[Congressional Record Volume 144, Number 139 (Wednesday, October 7, 1998)]
[Extensions of Remarks]
[Pages E1934-E1936]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                               GAS PRICES

                                 ______
                                 

                          HON. SILVESTRE REYES

                                of texas

                    in the house of representatives

                       Wednesday, October 7, 1998

  Mr. REYES. Mr. Speaker, the citizens of El Paso voiced their concerns 
to me over what they pay for gas at the pump. As many of you know, the 
mayor of El Paso, Carlos Ramirez, contacted me earlier this year with a 
request that I initiate a closer look at this situation. At my request, 
Congressman Gene Green chaired a public meeting in El Paso on gas 
prices. I would like to insert for the Record the statements of two of 
the participants, Mr. Carter Montgomery of Longhorn Partners Pipeline, 
and Dr. R. Perryman of Perryman and Associates, who both spoke about 
the gas prices in El Paso and how to resolve those problems.

  Statement of Carter R. Montgomery, President and CEO, The Longhorn 
             Partners Pipeline, Sept. 3, 1998, El Paso, TX

       Good morning. I am Carter Montgomery, President and CEO of 
     Longhorn Partners Pipeline. Longhorn is a limited partnership 
     based in Dallas, Texas. In 1995, we began developing a 700-
     mile, 18-inch diameter pipeline that will transport gasoline, 
     diesel and jet fuel from Gulf Coast refineries to West Texas 
     communities and the El Paso gateway market.
       Our pipeline consists of an existing 450-mile section from 
     Houston to Crane, which we have significantly improved; a 
     newly constructed 250-mile extension from Crane to El Paso; 
     and a new nine-mile section to connect the existing pipeline 
     in Houston with the GATX terminal in Galena Park, Texas. GATX 
     is the largest products terminal on the Gulf Coast. By 
     originating there, Longhorn will be able to receive products 
     for delivery to West Texas from as many as 12 Gulf Coast 
     refineries that, together, constitute nearly 25 percent of 
     the refining capacity of the U.S. Our goal is to begin 
     delivering products to El Paso and West Texas before the end 
     of 1998.
       In El Paso, we are also constructing a 19-tank, 900,000-
     barrel terminal to allow shippers to store fuels for this 
     area and send some on to New Mexico and Arizona. In addition, 
     Longhorn is constructing a smaller terminal in Odessa, Texas 
     to serve the Permian Basin market. An 8-inch pipeline is 
     being constructed from Crane to serve the new terminal in 
     Odessa.
       We made the decision to serve El Paso consumers and 
     businesses after identifying historically high gasoline 
     costs, often 10 to 20 cents per gallon more than drivers pay 
     in other parts of Texas, such as Houston. This costs El 
     Pasoans more than $12 million per year.
       As this chart shows, between January 1990 and July 1998, 
     Houston had consistently lower gasoline prices than El Paso.
       Even as El Paso's gasoline prices became slightly lower 
     between June 1996 through July 1998, its prices have still 
     remained higher than in Houston plus the cost of 
     transportation, although an interesting phenomenon is 
     taking place.
       From June 1996 through July 1998, there has been a definite 
     closing of the price gap. It appears to me that several 
     factors have contributed to this welcome relief to El Paso 
     motorists: the actions of El Paso citizens in demanding lower 
     prices, including some very active advocates in the media; 
     the actions of Mayor Ramirez and other elected officials like 
     yourselves; and the mere threat of competition from the Gulf 
     Coast that has resulted in gasoline merchandisers competing 
     for market share before the new gasoline supplies get here.
       I want to emphasize, though, that El Paso citizens have 
     seen short-term price reductions before, only to have their 
     hopes dashed a few months later. What will be different after 
     Longhorn is operating is this--bringing gasoline and other 
     fuels from those Gulf Coast refineries will create a 
     structural change in the market. That structural change is 
     what will seal in the new, more competitive market that will, 
     in turn, help make fairer pricing a lasting part of the El 
     Paso economy.
       I am extremely proud to be a part of this project. We are 
     building a safe, environmentally sound pipeline, with a goal 
     of 100 percent safety. We have gone to great lengths to 
     ensure the operating integrity of this pipeline. Many of the 
     tests and improvements to the line exceed federal and state 
     requirements.
       Even before purchasing the line in 1995, we conducted 
     several comprehensive tests. These included the ``Smart Pig'' 
     test, a device, run through the pipeline, that electronically 
     measures wall thickness and other structural conditions. 
     Following that, a Hydrostatic Test was performed to confirm 
     the integrity of the entire pipeline. In a Hydrostatic Test, 
     the line is pressurized to 1.25 times its maximum operating 
     pressure and held there for an extended period. The tests 
     confirmed the pipeline's structural integrity. Going forward, 
     Longhorn will conduct additional ``Smart Pig'' tests every 
     five years.
       Once in operation, the entire pipeline will be monitored 24 
     hours a day from a central control room, with readings taken 
     every few seconds by computer. An operator will manage the 
     pipeline, including the new remotely controlled valves we are 
     adding as a safety upgrade.
       Longhorn is adding these remotely operated block valves on 
     both sides of the Edwards Aquifer and at all river crossings, 
     isolating these small sections so the flow of products can be 
     quickly halted if necessary. Volumes entering and exiting 
     sections of the pipeline are metered and balanced every few 
     seconds, allowing the operator to monitor the flow of 
     products through the pipeline. Each valve operates 
     independently, enabling the operator to select the most 
     environmentally sound course of action.
       Suction and discharge pressures at all pumping stations are 
     also continually monitored, giving the operator additional 
     data to operate the pipeline safely and reliably.
       Longhorn will also install an additional pump near the 
     Edwards Aquifer that will lower the operating pressures over 
     the aquifer. These operating pressures will be lower than in 
     the past. This is an additional step that will help to 
     protect the environment.
       We are also posting pipeline identification signs closer 
     together than the previous operator, decreasing the risk of 
     third-party damage to the line.
       Longhorn will visually inspect the entire line once a week, 
     more frequently than in the past. Many of these safety 
     measures go beyond the requirements of law or regulation, but 
     we are doing them because they enhance safety, help us 
     fulfill our commitment to safety and environmental quality 
     and, frankly, because they're good, prudent business 
     measures.
       We are, and will continue to be, regulated by the U.S. 
     Department of Transportation's Office of Pipeline Safety on 
     interstate pipeline matters, and by the Texas Railroad 
     Commission on any intrastate pipeline matters.
       This concludes my statement. I will be happy to answer any 
     questions.
                                  ____


 Summary of Testimony by M. Ray Perryman, PhD, Sept. 3, 1998, El Paso 
                              Civic Center


                    Introduction and Qualifications

       My name is M. Ray Perryman. I am President and Chief 
     Executive Officer of The Perryman Group (TPG), an economic 
     research and analysis firm with its principal place of 
     Business in Waco, Texas. In addition to my responsibilities 
     at the firm, I am business Economist-in-Residence at Southern 
     Methodist University (SMU) and Institute Distinguished 
     Professor of Economic Theory and Method at the International 
     Institute for Advanced Studies.
       It is my pleasure to appear before this Committee and offer 
     a perspective on the retail gasoline market in El Paso and 
     New Mexico. I am deeply appreciative of the work that the 
     Committee is doing and greatly admire the willingness of this 
     group to tackle such complex issues. I will do anything 
     possible to assist in the process.


                              Introduction

       A new competitor is seeking to enter the market for 
     gasoline sales in the Upper Rio Grande area which is 
     dominated by the El Paso Metropolitan Statistical Area (MSA). 
     The project will also provide a new source of refined 
     petroleum products in New Mexico. The new venture promises 
     substantial economic benefits to consumers in the form of 
     lower costs. The project involves the development of a 
     pipeline connecting the refineries of the Texas Gulf Coast 
     with El Paso. The pricing structure offered by this new 
     initiative will bring significant savings to area residents, 
     particularly within the Hispanic population. The new pipeline 
     will also enable connections to third party pipelines with 
     access to major urban centers in Arizona and New Mexico.
       The total project has far-reaching economic benefits for 
     the economies of regions it serves, including construction 
     costs, ongoing operating expenditures, and substantial 
     savings to consumers. The present testimony presents the 
     project's economic savings to residents in the El Paso area, 
     to the local Hispanic community, and to New Mexico--all of 
     which are made possible by the pipeline. Initially, a brief 
     description of the methodology is provided. This discussion 
     is followed by a presentation of results and a concluding 
     synopsis.


                              Methodology

       The basic technique used in this investigation is known as 
     input-output analysis. In general, this approach involves the 
     creation of a system which estimates the amount of various 
     inputs required to make a unit of output (measured in 
     monetary terms). For example, the construction of a typical 
     house requires quantities of wood, glass, wiring, roofing 
     shingles, financial services, and numerous other factors. 
     Each of these items also requires inputs, thus leading to 
     multiple rounds of activity. The portion of this production 
     activity that remains in an area depends upon its capability 
     to supply the various items required in the process.

[[Page E1935]]

       The proposed pipeline will enable the achievement of 
     consumer savings through notably lower prices for gasoline 
     and diesel in the Upper Rio Grande areas it reaches. The 
     direct magnitude of fuel purchases in the relevant regions is 
     estimated based on data provided by the Texas Comptroller 
     of Public Accounts and the New Mexico Taxation and Revenue 
     Department for gallons of fuel sold and motor vehicle 
     registrations. As a conservative assumption, 1997 volumes 
     are used in the analysis although past data and forecasts 
     for the regions suggest increasing future sales. (The 
     regional forecasts of overall economic conditions are 
     generated by The Perryman Group using standard regional 
     modeling approaches.)
       Once the volumes are established, the potential savings in 
     wholesale costs are determined. Using data from the Oil Price 
     Information Service, the differential between prices in the 
     Gulf Coast area and the relevant consumer markets is 
     calculated. A four-year average (19943-1997) disparity is 
     employed in the analysis. The net differential in wholesale 
     prices is determined by subtracting the expected 
     transportation tariff for spot shippers to be levied by the 
     new competitor and other third party shippers from the price 
     gap. The calculations are completed in a manner that does not 
     incorporate disparities in state gasoline taxes within the 
     cost savings. Even greater savings could occur through 
     contract shipments at lower negotiated rates, although this 
     potential was not factored into the calculations in the 
     interest of conservatism.
       To translate these wholesale price reductions into retail 
     savings for consumers requires an evaluation of the extent to 
     which cost decreases are passed along to consumers. In 
     general, studies indicate that ``permanent'' changes in 
     wholesale gasoline costs are fully reflected in retail prices 
     within a short period of time. Several recent national 
     studies indicate that even temporary cost decreases are 
     passed from 80%-100% to consumers. (See, for example, Robert 
     Bacon, ``Rockets and Feathers: The Asymmetric Speed of 
     Adjustment of UK Retail Gasoline Prices to Cost Changes,'' 
     Energy Economics, 1991; A. Borenstein, Colin Cameron, and 
     Richard Gilbert, Do Gasoline Prices Respond Asymmetrically to 
     Crude Oil Price Changes?, National Bureau of Economic 
     Research, 1992; Jeffrey Karrenbrock, ``The Behavior of Retail 
     Gasoline Prices: Symmetric or Not?,'' Federal Reserve Bank of 
     St. Louis Review, 1991; and US General Accounting Office, 
     Analysis of the Pricing of Crude Oil and Petroleum Products, 
     1993.) In the present study, it is assumed that only 80% of 
     the wholesale savings is translated to consumers, thus again 
     understating the likely benefits. It is further assumed, and 
     widely supported by empirical studies and market behavior, 
     that reductions in cost from one supply source will be 
     matched by others in the market. (See, for example, Howard 
     Friedman, ``The Analyst's Angle,'' Indiana Department of 
     Natural Resources, 1998; ``Taking the Mystery Out of Gasoline 
     Prices,'' Petroleum Communications Foundation, 1997; Rick 
     Castnais and Herb Johnson, ``Gas Wars: Retail Gasoline Price 
     Fluctuations,'' Review of Economics and Statistics, 1993; and 
     Margaret E. Slade, ``Vancouver's Gasoline-Price Wars: An 
     Empirical Exercise in Uncovering Supergame Strategies,'' 
     Review of Economic Studies, 1992.)
       The calculated savings to consumers represent a net 
     increase in after-tax spendable income. A portion of this 
     gain will be saved or spent outside the area, but the vast 
     majority of it will be spent locally on various household 
     purchase items. The composition of these direct outlays is 
     estimated using information regarding typical local spending 
     patterns compiled from the US Department of Labor and the 
     American Chamber of Commerce Researchers' Association. (Some 
     of these savings also accrue to local business enterprises. 
     Those entities typically have higher multipliers than 
     consumers, thus making the approach employed in this study 
     quite conservative.)
       After the components of direct spending are compiled, the 
     indirect and induced (or multiplier) effects are determined. 
     (The actual incremental consumer spending that takes place as 
     a result of savings stemming from the project is called the 
     direct effect. The production of the purchased goods is known 
     as the indirect effect, while that resulting from payroll 
     spending is the induced effect.) Given a reliable measure of 
     the direct magnitude of increased spending, localized 
     input-output models may be used to determine the 
     additional or ``multiplier'' production that is generated.
       These effects are calculated by using the relevant 
     geographic submodels of the U.S. Multi-Regional Impact 
     Assessment System which was developed and is maintained by 
     The Perryman Group. This model, which has been used in 
     hundreds of applications over the past two decades, reflects 
     the unique industrial composition of each geographic region 
     and may be used to assess business activity in any county or 
     multi-county region. The system is extremely comprehensive 
     and encompasses more than 500 distinct industrial categories. 
     The model is similar in scope to the Input-Output Model of 
     the United States and the Regional Input-Output Modeling 
     System maintained by the U.S. Department of Commerce, but it 
     incorporates numerous refinements, updates, expansions, and 
     localization parameters. It is designed to provide a 
     realistic yet conservative estimate of the overall outcomes 
     resulting from specific economic stimuli. Thus, it offers an 
     ideal mechanism to assess the anticipated gains to residents 
     in the El Paso area and New Mexico who will benefit from the 
     new pipeline's lower gasoline prices.


Annual Economic Benefits to Consumers in The Upper Rio Grande (El Paso 
                               MSA) Area

       The Upper Rio Grande region primarily benefits from the 
     advent of new competition via cost savings in gasoline and 
     diesel products. The total yearly gains (from cost savings) 
     to consumers in the El Paso area at project maturity are thus 
     determined to be: $46.648 million in annual Total 
     Expenditures; $21.165 million in annual Gross Area Product; 
     $13.168 million in annual Personal Income; $12.264 million in 
     annual Retail Sales; and 568 Permanent Jobs.
       The first graph appended to this report graphically 
     illustrates these economic benefits. (All monetary values 
     throughout this analysis are given in 1998 dollars in order 
     to adjust for the effects of inflation.)
       These enhancements to local economic conditions permeate 
     the entire area and positively affect virtually all segments 
     of the population.


   Annual Economic Benefits to Hispanic Consumers in the El Paso Area

       As more competitive gasoline prices occur in the El Paso 
     area, the highly-concentrated Hispanic population will 
     receive significant economic benefits. Due to the presence of 
     lower gasoline prices, this group is projected to enjoy 
     yearly savings of over $5.7 million, with an average gain of 
     about 22.0% relative to non-Hispanic households.
       The total yearly impacts (in consumer savings) from the 
     new, competitive pipeline on economic activity among local 
     Hispanics are expected to be: $7.045 million in annual 
     Personal Income; $5.456 million in annual Wages and Salaries; 
     $7.154 million in annual Retail Sales; $11.346 million in 
     annual effective Purchasing Power; and 411 Permanent Jobs.
       The second attached graph illustrates these benefits.
       This entrance of a new player in the market clearly offers 
     impressive increases in the well-being of the Hispanic 
     community of the Upper Rio Grande region.


  Annual Economic Benefits to Hispanic Consumers in the State of Texas

       Hispanics across Texas will enjoy further economic benefits 
     from lower prices offered by the new competitor. Hispanic 
     consumers and businesses in the Upper Rio Grande region will 
     purchase inputs from other parts of the state, thus 
     generating subsequent indirect and induced gains.
       The total annual impact of the ongoing activities of the 
     new pipeline (from cost savings) on the Hispanic population 
     of Texas are estimated to be: $10.110 million in annual 
     Personal Income; $7.813 million in annual Wages and Salaries; 
     $9.249 million in annual Retail Sales; $14.875 million in 
     annual effective Purchasing Power, and 590 Permanent Jobs.
       The third attachment to this report graphically presents 
     these economic enhancements.
       There are, thus, substantial economic gains which will 
     accrue to the Hispanic residents of the state due to the new 
     competitor's lowered gasoline and diesel prices. Texans are 
     not the only US citizens to gain from the presence of a new 
     competitor. New Mexico residents also stand to benefit.


 Annual Economic Benefits to Consumers in the Albuquerque Metropolitan 
                                  Area

       Consumers in Albuquerque and Las Cruces are among New 
     Mexico's residents most likely to feel an increase in 
     economic activity from the new venture. The Albuquerque area 
     will primarily benefit from the proposed pipeline through 
     cost savings in gasoline and diesel products. At project 
     maturity, the increase in local business activity generated 
     by lower prices of refined products and the associated 
     increase in consumer spending is expected to be: $33.133 
     million in annual Total Expenditures; $17.346 million in 
     annual Gross Area Product; $10.348 million in annual Personal 
     Income; $9.230 million in annual Retail Sales; and 581 
     Permanent Jobs.
       These enhancements to local economic conditions permeate 
     the entire area and positively affect virtually all segments 
     of the population. The fourth graph following this report 
     depicts these gains.


 Annual Economic Benefits to Consumers In the Las Cruces Metropolitan 
                                  Area

       As in Albuquerque, the Las Cruces area will also derive its 
     major gains from the proposed pipeline through savings 
     accruing to purchasers of gasoline and diesel products.
       The stimulus to the local economy resulting from lower 
     prices of petroleum products and the corresponding 
     enhancements to consumer spending is estimated at: $9.308 
     million in annual Total Expenditures; $4.704 million in 
     annual Gross Area Product; $2.840 million in annual Personal 
     Income; $2.667 million in annual Retail Sales; and 164 
     Permanent Jobs.
       Again, these benefits, which are measured at project 
     maturity, are enjoyed across a broad spectrum of industries 
     and population cohorts. The fifth attached graph illustrates 
     these enhancements.


    Annual Economic Benefits to Consumers in the State of New Mexico

       The savings achieved in Las Cruces and Albuquerque yield 
     spillover benefits to the entire state of New Mexico. The 
     overall statewide gains from greater accessibility to more 
     competitive gasoline prices in these two urban markets are 
     projected to include: $48.938 million in annual Total 
     Expenditures; $25.163 million in annual Gross Area Product;

[[Page E1936]]

     $14.469 million in annual Personal Income; $12.370 million in 
     annual Retail Sales; and 807 Permanent Jobs.
       Assuming that a similar level of direct savings is 
     available across the entire state, the aggregate incremental 
     stimulus to business activity in New Mexico expands to: 
     $128.686 million in annual Total Expenditures; $66.167 
     million in annual Gross State Product; $38.048 million in 
     annual Personal Income; $32.529 million in annual Retail 
     Sales; and 2,122 Permanent Jobs.
       It is, thus, readily apparent that the consumers and 
     producers of New Mexico have a substantial stake in the 
     ongoing availability of gasoline at lower prices which is 
     afforded by the new, competitive pipeline. Both sets of 
     consumer benefits are illustrated in the graphs following 
     this report.


                                Synopsis

       This testimony presents an evaluation of the contributions 
     to consumers of a dynamic, new competitor in the Upper Rio 
     Grande and New Mexico markets for gasoline and diesel sales. 
     The results reveal impressive economic enhancements for the 
     residents of the El Paso area, particularly among Hispanic 
     residents. Substantial gains are also observed for retail 
     customers in New Mexico. Conservative assumptions were used 
     throughout the analysis; longterm effects, such as the 
     greater competitiveness of a region for new industrial 
     locations engendered by lower transportation costs, have not 
     been factored into the analysis. Thus, this assessment should 
     be viewed as a measure of the minimum benefits ensuing from 
     the entrance of a new competitor. The findings clearly reveal 
     that the pipeline is an imaginative endeavor which will be 
     highly advantageous to the consumers it reaches.
       Again, I appreciate the opportunity to participate in this 
     process and look forward to ongoing involvement. As 
     additional issues surface concerning the impacts of gasoline 
     prices, I will continue to update our analysis.
       If any of you have questions or need additional 
     information, please feel free to let me know. I appreciate 
     the work that all of you do on behalf of the citizens of the 
     United States, and I wish you all the best with the many 
     challenges you face.

     

                          ____________________