[Senate Hearing 110-210]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-210
 
     THE IMPACT OF RISING GAS PRICES ON AMERICA'S SMALL BUSINESSES

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

                                HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                          AND ENTREPRENEURSHIP



                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 14, 2007

                               __________

      Printed for the use of the Committee on Small Business and 
                            Entrepreneurship


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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                 JOHN F. KERRY, Massachusetts, Chairman
CARL LEVIN, Michigan                 OLYMPIA J. SNOWE, Maine,
TOM HARKIN, Iowa                     CHRISTOPHER S. BOND, Missouri
JOSEPH I. LIEBERMAN, Connecticut     NORMAN COLEMAN, Minnesota
MARY LANDRIEU, Louisiana             DAVID VITTER, Louisiana
MARIA CANTWELL, Washington           ELIZABETH DOLE, North Carolina
EVAN BAYH, Indiana                   JOHN THUNE, South Dakota
MARK PRYOR, Arkansas                 BOB CORKER, Tennessee
BENJAMIN L. CARDIN, Maryland         MICHAEL B. ENZI, Wyoming
JON TESTER, Montana                  JOHNNY ISAKSON, Georgia

                 Naomi Baum, Democratic Staff Director
                Wallace Hsueh, Republican Staff Director


                            C O N T E N T S

                              ----------                              

                                                                   Page

                           Opening Statements

Kerry, the Honorable John F., Chairman, Committee on Small 
  Business and Entrepreneurship, and a United States Senator from 
  Massachucetts..................................................     1
Corker, the Honorable Bob, a United States Senator from Tennessee     5
Tester, the Honorable Jon, a United States Senator from Montana..     5
Thune, the Honorable John, a United States Senator from South 
  Dakota, prepared statement.....................................    59

                               Testimony

Caruso, Guy F., Administrator, Energy Information Administration, 
  U.S. Department of Energy, Washington, DC......................     7
Smith, Frederick W., chairman, president, and chief executive 
  officer, FedEx Corporation, Memphis, Tennessee.................    16
Lupoli, Sal, president and chief executive officer, Sal's Pizza, 
  Lawerence, Massachusetts.......................................    24
Myhre, Janet, director, Government Services Group, Chuckals, 
  Inc., Tacoma, Washington.......................................    28
Lynch, Timothy P. senior vice president, American Trucking 
  Association, Washington, DC....................................    35

          Alphabetical Listing and Appendix Material Submitted

Caruso, Guy F.
    Testimony....................................................     7
    Prepared statement...........................................     9
Corker, the Honorable Bob
    Opening statement............................................     5
Kerry, the Honorable John F.
    Opening statement............................................     1
    Prepared statement...........................................     3
Lupoli, Sal
    Testimony....................................................    24
    Prepared statement...........................................    26
Lynch, Timothy P.
    Testimony....................................................    35
    Prepared statement...........................................    37
Myhre, Janet
    Testimony....................................................    28
    Prepared statement...........................................    31
Smith, Frederick W.
    Testimony....................................................    16
    Prepared statement...........................................    18
Tester, the Honorable Jon
    Opening statement............................................     5
Thune, the Honorable John
    Prepared statement...........................................    59

                        Comments for the Record

Buis, Tom, president, National Farmers Union.....................    68
National School Transportation Association (NSTA), Alexandria, 
  Virginia.......................................................    79
Rell, M. Jodi, Governor, State of Connecticutt...................    85


           THE IMPACT OF RISING GAS PRICES ON SMALL BUSINESS

                              ----------                              


                        THURSDAY, JUNE 14, 2007

                      United States Senate,
                    Committee on Small Business and
                                          Entrepreneurship,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:41 a.m., in 
room SR-428A, Russell Senate Office Building, the Honorable 
John F. Kerry (Chairman of the Committee) presiding.
    Present. Senators Kerry, Cantwell, Cardin, Tester, Snowe, 
Coleman, Thune, and Corker.

  OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, CHAIRMAN, 
COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A UNITED 
               STATES SENATOR FROM MASSACHUSETTS

    Chairman Kerry. Good morning. This hearing will come to 
order, and I apologize to all our witnesses and my colleagues 
for being a little late, but traffic today was more 
incomprehensible than it normally is. I see some heads nodding. 
So we were a bit delayed and I do apologize to everybody.
    Thank you very, very much to this panel particularly for 
taking time to come in here and discuss the important impact of 
rising gas prices on America's small businesses. Obviously, 
this is an important topic not just for our businesses, but 
with respect to American security and energy policy as a whole.
    I am grateful to all the members of this panel for coming 
in. I particularly want to thank Fred Smith and I look forward 
to his testimony. Federal Express got its start as a small 
business back in 1971 and its success was built in large part 
by servicing America's small businesses and facilitating the 
ability of a small business to be able to grow and do what it 
does. Because he has contact with so many small businesses in 
so many parts of the country and the world, I think he is 
particularly qualified to share with us his view on how fuel 
prices are impacting those businesses and his company.
    In addition, he represents an important shift that is 
taking place in the country with respect to energy policy, and 
that is the recognition among key business leaders, big 
business leaders, that our Nation's energy policy is directly 
linked to our overall economy, to our security, as well as to a 
host of environmental issues. And without a strong energy 
policy that invests in efficiency and renewable energy sources, 
America is digging itself deeper and deeper into a hole.
    Last month, Americans emptied their wallets at the pump, 
paying record prices that reached, according to the Department 
of Energy Information Administration, $3.22 a gallon. This 
price represented a 28 percent increase over a period of just 2 
months and a 52 percent increase since the end of January. That 
is a big increase for small business folks who use vehicles in 
their business on an everyday basis to swallow, and those 
rising prices underscore the increased attention that small 
business owners are now paying to this issue.
    According to a survey conducted by the National Small 
Business Administration, 62 percent of small businesses in our 
country use vehicles for delivery or customer transportation, 
and a majority of those who use vehicles travel more than 50 
miles a day.
    So we will hear from Administrator Caruso today that we are 
not simply dealing with a temporary spike in prices. The Energy 
Information Administration projects that gas prices will remain 
above $3 at least through the summer months. Meanwhile, small 
businesses like the ones we will hear from today, businesses 
that operate close to the margin and that rely on vehicles 
every day to maintain their competitiveness are struggling to 
keep up.
    These are the same businesses that are coping with double-
digit increases in the cost of providing their employees health 
care, the same burgeoning entrepreneurs that we count on to 
create nearly three-quarters of the jobs of our country. These 
businesses can no longer be expected to shoulder the burden 
that is created by this rapid increase in oil prices coupled 
with serious questions about refinery rates and about input 
rates to those refineries, as well as output rates.
    The good news is that right now, even as we sit here, the 
Senate is debating legislation that can put this country on a 
clear path toward energy independence. In a single month, we 
could rewrite the story of procrastination, manipulation and to 
some degree failed leadership, that has defined energy policy 
for 30 years. On a bipartisan basis in the Senate, Senators are 
working to develop a comprehensive energy policy that will make 
the country safer and stabilize and lower fuel costs for small 
businesses and all Americans.
    I think it is clear that to do that effectively, the final 
legislation has to particularly embrace three components. One, 
a major increase in the efficiency of all sources and uses of 
energy, from pick-up trucks to fluorescent light bulbs.
    Two, dramatic incentives for all renewable energy sources, 
including a requirement that at least 20 percent of our energy 
come from renewable sources like wind and solar by 2020. That 
sounds like a lot, but let me tell you, 24 States have already 
adopted a standard. Minnesota recently set a 25 percent 
standard and California is already near reaching that level. If 
the sixth-largest economy in the world can do that on its own, 
surely we have the ability to set a standard nationally that we 
can meet across the board.
    And finally, we need a comprehensive plan to get clean coal 
technologies and carbon sequestration off the drawing board and 
under construction. Improving fuel economy is also a 
cornerstone of this strategy.
    I will just end quickly by saying I will put the rest of my 
comments in the record.
    But after America's second oil crisis in 1980, and many of 
us remember President Carter's response to that and the initial 
unbelievable gains we made when we made a commitment to 
renewables and alternatives, opened the laboratory in Colorado 
and committed incentives to that sector, we became the world's 
leader in alternatives and renewables. But when ideology 
trumped common sense and we pulled the guts out of those 
incentives, Germany and Japan took over as the world's leaders. 
When the Eastern Bloc countries came into the marketplace in 
the 1990s and they realized they needed to clean up the 
devastation that communism had left them with, they turned to 
Germany and Japan for those technologies. It is estimated that 
we have lost upwards of 200,000 jobs or more because of our 
myopia with respect to those incentives.
    The same is true today with oil imports that have increased 
from 37 percent back then to 56 percent today, and our 
passenger fleet averages only 25 miles per gallon, which is 
exactly the same that it did in 1981. That is happening, 
despite the fact that small businesses are contributing to the 
technology that could change this.
    There is a Massachusetts company in Watertown called A123 
which will retrofit a current hybrid with a lithium battery 
that gets 40 miles to its one-time use. The average commute of 
Americans is less than 40 miles a day. So if more cars were 
retrofitted with this, most Americans could actually drive to 
and from work without ever touching a drop of gasoline. The 
dramatic impact would be that, per vehicle, you could go to 150 
miles per gallon in a matter of months.
    All of this is achievable, but it is going to take some 
leadership and that is what we are here today to talk about. So 
I welcome the panel. We look forward to your testimony.
    [The prepared statement of Chairman Kerry follows:]

           Prepared Statement of Hon. John F. Kerry, Chairman

    Good morning. I want to thank our esteemed panel of witnesses for 
coming together today to discuss the impact of rising gas prices on 
America's small businesses, a crucial topic not only for America's 
small businesses, but for this nation's continued security and economic 
sustainability.
    I am glad that Mr. Smith is able to join us today, and I'm looking 
forward to his testimony. Mr. Smith's company Federal Express got its 
start as a small business back in 1971, and its success was built in 
large part by servicing America's small businesses, so he is in a 
unique position to speak on how fuel prices are impacting both his 
company and his small business customers.
    Mr. Smith also represents an important shift that is occurring in 
this country--the recognition among key business leaders that that our 
nation's energy policy is linked directly to our economy, our security 
and our environment. Without a strong energy policy that invests in 
efficiency and renewable energy sources, America is digging itself 
deeper into a hole.
    Last month, Americans emptied their wallets at the pump, paying 
record prices that reached $3.22 a gallon according to the Department 
of Energy's Energy Information Administration. This price represented a 
28 percent increase over a period of just 2 months, and a 52 percent 
increase since the end of January.
    Rising prices underscore the increased attention that small 
business owners are paying to this issue. According to a survey 
conducted by the National Small Business Association (NSBA), 62 percent 
of small businesses use vehicles for delivery or customer 
transportation, and a majority of those who use vehicles travel more 
than 50 miles a day.
    We'll hear from Administrator Caruso today that we're not simply 
dealing with a temporary spike in prices. The Energy Information 
Administration projects that gas prices will remain above $3.00 at 
least through the summer months. Meanwhile, small businesses like the 
ones we'll hear from today--businesses that operate close to the margin 
and that rely on vehicles every day to remain competitive--are 
struggling to keep up.
    These are the same businesses coping with double digit increases in 
the cost of providing their employees health care--the same burgeoning 
entrepreneurs that we count on to create nearly \3/4\ of the jobs in 
this country. These businesses can no longer be expected to shoulder a 
burden created by price gouging oil companies and a government that has 
been reluctant to shift its priorities from serving the same old 
special interests.
    The good news is that right now, the Senate is debating legislation 
that would put the country on a clear path toward energy independence. 
In a single month, we could rewrite the shameful story of 
procrastination, manipulation and--most of all--failed leadership that 
has defined our energy policy for thirty years.
    On a bipartison basis in the Senate, Senators are working to 
develop a comprehensive energy policy that will make America safer and 
will stabilize and lower fuel costs for small businesses and all 
Americans. But in order to effectively address energy security, the 
final legislation must include three components: (1) a major increase 
in the efficiency of all sources and uses of energy, from pickup trucks 
to fluorescent light bulbs; (2) dramatic incentives for all renewable 
energy sources, including the requirement that at least 20 percent of 
our energy come from renewable sources like wind and solar by 2020; and 
(3) a comprehensive plan to get clean coal technologies and carbon 
sequestration off the drawing board and under construction.
    Improving fuel economy is the cornerstone of the strategy to reduce 
our reliance on imported oil and to stabilize the volatile market for 
gasoline. Since America's second oil crisis in 1980, our oil imports 
have increased from 37 percent to 56 percent, but our passenger fleet 
averages 25 miles per gallon (mpg), the same as in 1981.
    Thankfully, small businesses are helping to contribute to a 
solution. Today there's a company in Massachusetts that has developed 
the technology for a plug-in hybrid car that gets 150 miles per gallon. 
The average American's commute is 40 miles--and this car can travel 
that far on batteries alone. Just think of the fuel savings if the 
average commute didn't require any fuel.
    Senator McCain and I first proposed a 35 mpg increase to fuel 
standards in 2002, and I've supported efforts to move in this direction 
for my entire Senate career. The Commerce Committee has reported a bill 
that would achieve 35 mpg by 2020. We must work to guarantee those 
improvements and fend off any efforts to weaken the Commerce bill on 
the floor.
    Second, we need to establish a mandate for renewable energy 
production. Over the last 5 years, 24 states and the District of 
Columbia have implemented local requirements that a certain percent of 
their energy comes from renewable sources by the year 2020. And yet 
Republicans continue to stand in the way of a Federal Renewable 
Portfolio Standard. States are screaming for leadership on this issue, 
and I will once again fight for an aggressive renewable portfolio 
standard in this bill.
    Finally, this energy bill doesn't adequately address our number one 
source of energy: coal. Coal is available, abundant and cheap, that's 
true--but it's also a huge source of US greenhouse gas emissions--1.5 
billion tons of carbon dioxide each year. Any energy bill worth the 
paper it's printed on should make dramatic investments in developing 
technologies for clean coal.
    These are the first steps Congress must take to address the long 
term security and stability of this country's fuel supply. But there 
are other steps we can take in the short term to make sure our small 
businesses are protected against dramatic interruptions in fuel.
    Today, I'm introducing legislation that creates an emergency fuel 
assistance program for small businesses in the event of a severe fuel 
interruption. Under this program, small businesses and farms that rely 
on fuel as a key operating cost would be eligible to receive grants to 
help them stay afloat during periods of extraordinarily high gas 
prices. This program could go a long way toward helping businesses 
operating close to the margin deal with costs that are beyond their 
control.
    I'm also reintroducing legislation to provide low interest SBA 
loans to small business owners dependent on fuel. This legislation has 
passed the Senate in two previous Congresses and would provide the 
capital that small business owners need to cope with extraordinarily 
high increases in fuel prices.
    For too long, we've asked Americans to put up with an energy supply 
that is unstable and flat out dangerous. The path to energy security--a 
path that's being cut in the Senate as we speak--will lead to stability 
and lower prices at the pump. I look forward to hearing your 
testimonies today, and to working together to secure this nation's 
energy future.

    Chairman Kerry. Let me turn to my colleagues first. Senator 
Corker.

OPENING STATEMENT OF THE HONORABLE BOB CORKER, A UNITED STATES 
                     SENATOR FROM TENNESSEE

    Senator Corker. Mr. Chairman, thank you for convening the 
meeting. I might have a few editorial comments regarding your 
opening statement, but I will reserve that for the floor. I 
would rather----
    Chairman Kerry. You mean you don't agree with me 100 
percent?
    [Laughter.]
    Senator Corker. But I do want to welcome this distinguished 
panel and thank you all for coming. We all apologize for 
starting late. You all are very distinguished and we want to 
hear from you.
    I do want to make some comments about Fred Smith. He is an 
icon in the State of Tennessee, wrote a paper in graduate 
school that received an ``F'' and proceeded to build a global 
enterprise off that failed paper. He is a civic leader. He is a 
great American, was a veteran between 1966 and 1970. He is 
someone that the State of Tennessee looks to for tremendous 
leadership, and Mr. Chairman, I am glad you have called upon 
him to help lead us here at the Nation's capital.
    So I welcome him and all of the other panelists, some of 
which I know personally, and thank you for your testimony.
    Chairman Kerry. Thank you very much, Senator. I think, if I 
can correct one piece of mythology here, because Mr. Smith was 
my classmate and collegemate and I am not too sure that I 
didn't see that paper back then when he wrote it, but I know he 
didn't fail on it.
    [Laughter.]
    Chairman Kerry. Am I correct?
    Mr. Smith. Senator, the record would show, I think, that it 
was a ``C'' grade, which, as you know, I was very gratified to 
receive.
    [Laughter.]
    Chairman Kerry. Well, we have seen what people with ``C'' 
grades accomplish.
    Senator Tester.

OPENING STATEMENT OF THE HONORABLE JON TESTER, A UNITED STATES 
                      SENATOR FROM MONTANA

    Senator Tester. Well, thank you, Mr. Chairman. I, too, want 
to commend you on holding this hearing. I also want to commend 
you on your energy vision for this country. I think it is on 
the right track.
    As many of you know and some of you may not, I happen to be 
a farmer in production agriculture. We use a lot of energy. It 
is part of the business. So when fuel prices go up approaching 
$3 a gallon for untaxed fuel for my tractor, it cuts a pretty 
big hole in my profit margin.
    I look forward to hearing from Guy Caruso on the energy 
outlook. I certainly sympathize with Mr. Lynch's situation that 
he is in in the trucking business. I can't imagine what the 
increase in gas prices has done to your bottom line, as well as 
Janet Myhre in the office supply business. Mr. Smith, you have 
already been talked about. With Federal Express, it speaks for 
itself. And to a guy who knows the way to get to my heart, and 
that is through my mouth in the pizza business, the food 
delivery business, I can imagine your challenges, each and 
every one of you. Making sure your business remains profitable 
in this time when energy prices have gone up like they have is 
truly a challenge, as it is for me.
    I can also tell you that if we continue to do business from 
an energy standpoint, as we have done over the past 20 years, 
my future doesn't look very bright. So we need to make some 
changes. We need to make some administrative changes at the 
Federal level if we are going to empower small business to be 
all they can be and to grow and flourish.
    I certainly look forward to each and every one of you 
folks' perspective as to how you deal with the current energy 
situation and, by the way, I look forward to any ideas, any 
silver bullets you may be able to pull out of your holster that 
could help us make our energy future bright.
    Thank you, Mr. Chairman.
    Chairman Kerry. Senator Tester, thank you. Thanks for your 
comments. I think everybody on the Committee is thrilled with 
your participation on this Committee because you bring very 
practical and real-time experience to the Committee. It is 
enormously helpful to all of us.
    Guy Caruso is the Administrator of the Energy Information 
Administration, nominated in February of 2002. He runs the 
statistical agency within the U.S. Department of Energy which 
provides policy independent data, forecasts, and analyses 
regarding energy. We welcome his testimony.
    Fred Smith, I have already mentioned, the CEO of FedEx, a 
$32 billion global transportation and logistics company that, I 
think, if memory serves me correctly, had the benefit in its 
early days of a Federal guaranteed loan through SBA. Am I----
    Mr. Smith. SBA guaranteed small business investment 
companies' investment----
    Chairman Kerry. Right, SBIC.
    Mr. Smith. Very important.
    Chairman Kerry. He has obviously served on the boards of a 
number of large public companies. He is Chair of the Business 
Roundtable's Security Task Force and a member of the Business 
Council and the CATO Institute.
    Sal Lupoli, from my State, president and co-founder of 
Sal's Pizza from Lawrence, Massachusetts. I have been to his 
place. He has hosted a small business consortium that we put 
together there. At the age of 22, after graduating from 
Northeastern with a degree in business management, he founded 
Sal's Pizza with his brother, Nick. Their first year annual 
sales were $200,000. Today, his pizza company produces over 
12,000 pizzas a week for schools throughout New England and 
provides product to several supermarket chains, convenience 
store distributors and various concession groups.
    Tim Lynch, senior vice president of the American Trucking 
Associations. He is charged with developing and executing 
strategic plans to ensure that ATA and its member motor 
carriers achieve the necessary public policy goals to keep the 
U.S. trucking industry safe, efficient and profitable.
    And Janet Myhre, director, Government Services Group, 
Chuckals Office Products. She joined Chuckals Office Products 
in 1999 as the administration operations director and holds a 
B.S. in business administration from Park University.
    So we are really delighted with the expertise the panel 
brings. Mr. Caruso, why don't you lead off.

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

    Mr. Caruso. Chairman Kerry and Members of the Committee, 
thank you very much for this opportunity. The Energy 
Information Administration, as the Chairman mentioned, is an 
independent statistical and analytical agency and because we 
have an element of statutory independence, with respect to our 
activities, our views are strictly those of EIA and should not 
be construed as representing those of the Department of Energy 
or the Administration. Today, I will focus on our latest short-
term outlook, which we released on Tuesday, looking at crude 
oil and gasoline markets and discuss, some of the factors that 
have led to these high prices and particularly, as the Chairman 
noted, the continued uncertainty that we face in both the short 
and the longer term.
    Global oil markets have tightened for crude oil and light 
petroleum products, especially gasoline. Commercial oil 
inventories have dropped sharply since the end of September, 
reflecting strong oil demand, production cuts by the 
Organization of Petroleum Exporting Countries (OPEC), and only 
modest increases in non-OPEC production. Plus, increasing 
global demand for light products has put pressure on refinery 
capacity worldwide. We project crude oil prices will average in 
the mid-$60 per barrel this summer.
    Against this background of already tight world markets, 
global geopolitical uncertainties continue to threaten global 
oil supplies and transport. Geopolitical uncertainty in a 
number of countries in the Middle East and Africa will continue 
to keep markets on edge. For example, Nigeria's problems have 
aggravated the gasoline situation both internally and globally 
because that country produces light and sweet crude which is 
used by the world's refineries to maximize production of 
gasoline.
    Turning to gasoline markets, we expect gasoline markets 
will remain fairly tight, although we anticipate some 
improvement over the next several months. U.S. regular grade 
gasoline prices are projected to average $3.05 per gallon over 
the summer, and gasoline inventories, which typically build 
slightly in April, sharply declined instead because of refinery 
outages, both planned and unplanned, and low imports.
    Gasoline supply has been affected more than usual by 
refinery outages this spring. U.S. refineries typically have 
higher outages during the first quarter, which reduces 
production of gasoline and other products. But this year, 
outages extended into May and even into June, which along with 
lower imports and seasonally rising gasoline demand, all 
contributed to the steep inventory decline and the upward price 
pressure that the Chairman mentioned in his opening remarks. 
Refinery throughputs remain lower than typical for this time of 
the year, although we expect them to increase over the next 
several months. We do think that markets should be adequately 
supplied, assuming that there are no disruptions either 
naturally-caused or manmade.
    Gasoline imports are critical to meeting U.S. summer 
consumption needs, particularly in the Northeastern part of the 
United States, and they have been lagging last year's level 
through this spring. Lower gasoline inventories in Europe 
resulted in limited volumes available for export to the United 
States early this year. Recently, total U.S. gasoline imports 
have returned to more normal levels and we do think that these 
normal levels, or even above normal, will be needed to avoid 
persistent upward pressure on gasoline prices.
    In conclusion, Mr. Chairman, the combination of tight crude 
oil and refined product markets, along with ongoing 
geopolitical concerns, leaves crude oil and gasoline markets 
poised for continued volatility this summer. If gasoline 
production increases during the rest of June and import volumes 
increase, gasoline markets should ease somewhat, causing prices 
to recede from their current levels. With the hurricane season 
already beginning, continued tight refinery conditions, low 
gasoline inventories, and increased demand for summer travel, 
upward pressure on gasoline prices does remain a concern.
    In sum, Mr. Chairman, Members of the Committee, most of the 
risks in the near term point to upward pressure on prices. And 
for the medium to longer term, the fundamental problem, as 
noted in the opening remarks, is the lack of infrastructure 
investment that we have faced in this country for the last 20 
years. We need to increase investment in the infrastructure not 
only of refineries, but of the distribution system, as well as 
on the demand side, improving efficiency as noted by the 
Chairman.
    Mr. Chairman, that concludes my remarks. I will be happy to 
answer questions at the appropriate time.
    [The prepared statement of Mr. Caruso follows:]

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    Chairman Kerry. Well, we look forward to the opportunity to 
ask them. Thank you very much.
    Mr. Smith.

STATEMENT OF FREDERICK W. SMITH, CHAIRMAN, PRESIDENT, AND CHIEF 
    EXECUTIVE OFFICER, FEDEX CORPORATION, MEMPHIS, TENNESSEE

    Mr. Smith. Senator Kerry, it is always good to see you, and 
thank you for clarifying that thing about my school grade. As 
you noted and Senator Corker, who represents our hometown 
State, FedEx is indeed a very big company, employing about 
275,000 folks around the world, 38,000 of them in Tennessee, 
Senator. But we did start as a small company and we understand 
the issues of small business very well, because our four 
operating companies uniquely provide transportation services 
that allow small businesses everywhere to connect to an 
increasingly large global marketplace.
    But I am not here today representing FedEx. I speak to you 
today as the co-chairman of a group, the Energy Security 
Leadership Council, which is composed of 18 CEOs and retired 
four-star admirals and generals who came together because we 
collectively believe that the Nation's increasing dependence on 
imported petroleum after nuclear proliferation and bioterrorism 
represents the greatest economic and security threat to this 
Nation.
    We base much of what we have recommended on a very in-depth 
study conducted by an organization called SAFE, Securing 
America's Future Energy, which conducted a simulation at Davos 
a year ago in January which showed that very small 
perturbations in supply can result in very substantial 
increases in prices. A 3 to 4 percent reduction in supply could 
easily run the price of a barrel of oil up to $120, $125 a 
barrel, which would have very significant deleterious effects 
on the U.S. economy.
    Much more importantly, I think, is the fact as you noted in 
your opening comments, Senator, that we are now importing 
almost 60 percent of our petroleum. Transportation is 97 
percent fuel petroleum. Ninety percent of the world's oil 
reserves are now owned by national oil companies, many of whom 
are controlled by countries who, quite frankly, do not have the 
best interests of the United States at heart.
    If you look historically at the problem, one finds that the 
reason that our economy has been able to absorb the tremendous 
run-up in fuel prices over the last few years is that between 
1975, after the first Arab oil embargo, to the middle part of 
the 1990s, the U.S. energy efficiency improved by 100 percent. 
And a large part of that improvement was based on a system of 
fuel efficiency standards which were enacted by the Congress in 
1975 under a Republican administration, which, I might add, 
were opposed by the auto manufacturers at the time. And those 
fuel efficiency standards, so-called CAFE standards, were very, 
very important in the improvements that our economy has seen 
and given us the basis to absorb the shock that we have already 
seen.
    So with that background, we prepared a report to the Nation 
which we published in December which recommended that the 
Congress consider a balanced piece of legislation which had 
three fundamental prongs on which it rested. The first was 
increased domestic production. The facts of the matter are 
that, worldwide, oil markets are global in nature and a barrel 
of oil produced off the coast of South Carolina does have an 
effect on the price of oil everywhere.
    The second part of our recommendation was that the United 
States should promote the production of alternative fuels to 
the maximum extent possible. That obviously is something that 
has been the source of much debate, but it is very important 
that these goals be realistic and not pie-in-the-sky or the 
Congress will be sitting here 20 years hence dealing with an 
even bigger problem.
    And third, and very importantly, is the recommendation that 
the Congress enact a new system of fuel efficiency standards 
which are quite different from the fleet averages that were 
used in the 1975 legislation. Instead, we recommended that 
NHTSA be empowered to regulate a fuel efficiency improvement 
program by each category of vehicle and by attribute, so that a 
Suburban car for a soccer mom would not be in the same category 
as a pick-up truck used for agriculture, and within each 
category, NHTSA would oversee a program of 4 percent per annum 
fuel efficiency improvement, provided that there were 
appropriate off-ramps for safety or technological limitations.
    With a balanced program like that, the math that we did in 
the report to the Nation, which obviously has been made 
available to all of you, the United States would see in the 
coming years a significant reduction in our dependence on this 
foreign imported petroleum.
    And I would point out in conclusion, Senator, and I put all 
of this in a written statement which I have given you for the 
record, many of us on the Energy Security Leadership Council 
did not come to this position lightly. I rarely come to 
Washington over these many years I have been in business to 
argue for Government regulation. Quite the contrary. But in 
this particular case, you are talking about very serious 
economic and national security risk. You are not talking about 
a free market. You are talking about a market which is set by a 
cartel whose actions, were they conducted in the United States, 
would simply be illegal.
    And we think what we proposed to the Nation, and bear in 
mind a company like FedEx, who spends over $3 billion a year in 
fuel, the CEO of UPS, the CEO of Carnival Cruise Lines, the CEO 
of Dow Chemical, the CEO of Southwest Airlines, the CEO of Auto 
Nation, the largest seller of automobiles in the country, and 
distinguished four-star military officers, including our co-
Chair, General P.X. Kelley, the former Commandant of the Marine 
Corps, and many of the admirals and generals who were 
responsible in their careers for protecting these oil lanes, 
have come to the Congress saying this is a problem that has to 
be addressed, and if the Nation doesn't address it, we do so at 
our peril.
    Thank you very much for your kind attention, Senator.
    [The prepared statement of Mr. Smith follows:]

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    Chairman Kerry. Well, Mr. Smith, thank you very much. I 
think your testimony is enormously important for a number of 
reasons, not the least of which is that I think you bring a 
special kind of validation to the table which is very important 
for everybody to hear, not just our colleagues here, but for 
people in the country. So we will, I know, follow up with some 
questions, but I think it is important testimony and we really 
do appreciate your taking time to be here.
    Mr. Lupoli.

STATEMENT OF SAL LUPOLI, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 
              SAL'S PIZZA, LAWRENCE, MASSACHUSETTS

    Mr. Lupoli. Thank you, Chairman Kerry, Ranking Member 
Snowe, and Members of the Committee. My name is Sal Lupoli and 
I am the owner of Sal's Pizza, a family owned business 
established in 1990 located in Lawrence, Massachusetts. My 
company has over 30 retail stores, two upscale restaurants, and 
a central commissary which sells to supermarket chains and 
school districts throughout the New England area. I am also on 
the board of the Merrimack Valley Chamber of Commerce, 
Workforce Investment Board, and many community organizations 
throughout the Merrimack Valley in Massachusetts.
    I would like to thank you for inviting me to testify today 
regarding the impact of rising gasoline prices on small 
businesses, particularly mine. I am very grateful that you are 
cognizant of the negative effect that the increasing gasoline 
prices are having on small businesses across the country and 
that you are seeking to address it. Whatever the cause, the 
volatile and increasing price of gasoline is wreaking havoc on 
American small business.
    In the day-to-day operation of my small business, I have as 
many as 30 delivery trucks and 5 management vehicles on the 
road at any one point. Every day, my company makes deliveries 
of fresh ingredients, of product to various supermarkets 
throughout New England, 30 franchise stores, retail stores, and 
school districts. Obviously, these trucks fall into the 
category of non-fuel-efficient vehicles. Unfortunately, there 
is no affordable alternative to me at this choice.
    Currently, the cost of gasoline in the Merrimack Valley 
varies from $2.80 a gallon to as high as $3.09. This is from a 
low last year of $1.98. This sudden and unpredictable 50 
percent increase hits directly to the bottom line of my 
business and countless others. Rising fuel costs have a direct 
impact on my means of delivery for my product, but also other 
aspects of my business.
    For instance, it has a direct impact on my employees. It 
has a tremendous effect on them. Many of my employees have low 
to modest means. Many of my employees live in low-income areas, 
such as Lawrence, Massachusetts, and towns throughout the 
Merrimack Valley. Many employees drive their cars to work. 
Often I am faced with employees that are unable to afford the 
gasoline for their cars. They face days out of work, which 
often results in myself or my staff having to pick them up. 
This further disrupts daily business operations. We encourage 
carpooling. We encourage public transportation. But these 
options are always not available in the towns of their 
residences.
    Another area in rising fuel costs have impacted my business 
is to my customers and their expendable income. I have seen a 
decline in sales when gas prices increase, only to see business 
pick up when prices go down. A family that I would generally 
see on a weekly basis on a Friday night is now a twice-a-month 
customer. Customers in my restaurant that I see two and three 
times a week may only come to my restaurant once a week as a 
result of gas price spikes. My business, as any retail, 
competes for the expendable dollar. I compete for the customer 
dollar when families make a choice between fixing a leaking 
faucet or taking the family out to a nice meal at my 
restaurant. When gas prices are high, the American small 
business loses.
    In addition to the direct impact that rising gas prices has 
on my business, it is immeasurable. Although my company has 
moved its corporate offices to Lawrence, Massachusetts and has 
renovated a mill building along with other businesses, which 
are my tenants--the mill building consists of 240,000 square 
feet--I have found it extremely expensive to heat my building 
during the winter months and pay for increasing electricity for 
cooling in the summer months. I was forced to consider and 
chose to install solar panels on the roof of my mill as an 
alternative to the traditional fossil fuel energy. Solar energy 
helps defray some costs, but has yet to make a significant 
impact on the overall operation.
    In order to maintain a level of profit in my operation, I 
have no alternative but to pass the costs of rising fuel on to 
my customers, whenever possible trying to absorb the cost 
myself. On most deliveries, we have been forced to include a 
fuel surcharge on our delivery invoices. I am not alone in the 
rising prices whenever possible.
    According to the 2006 NSBA Small Business Energy Survey of 
the businesses that reported passing along their increased 
energy cost to their customer, 65 percent have increased their 
prices. Of that, 47 percent reduced the amount of business 
travel and 18 percent have reduced their workforce. The 
ramifications of rising gas prices reverberate throughout the 
entire economy.
    This concludes my testimony. Thank you again for inviting 
me here today and recognizing the threat rising and volatile 
energy prices pose to America's small business. As you seek to 
address America's oil dependence, the shortcomings of the 
national energy policy, and the global climate change, I hope 
you will continue to keep America's nearly 26 million small 
businesses in mind. I thank you for your time and welcome any 
questions.
    [The prepared statement of Mr. Lupoli follows:]

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    Chairman Kerry. Thank you, Mr. Lupoli, for very graphic, 
important and powerful testimony. I don't think a lot of us 
necessarily thought that people weren't able to get to work or 
that the CEO is going to have to go out and actually pick them 
up to get them there, and that is a pretty downstream real 
impact, so we appreciate your sharing it with us here.
    Mr. Lupoli. Thank you, sir.
    Chairman Kerry. Ms. Myhre.

STATEMENT OF JANET MYHRE, DIRECTOR, GOVERNMENT SERVICES GROUP, 
               CHUCKALS, INC., TACOMA, WASHINGTON

    Ms. Myhre. Thank you, Chairman Kerry, Ranking Member Snowe, 
and distinguished Members of the Committee for the opportunity 
to testify today. My name is Janet Myhre and I am the director 
of Government Services Group of Chuckals Office Products, which 
is headquartered in Tacoma, Washington. I am here on behalf of 
the co-owners, Chuck Hellar and Al Lynden, and our great team 
of employees who support the success of our small business. I 
know that Chuck and Al would have liked to attend today's 
hearing, but as you know, air fare from the West Coast on short 
notice is quite high.
    Fundamental to Chuckals' growth over the last 13 years has 
been a combination of innovative use of technology and powerful 
strategic alliances that have enabled the company to offer big 
business prices while still preserving small business value and 
service. Use of a stockless, just-in-time distribution model, 
partnering with key suppliers like Federal Express, and a 
commitment to find new and innovative ways to consistently 
streamline internal operations has furnished a solid platform 
for sustained growth and enabled us to provide a broad product 
offering and consistently high service.
    Fuel costs impact each and every transaction that our 
organization manages and it is the third-largest expense item 
on our financial statement after cost of goods and employee 
wages. To keep it simple, we have three categories of delivery 
expense. The first two categories represent the costs and/or 
expense of getting our product to our customers. Category one 
is the local and regional deliveries that are handled through 
our company-owned vehicles and span a large portion of middle 
and south Puget Sound region in Washington State. Currently, 
this sector makes up 7 percent of our delivery expense.
    Category two is the servicing and delivery to both 
commercial and Federal accounts under Federal contracts 
nationwide through the use of third-party carriers such as 
Federal Express, UPS, and LTL Truckload Relationship. This 
category represents 91 percent of our delivery expense.
    A final category is the cost of shipment from wholesalers 
and manufacturers to our organizations and other internal fuel 
expense, such as employee auto reimbursement.
    During the past 24 months, we have experienced a total 
increase in delivery cost of over 35 percent in the combined 
categories. The highest percentage was experienced in the 
category of national delivery, which has increased 36.4 
percent. Just a quick look at the increases. The local delivery 
has increased around 18; the national delivery, 36.4. The third 
category for internal kind of uses within the business is 30 
percent.
    To break down the impact on a per delivery basis, in 
January 2005, the average delivery cost to deliver to a local 
customer was 56 cents per delivery. Today, our costs have 
almost doubled and have peaked at $1.02 per delivery.
    When we use other carriers such as UPS, FedEx, and DHL, our 
per delivery costs are experiencing the same type of increase. 
For example, the cost to ship an order to an Army customer in 
January 2006 was averaging $12.40 per order. As of April 2007, 
that cost has risen by 34.2 percent to $18.86 per order.
    From the early days of Chuckals' organization, we have 
applied a business model of continually improving our business 
practices to embrace technology and efficiency. One of the 
first applications was to be an early leader in transitioning 
an industry which heavily depended on a traveling outside sales 
team to a technology-driven inside team. Even with this 
transition, a limited outside sales team, we incur another 
associated cost with fuel for employee auto reimbursement, 
indexing our expense reimbursement to the IRS guidelines, which 
we have watched jump by 38 percent.
    Today, I presented a brief synopsis of the hard costs and 
direct impact of double-digit delivery expense that we are 
incurring in the delivery segment of our business. It is 
important to also discuss the impact this fuel increase has had 
on the production and cost of goods. It is quite amazing to 
discover how many products are petroleum-based, such as vinyl 
and polypropylene resins, which go into binders and hard 
plastic office supplies.
    We have seen the same percentage increase in our cost of 
goods. Many times our suppliers do not charge for hard 
transportation costs, but they increase the unit cost of the 
product. As an example, we have seen our cost of goods price 
increase on a carton of paper by 15 percent during the same 24-
month period. This increase has a direct relationship with the 
cost of fuel, both in manufacturing and transportation.
    We continue to look for alternative ways to save fuel and 
cut costs through efficiencies of technology and management, 
such as mapping of local delivery routes, consolidating 
customer deliveries, routine maintenance of our fleet, and the 
continuous measurement and feedback of productivities of our 
drivers. However, we have no options when it comes to the raw 
cost of fuel. It is still X miles from point A to point B and 
that will consume a defined amount of fuel.
    As we have discussed with Senator Cantwell and her staff, 
while there are many new options for the consumer both in 
alternative fuel and vehicles to combat this fuel emergency, 
there currently are very few options for the small business 
owner who has commercial fleets which run on gasoline. Couple 
the 40 percent increase in fuel cost with the compounding 
increase in health care that we have also incurred in the past 
3 years, the small business professional is finding it harder 
and harder to compete and stay in business.
    As we continue to watch our operational margins shrink, 
Chuckals will be faced with critical management decisions. What 
programs and investment in capital and innovation must be 
foregone to absorb the increased cost of fuel and delivery? 
What application and impact will this have on our competitive 
position in the marketplace and our viability to win future 
awards? And finally, what impact does this have on our finest 
assets, our employees? We will have to change employee benefit 
plans, head count, and other organization structures to react 
to the rising costs. Thank you.
    [The prepared statement of Ms. Myhre follows:]

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    Chairman Kerry. Very helpful. Thank you very, very much. 
That is very helpful testimony.
    Mr. Lynch. Let me just say for the record, everybody's 
testimony will be placed in the record in full as if read in 
full. Thank you.

STATEMENT OF TIMOTHY P. LYNCH, SENIOR VICE PRESIDENT, AMERICAN 
             TRUCKING ASSOCIATIONS, WASHINGTON, DC

    Mr. Lynch. My name is Tim Lynch. I am a senior vice 
president with the American Trucking Associations, and on 
behalf of our membership, we want to thank Chairman Kerry, 
Ranking Member Snowe, and all the Members of the Committee for 
giving us an opportunity to testify on this very, very 
important subject.
    The trucking industry is a vital component of our national 
economy. In 2005, trucks transported nearly 11 billion tons of 
freight domestically, representing almost 70 percent of all 
freight transportation tonnage. The trucking industry accounts 
for 84 percent of the nation's freight bill and exclusively 
serves the freight needs of over 80 percent of communities in 
the United States.
    While the industry is very large, it includes hundreds of 
thousands of small businesses. As of November 2006, there were 
over 700,000 interstate motor carriers in the United States 
classified as small businesses, 97 percent of which operated 20 
or fewer trucks.
    For most motor carriers, fuel is the second-largest 
operating expense after labor. Small carriers are particularly 
vulnerable to large and swift increases in fuel prices. 
Typically, the smaller the carrier, the larger percentage fuel 
represents of total operating expenses.
    Over the past 4 years, the price of diesel fuel has 
steadily increased. According to the Energy Information 
Administration, the national average price of diesel rose from 
$1.81 per gallon in 2004 to $2.41 in 2005, and then rose again 
to $2.71 in 2006. Unfortunately, there doesn't seem to be any 
relief in sight. EIA analysts now estimate that diesel will 
average $2.75 per gallon in 2007 and $2.76 in 2008.
    This year, in order to haul the Nation's freight, the 
industry will consume 51 billion gallons of fuel, including 
more than 38 billion gallons of diesel fuel, at a record cost 
of $106 billion, $3 billion more than in 2006 and more than 
double the industry's fuel bill in 2003.
    The sharp increase in the cost of diesel fuel is a hardship 
for small trucking companies, but the full impact must be 
viewed in the context of what also is occurring with fuel 
economy and environmental controls. This challenge is fully 
captured in the comments that were made by Barry Pottle of 
Pottle Transportation of Bangor, Maine.

          ``Twenty-five years ago, my trucks were getting a little over 
        4 miles to the gallon. In the mid-1990s, my trucks were getting 
        close to 7 miles to the gallon. With the new engines and new 
        requirements for the use of ultra low-sulfur diesel, my trucks 
        are now getting about 5 miles to the gallon.''

    And let me just say, in making that comment, we were not 
opposed and do not oppose the new engine requirements and the 
use of ultra low-sulfur diesel, but we do want to make the 
point that those don't come without some cost. And to put a 
fine point on that, for a company like Mr. Pottle's, whose 
individual trucks might travel 125,000 miles annually, at a 4-
mile-per-gallon average, he would use 31,250 gallons to travel 
those 125,000 miles. At 5 miles per gallon, that would be 
25,000 gallons, and at 7 miles per gallon, that would be 17,857 
gallons.
    If we were to apply today's rate of $2.79 per gallon cost 
for diesel, Mr. Pottle's cost per truck would be as follows. 
Again, at the 4, $87,000. At the 5, $69,000. And at the 7, 
$49,000. The approximately $20,000 difference between a 5 and a 
7-mile-per gallon fuel efficiency rate multiplied by the number 
of trucks operated by a small business like Mr. Pottle can 
literally make the difference between business success and 
business failure.
    I have a number of recommendations in our testimony, but I 
would like to focus on one because given the current debate in 
both the Senate and the House, is the APU weight exemption. The 
Energy Policy Act of 2005 included a 400-pound weight exemption 
for alternative powering units that allow truck drivers to run 
fuel-efficient devices, such as generators, to operate heating 
and air conditioning units instead of using the main engine. 
The Federal Highway Administration has interpreted this 
language, incorrectly in our opinion, as giving States the 
option of allowing this exemption rather than establishing a 
nationwide standard as Congress intended. We need language 
clarifying Congress' intent to ensure that small trucking 
businesses don't have to choose between advanced idle reduction 
strategies and lost productivity due to a weight penalty.
    Furthermore, we support legislation currently in the 
Senate, S. 894, that would provide a tax incentive to help 
offset the cost of these devices, since many small businesses 
simply cannot afford to buy them.
    I have other suggestions here, including speed limits. Even 
within our own industry, the speed issue is somewhat 
controversial. I notice that Senator Tester is smiling. I had 
the pleasure of presenting ATA's position to the Montana 
Trucking Association to have a national speed governed at 68 
miles per hour, and Senator Tester, I barely got out of the 
State. But we believe it is the right thing to do and we would 
certainly urge whatever assistance we might get from the 
Congress on that, as well.
    I would be happy to answer any questions.
    [The prepared statement of Mr. Lynch follows:]

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    Chairman Kerry. Thank you very much, Mr. Lynch. I learned 
first-hand out there how tough that issue can be for a lot of 
folks on those wide-open roads for long distances. It is a 
pretty important issue.
    Thank you, all of you, very, very much for the testimony 
here today. We are going to do about 5-minute rounds, try to 
give everybody a chance to get in here. We can go for a second 
round afterwards if all of you can put up with that. I know 
there will be a lot of questions and a lot of areas we want to 
try to cover.
    Mr. Caruso, if I could just begin, you mentioned quickly 
that the throughput is lower--the refinery throughput is lower. 
A lot of Americans don't understand that. They are having 
trouble seeing the crude prices are low, but we still have this 
problem of supply. Can you just help explain to people? A lot 
of small business people keep saying, am I getting manipulated? 
Am I being jerked around here? The oil companies walked away 
with, since 2005, $225 billion of profit, record levels of 
profit, and a lot of people sit there and say, well, what if 
they had only had $220 billion or $200 billion or $180 billion? 
Is that really the difference in their success versus the 
success of these folks over here? So can you help people 
understand why the throughput is so low given the crude 
situation and where we are on the manipulation issue?
    Mr. Caruso. Sure. Why the throughput is low is that there 
have been a number of refineries out for either planned or 
unplanned maintenance this year. This is not particularly 
unusual for January and February, because normally refiners 
take down units that need to be maintained for safety and 
efficiency reasons in order to be ready for the peak driving 
season. So----
    Chairman Kerry. Question--should that be, therefore, left 
up--since it is having such a dislocative effect on the 
marketplace, and as Mr. Smith and others have said, this is not 
a free market sort of structure, should there be some better 
planning as to what the rate of that offline maintenance, et 
cetera, is for the at least planned downtime, because it is 
having a serious impact on small business, as you can hear.
    Mr. Caruso. Yes.
    Chairman Kerry. And a lot of people question whether that 
planned maintenance truly couldn't be done in a more 
effectively planned manner.
    Mr. Caruso. Well, the companies, of course, try to plan it 
to maximize their own individual sales opportunities. So no 
individual company would take down a refinery because it would 
be to their own detriment. They would lose sales. So the 
individual refiner's objective is to do this in the most 
efficient and planned way so as to maximize their sales.
    Now, what has gone wrong is there have been a number of 
unplanned outages. You know, of course, we are not an 
investigative agency in any way, but we certainly have not seen 
any reason to think that there was any attempt to manipulate 
the market----but that is not our role. That would be the 
Federal Trade Commission, of course.
    Chairman Kerry. Can you comment on the likelihood of the 
scenario that Mr. Smith described, where you have oil prices at 
$120 a barrel?
    Mr. Caruso. Well, that is certainly possible, but it would 
take a huge disruption in either crude oil or refined products 
to get to that kind of number. One could pose--and I know the 
group that Mr. Smith is part of did that in the scenario 
planning that he mentioned--a severe disruption because we are 
so dependent on imports. It could certainly--in the short run, 
there is no real pressure relief valve except price because 
there is very little cushion, as I have mentioned, with such 
tightness in capacity. And, of course, the Strategic Petroleum 
Reserve might get you through a short-term situation, but in a 
long-term disruption, you could get very high prices.
    Chairman Kerry. Mr. Smith, to what degree has this 
increased price changed or affected the way you do business 
with small businesses? I mean, has it had an impact? Have you 
changed actual practices?
    Mr. Smith. Well, I think the testimony that you heard 
indicates where it has had the most effect on small business. 
We decided a long time ago that we should not be in the oil 
futures market, so we have in our rates a baseline crude oil 
price, which we put on the Internet. And then as the price of 
crude goes beyond that, we have a surcharge. So many of the 
price increases that were mentioned are the run-up in fuel 
prices reflected in the surcharges.
    For the air express business at FedEx Express, those 
surcharges have gotten up at times during this run-up in fuel 
prices to almost 20 percent. For our ground parcel service, it 
has been somewhat less, but still very significant. And in the 
aggregate, when you are shipping many small shipments the way 
many of our small business customers do, this gets to be a very 
considerable expense to either them or their customers.
    Chairman Kerry. So yours is essentially a straight pass-
through based on a very transparent--it is very transparent----
    Mr. Smith. Yes, and we have over the last 3 years steadily 
increased the base barrel of crude price. We use the DOE 
numbers to establish that.
    Chairman Kerry. Also, share with us, if you would, speaking 
from your experience as a business person, having come to the 
judgments you have come to, why we still have resistance in 
some quarters about the change in the CAFE standards and in 
trying to get better fuel efficiency on cars. I think one of 
the major auto makers stood up the other day and suggested that 
this was going to hurt their industry, et cetera. You are 
obviously of a different opinion, both from a security point of 
view, as well as a business point of view. Can you share with 
us quickly why you think it is so compelling and important that 
we respond with that as one of the components of our overall 
approach?
    Mr. Smith. Well, as I mentioned during the testimony, and 
in the simulation that as done in Davos, it assumed a 4-percent 
reduction in worldwide supply. That is, as you well know with 
your knowledge of geography and naval matters, very easy to 
accomplish. By simply shutting down the Straits of Hormuz, you 
would have far more than 4 percent of worldwide supply taken 
off the market. Many individual producers, which are subject to 
very volatile political situations, could take that amount off 
the market. So that is not far-fetched and it is about 3 
million barrels of oil a day, 4 percent of 80 million barrels 
of need worldwide per day.
    We were very mindful about the issue of the auto 
manufacturers in coming up with our recommendation. Certainly, 
the last thing in the world we would want to do is to harm our 
automotive manufacturers. They are wonderful customers and 
great business partners, and I think the facts of the matter 
are that our balanced approach, which provides funds from the 
government, largely through royalties and all from increased 
production, and allows them to retool, would get them into a 
better market position, because I think the record is pretty 
clear. The U.S. auto manufacturers with the old fleet average 
CAFE standards built a lot of small and profitable cars and a 
lot of large profitable trucks, and it would have been a lot 
better had they, like the foreign manufacturers, been producing 
a lot more fuel-efficient vehicles.
    So we certainly believe that nothing we have suggested at 
the end of the day is harmful. Now, the auto manufacturers, I 
certainly can't speak for them, but I do think that they have 
come around to the point of view that fuel efficiency standards 
are probably in the cards and now they are really just talking 
about what those percentages should be.
    I would point out one final thing to you, Senator. In 1975, 
when the Ford administration and the Congress passed the 
original fuel efficiency standards, as I said in my remarks, 
they were opposed by the auto manufacturers. Subsequent to the 
fact, Henry Ford II, who was the CEO of Ford Motor Company, to 
his credit, said, ``I was wrong,'' that this country would not 
have achieved the improvements in energy efficiency that it has 
achieved absent those fuel efficiency standards.
    And I think we are simply in the same place we were before, 
except in a much more serious state of vulnerability because, 
as you noted in your remarks, imports have gone up from 37 
percent to almost 60 percent. So we have an extreme exposure to 
a disruption in supply in terms of our economy security and we 
are already in the Middle East and involved in combat 
operations over there and I don't think these four-star 
admirals and generals came to this conclusion lightly, either. 
They see a real prescription for a severe national security 
challenge unless we do something.
    Chairman Kerry. I appreciate that very much.
    Senator Snowe.
    Senator Snowe. Thank you, Mr. Chairman for initiating this 
hearing that rightfully focuses on the impact of rising 
gasoline prices on small businesses. I also want to thank all 
our witnesses here today for their very graphic and compelling 
testimony that speaks to this issue, which affects small 
businesses and Americans and particularly low-income Americans 
disproportionately. I know I have seen that in my State.
    We in America depend on jobs being created from the small 
business sector. Approximately two-thirds of all new jobs each 
year are created from small businesses. So if they are affected 
disproportionately and they can't survive, we can't thrive in 
America. So this is clearly an issue of major national 
priority.
    We have abrogated our responsibilities over the years, 
frankly, in developing a very bold and comprehensive National 
Energy Policy. We failed to execute the leadership, and as you 
mentioned, Mr. Smith, in 1975, it was a generation ago that we 
enacted CAFE standards for this country that yielded a 40-
percent increase. I am just relieved that we are finally 
considering in the base energy bill that is pending before the 
Senate, a CAFE standard increase of another 40 percent that 
Senator Feinstein and I have been working on for the last 6 
years. There will be efforts to undermine that and I hope we 
can resist them. This is the minimum and the least that we can 
be doing today in order to improve fuel economy standards.
    Ater all, the transportation sector represents 40 percent 
of the fossil fuel that is consumed in America. And we have 
seen significant job losses in the automobile industry, which 
needs to be on the vanguard and the cutting edge to be able to 
offer choices to the consumers. They have lost jobs and yet we 
haven't increased fuel efficiency standards. And we are losing 
jobs today, because every 10-percent increase in oil prices 
results in 150,000 jobs being lost in America.
    And so I think that we have much more to do. Hopefully, we 
can create an ambitious National Energy Policy. We are 
surrounded by the consequences of a lack of a National Energy 
Policy and it has repeatedly manifested itself, whether it is 
in our environment, our economy, or as you say, Mr. Smith,and 
our national security. We cannot be shifting billions of 
dollars from America to the most volatile, radical regions and 
leaders in the world, and that is essentially what we are 
doing. So it is in our national security interest to reduce our 
reliance on imported oil.
    We need to help small businesses, as well, in this process. 
People say that we don't have the ability to develop the 
technology to increase CAFE standards by 10 miles per gallon 
over 10 years. I mean, this country has been founded on 
innovation. But when you think about it, 1985, was the last 
year in which passenger vehicles went up as a result of the 
1975 increase. Think of where we are today. We have got hand-
held computers from mainframes. We have gone from landlines to 
cell phones, encyclopedias to the Internet. And we are saying 
in America we can't do better?
    Absolutely, we can, and that is what the bill on the floor 
hopefully can accomplish in challenging that innovation and the 
wherewithal, and also spearheading efforts here. And I know 
Senator Kerry and I are going to be working on an initiative to 
see if we can help small businesses play a leading role in 
promoting energy efficiency and combating climate change. But 
in the meantime, hopefully, we can do everything we can in the 
bill that is pending.
    Mr. Smith, I just wanted to ask you, is there anything more 
we should be doing in this bill? I thank you for co-Chairing 
the Energy Security Leadership Council. Is there anything more 
we ought to be doing in this bill that is before the Senate?
    Mr. Smith. Well, Senator, the council's recommendation, I 
want to urge people to look at again, is a comprehensive bill. 
It sits on three fundamental pillars. It is the different, new, 
by category, by attribute, fuel efficiency standards with the 
off-ramps, incentives and help for the auto manufacturers to 
retool, alternative fuel production that is truly feasible. We 
all would love to think that we could raise switchgrass in 
Montana and the Plains and fuel our vehicles, but we are a few 
years away from that and we don't want to destroy the food 
markets by overshooting there. And the third part about it, and 
I know this is controversial in certain areas, is increased 
domestic production.
    So it is all three of those which is the best way to deal 
with the problem, and quite frankly, from our perspective--and 
here I am preaching to the choir, you folks know a lot more 
about this than I do--but it seems to be that you cover the 
political spectrum in a grand compromise with legislation such 
as we recommended and I think is reflected in the bill put 
forward by Senators Dorgan and Craig.
    So that is what we would recommend, a balanced approach 
with all three of those things. And I think the military 
officers in our council would also say there is a fourth 
element, and we have to get folks around the world who benefit 
from the security that the United States military and 
particularly our Navy provides to the movement of this oil 
around the world, that they have to get in the game and help 
pay for this.
    Senator Snowe. Good point. Mr. Lynch, you mentioned Pottle 
Transportation, and I am very familiar with that company. In 
talking to them, it is amazing. Last year they made a 
significant profit. That has now dropped even though they had 
an increase in business of more than a million dollars. Their 
lost profit is attributed primarily to the rising price in 
gasoline.
    One of the issues that has surfaced in Maine over the last 
few years, and one we are trying to change here, is the whole 
issue of truck weight limits, and you referred to that in your 
testimony. In fact, I met with a group from Maine yesterday 
that suggested that we could have a national standard in 
America on weight limits. There are 29 States that have waivers 
from the weight limits on the Interstate of 80,000 pounds. Data 
indicates that if we had a national standard of 97,000 pounds 
uniform across the country, that we could promote highway 
safety. This is it a safety question for us in Maine, because 
having these big trucks rumbling through small towns can lead 
to accidents. In fact, we have had two serious tragic accidents 
recently in Maine as a result of that.
    But second, it would achieve an enormous savings in fuel 
cost, not only to the truckers in Maine, the independent 
truckers, but also to this country, not to mention the impact 
on the environment. Can you speak to that question?
    Mr. Lynch. Certainly, and I would really give two comments 
on that. First, that recommendation on the 97,000 pounds was 
also part of the Energy Security Leadership Council's overall 
recommendations. When we saw that, there are certainly portions 
of the recommendations that are going to be a little harder to 
deal with than others and to accept, but we saw that as a very, 
very positive step.
    It is important to keep in mind the whole issue of truck 
size and weight, the debate previously has generally been along 
the lines that we are going to run these bigger, heavier, 
longer trucks on every road, every time, everywhere. The fact 
of the matter is that right now today, there is something 
called the National Highway System, the NHS system. That system 
represents about 7 percent of the entire road network in the 
country. That system handles 75 percent, though, of the freight 
traffic, the truck traffic that runs in the country.
    So what we would like to see is concentrate on those roads 
where the freight is moving. Do what needs to be done. We 
understand that there are bridge issues that have to be dealt 
with, off-ramp, on-ramp issues, et cetera. But we think that 
these are, as you said, these are not insurmountable problems. 
I mean, we can look at these things, identify where the work 
needs to be done and what has to happen to make this equipment 
the standard on the highway, because we can, in fact, reduce 
the number of trucks that operate on the system if we can look 
at this from a little more rational way.
    Senator Snowe. Thank you.
    Chairman Kerry. Thank you, Senator Snowe.
    Senator Corker.
    Senator Corker. Well, thank you, Mr. Chairman. I think this 
testimony has been very enlightening and timely because of what 
is on the floor right now and I want to thank the testimony 
that has been received regarding businesses. I was on the board 
of one of the companies that Mr. Lynch represents and find it 
hard for them to figure out how to have a steady stream of 
profits based on the various volatilities they face, and 
certainly have dealt with some of the issues that you have 
focused on in your testimony and want to thank you for that.
    I think the reason, though, we are focused over here a 
little bit today is we are dealing with some global issues, and 
I think the testimony, Mr. Smith, that you gave could not be 
more dead on. I was just in Brussels a few weeks ago meeting 
with European officials, talking about some of the energy 
policies that have been put in place, and I think that 
sometimes we here in our country pick winners and losers, or 
try to pick winners and losers instead of having a balanced 
approach where we have an overall goal that absolutely focuses 
on energy security, and I think that is one of the biggest mid- 
to long-term issues that we face in our country. I could not 
agree more.
    But combine that with raising the standard of living for 
future generations, growing our GDP, but combines that with 
certainly lessening the impact that we have on our world, the 
climate, environmental considerations. And I think if we can 
hit that sweet spot with our energy policy, then we have done 
something that will be great for generations to come.
    I would like to just reiterate for my colleagues that I 
think what Mr. Smith has said is that he embraces the CAFE 
standards that are in the base bill put forth by Commerce, and 
I find that fascinating and I appreciate that. We have had a 
number of Tennessee companies that do the same.
    But I would like for you and Mr. Caruso to focus on an 
issue. I am proud to be on the Energy Committee and we have a 
really aggressive alternative fuels bill. I am setting out an 
amendment that I hope will pass that just sets a standard and 
doesn't pick alternative fuels specifically, but sets a 
standard for us to meet, because other technologies will come 
into play.
    But one of the issues that you both have focused on is the 
refinery issue and domestic production, and that is something 
that we seem not to want to embrace here in our country today, 
and there is a lot of focus on price gouging. There is a lot of 
focus on refineries being down. I wonder if you all could talk 
a little bit about what appropriate policies should be in place 
nationally to affect our refining capacity and our own domestic 
growth.
    Mr. Caruso. Well, as you know, Senator Corker, EIA is not 
in the policy business, but I can give you some of the 
fundamentals that would lead to the investment needed in the 
downstream refinery sector. There hasn't been a new grassroots 
refinery constructed in this country since the late 1970s and 
that is part of the problem. And one of the reasons that exists 
is that for most of that 25 to 27-year period the return on 
investment in that sector has been poor. So therefore, the only 
additions to capacity have been made at existing plants. That 
is partly a problem of getting permitting and other issues, but 
it is mainly that the fundamental return on investments was 
poor.
    Now, as one looks forward, how do we change that? The way 
to change it, of course, is to make it more attractive to 
invest and for a typical refinery now in the size of, let us 
say, 300,000 to 400,000 barrels a day, companies are looking at 
$6 to $8 billion in investments that would require about a 20-
year time of operation in which they can get a return on that 
investment. Frankly, there is a lot of uncertainty about what 
the investment climate will be for refined products over the 
next 15 to 20 years.
    I think some of the things that are being discussed in the 
current energy bill and that were passed in the Energy Policy 
Act of 2005 are helping to clarify that outlook, but clearly 
companies in the petroleum downstream sector are looking at 
greater regulatory certainty and issues that you talk about in 
some of the other industries represented here today. But that 
is the fundamental issue--getting the investment needed to meet 
the demand that we are projecting.
    Mr. Smith. Well, Senator, one of the things I would just 
point out to the Committee that always makes me stop and 
wonder, we are heavily involved in China, as you know. We have 
been there 23 years. We have a very large business in China. 
The paper today talks about four Senators who want to put 
sanctions on China because of their level of exports to the 
United States or the balance of payments. But hardly anybody is 
talking about the balance of payments issue in the petroleum 
sector.
    Five or 6 years ago, Saudi Arabia produced about $30 
billion from producing oil. I think the last year we have 
figures, it went up to $200 billion. Forty percent of our 
balance of payments problem is from oil exporting countries 
that buy very little from us. The exports to China are going up 
at a very rapid rate, not as fast as their exports to us.
    So as I said in my remarks, you have to recognize it is a 
worldwide market for oil, and a barrel of oil produced in the 
United States, whether it is Alaska or off the Outer 
Continental Shelf, has an effect on total worldwide prices and 
total supply.
    And in the case of the refineries, when a business is 
looking at whether it can get a return on that invested 
capital, there is always a band in there. On the one hand, when 
prices are too low, they won't invest. But on the other side of 
the coin, when supply is constrained, they have a disincentive 
to invest because they can maximize price on the existing 
investment. So the way to get refinery capacity, in my opinion, 
is to have a greater source of supply and let the market work 
to a greater extent than was the case before.
    But it has to be, in our opinion on the Energy Security 
Leadership Council, a comprehensive approach. We are exporting 
billions of dollars, as Senator Snowe mentioned, to people who 
wish us ill. In the debate about U.S. production, there is 
always this oil spill off of Santa Barbara that is brought up 
that took place 30 years ago. Well, all kinds of technology, 
again, as Senator Snowe mentioned, has taken place in 30 years 
and I would point out to the Committee that during the 
disasters of Hurricane Katrina and the other one, whose name 
escapes me--Hurricane Rita and Katrina, there were 1,000 
offshore rigs in the Gulf of Mexico. There wasn't one drop of 
oil spilled.
    So not to be producing oil on our Outer Continental Shelf 
when the Cubans are getting ready to do it and so forth, or 
Alaska, it seems to me, is not in our strategic interest. So we 
would say that fuel efficiency standards, alternative fuels, 
and production are the answer.
    Chairman Kerry. Thank you, Senator Corker.
    Senator Corker. Thank you.
    Chairman Kerry. I appreciate it. I might just comment 
quickly, because this is an issue I have been involved with a 
lot around here for a long time. As we debate Alaska, 95 
percent of the Alaska oil shelf is open for leasing and the 
largest lease in history was letted at the end of the Clinton 
administration and is still not fully exploited, I might add. 
In addition to that, the largest explored but unexploited oil 
field in the world is the offshore Gulf of Mexico, which we 
have permitted, which is allowed. A lot of the oil companies 
have not done that, I am told, because they are waiting for the 
price to be right on it.
    So we have permitted significant additional production. I 
am all for it. I think we ought to have additional domestic 
production. But those are two places where you don't run into a 
whole bunch of political and environmental clash. They are 
there. They are available. They are subject to exploitation now 
and the oil companies are not doing it.
    Senator Tester.
    Senator Tester. Thank you, Mr. Chairman, and I, too, want 
to express my appreciation to the members of the panel for 
their testimony today. I am not going to focus on Mr. Caruso or 
Mr. Smith as much as the other three, but I do want, 
particularly you, Mr. Smith, I want to thank you for your 
leadership in the area of production. I think the points you 
bring up are well founded and I certainly appreciate that 
perspective.
    This can be for Janet or Sal, or both. You both run or are 
part of successful small businesses, at least to this point 
they have been successful for a number of reasons, and I am 
sure that when you do your short-term and long-term planning 
for the future, energy costs have to be something that you are 
very concerned about or you wouldn't be here today, as a matter 
of fact. What are you looking at as potential ways that you can 
save energy costs down the line that you think are realistic, 
or are you just hoping the market gets better as far as price 
at the pump? Either one or both.
    Ms. Myhre. Just real quickly, with the local delivery, what 
we are finding is that we just don't have any options 
associated with the fleet or anything like that. We still only 
have gas-driven kind of vehicles. So the only thing we have is 
to sell more to absorb, you know, hopefully we get to that 
level where as our volume of sale increases, obviously the 
operational cost for delivery goes down. So that is what we 
focus on. We focus our energy into increase our volume to be 
able to absorb some of these without having to go to a 
downsizing, if you will. We do plan for that, but not in the 
initial. We plan for growth.
    Senator Tester. OK. Sal.
    Mr. Lupoli. Thank you, sir. Much like this answer that was 
just given, we found ourselves consolidating a lot of routes. 
You know, instead of making deliveries two to three times a 
week, we are trying to make that same delivery one or two times 
a week. We are trying to carpool with our employees. We really 
feel--I feel as the owner of the company that our biggest asset 
is our employees. That is what we have to look at first.
    So, as far as looking at that bottom line, it is important. 
We want to continue to be profitable. But we will not be 
profitable if we don't take care of the kids that work in our 
company, and almost in excess of 300 kids that work in our 
company, or 300 adults, I should say, that work in the company, 
I find myself speaking to them and speaking to the managers how 
to help these guys consolidate the driving, public 
transportation and some of the things that were mentioned at 
this table. But it certainly results back to focusing on that 
individual worker that needs the most help in my organization 
right now.
    Senator Tester. Thank you. Mr. Lynch, just as a sidebar, 
the reason I was kind of chuckling is because once upon a time 
in Montana, we didn't have a speed limit, and I happen to have 
been in the legislature when we put one in and I remember the 
Trucking Association coming in and saying they wanted, I 
believe it is 65, and then I remember going back to my offices 
and getting calls from the independent truckers that were not 
happy, to say the least. So that is what brought a smile.
    But at any rate, what I want to talk to you about real 
quickly is the low-sulfur fuel and if, and I think it is going 
to happen, we get standards for biodiesel so biodiesel becomes 
something that the quality is dependable on, what kind of 
impact do you see that having on the low-sulfur fuel issue and 
the fuel economy issue?
    Mr. Lynch. On the ultra low-sulfur diesel, we are in the 
transitional stage now. I think we are probably almost up--
well, frankly, we might even be up close to 100 percent now. 
That transition began in October. I will be very honest. Many 
of the problems that had been anticipated did not materialize. 
There still are some questions about clogging of the filters, 
some other issues, particularly in the colder weather States, 
there have been some issues there. But again, we didn't see 
nearly the number of problems that we had anticipated, but they 
could be longer-term.
    Senator Tester. Right.
    Mr. Lynch. Now, with respect to the biodiesel, we could not 
agree with you more on the need for a standard. We think--we 
are very supportive of biodiesel, very supportive of its use. 
We certainly want to see, though, standards so that when every 
farmer decides that they are going to start producing this 
stuff, that when it gets into the stream, that it is of high 
quality, because frankly, we have an issue also then with the 
engines and the warranties on the engines. We have had this 
sort of back and forth with the manufacturers.
    But again, I think if we stick to a standard, a Federal 
standard, and we would hope that the current pending energy 
bill would include something along those lines, labeling, and 
we are a little ambitious. We would like to see a little 
preemption so that we don't get a plethora of boutique fuels 
around the country, but we also recognize the challenges with 
that. But that is certainly what we would like to see.
    Senator Tester. Do you think that will help with the sulfur 
issue?
    Mr. Lynch. My understanding is that it will not only help 
with the sulfur issue, but with the emissions issue, as well.
    Senator Tester. OK. Just one other question. It deals with 
your testimony that talked about the Federal Highway 
Administration interpreting language on basically a generator 
that is allowed in the truck for 400 pounds and they are not 
allowing for that weight exemption. How long has this been 
going on, because to me, it makes perfect sense from an energy 
standpoint and from a common sense standpoint to have a 
generator instead of a big old hunk of cast iron sitting there 
pumping heat or cooling to your cab. How long has this been 
going on? When was the exemption given and when did they take 
it away?
    Mr. Lynch. Language was included in the Energy Act of 2005. 
Like most things in this town, the intent and then the 
interpretation when it gets to the agency, sometimes it drops a 
bit. In this case, the Federal Highway Administration, and we 
are not critical of them, but Federal Highway said the way the 
language was written, it is not mandatory. It is basically 
State by State. Well, for trucks running interstate, they can't 
purchase the equipment and be able to run it in one State, but 
not run it in the other, so consequently, it is of little 
value. So we are still exploring with the Department as well as 
in Congress ways to get that done.
    Senator Tester. OK. I will rely on people who have more 
experience than I to figure out ways to influence the 
bureaucracy. Mr. Chairman.
    Chairman Kerry. Thank you, Senator Tester.
    Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman, and thank you 
for holding this important hearing. I think when we talk about 
all the issues in regards to our energy supplies and the high 
cost, I think many people often forget the impact on small 
businesses and those that are particularly impacted because 
they are in the transportation sector, so thank you for having 
this hearing.
    Mr. Smith, thank you for your leadership on trying to get a 
larger focus on this issue from an industry perspective and 
from a national security perspective. I noticed in your Q&A 
answer back and forth that you said you no longer were 
participating in energy futures as part of your business. Why 
is that?
    Mr. Smith. Senator, it is probably because we are not smart 
enough. But we simply decided that the markets were so volatile 
that as a large publicly held company, we shouldn't be 
speculating on oil prices. We make it very transparent to our 
customers whether using express, ground, freight, or what have 
you, that this is the baseline, the barrel price of fuel that 
is baked into the rate, and then each month, we have a 
surcharge if the prices go beyond that. And we just think it is 
a better way to do it. We lose as prices run up because we are 
about a month behind on the posting, and then we pick up it, 
hopefully, if it ever goes down, on the other side. It is just 
a business decision that is fairly standard in our industry as 
opposed to the passenger airline industry where there is a lot 
of fuel hedging that goes on.
    Senator Cantwell. Well, it is a very interesting comment. I 
hope that somebody doesn't write a sequel to ``The Smartest 
Guys in the Room'' that now is about how the lack of 
transparency in energy futures market, which again, you can't 
figure out. It is too volatile. So a basic function that 
allowed businesses to do something to protect against future 
prices no longer works, and it doesn't because it is too 
volatile and I personally believe we don't have enough 
transparency there.
    I hope you will consider the 787 coming out from Boeing 
that is 20 percent more fuel efficient. I think that they 
listened to customers. Given your CAFE comments, I think the 
aerospace industry listened to customers and said, we need a 
more fuel-efficient plane. Achieving 20 percent more fuel 
efficiency is going to be quite a landmark, so we are excited 
for that.
    Mr. Smith. I might mention, Senator, that we have on order 
15 of the new Boeing 777 freighters, which we start taking 
delivery of in 2009, and that airplane in subsequent editions, 
based on what the chairman of Boeing, Mr. McNerney, has told 
me, will incorporate many of these wonderful technology 
improvements embodied in the 787. So we are looking forward to 
getting those airplanes. They are about 25 percent more fuel 
efficient than the MD-11s which we currently operate.
    Senator Cantwell. Thank you. Thank you for that.
    Ms. Myhre, when a small business is caught between these 
high expenses and delivering service, we just heard Mr. Smith 
say how he had adjusted to large carriers and basically 
changing and creating a surcharge, what do you do when margins 
are obviously a lot tighter at the retail end? I mean, what is 
the end result if prices are going to keep going up? Are you 
just going to--I mean, is it going to be a job impact? You are 
going to lose customers? How----
    Ms. Myhre. It can. Originally, we try not to increase our 
costs to the end consumer. We are trying to absorb----
    Senator Cantwell. Why?
    Ms. Myhre. We are trying to watch the market. As you know, 
prices went back down very close to the election last year, 
back down to a manageable thing, and now again they have crept 
back up, and we understand there is a seasonal fluctuation. So 
we have tried to put that into our end prices to the customers 
for our delivery.
    Right now, however, the trend has been continually to rise 
and rise and rise with no slide-back. So what we are going to 
have to do is start passing on the increase in our expense to 
the end product, to the end consumer. And we have quite large 
Federal contracts that that is a good portion of our business. 
It is destination. So every time I charge for a pencil, my 
freight cost has to be included in that unit cost.
    So you are going to watch--I cannot surcharge the 
government for delivery. I have to deliver--you know, it is 
included in the cost of the goods. So we are watching our 
industry starting to charge more for a pencil and a pen, 
whereas before--it is starting to be competitive. There are 
larger plays that can absorb a little bit faster than we can, 
so----
    Senator Cantwell. Thank you very much. Mr. Lupoli, did you 
want to answer that, too?
    Mr. Lupoli. I think what is interesting in my business, we 
have had growth every single year since the inception and our 
philosophy in our business is we take a portion of the profits 
every year and reinvest them into the company for expansion. 
And I think what is happening in the fuel, for example, last 
year, we spent about $130,000 in fuel expense. This year, we 
are on budget to probably spend over $200,000. Now, that is 
going to come directly out of the bottom line. That is going to 
come directly out of profit. We don't have any intention or 
desire to cut back quality, cut back certainly employees.
    So what is going to happen to us? That means we are going 
to have to cut back expanding our stores, and by cutting back 
expanding of the stores, we are not offering additional jobs 
out there. Although being a small business, every one of our 
stores typically employ anywhere between 10 and 15 people, and 
as we have a growth plan of 3 to 4 stores a year, well, that is 
a big impact if we are not able to expand our stores. That 
trickles all the way down to somebody that needs a job, a local 
person, a local mom, dad, individual that is looking for that 
job that doesn't have the ability or possibly the education for 
a high-paying job to come over to our organization. It is not 
going to be there because of these rising fuel costs. So in a--
--
    Senator Cantwell. Thank you, Mr. Lupoli, and thank you, Mr. 
Chairman. I appreciate that very much.
    Chairman Kerry. Thank you very much, Senator Cantwell. We 
appreciate it. Thank you very much, and thank you for helping 
us connect with Ms. Myhre. We appreciate that very much.
    Senator Coleman.
    Senator Coleman. Thanks, Mr. Chairman. This is a very 
important hearing, Mr. Chairman. I really appreciate it.
    Mr. Caruso, has EIA, have they done a study? I mean, we 
have some great testimony, but have you done a study on the 
impact of energy prices on small business?
    Mr. Caruso. We have not, Senator. We don't disaggregate our 
data collection to that level of detail.
    Senator Coleman. It would be worth having more extensive 
information, and this has been--I am sitting here listening 
about 35 percent increases. I am wondering, Ms. Myhre and Mr. 
Lupoli, is there a point where we simply say--is there a 
tipping point that says, we can't handle this any more? Is 
there a price of gas or something? I am amazed at this figure, 
36 percent in a short period of time. I mean, your margins 
can't be that great. Is there some point where you say, we 
can't afford it. You are going to drive us out of business, or 
the price of gas will drive us out of business?
    Mr. Lupoli. That is a very real statement, sir, and the 
answer is yes. We are getting--my business, our business, we 
are getting dangerously close to those levels. What we would 
like to do is continue to increase sales, increase expansion, 
but we are really finding it difficult to maintain the 
foundation we built of giving all our employees insurance, 
offering them 401(k) plans, doing all those incentives to keep 
the people and create a lifestyle. We are finding it very 
difficult, very close to the point right now where those 
options don't exist anymore, or they have to be stopped and we 
are waiting for this market or this release to take place. 
Something has to happen in order to give us some kind of 
opportunity to expand, and the rising gas prices are preventing 
us from doing that.
    Senator Coleman. I appreciate that. Ms. Myhre.
    Ms. Myhre. We are in the same option right now, I mean, the 
same level that you have to make that critical decision whether 
or not you have to scale back your operations in order to 
absorb, and what employees and what route. You know, a driver 
that drives a route, maybe we will go down to two routes. Maybe 
we will get rid of our local employees all the way around and 
they will be back home. But maybe we will go to an outside 
deliver service and pass it on that way. So yes, every day, 
there is a decision that has to be made to absorb 35 percent--
any line item of your financial statement.
    Senator Coleman. Is there anything, and Mr. Smith, you have 
looked at the big picture, and maybe Mr. Caruso, is there 
anything the Government can do in the short term? Is there 
anything that we are not doing right now that we could be doing 
to lower the cost of a gallon of gas?
    Mr. Smith. Well, I think, Senator, the situation we are in 
built up over many, many years. We see this very clearly in our 
business and I think you would find that the Federal Reserve 
looks at our traffic and UPS's traffic as an excellent 
surrogate as to what is going on in the economy as a whole, and 
since the majority of all business activity is small business, 
one of the things that we have seen over the last year is the 
echo effect of this run-up, and there is just no question that 
the current economic slowdown is directly attributable to the 
run-up in fuel prices which has acted as a tax, particularly on 
small businesses and lower-income people, where those dollars 
have been shipped offshore and they are not recycling in our 
economy.
    I think Sal's testimony was perfect about the people that 
used to come into his restaurant several times a week have to 
scale down. So that is what you are seeing. If the situation 
were to become worse by the withholding of some supply, either 
because of a political act or the cartel determined to increase 
it more, I think you would see significant economic travail in 
this country, particularly in small business.
    Senator Coleman. And yet we clearly have to take a long-
term view, and I----
    Mr. Smith. Well, that is the problem. You know, I don't 
know any short-term palliative. Obviously, you do something 
like have the Government short the market or put petroleum out 
of the Strategic Oil Reserve, but it would just be a short-term 
effect. I mean, these are long-term issues and they need to be 
dealt with in a comprehensive long-term fashion, in our 
opinion.
    Senator Coleman. Just one question about CAFE. Clearly, we 
have to be more aggressive. With the underlying bill there is 
going to be an alternative that is out there. The industry is, 
I think, finally getting it. They are a little slow to the 
dance, but they are getting it. Do you have a position on a 
particular--I thought my colleague from Tennessee asked a 
question about your position on the underlying bill. Do you 
have a position on a particular proposal or is it just the 
general concept that the industry has to be at the table and 
they aren't now?
    Mr. Smith. Our proposal was reflected in the bill that was 
put in by Senators Dorgan and Craig, which call for a 4-percent 
by category, per year, administered by NHTSA, but very 
importantly, with off-ramps if it were technologically 
infeasible or there were safety considerations, you know, 
traffic fatalities went up or whatever the case may be. So you 
have that and then you have, I think in the Commerce bill, 
Senator Feinstein's bill, I believe it is 3\1/2\ percent.
    But the council believes that the underlying technology 
would support what is in the Dorgan-Craig bill. Obviously, 
politics enters into the equation. Maybe there is a compromise 
at some other level or lower level, I don't know. But we 
support the Dorgan-Craig bill and certainly the Feinstein bill 
is in that direction, as opposed to lower levels.
    Senator Coleman. I appreciate your leadership in this area. 
Thank you.
    Chairman Kerry. I think, I may be wrong, but I think the 
Feinstein bill may ramp up after a number of years. It ramps up 
to the 4 percent. So we actually get much closer than people 
would think, and there are some restraints on the off-ramps. I 
think people have been nervous that the off-ramps could be 
deemed by some people to be a non-compliance invitation. That 
is a balance that people are trying to get at. But we hope we 
can hold it together on the floor.
    Senator Cardin, welcome, sir. I think we are going to have 
a vote around 11:30, so go right ahead.
    Senator Cardin. Mr. Chairman, I am going to be very brief. 
I really apologize for not being here earlier to listen to the 
testimony and hear my colleagues with the questions and your 
answers. The Judiciary Committee, as you know, various 
committees including the Judiciary Committee had markup today 
and they needed to make a quorum, so I was over in the 
Judiciary Committee for this morning.
    But I really wanted just to come by to thank the Chairman 
and the Ranking Member for holding this hearing. I think this 
is a critically important issue to get your input. The energy 
policy in this country is so important to this Nation for 
national security, becoming energy independent and less 
vulnerable to other countries' whims. It is important for our 
environment. Global climate change is a real issue that we need 
to deal with as a Nation and show international leadership.
    But it is also important for economic reasons. I can tell 
you, businesses in my community are hurting from the 40 percent 
increase in gasoline prices over the last 5 months and energy 
costs generally. So I look to this Committee and I look to the 
leadership within our business community to come forward with 
workable ways that we can find the technology to advance energy 
independence and can deal with the economic realities of the 
energy pricing as to economic growth in our community.
    Mr. Chairman, I am not going to venture to ask a question 
that may have already been asked, but I wanted to come by and 
tell you that I think this hearing was extremely important. I 
will look forward to reviewing the testimony of the witnesses.
    Chairman Kerry. Thanks a lot, Senator Cardin. We appreciate 
it.
    Senator Thune, I apologize. I didn't realize you had come 
back in. It was my fault. I am sorry about that.
    Senator Thune. Mr. Chairman, I, too, want to express my 
appreciation to you and Senator Snowe for holding what I think 
is a very important hearing. The impact of fuel prices and 
energy prices on small businesses is certainly something that 
is being felt all across the country. And in my State of South 
Dakota, we travel long distances and we are very dependent upon 
the agricultural farm-to-market economy. Obviously that is an 
input cost that our economy is having to bear out and it is 
having a profound impact.
    I guess I would just like to ask a question of some of the 
small businesses on the panel about whether any of you have 
considered switching to alternative fuel-type vehicles, hybrids 
or flex-fuel vehicles, and if not, why, and what are the 
barriers to greater use of those types of automobiles.
    Ms. Myhre. The co-owners did do some research with our 
local fleet management companies, a Ford dealership. We went 
out and we did research to see if there was anything currently 
on the market to fit our delivery needs. We are a lot of stops, 
short route kind of delivery, much like a pizza delivery, I 
guess. But there currently is no alternative option for the 
type of vehicle we would use.
    We only have one diesel truck, so obviously we could use 
the biodiesel, and Washington State is starting to have a 
better distribution system, I guess better than any other 
State, where you can get access to the biodiesel. But for a 
gasoline small delivery, we just don't have any commercial 
options right now.
    Senator Thune. Mr. Smith.
    Mr. Smith. Senator, FedEx, along with the Environmental 
Defense Fund and Eton Corporation, pioneered the development of 
a robust pick-up and delivery vehicle, 700-cubic foot delivery 
vehicle like you see our express and ground units using. It 
gets about 100 percent more fuel efficiency than the 
conventional diesel-powered. It emits about 10 percent of the 
emissions of a standard diesel-powered unit. The problem is, 
and these are rough order of magnitude numbers, a 
conventionally powered vehicle will cost about $55,000 and the 
hybrid will cost about $90,000. So it is impossible with that 
kind of disparity in capital cost, and if it were reflected in 
a smaller vehicle used by office supply or pizza delivery, you 
would have the same relative, perhaps percentagewise even 
higher.
    So as part of this fuel efficiency quest to reach this 4-
percent goal, clearly, the way to do it in the pick-up and 
delivery area, and we did include in our recommendations that 
light trucks and heavy trucks be included for the first time in 
fuel efficiency standards, a big part of that would be to 
develop at scale hybrid pick-up and delivery vehicles, because 
it is a logical place to introduce those. But you would have to 
have incentives to be able to afford them as a small business 
unit or a company like FedEx, which employs 77,000 vehicles in 
our operation.
    But clearly, as Senator Kerry mentioned, the technology is 
there. It is just the will and the incentives and the retooling 
and the production to put these vehicles--battery-powered 
vehicles for the smaller vehicles are certainly on the horizon. 
New battery technology can get us where we need to do. And all 
of those will be driven by a program like we recommended, which 
come from the fuel efficiency standards, because you have to 
use technologies like that to get to where you need to get to.
    Senator Thune. Mr. Lynch.
    Mr. Lynch. Senator, the Class 8 engine tractor is truly a 
marvel. This is an engine that typically for over-the-road 
truck operations can run anywhere from 150,000 to 200,000 miles 
annually. In some truck operations, the vehicle barely stops. 
There is a driver in it. It stops. The next driver comes in 
after the 10 hours, 11 hours. It is a workhorse vehicle. It is 
that efficiency and that dependability, I think, that 
ultimately, not in the P&D operation, but in the over-the-road 
long-haul operation, that is where the biggest challenge is.
    As we look at it, when you are operating at a 4- or 5-mile 
per gallon standard now, you have a lot of room to grow and 
improve, and we certainly would like to see that. But part of 
the challenge there is that same tractor can pull 80,000 pounds 
or the same tractor can pull 30,000 pounds and that can make 
one whale of a difference as to how much of a CAFE standard 
that particular equipment is going to be able to achieve.
    But it is certainly something that--I think one of the 
Senators said, what can we do? I think it is start now.
    Senator Thune. And it sounds like what I am hearing is that 
it is going to take that kind of a requirement. It is not going 
to happen, the economics are not there currently for you to 
start using those types of vehicles until they start producing 
them and have some sort of a requirement that they achieve a 
certain level of fuel efficiency and, therefore, get the 
technology into the assembly lines and what not to be able to 
move in a direction that would make those types of vehicles 
more cost effective. I mean, in your operation, that is 
significant, 55,000 versus 90,000, and I understand you need a 
workhorse engine.
    How much of it, too--it seems to me that is a bigger issue 
than the question I am going to ask now, but how much of it, 
too, is having access to alternative fuels at the retail level? 
We have about 180,000 gas stations in America and of those, 
only about 1 percent make, for example, the 85 available, and 
most of that you are probably going to find in the Midwestern 
region. So it seems like we have also an infrastructure problem 
we have to solve, and these things may have to all be solved 
kind of at the same time. But that is something I have been 
working on.
    I think as we go toward hopefully cellulosic ethanol, we 
will see more and more, and the research phase is, of course, 
underway. Hopefully, commercialization is not very far away. 
But we have got a limit, I think as you noted in your 
testimony, Mr. Smith, to what we can do in terms of corn-based 
or kernel ethanol. We now have to look at other biomass to be 
able to produce it.
    I thought your testimony was especially good with regard to 
what I think is a very precarious situation that we face in the 
world relative to where we get our energy. I think that it 
would not take much to disrupt or cause a significant increase 
in cost to the American consumer, the American business, if 
there is just the slightest hiccup in the Middle East or 
Venezuela or someplace like that. I describe that as a 
terrorism tax. I think we are paying enormous amounts of money 
to countries around the world who have hostile intentions 
toward the United States and that we need to diversify away 
from that.
    The energy bills that we are debating this week and 
hopefully will continue to move legislation through here that 
addresses this issue, because I think that--I am a big 
advocate, as you might expect from my part of the country, for 
renewable energy. But we have got to add supply. We have got to 
add supply. We have got to figure out ways to get home-grown 
American energy so that we do not get 60 percent of it from 
outside the United States. I think that is a very perilous 
situation for our country.
    So I am supportive of whatever steps we can take to move in 
that direction, but I am appreciative of your testimony and 
comments in response to questions about the best way to go 
about that and what makes the most sense in terms of your day-
to-day operations. So thank you for being here and thank you 
for your testimony.
    I have got a statement, Mr. Chairman, I would like to get 
included in the record.
    [The prepared statement of Senator Thune follows:]

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    Chairman Kerry. Without objection, it will be put in the 
record. I really appreciate the Committee's strong 
participation in this, obviously.
    Just a couple of quick wrap-up questions and thoughts. 
First of all, I am going to be introducing legislation, the 
Small Business Emergency Fuel Assistance Act of 2007, which is 
based on a Presidential declaration of a fuel emergency. As we 
saw after Katrina and other instances, there are moments where 
you may really come into the kind of shortfall that Fred Smith 
has talked about. And under those circumstances, we want to 
create a grant program to help small businesses through a 
legitimate fuel emergency. This is not for standard business 
operation, but rather a legitimate Presidentially declared 
emergency. Eligibility for these grants would be restricted to 
businesses with fewer than 50 employees and less than $5 
million in gross receipts, eligibility being determined on 
those businesses having a plan to, in fact, become more energy 
efficient. So hopefully we have a linkage there.
    I might also comment that in the 23 years I have been here 
now, on the Commerce Committee, when Senator McCain and I tried 
to get CAFE standards raised to 35 miles per gallon about 5 or 
6 years ago, and the mood of the Senate just was not there. In 
fact, one Senator actually brought a poster of a Volkswagen 
dragging a plow through a field--a purple Volkswagen, I might 
add--and that was the image and the sort of sloganeering used 
to try to deter people from moving in this direction, which has 
been obvious for a long time.
    I think when Harvard and Stanford and Tuck and Wharton and 
places do their case studies in the future, one of the dramatic 
case studies is going to be the big three out in Detroit, 
tragically, who have again and again, from the 1960s on, missed 
market trends and missed what consumer desire is or could be, 
or what it might be marketed to. They have taken the simplest 
marketing route rather than sometimes the most visionary or the 
best or the most creative.
    I know that in 1990, when we negotiated the Clean Air Act, 
I remember sitting there and listening to industry come into 
that room where we sat with Senator Mitchell off of the 
Majority Leader's office, with John Sununu and Bill Reilly and 
George Herbert Walker Bush involved it, and the industry said, 
don't do this to us. It is going to cost $8 billion. It is 
going to take 10 years. You are going to bankrupt us. We just 
can't do it.
    The environmental community and others came in and said, 
no, it is not. It is going to cost about $4 billion. It can be 
done in about half that time and it won't bankrupt folks.
    In the end, folks, it took half of that. It cost about $2 
billion and it was done in about 2\1/2\ years. Why? Because no 
one was able to predict what happens when American ingenuity is 
unleashed around a national goal or standard.
    We already have the National Academy of Sciences telling us 
we have the technology to dramatically change fuel efficiency. 
So we run into this simplistic resistance based on old visions 
of an old market, when there is really an enormous opportunity 
here to grab this and take the ball and run with it. We want 
cars made in Detroit. We want American workers making those 
cars. We want to beat Toyota and BMW and all the rest of these 
folks. But you have sure got to market something, which is a 
product that makes sense.
    I wanted to buy an E-85 vehicle to drive around 
Massachusetts. One gas station, in Chelsea, has the 
availability. For the price of 1 week of the war in Iraq, we 
could actually pay to put an alternative fuel pump in every 
single gas station in America. I mean, these are the real 
choices that we face.
    And I concur with what Fred Smith said. We have to be 
careful not to go rushing off into the grain-based ethanol 
because of what it will do to the food markets, as well as what 
it does to soil, water, and a lot of other usages where you 
have these cellulosic opportunities.
    And if you talk to the venture capitalists in California 
and Massachusetts and New York and elsewhere, they are already 
putting billions of dollars into these other sectors, some of 
them promising. They believe there will be an alternative to 
fossil fuel maybe 5 or 10 years from now.
    So if we set this goal and we start to move our technology 
and creativity in that direction, I am absolutely convinced, 
based on past experience and current technology, that this is 
going to prove so much easier than people think. And Mr. Lynch, 
you commented on how many of the problems that had been 
predicted didn't show up in terms of the low-sulfur. I think 
the same thing will be true here and we ought to have 
confidence in America's ability to do these things.
    I might ask you just one more question, Sal, in terms of 
your business. I wanted to provide a billion dollars of 
retooling to the auto industry and I wanted to provide a $4,000 
per vehicle credit for hybrids, which I think would change a 
lot of attitudes. If you had a better tax incentive available 
to you on solar or on other fuel efficiencies, or you, Ms. 
Myhre, would that make a difference to sort of the business 
plan you lay out, what you might be willing to capitalize on, 
and ultimately, to your bottom line?
    Mr. Lupoli. Absolutely, yes, sir. What we would do is we 
would look at the long-range vision, not trying to put a band-
aid on today but really look at this in 5 to 10 years from now. 
You know, oftentimes, people tell you, you know, buying 
electricity, trying to contract it right now, or trying to 
contract a fuel price right now. I want to extend that. They 
are trying to hold you to a 16-month or a 2-year program. I 
want to extend it to a 5- or 10-year program.
    And if there were more exemptions and we took advantage of 
one of them in our State of Massachusetts by putting the 
second-largest solar panel system on a private business, we 
would do those things, because in the long run, we will be 
better off. As opposed to just looking at the short-term gain, 
I want to look at the long-term gain, because as prices 
continue to increase, when people try to talk about the 
amortization of that cost, we really look at it as the gap is 
going to close even much faster because it is not going to be a 
10-year program. If prices continue to rise, it is really a 5-
year program we are talking about. So before you know, you will 
open your eyes and that incentive and that opportunity will be 
there to take advantage.
    Chairman Kerry. Obviously, your product is price-sensitive 
to your consumer, so there is a limit to how much you can 
absorb here?
    Mr. Lupoli. That is correct.
    Chairman Kerry. Without starting to lose business, just 
based on your own pricing, and the same for Ms. Myhre. Have 
you, however, raised prices? Have you sort of reached that 
limit at all?
    Mr. Lupoli. We really have, Senator. You know, we really 
feel the product to be competitive, and I think that is the 
most important thing we are talking about in my industry, there 
is only so far you can go, sir, to be competitive. And unless 
you are willing to sacrifice the quality or employees, which we 
are not, which will never be an option, it really just comes 
right out of your pocket. And we are at that point where we 
can't really raise any prices anymore. We can't pass that price 
over to our customers on the wholesale end of it. So it is just 
really becoming a financial burden and it is becoming a great 
problem to the employee.
    Chairman Kerry. Well, we really appreciate your business 
ethics, your values that guide your business, and are very 
sympathetic.
    We are working on this right now, literally today, and the 
mark should be out on the tax bill that we are doing to 
accompany what is happening on the energy bill. We are going to 
put some serious incentives in there for alternative renewable, 
hybrid electric, and plug-in, and really try to stimulate this. 
As I said, I fought for a billion dollars in 2004. I think I am 
going to be able to get about a half-a-billion dollar tax 
benefit to businesses and to the auto industry here to be able 
to retool. Hopefully that can help to cushion some of what we 
need to do to get these vehicles that Fred Smith talked about.
    It is crazy that you all don't have better alternatives. It 
is crazy that a whole bunch of folks can't go out there and 
find a car or big truck or big SUV, even, that a soccer mom 
can't be confident that she can get everybody in the team to 
the game with a fuel-efficient vehicle. There is no reason not 
to in our country. So----
    Senator Cardin. Would the Senator yield just for one 
moment?
    Chairman Kerry. Sure.
    Senator Cardin. I just want to concur in your comments and 
just point out what I think is absolutely accurate. You have to 
make it a little bit easier for individuals and businesses to 
make that initial investment and I look forward to seeing the 
tax provisions from the Finance Committee on the energy bill.
    Mr. Lynch, we have the technology today to make engines 
with alternative fuels as reliable and as efficient so that the 
business concern of having the reliability of an engine that 
can go 100,000 or 150,000 miles a year, we have that. We just 
need to make sure it is available.
    I just really want to underscore one point you made, Mr. 
Chairman, and that is in my own State of Maryland, we have 
governmental fleets and business fleets that want to use 
biodiesel. The problem is they can't get biodiesel. Most of the 
diesel stations don't offer it. So we also need to make sure 
that there is the infrastructure network out there to supply 
those that are moving forward with alternative fuels, so that 
they can get it conveniently, and that may require some action 
on our part to make sure that network is available.
    I thank you for yielding, because I agree completely with 
your assessment. We have the technology. We have the ability to 
get this done. We now need--I think we also have the national 
will, by the way. So let us now enact the policy so that we can 
get it done.
    Chairman Kerry. Well, I really want to thank everybody on 
the panel. I know you have traveled some distance. You have all 
sat here giving precious time to the Committee. I think it has 
been very, very helpful, very important testimony, particularly 
at this moment with a bill on the floor. I think some of the 
Senators here will take some of this testimony to this debate, 
so I think it has been really helpful in that regard.
    I will leave the record open in case somebody does have a 
question they want to submit in writing to you, but we are 
very, very appreciative and with that, we will stand adjourned. 
Thank you very much.
    [Whereupon, at 11:40 a.m., the Committee was adjourned.

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