had, I think, a very impressive record on 
enforcement. We sent Congress a report in, I think March of 
this year, that detailed the Commission enforcement actions 
taken in recent years. Even though we didn't have penalty 
authority, we have secured very impressive settlements.
    Mr. Burgess. And what do those settlements look like for 
the last 6 months? Have they been even more impressive with the 
new tools that you have?
    Mr. Kelliher. We have only had the new tools since August 
8, and I think there have been, well, there have been a number 
of settlements that have been announced since then, but we 
decided, you know, to be fair, we decided that it wouldn't be 
appropriate to impose civil penalties for violations that 
predated the enactment of the new law.
    Mr. Burgess. At some point in the future, can this 
committee expect that you will keep us up to date on----
    Mr. Kelliher. Yes, sir.
    Mr. Burgess. [continuing] on what these new tools have done 
for you, and----
    Mr. Kelliher. Yes.
    Mr. Burgess. [continuing] and where we have forced 
compliance, where before, it might have been much more 
difficult to do so?
    Mr. Kelliher. Yes.
    Mr. Burgess. Thank you.
    Mr. Kelliher. Thank you.
    Mr. Burgess. Mr. Maddox, the current Administration is 
often criticized for drilling, wanting to drill anywhere and 
everywhere. In 1999, the Clinton Administration issued 2,414 
permits to lease in the Rocky Mountain States. In 2003, under 
the current Administration, that number was down to 1,479, in a 
time when supply is more important than ever. What is the 
Department doing to help the Department of the Interior in its 
effort to issue more leases?
    Mr. Maddox. As I stated earlier, we are working very 
closely with them to clarify the environmental impacts of 
different technology, trying to identify best practices that 
can be employed and used to expedite that process, as well as 
developing new processes going forward.
    Mr. Burgess. Thank you. Mr. Chairman, I am a little over. I 
will yield back.
    Mr. Shimkus. The gentleman yields back, and per our 
previous discussion, we will accept the statement in the record 
that Mr. Markey requested, since it has Chairman Barton's co-
signature, it made sense to do so.
    The Chair now recognizes the gentleman from Texas--and 
apologizes for not recognizing him earlier--for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman, and I want to thank my 
colleague from Texas, Congressman Burgess, for getting rid of 
the myth that the Clinton Administration was anti-energy, 
because some of us tried to work on that for many years, and I 
am glad they allowed the 2,000 plus permits, as compared to 
1,400.
    I want to talk about economic dispatch. But before I get 
here, it seems like from your testimony, and a lot of the 
questions, is that right now, we are, you know, it is about $11 
per million cubic feet, and if Congressman Wynn is correct that 
we have a 3-percent growth, you know, and it takes 3 years to 
get an LNG terminal, which is, again, not the panacea we wish 
it were, but it seems like we need to do everything. I mean, we 
need to drill more in the Rocky Mountains. We need OCS 
exploration and production, and the de-bottlenecking the 
chairman talked about, of course, the Alaska pipeline. I know 
in the refinery bill that the House passed, but it is not law 
now, there was some effort to encourage the companies to build 
that pipeline, but it seems like we need to do everything for 
gas supply, and that is what is frustrating.
    Let me ask you about, Chairman Kelliher, about the economic 
dispatch, and you know, we have such high prices, and I have a 
strong interest in economic dispatch, because we hear the 
problems up here from those States that don't necessarily 
produce like Texas does. And therefore, I am pleased to hear 
that FERC is moving forward on that regional joint board that 
the States, to examine economic dispatch, as provided by our 
amendment that this committee accepted to the Energy Bill that 
passed this last July.
    There is an issue for, that maybe even a lot of our 
committee members and our staff don't understand, that are 
familiar with, so could you lay out the basics of what economic 
dispatch is, and let us know what FERC and joint boards will be 
discussing on that issue. And on a separate issue, since again, 
it is a new law on the streamlined permitting process for LNG 
terminals, you have had all of 2 months now, what is happening 
with FERC on trying to permit new LNG terminals, to get them 
online? Again, 3 years may be the average, hopefully, we can 
shave a few months off that, not only for Mr. Markey's 
constituents in Massachusetts, but for my constituents who use 
natural gas to cool our homes during the summer.
    Mr. Kelliher. Well, first of all, on economic dispatch. 
Power plants have different costs. There are base-load plants 
and peaking plants, but base-load plants have varying costs, 
and normally, economic dispatch has been done for a long time. 
Typically, it has been done on a utility-by-utility basis. They 
dispatch the generation they own. They start with the lowest 
cost generation, and they, in a theoretical way, they start 
with the lowest cost generation, and add to it, each increment 
slightly more expensive than the last, until the point where 
they actually satisfy demand. They are dispatching enough 
generation that they can satisfy demand.
    That very simple model has gotten more complicated as 
independent power production has been added. Now, in some 
regions of the country, ERCOT, the organized markets in the 
Midwest and the Northeast, they dispatch, they have security 
constrained economic dispatch, where they will dispatch on a 
regional basis, not just on each individual utility system, but 
on a regional basis. In other parts of the country, they 
continue, they have economic dispatch, but on a system by 
system basis.
    That is what the Commission will look at at the joint board 
meetings. Texas, I will be chairing the southern joint board 
meeting in about 2 weeks, well, less than 2 weeks, and we will 
hear from ERCOT on how ERCOT does economic dispatch.
    And on LNG, since EPACT, I mean, one development since 
EPACT is the Commission, jointly with the California Public 
Utilities Commission, filed a motion to dismiss the litigation 
that inspired Congress to act to clarify the Commission's legal 
exclusive jurisdiction over authorizing LNG import facilities. 
I am not aware. Have there been filings? Oh, we did. Yeah, one 
of our first actions in the Energy Policy Act was within 60 
days--we have a deadlines under the Energy Policy Act, 
something like 15--and the first one was issuing a final rule 
on LNG pre-filing process, and we issued that on the sixtieth 
day, which is not easy to do under the Administrative 
Procedures Act.
    I am not aware. Have there been other LNG proposals filed? 
No new proposals have been filed. We expect there may be some 
filed soon, though.
    Mr. Green. Okay. In what brief seconds I have left, 
Secretary Abraham, in 2003, recommended economic dispatch to 
State PUC chairs as a way to reduce natural gas prices. Has the 
Administration made this recommendation again going into this 
winter, which would have even, will have even higher prices 
than we did 2 years ago? If not, is this a good idea for the 
Department of Energy to do that?
    Mr. Maddox. As I noted earlier, this isn't actually part of 
my portfolio, so I would take that question for the record, and 
respond in writing.
    Mr. Green. Okay. Thank you, Mr. Chairman, for the time.
    Mr. Shimkus. I thank the gentleman. Now, the Chair 
recognizes the gentleman from Maine, Mr. Allen.
    Mr. Allen. Thank you, Mr. Chairman. This is working, I 
gather.
    Mr. Shimkus. I will hit the mute button in a minute.
    Mr. Allen. Okay. When this light goes out, I will come back 
to you. First of all, Chairman Kelliher, I just had a question 
for you to begin with. I am sure you share my concern that as 
commodities supplies tighten, the potential for market 
manipulation increases. Can you give us any more detail about 
the market manipulation rules your Commission has proposed? 
Specifically, when will they be implemented, and will they be 
in place to prevent market manipulation on a real-time basis in 
the natural gas market this winter, if it occurs?
    Mr. Kelliher. Sure. And first of all, let me start with, 
this is something that I personally urged Congress to do in a 
letter to Mr. Dingell last January. I thought that, given 
changes in the market, the Commission needed stronger 
enforcement tools. Something Senator Bingaman supported, Mr. 
Boucher supported, and it ended up getting into law. It was 
something I personally was committed to. So one of the first 
orders of business after the new law was enacted was to follow 
the path that Congress laid out for us. Congress told us to 
issue anti-manipulation rules modeled on the securities model, 
the model in securities law. We don't, at FERC, naturally have 
great expertise on securities law. It is not something we deal 
with, so we started with the model Congress gave us, understood 
securities law, and issued a proposed rule modeled on the 
securities approach. And we issued those rules on October 20, I 
believe. We approved them October 20, and we fill finalize them 
by the end of the year.
    Mr. Allen. Okay. So they will be in effect.
    Mr. Kelliher. Yes, sir. This winter.
    Mr. Allen. Before this winter.
    Mr. Kelliher. Yes.
    Mr. Allen. Mr. Maddox.
    Mr. Kelliher. Oh, I am sorry. And can I clarify one thing?
    Mr. Allen. Yes.
    Mr. Kelliher. We also did have other market manipulation 
rules that go back 2 years, the market behavior rules the 
commission issued 2 years ago. Those have been challenged in 
court. They are still good rules. They haven't been overturned 
by the court, but one reason we saw express prohibition of 
market manipulation was to guard against that legal threat, so 
there are market behavior rules in place until we finalize the 
new rules.
    Mr. Allen. Okay. And you feel the new rules have cleared up 
the legal problems with the old?
    Mr. Kelliher. I think so.
    Mr. Allen. To the extent there were legal problems.
    Mr. Kelliher. Yeah, I think it would be hard to challenge 
the essence----
    Mr. Allen. Okay.
    Mr. Kelliher. [continuing] of the new rules, given 
Congress's action.
    Mr. Allen. Okay. Mr. Maddox a couple of questions for you. 
In the formulation of the Administration's budget policy over 
the last 5 years, was it ever conceived that a major hurricane 
could strike oil and gas producing regions in the Gulf of 
Mexico? I mean did you take that into account in the 
formulation of the Department's budget? That risk.
    Mr. Maddox. That planning would undoubtedly go over to DHS. 
I can tell you we have done extensive work on energy assurance. 
We have created an Office of Energy Assurance. We staffed it. 
So yes, the Department has addressed that issue, and moved 
forward, and in fact, our Department had played a major role in 
helping restore some of the energy, working with the industry, 
DHS, the Department of Transportation, Coast Guard, to clear 
channels, and get electricity back to critical infrastructure. 
So it was contemplated. A program was set up to address these 
issues, and it was very effective throughout this process.
    Mr. Allen. Okay. Coming back to the statement I made in my 
opening, I mentioned the fact that back in March, Secretary 
Bodman said that 95 percent of the Administration's energy 
policy had been implemented. What do you believe was left out? 
What do you believe we should be doing now? The related 
question is do you agree at this point, it might have been wise 
to have a little more of a conservation component to the energy 
policy? It was, I think, Mr. Kelliher, who said in his remarks 
that we are counting on State conservation plans to help us 
through the winter. Wouldn't it have been good to have a 
comprehensive, extensive Federal conservation plan in that 
energy policy?
    Mr. Maddox. First, you know, the Administration's policy 
during the Energy Bill was to support conservation and 
renewable energy efforts. I think we had $7.7 billion in 
spending and tax credits to support conservation. The 
Administration policy was not to support production credits. We 
felt like in the current price environment, that there was 
enough incentive to continue producing. Having said that, I 
would also note that, in October, Energy Awareness Month, the 
Secretary kicked off a campaign, our senior folks, the 
Secretary, Undersecretary, I think visited eleven cities. We 
have created a website, energysavers.gov, we have been out 
there talking about conservation for some time. We had this 
discussion, I think, in 2003. Secretary Abraham convened a 
group in July. So there has been extensive work on 
conservation.
    What we really have got to understand is that turning a 
ship this size takes time. It takes time to insulate homes. It 
takes local building code changes. We can educate it. We are 
getting very aggressive now in creating the Energy Saver codes. 
Some of this has been bogged down in courts for years. So we 
are very quickly moving out, and have been trying to move out 
in this front. It still does not ignore the fact, though, that 
we still do need additional production. The United States is 
the third largest oil producer in the world and declining. We 
are at 5.5 million barrels today. Projections have at 4.5 
billion barrels in the not too distant future, unless we bring 
on ANWR, unless we bring on some of these other reserves.
    So it needs to be a combination. We are using energy much 
more efficiently than we did 10, 15 years ago. However, we have 
a huge hole in the residential area, which I think is a major 
problem going forward. Conservation from an industry 
perspective is pretty much a competitive necessity, and they 
are getting there. But we have a lot of work to do on the----
    Mr. Allen. I see my time has expired, Mr. Maddox. I would 
just not belabor the point, but since 70 percent of all our oil 
goes into vehicles, it would have been nice, it seems to me, 4 
years ago, to have done something serious about a policy, not 
just talking about a policy that would have driven down or 
improved the vehicle emissions, vehicle fuel efficiency as 
well.
    But I see my time has expired, and I argue with Mr. Shimkus 
about this now and then. So we won't do it again today. Thank 
you.
    Mr. Shimkus. The chairman thanks my colleague. If the Chair 
can dismiss this panel, and thank them for their testimony, and 
call the second panel to their seats.
    Mr. Markey. Mr. Chairman, could I ask one question by 
unanimous consent?
    Mr. Shimkus. If the Chair would limit it, we have already 
been here 2 hours, we have got two more panels. If the 
gentleman can assure me that we can do this expeditiously, I 
would be happy to.
    Mr. Markey. No, I will. I just have----
    Mr. Shimkus. Thank you.
    Mr. Markey. [continuing] one question for Mr. Maddox.
    Mr. Shimkus. I knew we wouldn't get out of here.
    Mr. Markey. Well----
    Mr. Maddox. But first, may I acknowledge my error.
    Mr. Markey. Okay. No, I appreciate it, Mr. Maddox. So what 
I would like to do, Mr. Maddox, is just for you to clarify, 
because in the Administration's letter to the committee on the 
bill, it says that they have concerns about certain provisions. 
I guess what I would like to know is first, do they have 
concerns about the bill having a provision which increases the 
reserve from 2 million to 5 million barrels? Is that one of the 
concerns?
    Mr. Maddox. I don't believe there is a fundamental concern 
over increasing the authorization to 5 million barrels.
    Mr. Markey. Okay. And second, it says there are 
Constitutional concerns about the Barton bill. What are the 
Constitutional concerns that the Administration has about the 
Barton bill?
    Mr. Maddox. That I couldn't address, but I would be happy 
to take it for the record.
    Mr. Markey. Okay. Thank you.
    Mr. Shimkus. And as with Chairman Barton, if there is 
additional questions that any member would like to address, 
they can submit those to, and we want to thank you for your 
time and your responses.
    And now, if we can get folks to expeditiously exercise 
their legs and move out of sight of the committee room, and 
have our second panel take their seats.
    I would like to get the second panel moving as 
expeditiously as possible. I will do some brief introductions, 
and then, we will go to opening statements.
    We have, in the second panel, and you can correct me if I 
butcher your last name. It is not intentional. Mr. Robert 
Stibolt.
    Mr. Stibolt. Stibolt.
    Mr. Shimkus. Stibolt. Who is the Senior Vice President for 
SUEZ Energy North America. We also have with us Mr. Stephen 
Ewing, a Vice President of DTE Energy. Ms. Mary Ann----
    Ms. Manoogian. Manoogian.
    Mr. Shimkus. Manoogian. Director of the New Hampshire 
Office of Energy and Planning. And Ms. Dorothy Tucker, from 
Medford, Massachusetts.
    We welcome you. Your whole statements are submitted for the 
record. If you can summarize in 5 minutes, and we would like to 
start with Mr. Robert Stibolt.

    STATEMENTS OF ROBERT D. STIBOLT, SENIOR VICE PRESIDENT, 
  STRATEGY, PORTFOLIO, AND RISK MANAGEMENT, SUEZ ENERGY NORTH 
  AMERICA, INC.; STEPHEN E. EWING, VICE CHAIRMAN, DTE ENERGY, 
     INCOMING CHAIRMAN, AMERICAN GAS ASSOCIATION; MARY ANN 
    MANOOGIAN, DIRECTOR, NEW HAMPSHIRE OFFICE OF ENERGY AND 
             PLANNING; AND DOROTHY ELIZABETH TUCKER

    Mr. Stibolt. Thank you, Mr. Chairman. I appreciate the 
opportunity to be here today to discuss natural gas and home 
heating oil this year.
    As you know, I work for and represent SUEZ Energy North 
America, which through its LNG division, owns and operates the 
liquefied natural gas terminal in Everett, Massachusetts. My 
written statement is fairly thorough, and I ask that it be 
entered into the record.
    Mr. Shimkus. Without objection, so ordered.
    Mr. Stibolt. Beyond the written statement, I thought I 
might discuss just three things very briefly. First, I want to 
note that the Everett terminal is important to the energy 
supply in New England. We provide about 20 percent of all the 
natural gas supplied to that region. On the coldest days, our 
estimates indicate that as much as 40 percent of the gas used 
in New England flowed through our terminal.
    We are justifiably proud of the role we play in keeping 
people warm and keeping the power on in New England. At the 
same time, we routinely take actions to keep the gas we sell 
economical to our customers. We typically sign long-term 
contracts with secure sources of supply. We then customarily 
hedge a significant percentage of the price risk carried within 
those contracts, which positions us to offer fixed price sales 
contracts to our customers, and positions our hedge counter 
parties to offer additional price hedging services. In short, 
we take prudent steps to keep prices in New England as modest 
as possible. We also, when possible, try to bring additional 
cargos into New England. Given the complicated logistics of 
bringing a ship into Everett, it would be difficult to do much 
this winter, but we are looking for those opportunities.
    Second, there is a lot of talk about bringing new supplies 
online. While we are proud of what we are doing right now, we 
are not just talking about what to do next. Right now, we are 
investing significantly in two major projects. The first is an 
offshore facility located about 12 miles off the coast of 
Massachusetts near Gloucester. This facility, which will 
consist essentially of a hookup to a nearby underwater pipeline 
will require a special set of tankers that can regasify the LNG 
right on the ship, and feed directly into the region's pipeline 
system. When complete, this $1 billion project will give us the 
ability to supplement our cargos into Everett, increase the 
supply of natural gas being delivered into New England, and 
provide our customers with the most affordable natural gas in 
the region.
    The second is a similar project in Florida, which will 
bring LNG into Florida via pipeline, either from the Bahamas, 
or from an offshore regasification facility. Right now, we are 
actively working on both options. Third, I think we need to 
keep things in perspective. It is wrong to claim that LNG alone 
can meet all of our growing needs for natural gas. We view LNG 
as an important energy source in addition to other North 
American natural gas supplies, not as a replacement for them.
    Policymakers cannot and should not allow our very sensible 
and successful approach to LNG to obscure the fundamental 
reality that we need to better access and develop our Nation's 
natural resource base.
    Thank you again for inviting me to discuss these issues 
with you, and I look forward to any questions you might have.
    [The prepared statement of Robert D. Stibolt follows:]
    Prepared Statement of Robert D. Stibolt, Senior Vice President, 
          Strategy, Portfolio and Risk Management, Suez Energy
    Thank you, Mr. Chairman and members of the Committee for inviting 
me to present testimony regarding natural gas prices and, more 
specifically, the role of liquefied natural gas (LNG) in the larger 
marketplace.
    My testimony today will concentrate on five important points 
related to LNG.
                         regional energy supply
    First, I think it is important to recognize that LNG can contribute 
substantially to a region's energy supply. For instance our terminal in 
Everett, Massachusetts meets 15-20% of New England's natural gas 
demand, and we are capable of meeting 35-40% of the region's demand on 
peak days. In addition we are supplying the fuel for a new 1,550 
megawatt powerplant, which can generate enough electricity for 
approximately 1.5 million homes each year. If LNG resources were not 
available in New England, supplies would be far tighter and consumers 
would suffer.
    In short, wherever there is a facility LNG keeps downward pressure 
on prices by helping to diversify and increase a region's energy 
supply. By competing openly and fairly with gas delivered via pipeline, 
LNG helps ensure that consumers get the best deal possible.
    There are two other important advantages of LNG. First, LNG helps 
us access the ample supplies of natural gas around the world. Estimates 
of the total world supply of natural gas hover around 6 quadrillion 
cubic feet, and more reserves of natural gas continue to be discovered. 
Much of this natural gas is stranded a long way from market, in 
countries that do not need large quantities of additional energy. For 
purposes of perspective, U.S. natural gas reserves were estimated by 
the Energy Information Administration (EIA) at 193 trillion cubic feet 
as of the end of 2004. This represents only about 3% of the world 
total. Second, liquefying natural gas and shipping it is more 
economical than transporting it in pipelines for distances of more than 
about 700 miles offshore or more than 2200 miles onshore.
    Consequently, there are 113 active LNG facilities in the U.S., 
including marine terminals, storage facilities, and operations involved 
in niche markets. Worldwide there are 17 LNG export terminals, 40 LNG 
import terminals and 136 specially-designed LNG ships.
                           natural gas supply
    Second, even with our obvious enthusiasm for LNG, it is wrong and 
probably irresponsible to claim that LNG alone can meet all of our 
growing needs for natural gas. We view LNG as an important energy 
source in addition to other North American natural gas supplies, not as 
a substitute for them.
    In short, LNG needs to be thought of as complementary to our 
current resource base. This is a very important point. Policymakers 
cannot and should not allow our very sensible and successful approach 
to LNG to obscure the fundamental reality that we need to better access 
and develop our Nation's natural resource base.
    We believe that the U.S. must increase its domestic production of 
natural gas. Recent legislative, regulatory and market trends have 
placed greater demands on our gas supply without taking commensurate 
steps to increase production. Congress needs to take steps to create a 
climate in which we can develop adequate supplies, produced in an 
environmentally protective manner. Access to new reserves is necessary 
not only to meet new demands, but simply to sustain current production 
levels.
    Currently, in the natural gas industry generally, many fields in 
the United States are getting more difficult to develop since most of 
the easy-to-access, highly productive reserves already seem to be 
accounted for. In Canada, key fields are also maturing while the 
country is experiencing its own increase in natural gas demand.
    At the same time, natural gas demand is growing both overall in the 
U.S. and in our terminal's home base in New England. There is a 
significant increase in new natural gas-fired electric power plants, 
which, although they use less fuel than older, less efficient gas and 
oil powerplants, still place demands on the resource base. In addition, 
there is steady growth in demand for natural gas from residential and 
commercial customers.
    More specifically, according to the Energy Information 
Administration (EIA), natural gas production in the U.S. is predicted 
to grow from 19.5 Tcf in 2001 to about 26.4 Tcf in 2025. At the same 
time, total natural gas consumption is expected to increase to about 35 
Tcf in 2025. It is not complicated math to see that demand is 
outstripping supply.
    We can talk for a long time about the reasons for higher prices, 
but when demand is increasing and supply is steady or dropping, it 
makes no difference whether you are buying and selling toast or 
helicopters or natural gas--prices are going to increase.
    As a result of these factors, many are concluding that LNG 
represents an important part of the long-term natural gas supply 
solution.
    We believe that because it provides unique flexibility, LNG will 
continue to grow as a resource for the United States. In our ongoing 
effort to diversify our supply of energy, LNG's exceptional and 
exclusive ability to transport what was once stranded natural gas from 
various sources can only help.
    Additionally, as response to demand becomes more important, our 
ability to move natural gas to where it is needed, freed in part from 
the constraints of pipelines, will ensure that LNG is an increasingly 
important element in our Nation's energy supply portfolio. Simply put, 
LNG offers greater trade flexibility than pipeline transport, allowing 
cargoes of natural gas to be delivered where the need is greatest and 
the commercial terms are most competitive.
    This trend can already be seen. As the Energy Information 
Administration has noted, LNG imports have increased by more than 30 
times--from 18 Bcf in 1995 to 540 Bcf in 2003. Factors ranging from 
additional sources of supply to lowered costs for liquefaction and 
shipping have contributed to the increase. Currently, anticipated 
expansions on LNG facilities are expected to raise the United States' 
import volumes from 2 Bcf per day in 2005 to about 6 Bcf per day in 
2010.
                                projects
    Let me move onto my third topic and address questions about the 
development of LNG as an important source of energy for the United 
States. As you know, the Energy Information Administration has 
indicated that LNG might supply as much as 20% of the natural gas 
consumed in the United States in the future. Additionally, there are 
dozens of proposed LNG terminals on the drawing board right now. While 
I think we can all agree that not all of those facilities will be 
built, and it is unlikely that LNG will supply 20% of this Nation's 
natural gas anytime in the near future, it is safe to say that LNG can 
provide a growing fraction of the energy needed to power the world's 
largest economy.
    We at Suez are confident in the future of LNG in this country. We 
are investing in two major projects to bring LNG into the U.S. We own 
and operate the terminal at Everett, and have some capability to 
deliver additional LNG supplies through both Cove Point and Lake 
Charles. A Suez subsidiary with direct access to LNG at the point of 
liquefaction is an important source of supplies delivered into Cove 
Point and Lake Charles. We are leaders in the worldwide LNG industry 
and are involved in the process from liquefaction through 
transportation right up to the point at which the gas is delivered into 
the pipeline.
    Our two major projects are designed to bring more LNG into the 
markets in New England and Florida. These markets have constrained 
access to natural gas, in part because pipeline capacity is not robust 
in those areas. These projects make sense for us as a business and for 
the consumers of New England and Florida, who continue to demand the 
benefits brought about by a plentiful, affordable supply of natural 
gas.
    The project in New England is an off-shore facility located about 
12 miles off the coast of Massachusetts near Gloucester. This facility, 
which will consist essentially of a hookup to a nearby underwater 
pipeline, will require a special set of tankers that can regasify the 
LNG right on the ship and feed directly into the region's pipeline 
system. When complete, this $1 billion project will give us the ability 
to supplement our cargoes into Everett, increase the supply of natural 
gas being delivered into New England, and provide our customers with 
the most affordable natural gas in the region.
    The project in Florida will bring LNG from the Bahamas via 
pipeline. Right now, we are working with the regulatory agencies to 
determine our best options. Unfortunately, sometimes the regulatory 
agencies are not as interested in moving energy projects along as we 
are.
    Let me offer our experience in Florida as an example. There, we 
have been working diligently to gain the appropriate regulatory 
authority to construct a pipeline between the Bahamas and Florida. Last 
April, FERC approved our EIS, the State gave its determination of 
consistency with respect to the coastal zone, and the local governments 
all approved the project. Unfortunately, the Corps of Engineers decided 
after all that to raise questions. The Corps representatives had 
participated in all the interagency meetings and discussions, but they 
waited until FERC had acted to raise their concerns, some of which 
included very fundamental elements of the process including potential 
pathways, tunneling, etc. Now, we find ourselves caught between a 
dramatic design change requested by the Corps of Engineers and the 
design that was approved by more than ten federal, state, and local 
agencies through the FERC multi-agency permitting process.
    As a coda to this section, I would simply point out that permitting 
and other delays complicate the supply picture. LNG is a global 
commodity. If we can't move expeditiously to develop and secure 
supplies of it, other countries will.
                           integrated markets
    My fourth point is that we need to better integrate natural gas 
markets. I have attached a chart to my testimony outlining how this can 
be thought about. For reasons both physical and financial, we are 
experiencing something of a balkanized marketplace for natural gas in 
the United States. Much of the natural gas from the Gulf of Mexico 
flows into the Northeast, which appears to be the gas market most 
stressed in the event of a cold winter. More abundant supplies of 
natural gas from the Western United States and Canada flow into the 
Chicago and other Midwest Hubs, but because of physical constraints and 
financial realities, does not flow further eastward into New England.
    This places us in a situation where New England is dependent on 
natural gas primarily from the Gulf, which, despite being a region rich 
in the resource, struggles to meet the demand. In this year, the 
hurricanes have greatly complicated the supply picture and placed New 
England in a position where supply, especially in February, may be 
problematic.
    We need to do everything we can to see that supplies scheduled for 
delivery to both the Gulf of Mexico and the Northeast US can in fact be 
delivered.
                                 safety
    Finally, let me address--and hopefully put to rest--the very 
important issues of safety and security.
    First off, I want to note that LNG is as safe, if not safer, to 
transport and store than most other fuels. It is not explosive, 
corrosive, carcinogenic, or toxic. It does not pollute land or water 
resources. It is not transported or stored under pressure.
    Like other fuels, LNG has risks associated with its improper 
handling; however, LNG has certain characteristics which minimize some 
of the dangers that may result from mishandling. For example, compared 
to other fuels, LNG is less likely to ignite in a well ventilated area.
    With respect to the transportation, LNG ships, with their double-
hull construction, are among the best-built, most sophisticated, most 
robust in the world. According to shipping expert Lloyd's Register, 
there has never been a recorded incident of collision, grounding, fire, 
explosion, or hull failure that has caused a breach to a cargo tank of 
an LNG ship. In fact, over the last 40 years there have been 33,000 LNG 
carrier voyages, covering more than 60 million miles without major 
accidents or safety problems either in port or on the high seas.
    It is also important to note that in the extremely unlikely event 
that an LNG vessel were involved in an incident that ruptured a cargo 
tank, and the LNG vapor released met with an ignition source, the 
likely consequence would be a localized fire, and not an explosion as 
is often feared.
    With respect to the storage of LNG, there has never been a report 
of any off-site injury to persons or damage to property resulting from 
an incident at any of the LNG import terminals currently in operation 
worldwide, including our terminal in Everett. This is due to excellent 
equipment and facility design, excellent safety procedures employed in 
the industry, stringent design and safety codes governing design, 
construction, and operation of storage facilities, and a well-trained, 
highly experienced workforce.
    Finally, we live in a world of comparative risk. At Everett, we 
take about 80 shipments of LNG a year. Next door to us is a gasoline 
terminal that probably takes at least as many. Across the Nation there 
are thousands of such terminals and storage tank farms next to houses, 
schools, and businesses. I am not saying that because of this we need 
to pay less attention to the safety and security of LNG shipments. What 
I am saying is that we need to make sure that we are addressing real 
world risks in an appropriate and measured way.
    Thank you again, Mr. Chairman and Members of the Committee for 
inviting me to present our thoughts on possible approaches to help 
moderate natural gas prices and, more specifically, the role of 
liquefied natural gas in the larger marketplace. I look forward to 
answering any questions you might have and working with the Committee 
on these very important issues.

    Mr. Shimkus. Thank you. Now, the Chair recognizes Mr. 
Ewing. Your statement is in the record, and your are 
recognized, sir.

                  STATEMENT OF STEPHEN E. EWING

    Mr. Ewing. Thank you, Chairman Shimkus, and thank you, 
Ranking Member Boucher, and members of the committee.
    I am here today in my role as Vice Chairman of the American 
Gas Association, which represents 195 utilities across the 
country that deliver natural gas to more than 63 million 
customers. I am also the Vice Chairman of DTE Energy, a 
combination electric and gas utility in Michigan. We serve 2.2 
million electric customers, and 1.2 million natural gas 
customers.
    Before I begin my comments, I would like to offer my 
sincere thanks to the members of this committee for all the 
work that you did to successful pass the Energy Policy Act of 
2005, for your support for $1 billion of increased funding for 
LIHEAP, and most recently, I would like to thank you for 
conducting these hearing, which serve as an important forum to 
further explore the impact of high gas prices, and to consider 
policy measures that could be enacted.
    As you already know, natural gas prices have reached 
unprecedented high levels, reaching a peak of $15.60 per 
thousand on October 5 of 2005. While prices have softened 
somewhat, they remain extremely sensitive to changes in 
weather, supply, and demand. Today, I would like to focus 
briefly on three things. First, the needs of low-income 
customers, who are the most vulnerable group to the impact of 
high prices. Second, the need for continued, effective 
communication measures that will do the following: warn 
customers about significantly higher heating bills this winter, 
and inform them of what actions they can take to reduce natural 
gas consumption, where to get help if they need it, and things 
they should not do, because they are unsafe. And third, the 
need for a long term solution, in the form of increased natural 
gas supplies.
    Returning quickly to the first point, the increase in gas 
prices has caused a corresponding decrease in the purchasing 
power of LIHEAP dollars. Based on current prices, it is a 
reduction of almost 50 percent. At the same time, the number of 
households receiving LIHEAP assistance, essentially 20 percent 
of those eligible, has increased from approximately 4.2 
households in fiscal year 2002 to more than 5 million 
households this year, the highest level in a decade.
    The National Energy Assistance Directors' Association 
study, that was referred to by Congressman Wynn earlier, 
released its second annual survey detailing the effects of high 
energy costs on poor families. These circumstances, noticed by 
the Congressman, create an immediate need that can only be 
addressed by an increase in LIHEAP funding. AGA is advocating 
that LIHEAP funding be increased to the full $5.1 billion that 
was incorporated in the Energy Policy Act of July 2005.
    To my second point, AGA and its member companies have 
embarked on extensive communication programs to our customers, 
warning them about higher heating bills this winter, and while 
this subject has been in the national media for some time, I 
believe it is only through repetition of the message that it 
becomes real for many people. And the message is simple: Prices 
are high; winter is coming; here are some things that you can 
do and some things you should avoid. The gist of the message? 
Act now. Don't wait until the situation becomes critical.
    And while on the subject of communications, I think it is 
important to note that unlike the major energy companies who 
recently announced record quarterly earnings, natural gas 
utilities, like our customers, do not benefit from higher 
prices. We make our money on the delivery of the commodity, and 
those rates are regulated by each State.
    Last, and in the long term, the most important action is to 
increase the supply of natural gas. To that end, AGA advocates 
opening restricted offshore areas for the environmentally 
responsible production of natural gas; providing adequate 
funding and staff for the Federal offices principally involved 
in the issuance of permits for drilling and production of 
natural gas; further expanding and expediting procedures for 
producers to access lands and production areas; and finally, to 
take advantage of the provisions that have already been adopted 
through Congress, among them, taking steps to increase U.S. 
capacity to receive liquefied natural gas to our LNG shipments. 
It has been talked about already this afternoon. And also, to 
follow through on the construction of the Alaskan pipeline.
    Thank you very much for your attention, and again, thank 
you for the work that you have already done.
    [The prepared statement of Stephen E. Ewing follows:]
  Prepared Statement of Stephen E. Ewing, President & Chief Operating 
   Officer, DTE Energy Gas on Behalf of the American Gas Association
    Thank you for the opportunity to testify before this Committee on 
behalf of the American Gas Association and the 56 million consumers 
served by its members. My name is Stephen Ewing, and I am President and 
Chief Operating Officer of DTE Energy Gas, a natural gas utility in 
Michigan that provides service to more than one million customers. I am 
also the Vice Chairman of the American Gas Association (AGA), which 
represents 195 local energy utility companies that deliver natural gas 
throughout the United States.
    Energy is the lifeblood of our economy, and natural gas supplies 
about one-fourth of this country's energy. Natural gas also is 
America's most popular home-heating fuel, heating 52% of America's 
homes. As the purveyor of this home-heating fuel, natural gas utilities 
are a lifeline business--it is a responsibility they take seriously 
and, as you will see, it guides their actions.
    Given the recent run up in natural gas prices in the wake of the 
warmer-than-normal summer and Hurricanes Katrina and Rita, this winter 
natural gas customers will likely face significantly higher energy 
bills. Local natural gas utilities as a whole have been consumed by 
planning for the winter heating season and seeking means to ease the 
burden that high gas prices will place on consumers.
    Accordingly, AGA's focus is to pursue policies that will mitigate 
the high cost of natural gas for America's consumers this winter and 
that will, in the longer term, increase supply. It is distressing to 
consider that the $13 prices projected in the American Gas Foundation 
study, ``Outlook to 2020,'' published in February of this year, have 
already been exceeded over the last few weeks. That study concluded 
that if policy makers and industry decision makers did not immediately 
address critical issues that will have a significant impact on the 
availability and price of natural gas (such as diversifying electric 
generation mix and increasing access to domestic supplies) then prices 
could reach $13 by 2020. No one imagined that a mere seven months later 
those prices would become a reality. Today's higher natural gas prices 
will, of necessity, lead to much higher bills for consumers.
    Higher bills are harmful to consumers, harmful to the economy, and 
harmful to the natural gas utilities that AGA represents. More than 63 
million Americans rely upon natural gas to heat their homes. 
Unexpectedly high prices are a serious drain on their pocketbooks. High 
prices also put the nation's industrial sector at a distinct 
competitive disadvantage, cause plant closings, and cause workers to 
lose their jobs.
    Most observers readily understand why higher prices are harmful for 
consumers and the economy, but they fail to apprehend that they are 
also harmful for natural gas utilities. By law and regulation, natural 
gas utilities in almost all circumstances are not permitted to mark-up 
the price of natural gas that they acquire for their consumers and must 
instead sell the gas to consumers at exactly the same price they pay 
for it. This process is overseen by state public service commissions 
and is subject to review and audit. Rather. natural gas utilities earn 
their income by delivering natural to their customers. Under the most 
basic principles of economics, today's higher natural gas prices mean 
that customers will consume less natural gas. As a consequence, natural 
gas utilities will deliver less natural gas, thus diminishing the 
revenues paid to them for services performed for their customers. As a 
result, and contrary to the belief of so many, the interests of 
consumers and of natural gas utilities are aligned on this issue. Both 
want lower natural gas prices and reliable natural gas supply.
    Recently the Department of Energy's Energy Information 
Administration (EIA) issued its Short-Term Energy Outlook and Winter 
Fuels Outlook (October 12, 2005). AGA does not issue its own natural 
gas price projections. As a result, I will be discussing in my 
testimony the prices projected by EIA. As has been widely reported, EIA 
projects that the average natural gas household's winter fuel 
expenditures will increase by 47.6% over last year.
    It is important to remember, as EIA carefully notes, that the EIA 
projections are based on modeling results that depend on assumptions 
regarding several critical variables:

(1) A significant assumption is that there will be a ``medium 
        recovery'' of energy operations in the Gulf of Mexico following 
        Hurricanes Katrina and Rita. EIA assumes neither a best-case 
        nor worst-case scenario in projecting the recovery of natural 
        gas production, gas processing, and pipeline facilities in the 
        Gulf. What if this assumption turns out to be off the mark?
(2) Another significant assumption is that the winter weather will be 
        normal. A ``normal'' winter means weather somewhat colder than 
        most parts of the United States have seen in recent years. What 
        if we do not have a normal winter? EIA projects that a ten-
        percent-warmer-than-normal winter would cause average 
        residential natural gas prices to rise 29.8 percent, while a 
        ten percent colder than normal winter would lead to a 67.3 
        percent price increase. This is quite a price range, entirely 
        without regard to best-case or worst-case Gulf of Mexico 
        recovery scenarios.
    AGA and its members are, on a national basis, facing significantly 
higher natural gas prices in the best of cases and extraordinarily 
higher prices in the worst of cases.
    What are natural gas distribution utilities doing to help their 
customers this winter? Natural gas utilities are doing what they always 
do--whatever they must to serve their customers reliably this winter. 
Gas utilities are pursuing purchasing strategies that, while tried and 
true, have also evolved over the past five years with ever-rising 
natural gas prices. It is a building-block process that begins months 
ahead of the winter heating season as utilities begin purchasing 
natural gas during the spring and summer months and putting it into 
underground storage. Usually summer and early fall natural gas prices 
are lower than winter prices, and purchasing storage gas in the summer 
and early fall provides a natural, physical hedge against higher prices 
in the winter.
    In addition to the basic building block of underground storage, 
natural gas utilities layer other supply and transportation services. 
Companies build and manage a portfolio of supply, storage, and 
transportation services, which may include a diverse set of contractual 
arrangements to meet anticipated peak-day and peak-month gas 
requirements.
    Layered increasingly on top of that are financial tools to hedge 
natural gas costs and, hence, promote a greater degree of price 
stability. Financial hedging tools include options, fixed-price 
contracts, swaps, futures, as well as more exotic instruments. These 
tools help in reducing price volatility. Although natural gas 
distribution utilities have grown increasingly savvy in the use of 
these tools over the past few years, they still do not guarantee lower 
natural gas prices. They are, rather, designed to promote price 
stability. Lower prices and price stability can sometimes be competing 
objectives.
    Natural gas distribution utilities must also help their customers 
to help themselves. To this end, customer education is critical for a 
number of reasons:
    First, customers need to be aware of higher natural gas prices in 
order to have an opportunity to take action today to reduce this 
winter's bills. That is why the American Gas Association and its member 
gas distribution utilities are working urgently to communicate to 
customers regarding the higher winter bills that they can anticipate 
and to offer consumers some tools for protecting themselves.
    One important tool is the use of budget (or levelized) billing 
plans that allow utility customers to spread out their natural gas 
bills so that they pay about the same amount each month year round. 
Consumers using these plans are charged the same total bill each month 
for 11 months, regardless of weather variations and regardless of 
unpredictable commodity prices. A reconciling adjustment is made during 
the twelfth month to reflect differences in actual versus projected 
costs and actual versus projected consumption.
    Another important tool is assisting customers to increase their 
homes' energy efficiency and to conserve energy better. Energy 
efficiency and conservation can do much to reduce individual energy 
consumption and, therefore, lower customer bills. Indeed, one recent 
study indicated that aggressive energy efficiency and conservation 
measures could reduce natural gas prices by up to 25%.1 
While analysts may quarrel with the likely impact of an increased 
application of energy efficiency measures on natural gas prices, AGA 
and its members know that appropriate customer energy-efficiency 
measures can benefit their customers. Moreover, these benefits will be 
almost immediate in today's high-priced environment. In contrast, other 
measures to ameliorate the impact of natural gas prices require a 
considerably longer time frame.
---------------------------------------------------------------------------
    \1\ Impacts of Energy Efficiency and Renewable Energy on Natural 
Gas Markets: Updated and Expanded Analysis, R. Neal Elliott and Anna 
Monis Shipley, American Council for an Energy-Efficient Economy, Report 
No. E052 (April 2005) http://aceee.org/pubs/e052full.pdf (adoption of a 
portfolio of energy efficiency measures could reduce natural gas prices 
by 25% in the first year).
---------------------------------------------------------------------------
    AGA would like to thank the Committee for its work in encouraging 
greater consumer energy efficiency. AGA and its member companies will 
continue to encourage improved customer energy efficiency and 
conservation to help reduce the sting of higher natural gas prices.
    Another significant utility effort to help customers struggling to 
pay high natural gas bills is utility programs that provide low-income 
customer assistance. Each year utility programs and rate structures 
provide about $1.7 billion in low-income customer 
assistance.2 These programs are designed to augment the 
federal government's Low Income Home Energy Assistance Program 
(LIHEAP), which in recent years has been funded at approximately $2 
billion per year. Much of the utility low-income assistance comes in 
the form of rate assistance, which may involve reduced rates for low-
income households, waivers of fees, and arrearage forgiveness. Other 
utility programs include energy efficiency and weatherization programs 
that help reduce customer natural gas consumption.
---------------------------------------------------------------------------
    \2\ The Growing Need to Help Low-Income Energy Consumers: 
Government, Charitable, and Utility Programs, American Gas Association 
Energy Analysis, EA 2005-3, (September 14, 2005).
---------------------------------------------------------------------------
    What natural gas utilities seek to achieve from all of these 
approaches is to flatten out the highest peaks of natural gas prices 
and dampen somewhat the impact on customers of high and volatile 
natural gas prices. In neither the short run nor the long term, 
however, can these tools mask the impact of higher natural gas prices 
on consumers. Instead, other actions are necessary. They were necessary 
five years ago, they were necessary last year, and, even with the 
recent enactment of the Energy Policy Act of 2005, they remain 
necessary today.
    Accordingly, AGA recommends the following actions to address both 
ends of the delivery chain--supply and demand.
    First and foremost, LIHEAP funding should be increased to the fully 
authorized $5.1 billion level. We commend the committee for including 
an additional $1.0 billion for LIHEAP in its budget reconciliation 
package. This would bring total LIHEAP funding above $3.0 billion. 
Without an increase in funding, the ``purchasing power'' of LIHEAP will 
be reduced by up to 50 % this winter. The expected rise in home energy 
costs hits low- and fixed-income individuals particularly hard. The 
National Energy Assistance Directors' Association (NEADA) just released 
its second annual survey of the effect of rising energy costs on poor 
families. Among the study's findings: 32 percent of families in the 
survey sacrificed medical care; 24 percent failed to make a rent or 
mortgage payment; 20 percent went without food for at least a day; and 
44 percent said that they skipped paying or paid less than their full 
home energy bill in the past year. Furthermore, the number of 
households receiving LIHEAP assistance has increased from about 4.2 
million in FY 2002 to more than 5 million this year, the highest level 
in a decade. LIHEAP applications are expected to increase significantly 
this winter. The nation should help customers who will be hardest hit 
by energy price increases for home heating and cooling.
    Natural gas supplies must be increased. AGA supports policies that 
would increase the supply of natural gas in environmentally responsible 
ways. Demand responses can only go so far toward the goal of lower 
natural gas prices. And while a demand response will help us through 
this winter, in the long-term supplies of natural gas must increase if 
we are to reduce customers' bills meaningfully. Accordingly, Congress 
should support appropriate incentives and legislative changes that 
would increase the production of natural gas. These priorities have not 
changed over the last several years as AGA has testified before 
Congress. Nevertheless, I would like to briefly reiterate a few of the 
most important access issues:

 Opening restricted off-shore areas for the environmentally 
        responsible production of natural gas;
 Providing adequate funding and staff for the federal offices 
        principally involved in the issuance of permits for natural gas 
        and production;
 Further expanding and expediting procedures for producers to access 
        lands and production areas; and
 Taking steps to increase the U.S. capacity to receive liquid natural 
        gas (LNG) shipments.
    Energy efficiency programs should be supported that encourage the 
most efficient utilization of all energy forms through the matching of 
each energy task with the most appropriate fuel (e.g., running 
computers with electricity and heating homes and businesses with 
natural gas). Additionally, incentives should be incorporated for more 
efficient energy use through tax credits for the purchase of energy-
efficient appliances and the construction of energy-efficient homes and 
commercial buildings. Congress should further accelerate the effective 
date of energy-efficiency tax incentives in the Energy Policy Act and 
fund energy awareness programs at the Department of Energy.
    Fuel diversity should be the goal for electric generation 
facilities. In recent years, as a result of its lesser impact on the 
environment, natural gas has been the dominant fuel for new electric 
generation facilities. Electric generation remains the fastest growing 
sector of natural gas demand. This increase in demand has occurred 
while production has remained stable, thus driving prices higher. AGA 
supports the direct use of natural gas and encourages electric 
generators to seek greater fuel diversity, such as clean coal, nuclear, 
alternative and renewable fuels. AGA urges Congress to provide 
incentives for, and to reduce regulatory barriers to, electric 
generation facilities that use clean coal, nuclear energy and 
alternative and renewable fuels.
    Consumer education should be the goal not just of natural gas 
distribution utilities but of all policy makers. AGA and its members 
will continue our efforts to educate our customers. But we also urge 
Congress to educate our customers--their constituents--so that every 
avenue to the customer is blanketed with information that will ease the 
potential cost burden that will be imposed this winter by natural gas 
bills.
                               conclusion
    For the past five years AGA members and their customers have been 
operating in challenging times--this winter will be no exception. While 
natural gas customers can do their part by embracing energy efficiency 
solutions, policy makers in Washington must do their part to balance 
supply and demand.

    Mr. Shimkus. Thank you. The Chair now recognizes Ms. 
Manoogian, and your statement is in the record. You are 
recognized for 5 minutes.

                 STATEMENT OF MARY ANN MANOOGIAN

    Ms. Manoogian. Thank you, Mr. Chairman, and members of the 
committee. I am the Director of New Hampshire's Office of 
Energy and Planning in New Hampshire, and I am honored to be 
here today on behalf of Governor Lynch to testify on the 
critical energy situation we are facing this winter.
    My office is also a member of the National Association of 
State Energy Officials and the National Energy Assistance 
Directors' Association, and in the 8 years I have been with New 
Hampshire's Energy Office, I have never witnessed such 
unprecedented increases in energy prices over a sustained 
period of time. Consequently, I have grave concerns about 
ensuring that our most vulnerable citizens, the elderly, people 
who are disabled, and working poor families, are safe and warm 
this winter.
    When we look at the EIA projections for this upcoming 
winter, which average to be anywhere between 30- to 50-percent 
increases for home energy, there is a critical point that I 
want to highlight for you all, and that is that the projected 
increases are on top of significant price increases last 
winter. Energy prices, including gasoline, have been on a 
steady increase the past 2 years. For example, in mid-October, 
New Hampshire residents were paying, on average, 33 percent 
more for heating oil than they were for the same time period in 
2004, an 105-percent increase from 2003. For gasoline, New 
Hampshire citizens paid 34 percent more than in 2004, and 62 
percent more than in 2003. Consumers have had no respite from 
rising energy costs in the past 2 years.
    This winter, with energy prices continuing to escalate, 
NEADA and NASEO members expect an enormous number of people 
having to face stark choices as they choose between heating and 
other necessities, such as food, medication, or the ability to 
pay their rent or mortgage. To put this in perspective, last 
heating season in New Hampshire, our community action agencies 
processed approximately 36,000 requests for heating assistance 
through the end of April. This year, our community action 
agencies have already processed over 20,000 applications. We 
are not even into the start of the winter season, and our State 
program has processed more than half the total applications 
taken last heating season.
    To compound the problem, at current fuel prices, the 
average benefit of $575 will buy a LIHEAP recipient less than a 
full tank of oil. And like many other States, we know that 
sufficient funding does not exist to serve all LIHEAP eligible 
households. The U.S. Census Bureau estimates that approximately 
146,475 New Hampshire households are under 60 percent of the 
State median income, and therefore, in accordance with Federal 
regulations, eligible for LIHEAP. We know that sufficient 
funding doesn't exist to serve all those households, but at 
this point, we don't even have a final Federal appropriation to 
be able to determine how many households we can serve. And 
although New Hampshire operates a winter heating program, I 
want to stress that LIHEAP is not simply a cold weather State 
problem. Next summer, with high prices expected to continue, 
the cost of air conditioning will likely increase dramatically, 
with similar impacts on low and middle income Americans.
    In addition, rural America is facing a crisis with 
escalating propane prices. For many Americans who either pay 
heating or cooling bills, the problem is further compounded by 
high gasoline prices. Again, I cannot underscore enough the 
need for LIHEAP assistance, and the fact that for those States 
operating heating programs, it is crucial to receive funds 
immediately. We need to assist our most vulnerable households, 
and discourage them from engaging in unsafe practices in an 
effort to stay warm. And according to our State's Fire Marshal, 
New Hampshire is the only State in the country where the No. 1 
cause of fire-related death is the result of improper use of 
heating systems. Governor Lynch and other public and private 
officials are doing all we can to ensure that this alarming 
statistic does not increase this winter season. Immediate 
LIHEAP funding will serve to prevent needless tragedies this 
winter season.
    And finally, I can't underscore enough the importance and 
the value that energy efficiency and energy conservation can 
play in the long term and, also, in the immediate short term 
effect. My written testimony identifies various opportunities 
that the States are already taking advantage of to implement 
much more aggressive energy efficiency programs, in addition to 
public education programs, in regards to low cost, no cost 
measures that consumers can undertake.
    My written testimony also identifies other measures that 
the Congress can take, including implementing some of the 
recommendations in the Energy Policy Act of 2005, including 
full funding, as authorized for the LIHEAP program, full 
funding as authorized for the State energy programs, and full 
funding, as authorized for the low income weatherization 
programs, in addition to accelerating the rules and the start 
date for the tax credits to help both residential and business 
consumers.
    Again, I thank you for this opportunity, and would be happy 
to entertain questions.
    [The prepared statement of Mary Ann Manoogian follows:]
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    Mr. Shimkus. Thank you very much. Now, the Chair recognizes 
Mrs. Tucker, from Medford, Massachusetts. Welcome, and your 
full statement is in the record, and you have, for you, as much 
time as you would like.
    Ms. Tucker. Thank you. Good afternoon, Mr. Chairman.
    Mr. Shimkus. I think we need to make sure your microphone 
is on. There is a button underneath, on the base there.

               STATEMENT DOROTHY ELIZABETH TUCKER

    Ms. Tucker. Good afternoon, Mr. Chairman and members of the 
subcommittee. Thank you for the opportunity to share my 
testimony with you this afternoon. It is an honor for me to be 
here. I want to thank Congressman Edward Markey for inviting me 
to this hearing, and I want to thank Mr. Dan O'Leary from 
Mystic Valley Elder Services in Malden, Massachusetts for 
coming to Washington with me today.
    My name is Dorothy Elizabeth Tucker, and my friends call me 
Dorothy Elizabeth. I am 83 years old, and I live in Medford, 
Massachusetts. I went to public schools and graduated from 
Boston University. The majority of my working life was with the 
Massachusetts Department of Mental Health and the Massachusetts 
Department of Mental Retardation until I retired at age 65. I 
am a divorced mother who has two wonderful children, and I live 
alone in my home in Medford.
    I want to share with you what it is like to be a senior 
citizen living on a fixed income as winter approaches, and my 
heating bills are going up. While I might not be considered low 
income from the government's perspective, I still must make 
difficult choices when it comes to heating my home, taking my 
medicines, paying my property taxes, and living my life. For 
many of my friends and acquaintances, the choices are even more 
severe. And if the price of oil keeps going up, my choices will 
be severe, also.
    I am on a payment plan with my oil company. In October, my 
bill increased from $400 a month to, now, $580 a month. That is 
$180 per month more that I will be paying. I keep my heat low, 
but I know I have to keep it on so that my pipes don't freeze. 
I have spent a lot of time figuring out where the warmest part 
of my house is, and it is a room on the second floor, because 
as you know, heat rises. When it gets colder, that is where I 
will spend all of my time. I have a sofa in that room, and I 
prepare my meals in the kitchen, bring them up to the second 
floor. My bedroom is a little colder, but that is okay.
    I have also been planning on changing the way I manage my 
medications. Right now, I have one pill I am supposed to take 
once a week. My plan is to take it three times a month instead. 
On Monday 1 week, Wednesday the next week, and Friday the next 
week. That way, I can stretch it out.
    A few years ago when my car broke down, I decided I 
couldn't afford to fix it, and I would try to get along without 
it to save money. I still get around pretty well, so that it is 
working out pretty good.
    I have many friends who could use the local food pantry, 
but don't, because they are embarrassed to need help, and 
sometimes, they do go and say it is for one of their children. 
More often, they use the senior meals program in town to 
stretch their food budget. While we struggle, we also want to 
maintain our independence and our dignity.
    I think things are going to be pretty tough this winter. I 
guess if I had one message for Congress from me and my friends, 
as you consider these issues, it is that I just think it is 
totally unfair for people who have worked so hard all their 
lives to receive so little at the end of their lives. We just 
can't see why it is necessary for us to live this way. We know 
that people are making money off of us while we are struggling, 
and we don't like it a bit.
    I do hope that my observations are helpful to all of you in 
Congress as you work on these important issues. I hope that you 
will be able to fund the fuel assistance program at a level 
that will allow us to heat our homes enough so that we will be 
able to safely live in them throughout this winter and in the 
years to come. Thank you again for inviting me to share my 
story.
    [The prepared statement of Dorothy Elizabeth Tucker 
follows:]
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     Mr. Shimkus. Thank you, and we are all pleased to have 
you. We get a lot of important people here, but I think you got 
all of our attention with your testimony, and we appreciate you 
being here.
    Now, I would like to recognize myself for 5 minutes for a 
round of questions. I would like to start with Robert Stibolt. 
In your testimony, you talk about the balkanization of the 
natural gas markets, and this map depiction. When you talk 
about the balkanization, based upon the gasoline and the fuel 
market, which we know is disrupted. Is it disrupted the same 
way in the natural gas, and although I am from the Midwest, I 
am not sure if I would like to be shipping my natural gas east 
to, for them to take, you know, advantage of it. Can you talk 
me through that real quick?
    Mr. Stibolt. Yeah, I think the testimony makes the 
observation that we have seen this division of the continent 
really into two markets, effectively. There is one that I would 
characterize as the Gulf of Mexico to Northeast Corridor, and 
then, there is the other Western U.S. portion, which includes 
Chicago and Midwest hubs.
    The current condition is, for example, in the forward 
markets, you see the Chicago city gate trading at $0.30 or 
$0.40 below Henry Hub in Louisiana, which is something we have 
never seen before. What it tells me is that we are relatively 
supply short in the Gulf of Mexico and the Northeast, relative 
to other parts of the country. So as you look at the Midwest, 
you have supplies coming from Canada, supplies coming from the 
Rockies and the mid-continent, which are relatively abundant 
and growing, but I think the real stress for the country is 
this Gulf of Mexico to Northeast Corridor, which tells me we 
need to not only get cargos into the Northeast, but into the 
Gulf of Mexico.
    Mr. Shimkus. Thank you, and Ms. Manoogian, as you know, 
last week we, in the reconciliation bill, increased LIHEAP an 
addition $1 billion. Did you support that addition to the 
LIHEAP fund?
    Ms. Manoogian. Mr. Chairman, I would support additions, any 
additions to the LIHEAP fund that would just get it out the 
states as quickly as possible.
    Mr. Shimkus. Great. Thank you. To a total now of $3 
billion. It was the largest increase in LIHEAP funding that we 
have done in the history of this country, and we hope that it 
is going to be helpful.
    Another question. It is always somewhat problematic, 
talking about my friends in the Northeast. Based upon your 
position as the Office of Energy and Planning, what is your 
state doing to increase their own ability for accessing natural 
gas supplies or other help in the supply equation of this 
debate?
    Ms. Manoogian. In 2001, our State actually sited two 
additional natural gas facilities in New Hampshire that brought 
on approximately 1,200 megawatts of natural gas energy. In 
addition, 2 years----
    Mr. Shimkus. So that is like for electricity generation.
    Ms. Manoogian. For its electricity generation, yes.
    Mr. Shimkus. Where is supply coming from?
    Ms. Manoogian. I don't remember right now, but I could 
supply that.
    Mr. Shimkus. It is all right. Very good. Anything 
additional? Have you been involved in supporting locating LNG 
facilities in the State of New Hampshire?
    Ms. Manoogian. We haven't been directly involved right now. 
I don't know. To my knowledge, there is no interest in locating 
an LNG facility in New Hampshire.
    Mr. Shimkus. Has the State made any effort to find out why, 
and encourage the development of that?
    Ms. Manoogian. We haven't aggressively entertained as to 
why, but I do know that we continue to try and find ways to 
site generation into New Hampshire, be it through the, again, 
the two electric natural gas facilities for electricity, or in 
the conversion of one of our coal-fired burners to a wood-fired 
burner.
    Mr. Shimkus. I toured a refinery just on Monday, and 3 
percent of the product of a petroleum refinery was natural gas. 
What about in the development of new refineries? Has your State 
been involved in encouraging refinery capacity?
    Ms. Manoogian. For our State?
    Mr. Shimkus. Sure.
    Ms. Manoogian. Refinery capacity? We import the oil from, 
primarily from New York Harbor and it then comes to us via 
Portland. New Hampshire is a small enough State that, at this 
point, there has been no interest that I have heard of refinery 
capacity within New Hampshire.
    Mr. Shimkus. The last question. If there was identified 
natural gas reserves off the coast of New Hampshire, would the 
State of New Hampshire be very supportive in pushing for access 
to those natural gas reserves?
    Ms. Manoogian. At this point, I am not, you know, I am not 
in a position--I don't know. I don't have enough information, 
and I----
    Mr. Shimkus. But you are from the Office of Energy and 
Planning, is that correct?
    Ms. Manoogian. That is correct, but at least in terms of 
any interest in trying to generate any natural gas facilities 
off the State of New Hampshire, I would have to review the data 
and analysis to make sure that it was something that would be 
prudent both in the short term and also in the long term.
    Mr. Shimkus. Thank you, and I would like to now recognize 
the gentleman from Virginia, Mr. Boucher.
    Mr. Boucher. Well, thank you, Mr. Chairman, and I want to 
commend each of these witnesses for their testimony, and 
particularly, Mr. Ewing, Ms. Manoogian, and Mrs. Tucker for 
your very compelling testimony in support of full funding for 
the LIHEAP funding.
    Mr. Ewing, let me begin with you. I am very pleased to note 
that the gas industry is supportive of full funding for LIHEAP, 
and my first question to you is whether other segments within 
the energy industry generally, perhaps electric utilities, or 
the coal industry, or the nuclear industry, or the petroleum 
industry, are doing what you are so boldly doing, and calling 
for the full $5.1 billion for LIHEAP. Do you know if others are 
doing the same thing?
    Mr. Ewing. No, sir. I don't. Historically, the distribution 
end, which AGA represents, has been the most vocal in its 
support of LIHEAP.
    Mr. Boucher. Okay. The next question I have for you is 
this. You mentioned two ways in which the purchasing power for 
homeowners and home renters, with respect to heating costs, are 
diminishing this year. One of those comes from the fact that 
energy prices have gone up as much as they have, and they are 
anticipated to, and the other one is the fact that there are so 
many more people eligible for the Low Income Assistance Program 
now, as compared to a previous year.
    Could you relate those numbers to me once again? You 
mentioned the 2002 number of eligibility, and then, you 
mentioned a later number. Could you tell us what those numbers 
are?
    Mr. Ewing. And this represents approximately 20 percent of 
those who are actually eligible, based on income guidelines. 
And the numbers I made reference to were 4.2 million households 
in 2002 fiscal year, moving up to more than 5 million 
households this year.
    Mr. Boucher. Okay. Do you have a calculation as to how 
much, in percentage terms, the purchasing power for home 
heating has diminished this year, as compared to last year, 
based upon these two factors?
    Mr. Ewing. It would be more than 50 percent.
    Mr. Boucher. A more than 50-percent reduction.
    Mr. Ewing. Yes.
    Mr. Boucher. Do you know how much more than 50 percent?
    Mr. Ewing. No, I don't.
    Mr. Boucher. I mean, for someone who heats with gas, just 
the increase in price alone approaches 50 percent, because that 
expected price increase is 48 percent, so it would obviously be 
higher for someone who heats with gas.
    Mr. Ewing. Yes, it would. The difficulty I have is that 
prices vary State by State, and the EIA, for example, has 
presented a range of increase ranging from 40 to 71 percent, 
depending on that part of the country. And as a consequence, 
clearly, it is more than 50 percent, it would be greater in 
those areas where prices have gone up at least 40 percent, and 
certainly much more in those areas where prices are at the high 
end of that spectrum.
    Mr. Boucher. You are calling for Federal funding for the 
full authorization level for LIHEAP, which is $5.1 billion. 
Funding for last year was $2 billion, less than half of the 
full funding level. This committee, as part of a recent 
reconciliation package, had recommended a $1 billion add to 
that $2 billion, which would bring the level to $3 billion, but 
that doesn't even approach the $5.1 billion authorization 
level, and you are calling for funding of that. Could you talk 
a little bit about why you think the higher number is 
necessary, and why the $3 billion number, assuming that is 
passed into law, is not adequate?
    Mr. Ewing. Yes, sir. And there are two reasons in my mind. 
Both are economic. Both are quantitative. The first is if we 
were to increase LIHEAP funding from $2 billion to $3 billion, 
that simply offsets the increase in price, so it is a stay even 
situation, not an increase. So that is the first reason.
    The second is that there is a material increase in the 
number of households, those who actually qualify for LIHEAP 
assistance based on economic guidelines. Current guidelines are 
a family of four making less than $19,000.
    Mr. Boucher. Okay. Thank you very much, Mr. Ewing. Again, I 
want to commend the witnesses for illuminating us in such a 
thorough way this afternoon. Your testimony was compelling, and 
we appreciate it very much.
    Thank you, Mr. Chairman. I yield back.
    Mr. Shimkus. I thank the gentleman. The Chair recognizes my 
colleague from Texas, Mr. Burgess, for a round of questions.
    Mr. Burgess. I thank the chairman.
    Mr. Stibolt, if I could ask you the price of natural gas 
generally tracks the price of crude oil. As the price of crude 
oil goes up, the price of natural goes up as well. But there 
are times, like the present time, when the price of natural gas 
per unit is actually markedly higher than crude oil. Can you 
give us any insight as to why that would be?
    Mr. Stibolt. Well, I think what you are observing lately is 
the effects of the two hurricanes. The gas market is a more 
continental market than the oil market, so we had a very 
significant loss of gas production as a result of the 
hurricanes. I have seen estimates of 700 billion cubic feet. 
Just to put that in perspective, that is more than three times 
the volume we deliver through the Everett terminal in 1 year. 
So you had a localized impact in the natural gas market. In the 
oil and oil products markets, we saw, and I think this was 
mentioned earlier, substantial imports coming from Europe, more 
adaptability in that system to a disruption than we have in 
natural gas, so it has created a spike. I think we see it now 
coming back closer to parity with crude oil.
    Mr. Burgess. We have heard a lot of this committee, and I 
mean a lot in this committee, about the potential dangers 
associated with liquefied natural gas imports, and there are 
people in this committee who are pushing the idea that 
liquefied natural gas import terminals should be located in 
remote sites away from major population centers, in order to 
decrease that risk. Can you tell the committee from purely a 
business perspective if there are benefits to remote siting, 
and what the costs are associated with remote siting, and how 
difficult would it be to site a terminal in an unpopulated 
area, and does it affect capacity when you move offshore?
    Mr. Stibolt. Well, there are a number of considerations I 
think you have raised there. The biggest challenge that I have 
seen is the infrastructure. Natural gas is a commodity that 
moves through pipelines. There is a constructed infrastructure 
today. One of the benefits, for example, coming into Boston is 
there is already that infrastructure in place, and we are 
helping to de-bottleneck constraints. When we do that, when you 
go to a remote location, there is often no infrastructure, so 
you can be talking about billions of dollars of pipeline 
investment, for example. And so I think that is one of the 
challenges.
    That being the case, I think there are opportunities, maybe 
some attractive offshore locations. We have filed an 
application for one, for example. We are looking at another 
possibility off of Florida, where you could, in fact, tie into 
existing infrastructure, with a relatively remote terminal.
    Mr. Burgess. How much at risk are these, if--I mean, 
Florida sometimes will have hurricanes. Does that impact your 
siting of these liquefied natural gas terminals?
    Mr. Stibolt. Well, in fact, that may be one of the 
advantages of a floating terminal, is that the ships are 
portable. You could, in fact, move them out of harm's way in 
the event of a severe storm. If you do have the terminal there, 
you want it to be on very solid grounded land, clearly, but you 
do have hurricane risk, yes.
    Mr. Burgess. Very well. Mr. Ewing, one of the more alarming 
points that you brought up was that the $13 prices projected by 
the American Gas Foundation study outlook to 2020, published in 
February of this year, have already been exceeded over the last 
few weeks. That study concluded that if policymakers and 
industry decisionmakers do not immediately address critical 
issues, they will have a significant impact on the availability 
of natural gas prices, and natural gas prices could reach $13 
by 2020. What are some of the other critical issues that you 
feel that policymakers have not addressed since we passed the 
Energy Policy Act of 2005, and what hurdles do you see 
preventing them from happening?
    Mr. Ewing. The first is the one that I spoke to in 
relationship to LIHEAP funding. The Energy Bill provided for 
the $5.1 billion, and I think given circumstances as they exist 
today, we need to follow through on that commitment, and I 
think this committee has already taken a major step in that 
direction with the $1 billion increase that was proposed in the 
budget reconciliation process.
    The second is the third point in my remarks, and that has 
to do with stimulating activities that will create more 
domestic supply. Some of those were provisions that were 
incorporated in the Energy Bill or previous legislation, like 
the Alaskan gas pipelines, and like the siting for LNG, and 
given the authority to the FERC. But things like permitting and 
recognizing, as was discussed earlier this afternoon, that 85 
percent of the productive region in the Gulf Coast is off 
limits. I think it makes sense to look at that reserve, and 
bring that gas to the market.
    So I think it tends to be restrictions on access, 
impediments to processing, and then, infrastructure approval.
    Mr. Burgess. Do government dictates have a role in that? Do 
they have a place in that?
    Mr. Ewing. Yes, they do.
    Mr. Shimkus. The gentleman's time has expired.
    Mr. Burgess. Mr. Chairman, I actually was going to ask a 
medical question of Mrs. Tucker. You are taking a medication 
you take once a week, and presumably, that is to help you with 
bone health. Is your Congressional representative going to help 
you with the new Medicare Modernization Act, where you will 
have availability of prescription medicines next year?
    I will yield back, Mr. Chairman.
    Mr. Shimkus. The gentleman yields back. Now, the Chair 
recognizes the gentleman from Massachusetts, Mr. Markey, for 5 
minutes.
    Mr. Markey. I thank you. Mr. Chairman, we have two crises 
in New England this year. The first crisis is what are the Red 
Sox going to do now that Theo Epstein is leaving. And the 
second crisis is how are we going to handle these high prices 
for natural gas and for home heating oil?
    We keep talking, we keep hearing here discussions about 
putting LNG facilities in New Hampshire or Massachusetts. I 
don't know that any company has proposed to put one in New 
Hampshire. I don't know that Hampton Beach or Seabrook Beach or 
Rye Beach would be just the right location, especially since 
the Seabrook Nuclear Power Plant would be right there, that 
might really get complicated in the event of a real emergency. 
But you should also know that because of the Republican bill 
that was just passed and signed by the President, the State of 
New Hampshire now no longer has any say in where an LNG 
facility would go in New Hampshire. So the reason you don't 
know the answer is that you are not going to be asked or 
thinking of an answer. So you should feel very comfortable 
under this new bill. It is out of the control of New Hampshire. 
It would be in the hands of FERC, exclusively.
    And Mr. Stibolt, you represent a French company, and this 
French company already has a huge facility in my Congressional 
district, an effort that is consistently referred to. And isn't 
it ironic--well, I won't ask you; although, the French do like 
irony--but I find it ironic that the French told us that 
invading Iraq would be a big mistake, and it could destabilize 
the oil and gas prices out of Iraq, and the Bush Administration 
went in because they thought that they could increase 
production, and now, the French, it turns out were right, and 
now, we are winding up with all the Republicans advocating that 
the French bring more natural gas into the United States at a 
very high price.
    So it is kind of an interesting kind of reverse takedown 
that the French have done on the United States that we are here 
listening to you testify that we need more French natural gas 
to be imported into the United States, and I congratulate you 
on your perspicacity, from a public policy perspective.
    I would say to you, Mrs. Tucker, that you gave eye-opening 
testimony, and you made the point that you have a Social 
Security check, and you have your retirement pension, that you 
are not considered poor, but that your home heating oil bill is 
skyrocketing.
    Ms. Tucker. I will be poor shortly.
    Mr. Markey. You will be poor shortly. So where does the 
money come from? Where do you get the extra money for what 
could wind up, it sounds like to me, an extra $800 or $1,000 
that you are going to have to pay for home heating oil this 
winter? Where are you going to get that money from?
    Ms. Tucker. Nobody knows when I don't eat, and a lot of 
people that have my income, we are proud, because we worked so 
hard. I remember working, and not taking my increases so I 
could save them for this time in my history. And now, it is 
like it is lost. And I perhaps will act like other people who 
are like me behave. We don't tell. We just don't tell, we just, 
as I say, nobody will know whether I am eating or not, and 
nobody will know whether my house is cold. In fact, we will 
make a joke out of it. We will put a whole lot of scarves and 
things on the clothes rack, and people come in, we will say 
come on in, and put on a jacket. I mean, this is our behavior. 
This is our style, when things get really tough.
    I belong to an organization of people sort of like me, and 
it has already been announced that the room that we have in the 
special building, the heat is going to be up to, I think they 
said something like 68, it is lower than the average, and they 
are telling us if we are going to meet there, we are going to 
have to come with our overshoes, so to speak.
    Mr. Markey. Well, how do you react, with your scarves and 
turning down the heat, and perhaps not eating as much during 
the winter, when you see that in the last 3 months, that Exxon 
made $10 billion, but nobody is saying we want to help you, 
Mrs. Tucker?
    Ms. Tucker. Well, I am very angry, but I was talking to a 
couple of my elder friends, and they just feel like victims. 
They sort of said, what can we do? That is just the behavior. 
They may be angry, but they don't express it. Actually, the 
younger people, that is my children, and that age, express the 
anger quite vividly, where people my age tend to express anger, 
but it is a little softer. We really feel more like victims.
    Mr. Markey. Well, we thank you, Mrs. Tucker, for coming 
here today. And we wish that there was more that the Congress 
and the Bush Administration was willing to do, but it is not, 
and you should, unfortunately, prepare for a tough winter, 
because while the oil companies are reporting all these 
profits, there is no plan to increase the funding so that you 
would qualify, and people like you would qualify, to reap some 
benefit that could contrast with the windfall profits that all 
the oil and gas companies are reaping at your expense. This is 
all coming out of your pocket, Mrs. Tucker. You are the one, 
and all your friends, who are having their pockets emptied out 
and handed over to these oil companies, and I just think it is 
disgusting.
    Mr. Shimkus. The gentleman's time has expired. The Chair 
would recognize the gentleman from New Hampshire, Mr. Bass.
    Mr. Bass. Thank you, Mr. Chairman.
    Mr. Stibolt, as I recall, your company's terminal in my 
friend from Massachusetts's district provides 40 percent of our 
region's gas supply on a peak day. Is that correct?
    Mr. Stibolt. Well, what I said is that 40 percent of what 
is supplied went through our terminal. Those resources are 
distributed to a number of regional storage tanks operated by 
different companies, so our company isn't specifically 
controlling 40 percent. It is really a much smaller number, but 
we think that provides about a 40-percent capability on a peak 
day, yes.
    Mr. Bass. Do you think that an addition Northeast or New 
England LNG facility would have a--what do you think the effect 
it would have on our ability to meet tight supply days, meet 
our goals for tight supply days?
    Mr. Stibolt. Well, it will give you more flexibility, 
because you are downstream of the bottlenecks coming through 
the pipeline systems. On a cold day, it is really those 
pipeline constraints that set the price. So the more you can 
get supply into the region downstream of the bottleneck, the 
more adaptable you are to extreme market conditions.
    Mr. Bass. So the Fall River, there is a proposal for an LNG 
plant in Fall River, that would probably double the supply for 
New England. Is that correct, or do you know the answer to 
that?
    Mr. Stibolt. I don't specifically know the answer, with 
respect to that project. Of course, we have our Neptune 
Project, that would significantly increase supply as well.
    Mr. Bass. Thank you. I heard my friend from Illinois, Mr. 
Shimkus, mention that, talk to Ms. Manoogian about LNG supply, 
to only point out that New Hampshire actually is an exporter of 
electric energy, because of the construction of a very large 
nuclear power plant, Seabrook, which my friend from 
Massachusetts is also well aware of, yet we have, in New 
Hampshire, made significant sacrifices over the years to 
provide energy for not only our State, but other parts of New 
England.
    Ms. Manoogian, I was wondering if you would be willing to 
address the issue of advanced funding of LIHEAP. Do you think 
that if we--there are certain programs, Public Broadcasting, 
for example, that are, to name one, that is advance funded. Do 
you think advance funding LIHEAP would be helpful to you in 
planning for consumptions and applications, and so forth?
    Ms. Manoogian. I know, for those of us that operate heating 
programs, that an advance funding mechanism would very much be 
helpful, and would also be a much more prudent use of their 
resources. We are, you know, going into the winter season right 
now. It is kind of hard when you don't know what a Federal 
appropriation is going to be, in terms of how to set your 
eligibility criteria, your benefit criteria, and also, for 
those of us who operate heating programs, essentially, the way 
the LIHEAP funding comes in, it precludes us from being able to 
take advantage of energy costs when they are lower. You know, 
with advance funding, we would be able to secure purchases of 
energy on behalf of low income residents and other consumers 
similar to Ms. Tucker, at a time when heating prices are lower, 
as opposed to getting us to, you know, at least in our State, 
the way that we operate our fuel assistance program, we are 
basically purchasing during the peak of the season, which 
doesn't, again, seem the most prudent way to operate a heating 
assistance program.
    Mr. Bass. Other than the advance funding idea, do you have 
any other suggestions on the administrative side as to how we 
could improve LIHEAP?
    Ms. Manoogian. Well, again, I think, you know, with the 
advance funding, enabling those States that operate heating 
programs to be able to purchase when energy prices are low, for 
heating assistance, as opposed to during the peak of the 
season, it would be tremendously valuable. It also would permit 
us to, in a much more administratively efficient manner, 
operate our LIHEAP program, whereby our sub-grantees, the 
community action agencies, will know who they can put on staff, 
and how long they can have them on staff for.
    Mr. Bass. One of the provisions that was added to the 
Energy Bill when it was in this committee would allow LIHEAP 
funds to be used for energy sources other than oil, gas, and I 
suppose, coal. There is also another provision that would allow 
weatherization funds to be used to install alternative energy 
systems in houses. Do you have any plans to take advantage of 
this new provision or not?
    Ms. Manoogian. Yes, in our State, we actually--our LIHEAP 
benefits can go to the purchase of cordwood, and now, we can 
also go to the purchase of wood pellets. We are also working on 
the weatherization side, with our community action agencies, to 
explore ways to invest in renewable energy on the 
weatherization program, such as solar water heaters, and other 
renewable, and other opportunities for renewable sources in the 
weatherization program. And that was huge, to be able to open 
that door for the weatherization program, to take advantage of 
the renewable energy.
    Mr. Bass. Ms. Manoogian, my time has expired. As a 
constituent of mine, and a resident of New Hampshire, I want to 
welcome you here to Washington, and I have very much enjoyed 
your testimony, and I think the committee will benefit from it, 
and I yield back to the chairman.
    Mr. Shimkus. I thank the gentleman for yielding. I think 
that concludes the questioning of our second panel.
    Mr. Markey. Mr. Chairman. Mr. Chairman.
    Mr. Shimkus. I would remind the gentleman we have a third 
panel, who have been waiting very patiently.
    Mr. Markey. I just have a couple of questions. Because two 
of my constituents are on the panel, and I would just 
appreciate your indulgence for a couple of minutes.
    Mr. Shimkus. The Chair will yield for one question.
    Mr. Markey. Mr. Stibolt, Mr. Bass just questioned you about 
the Fall River facility. As you know, there are four different 
proposals for Massachusetts, although there are none for New 
Hampshire, and he seems particularly interested in the Fall 
River project, but not particularly interested in your project. 
Perhaps you could enlighten the committee as to how much 
additional natural gas you believe you could bring in to New 
England by siting your facility offshore, rather than onshore, 
which is what the other facility is right now, and the Fall 
River facility would be as well, and why you think that that is 
a better way of going, having your offshore proposal be the one 
that is approved by the FERC?
    Mr. Stibolt. Yeah. I think the volumes we can deliver are 
comparable. I mean, these things are typically a 700 million 
cubic foot per day to as much as bcf per day. I don't have the 
exact number for that project off the top of my head, but that 
would be the order of it. They are going to be similar in terms 
of volume.
    Mr. Markey. And would that be a doubling of capacity for 
everything?
    Mr. Stibolt. Yeah. Yeah, it would.
    Mr. Markey. So in other words, when Mr. Bass was talking 
about 40-percent peak capacity, you are saying you might be 
able to increase that to 60 or 80-percent peak capacity, and so 
we have, right now, we have four different proposals in 
Massachusetts, but the FERC and this committee, by the way, 
seems to favor one project in Fall River, and that is on land, 
with the Governor and the mayor opposing it, whereas you are 
proposing something that would be offshore, that would provide 
the same amount of natural gas, dramatically increase the 
supply, and be in a location which is 10 miles or further 
offshore, just bringing it in in a pipe. So why do you think 
there is a continuing bias by the Bush Administration to put it 
onshore, when you are here testifying that you are ready to do 
it economically offshore right now, with very little homeland 
security problems that would be attached to it?
    Mr. Stibolt. Well, I don't know. I won't comment on whether 
there is a bias or not. I think we like our project, clearly, 
as you well know. We think it is a very good project. It is 
relatively new technology, but we think it is very safe, very 
secure technology, so we are excited about it. We think there 
will be more opportunities to apply that technology.
    Mr. Markey. Would it be theoretically possible for you to 
bring your pipeline right into New Hampshire, right into 
Hampton Beach or Rye Beach? Would that be an entry point that 
is possible?
    Mr. Stibolt. Well, I know with Neptune, we are tying into 
the Hub Line System, which is operated by Duke.
    Mr. Markey. Right.
    Mr. Stibolt. And that serves the whole region. In terms of 
other locations off of New England where you could do this----
    Mr. Markey. Right. I just----
    Mr. Stibolt. [continuing] I am not an expert on that.
    Mr. Markey. It seems Mr. Bass wants----
    Mr. Burgess. Mr. Markey----
    Mr. Markey. [continuing] and I would just suggest that--
they are his constituents. Perhaps you could look at just 
bringing a pipeline right into New Hampshire, right into 
Hampton Beach or Rye Beach.
    Mr. Burgess. In fairness, I should recognize Mr. Bass for a 
follow-up question, if he has one. Does the gentleman seek 
recognition?
    Mr. Bass. Yeah. Mr. Chairman, I just want to express my 
excitement about my friend from Massachusetts's endorsement of 
the offshore LNG facility, which I heard, and I want to thank 
him for that, because I, too, endorse that as well. So he and I 
agree that this a very high priority, and I would be very happy 
to see that built along with the Fall River project, because I 
do believe, as I believe he does, that it is very important to 
provide adequate LNG and natural gas capability for New 
England, so that we don't have these terrible gas shortages 
that we are faced with during the winter. So with that, I will 
yield back to the chairman.
    Mr. Burgess. And I thank the gentleman for yielding.
    Mr. Markey. By the way, I do not include----
    Mr. Burgess. This concludes----
    Mr. Markey. If I may, a point of personal privilege, Mr. 
Chairman.
    Mr. Burgess. [presiding] the gentleman is recognized.
    Mr. Markey. I thank the Chair very much. I just want to 
make it clear that I do not endorse this gentleman's proposal. 
My only point was to make out that there are four separate 
Massachusetts projects, which Massachusetts should be able to 
decide what it wants. And by the way, there is also two 
additional Canadian projects.
    Mr. Burgess. Okay.
    Mr. Markey. All of them would benefit New Hampshire, but it 
should be the decision--and those two projects have already 
been approved, which is additional natural gas. My only point 
is that that is a decision which should be made by the New 
England region, and not by the FERC, and it just seems to me 
that just focusing on the Fall River project obscures the fact 
that there are five other projects that could all serve the 
very same purpose, and I thank the Chair.
    Mr. Burgess. Very good. Thank you. Thank you, panel, and 
now, we are going to hear from our third panel. And I thank 
everyone for their indulgence, while we went a little long. I 
welcome the spirit of bipartisanship between New Hampshire and 
Massachusetts. I think that is a beautiful thing.
    And we are very pleased to welcome our third panel this 
afternoon, and I again thank all of you for your indulgence. We 
are going to be hearing from Mr. Charles Davidson, from Noble 
Energy, Incorporated, from the great State of Texas, and 
welcome, Mr. Davidson.
    We will also be hearing from Mr. Skip Horvath, from the 
Natural Gas Association. We will be hearing from Mr. Bob 
Slaughter, National Petroleum and Refiners Association. Mr. 
Phillip Wright, Williams Pipeline Company, representing the 
Interstate Natural Gas Association of America. And Mr. Brian 
Castelli, did I pronounce that correctly?
    Mr. Castelli. Yes, you did.
    Mr. Burgess. Mr. Brian Castelli, the Alliance to Save 
Energy. Welcome all, and again, thank you for your patience 
today. We will begin with the testimony of Mr. Davidson.
    All of your remarks, of course, are submitted, your written 
remarks are submitted for the record, and we will hear from you 
now. Thank you.

  STATEMENTS OF CHARLES D. DAVIDSON, CHAIRMAN, PRESIDENT, AND 
 CEO, NOBLE ENERGY, INC.; R. SKIP HORVATH, PRESIDENT, NATURAL 
  GAS SUPPLY ASSOCIATION; BOB SLAUGHTER, PRESIDENT, NATIONAL 
  PETROCHEMICAL AND REFINERS ASSOCIATION; PHILLIP D. WRIGHT, 
SENIOR VICE PRESIDENT, GAS PIPELINE, WILLIAMS PIPELINE COMPANY, 
ON BEHALF OF INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA; AND 
 BRIAN CASTELLI, EXECUTIVE VICE PRESIDENT AND COO, ALLIANCE TO 
                          SAVE ENERGY

    Mr. Davidson. Thank you, Mr. Chairman. I am Chuck Davidson, 
Chairman, President, and CEO of Noble Energy, and also, I am 
the Chairman of the Domestic Petroleum Council, representing 
the largest U.S. independent exploration production company, 
and also today, I am testifying on behalf of the Independent 
Petroleum Association of America and the International 
Association of Drilling Contractors.
    I am very pleased to be here to discuss the current natural 
gas supply and price situation, and how we might improve it for 
both the near as well as the longer term. I think we have to 
start out and remind ourselves that the current tight natural 
gas market should not, unfortunately, surprise us. Many of us 
have been warning about such a market for years. For instance, 
in 2003, the National Petroleum Council told us through their 
study that we needed to make policy changes to fulfill our gas 
supply potential. By and large, those detailed recommendations, 
of not only that study but others, until recently have been 
ignored.
    Clearly, conservation on the near term is very important, 
and that could be an effective action to offset some of what we 
are seeing today's natural gas market, and certainly, we 
wholeheartedly support that. We also support increased 
Congressional appropriations to LIHEAP, which we have heard 
from a number of panelists today, as well. Our written comments 
include four recommendations. I will highlight them just 
briefly. First of all, industry and government must work 
together to restore as quickly as possible the production that 
has been shut in in the Gulf of Mexico from Hurricanes Katrina 
and Rita.
    According to the Mineral Management Service, as of last 
Friday, they were still 1 million barrels per day of oil 
production, and over 5 billion cubic feet of natural gas 
production shut in in the Gulf of Mexico as a result of the 
hurricanes. This represents some 68 percent of the daily oil 
production and 55 percent of the daily gas production from the 
Gulf of Mexico.
    As we look for additional supplies of natural gas near 
term, there can be no more obvious source than gas currently 
shut in as a result of the hurricanes. The industry knows this. 
We are investing unprecedented funds that may ultimately reach 
billions of dollars to repair and replace the damaged 
infrastructure. Second, I think our recommendation is to have 
immediate, visible, and responsible action by our land 
management agencies to improve and speed the processing of 
permits. On multiple use lands administered by the Department 
of the Interior's Bureau of Land Management alone, there is a 
backlog of over 3,000 drilling permits. An analysis for the DPC 
showed that just clearing out the first year of the backlog, we 
could see as much as 105 billion cubic feet of additional 
natural gas production in the Rockies. That is enough natural 
gas to supply 1.25 million additional households in that first 
year. I think that such action would certainly be recognized 
and understood in the natural gas markets.
    Third, we would recommend immediate action by Congress and 
the Administration to see leasing of the remaining Sale 181 
area in the eastern Gulf of Mexico as early as next summer. The 
original Sale 181 area was administratively reduced before bids 
were received in 2001. However, discoveries that were made in 
the area that was leased provide much better understanding of 
the energy potential of the unleased portion. First, production 
from what is expected to be, perhaps trillions of cubic feet of 
additional discovered reserves could probably begin flowing to 
the market within 18 months to 2 years of a lease sale.
    Finally, we would recommend immediate action to be taken to 
allow selective removal of prohibitions against energy 
exploration, development, and production offshore. The natural 
gas resources in current moratoria areas that prevent 
exploration and production of approximately 90 percent of our 
coast outside of Alaska could be tremendous, and we must change 
our decades-old moratoria policy in view of not only our 
growing energy demand, but also, our 21st Century offshore 
exploration and production technology, that allows clean, safe 
extraction of oil and natural gas from deeper and deeper 
waters, with seabed wells and fewer facilities.
    At a minimum, states should be allowed to opt out of 
moratoria off their coasts and share in the resulting revenues 
generated by production. The House Resources Committee has 
taken bold action on such an approach by including the Ocean 
State Options Act in its budget reconciliation package.
    I think one final point in conclusion, on prices. We in the 
exploration and production sector are price takers. We sell our 
oil and gas in the world and national markets, in which forces 
well beyond our control determine price levels. Higher prices 
do give us financial strength, and certainly, for the 
independent E&Ps, where we advance, we invest a substantial 
amount of our profits back into drilling. That is very 
important. But we are not served well by volatile prices, and 
so from that aspect, we are aligned with our customers and 
consumers. The volatility is not a healthy environment, and we 
clearly believe that increased supply in the future will help 
reduce that volatility going forward.
    So I think we need to recognize this is as not only a short 
term, but a long term situation, and that we need to move 
forward in all these areas of recommendations that would assist 
in supply response for both near term as well as long term. 
With that, that concludes my summary comments, and I will 
certainly be available for questions later.
    [The prepared statement of Charles D. Davidson follows:]
Prepared Statement of Charles D. Davidson, Chairman, President and CEO, 
  Noble Energy, Inc. and Chairman, Domestic Petroleum Council also on 
     Behalf of Independent Petroleum Association of Americaand the 
           International Association of Drilling Contractors
    Mr. Chairman, I am Chuck Davidson, Chairman, President and CEO of 
Noble Energy and the Chairman of the Domestic Petroleum Council (DPC) 
that represents the largest U.S. independent exploration and production 
companies.
    Today I am testifying on behalf of my company and the DPC, and also 
for the Independent Petroleum Association of America and the 
International Association of Drilling Contractors.
    I am very pleased to be here to discuss the current natural gas 
supply and price situation--and how we might improve it for the nearer, 
as well as the longer, term.
    We--government and the exploration and production industry--have 
potential to improve even this winter's natural gas situation for our 
consumers. But we must have prompt action.
    I will explain actions in four areas that can help, perhaps very 
significantly.
    First, however, we need to remind ourselves that the current tight 
natural gas market should not surprise us. Many in our industry, in 
trade associations and in think tanks have been warning of such a 
market for years. In 1999 and again in 2003, for example, the National 
Petroleum Council told us in the most comprehensive studies of their 
times that we had to make policy changes to fulfill our gas supply 
potential and ensure the best future for consumers. By and large the 
detailed recommendations of those and other studies have, until 
recently, been ignored.
    Now we have more attention to our natural gas supply situation that 
provides a solid basis for reaching consensus on overdue supply 
actions. Unfortunately that is because of current and projected high 
prices, industrial demand destruction and consumer hardship.
    Clearly conservation is the most immediate and effective action 
that can offset some of what we see in today's natural gas market. We 
support it wholeheartedly. We are seeing increased efforts by 
governments and natural gas consumers across a broad spectrum to focus 
more attention on conservation. (And we support increased congressional 
appropriations for the Low Income Home Energy Assistance Program 
(LIHEAP) to aid our most vulnerable consumers while we work to ensure 
wise gas use.)
    In addition, as this Committee and others have heard clearly, 
current and projected prices are causing businesses and industrial 
users to not only reduce gas demand by process improvements and fuel 
switching, but also by planning to make future investments overseas 
where natural gas costs less. These actions highlight that, while 
conservation is good and even necessary, it is not enough--and the more 
dramatic forms of conservation can have economic effects as 
manufacturing and investment in the United States decreases.
    The bottom line is that there must be a market recognition and 
understanding that more natural gas supply is on the way.
                            recommendations
    To provide that market recognition and understanding, we must see 
the following:
Industry and government must work together to restore as quickly as 
        possible production that has been shut-in as a result of 
        Hurricanes Katrina and Rita.
    According to the MMS, as of last Friday, October 28, 2005, there 
was still one million barrels of daily oil production (1.0 MMBpd) and 
5.5 billion cubic feet of daily natural gas production (5.5 Bcfpd) 
shut-in in the Gulf of Mexico as a result of Hurricanes Katrina and 
Rita. This shut-in production represents approximately 68% of the daily 
oil production and 55% of the daily gas production from the Gulf of 
Mexico.
    As we look for additional supplies of natural gas near-term, there 
can be no more obvious source than gas currently shut-in as a result of 
these hurricanes. The industry knows this and is investing 
unprecedented funds that may ultimately reach billions of dollars to 
repair and replace damaged infrastructure. In the meantime, not only 
money, but also a lot of creativity is being expended to find ways to 
accelerate the return-to-production.
    An example from my company relates to a new deepwater gas well that 
was about to come on production just as Hurricane Katrina hit. Even 
though the gas sales line to shore was intact, this well had to remain 
shut-in because damage to downstream oil pipelines resulted in there 
being no outlet for the liquid condensate that was to be produced with 
the gas. As a solution, we and our partners secured a barge and 
produced the condensate into the barge so that natural gas could flow 
from this high-rate well.
    This is just one of many examples of creative actions being taken 
everyday as companies look for ways to accelerate the restoration of 
Gulf of Mexico production. In my view, nothing should have higher 
priority than these efforts.
Immediate, visible and responsible action by our federal land 
        management agencies to improve and speed processing of energy 
        permitting.
    On multiple-use lands administered by the Department of the 
Interior's Bureau of Land Management alone there is a backlog of more 
than three thousand applications for permits to drill (APDs) that are 
awaiting final approval.
    An analysis done for the Domestic Petroleum Council--and a similar 
analysis done for the Department of the Interior that has yet to be 
released--demonstrates that adequate funding and resources to process 
and clear out those backlogged pending APDs could increase natural gas 
reserves in the Rocky Mountain region by several trillion cubic feet--
some of which would begin flowing soon and would make a difference in 
today's tight market.
    The DPC analysis shows that in the first year of increased work to 
clear the backlog we could see as much as 105--billion cubic feet of 
additional natural gas production from the Rockies. That's enough 
natural gas to supply one and a quarter million additional households 
in that first year.
    We know that the BLM has made significant progress in permitting--
and is processing more permits than ever. That progress needs to 
continue, but the demand for permits to meet natural gas consumer needs 
continues to rise, so we must see further processing improvements, 
including reduction of permit restrictions that are not essential for 
environmental protection, and speed.
    Other agencies, especially the Department of Agriculture's U.S. 
Forest Service, have even further to go and must follow the BLM lead.
    The prospect of such action would be recognized and understood in 
the natural gas market.
Immediate action by Congress and the Administration to see leasing of 
        the remaining Sale 181 area in the Eastern Gulf of Mexico as 
        early as next summer.
    The original Sale 181 area was administratively reduced before bids 
were received on the remainder in 2001. Discoveries in the portion that 
was leased provide much better understanding of the energy potential of 
the unleased portion. First production from what is expected to 
eventually be trillions of cubic feet of additional discovered reserves 
could probably begin flowing to market within 18-months-to-two-years of 
a lease sale.
    Such a lease sale, based on appropriate congressional findings and 
direction, and based on the environmental work already done, could be 
held as early as next summer.
    The prospect of such action--and more gas coming to market as 
additional Rockies supply also ramped up--would be recognized and 
understood in the natural gas market.
Immediate action should be taken to begin allowing selective removal of 
        prohibitions against energy exploration, development and 
        production offshore.
    The natural gas resources in current moratoria areas that prevent 
exploration and production off approximately 90 percent of our coasts 
outside of Alaska could be tremendous.
    In fact, Atlantic and Pacific natural gas resource estimates are 
approximately what we believed to be in the Gulf of Mexico in the mid-
70s. But in the area of the Gulf in which we have been allowed to 
search for oil and gas we have produced three times the 70s' amount and 
we estimate five times more remaining. The more we explore, the more we 
know.
    We must change our decades-old moratoria policy in view of both our 
growing energy demand and our 21st century offshore exploration and 
production technology that allows clean, safe extraction of oil and gas 
from deeper and deeper waters, with seabed wells and fewer facilities
    At a minimum states should be allowed to opt out of moratoria off 
their coasts and share in resulting revenues generated by production. 
The House Resources Committee has taken bold action on such an approach 
by including the Ocean State Options Act in its budget reconciliation 
package.
    Action by the Congress to approve such legislation--with its 
prospect of more natural gas supply coming to market in addition to 
more from the Rockies and the expanded Sale 181 area--would be 
recognized and understood in the natural gas market.
                               conclusion
    One final point--on prices. We in the exploration and production 
sector are price takers, selling our oil and gas into world and 
national markets in which forces well beyond our control determine 
price levels.
    Higher prices do give us greater financial strength. This is 
essential in a business that may be somewhat less risky because of 
better technology, but in which much higher capital requirements (a 
billion dollars for one offshore project, for example) and operating 
costs make our risks every bit as important as theirs were to the 
wildcatters of bygone eras.
    But, in common with consumers, we are not well served by volatile 
prices. Planning for future investment requires ability to reasonably 
assume or project prices to support that investment. The prospect of 
volatility clouds our view of what we can afford to prudently spend in 
the future for new supply. More supply reduces the volatility that we 
see in markets such as today's and is in everyone's interest.
    While there is great concern for the current high prices for 
natural gas, we need to recognize that this is not only a short-term 
problem, but also long-term as well. Long-term natural gas prices as 
reflected in the futures markets have also risen substantially, 
implying that there is a market perception that natural gas supplies 
will be tight for a long time. There is currently an opportunity to 
change this perception by taking meaningful and visible action on the 
recommendations presented here today.
    Working together on supply, as well as conservation, government and 
industry can make real differences in the natural gas outlook for our 
country.
    But policy action such as I have outlined is needed now.
    Thank you.
    I would be glad to answer questions.

    Mr. Burgess. Thank you, Mr. Davison. We will now hear from 
Mr. Horvath.

                    STATEMENT OF SKIP HORVATH

    Mr. Horvath. Thank you, Mr. Chairman for this opportunity. 
I am Skip Horvath, President and CEO of the Natural Gas Supply 
Association, NGSA. We represent the major natural gas producers 
of the United States.
    And let me be among those who commend this Congress for a 
successful, bipartisan effort to get the recent EPACT through 
over the summer. Since that time, my members have put forth 
quite a few billions of dollars worth of investment that will 
help bring new gas supply to this country, and that certainly 
has been helped by that act.
    Let me talk about this winter for a little bit. The recent 
hurricanes have wreaked unprecedented havoc on the natural gas 
industry. Very unusual destruction in the Gulf of Mexico very 
recently. Full recovery will take roughly a year. We hope to 
beat that, but a year is realistic. However, we have seen 
enough of the recovery pace recently to be able to say with 
some confidence that residential and commercial customers 
served by local distribution companies holding firm 
transportation and gas supply agreements will continue to 
receive natural gas service sufficient to meet their 
requirements throughout the winter, even during periods of peak 
demand.
    We do share concerns others have expressed about potential 
regional problems, especially in New England, where some 
electric generators may be relying on less expensive 
interruptible contracts, and they may, indeed, get interrupted 
this winter. We also acknowledge that bills will likely be high 
this winter, and we urge conservation efforts that will help 
lower the bills, and we also support LIHEAP.
    Now, let me explain from a broad national perspective how 
this winter will work in terms of the number. The Gulf of 
Mexico is responsible for about 10 bcf a day of natural gas 
supply, and that is about 13 percent of the daily winter 
consumption. As of today, about half of that is still shut in, 
half of that, about five bcf a day is still shut in. Over the 
winter, we expect recovery to allow us to have only 2.5 bcf a 
day shut in.
    Now, let us look at the overall demand picture and supply 
picture for the Nation. Demand is expected to be roughly, a 
little under 73 bcf a day for the winter. That is down a little 
bit. We expect about 60 bcf a day of supply from the following 
sources: domestic supply, Canadian producers, Canadian imports, 
and liquefied natural gas, LNG. Now, that is still short about 
a little less than 13 bcf a day. But we haven't factored in 
storage. Once you do take storage into account, we still have 
about 600 bcf that can be used in case the weatherman is wrong, 
and we do, indeed, have a colder than expected winter.
    Now, the U.S. is blessed with a highly flexible natural gas 
network, and natural gas does find its way to where it is 
valued the most. While there may be some localized problems, 
and there is a potential for that every winter, not just this 
winter, we have enough supply to meet firm demand from a 
national perspective, and a market that will deliver the gas 
locally when it is needed and valued the most. The hurricanes 
that served as a wakeup call, to both natural gas customers and 
the industry. Without access to new natural gas resources, the 
diversification of supply sources, and relief from delivery 
constraints, the potential for localized natural gas 
disruptions and upward pressure on prices, as we may see this 
winter, will persist over the coming years.
    That concludes my remarks. Thank you.
    [The prepared statement of Skip Horvath follows:]
  Prepared Statement of Skip Horvath, President and CEO, Natural Gas 
                           Supply Association
    Mr. Chairman and members of the subcommittee, my name is Skip 
Horvath and I am the president and CEO of the Natural Gas Supply 
Association (NGSA). Today, I am testifying on behalf of the major 
natural gas producers and marketers comprising our association. Thank 
you for the opportunity to participate in this timely forum.
    The impact of the hurricanes was devastating in terms of natural 
gas production in the Gulf of Mexico. These shut-ins have exacerbated 
the tight natural gas supply and demand balance in the United States 
during the last several years. Today, I would like to share with you 
NGSA's winter season outlook and hurricane recovery updates, as well as 
provide some facts regarding market conditions.
    First of all, we share legitimate concerns about regional natural 
gas constraints and costs that could impact customers, particularly 
during peak days, this heating season. These constraints could be most 
evident in those regions that rely heavily on supplies from the Gulf of 
Mexico.
    To put the importance of the Gulf of Mexico into perspective, at 
pre-hurricane levels, the offshore region's production of 10 billion 
cubic feet per day (Bcf/d) represents approximately 13 percent of 
average daily winter consumption.1 As of Monday, 
approximately 5.4 Bcf/d was shut-in in the offshore region. This 
represents approximately 7 percent of average daily winter consumption.
---------------------------------------------------------------------------
    \1\ Approximately 75 Bcf/d (Source: Energy Information 
Administration)
---------------------------------------------------------------------------
    While sensitive to potential regional constraints, I want to 
clarify that I am here today to address market fundamentals from a 
broad, national perspective. In our fifth annual Winter Outlook, 
released September 28, we outlined the key supply and demand factors we 
expect to affect natural gas prices this heating season.
    We anticipate upward pressure on wholesale natural gas prices as a 
result of public projections of relatively flat production, hurricane-
related production losses, and an increase, relative to last winter, in 
seasonal heating demand in the residential and commercial sectors. 
Another factor in our assessment is that it cost more to put gas into 
storage this summer, and we anticipate those higher costs will be 
noticeable in customers' home heating bills in the coming months.
    Today, we have further post-hurricane updates to some of the 
numbers in our Winter Outlook, as well as additional data that supports 
our assessment and demonstrates that the market is responding 
appropriately to temporary Gulf of Mexico production delays.
    We have had a couple of macroeconomic changes since we last 
presented our Outlook. For example, GDP growth has been lowered for the 
winter, from 3.4 percent to about 3.3 percent, and manufacturing is 
down, from 2.9 percent to 2.7 percent, which indicates some demand 
coming off.
    Weather is always the most critical factor in determining demand 
during the winter heating season; it is also the most difficult to 
predict. Using government weather data, we are predicting warmer than 
normal temperatures across much of the Western States, with near-normal 
temperatures in the East and East Central States. Based on this 
forecasting provided by the National Oceanic and Atmospheric 
Administration (NOAA), the winter is expected--in aggregate--to be 
slightly warmer than normal, but colder than last winter.
    Given that weather scenario, and the decline in the GDP and 
manufacturing index, our revised estimate for U.S. natural gas demand 
this winter is now 72.7 Bcf/d, down 0.7 percent since Hurricane Rita.
    On the supply side, prior to the hurricanes, the nation's 6,000 
natural gas producers were on a pace this year to expand domestic 
production. Now, factoring in the effects of the hurricanes, despite 
increases in capital spending and rig counts, production is projected 
to be relatively flat this winter, due in large part to the decline 
rate in traditional basins. According to the consulting firm Energy and 
Environmental Analysis (EEA), post-hurricane data show that annual well 
completions, for example, are projected to increase to 26,100 from 
23,400, and the rig count is forecast to increase this winter to 1,189, 
from 1,025 last heating season, indicative of an accelerating response 
to ongoing tight-market conditions.
    Although we anticipate relatively flat production overall, there 
are additional amounts that may not make it to market early in the 
winter, due to the continuing recovery of processing plants from 
hurricane damage. Downstream issues continue to have a dampening effect 
on some supply--although we are still trying to assess the extent of 
that effect.
    Any decline in traditional supplies, however, is being offset 
somewhat by an increase in unconventional production, as well as 
pipeline and LNG imports. Since our Winter Outlook--and in response to 
market conditions since the hurricanes--projected net pipeline imports 
have increased to 8.9 Bcf/d.2 Imports as a whole will 
continue to play a critical role this winter to help compensate for 
some hurricane-related production losses, and to add further certainty 
to the marketplace. In fact, according to EEA, LNG imports are now 
expected to increase 28 percent from last winter. For this winter, 
however, our LNG and Canadian import capability will be limited by 
existing infrastructure, as well as competing worldwide demand for LNG.
---------------------------------------------------------------------------
    \2\ Canadian 10.0 Bcf/d; offset by 1.1 Bcf/d export to Mexico 
(Source: Energy and Environmental Analysis)
---------------------------------------------------------------------------
    Since our preliminary assessment of the effects of Hurricanes 
Katrina and Rita on natural gas supply, new data from EEA suggests that 
the total hurricane disruption will average about 2.5 Bcf/d during the 
official heating season, November 1 through March 31. In total, 
reflecting the shut-in supply in the Gulf of Mexico, domestic, Canadian 
and liquefied natural gas (LNG) supplies are expected to amount to 
about 60 Bcf/d.
    Storage is the last piece of the supply puzzle needed to balance 
supply and demand. We are now at the end of the traditional injection 
season, and inventories are above the five-year average at more than 
3.1 trillion cubic feet (Tcf). With one more reporting week to go, we 
are confident that storage will be healthy this winter, potentially 
even reaching the 3.2 trillion cubic feet (Tcf) mark. A storage 
inventory level at 3.1 Tcf translates to almost 21 Bcf per day on 
average. Coupled with the 60 Bcf per day domestic and imported 
production, it should be more than adequate to serve the U.S. firm-
service demand requirements under at least normal winter weather 
conditions.
    There are four scenarios that could impact the supply demand 
balance that I've presented for you today: 1) slower than anticipated 
rate of supply/infrastructure recovery from the hurricanes, 2) colder 
than normal weather conditions, 3) natural gas quality restrictions and 
4) lower-than-projected levels of LNG or Canadian imports. Weather is 
probably the most critical factor this winter or any winter. Severe 
weather conditions can alter the supply-demand balance significantly 
and, as is the case anytime there is a heavy regional dependency on a 
single supply source, there is the risk of localized constraints.
    Let me emphasize: under most weather scenarios (including those 
more conservative than the weather predicted by NOAA), supply and 
demand will balance, meaning there is no natural gas supply shortage. 
There are, however, access and infrastructure constraints. The 
industry's challenge this winter will be getting available supply to 
where it is needed, and we've been working hard to not only restore 
damaged facilities, but to reroute supply to bring it to market and 
address these regional issues.
    While producers and the industry as a whole continue to work around 
the clock to ease potential constraints, customers can also play a 
critical role this winter. As we highlighted in our Outlook, end-use 
conservation will be a big help this heating season in offsetting the 
price impact of production losses. For example, recent statistics from 
the Department of Energy reportedly show that precautionary 
conservation to reduce demand by only 5 percent would amount to a 
savings of 3.5 Bcf/d--which alone would more than compensate for the 
projected Gulf of Mexico shut-ins. Conservation can be as simple as 
customers installing programmable thermostats, or turning their 
thermostats down by only two degrees from their usual setting. These 
measures will be the most effective, efficient and money-saving 
precautions customers can take to alleviate heating season impacts.
    Altogether, urgent efforts by producers and the industry are 
focused on ensuring adequacy and reliability this winter. Although 
heating costs are still projected to increase--significantly in some 
regions--this data supports our view that ample storage, coupled with 
import and production responses, will likely mean sufficient overall 
supply for this winter. Ongoing conservation precautions also can help 
ease localized constraints, and all will help to protect the nation's 
firm-service customers this winter.
    Importantly, under normal weather conditions, even with the affects 
of the hurricanes on the supply coming from the Gulf of Mexico, our 
market balances itself with the help of Canadian and LNG imports, and 
production from other regions in the U.S., such as the Mid-Continent. 
Allowing the market to work to move supply to address localized 
imbalances, and to facilitate needed infrastructure repairs, is the 
most important step government can take in the short-term. Additional 
government actions to expand future supply, as outlined by others in 
our industry, could also have a calming effect on the futures market.
    Going forward, it is our sincere hope that this hurricane season 
serves as a national wake-up call with regard to natural gas and 
overall energy policy. Promoting the use of clean-burning natural gas 
should be coupled with access to new supplies to help fuel growing 
demand. The impact of the hurricanes on the market has underscored the 
importance of increasing supplies and resource diversity.
    The Energy Policy Act of 2005 is a good first step, but more needs 
to be done. It is in our national interest to continue to expand supply 
resources, as outlined by other industry participants on this panel, 
both to help stimulate economic expansion and to reduce air pollution, 
creating a more secure energy future for America. Without additional 
and diversified sources of supply, the market will continue to be at 
risk for disruptions like Katrina and Rita, and the higher costs that 
inevitably result.
    Thank you, Mr. Chairman, for this opportunity to outline our 
assessment of the challenges we face this critical heating season.

    Mr. Burgess. And thank you, Mr. Horvath. We will hear from 
Mr. Slaughter.

                   STATEMENT OF BOB SLAUGHTER

    Mr. Slaughter. Thank you, Mr. Burgess, Mr. Boucher. I am 
Bob Slaughter. I am the President of the National Petrochemical 
and Refiners Association, NPRA. Our members include those who 
own or operate virtually all U.S. refining capacity and 
petrochemical manufacturers.
    Today's hearing focuses on two important and timely issues. 
The first is the cost and availability of natural gas. It 
presents a challenge for both refiners and petrochemical 
producers. Refiners use large quantities of natural gas, and 
petrochemical producers rely on natural gas supplies for use as 
a feed stock. NPRA urges Congress to take immediate action to 
increase domestic natural gas supplies by opening up OCS and 
onshore areas currently subject to moratoria and other 
restrictions on exploration and production.
    The Nation can no longer afford to place off limits 
critical supplies of natural gas that are needed for 
residential, commercial, and industrial use. The U.S. is in the 
process of exporting its petrochemical industry, due to 
concerns about the availability and cost of future gas 
supplies. Action is needed in short order to protect the 
hundreds of thousands of jobs that depend directly or 
indirectly on the domestic petrochemical industry, a major 
contributor to the U.S., State, and local economies.
    Second, the Nation's refiners and petrochemical 
manufacturers have made considerable progress in recovering 
from the effects of Hurricanes Katrina and Rita. Those storms, 
at one time or another, shut down roughly 30 percent of U.S. 
refining capacity. Hurricane Rita shut down about 16 major U.S. 
refineries. NPRA members joined other sectors of the oil and 
gas industry in working around the clock to bring as much of 
the affected supply back online as quickly as possible. A great 
deal has been accomplished. As of November 1, roughly 4 million 
barrels per day of refining capacity hit by the storms has 
returned to full operation. Most petrochemical facilities hit 
by the storms have also restarted.
    The EIA has noted that gasoline supply has returned to pre-
Katrina levels with the help of significant gasoline imports 
during recent weeks. As always, higher prices served as a 
magnet to attract additional supplies needed to address a 
temporary market imbalance. Now, with most of the refineries 
restarted, domestic production has ramped up, and import levels 
should eventually return to normal volumes. EIA also announced 
yesterday a significant drop in U.S. average gasoline prices to 
pre-hurricane levels. Due to high crude costs, however, current 
gasoline prices do remain above those in 2004.
    There is also positive news regarding distillates, which 
include home heating oil. During the key winter months of the 
winter heating season, heating oil demand is met by refinery 
production, imports, and inventory stocks. For much of 2005, 
refinery distillate production, which is indicated in this 
first chart, has been higher than the average during the past 4 
years, which is good news. Distillate inventories were reaching 
relatively comfortable levels at the time of the hurricanes, 
but supplies were drawn down while refinery disruptions caused 
by the hurricanes were most severe.
    The attachment two, or our board No. 2, will show you the 
magnitude of the storms' effect day by day on refinery 
operations. The good news is that as of last week, U.S. 
distillate inventories, including both home heating oil and 
highway diesel, were slightly higher than the stocks on hand at 
this time last year. Diesel prices have not yet returned to 
pre-Katrina levels, and diesel prices pretty much set the 
standard for the whole distillate curve. Strong worldwide 
demand for distillate has resulted in higher than normal prices 
for diesel, compared with gasoline, for much of this year. 
However, EIA did announce yesterday that average diesel fuel 
prices fell by over $0.28 in the past week.
    At this very early point in the heating season, demand for 
home heating oil itself is roughly the same as it was last 
year, but as with most winters, actual demand for heating oil 
will be greatly affected by weather conditions. NOAA projects a 
slightly more severe winter than last year, but it remains to 
be seen whether that scenario will play out. If additional 
heating oil supplies are needed beyond those produced in 
domestic refineries, imports are likely to be available from 
Canada, the Virgin Islands, Venezuela, and perhaps Europe if 
winter conditions there are not severe.
    Temporary price spikes can occur if suppliers are short, 
but those situations usually quickly react to the arrival of 
additional heating oil in response to market incentives. A lot 
of the discussion today has been about natural gas price supply 
and price concerns. This situation could significantly impact 
the heating oil market. If interruptible gas customers abandon 
the gas market because of high prices this winter, they will 
rely on heating oil supplies to replace their usual fuel. Many 
utilities are required to hold reserve inventories to address 
this eventuality, and it is hoped that this would act to 
mitigate the impact of additional, unexpected demand for home 
heating oil.
    We would argue that this possibility of additional demand 
for home heating oil this year would help provide another good 
reason why Congress should not delay in taking action to 
increase domestic production of natural gas. As others who have 
testified today say, we are supporters of LIHEAP. We do, 
unfortunately, that bills will be higher this year, as 
predicted by the EIA and others. We think that conservation is 
important, as is adequate LIHEAP funding.
    And so we want to thank you again for the opportunity to 
discuss these issues today, and we look forward to responding 
to your questions.
    [The prepared statement of Bob Slaughter follows:]
Prepared Statement of Bob Slaughter, President, National Petrochemical 
                        and Refiners Association
    Mr. Chairman and members of the Subcommittee, thank you for the 
opportunity to appear today to discuss issues related to petroleum 
refining and the home heating oil market. My name is Bob Slaughter and 
I am President of NPRA, the National Petrochemical & Refiners 
Association. NPRA is a national trade association with 450 members, 
including those who own or operate virtually all U.S. refining 
capacity, and most U.S. petrochemical manufacturers.
    Today's hearing focuses on important and timely issues. The cost 
and availability of natural gas presents a challenge for both refiners 
and petrochemical producers. Refiners use large quantities of natural 
gas and petrochemical producers depend on natural gas supplies for use 
as feedstock. NPRA urges that Congress take immediate action to 
increase domestic natural gas supplies by opening up to exploration and 
production OCS areas currently subject to moratoria. The nation can no 
longer afford to place off limits critical supplies of natural gas that 
are needed for residential, commercial and industrial use. The nation 
is in the process of exporting the U.S. petrochemical industry due to 
concerns about the availability and cost of future natural gas 
supplies. Action is needed in short order to protect the hundreds of 
thousands of U.S. jobs that depend directly or indirectly on the 
domestic petrochemical industry.
    I have been asked to address my remarks today to trends in the home 
heating oil market. Given the tightness in refining capacity generally, 
the high cost of crude oil, damage caused by two major hurricanes and 
the strong pressure on the industry to continue to keep up gasoline 
production levels in light of consumer demand, challenging conditions 
have emerged for this winter's heating oil market.
A snapshot of current conditions
    The nation's refiners and petrochemical manufacturers have made 
considerable progress in recovering from the effects of hurricanes 
Katrina and Rita. Those storms at one time or other shut down roughly 
30% of U.S. refining capacity. Hurricane Rita shut down about 16 major 
U.S. refineries. At the same time, the effects of Hurricane Katrina 
still lingered, as four major refineries remained offline due to the 
impact of that earlier storm. The refining industry has joined other 
sectors of the oil and gas industry in working around the clock to 
bring as much of the affected capacity back on line as possible. A 
great deal has been accomplished. As of November 1, roughly 4 million 
barrels per day of refining capacity hit by the storms has returned to 
full operation. Most petrochemical facilities have also been returned 
to full operation after the storms.
    Remaining offline at this date are four facilities: BP's Texas City 
refinery, which is shut down for repair; ExxonMobil/PDVSA's Chalmette 
refinery, which is expected to be fully operational later this month, 
ConocoPhillip's Belle Chasse refinery, and Murphy Oil's Meraux 
refinery, expected to start-up in the first quarter of 2006. The U.S. 
Energy Information Administration has noted that gasoline supply has 
returned to pre-Katrina levels with the help of significant gasoline 
imports during recent weeks. With most of the refineries restarted, 
domestic production has ramped up and import levels should eventually 
return to more usual volumes. EIA also announced yesterday a 
significant drop in U.S. average gasoline prices, returning to pre-
hurricane levels. Due to continued high crude prices, however, current 
gasoline prices do remain above those in 2004.
    There is also positive news regarding distillates, including home 
heating oil. During the key winter months of the home heating oil 
season, demand is met by refinery production, imports and inventory 
stocks. Refinery distillate production (as indicated in attachment one) 
have been higher than the average of the past four years for much of 
2005. Inventories were reaching comfortable levels at the time of the 
hurricanes, but those supplies have been drawn down somewhat to provide 
supply during the time when refinery disruptions caused by the 
hurricane were most severe. (See attachment 2 for the magnitude of the 
storms' effect on refinery operations.)
    The good news is that as of last week, U.S. distillate inventories, 
including both home heating oil and highway diesel, were slightly 
higher than the stocks on hand at this time last year. Strong demand 
for distillate worldwide has resulted in higher than normal prices for 
diesel when compared with gasoline for much of this year. Diesel prices 
have not yet returned to pre-Katrina levels, but EIA announced 
yesterday that diesel fuel prices fell by over 28 cents in the past 
week.
    As with most winters, demand for home heating oil will be greatly 
affected by weather conditions. NOAA is projecting a slightly more 
severe winter than last year, but it remains to be seen whether that 
prediction will play out as anticipated. If additional heating oil 
supplies are needed beyond those produced in domestic refineries, 
imports are likely to be available from Canada, the Virgin Islands, and 
perhaps Europe if winter conditions there are not severe. As always, a 
price spike can occur if supplies are temporarily short, but such 
situations are usually quickly addressed by the arrival of additional 
supplies in response to market incentives.
    There has been much discussion at this hearing of concerns about 
natural gas supply during this winter. That situation could also impact 
the heating oil market. If interruptible gas customers abandon the 
natural gas market because of high gas prices this winter, they would 
rely on heating oil supplies to replace their usual fuel. Many 
utilities are required to hold reserve inventories of heating oil to 
address this eventuality, and it is to be hoped that this supply would 
act to mitigate the impact of additional, unexpected demand for home 
heating oil. The possibility that industrial natural gas customers 
might present additional challenges for home heating oil consumers is 
another good reason why Congress should not delay in taking action to 
increase domestic production of natural gas.
Refining and Home Heating Oil
    Basically, our nation has two sources of heating oil: domestic 
petroleum refining and imports. For their part, refineries produce 
heating oil as a part of the ``distillate fuel oil'' product family 
that also includes diesel fuel. Distillate products are shipped 
throughout the United States by pipelines, barges, tankers, trucks and 
rail cars.
    Past experience and EIA analysis confirm that refiners are limited 
in the amount of heating oil they can make during the winter to meet 
the demands of the October to March heating season. Some winter heating 
oil is produced by refineries in the summer and fall months and stored 
for winter use. During the coldest winter months, the inventories built 
in summer and fall are used to help meet the high demand. Refiners can 
increase heating oil production in the winter only to a modest degree.
    As indicated previously, imports can make up the difference when 
distillate and heating oil stocks are low. Primary sources of imported 
distillate are Canada, the Virgin Islands, and Venezuela.
    Whether imported or produced by domestic refiners, heating oil is 
then stored in a terminal that services a particular area served by 
retailers. For example, heating oil may be delivered to a central 
distribution area, such as New York Harbor, where it is then 
redistributed by barge to other consuming areas, such as New England. 
Once heating oil is in the consuming area, it is redistributed by truck 
to smaller storage tanks closer to a retail dealer's customers, or 
directly to residential customers.
Current Supply/Demand Picture for Home Heating Oil
    According to the U.S. Energy Information Administration, about 8.1 
million households out of 107 million total use heating oil to heat 
their homes. This fuel oil is primarily used for residential space 
heating, a fact that creates great seasonal variations in demand. Home 
heating oil is a seasonal product, with most consumed between the 
months of October and March.
    Home heating oil demand is also limited geographically, with 
households in the Northeastern United States consuming about 78 percent 
of total U.S. demand. While total demand has stayed about the same over 
the last year, residential and wholesale prices are up by 56 and 39 
percent respectively. The reasons for volatility are clear.
    Refiners have been working hard to address the lingering impacts of 
the summer's storms. The industry faced unprecedented logistical, 
facility, and personnel complications with the impact of two major 
storms in rapid succession. The dedicated employees of these facilities 
deserve most of the credit for the rapid return to service of so much 
capacity, as do their employers. The refining companies in many cases 
provided for the shelter, safety and security of these workers and 
their families. Despite so great a loss of productive capacity in such 
a short time, it is important to note that the nation experienced only 
very isolated and short-lived transportation fuel shortages.
    NPRA commends the federal government for acting quickly and 
decisively in the face of these supply outages. Several steps taken in 
the days and weeks following these storms helped refiners provide 
consumers with the products they need. The Administration released 
crude oil from the Strategic Petroleum Reserve (SPR) to assist refiners 
who were short crude supplies as a result of hurricane damage. NPRA 
applauds this appropriate utilization of the reserve in a time of 
crude-oil supply crisis. The decisive steps taken to judiciously use 
crude oil from the SPR during this emergency enabled several 
refineries, otherwise unaffected by the storms, to receive the crude 
oil required to keep the refineries in production.
    NPRA also notes that the Environmental Protection Agency provided 
temporary fuel waivers that made it easier to supply fuels to affected 
areas. The waivers pertain to both gasoline and diesel specifications. 
NPRA appreciates the efforts of EPA and commends the agency for its 
diligence in gathering the necessary information to protect both fuel 
supply and environmental concerns.
    The Department of Homeland Security also deserves recognition for 
temporarily lifting Jones Act requirements in order to allow non U.S. 
flagged vessels to transport much needed refined products from one U.S. 
port to another. These actions provided additional flexibility to the 
marketplace and have helped refiners to continue to meet demand.
Other Factors Which May Lead to Volatility in the Heating Oil Market
    There is no one single answer for why home heating supplies can be 
tight, although the market has historically been a volatile one. Among 
the reasons for this are the following:
    1. Seasonality of demand. Because heating oil is essentially a 
winter product, the laws of supply and demand dictate that consumers 
feel the greatest pinch precisely at the time when heating oil is in 
the most need. While transportation fuels are somewhat seasonal 
(particularly gasoline), the demand curve is not nearly so biased 
towards one season as is the demand curve for heating oil. As a result, 
moderate changes in distillate inventories can have relatively profound 
impacts on the heating oil market.
    Data collected over the last few weeks show that unusually warm 
weather in the Northeast has dampened demand for fuel oil and resulted 
in stable distillate supplies. These factors have resulted in futures 
price declines, as November contracts have given way to December 
trading, according to data reported by Bloomberg. However, heightened 
demand overseas, coupled with interrupted distribution attributable to 
this summer's hurricanes may create rather volatile conditions. Rapid 
changes in temperatures or prolonged storms can result in spikes in 
demand at the very time when some infrastructure (harbors, barge 
traffic, truck traffic, etc) are constrained for making deliveries at 
optimal rates.
    2. Crude oil costs. Just as with gasoline production, one of the 
greatest cost factors affecting home heating oil is the cost of the 
underlying crude oil input. Crude prices are of course a product of 
worldwide supply and demand factors well beyond the control of the 
refiner or the heating oil vendor. In particular, heightened crude 
demand in India and China has affected the crude market. Crude input 
accounts for approximately 42 percent of heating oil cost.
    3. Competition in local markets. While NPRA does not represent the 
retail sector, we can point out some obvious characteristics of retail 
markets. Some heating oil markets are served by multiple vendors, 
whereas others may have only one primary vendor. As a result, not all 
local retail markets are as competitive as might be the case under 
optimal conditions.
    4. Differential overhead. The retailing of home heating oil is 
labor intensive and can be complicated from a logistical point of view. 
Some of the most significant markets for heating oil have a relatively 
high cost of doing business, and do not always react as quickly to 
market stimuli. EIA recently stated that "Prices also are impacted by 
higher costs of transporting the product to remote locations. In 
addition, the cost of doing business by dealers can vary substantially 
depending on the area of the country in which the dealer is located. 
Costs of doing business include wages and salaries, benefits, 
equipment, lease/rent, insurance, overhead, and state and local fees." 
Distribution and marketing costs alone account for some 46 percent of 
the cost of a gallon of heating oil.
    5. Fuel switching. Demand for home heating oil is roughly the same 
as it was last year at this time (4.293 mmb on 10/26/2005 compared to 
4.368 mmb a year ago, a change of only -0.075). As previously mentioned 
however, with the price of natural gas substantially above its historic 
average, and with some homes in the Northeast capable of utilizing 
either gas or oil heating, there may be some switching from natural gas 
to fuel oil, but this is difficult to predict.
Addressing Volatility in the Heating Oil Market
    Some policymakers have suggested that the federal government should 
adopt price control mechanisms on heating oil and other refined 
products, sometimes at the wholesale level, to combat the current rise 
in fuel prices. NPRA urges Congress to reject this advice.
    As previously noted, in the immediate aftermath of both Hurricanes 
Katrina and Rita, there were but a few reports of supply shortages or 
market distortion. Reliance on market forces provided appropriate 
market signals to help balance supply and demand even during these 
difficult times. Enactment of politically tempting but marketplace 
disrupting price controls is absolutely the wrong cure for the 
situation. President Reagan eliminated price controls on oil products 
immediately upon taking office in 1981. He was outspoken about the 
inefficiencies and added costs to consumers that resulted from 
America's ten-year experiment with energy price controls during the 
1970s.
    The energy price and allocation controls of the 1970s resulted in 
supply shortages in the form of long gas lines. Studies have shown 
that, although intended to reduce costs, controls actually resulted in 
increased costs and greater inconvenience for consumers. The benefits 
of market pricing became clear soon after the elimination of price and 
allocation controls in 1981. The U.S. Federal Trade Commission stated 
in an extensive study published this June that the price of refined 
products over the past two decades has been on average lower than any 
time since 1919. It is important to note that a ``windfall profit tax'' 
is merely another form of price control. Price caps and other forms of 
price regulation are no more effective in the 21st century than they 
were in the 1970s. Interference in market forces always creates 
inefficiencies in the marketplace and extra costs for consumers.
    There are numerous, more market sensitive, strategies available to 
consumers and policy makers that can address heating oil volatility or 
at least somewhat ameliorate its consequences.
    Some heating oil consumers, in recognition of potential price 
increases, may fill their storage tanks during lower demand periods. 
While most homeowners do not possess sufficient storage capacity for an 
entire winter, such behavior can address price increases during 
shoulder or transitional seasons. Consumers may, therefore, arrange to 
have their tanks filled in late summer or early fall when prices are 
generally lower.
    In addition, many of the nation's 9300 heating oil retailers offer 
budget plans or fixed price protection programs to help stabilize 
monthly bills. Home energy audits can also ensure that furnaces and 
other appliances are running efficiently before the season begins. 
Conservation gains attributable to weatherizing (i.e., installing the 
proper insulation in houses and around hot water heaters) as well as 
caulking and weather stripping windows and doors to seal out cold air 
also help save energy. Installing a programmable thermostat is another 
way to reduce heating fuel costs.
    For those living on fixed incomes or under other significant budget 
limitations, both Federal and State energy assistance programs are 
available. For example, the Low Income Home Energy Assistance Program 
(LIHEAP) is a Federal program that distributes funds to States to help 
low-income households pay heating bills. Additional State energy 
assistance and fuel fund programs may be available to help households 
during a winter emergency.
    Thank you again for the opportunity to discuss this important issue 
of winter fuel supply with you today. I look forward to responding to 
your questions.

    Mr. Burgess. Thank you, Mr. Slaughter. Now, we will hear 
from Mr. Wright.

                   STATEMENT OF PHILLIP WRIGHT

    Mr. Wright. Thank you, Mr. Burgess and members of the 
subcommittee. I bring you greetings from the home of the 
National League champions. My name is Phil Wright, and I am 
Senior Vice President and General Manager for Williams Gas 
Pipeline Company.
    I am responsible for the operation of about 15,000 miles of 
interstate natural gas pipelines, extending from the Rocky 
Mountains to the Pacific Northwest, and from the Gulf Coast 
into the Southeastern United States, Eastern seaboard, and 
ultimately, into the New York City metropolitan area.
    I am here today on behalf of the Interstate Natural Gas 
Association, which I will refer to as INGA. INGA members 
transport over 95 percent of the Nation's natural gas through a 
network of 180,000 miles of pipelines. Following restructuring 
of the natural gas industry, gas pipelines are no longer in the 
role of buying and selling the commodity. Thus, the role of the 
interstate pipelines is similar to that of a trucking company. 
We provide the natural gas transportation services, including 
storage, that our customers need.
    The Federal Energy Regulatory Commission regulates 
virtually every aspect of our business, including the rates we 
charge. Our costs, as Chairman Kelliher testified, is the 
smallest part of the delivered price of natural gas, typically 
less than 10 percent of the consumer's total bill, and we do 
not, therefore, benefit from higher natural gas prices.
    At the outset, let me say that we agree with NGSA, in that 
our best judgment is that sufficient supplies will be available 
this winter to meet residential and commercial demand. Storage 
levels are good, ahead of the 5 year average, and production 
from the Gulf of Mexico, while significantly below pre-
hurricane levels, is gradually returning.
    Having said this, the industry faces very real challenges 
this winter that could require some regulatory allocation of 
deliveries to certain customers at certain times. As of early 
this week, about 55 percent of the daily production from the 
Gulf of Mexico, which accounts for roughly 20 percent of the 
Nation's supplies, remain shut in due to the storms. 
Complicating the situation is that a number of natural gas 
processing plants in the Gulf were damaged by the hurricanes. 
Several of these facilities may be out of operation during 
most, if not all, of the winter. And a certain amount of 
unprocessed natural gas can be accepted into the gas pipeline 
network, but if the quantity becomes too high, liquids in the 
unprocessed gas can cause safety and operational problems. And 
if this occurs, pipelines may have to limit the volume of 
unprocessed gas that we can accept, to preserve the operational 
integrity of the transmission and distribution network.
    I would assure you that we are doing all we can to repair 
or bypass the hurricane damage to natural gas infrastructure in 
the Gulf. Despite heroic efforts, however, the damage is too 
widespread, and the amount of repair work too great for 
everything to be repaired in time for the winter heating 
season, which is upon us. To assess the potential damage, or 
excuse me, impact of the storm on supplies, INGA retained an 
economic consultant, EEA, to analyze the supply and demand 
outlook for the coming winter.
    A key focus of the study was to assess the likelihood of 
scenarios which could result in regulatory allocation of supply 
to certain customers, primarily industrial users and 
electricity generators during certain times. The EEA analysis 
concludes that residential and commercial customers served by 
local distribution companies holding long term, firm 
transportation and supply entitlements, will continue receiving 
natural gas. Thank you. The study concludes that residential 
and commercial customers served by local distribution companies 
holding firm transportation and gas supply entitlements will 
continue receiving service throughout the winter, even during 
periods of peak demand. This will remain the case, even in 
situations where State allocation plans are implemented due to 
supply constraints.
    These customers will receive natural gas this winter, 
albeit at a higher price. Clearly, the severity of the winter 
weather will be a critical factor in determining how natural 
gas markets will balance. If the weather is colder than normal, 
the probability of regulatory gas supply allocations becomes 
greater. Historically, this type of winter occurs one in every 
seven winters. New York and New England will be the most likely 
to have spot regulatory allocations under all of the scenarios 
analyzed in the study, although other States might also be 
affected should the winter be colder than normal. Should such a 
scenario occur, it would likely be near the end of the winter, 
after storage supplies have been depleted.
    So what can be done? The short term imperative is repairing 
the infrastructure as quickly as possible. That means 
expediting permitting and approvals for repair work. It also 
means the various levels of government should consider the 
value of granting companies some forbearance from legal 
restrictions that might otherwise frustrate their ability to 
coordinate assessment and repair activities. Both the energy 
industry and the government must educate consumers in advance, 
so they are prepared for higher bills, and have the ability to 
implement strategies for conserving energy.
    Funding of the Low Income Home Energy Assistance Program is 
critical in helping needy families cope. State regulators 
should be reviewing their allocation plans, and preparing to 
implement them, if necessary, including coordinating any plans 
with local electric generators, who would be some of the most 
likely customers to have supplies allocated. As well, large gas 
consumers should be in close consultation with their suppliers 
to ensure that the gas they are counting on can be supplied and 
delivered.
    Some have complained about the environmental risks 
associated with expanding offshore energy to include waters 
outside the western Gulf of Mexico. Still, after three 
significant hurricanes in 2 years, it is time to concede that 
apprehensions about the environmental consequences of offshore 
energy development are greatly overstated. Production is 
growing in the Rocky Mountain region as several pipeline 
projects have been proposed to bring that gas east, but access 
to public lands, seasonal drilling restrictions, and the timely 
issuance of permits remain a problem in some areas.
    To enable the financing and development of $61 billion of 
critical natural gas infrastructure this Nation needs by 2020, 
we urge State commissions to support more balanced supply and 
transportation contract portfolios for the utilities they 
regulate. Long term contract commitments are critical to 
enabling that infrastructure to be developed.
    Some have questioned whether the energy industry is 
investing enough capital into the North American market to 
develop supply, to mitigate prices in the long term, and while 
I can only speak for the interstate gas pipeline sector of the 
industry, I want to assure you we are committed to this market 
long term, and are investing capital at a robust pace.
    I will be prepared to respond to questions. Thank you.
    [The prepared statement of Phillip D. Wright follows:]
  Prepared Statement of Phillip D. Wright, Senior Vice President, Gas 
     Pipelines, Williams, on Behalf of The Interstate Natural Gas 
                         Association of America
    Mr. Chairman and Members of the Subcommittee: Thank you for the 
opportunity to testify on this important topic. My name is Phil Wright, 
and I am Senior Vice President for Gas Pipelines at Williams. Williams 
is the second-largest transporter of natural gas in the United States, 
transporting about 12 percent of the natural gas consumed. We operate 
three interstate pipelines which provide natural gas to major markets 
on both the east and west coasts including Atlanta, the Carolinas, 
Philadelphia, New York, Seattle, Portland and Florida. These systems 
total about 15,000 miles of pipe, transporting natural gas from the 
Gulf of Mexico, Canada, the Rocky Mountains and other production areas.
    I am here today on behalf of the Interstate Natural Gas Association 
of America (INGAA). INGAA is a trade organization that represents the 
interstate natural gas transmission pipeline companies operating in the 
U.S., as well as comparable companies in Canada and Mexico. Its members 
transport over 95 percent of the nation's natural gas through a network 
of 180,000 miles of pipelines.
                     natural gas pipeline industry
    Before discussing the winter outlook for natural gas supplies, I 
first want to make a few points about the structure of the natural gas 
industry. The natural gas industry has never been as vertically 
integrated as the oil and electric power industries. Put differently, 
it is the exception and not the rule for a single company to be 
significantly involved in all segments of the industry. These segments 
can generally be broken down into the following categories: production, 
gathering and processing (also known as midstream services), interstate 
pipelines, marketing, and local distribution. Some of these segments 
are subject to economic (i.e., rate) regulation at the federal or state 
level, while others are not subject to any rate regulation.
    The Federal Energy Regulatory Commission (FERC) regulates the 
rates, terms and conditions of service for the interstate pipeline 
segment. As part of the natural gas industry restructuring that 
occurred during the 1980s and early 1990s, the interstate pipeline 
industry gave up its merchant role as the provider of bundled wholesale 
natural gas services. Under the current industry structure, interstate 
pipelines transport and store natural gas, but do not produce, purchase 
or sell the commodity. An interstate pipeline is analogous to a 
trucking company that provides both transportation and warehousing 
services for goods, but that does not take title to the goods. The 
maximum rate an interstate pipeline may charge for transportation and 
storage is set by FERC on a pipeline-by-pipeline basis, based upon the 
costs incurred by a specific pipeline to provide such services.
    Pipeline transportation and storage is the smallest part of the 
cost of natural gas delivered to residential and commercial customers--
typically about 10 percent of the total retail cost of natural gas. 
(See Appendix 1) Pipelines earn their revenues by charging the 
regulated rates for transportation and storage set by FERC; since 
pipelines have no role in purchasing and reselling natural gas they do 
not benefit from higher commodity prices.
    The shippers (i.e., customers) on interstate pipelines--who may be 
local distribution companies (LDCs), municipal gas companies, electric 
generators or industrial companies--are responsible for purchasing 
natural gas and arranging pipeline transportation and storage. Each 
shipper is responsible for its own portfolio of natural gas supply, 
transportation and storage. A customer's natural gas supply portfolio 
may include long-term and short-term contracts and spot market 
purchases, as well as financial instruments to manage price risk. In 
the case of pipeline transportation, a shipper can choose to purchase 
firm transportation that ensures year-round availability (including on 
the coldest days of the year) or a shipper can choose to purchase 
various types of non-firm transportation that may be interrupted during 
periods of greatest natural gas consumption. Non-firm capacity 
generally is sold at rates lower than firm service, but the shipper 
accepts the risk that this capacity will be unavailable during a peak 
period when firm transportation customers are fully utilizing their 
entitlement to pipeline capacity. Pipeline companies build additional 
facilities to add pipeline capacity if shippers are willing to sign 
long-term firm contracts for such capacity. Still, due to the time 
required to comply with new construction certification and permitting 
requirements and to actually construct the facility, there often is a 
multi-year lag between the inception of a pipeline project and when 
natural gas can flow through the newly-completed capacity.
    While the business model for the natural gas industry is not 
vertically integrated, there are significant operational 
interdependencies between the industry's various segments. This is 
especially true regarding off-shore production in the Gulf of Mexico, 
an important consideration in evaluating gas supply availability for 
the upcoming winter. Generally speaking, the chain of delivery is as 
follows: Natural gas is first produced at off-shore platform or 
wellhead facilities; it is then gathered and transported through 
smaller diameter gathering pipelines for redelivery to FERC-regulated 
transmission pipelines for transportation to onshore processing plants. 
There, the natural gas is processed to remove hydrocarbon liquids, such 
as propane and butane. Those processed liquids must be transported, via 
dedicated pipeline, barge or truck, to markets for those products, such 
as refineries and petrochemical facilities. Once the liquids are 
removed, the natural gas is fit for consumption and is redelivered into 
the interstate pipeline network where it is transported to end-use 
customers. These systems all must work together for natural gas to flow 
onshore, and from there to the millions of customers downstream. If any 
link in this delivery chain is disrupted, the remaining links in the 
chain will be affected in some way.
    Hurricanes Katrina and Rita have highlighted these 
interdependencies. In cases where multiple links in the supply chain 
have been damaged, we cannot repair only a single link and expect 
natural gas supplies to return to pre-hurricane levels. All of the 
links must be working in order to achieve that result.
                        effect of the hurricanes
    Mr. Chairman, two major hurricanes striking back-to-back at the 
heart of our nation's energy system have caused an unprecedented 
disruption in our Gulf-based natural gas infrastructure. The federal 
waters in the Gulf of Mexico account for about 10 billion cubic feet 
per day (bcfd) of natural gas production, which is about 20 percent of 
total U.S. production. As of early this week, about 55 percent of this 
daily production, or about 5.5 bcfd, remained ``shut-in'' due to the 
storms. To place this number in perspective, the United States 
typically consumes on average 61 bcfd nationwide. Given the tight 
supply/demand balance that the nation already was facing before the 
hurricanes, this loss of supply--even if only temporary--is cause for 
concern as we begin the winter heating season.
    The media, and indeed most Americans, have focused most intently on 
how the twin hurricanes have affected the price and supply of gasoline. 
Gulf Coast oil production and refineries are a critical part of the 
nation's infrastructure for obtaining supplies of gasoline, jet fuel 
and fuel oil. Nonetheless, the United States imports almost 60 percent 
of its petroleum supplies from overseas. This means that a short-term 
increase in imports can mitigate some portion of the impact of the 
hurricanes on petroleum supplies. When it comes to natural gas, 
however, the United States still produces 85 percent of the total 
supplies needed to meet domestic demand. Most of the remaining supply 
comes from Canada. The United States' ability to import natural gas 
from outside North America is far more limited than with petroleum, 
given the small number (5) of operational liquefied natural gas (LNG) 
import terminals in the U.S. Therefore, even as the country remains 
focused on gasoline prices, the more profound and protracted impact of 
the hurricanes will be on natural gas prices and supplies.
    I want to assure the Committee that we are doing all we can to 
repair or bypass the hurricane damage to natural gas infrastructure in 
the Gulf region. The dedication of our employees, in the face of losing 
their homes and possessions and having their families uprooted, has 
been phenomenal. Across the industry, people are showing up to work 
long hours even as they have no place to go home to. Supporting our 
employees with temporary housing within the region so they can continue 
to repair and operate critical energy facilities is crucial to speeding 
the pace at which natural gas supplies in the Gulf can be brought back 
online.
                         winter supply outlook
    Let me now turn to our outlook for the winter heating season. There 
can be no doubt that, compared to last year, there will be less natural 
gas delivered from the Gulf of Mexico region this winter. The damage is 
too widespread, and the amount of repair work too great, for everything 
to be repaired in time for the winter heating season. The fundamentals 
of supply and demand in the North American natural gas market already 
were tight before hurricanes Katrina and Rita. Consequently, any loss 
of supply--even a relatively small one--can have a disproportionate 
impact on natural gas prices over the winter. This tight supply and 
demand balance places extra emphasis on natural gas storage.
    While it is largely invisible to the public, the United States has 
a significant amount of natural gas storage scattered throughout the 
country. These storage facilities, typically located in depleted oil 
and gas fields, usually are filled during the warmer months when there 
is excess natural gas supply and pipeline capacity to move it. Storage 
fills are generally completed by November 1st, which is the beginning 
of the winter heating season. During the coldest winter days, which 
typically are the days of peak natural gas demand, storage withdrawals 
meet more than 50 percent of the daily natural gas load in some market 
areas.
    Prior to the hurricanes, storage fills were proceeding at total 
volumes above the five-year average. The hurricanes slowed storage 
fills somewhat, but volumes still remain ahead of the five-year 
average. On this first week of the winter heating season, the storage 
fill stands at about 3.1 trillion cubic feet--a robust number given the 
damage in the Gulf. The significant damage to industry and to homes and 
businesses in the Gulf region greatly reduced natural gas demand 
September and October. This loss of load partially offset the 
diminished natural gas production from the Gulf and freed up gas supply 
that could be diverted to storage in preparation for the upcoming 
winter.
    Still, it cannot be emphasized enough that storage supplements' but 
does not replace--natural gas flowing through the interstate pipeline 
network. Many of the interstate pipelines serving the Midwest, 
Northeast and Southeast draw their primary supplies from the Gulf 
region. There are physical limits on how much natural gas can be drawn 
from storage on a daily basis and it is assumed that storage will be 
withdrawn at its full capacity on a peak day. Therefore, if supply 
constraints limit the volumes of natural gas available for 
transportation, peak day conditions could create deliverability 
challenges in some markets. While peak day conditions could occur at 
any point during the winter, the risk of deliverability challenges will 
become greater as storage becomes increasingly depleted during the late 
winter months. This could create significant operational challenges for 
pipelines in late winter, particularly if cold weather, limited supply 
availability, and low storage cause customers to attempt to take more 
gas from a given pipeline than has been delivered to the pipeline on 
their behalf.
    I should also mention the importance of returning damaged natural 
gas processing facilities to service. As mentioned previously, natural 
gas processing plants remove the heavier hydrocarbons entrained within 
produced natural gas. These natural gas liquids include propane, ethane 
and butane. Once removed, there is a separate market for these liquids, 
principally in the petrochemical industry. Just as with oil refineries 
in the Gulf region, however, a number of natural gas processing plants 
were damaged by the hurricanes. Several of these facilities may be out 
of operation during most, if not all, of the winter.
    This presents another operational challenge for pipelines. A 
certain amount of unprocessed natural gas can be accepted into the 
natural gas pipeline network. If the quantity of heavier hydrocarbons 
in the gas stream becomes too high, however, these substances can 
``drop out'' of the natural gas stream as liquids and collect in 
pipelines and end-use equipment. This is a particular concern during 
the winter heating season when the lower ambient temperatures cause the 
temperature of the flowing gas to drop, increasing the volume of heavy 
hydrocarbons that will return to the liquid state. This phenomenon can 
cause safety and operational problems as slugs of liquids work their 
way through sensitive equipment. Therefore, as off-shore production 
facilities come back on line, it is also important to bring 
corresponding processing capacity back on line as well; otherwise, 
pipelines may be compelled to limit the volumes of unprocessed natural 
gas that can be accepted during the winter heating season in order to 
preserve the operational integrity of the transmission and distribution 
pipelines and protect end-users. Pipelines may be compelled to enforce 
their tariffs strictly (in this case, for gas quality) to protect 
system integrity, even if it means reducing the volumes of natural gas 
that can be delivered during peak demand periods.
                         winter supply analysis
    Because of our concern about these potential winter supply 
scenarios, INGAA retained an economic consultant, Energy and 
Environmental Analysis Inc. (EEA), to analyze the adequacy of natural 
gas supplies (including gas storage) for the upcoming winter. This 
study includes a detailed analysis of the effects on natural gas 
deliverability from Hurricanes Katrina and Rita. The primary objective 
of the study is to analyze the likelihood that, due to the effects of 
the hurricanes, individual natural gas markets (i.e., consuming 
regions) within North America could experience difficulties that would 
lead to supply curtailment for certain customers (primarily industrial 
users and electric generators).
    INGAA believes that the EEA study is noteworthy in several 
respects. First, the study is premised on EEA's Gas Market Data and 
Forecasting System, a model of the North American natural gas market 
that examines supply and demand balances at individual points within 
the natural gas infrastructure. This permits an analysis of individual 
natural gas markets that takes into account the particular features of 
the infrastructure and gas flows, rather than just making assumptions 
based upon nationwide aggregate supply and demand. EEA's model has been 
used for three widely referenced natural gas market studies in recent 
years: the 2003 National Petroleum Council study; the 2004 and 2005 
INGAA Foundation studies on natural gas infrastructure needs; and the 
2005 American Gas Foundation study.
    Second, the EEA study has benefited from broad participation by 
representatives from both government and industry. This has included 
natural gas industry representatives from individual pipeline 
companies, natural gas processing companies and natural gas producers. 
Trade association participants have included INGAA, the American Gas 
Association (AGA), the Natural Gas Supply Association (NGSA), the 
Independent Petroleum Association of America (IPAA) and the American 
Petroleum Institute (API). Federal agency participants have included 
representatives from the Department of Energy (DOE), the Energy 
Information Administration (EIA), the Minerals Management Service (MMS) 
and FERC. The input assumptions for the study represent the collective 
views of all these participants.
    One key point in the results is worth mentioning first. The EEA 
analysis concludes that, assuming curtailment plans work as expected, 
residential and commercial customers served by local distribution 
companies that hold firm transportation and gas supply entitlements 
will continue receiving natural gas service, sufficient to meet their 
requirements throughout the winter, even during periods of peak demand. 
These customers will receive natural gas this winter, albeit at higher 
prices. The study, however, does not, and cannot, account for 
individual cases where a particular LDC, municipal utility or gas 
marketer may experience difficulties because it has not adequately 
secured transportation or supply for the winter. Still, should they 
occur, such situations would be isolated.
    The EEA study examines three different hurricane recovery and 
supply scenarios this winter--a base case, a best case, and a worst 
case. These supply scenarios are then analyzed within the context of 
winter weather probabilities to determine the likelihood that 
particular consuming markets will experience stressed conditions as the 
weather turns colder. EEA assumes that an average of between 2.5 bcfd 
(best case) and 3.5 bcfd (worst case) of Gulf supplies will be missing 
from the market due to hurricane damage. This loss of supply is netted 
against supplies from other sources to determine an overall effect on 
gas supply. This will result in higher-than-normal gas commodity 
prices, even if the winter is relatively mild.
    EEA's analysis makes an important point that should not be lost on 
policymakers. That is, even before the hurricanes, natural gas supply 
and demand were very tightly balanced and there already was some 
potential for supply challenges this winter. The hurricanes simply have 
increased the probability that both industrial and power generation 
customers in certain markets may experience supply disruptions.
    The severity of winter weather will be a critical factor in 
determining how natural gas markets will balance. Industrial demand 
destruction, as a result of high commodity prices, will help maintain 
this balance to a point. Still, if the weather is colder-than-normal, 
the probability of gas supply curtailments becomes greater.
    What do we mean by ``gas curtailments?'' For purposes of the EEA 
study, the term is defined as follows: a curtailment situation occurs 
when the analysis indicates that gas supply into a market will be 
insufficient to meet all demand even after all economic alternatives 
have been exhausted. As gas commodity prices move higher due to tight 
supply and high demand, many customers will scale back their 
consumption and the market will re-balance. In some limited 
circumstances, however, economic forces alone might not be enough to 
balance the market. In these cases, certain customers must be removed 
from service for short periods in order for the market to balance. 
Generally speaking, these curtailments affect industrial and power 
generation customers.
    These curtailments would be localized. The likelihood of such 
curtailments would increase if winter weather is five percent or 
greater colder than normal. Historically, this type of weather occurs 
in one out of every seven winters.
    Curtailments, if any, are likely to be concentrated east of the 
Mississippi River, with the likelihood being greatest in the Northeast. 
This is because the United States east-of-the-Mississippi region is far 
more dependent on Gulf Coast natural gas supplies than is the rest of 
the country, and because the Northeast (compared to other regions) has 
fewer natural gas supply alternatives. Therefore, New York and New 
England have the highest probability of gas curtailments in all the 
scenarios, although other states might also be affected should the 
winter be colder than normal. (See Appendix 2)
    Delayed recovery of Gulf Coast supplies significantly increases the 
likelihood of curtailments as well, particularly on the East Cost. This 
is illustrated by the worst case scenario in the EEA analysis and 
highlights the need to facilitate Gulf Coast energy infrastructure 
recovery as quickly as possible.
    One final point about gas curtailments. If and when necessary, gas 
curtailments will not be a large percent of total winter natural gas 
load. Still, because such mandated interruptions would be concentrated 
within a particularly cold week or two, a significant part of the total 
industrial and power load within an affected market could be curtailed 
for that span of time.
                       short-term recommendations
    What can be done? As previously mentioned, the short-term 
imperative is repairing the infrastructure as quickly as possible. That 
means expediting permitting and approvals for repair work. It also 
means the various levels of government should consider the value of 
granting individual companies some forbearance from legal restrictions 
that might frustrate their ability to coordinate assessment and repair 
activities. The twin hurricanes have resulted in extraordinary damage, 
and extraordinary measures are needed to get systems repaired on a 
timely basis
    Also in the short-term, both the energy industry and the government 
must educate consumers in advance so they are prepared for higher bills 
and have the ability to implement strategies for conserving energy. 
This is important, because unlike the gasoline price that is posted at 
the local gas station, the consumer sees the price of natural gas after 
the fact when he or she receives a bill for the previous month's 
consumption. Many of you are already familiar with some of these 
measures, including weatherization of homes, regular inspections of 
furnaces and changing of filters, installing programmable thermostats 
and setting thermostat a couple of degrees cooler than normal. Funding 
the Low Income Heating Energy Assistance (LIHEAP) program is also 
critical in helping needy families cope with rising heating costs.
    The EEA analysis also points to the need to review curtailment 
programs. The last time that natural gas supply curtailments were a 
major issue--during the 1970s--FERC regulated interstate pipelines 
played a major role in instituting curtailments. Due to the 
restructuring of the natural gas industry, however, interstate 
pipelines no longer are gas merchants and pipeline tariffs no longer 
address supply curtailment based on end-use priority. Such curtailments 
now are largely the purview of state public utility commissions, and 
state regulators should be reviewing their plans and preparing to 
implement them if necessary. This would include coordinating any plans 
with local electric generators who would be some of the most likely 
customers to be curtailed.
    Wholesale natural gas customers should also be consulting with 
their suppliers about firm supply arrangements. This includes 
portfolios of storage, flowing supply, pipeline transportation and peak 
shaving. In the absence of such supply verification, wholesale 
customers--and in some cases, the retail customers served by such 
wholesale customers--may be in for some rude winter surprises.
                       long-term recommendations
    In the long-term, Mr. Chairman, we agree with many on this 
Committee that more must be done to diversify our supplies of natural 
gas. Hurricanes Katrina and Rita have clearly demonstrated the nation's 
high degree of reliance on the Gulf region to meet its energy needs. 
Other regions within the United States can, and should, be a part of 
the nation's energy supply and infrastructure development strategy. 
Yes, many groups have complained about the environmental risks 
associated with expanding offshore energy to include waters outside the 
western Gulf of Mexico. Still, after three significant hurricanes in 
two years, it is time to concede that apprehensions about the 
environmental consequences of offshore energy development are greatly 
overstated. The fact that we have not had significant environmental 
damage from off-shore production platforms after Ivan, Katrina and Rita 
must stand for something. Our national energy policy should not be 
premised on hypothetical problems or on assumptions based on incidents 
from 40 years ago.
    In addition, the United States must build new liquefied natural gas 
import terminals to keep pace with our demand for this fuel. Most of 
the new terminals that recently have been approved by FERC have are 
proposed to be constructed in the Gulf of Mexico region. While there 
are good reasons why this region is attractive, such as access to an 
extensive pipeline network, it stands out that the Gulf has been 
attractive for energy infrastructure development because it offers the 
``path of least resistance'' in terms of ``Not in My Back Yard'' type 
opposition. Perhaps the hurricanes, and the effects this winter on 
natural gas prices and the larger economy, will convince other regions 
in the United States of the importance of having a geographically 
diverse mix of these facilities.
    For both supply and infrastructure development, a re-focus on long-
term contracting is needed. When natural gas commodity prices were low 
due to excess supply, state public utility commissions discouraged 
their regulated gas LDCs from entering into long-term contracts for 
natural gas supply and transportation. Long-term contracts, however, 
are critical to financing and developing new supplies and 
infrastructure (pipelines, storage and LNG terminals). Long-term 
contracts also are an insurance policy against high prices and 
volatility. A joint task force representing the National Association of 
Regulatory Utility Commissioners (NARUC) and the Interstate Oil and Gas 
Compact Commission (IOGCC) recently produced a set of recommendations 
intended to encourage a return longer-term contracting in the natural 
gas industry; INGAA urges state commissions to review the NARUC/IOGCC 
report and to support more balanced supply and transportation contract 
portfolios for regulated utilities.
    Finally, it is worth examining the factors that have precluded 
electric generators from installing dual-fuel capability when building 
a gas-fired power plant. Over the last decade, dual-fueled facilities--
facilities that can operate on both natural gas and fuel oil--have been 
discouraged by emissions limits and by the difficulty in siting oil 
storage facilities on site. Also, the rules in some electric power 
markets provide such generators no assurances that the additional 
capital cost of such facilities can be recovered in the price received 
for electricity. These factors have compelled developers to build power 
plants totally dependent on natural gas. These same market rules have 
discouraged electric generators from contracting for firm natural gas 
transportation and storage service. Should natural gas supplies remain 
tight this winter, these facilities will face the choice of either 
paying huge fuel charges, or not running at all
                               conclusion
    Some have questioned whether the energy industry is investing 
enough capital into the North American market to develop supply and 
mitigate prices in the long-term. Mr. Chairman, while I can speak only 
for the interstate pipeline sector of the industry, I want to assure 
you that we are committed to this market long-term and are putting our 
capital into this market as a result. An INGAA Foundation report 
released last year suggested that the industry would need to invest 
approximately $61 billion between now and 2020 in order to keep pace 
with demand. This is for natural gas infrastructure--pipelines, storage 
and LNG terminals--in the United States and Canada. As an industry we 
are moving forward with that investment, and I am including a list of 
the proposed projects announced in 2005 as an example. (See Appendix 3)
    Before I conclude, I want to suggest some public policy responses 
that should not be undertaken. During a crisis, it is easy to overreact 
in ways that are ultimately counterproductive. The first suggestion I 
would like to leave you with is this: please do not try to regulate 
commodity prices. This country actually did regulate natural gas prices 
for many years, resulting in artificial supply shortages and a 
misallocation of resources. Similarly, the government should not 
attempt to pick winners and losers in allocating scarce supplies among 
end-users. Some have debated limiting the use of natural gas for 
electric generation. This too was tried in the past and failed 
miserably. While it can be painful in the short run, the market really 
does the best job of efficiently allocating scare resources and sending 
the right price signals that will solve supply problems.
    Mr. Chairman and Members of the Subcommittee, I thank you once 
again for the opportunity to testify, and I will be happy to answer 
your questions.

    Mr. Burgess. Thank you, Mr. Wright. Mr. Castelli.

                 STATEMENT OF BRIAN T. CASTELLI

    Mr. Castelli. Thank you, Mr. Burgess. Thank you for 
inviting us here to testify today. My name is Brian Castelli. I 
serve as the Executive Vice President and Chief Operating 
Officer of the Alliance to Save Energy.
    We are a bipartisan, nonprofit coalition of more than 90 
businesses, government, environmental, and consumer leaders. 
The Alliance's mission is to promote energy efficiency 
worldwide to achieve a healthier economy, a cleaner 
environment, and a greater energy security. Representative 
Ralph Hall and Ed Markey of your committee are both on our 
board as Vice Chairmen.
    I respectfully request that a full list of the Alliance's 
board of directors, and its associate members, be included in 
the record as part of this testimony.
    Mr. Burgess. Without objection.
    Mr. Castelli. While some of you may find it odd to see an 
energy efficiency organization represented on a panel with 
supply side trade associations, rather than with energy 
consumers, the key message I want to leave with you today is 
that energy efficiency is our Nation's greatest energy 
resource.
    Past energy efficiency measures produced more energy than 
any other single resource to meeting our energy needs of this 
Nation, including oil, natural gas, coal, or nuclear power. 
Energy efficiency is the quickest, cheapest, and cleanest way 
to balance energy supply and demand. Energy efficiency helps 
meet our energy needs without hurting the environment. 
Furthermore, it is not imported, it is invulnerable to supply 
disruptions, and generally costs much less than adding energy 
supplies.
    The need to increase our energy efficiency resource has 
never been more clear. A typical Midwest or Northeast household 
may spend over $1,000 more for gasoline next year, and $700 
more for winter heating fuels than it did a couple of years 
ago. I have three requests of you today to help energy 
efficiency address shortages of natural gas and heating oil.
    First, immediate steps are needed to address winter heating 
demand and prices, and to help in rebuilding in the wake of the 
hurricanes. The fastest way to address an energy supply 
shortage, and probably the only way to have a significant 
impact on prices this winter, is consumer education. When a 
series of rolling blackouts and electricity price spikes hit 
California in 2000 and 2001, the State undertook a massive 
outreach campaign that reduced peak summer demand by 10 percent 
in less than a year, thus helping to avoid future shortages. 
The Energy Bill authorizes a similar national program. We need 
at least $10 million in immediate funding for outreach and 
education this winter, as well as additional funding for the 
Energy Star program.
    In the wakes of Hurricane Katrina and Rita, hundreds of 
thousands of homes will be rebuilt with Federal aid. The most 
reasonable course of action is to build these homes so that 
they are extremely energy efficient. They should at least be 
required to earn the Energy Star label. If that course of 
action is chosen, the aid recipients will not have to turn 
around and ask for more help to pay high energy bills, and 
those houses then become part of the energy solution, not part 
of the problem. In addition, more Federal assistance should be 
provided to the Gulf States to update their building energy 
codes, and to train builders and inspectors, so that all the 
new housing meets minimum standards.
    Second, we need to work on the Energy Bill that was enacted 
in August. That bill is really an important to-do list, rather 
than a completed product. The Energy Bill included important 
tax incentives for highly energy efficient new buildings, 
vehicles, and equipment. However, to make these incentives 
effective, we need the implementing rules out as soon as 
possible. We need to move up the effective dates, and we need 
to extend the incentives beyond the 2 years which most are 
scheduled to last.
    The Energy Bill included 15 important new appliance 
efficiency standards, though we remain very concerned, since 
DOE is years behind in setting about 20 standards required 
under previous laws. This program requires effective and 
vigilant oversight, as well as increased funding. Other 
programs in the Energy Bill that need funding to have a major 
impact on natural gas and oil needs are detailed in the written 
testimony I have provided to this committee.
    Let me quickly note here, though, for the record, that 
existing Federal programs also have a tremendous potential for 
cost effective energy savings. Yet, the 2006 budget request for 
energy efficiency is down 14 percent just since 2002. For these 
policies and programs to have an impact, they need 
implementation, oversight, and funding.
    Third, although I am hesitant to broach this subject, we 
need a new Energy Bill. In the Energy Policy Act of 2005, there 
is a gaping hole where transportation policy should be. The 
Alliance estimates that the Energy Bill will save virtually no 
oil. We cannot afford to wait 13 years for another Energy Bill 
to fill this hole. The economic, environmental, and national 
security costs of our insatiable oil demand are too high.
    The Alliance recommends consideration of two policies that 
could be as effective and as straightforward increase in CAFE 
standards, and we hope will be much more politically palatable. 
First, is to close a number of the loopholes that weaken 
existing CAFE standards. Several reforms are needed to bring 
actual fuel efficiency closer to current standards. One, base 
CAFE on realistic testing of fuel economy. Two, treat SUVs and 
minivans like the passenger vehicles they are. Three, include 
heavier SUVs under CAFE. And four, treat dual fuel vehicles 
based on actual alternative fuel use.
    Second, a new, innovative approach to efficiency of cars 
and light trucks could be a national feebate system. Such a 
system would impose a national security surcharge, or fee, on 
inefficient vehicles, and then use those funds collected to 
provide a rebate to fuel efficient vehicles. There would be 
cost to the Federal Government, and it would not be a net tax 
increase. A feebate would create an incentive for automakers to 
use fuel efficient technologies in the vehicles they produce, 
and create an incentive for consumers to buy more efficient 
vehicles.
    A number of policies to save natural gas also should be 
reconsidered in light of the sharply higher natural gas prices. 
Energy efficiency is our largest energy resource, and it should 
be our first energy priority. We hope you will both work to 
ensure the fine energy provisions of the last Energy Bill are 
fully funded and implemented, and use the increasing pressure 
for action to fill the gaping hole in that bill.
    I would be pleased to answer any questions.
    [The prepared statement of Brian T. Castelli follows:]
 Prepared Statement of Brian T. Castelli, Executive Vice President and 
                      COO, Alliance to Save Energy
                              introduction
    My name is Brian T. Castelli and I serve as the Executive Vice 
President and Chief Operating Officer of the Alliance to Save Energy, a 
bipartisan, nonprofit coalition of more than 90 business, government, 
environmental and consumer leaders. The Alliance's mission is to 
promote energy efficiency worldwide to achieve a healthier economy, a 
cleaner environment, and greater energy security. The Alliance, founded 
in 1977 by Senators Charles Percy and Hubert Humphrey, currently enjoys 
the leadership of Senator Byron Dorgan as Chairman; Washington Gas 
Chairman and CEO James DeGraffenreidt, Jr. as Co-Chairman; and 
Representatives Ralph Hall, Zach Wamp and Ed Markey and Senators 
Bingaman, Collins and Jeffords as its Vice-Chairs. Attached are a list 
of the Alliance's Board of Directors and its Associate members, which I 
respectfully request be included in the record as part of this 
testimony.
             the time is now for energy efficiency measures
    The startling and immediate effects of Hurricanes Katrina and Rita 
on energy prices have dramatically highlighted our need to bring energy 
supplies and energy demand into balance. In the immediate wake of 
Katrina, gasoline prices nationwide shot up over $3 a gallon for the 
first time. While they have since dropped slightly, they are still 
almost double prices at the beginning of 2004. Heating oil prices have 
risen similarly. Natural gas prices have gone up even more. Spot 
natural gas prices doubled between 2002 and the beginning of this year, 
doubled again by the end of August, and are still rising to record 
highs.
    These prices are causing real hardship for the American people. At 
current gasoline prices, a typical two-car household would spend over 
$1,000 more for gasoline than it did in 2004. And with winter 
approaching, the squeeze on American wallets will only increase. The 
U.S. Energy Information Administration expects natural gas heating 
costs for a typical Midwestern household to rise $500 (61 percent) this 
winter compared to last year and $700 (107 percent) compared to the 
1999-2004 average. Northeastern heating oil costs are expected to rise 
$400 (31 percent) compared to last year, and $700 (80 percent) compared 
to the 1999-2004 average. Some households already living on a tight 
budget will not be able to pay these costs and still have adequate 
funds to pay for food and rent. At the same time, natural gas prices 
are forcing chemical and fertilizer companies to shut down plants in 
the United States and move those jobs overseas.
    While the hurricanes have highlighted the problem, the fundamental 
causes are not going away so quickly. Energy prices are soaring because 
America's gluttonous energy consumption is outstripping supply. The 
United States has only 2 percent of the world's known oil reserves, and 
5 percent of the world's people, but uses 25 percent of the world's 
oil. And now the same pattern is being repeated with natural gas.
    Although measures to increase energy supplies are necessary, we 
must not fool ourselves into believing that we can produce our way out 
of the problem. U.S. production of oil and of natural gas is lower than 
it was in 1970, while our energy consumption has steadily risen. Even 
the National Petroleum Council has concluded that natural gas supplies 
from traditional North American production will not be able to meet 
projected demand, and that ``greater energy efficiency and conservation 
are vital near-term and long-term mechanisms for moderating price 
levels and reducing volatility.'' It is time to turn serious attention 
to the demand side of the equation, to reducing our energy use.
        energy efficiency is america's greatest energy resource
    Energy efficiency is the nation's greatest energy resource--
efficiency now contributes more than any other single energy resource 
to meeting our nation's energy needs, including oil, natural gas, coal, 
or nuclear power. The Alliance to Save Energy estimates that without 
the energy efficiency gains since 1973 we would now be using at least 
39 quadrillion Btu more energy each year, or 40% of our actual energy 
use. Much of these savings resulted from federal energy policies and 
programs like appliance and motor vehicle standards, research and 
development, and the Energy Star program.
    Energy efficiency is the quickest, cheapest, and cleanest way not 
only to tackle our current energy cost issues, but also to meet the 
anticipated future growth in energy demand in the U.S. The enormous 
contribution of energy efficiency to meeting our energy needs is 
achieved with little or no negative impact on our wilderness areas, our 
air quality, or the global climate. Energy efficiency enhances our 
national and energy security by lessening requirements for foreign 
energy sources. Further, energy efficiency is invulnerable to supply 
disruptions; is rarely subject to siting disputes; is available in all 
areas in large or small quantities; and generally costs much less than 
it would to buy additional energy.
    Energy-efficiency and conservation measures have a proven track 
record of balancing demand and supply much faster than drilling, 
constructing power plants, or new import facilities. When a series of 
rolling blackouts and electricity price spikes hit California in 2000-
2001, the state undertook a massive electricity efficiency outreach 
campaign that reduced peak summer power demand by 10 percent and 
reduced overall electricity use by 7 percent in less than a year, thus 
helping avoid further shortages. The cost was just 3 cents per kWh. The 
American Council for an Energy-Efficient Economy estimates that a small 
decrease in natural gas demand (2-4 percent) could result in a decrease 
in wholesale natural gas prices of as much as 25 percent over the next 
few years, with vast savings for consumers and energy-intensive 
industries.
              the time is now to make the energy bill real
    Many of the policies needed to increase use of energy efficiency as 
a major energy resource are enacted, and many of the programs are in 
place. But these policies must be carried out, and the programs must be 
funded, or they will do no good. In particular, the recently enacted 
energy bill (the Energy Policy Act of 2005, P.L. 109-58) is really an 
important ``to-do list,'' rather than a completed product. The Alliance 
to Save Energy estimates that the new energy law could save 5 percent 
of all U.S. energy use by 2020, and a higher percentage of natural 
gas--if it is fully implemented and funded. If the law is widely 
ignored, the savings will be a fraction of that amount.
    Existing federal programs also have a tremendous potential for 
energy savings. A 2001 National Research Council report found that 
every dollar invested in 17 Department of Energy (DOE) energy 
efficiency research and development (R&D) programs returned nearly $20 
to the U.S. economy in the form of new products, new jobs, and energy 
cost savings to American homes and businesses. Environmental benefits 
were estimated to be of a similar magnitude. DOE itself estimates that 
its efficiency and renewables programs will result in major savings, 
including $134 billion in energy bills, 157 GW of avoided new 
conventional power plants, 1.9 quads of natural gas, and 213 MMTC of 
greenhouse gas emissions in 2025. Yet the fiscal year 2006 budget 
request for energy efficiency is down 14 percent after inflation just 
since 2002, and core research and development funding (excluding grants 
and the fuel cell FreedomCar program) is down 31 percent in those four 
years.
    Following are some key implementation and funding needs for 
programs that have the potential to save large quantities of natural 
gas and, in some cases, oil. Note that one of the most effective ways 
of reducing natural gas consumption is to reduce electric demand, as 
most peaking power plants and most new power plants are fueled by 
natural gas. Similarly, any reduction in the consumption of oil 
products (gasoline, jet fuel, etc) helps reduce the stress on heating 
oil supplies.
    Consumer education: As was demonstrated in California, the fastest 
way to address an energy supply shortage, and probably the only way to 
have a significant impact on prices this winter, is consumer education 
and associated incentive programs. In particular, there is an immediate 
need for funding for the energy efficiency public information campaign 
authorized in the energy bill section 134. This important program was 
authorized by the Congress at $90 million per year, from fiscal year 
2006 through fiscal year 2010. It is intended to provide consumers with 
energy saving tips like maintaining and repairing heating and cooling 
ducts and equipment, insulating and weatherizing homes and buildings, 
properly maintaining tires and cars, and purchasing energy-efficient 
products and equipment. Importantly, the program could ensure that 
consumers and businesses are made aware of the important energy-
efficiency tax incentives included in the energy bill (see below). It 
also could be coordinated with, and could support, other programs, 
including the appliance rebate program and state demand-side management 
programs. Coupling such efforts would optimize use of federal funding 
and ensure the greatest impact in terms of changing consumer behavior.
    Additional funding is equally important for the Energy Star 
program. Energy Star is a successful voluntary deployment program at 
EPA and DOE that has made it easy for consumers to find and buy many 
energy-efficient products. Energy Star is the best demonstration of how 
effective government consumer education can be. For every federal 
dollar spent, Energy Star produces average energy bill savings of $75 
and sparks $15 in investment of new technology. Last year alone, 
Americans, with the help of Energy Star, prevented 30 million metric 
tons of greenhouse gas emissions--equivalent to the annual emissions 
from 20 million vehicles, and saved about $10 billion on their utility 
bills.
    Tax incentives: The energy bill included important tax incentives 
for highly energy-efficient new homes, improvements to existing homes, 
commercial buildings, heating and cooling equipment, appliances, and 
hybrid vehicles. These incentives for consumers and businesses have the 
potential to help transform markets to embrace energy-efficient 
technologies and thus to help the best buildings, vehicles, and 
equipment become mainstream.
    However, there are several immediate needs to make these incentives 
effective. First, IRS, with the assistance of DOE, must get the 
implementing rules out as soon as possible. Many important details and 
interpretations were left to the agencies. We also hope these rules 
will make determining eligibility and applying for these incentives as 
simple as possible. Without clear rules and procedures, only ``free-
riders''--those who were going to buy the products anyway--likely will 
take a chance on the incentives, and the opportunity for meaningful and 
sustainable market transformation will be lost.
    Second, we need to move up the effective date of the incentives 
from January 1, 2006. Under current law consumers that want to put in a 
better furnace or new windows need to wait until next year, well into 
the winter heating season, if they want to take advantage of the 
incentives. We already have begun consumer education programs aimed at 
winter heating; however, we are reluctant to inform consumers of the 
``soon-to-be available'' incentives, as purchases that are important to 
managing energy use and costs this winter may be delayed until the 
current effective date of the incentives. This creates a conundrum, as 
the incentives are an important tool to change consumer behavior, but 
represent a potential barrier to immediate action, which is what we are 
seeking to encourage.
    Third, we need to extend the incentives beyond the two years most 
are scheduled to last. It is almost impossible to plan and build a 
commercial building in two years, so large segments of the market are 
effectively excluded from the incentive by the short time horizon. For 
the best-selling hybrid vehicles, the tax incentives may have an even 
shorter horizon, as the law includes a per-manufacturer phase-out 
triggered by the sale of 60,000 eligible vehicles. The incentives were 
mostly planned to last four to five years, and their effectiveness will 
be multiplied if the eligibility is extended and the manufacturer 
vehicle volume cap is removed or increased.
    Appliance standards: National appliance and equipment efficiency 
standards provide an efficiency baseline that American consumers can 
trust, provide uniform national rules for manufacturers, and slash 
wasteful energy consumption with one broad and effective stroke. The 
federal appliance standards program has been among the most effective 
of all efficiency measures. The program already has saved an estimated 
2.5 percent of all U.S. electricity use and saved consumers billions of 
dollars in energy bills.
    The energy bill includes a package of fifteen new energy-efficiency 
standards that were negotiated between energy-efficiency advocates, 
product manufacturers, and states. DOE is required to set standards for 
additional products, as well as to update many of the standards set in 
law.
    The Alliance is pleased that DOE recently codified the legislated 
standards in rules. However, we remain very concerned that DOE is years 
behind the statutory deadline for setting about 20 standards required 
under previous laws. For example, an updated standard for residential 
furnaces and boilers was due in 1994. This is one of DOE's highest 
priorities as it is one of the most effective ways to save natural gas. 
The most recent delay, announced last December, means that DOE will not 
set this standard until late 2007 at the earliest, and that the 
standards will not go into effect until at least 2010. According to the 
American Council for an Energy-Efficient Economy, each year of delay in 
just three of these national standards--residential furnaces and 
boilers, distribution transformers, and commercial air conditioners and 
heat pumps--has locked in $7.1 billion in higher energy costs for 
consumers and businesses.
    Largely due to the delays in the DOE program, a number of states 
are setting state standards on products not regulated by the federal 
government in order to reduce the cost, reduce the environmental 
impact, and increase the reliability of their energy systems. In 
addition, the work on state standards has been a key incentive to 
reaching agreements on federal standards.
    The new energy bill adds additional standards to DOE's list of 
responsibilities. Even the legislated standards require test procedures 
that were not included in DOE's recent rulemaking. This program 
requires effective and vigilant oversight. In addition, as establishing 
standards requires a rigorous, time consuming, and costly rulemaking 
process, increased funding to the DOE standards program is critical to 
ensuring that the enormous potential of this program is achieved.
    We are disappointed that this committee recently amended the budget 
reconciliation bill to preempt all state standards on digital 
television adaptors, opting instead for very weak efficiency criteria 
on those DTAs subsidized by the federal government. This action, which 
preempts effective state DTA standards that already are in place or are 
under consideration by states, would establish a terrible precedent as 
well as increasing energy use and costing consumers millions of 
dollars. I hope the committee will reconsider its support.
    Building codes assistance: While residential and commercial 
building codes are implemented at the state level, the states rely on 
DOE for technical specifications, training, and implementation 
assistance. Full adoption of and compliance with up-to-date building 
codes could save almost as much energy as appliance standards. The 
energy bill includes an authorization of $25 million per year for 
building codes assistance to states. Part of the funding increase would 
be for a new program to encourage states to adopt the latest codes and 
then assist them in achieving high rates of compliance. Such assistance 
is especially critical in the Gulf states to ensure that the massive 
rebuilding in the wake of the hurricanes is performed at least to 
minimally acceptable efficiency standards. We urge funding for this 
program.
    In addition, we are concerned that DOE is significantly behind in 
providing information and guidance to the states on both residential 
and commercial building energy codes. DOE is required within one year 
of a residential or commercial model energy code update to make a 
determination on whether that update save energy; however, DOE still 
has not made the required determinations on the 2003 residential IECC, 
the 2004 Supplement, the newly adopted 2006 IECC, the 2001 ASHRAE 
commercial standard, or the 2004 ASHRAE standard. DOE must apply the 
necessary human and financial resources to ensure timely determinations 
on the codes.
    State and utility energy-efficiency programs: Over the last two 
decades, states worked with regulated utilities using ``Integrated 
Resource Planning'' and demand-side management programs to avoid the 
need for about 100 300-Megawatt (MW) power plants. However, utility 
spending on public benefit programs nationwide has been cut 
significantly since the mid-1990's. In recent years some states have 
adopted innovative policies to rebuild these programs, including public 
benefits funds, energy efficiency performance standards, incentive rate 
structures, and priority in infrastructure planning. But the benefits 
of these programs have not spread to many other states.
    The energy bill requires a study by DOE along with the National 
Association of Regulatory Utility Commissioners (NARUC) and the 
National Association of State Energy Officials (NASEO) of ``best 
practices'' among the states in demand side management (DSM) and other 
energy efficiency resource programs (Sec. 139). In addition, it 
authorizes $5 million per year for an innovative new pilot program to 
provide funding assistance to several states (3 to 7) to assist in the 
design and implementation of energy efficiency resource programs 
designed to lower electricity and natural gas demand by 0.75% a year. 
Again, funding is needed for this program.
    Federal energy management: America's largest, single energy 
consumer is the federal government. According to the 1998 Alliance to 
Save Energy report, Leading by Example: Improving Energy Productivity 
in Federal Government Facilities, the federal government wastes $1 
billion in taxpayer dollars each year on its buildings that use energy 
inefficiently.
    DOE's Federal Energy Management Program (FEMP) is a rare example of 
a program that actually saves the government money. At an average cost 
of $20 million per year, FEMP has helped cut federal building energy 
waste by nearly 21 percent from 1985-1999--a reduction that now saves 
federal taxpayers roughly $1 billion each year in reduced energy costs. 
However, much more can be done, and the added targets, standards, and 
authorities in the energy bill will help.
    We are especially pleased that the energy bill extended authority 
for Energy Savings Performance Contracts (ESPCs) through FY 2016. This 
unique program allows federal agencies to contract with the private 
sector to upgrade the efficiency of federal buildings. The contractors 
put up the money for the improvements and are paid back out of the 
utility bill savings. By law the payments can be no more than the 
savings. The agency saves energy at no additional cost, the companies 
build their business and create jobs, and the government saves money 
and pollution. Unfortunately, the ESPC program is still trying to get 
back on its feet after its authorization lapsed for a year in 2004.
    The advice and assistance of FEMP is critical to the success of 
this program. FEMP support also is necessary for successful 
implementation of other federal energy management provisions in the 
energy bill--to provide guidance on building metering (``You can't 
manage what you can't measure''), help agencies comply with the product 
procurement rules, and help agencies meet the overall energy reduction 
targets. Without FEMP's support, the federal energy management title 
probably is not worth the paper it is printed on. More funding is 
needed to ramp up ESPC use and to undertake these other activities.
             the time is now to move beyond the energy bill
    Although the energy bill includes a number of programs with the 
potential to save natural gas, of course many other effective policies 
were not included. And even though the major authors of the bill all 
cited high gasoline prices as a key rationale for the bill, there is a 
gaping hole where transportation policies should be. The Alliance 
estimates that the energy bill will save virtually no oil--small 
savings from the hybrid tax credit and other policies will be roughly 
canceled out by the extension of the fuel economy standard loophole for 
``dual-fueled'' vehicles. This hole was noted by virtually every major 
editorial page in the country, and even noted by the authors of the 
bill as gasoline prices jumped even higher in the wake of Hurricane 
Katrina.
    We cannot afford to wait thirteen years for another energy bill to 
fill in this hole, or another thirty years for an effective 
transportation policy. The economic, environmental, and national 
security costs of our insatiable oil demand are too high. While the 
Alliance recognizes that politically this is one of the most difficult 
areas to address, we must act now to bring our oil use under control.
                additional opportunities for oil savings
    The Alliance recommends consideration of two policies that could be 
as effective as a straightforward increase in Corporate Average Fuel 
Economy (CAFE) standards, and we hope will be more politically 
palatable:
    Close CAFE loopholes: CAFE standards passed by Congress in 1975 led 
to a 70 percent increase in America's gas mileage over the subsequent 
decade. However, CAFE standards have remained static for almost two 
decades due to political gridlock. The current standards of 27.5 miles 
per gallon for automobiles and 21 mpg for light trucks are roughly the 
same as in the mid-1980s. Furthermore, real on-road fuel economies are 
much lower than those numbers would suggest--the average fuel economy 
of cars and light trucks is only around 20 mpg. And as the sales of 
SUVs have exploded, average vehicle fuel economy has actually declined 
since 1988. Even if the political will to raise CAFE standard numbers 
does not exist, there are several reforms that could close major 
loopholes and thereby bring actual fuel economies closer to standards 
already required under existing law:

 ``Truth-in-testing'' loophole: By law, CAFE is based on the fuel 
        economy tests that were used for model year 1975. EPA 
        recognized that those tests are inaccurate, and in 1984 started 
        reducing reported fuel economies by about 15%. Because driving 
        patterns have changed, real gas mileage is likely 20-25% below 
        CAFE numbers. Testing procedures for CAFE need to be updated to 
        reflect increased congestion, higher speed limits, use of air 
        conditioning, more powerful vehicles, and other changes.
 ``SUV'' loophole: When light trucks were given a lower standard, 
        pickup trucks and vans were used primarily for businesses and 
        farming, and represented only about 20% of vehicles sold. 
        Today, about half of all light-duty vehicles sold in America 
        qualify as ``light trucks'' for CAFE. Most of those are SUVs 
        and minivans, most are used as passenger or family vehicles, 
        and they average roughly 40% more fuel for each mile driven 
        than the average passenger car. SUVs and minivans should be 
        reclassified as what they are: passenger vehicles.
 ``Hummer'' loophole: CAFE standards only apply to vehicles under 
        8,500 pounds (gross vehicle weight). In fact, EPA does not even 
        test or report the fuel economy of larger vehicles, yet their 
        mileage is generally much lower. Manufacturers are selling more 
        and more of these super-large SUVs and pickup trucks, such as 
        GM Hummers and Ford Excursions. CAFE standards should cover 
        these heavier vehicles.
 ``Dual fuel'' loophole: Automakers that produce vehicles that can run 
        either on gasoline or on an alternative fuel, usually ethanol, 
        can claim CAFE credit as if the vehicles ran on the alternative 
        fuel one-half of the time. Unfortunately, dual fueled vehicles 
        today run on gasoline 99% of the time. With only a few hundred 
        ethanol fueling stations, the infrastructure does not exist to 
        supply these vehicles with ethanol. This credit has allowed 
        manufacturers to put more gas guzzlers on the road, and thus 
        increases gasoline use. It should be modified to require actual 
        use of the alternative fuel.
 Vehicle fuel use ``feebate'': A new, innovative approach to 
        efficiency of cars and light trucks is a national ``feebate'' 
        system. Such a system would impose a national security 
        surcharge, or ``fee'' on inefficient vehicles, and then use the 
        funds collected to provide a ``rebate'' to fuel efficient 
        vehicles.
    How would a national feebate work? In one approach, a fee or rebate 
would apply to manufacturers of all new light-duty passenger vehicles--
including SUVs and minivans. The amount would be based on 25 cents per 
gallon of gasoline estimated to be used over the lifetime of the 
vehicle. The fee or rebate would then be determined relative to a mid-
point fuel economy. This dividing line between fees and rebates would 
be set each year such that the total fees would just pay for all the 
rebates, so there would be no net revenue or cost to the government.
    A feebate would create an incentive for manufacturers to use fuel-
efficient technologies in the vehicles they produce, and hence should 
increase the availability of efficient vehicles, as well as creating an 
incentive for consumers to purchase more efficient vehicles. As fuel 
economies increased, the mid-point fuel economy would be ratcheted up, 
creating an incentive for continual improvement, but never out of line 
with the existing market.
            additional opportunities for natural gas savings
    As I mentioned, there also are a number of other policies to save 
natural gas that should be reconsidered in light of sharply higher 
natural gas prices. The Alliance recommends consideration of two 
additional sets of policies.
    Federal building codes: Although the energy bill requires new, 
stricter standards for energy efficiency in buildings owned by the 
federal government, it passed over several opportunities to improve 
standards for buildings regulated by or paid for by the federal 
government. These standards could help transform the housing market and 
make the federal government into a market leader rather than a market 
laggard. They include:

 Manufactured housing: Even before the hurricanes, ``mobile homes'' 
        accounted for 131,000 buildings last year, about one in twelve 
        new homes. Because they are manufactured in central factories, 
        they are regulated not by the states but by the federal 
        Department of Housing and Urban Development (HUD). Like many 
        states, HUD is years behind in adopting up-to-date building 
        codes--their standard has not been modified since 1996. These 
        buildings are used like site-built homes. There is no reason 
        they should not meet the same current model energy code. 
        Setting this floor would reduce the energy bills of mobile home 
        owners, many of whom are low income and many of whom rely on 
        federal LIHEAP assistance, by 9 percent.
 Federally subsidized housing: New public housing and new housing with 
        federally assisted mortgages also must meet a federal standard, 
        currently the 1992 Model Energy Code as set in the Energy 
        Policy Act of 1992. This standard should be updated to the most 
        recent model codes. Rebuilding with federal subsidies in the 
        wake of the recent hurricanes and other natural disasters also 
        should be subject to a federal standard to ensure recipients 
        receive high-quality homes and that neither the victims nor the 
        federal government pay for unnecessarily high energy bills. To 
        ensure cost-effective energy savings based on criteria with 
        which local builders and manufacturers are already familiar, 
        both manufactured and site-built homes built with federal 
        disaster assistance should qualify for the Energy Star label.
 Privatized military housing: About 37,000 units of housing are being 
        built each year with federal assistance in order to move 
        service members out of the barracks and into newer private 
        housing. The federal government indirectly pays the energy 
        bills through an energy allowance. We should require that this 
        housing too qualify for the Energy Star label.
    State and utility energy-efficiency programs: As described above, a 
number of states are implementing innovating energy-efficiency policies 
and funding mechanisms. Several states have recently passed an energy 
efficiency resource standard (EERS), requiring electricity utilities to 
meet customer needs in part through demand-side management (energy 
efficiency and load reduction) programs rather than by constructing new 
facilities and purchasing energy. An EERS sets a specific target for 
demand or use reduction due to DSM programs, and requires monitoring 
and verification of the program savings. The programs have generally 
been found to save electricity much more cheaply than it could be 
generated and delivered. Several of the states are now implementing an 
EERS as part of or alongside renewable electricity generation 
standards.
    The Senate bill included a requirement that state PUCs consider 
this and other energy efficiency policies. This directive also was 
included in the Energy Efficiency Cornerstone Act (HR 3263), sponsored 
by the Alliance Vice-Chairs in the House, Reps. Wamp, Hall, and Markey, 
and by a number of other members including Reps. Allen, Sherrod Brown, 
Gonzalez, Green, Murphy, and Heather Wilson. This provision could be an 
effective tool to save natural gas around the country. We urge its 
renewed consideration.
                               conclusion
    Energy efficiency is our largest energy resource, and it should be 
our first energy priority. American consumers need a balanced energy 
policy that takes aggressive steps to save energy wherever and whenever 
it is cost-effective and feasible.
    Many of the policy options identified by the Alliance, such as 
standards, tax incentives, and federal energy management, have been 
proven effective on the national level. Federal programs that support 
research, development, and deployment of energy-efficient technologies 
also have proven effective and deserve greater funding. Other policies, 
such as those targeted at the transportation sector, are sorely needed 
to ensure a secure and sustainable energy future in the U.S..
    The Alliance to Save Energy applauds the fact that this committee 
is willing to wade back into the rough waters of energy policy. With 
respect to energy efficiency provisions, which must be a cornerstone of 
any such energy policy, we hope you will both work to ensure the fine 
provisions of the last energy bill are fully funded and implemented, 
and use the increasing pressure for action to fill the gaping holes in 
that bill. Additional administrative and legislative action to save 
natural gas and oil is the only way to assure that we give the American 
people immediate, cost-effective and sustainable assistance in 
addressing spiraling energy costs and an ever-less secure energy 
future.

    Mr. Burgess. Thank you, Mr. Castelli, for your testimony. 
With the 4 hours that we have spent on energy efficiency for 
ceiling fans here in this committee earlier in the year, I 
don't look forward to another Energy Bill, but you know what, 
you may get your wish.
    Mr. Davidson, I asked a question of one of the members of 
the other panel earlier, about the over, you know the Bush 
Administration drill anywhere, any time, on anything. But in 
the Clinton Administration, they had over 2,400 drilling 
permits in the Rocky Mountains. In the Bush Administration, 
under 1,500. So at this point, when supply is more important 
than ever, can you kind of help us understand why that would 
be?
    Mr. Davidson. I think clearly, drilling has been increasing 
in the Rocky Mountains, and it is an area that has demonstrated 
great resources for our country. And so clearly, the rig 
activity is at very high levels, but we continue to build a 
backlog of permit requests. And as I noted in the testimony, we 
now have some 3,000 permits in backlog.
    Clearly, at today's prices, the industry sees tremendous 
opportunity, particularly in some of these new areas that have 
tighter gas, but a lot of gas potential, and we have a great 
desire to continue to pursue the drilling programs. They have 
made progress. There has definitely been some progress in 
trying to speed up permit processing. But I think it, in the 
case of the Federal agencies, in some instances, they have 
needed additional funding and resources to be able to handle 
the volume of activity.
    Many of these are short duration wells, so they end up 
being very high volume. We are in the midst now of drilling 
shallow wells that sometimes will only take a week to drill, 
and so it results in a high volume of activity.
    Mr. Burgess. Very well. You described the industry as being 
price takers. I always thought that was doctors and farmers, 
but Congress, I would expect, would have a difficult time 
seeing a powerful industry like yours as a price taker. Can you 
expound on that, and explain the nature of the natural gas or 
oil marketplace, so we can understand that statement a little 
bit better?
    Mr. Davidson. Well, I think it is, when it gets to oil, it 
is perhaps even simpler, because oil is a global market that we 
supply and demand, and it is actually a very diverse industry. 
And certainly, when we look at it from the independent sector, 
which is basically companies that explore for, find, and 
produce, we basically just produce in the pooling points. And 
as the market sees supply and demand at those points, and 
prices are established through supply and demand, we basically 
just sell into that market.
    I would also add that the financial markets do play an 
important part, particularly with the smaller companies, such 
as what I represent, because in our case, where we have perhaps 
not as strong a balance sheet as others, and we invest a very 
high percentage in many years, in fact, in the most recent full 
year, 2004, over 150 percent of the E&Ps cash-flows were 
reinvested into the business. We have to go into the futures 
market in many instances and hedge future prices, so that we 
can eliminate some of the volatility, because we cannot simply 
afford to see the ups and downs of prices, so in that case, we 
are very dependent on what is established in those markets, and 
we do not have the ability to affect that. Our job is to find 
and produce natural gas and oil as efficiently as effectively 
as we can.
    Mr. Burgess. We have heard a lot on this committee about 
how pernicious the high profits are in the energy industry, and 
yet, at the same time, it seems to me with all the discussion 
of what is shut in in the Gulf of Mexico, you are going to have 
to make substantial capital outlays in the very near future. 
Can we expect that type of investment from the energy industry? 
Can we expect investment in siting refineries in this country, 
as we tried to encourage with Energy Bill II?
    Mr. Davidson. Well, I think I can best speak for the 
exploration and production side of the business. I really can't 
speak for the downstream refining, since I don't represent 
integrated companies. But from the exploration and production 
side, the independents, we have traditionally been major 
drillers in this country, and again, investing a substantial or 
more than all of our cash-flow back into the business. I can 
speak clearly for my own company, where we carry a substantial 
debt. We invest in a capital program that is more than our 
earnings, and we are building for the future.
    And so I am very confident, with the markets that we are 
in, that certainly, my company sees great incentive to make 
future investments in new areas, as well as the existing areas 
that require repair from the hurricanes.
    Mr. Burgess. Very well. I will recognize the gentleman from 
Virginia.
    Mr. Boucher. Well, thank you very much, Mr. Chairman. Mr. 
Horvath, I have several questions for you. First, I was pleased 
to hear you indicate that you are a supporter of the Low Income 
Home Energy Assistance Program. You didn't say in your oral 
testimony very much more than that. Do you support funding for 
that at the full authorization level, which is $5.1 billion?
    Mr. Horvath. Yes, we do, and we also support the DOE's 
weatherization program, which is the other side of LIHEAP, so 
we don't have to use LIHEAP quite so much in the future.
    Mr. Boucher. Do you know how much that program is funded 
at, the one at DOE?
    Mr. Horvath. I am sorry. I don't know the current level.
    Mr. Boucher. Okay. Are there others on the panel who would 
like to comment with regard to LIHEAP? I believe, Mr. Davidson, 
you had indicated your company's support for it.
    Mr. Davidson. Yes. The organizations I represent supported 
the full funding of LIHEAP.
    Mr. Boucher. At $5.1 billion?
    Mr. Davidson. Full funding, yes.
    Mr. Boucher. Okay. Mr. Wright, would you care to comment?
    Mr. Wright. We are, as well, supportive, but we have not 
addressed as an association just yet at what funding level. We 
would probably defer to others in that debate.
    Mr. Boucher. Okay. That is fine. Mr. Castelli.
    Mr. Castelli. Yes. We supported the $5.1 billion level for 
LIHEAP, and we have also supported a doubling of the 
weatherization program, which is also very critical.
    Mr. Boucher. Okay. Do you know the level of funding for 
weatherization?
    Mr. Castelli. I believe the current level of funding is 
around $220 million a year.
    Mr. Boucher. It is a far smaller program.
    Mr. Castelli. Far smaller program, but it has much longer 
term effects.
    Mr. Boucher. Right. Okay. Thank you. I only have one other 
question, and I will address this initially to Mr. Horvath, and 
Mr. Wright, you may also want to comment on this.
    I understand that while the projections for home heating 
costs for this winter, for people who heat with gas are 
approaching a 50-percent increase, 48 percent, I think, is the 
exact number, and for people who heat with oil, something on 
the order of a 32-percent increase is expected. But for people 
who heat with electricity, the increase is really expected to 
be only in the single digits. In fact, 4-percent increase over 
the previous year comes to mind.
    But I am wondering if that is going to be the situation for 
all people who heat with electricity. And the reason I ask the 
question is this. I have been told that depending upon how the 
utility that serves them acquires natural gas, assuming the 
utility is fueled with natural gas, that there could be a 
dramatic difference in end user cost, the cost to the consumer, 
based upon that gas acquisition charge. I have heard testimony 
from several of you that you will have adequate gas supplies to 
accommodate the needs of those who have firm contracts. The 
non-firm contracts, I gather, will be a different situation. 
Perhaps you will have adequate supplies when needed. Perhaps, I 
think, Mr. Wright, you made some reference to having to 
reallocate deliveries schedules, or something to that effect, 
and I am wondering what the situation might be with regard to 
those non-firm contracts.
    So several questions. First of all, do you know what 
percent of the total gas demand at this time is non-firm? 
Second, are you going to have adequate supplies this winter to 
serve all of the non-firm customers? Third, do you anticipate 
any disruption of those supplies, based on scheduling or other 
factors? And then, I will come back to where I started, what 
possible effect would there be, in terms of price for 
electricity purchase by the consumer, particularly the one who 
heats with electricity, depending upon whether or not the 
utility that supplies him has firm or non-firm contracts for 
gas delivery? And if you could translate that into a projected 
price for the guy who is served by a utility that has non-firm 
contracts, that would be very helpful.
    So there are a number of questions there. Mr. Horvath, do 
you want to begin with that?
    Mr. Horvath. I will start. I don't believe anybody knows 
how much non-firm gas there is. There is no real way of 
recording that, because there are so many gas customers. I will 
defer to Mr. Wright, who may have a little more information on 
that, through a recent study that they have done.
    On the adequate supplies for non-firm, I think I did 
address that, and we would concur with Mr. Wright and INGA that 
that is problematic for this winter. We are geared toward a 
firm customer base, in terms of long-term infrastructure, 
because that is what it takes, long-term contracts, and for 
those who choose to go interruptible, they pay less for that, 
and they get less service for that.
    Mr. Boucher. So there is some doubt as to whether there 
will be an adequate amount of gas for the non-firm customer, is 
that right?
    Mr. Horvath. There are interruptions every winter for those 
who have not paid for firm delivery, and this winter should be 
no different. Some would say it might be a little worse. We are 
saying we will get through it for the firm contracts. The 
interruptibles will be interrupted to some extent, and we tend 
to agree with INGA that the Northeast is probably the most 
problematic.
    Mr. Boucher. While we are on this point, let me ask you one 
other question. I am told that a number of merchant plants 
operate on a spot market purchase procedure, and really choose 
not to have firm contracts for gas delivery. Is that generally 
right?
    Mr. Horvath. Well, it is true that some do. I don't know 
the percent, but some do operate on a spot basis. That is 
correct.
    Mr. Boucher. And to the extent that electric utilities, 
then, are acquiring their generation from these merchant power 
plants, they could be at risk, in terms of the price to them.
    Mr. Horvath. They could be, and that gets to your last 
question, which was the effect on electricity. Nationally, 
about less than 20 percent of electricity is generated by 
natural gas. That is why the increase for electricity will be 
lower to those who heat with electricity than for natural gas 
or oil.
    Mr. Boucher. But for an electric utility that happens to be 
primarily gas-fired, and depends on merchant generation to 
acquire its power, where there are not firm contracts, the end 
customer for that utility could be at risk of very major price 
increases this winter. Is that correct?
    Mr. Horvath. It is possible. And again, it just depends on 
how much their portfolio is fueled by natural gas.
    Mr. Boucher. Yeah. Okay. Mr. Wright, would you like to 
comment?
    Mr. Wright. Generally, I concur with Mr. Horvath's 
comments. We do not have a percentage of the non-firm either, 
but in the written testimony that I submitted to the 
subcommittee, we have detailed several scenarios, a base, a 
worst, or a best case for the recovery of Gulf Coast supply, 
which is the driver we analyzed in detail as to pressure on gas 
prices. And we did see, for a number of days, and as Mr. 
Horvath noted, this has occurred every winter, you will have 
some level of allocation that has to occur, where people who 
don't hold firm contracts have to be interrupted, but only for 
a matter of days, and only for a short period of time, based on 
the scenarios that we analyze. So we are not looking here for a 
major sort of a dislocation. A lot turns on how cold the winter 
will be.
    And finally, with respect to the effect on the prices for 
those who heat their homes with electricity, much has to do 
with what the mix of fuels are for that generation.
    Mr. Boucher. I understand. Okay. Gentlemen, thank you very 
much. My time has long expired. Thank you, Mr. Chairman.
    Mr. Burgess. If the gentleman would like to continue his 
questioning, we can have, we have time for a second round. The 
panel seems a little thin up here. Then if I could have the 
indulgence of the panel for just a couple of follow-ups.
    Mr. Wright, you talked about gas into the pipelines that 
was perhaps had impurities. Who makes the decision of who gets 
in and who has to stay out? Who decides what gas is put into 
the pipeline?
    Mr. Wright. The impurities to which I am referring are 
really gas liquids, and those are removed from the gas stream 
near the production area, and become the building blocks for 
petrochemicals, ethane, propane, butane, and heavier. 
Generally, pipelines publish, well, all pipelines publish 
tariffs that have standards within them, and some are more 
explicit than others as to the entrained level of liquid 
allowed, but generally, it is pretty dry gas, gas that has been 
substantially removed, that is transported. And the reason for 
that is interstate gas pipelines use large compressor stations, 
and liquids are highly incompressible, gas is highly 
compressible, and it can actually damage the equipment. As 
well, if it gets very cold, the liquids will drop out, and so 
it is somewhat of an operational call on a given pipeline 
system, to manage its operations and reliability and stability, 
and so while there is not today a hard number standard that I 
could quote to you, I can tell you that generally, the 
assumption for most gas interstates is that liquids have been 
removed to a substantial extent.
    Mr. Burgess. Very well. Thank you. And Mr. Castelli, I 
would just make the observation, if $3 a gallon gasoline 
doesn't drive people into more fuel efficient vehicles, I don't 
know what the government can do that will make that happen.
    Mr. Horvath, I have one last question, and if I could do 
the math right, and bear with me for a minute. In your 
testimony, you indicate that currently, 5.4 billion cubic feet 
of natural gas from the Gulf of Mexico is shut in as a result 
of the hurricanes. The State of Louisiana reports another 1.3 
billion cubic feet of natural gas shut in as a result of the 
storms. Based on your testimony, this would represent a total 
of about 8.6 percent of average daily winter consumption. Did 
we do that math right?
    Mr. Horvath. I am not sure those two are additive. I don't 
think the second number is--maybe there is some double counting 
there.
    Mr. Burgess. Very well. But in the absence of the 
hurricanes, would there have been, then, a 5- to 8-percent 
increase in the natural gas supply this winter?
    Mr. Horvath. We would have that, all that hurricane gas 
back on the market right now.
    Mr. Burgess. And if we had that gas back on, would we have 
an additional 5- to 8-percent supply? Since we have got that 
percentage shut in, in the Gulf of Mexico, if the hurricanes 
hadn't happened----
    Mr. Horvath. We would have that gas now, so on top of what 
we have now, yes, that extra 5 or 8 percent.
    Mr. Burgess. So we would have 105 percent to 108 percent of 
what we had last year.
    Mr. Horvath. There would be some Canadian imports that 
would be displaced. We are scrounging this year for extra 
supplies, so you can't just subtract numbers, because those 
wouldn't otherwise have been here.
    Mr. Burgess. Where is the additional gas, if there is 
additional gas, where would it be coming from?
    Mr. Horvath. Some of it is from Canada. They have increased 
their amounts from last year. And we have additional LNG as 
well this year, this winter----
    Mr. Burgess. Very well.
    Mr. Horvath. [continuing] we might not have otherwise seen.
    Mr. Burgess. I thank everyone for their indulgence today. I 
know it has been a very, very long day, and thank you for your 
testimony. It has been very helpful, I know, to Mr. Boucher and 
myself, and I am sure the rest of the committee as well. So 
thank you very much for your testimony.
    This subcommittee is adjourned.
    [Whereupon, at 5:05 p.m., the subcommittee was adjourned.]

                                 
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