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74–099 PDF 2001

POTENTIAL ENERGY CRISIS IN THE WINTER OF

2000

HEARINGS

BEFORE THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

SEPTEMBER 20 AND 21, 2000

Serial No. 106–251

Printed for the use of the Committee on Government Reform

(

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

http://www.house.gov/reform
(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

HELEN CHENOWETH-HAGE, Idaho

DAVID VITTER, Louisiana

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JAMES C. WILSON, Chief Counsel

ROBERT A. BRIGGS, Clerk

PHIL SCHILIRO, Minority Staff Director
(III)

C O N T E N T S

Page

Hearing held on:

September 20, 2000 .......................................................................................... 1

September 21, 2000 .......................................................................................... 199

Statement of:

Browner, Carol, Administrator, Environmental Protection Agency ............. 226

Hoecker, James J., chairman, Federal Energy Regulatory Commission ..... 239

Richardson, Bill, Secretary, Department of Energy ...................................... 212

Santa, John, chief operations officer, Santa Fuel, Bridgeport, CT; Ray

Tilman, former president, Montana Resources, Butte, MT; David Pursell, vice president of Upstream Research, Simmons & Co. International, Houston, TX; Steve J. Lane, senior facilities engineer, SDL,

Inc., San Jose, CA; and David Hamilton, policy director, Alliance to

Save Energy .................................................................................................. 31

Simon, Steve, president, Worldwide Refining and Supply, ExxonMobile

Corp., Dallas, TX; Bob Slaughter, general counsel and director of public

policy, National Petrochemical and Refinery Association; Curt

Hildebrand, vice president, project development, Calpine Corp.,

Pleasanton, GA; David Hawkins, director, air and energy program,

Natural Resources Defense Council ............................................................ 102

Letters, statements, etc., submitted for the record by:

Browner, Carol, Administrator, Environmental Protection Agency, prepared statement of ........................................................................................ 230

Burton, Hon. Dan, a Representative in Congress from the State of Indiana, prepared statements of......................................................................... 6, 205

Chenoweth-Hage, Hon. Helen, a Representative in Congress from the

State of Idaho, prepared statement of ......................................................... 2

Hamilton, David, policy director, Alliance to Save Energy, prepared statement of ........................................................................................................... 73

Hawkins, David, director, air and energy program, Natural Resources

Defense Council, prepared statement of ..................................................... 153

Hildebrand, Curt, vice president, project development, Calpine Corp.,

Pleasanton, GA, prepared statement of ...................................................... 134

Hoecker, James J., chairman, Federal Energy Regulatory Commission,

prepared statement of ................................................................................... 241

Kanjorski, Hon. Paul E., a Representative in Congress from the State

of Pennsylvania, prepared statement of ...................................................... 21

Kucinich, Hon. Dennis J., a Representative in Congress from the State

of Ohio, prepared statement of .................................................................... 25

Lane, Steve J., senior facilities engineer, SDL, Inc., San Jose, CA, prepared statement of ........................................................................................ 68

Pursell, David, vice president of Upstream Research, Simmons & Co.

International, Houston, TX, prepared statement of ................................... 55

Richardson, Bill, Secretary, Department of Energy, prepared statement

of ..................................................................................................................... 216

Santa, John, chief operations officer, Santa Fuel, Bridgeport, CT, prepared statement of ........................................................................................ 33

Shays, Hon. Christopher, a Representative in Congress from the State

of Connecticut, prepared statement of ........................................................ 19

Simon, Steve, president, Worldwide Refining and Supply, ExxonMobile

Corp., Dallas, TX, prepared statement of ................................................... 104

Slaughter, Bob, general counsel and director of public policy, National

Petrochemical and Refinery Association, prepared statement of .............. 115

Tilman, Ray, former president, Montana Resources, Butte, MT, prepared

statement of ................................................................................................... 45
Page

IV

Letters, statements, etc., submitted for the record by—Continued

Waxman, Hon. Henry A., a Representative in Congress from the State

of California, prepared statement of ........................................................... 13
(1)

POTENTIAL ENERGY CRISIS IN THE WINTER

OF 2000

WEDNESDAY, SEPTEMBER 20, 2000

HOUSE OF REPRESENTATIVES,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The committee met, pursuant to notice, at 1:07 p.m., in room

2154, Rayburn House Office Building, Hon. Dan Burton (chairman

of the committee) presiding.

Present: Representatives Burton, Gilman, Morella, Shays,

McHugh, Souder, LaTourette, Biggert, Ose, Waxman, Kanjorski,

Maloney, Norton, Kucinich, Tierney, Allen, Ford, and Schakowsky.

Staff present: Kevin Binger, staff director; James C. Wilson, chief

counsel; David A. Kass, deputy counsel and parliamentarian, Sean

Spicer, director of communications; Josie Duckett, deputy communications director; Nat Weinecke, professional staff member; Robert

Briggs, clerk; Robin Butler, office manager; Michael Canty, legislative assistant; Leneal Scott, computer systems manager; John Sare,

staff assistant; Maria Tamburri, assistant to chief counsel; Corinne

Zaccagnini, systems administrator; Phil Schiliro, minority staff director; Phil Barnett, minority chief counsel; Kristin Amerling, minority deputy chief counsel; Ellen Rayner, minority chief clerk; and

Jean Gosa and Earley Green, minority assistant clerks.

Mr. BURTON. Good afternoon. The Committee on Government Reform will come to order.

A quorum being present, we are ready to conduct our business.

I ask unanimous consent that all Members’ or witnesses’ written

opening statements will be included in the record. And without objection, so ordered.

[The prepared statement of Hon. Helen Chenoweth-Hage follows:]
2
3

Mr. BURTON. I ask unanimous consent that all articles, exhibits

and extraneous or tabular material referred to be included in the

record. And without objection, so ordered.

I ask unanimous consent that questioning in this matter proceed

under clause 2(j)(2) of House rule 11 and committee rule 14 in

which the chairman and ranking minority member allocate time to

the members of committee as they deem appropriate for extended

questioning, not to exceed 60 minutes, equally divided between the

majority and minority.

Mr. WAXMAN. Reserving the right to object, and I only do this to

ask the chairman, we have as one of our colleagues who is the full

committee chairman of the International Relations Committee, and

I understand he has a scheduling conflict. Could I ask unanimous

consent that he be permitted to give the first opening statement,

and then you and I will proceed with our opening statements?

Mr. BURTON. That will be fine with me. He is very appreciative,

but he wants to wait just a few minutes.

I will proceed, and then we will get back to you just as quickly

as we can. And I thank the ranking minority member for his kindness. We have all this new technology, and we are having all sorts

of glitches.

Today we are holding our second day of hearings on problems in

our energy markets. Tomorrow we will hold our third. Last June

we focused on a very narrow problem. Prices that were spiking for

gasoline in the Midwest. This week we are going to step back and

take a look at the bigger picture.

The big picture doesn’t look very good right now. We continue to

have problems in our gasoline markets. We have problems in our

natural gas markets. We have problems in our home heating oil

and electricity markets. I’m not aware of any segment of our energy markets where we are not having problems.

The fact of the matter is that energy prices are soaring, and

every American family is going to feel the impact in the very near

future. We have to have a strong energy policy if we’re going to

deal with these problems, and right now we simply don’t have one.

The signs of a looming energy crisis are all around us. Look at

what happened to gasoline prices this summer, and now the price

of oil is creeping up to close to $40 a barrel. And if you go back

to 18 months, it was closer to $10 a barrel. That is a huge quantum

leap in just a short period of time.

Take a look at electricity. In San Diego, electricity rates have

doubled. In some cases they have even tripled. This year the State

of California has had 17 stage 2 alerts. That means that the level

of electricity in the wires was so low that some customers had to

have their power turned off 17 times around the State of California. In all of 1999, there was only one stage 2 alert in that State.

On June 14th, in San Jose, CA, the power went out. There wasn’t

any electricity. They had a blackout for 4 hours. We are going to

hear today from a businessman who will tell you what happened

to his company.

In Montana, electricity rates have gone up 500 percent for industrial users. We are going to hear from a witness today who had to

shut down his business and lay off 300 people because they couldn’t

pay their electricity bills.
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Take a look at natural gas. The cost of natural gas has tripled— tripled since March of last year. Prices are going to go up more this

winter. What impact is that going to have on senior citizens on

fixed incomes? Take a look at home heating oil.

Prices of home heating oil in New England spiked to more than

double their normal last winter. Going into this fall, inventories are

at a 5-year low. Home heating oil is so expensive that distributors

are going into winter with empty storage tanks. That spells real

trouble if we have a real cold winter. We’re going to hear from one

of those distributors today.

All of these things are like cracks in the dike. They are telling

us loud and clear that we have a system that is in serious trouble.

It looks to me like we’re headed to an energy crisis this winter and

another one next summer. We need to have a strong energy policy

to deal with these problems. Right now we simply don’t have one.

Praying for a mild winter won’t cut it. Pleading with OPEC to

lower prices won’t cut it. The first step is to try to figure out what’s

causing these problems. All of these areas there are local factors

you can point to. A breakdown in the Explorer pipeline this summer set off the gasoline price spike in Chicago. In California and

Montana, deregulation of electric utilities played a role. Some people think there is price gouging going on. We’re going to look into

that as well.

However, I think that if you look at each of these areas, electricity, natural gas, home heating oil, there is a deeper underlying

problem. Demand for energy has been growing with our growing

economy, and the supply of energy simply is not keeping up. When

demand starts bumping up against supply, that’s when the cracks

in the dike start forming.

Let’s take a look. There has not been a single new oil refinery

built in this country in 25 years. 25 years. If you could build a new

refinery, it would be almost impossible to build a new pipeline to

get your product to market because of environmental regulations

and other regulations. Look at the electricity situation in San Francisco. The population of the Bay area has grown 50 percent in the

last 20 years, yet not one new power plant has been built to serve

the area since 1982. We are going to talk today to a California executive who builds power plants about all of the problems they are

having in that area.

Secretary Richardson testified here before us in June. He

summed up the situation pretty well. He said, ‘‘We have dramatically increased demand; however, domestic oil production and domestic refinery capacity has not kept up with that demand.’’

Why not? State and local laws play a part, but a big part of the

problem is Federal regulation. Take a look at the oil business.

Under all of the requirements of the Clean Air Act, it simply is not

economical to build a new refinery in this country. You can’t do it.

In 1982, there were 231 refineries in the United States. Today,

that’s dropped to 155, and yet demand keeps rising.

Yet at the same time, under the reformulated gasoline provisions

of the Clean Air Act, refineries have to make as many as 15 different blends of gasoline in the summertime, so we have fewer refineries with much more demand by the government and by the

population as far as the need is concerned. The result is that you
5

have a system that is straining at its limits to meet demand.

Under those conditions, all it takes is one small disruption to set

off a crisis. And at the end of the summer, after struggling to meet

the demand for gasoline all summer, they’re not prepared for the

home heating oil season.

This isn’t a problem that is going to go away by itself. It is going

to get worse each year as demand keeps growing and supply

doesn’t or can’t keep pace. At the same time, the EPA has a whole

series of new rules in the pipeline. Now, I’m not saying that we

shouldn’t have good environmental laws. We certainly should. We

all want to breathe clean air. But we also want to keep warm in

the winter. What I’m saying is that there’s got to be some balance.

We have to weigh the costs against the benefits, because if we keep

going like we are, we are headed for a meltdown somewhere along

the way.

We have a number of witnesses before us today who know a lot

more about the energy business than we do. We have Mr. Simon

from Exxon Oil. We have Mr. Slaughter from the Refiners Association. We have Mr. Hildebrand from Calpine. We have an expert energy analyst on the very first panel.

I’d like to ask all of our witnesses today to do two things: First,

tell us what we in Congress can do to tackle some of these problems. And second, tell us what the administration can do.

We have 44 Members of the Congress on this committee. All

won’t be here today, but many of us will, and we’re listening. Secretary Richardson will be testifying tomorrow. Administrator

Browner of the EPA will be testifying tomorrow. Tell us what you

need from us and the administration to avoid disruptions, and we’ll

take up those issues with the people who have something to do

with it in the administration tomorrow morning—tomorrow afternoon.

The bottom line is this: we can’t bury our heads in the sand anymore. We have to have a strong energy policy. We have become

more self-sufficient and less reliant on foreign oil. We have been

talking about this since the gasoline crisis 25 years ago or 20 years

ago. Under this administration we have not had a strong energy

policy. When Secretary Richardson was here in June, he said we

needed more tax credits for fuel efficiency. He said we needed more

funding for alternative energy sources. Well, I think we all support

those things, but windmills and solar power aren’t going to solve

the problem.

We need a policy that would help us become more self-sufficient.

We have enormous deposits of oil and gas that are currently off

limits. We need to take another look at that. We need to review

some of these new EPA rules coming down the pike to see if some

additional flexibility isn’t in order. If we don’t step up to the plate,

we are just going to keep lugging from one crisis to another like

we have been doing for the last year and even before that.

So to our witnesses, thank you for being with us today, and we’ll

look forward to your testimony. And with that, I will yield to my

colleague, if it is all right with you, Mr. Waxman, the chairman of

the International Operations Committee, for his opening statement.

[The prepared statement of Hon. Dan Burton follows:]
6
7
8
9

Mr. GILMAN. Thank you, Chairman Burton, for today’s hearing,

and I want to thank our ranking minority member, Mr. Waxman,

for yielding some time to me and allowing me to go out of order.

I also want to thank the witnesses for their willingness to appear

before our committee to discuss how the turmoil in energy markets

throughout the country, the impending home heating crisis in the

Northeast, and the constraints and limitations by State and Federal regulations have been placed on the market sectors of the energy market.

Administration officials have given many reasons why the high

costs of energy have taken place, but what it comes down to is that

people throughout our Nation are suffering from exorbitant energy

prices. With oil at record prices, our constituents and our businesses are hurting, they’re frustrated, especially those who are on

fixed incomes.

How is the independent heating oil business in my district doing?

Well, let’s take a look at one of my suppliers, Mr. Crawford. He is

the proprietor of E&A Crawford Heating Oil in my district, was

paying 45 cents for heating oil in September 1999. He is now forced

to purchase the same at $1.06 a gallon, and on August 1st, the supplying Newburg rack price was 78.8 cents a gallon and now has

surpassed $1.10 a gallon, with a cost of more than $1.40 to his customers, and all of that before we are faced with a high demand of

the winter months.

Mr. Crawford has been in the heating oil business for more than

30 years. He’s losing customers to the larger companies that can

provide heating oil cheaper by buying it in bulk, and he’s been

writing to me that the price of the Newburg rack—as he was writing to me, the price of the Newburg rack heating oil rose 6 cents

on that day for the same oil in the same tank as the day before.

Mr. Crawford places a lot of the blame on the mercantile exchange traders who wouldn’t know a barrel of oil if they fell on one,

yet they continue to drive the price up as gamblers and speculators. His pain and frustration is being felt throughout our district, our State, and our Nation. He asked the same questions that

many people from all over that are inundating our offices are asking: How can we let this happen? Why has the President not done

more to lower the prices of oil? And since oil and its derivatives are

so vital, how did it ever get on the exchange where it is subject to

blatant manipulation?

Mr. Crawford is not alone with his frustration and his worries

about the rising price of energy. The prices of electricity have also

increased as a result of the high cost of crude oil and natural gas

which power the massive generators that produce the energy products. Couple the oil crisis with deregulation and, once again, my

constituents and the American people face a great deal of suffering

in the months ahead.

We are all being inundated with calls regarding the drastic increases that our constituents find on their utility bills, which are

up 30 to 40 percent from last year. The New York Times in late

August reported that people all over the New York region have denounced energy deregulation as either, ‘‘a failure or a fraud.’’

Edward Smeloff, a former utility official, director of a research

group on electricity in Pace University, stated, ‘‘In the past we
10

trusted that State regulators who were appointed by our elected officials were watching out for us, which may or may not have been

true. The new model is figure it out for yourself.’’

Only a few of energy competitors have entered the New York

market, which does not leave consumers with much choice in a provider. Senior executives in a major energy concern in my district

state that the deregulated market is not the reason for the high

cost of electricity. They attribute the high cost of energy to the excessive costs of crude oil and natural gas which are keeping the

prices of electricity excessively high.

The executives also point to supply and demand, where the demand has increased more than 30 percent, with a supply at 6 percent, as contributing factors to the higher prices.

Natural gas at more than $5.35 per mmbtu is also excessively

high. A recent article in our local newspaper, Times Herald Record,

states that supplies of U.S. natural gas has been declining since

the 1990’s, with energy firms finding it cost-prohibitive to produce

natural gas. What makes it worse, reported that newspaper, is that

production is up a scant 1 percent, while demand for the product

is off the charts, as it is needed to generate electricity as utilities

switched from coal and nuclear power plants.

Analysts are painting a bleak picture, ‘‘If we have a normal winter, we are going to see potentially astronomical natural gas prices,

much higher than we see today, reported David Chang, a senior energy trader for the Bank of America in New York.’’ The Energy Information Agency paints a similar picture stating, ‘‘The high price

of natural gas reflects the intense competition between current and

future uses of gas supplies and has been a disincentive to increasing storage injections.’’ The agency further reports that the total

amount of natural gas in storage is 65 percent full, which implies

that stocks are lower 18 percent from last year.

What all of this tells our constituents, the people of my State and

around our Nation is that the administration has failed to create

and implement a coherent strategic short- and long-term energy

policy and is not working with the private sector to craft an energy

policy that helps the hard-working people of our Nation.

This is how the current energy crisis is affecting the people and

businesses in my district, Mr. Chairman, and we look forward to

discussing these issues and potential solutions with our expert witnesses who are here today. And I thank you, again, for arranging

this hearing.

Mr. BURTON. I thank Mr. Waxman once again for allowing you

to go ahead since you have another meeting.

Mr. GILMAN. And I appreciate that, Mr. Waxman.

Mr. BURTON. Mr. Waxman.

Mr. WAXMAN. Thank you, Mr. Chairman. And I was pleased to

accommodate Congressman Gilman.

Today’s hearing is about a topic that has been neglected by the

Congress too long, energy policy. There is bipartisan agreement

that our Nation faces serious energy problems. The price of crude

oil has risen dramatically over the past year. Last winter in the

Northeast, the cost of heating a home with oil soared, and prices

could even be higher this year.
11

And this summer in California, consumers in San Diego have

faced electricity bills that are two to three times higher than normal, and other areas of the State have experienced brownouts.

Unfortunately, there is no bipartisan agreement about the cause

of these problems and how we should address them. Republican

leaders blame the Clinton administration. Some have even claimed

that the Clean Air Act, and other essential environmental laws, are

the cause of high energy prices. These theories make good politics,

but they are basically nonsense. The fundamental problem that our

Nation faces is that we are too dependent on fossil fuels in general

and oil in particular. This leaves us vulnerable to manipulation by

OPEC and threatens our economic and national security. And we

are entering the 21st century with an antiquated electric utility infrastructure.

These are not new problems. Gas lines in the 1970’s showed us

the dangers of excessive reliance on oil. But a combination of factors, lower energy prices, antiregulation sentiment in the administrations in the 1980’s and in Congress in the 1990’s, and a growing

economy have conspired to halt our progress toward alternative

fuels, renewable energy, and energy independence.

In fact, today we consume more oil, more gasoline, and more diesel fuel than we did 20 years ago. The Clinton administration has

proposed modest steps to reduce our dependence on oil and other

fossil fuels. The administration has proposed tax credits to spur energy efficiency and research and development partnerships with

the auto industry to develop a new generation of clean vehicles.

And the administration has sent Congress electricity restructuring

legislation. But even these needed measures have met resistance in

the Congress. As a result, we have not formulated or implemented

the kind of comprehensive energy policy our Nation needs.

The last time Congress enacted a comprehensive energy legislation was 1992. In recent years, the Republican leadership in Congress has even gone so far as to call for the abolition of the Department of Energy and the sale of the Strategic Petroleum Reserve.

The States, too, have made mistakes. With hindsight, the deregulation efforts in California may have serious flaws, allowing energy

suppliers to manipulate the market and raise prices through the

roof. But while we face serious problems today, the future could be

much brighter. Our energy policy may have stagnated, but technology has not. New energy technologies are on the horizon that

can strengthen our economy, protect our environment, and lessen

our dependence on oil and other fossil fuels.

Fuel cells, for instance, have made enormous strides in recent

years. This technology combines hydrogen with oxygen via an electrochemical process to generate electricity without emitting any air

pollution or greenhouse gases. The costs of these technologies are

dropping, and prototypes have been developed that can run automobiles or light buildings. And since fuel cells do not have to run

off gasoline, fuel cells can reduce our dependence on foreign oil.

It won’t be easy to shift course. The big oil and gas companies

are making billions off of today’s high prices, and they hire countless lobbyists and give millions in campaign contributions to preserve the status quo. But if we have the political will, we can craft

a sound energy policy for our children, one that relies on new tech-
12

nologies, energy efficiency, and renewable energy to create new industries and jobs, provide greater energy independence and protect

the global environment.

The energy crisis of the 1970’s showed us the importance of developing forward-looking energy policies, but unfortunately we

squandered that opportunity to reduce our dependence on oil and

implement needed changes in U.S. energy policies. I hope we won’t

repeat that mistake once again.

I look forward to hearing the witnesses—the testimony of the

witnesses and working with my colleagues, Democrat and Republican alike, to address what is a national issue and calls on us to

put partisanship aside, to use our best judgment and to try to be

constructive, not just point fingers at each other. Thank you.

[The prepared statement of Hon. Henry A. Waxman follows:]
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Mr. BURTON. Do any other Members have opening statements, or

should we go ahead? If you have an opening statement, that’s fine.

Mrs. BIGGERT. Thank you, Mr. Chairman. I represent a suburban

Chicago district, and as many of you know, the Chicago area was

hit with the highest gasoline prices in the Nation earlier this summer. Unfortunately for Illinoisans and consumers across the Nation, gasoline prices will not be the only energy cost putting a

strain on our pocketbooks this year.

We’re told now in the press reports and by utility companies to

get ready for the next hit: higher home heating bills. And who is

going to be hit? Nationwide, 55 percent of all homes have natural

gas service, but in my district in Illinois, approximately 95 percent

of all homes are able to get natural gas service. It is extremely disconcerting that this country is experiencing a natural gas price increase during the summer months, long before the traditional winter increase in demand and price. And for those of us living in the

Midwest where the winters are usually long and harsh, rising energy costs are a cause for serious concerns.

The problems that we are likely to face this winter are a symptom of the administration’s piecemeal, some might say failed, others might say nonexistent energy policy. It is no secret that the administration has ignored and shunned coal and nuclear power.

They threatened to tear down hydroelectric dams, which are one of

the cleanest sources of electricity today.

What is to compensate for increased electricity demand and the

gradual loss of generating capacity from nuclear and hydropower?

The reality of the situation is that renewable sources of energy

have a long way to go before they even come close to compensating

for nuclear and hydropower. What is the only clean source of energy that can meet the administration’s high standards and the increased demand for electricity while at the same time ensuring the

reliability of the electricity grid? Well, it’s natural gas.

In short, the administration’s narrowly focused energy policy contains so few options that it has created a monster. That explains

why 96 percent of the power plants currently being built are natural-gas-fired power plants. We know this all too well in Illinois,

where 400 to 800-megawatt natural-gas-fired peaker plants are

sprouting like mushrooms across the suburbs only to be used for

a few months during peak periods of demand. As a result, the natural gas typically purchased in the summer for storage and later

used for the winter is instead being used for electricity generation.

As one energy expert put it, electric utilities are the new 800-

pound gorilla of the natural gas market. And what does this mean

for the consumer? Well, NICOR Gas, the largest natural gas distribution company in Illinois servicing my constituents and 1.9 million residents in the northern third of the Illinois, estimates that

the heating bills could be as much as 50 percent higher than last

year. In real dollars this means that a normal winter could push

the cost of natural gas for average residential customers in Illinois

up to $610 or more for the months of October through March. Last

year the cost was $410, a difference of at least $200.

Local papers have been publicizing NICOR’s warnings. Even the

Chicago Tribune picked up on the rising public concern about natu-
16

ral gas prices this winter. An editorial in its August 14th edition

was entitled: Start Practicing Your Outrage.

One of the last paragraphs of this editorial summed it up. It

reads: ‘‘It will cost more to heat your home this winter. This will

be a burden, but it will not be the work of sinister forces. It will

be supply and demand at work.’’ It appears that the administration has ignored the consequences

of its supply limiting actions. They have taken away all the options

save one: natural gas. Small wonder then that we were left with

but one option: sky-high prices in energy markets.

Thank you very much, Mr. Chairman.

Mr. BURTON. Thank you Mrs. Biggert.

Ms. Schakowsky.

Mrs. Maloney, go ahead.

Mrs. MALONEY. Thank you. Thank you, Mr. Chairman.

After a summer of high gas prices for consumers, the outlook for

winter energy prices looks even more grim. As oil prices soar, and

heating oil inventories remain dangerously low, Americans are facing a catastrophic situation. A further alarming part of this is that

even as families continue to bear the burden of high oil prices, the

oil industry is enjoying record profits.

As Americans suffer, the industry has seen its profits soar. While

enjoying these record profits, I have been alarmed to see industry

lobbyists hard at work here in Congress to further improve their

bottom lines. Two recent examples currently, right now, before

Congress best illustrate this point.

First, I want to take this opportunity to bring to the attention

of the committee members an issue that I believe will have a major

impact on future energy prices. The full House may soon consider

legislation that has passed the Banking, Commerce and Agricultural Committees dealing with financial and energy derivatives

products. The Commodities Futures Modernization Act of 2000

would have the effect of allowing trading in energy futures to move

off of public exchanges and onto private electronic exchanges, out

of sight, where the public will have no ability to monitor changes

in energy prices.

Now is not the time to give big oil the gift of relieving the industry from the public scrutiny of public exchanges.

I offered an amendment in the Banking Committee that would

have deleted this provision and moved the House bill closer to the

approach that Senator Lugar has taken in the Senate. Unfortunately, despite bipartisan support, the amendment failed. Without

my amendment, trading in energy contracts for future delivery of

crude oil, heating oil, natural gas and electricity, which my California colleagues should take special note, will move off of public exchanges where the public, the regulators, and Members of Congress

can follow the changes in energy prices.

For example, currently market participants with more than 200

contracts, the equivalent of 200,000 barrels of oil, must report their

positions to the CFTC and the exchange. And the CFTC makes the

information available to the public. Trades off an exchange will not

have the audit trail available to reconstruct fraud.

A situation could occur where consumer energy prices spike

based on trades in energy derivative products conducted on private
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exchanges that the energy companies themselves may even own.

The potential for fraud and manipulation is too large to allow these

trades to take place outside of public view, especially as the government is currently investigating possible energy price gouging.

The Commodity Futures Trading Commission, which oversees

the exchanges, agrees with me. Just yesterday I received a letter

from CFTC Chairman William Rainer, Chairman Rainer writes:

‘‘Charging the Commission with the responsibility to police for

fraud and manipulation, however without conferring the authority

to promulgate regulations where necessary, leaves the CFTC inadequately equipped to fulfill these responsibilities,’’ and I’d like to

place his letter into the record.

I urge my fellow committee members to lobby our colleagues

from the Banking, Commerce and Agriculture Committees who are

currently negotiating a version of the bill for the floor to remove

this provision. If this provision is not removed, I look forward to

a healthy floor debate on energy prices and the oil industry.

Let me note that the commodity modernization bill is otherwise

a very important piece of legislation for the conduct of our Nation’s

financial services, and I totally support it.

I also want to point out to the committee another issue which

was recently brought to my attention and is currently being considered in the Senate. In 1996, Mr. Horn and I held together a hearing before the Government Management, Information, and Technology Subcommittee to look into the industry’s effort to cheat taxpayers out of millions of dollars owed in royalties for oil taken from

Federal land. These hearings, and subsequent investigations by the

GAO, led us to conclude that numerous major oil companies were

paying royalties based on prices that were far lower than the true

market value of the oil that they were buying and selling.

To date, lawsuits against the oil industry on this particular issue have resulted in more than $300 million being returned to the taxpayers. Overall, the oil industry has been forced to pay over $5 billion to the Federal Government, States, and Indian tribes. The revised oil valuation regulation that would base the price of oil from

Federal lands on market value has emerged from these lawsuits,

and according to MMS would add an additional $66 million each

year to the Federal Treasury, to the taxpayers.

Now, the Senate Energy and Natural Resources Committee plans

to attach a provision designed to thwart the new evaluation rule

to the Energy Policy and Conservation Act, legislation to reauthorize the Strategic Petroleum Reserve and to finally authorize the

desperately needed Northeast Home Heating Oil Reserve.

I am astonished that we would consider attaching a giveaway to

the oil industry in the midst of a bill designed to help consumers

deal with the rising oil prices, and I have written to Secretary Babbitt urging him to strongly oppose this provision, and I am hopeful

that the Senate will pass the Energy Policy and Conservation Act

without the royalty-in-kind rider attached.

Spikes in energy prices may represent the single greatest threat

to our record economic growth. This Congress should be working to

provide a stable energy supply to the country, not rewarding the

industry, particularly at this point in time.

Thank you, and I yield back the balance of my time.
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Mr. BURTON. Mr. Shays.

Mr. SHAYS. Thank you, Mr. Chairman.

Mr. Chairman, my statement is really to welcome our witnesses

here today, every one of them in both panels, to pledge to them

that I’m going to try to have a very open mind. I am one who believes that we need to conserve much more and make a greater effort there, but have an open mind at all aspects of this issue.

And finally, just to welcome a witness, our first witness John

Santa this morning. As the chief operating officer of the Santa Fuel

Co. in Bridgeport, CT, my hometown, Mr. Santa is an important

member of our business community and an extraordinarily knowledgeable spokesperson on energy issues in the Northeast. The

Santa family has been providing energy products to Connecticut

consumers since 1940. They know what it takes to build and sustain an efficient, reliable supply and distribution system, and I

know his insights and experience will be of benefit to the committee this morning. I am grateful that he has joined us and grateful

for the other witnesses.

Mr. BURTON. Thank you Mr. Shays.

[The prepared statement of Hon. Christopher Shays follows:]
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Mr. BURTON. Before I go to the next Member, let me say we are

going to have a vote in probably 10 minutes, and it is the intent

of the Chair to continue the hearing, so we can go on. Mr. Shays

will come back and take the chair after he votes, and then I will

run and vote so we can continue on with the hearing.

Mr. SHAYS. There are evidently two votes.

Mr. BURTON. There is going to be two votes, OK. Well, then, that

will mess that up. I would like to get to the witnesses as quickly

as possible, but I guess, Mr. Kucinich or Mr. Kanjorski, you want

to go next? We will try to enforce the 5-minute rule because we

have so many Members who want to speak, and we want to get to

the witnesses.

Mr. KANJORSKI. Mr. Chairman, I have extended opening remarks, and I would ask unanimous consent that they appear in the

record in their entirety. If I may just take 1 or 2 minutes.

Mr. BURTON. Without objection. Yes, sir, that is fine.

Mr. KANJORSKI. One, I want to thank you for holding the hearing

today. I look forward to the testimony over the next 2 days. But

rather than just hearing testimony anymore or talking about the

issue, it is time for the Congress to act. I think we are facing a potential that could create tremendous financial burden on working

families, the elderly, small business and farmers with energy costs

this winter.

In June of this last year, our committee met to discuss rising fuel

prices and determine what we could do about it. We were given a

lot of information as to where the volume and where the inventory

was, and we are significantly lower in inventory this year than is

wise.

We have, however, a policy and bill that the House passed in

April of this year which extended authority to the President to utilize the Strategic Petroleum Reserve. To my best information, this

legislation has remained dormant in the Senate, has not been addressed, and as a result it is highly questionable whether the President has the authority to release reserves from the Strategic Petroleum Reserve, and the potential may be either to knock the spiking

prices down or to provide the necessary inventory to meet crisis

conditions that could occur in a cold winter situation.

I think it is absolutely essential that we do our best on both sides

of the aisle to urge our counterparts in the Senate to move this reauthorization of the President’s authority through as quickly as

possible.

Above and beyond that, I look forward to the testimony that

these witnesses will give, and, again, I congratulate Mr. Chairman

for holding these hearings.

Mr. BURTON. Thank you, Mr. Kanjorski.

[The prepared statement of Hon. Paul E. Kanjorski follows:]
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Mr. BURTON. Any statements on our side?

Mr. Kucinich.

Mr. KUCINICH. I would also like unanimous consent to have my

entire statement in the record, but I would like a couple of minutes

here just to review.

Mr. BURTON. We will put your whole statement in the record.

Mr. KUCINICH. Thank you.

I would like a few minutes here to review what I think is the

most important point to consider at this point. And the area I’d like

to touch on is the U.S. oil company response to OPEC oil production cutbacks.

Mr. Burton and Mr. Waxman and members of the committee, I’d

like to quote a commentary found in Business Week. It is the edition that is just coming out September 25, 2000. The article, Big

Oil’s Priority: Pump Up the Stock Price. Here is the article:

It has been the problem that won’t go away. The skyrocketing price of oil. Already

three times this year, OPEC has increased its oil production quotas in an effort to

alleviate the pressure. So what about the major non-OPEC oil companies who, along

with a number of non-OPEC nations, collectively produce more than half the world’s

crude? Surprisingly, while OPEC is pumping harder than it has in decades, some

of the world’s largest oil companies are actually producing less. BP slashed its production by 4 percent, and midsized producers such as Texaco and Occidental Petroleum have been even less active. Both saw their worldwide oil output slide 7 percent

in the first half of this year. Together, 10 of the largest reduced their output by 0.4

percent in the first half of this year, according to a recent report from Merrill Lynch

and Co. ‘‘The lack of a production increase from non-OPEC sources is a big reason

why prices remain high,’’ says Merrill Lynch analyst Steven A. Pfeiffer.

This Business Week article suggests, Mr. Chairman, that while

Congress and the administration have directed attention and effort

to compelling greater oil production by OPEC, American-based oil

companies have escaped notice and are lowering production. The

commentary further explains that oil companies want higher profits to make Wall Street happy and protect themselves against future losses from low oil prices.

I look forward to the oil industry’s explanation of lowering oil

production during an oil shortage.

I yield back.

Mr. BURTON. Thank you Mr. Kucinich.

[The prepared statement of Hon. Dennis J. Kucinich follows:]
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Mr. BURTON. Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman. I will be very brief.

There are four of us from California on this committee, Mr. Waxman, Mr. Lantos, Mr. Horn, and myself, and we have had the dubious pleasure of enduring some rather significant variation in the

electricity pricing over the past 3 or 4 months. One of the interesting things that has come to my attention which I hope to explore

in the context of this committee hearing is the source of the electricity that goes into the California market and whether or not that

source has increased or that source of supply has increased, decreased, remained stable and the like.

In the context of the hearing, I will be sharing with the committee exactly what I found, which took me about 8 minutes on the

Internet. But the reality is that we have had a reduction in the

amount of electrical energy supplied to California, not from the private side, but from the Federal side. From the Federal side. A conscious decision by the Federal Government to reduce the amount

of electricity being generated to service any number of markets, but

the primary market being California, and the primary market

within California being San Diego.

So I just look forward to the time during questions where we can

go through that. I have the legislative background and everything,

and it is going to be quite interesting.

Mr. Chairman, with that I really do want to compliment you and

Mr. Waxman for putting this hearing together, and I look forward

to the questions.

Mr. BURTON. I thank the gentleman.

Let me just ask you if you would yield to me briefly.

Mr. OSE. Certainly, I will yield to you.

Mr. BURTON. You are saying there was a deliberate attempt by

some regulatory agency in the Federal Government to reduce the

amount of electricity to various parts of the country, and in particular southern California?

Mr. OSE. I’m saying that there has been a reduction for one purpose, the consequence of which has been a significant price spike

in the cost of electricity, even though the agency that implemented

the reduction has the authority to waive it. In other words, they

have the authority to not cause the reduction. Believe me, it will

be fun.

Mr. BURTON. I will be interested in hearing what you have to

say.

Ms. Schakowsky, did you have a statement?

Ms. SCHAKOWSKY. Thank you, Mr. Chairman.

Mr. Chairman, I represent also the Chicago area, as does Congresswoman Biggert, and some of the suburbs, and we have been

plagued with energy problems. The summer before last, we had—

we were notorious for unreliable electric service, and Commonwealth Edison is still struggling to be able to make sure that we

can have reliable service that we pay the highest prices in the Midwest.

And this past summer we faced the highest gasoline prices in the

Nation. At that time the oil industry made an attempt to justify

those prices mostly by blaming ethanol and the EPA. But it does

seem that as soon as Congress on both sides of the aisle asked for
29

an FTC investigation that those differential prices evaporated. The

administration was prompt to respond, but many people and business owners and farmers were made to suffer greatly.

And as we approach this heating season, as Mrs. Biggert pointed

out, we are facing more bad news. Natural gas prices, the fuel

which heats virtually every home in my district and over half of all

the Nation’s families, are soaring. The November and December future prices have more than doubled in the last year, and this definitely spells trouble, worse trouble even than Congresswoman

Biggert pointed out. Although we all received in the mail, those of

us who have NICOR, the notice that said that if you paid $410 last

year, that you will pay $610—I just got off of a conference call. The August projection was $410 last year. Then they said $670. Well,

their October estimate is that we will be paying $750 this winter

for the same amount of gas that we paid $410 for last year. So we

are getting close to a doubling of the cost for ordinary consumers.

And it seems to me that, once again, we’re getting excuses that

it is inconceivable to anyone in the energy industry that they could

not know that natural gas prices would go up. Even if the winter

is mild, increased demand from the electric utilities sector is evident. Over the past years energy consumption has been steadily on

the rise. Who did the industry think would supply these plants?

And given this demand, how did the industry think it would be

able to meet its long-term contract obligations and serve its core

customers?

It seems to me, just like earlier this summer, pinning the blame

on environmental protection won’t wash either. Nothing has

changed in terms of environmental protection over the last year.

But now the prices are so high, exploration is up 44 percent, and,

by their own admission, the industry purposely kept supplies low

because prices did not meet their profit goals.

We know that taxpayers already provide the oil and gas industry with massive tax breaks for exploration and development; $18 billion is the projected total for corporations for the 1996–2002 period,

and $1 billion alone in percent depletion and expensing provisions

this year. How can we tell our constituents that they are getting

their money’s worth when these companies make decisions to reduce supplies and charge cartel-level prices?

Mr. Chairman, I look—I very much look forward to these hearings. I was not here when Congress decided to deregulate natural

gas and crude oil, but many of us outside the Beltway at the time

had serious concerns about those decisions. Many of us questioned

the wisdom of turning energy supply and price decisionmaking, decisions that affect every inch of our economy and every person in

our country, over to an industry whose bottom line is their bottom

line and not our economic interest. I am glad that we have recognized that there is a Federal responsibility to ensure that energy

is available and reasonably priced, and I look forward to being informed by our witnesses. Thank you.

Mr. BURTON. Thank you, Ms. Schakowsky.

Any further statements?

Mr. Allen.

Mr. ALLEN. Thank you, Mr. Chairman for scheduling these hearings. I will be brief.
30

Last winter the Northeast, including my State of Maine, suffered

through a heating oil shortage that made many seniors and lowincome families choose between heating their homes and putting

food on the table. Today we are again facing a crisis with oil prices

at a 20-year high.

Rising diesel fuel cost are putting some truckers out of business

since they cannot survive when half their income goes into the gas

tank. We have to do everything we can to understand what is driving the rise in prices and use available mechanisms to protect the

American people.

First, I urged President Clinton to swap oil from the Strategic

Petroleum Reserve with the oil industry. Investment experts in the

petroleum market believe that just a small release of oil from the

Reserve could immediately stabilize prices.

Second, the U.S. must continue to pressure OPEC to increase oil

supplies.

Third, Congress needs to provide appropriate funding for the

Low-Income Home Energy Assistance Program, and the President

should immediately release $400 million and make it available to

consumers to lock in prices for the winter.

Fourth, we should increase funding for the Weatherization Assistance Program, which could reduce the energy costs of the poor,

elderly and disabled by over 23 percent.

Mr. Chairman, we also should not lose sight of our long-term

need to address our growing energy demand and reduce America’s

vulnerability to future price spikes. Unfortunately, the United

States will remain vulnerable as long as Congress fails to pass the

long-term energy efficiency policies that will reduce our dependence

on fossil fuels. The technology is available today for car companies

to meet higher standards without any loss in vehicle weight or

power. Companies like Ford are pledging to increase fuel economy

and reduce emissions on SUVs. We should be encouraging these

policies and programs.

Mr. Chairman, while we must investigate short-term causes and

find temporary solutions, we must also develop a long-term energy

policy that reduces our dependence on foreign oil, increases investments in renewable energy, and prevents consumers from being

gouged when supplies are low.

Mr. Chairman, I thank you for this opportunity and for holding

this important hearing.

Mr. BURTON. Thank you.

Do any other Members have comments they would like to make?

If not, I want to welcome our witnesses. Would you please stand

and raise your right hands.

[Witnesses sworn.]

Mr. BURTON. I think you have all been asked to try to restrict

your comments to 5 minutes so we can get to questions. If you have

to take a little bit longer than that, we will try to be lenient, but

we will try to stay to that if we can. We will start with Mr. Santa.
31

STATEMENTS OF JOHN SANTA, CHIEF OPERATIONS OFFICER,

SANTA FUEL, BRIDGEPORT, CT; RAY TILMAN, FORMER

PRESIDENT, MONTANA RESOURCES, BUTTE, MT; DAVID PURSELL, VICE PRESIDENT OF UPSTREAM RESEARCH, SIMMONS

& CO. INTERNATIONAL, HOUSTON, TX; STEVE J. LANE, SENIOR FACILITIES ENGINEER, SDL, INC., SAN JOSE, CA; AND

DAVID HAMILTON, POLICY DIRECTOR, ALLIANCE TO SAVE

ENERGY

Mr. SANTA. Thank you, Chairman Burton, and Mr. Waxman and

fellow committee members. My name is John Santa. I am CEO of

Santa Energy of Bridgeport, CT. We are a regional marketer and

distributor of petroleum, natural gas, and energy-related products

in southern New England. We employ 170 people, operate a truck

fleet of 140 units, and market approximately 4 million barrels of

all products of residential, commercial, industrial and wholesale

sectors.

We own or throughput in five terminals in three States. We

maintain approximately 700,000 barrels of storage to supply some

or all of the needs of approximately 130 dealers in southern New

England. Started by our parents in 1940, grown by my brothers

and me for the past 40 years, we are now ushering in a new generation of family and owners and managers who will rise to the

21st century energy challenges.

You have asked me here today to discuss the petroleum supply

and pricing situation with you and your committee colleagues.

More specifically you want to know what the government may have

done to exacerbate this issue, or, alternatively, what can they do

to help abate it. For this opportunity, and on behalf of my family

and other dealers like me whom I represent, I thank you.

My approach to this will be to present you with what we perceive

to be the symptoms of the current situation, the real issues of the

current situation, and we have some suggested solutions to you for

the situation facing us today.

As to the symptoms, currently there is what we refer to as a

market inversion, which is to say the product now costs more than

it will sell for in January. Unless you are out of your mind, you

are not going to buy any product or put it in storage. That is why

we’re not buying. It’s not that we don’t want to; we can’t.

Second, rapid price movement. When the supply gets low, the

price moves around a lot.

And finally, hysteria. A lot of it is media-fed, and I urge you very

passionately not to buy into that. Take a cool, dispassionate look

at this. This is serious business and deserves that kind of a look.

As to underlying issues and real ones that exist, we have, first

of all, the market and its players. It’s different, it’s new, it’s very

efficient. If I bring you no other message today, then let’s talk

about that one. It is a brave new world. It’s not your grandfather’s

Oldsmobile that we’re dealing with here today. More about that

later.

Infrastructure. Infrastructure has changed rapidly. In my city of

Bridgeport, 20 years ago there were 12 oil storage terminals. Today

there are three. Other cities nearby have had similar changes in

the amount of infrastructure there. That has also changed. It’s not
32

bad; it’s just different, and it’s way efficient, and you can’t play

with it the way you played with it before.

Third, we have had this problem tremendously exacerbated by

noncontracted interruptible gas users. I use those words very carefully chosen. We supply interruptibles like nobody’s business. The

ones that are the problems are the ones that do not contract for

or utilize interruptible service of product.

We have for you some suggested solutions. Right now on the Senate side there is a bill, the Energy Policy Conservation Act. I urge

you to look at this very carefully. Among other things, this will

bring to our consumers consumer information that they need. They

are fearful right now, and as you all well know, fear is based on

ignorance more than anything else, and the people are generally ignorant of how the new energy world works. I urge you to help them

get there. You could do them a real service by doing that.

Second, tax incentives. We had the opportunity last month to

meet with Secretary Richardson. We suggested to him that when

there is no carry in the market such as you find right now where

the price is inverted, if the Federal Government were to offer us

a tax incentive to have that carry, we’d fill the storage. And if the

carry came back, you can have your tax incentive back. We don’t

want to collect twice, just once. But we have to collect once or we

can’t fill the tanks. It is as simple as that.

Fourth, commitment. Commitment is very important. Last year,

I committed to my suppliers, and my customers committed to me.

I saved our homeowners over $4 million. To them the price spike,

to them supply dislocations did not happen. Very simply, we used

the mercantile exchange, the commodity market to do this. It can

do this for you. We did this also for our governmental customers

and as well as for institutional and industrial customers.

Finally, we would urge you to take a good solid look at and do

what you can to help conservation. I would point out to you that

in 1970, the average home in New England burned 1,600 gallons

of heating fuel per year. Today that number is 900 gallons per

year. That is a dramatic difference, and we played a big part in it,

and so did you. And let’s get together and do some more of that

because that is a win-win deal for everybody.

Concluding, I would like to say to you that it is a whole new

ballgame. I want very much to talk to you and tell you that because the impact, not just the heating oil, but what all of my

friends are here to talk to you about today, it is affecting all of

them, too, electricity, natural gas and petroleum products. It is a

whole new ballgame, and it is not a bad ballgame, it’s just a new

ballgame, and let’s talk about this. Thank you.

Mr. BURTON. Thank you, Mr. Santa. We will have some questions for you just a minute.

[The prepared statement of Mr. Santa follows:]
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Mr. BURTON. We send somebody over there to vote and come

back? We will go ahead. Those who want to go ahead and vote can

come back.

Mr. Tilman, you want to go ahead, and we will hear your testimony, and then we will recess for the vote.

Mr. TILMAN. OK. My name is Ray Tilman. I’m representing Montana Resources, a copper and molybednum mining company. I’ve

been associated with the company for the last 16 years, and I have

been directly involved in electric power issues for the last 35 years.

Montana Resources is located in Butte, MT. We mine and mill

raw ore to produce copper and molybednum concentrates that are

shipped to smelters and roasters throughout the world. Our ore deposit is very low-grade deposit, but through the last 14 years we

have been successful in operating. Our success has been as a result

of our unique employee programs, including profit-sharing. The

company has paid—I want to make a quick correction for you here. In the testimony I gave you, it said $5 million. It is $7.2 million

a year in State and local taxes. These are dollars that are directly

needed for the local school district and the government to operate.

Montana Resources has survived the ups and downs of the copper and moly market, as well as the changes in the price of crude

oil. Unfortunately, we have not been able to survive the unforeseen, unrealistic ramp-up of electricity prices in the Western

United States early this summer.

I’ve given you a handout. If you care to look at it, it’s page 7,

and it shows what’s happened to the Mid C price that affects the

Western power, and you can see that it has gone from somewhere

in the $30 range up to at high as $650 per megawatt hour. On

June 30, unfortunately, we were forced to temporarily shut our operations down and lay off 320 employees, which is 15 percent of the

work force, the industrial work force, in Butte, MT.

Power prices, as I mentioned, escalated from $35 to $650 per

megawatt hour on a spot basis. Our contract expired June 30th.

Prior to the expiration of our contract and since then, we have not

been able to secure a short-term or long-term contract at reasonable prices that would allow us to operate in the black.

Montana Resources uses about 32 million kilowatt hours of

power more month. We also use about 3.6 million gallons of diesel

fuel per year and 200,000 MCFs of natural gas per year. With

power prices at $35 per megawatt, our average cost is about $1.1

million a month or $13 million a year.

We produce about 85 to 90 million pounds of copper per year,

and approximately 9 million pounds of molybednum per year.

Electric power is approximately 25 percent of our overall cost of

producing power. When that cost goes up even a little bit, it has

a huge effect on our ability to stay in business. The unforeseen

and, in my opinion, frankly unexplainable spike in the Western

power prices not only has forced many Western basic industry

plants to shut down, including ours, it has also artificially inflated

the near-term and long-term prices in the West.

We now have a whole raft of experts who are rationalizing why

this happened and justifying why they believe the prices should

stay high for the foreseeable future. The price of power in the West

over the past 3 months has been well above $120 per megawatt,
43

which, when you look at that jump from $35 to $120 per megawatt,

is about the same as the price of gas going from $1.60 to $8.50. I

have a very hard time explaining to the 320 people that I personally had to lay off why our power costs are so high in the West.

When you look on the east coast—and by that, those of in us West

mean east of the Mississippi—is today selling in the 20’s during

the day and sometimes in the midteens in the offpeak, and you can

see that on the last page that I included.

I can only equate our situation to the canary in the coal mine

that was used to sense carbon monoxide before it killed the miners.

We’re sensing a problem and sending out warning signals. Montana Resources believes in the free enterprise system, and we understand the ups and downs of commodity markets. However, I

would suggest that there has never been a commodity swing so far

and so fast from $35 to $650 in 6 weeks. I would suggest that we

may need to fine-tune this whole idea of restructuring of our electrical industry.

Electricity is a very unique commodity. In many instances it has

no substitute, and it cannot be stored like wheat, copper, natural

gas or crude oil. In our business we have to have reasonably priced

electricity to run our industrial electric motors. There is no substitute. If I offer to sell you copper at $10 a pound, you can say,

no, I’m going to replace it with PVC or aluminum. When the homeowner turns on her air conditioner, she expects to be able to do

that for a reasonable price. What happened in San Diego this past

year? Electric bills tripled.

The price in the West over the past 4 months are giving some

companies huge windfall profits. You may want to check some

quarterly and year-end stockholder statements of certain power

producers and power brokers. When you have losers, who in this

case are always the consumers, you will also have winners. If it

costs $15 to $30 per megawatt to produce power, and it is being

sold for $100 to $200, there needs to be some fine-tuning in the

system.

Although I have spent the last 30 years buying power and negotiating contracts, presently I am unable to find a way in the current market out of this dilemma, but I trust that there are people

with sufficient knowledge with power to address the situation and

find solutions. I do know that if we don’t come up with a solution

soon, the basic industries in the West are in for additional shutdowns, some of them permanent. Additionally, I would suggest that

the next victims of these unrealistically high power prices will be

the homeowners.

I would offer the following suggestions for your consideration: I

think we need to limit the Federal agencies like BPA, WAPA or

TVA’s ability to go into the open market and buy or sell their

power above cost.

I think we need to regulate open access to the transmission systems to prevent gaming in that area.

I think that we need to insist that all power transactions are totally transparent and listed similar to other commodity markets.

Look more seriously at energy efficiency and energy sources for

the Federal Government uses. You may not know it, but the Fed-
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eral Government is one of the largest users of power in the United

States.

We need to encourage BPA to more seriously look at maximizing

power production from the Columbia River system while using

technology to assist the fish migration. I don’t have anything

against the fish; in fact, I take pictures of them and like to catch

them. But we have one of the most wonderful hydro systems in the

world that is not operating up to its capability. If we can put a man

on the moon, we can certainly get fish from Astoria, WA, up to

their breeding grounds.

We need to look at the process in building new generation. Certainly most experts believe California in particular needs more generation. And we need to look at expediting that process so that

plants can be built as expeditiously as possible.

The present prices for energy, natural gas and electricity, in my

judgment, will start having a huge negative impact on the U.S.

economy and the economy of the world if we don’t aggressively address it.

Thank you, and I appreciate, Mr. Chairman, the opportunity to

discuss these issues before this committee. Thank you.

Mr. BURTON. Thank you, Mr. Tilman.

[The prepared statement of Mr. Tilman follows:]
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Mr. BURTON. Mr. Pursell. We will proceed, because there is one

vote, and the Members will be coming back from the floor. And because of the importance of getting through the hearing, I decided

to stay here and miss this one vote, so I want you to know how

important I think it is, because I don’t miss many votes.

Mr. PURSELL. I am David Pursell. I’m a market analyst, both

global crude oil and North American natural gas, for Simmons &

Co. in Houston, TX.

I appreciate the opportunity to come talk to you today about

some very serious issues facing the country. In our opinion, we are

facing the very real possibly of shortages of natural gas and heating oil, the two key winter heating fuels. Current low inventory levels and record prices for both natural gas and heating oil portend

a continued market this winter that, depending on a number of factors including the weather, could result in shortages of one or both

key products.

It is important to point out that the single biggest factor driving

high heating oil prices is the cost of crude oil. My opinion and the

opinion of Simmons & Co. is that high prices will persist through

the winter, and as a result there will likely be little or no relief to

the consumer in the short term.

More alarming is the possibility for supply disruptions in the

event of a cold or sequential winter due to low inventory levels, as

you can see exhibit K. The key lines to look at are the inventory.

The bold white lines at the bottom show that we, both on the east

coast and nationally, have record low inventories of high sulfur distillate.

If you look at exhibit A, I also forecast record low natural gas inventories as we enter the winter season. These low inventories are

again a result of a tight market which could result in even higher

prices and the potential for interruptions during the winter.

The key graph to look at there is the green line. That’s the current inventory fill this summer. What is a bit troubling is the fact

that it is approaching the record low levels, and also the slope of

that line shows that inventory gains during the summer have significantly underperformed past trends. This portends a tight market.

We can characterize the natural gas market by low current inventory levels, difficulty in meaningfully increasing domestic production, and ongoing demand growth driven by the electrical generation sector.

If you look at Exhibit E, this is a graph that will take a second

to discuss, but it is production history of a significant amount of

wells in the Gulf of Mexico, a key producing basin. You can see in

the 1980’s, or the left side of this graph, the production seemed to

peak in the winter and through in the summer. This phenomenon

was because there was excess well capacity. In other words, producers were curtailed, or they had to restrict production or actually

shut in wells during the summer because the pipelines were full,

and there wasn’t enough end use demand.

You can see—and this is a key point to understanding the natural gas market. This term was called the gas bubble, meaning we

had too much well production capacity. If you look around 1992,

that excess capacity went away, and you can see it on the produc-
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tion graph by the seasonal oscillations it went away. If you make

this graph with almost any region of the country, you would see

the same phenomenon, that around 1992 or 1993 the gas bubble

burst, the seasonal oscillations went away, which means that wells

are being produced at or near capacity year round. That is a key

point to take out of this.

Contrary to the EIA’s contention that in a December 1997 report

that there is nearly 20 billion cubic feet a day of lower 48 surplus

wellhead productive capacity, actual production and market data

suggests that most gas wells are producing at or near capacity year

round. In fact, the EIA stated that the lion’s share of excess capacity existed in the Gulf of Mexico, which actual production data suggests that just maintaining production is extremely difficult.

Exhibit B shows the decline rate treadmill of the Gulf of Mexico

Shelf, one of the most prolific and important natural gas basins in

the United States. The aggregate decline rate of the most recent

wells for which data are available suggests an annual decline rate

of 50 percent, compared to 20 percent during the 1970’s. Most simply stated, that says your average well in the Gulf of Mexico declined; its production rate is cut in half within 12 months.

If you look at exhibit F, this—the top line is the line to focus on.

That is U.S. natural gas production over the last, I believe, 8 years

on a quarterly average basis. U.S. natural gas production has been

essentially flat over the last 5 years, even though natural gas directed drilling, which is the line below the green line, has steadily

increased. And we can measure—we count the number of rigs drilling for natural gas on a weekly basis. That is a number that is

very, very accurate.

The lack of substantive production growth is consistent with accelerating underlying decline rates of the base production. I can’t

reiterate any more strongly that there is simply no surplus wellhead capacity in the lower 48.

This is important because the difficulty in growing supply is extremely important when looking at the forecast domestic demand

growth. If you look at exhibit G, the National Petroleum Council

suggests that natural gas demand will grow 2 to 21⁄2 percent per

year, driven by the electrical generation sector. We believe in the

next 3 to 5 years those estimates could prove to be conservative.

The National Petroleum Council also forecasts that nearly 50

percent of the production volume growth to meet this demand over

the next 10 years originates from increasing domestic oil production and increased development of unconventional natural gas resource base, which includes low permeability, shale and coalbed

methane reservoirs. We’re simply moving down the food chain of

reservoir quality as we bet on the come that that is where we are

going to achieve the volume growth.

Given the current challenges facing domestic natural gas supply

growth, we believe it is unlikely that the NPC’s ambitious supply

side can be met without opening areas that are currently off limits

or available with restrictions. The NPC suggests that nearly 213

cubic feet of natural gas resource domestically is currently off limits, as shown in exhibit I.

Not often mentioned in the debate surrounding high natural gas

prices is the negative impact on the manufacturing sector, which
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we estimate accounts for nearly 30 percent of total domestic natural gas consumption. Several large companies have recently issued

profit warnings for the third quarter due to high energy prices, and

in extreme cases output has been restricted, as we have just heard.

We are concerned that large-scale curtailments could occur this

winter if the weather is colder than last year’s record warm winter,

further impacting the manufacturing sector. In short, we’re concerned that the near-term natural gas market will consist of high

prices with significant upside volatility with a potential for curtailments this winter. Longer term we believe that the supply side will

continue to struggle to keep up with ongoing domestic demand

growth, resulting in a new sustained high price level.

Thank you very much for the opportunity.

[The prepared statement of Mr. Pursell follows:]
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Mr. BURTON. Keep those graphs handy, because we are going to

have some questions in a little bit about those.

Mr. Lane.

Mr. LANE. My name is Steve Lane. I’m a senior facilities engineer with SDL, Inc., in San Jose, CA. And we have heard several

times including Mr. Burton said that there were some brownouts

in the San Jose area on June 14th, and I was one of the ones hit

by those. So what I am going to share a little bit is some of the

things, first, what happened to us, and what we’ve had to do to

hope to allay those problems in the future, but also maybe some

suggestions that we see could be implemented from a Federal level

as well as our State level.

Anyway, our company is only about 15 years old. We were started by Spectrophysics, and I forgot the other name of the company

before. But anyway, we were started just recently and haven’t been

in the market long enough to see any of the previous energy crises

that have hit in our area or anywhere else.

Anyway, basically back on June 14th, the temperature in San

Jose reached 109 degrees, which is the highest temperature ever

recorded in the San Jose area, and as a result of that, of course,

everybody was air-conditioning more and more, and the load on the

system continued to rise beyond the level of our local transmission

capability. We have almost no local generation at all in the South

Bay and San Francisco area. And so what happened is as the load

continued to increase, the voltage started to dip, and the California

ISO orders a brownout based on the voltage support. They were not

able to maintain the voltage of the system, and that’s why the

brownout or the blackout occurred in our area. It’s the first one we

have ever had in our area, so nobody was expecting it, nobody was

prepared for it, and we were probably one of the hardest hit companies in the whole area, mainly because as the voltage dropped, motors are going to pull more current to make up for dip in voltage.

So our PG&E transformer exceeded its capacity and burned up

about 15 minutes before PG&E shut our power down.

We were responding to an emergency situation—not physical life

safety emergency, but company emergency situation, and did not

even realize that our grid was shut down, because they left us a

voice mail message 15 minutes before they shut off the power, and

we were out responding to the urgent situation which happened

about 15 minutes before our power went down.

So anyway, what happened was we have very critical semiconductor equipment. It’s backed up by hydrogen gas purifiers, and

those purifiers must remain powered at all times. If the power

fails, those purifiers go down, and they have to be replaced. They

can’t just be regenerated like a cryopump or something. If our

power had failed to those things—we have emergency power

backup, but we have a limited amount of backup because we have

never had to worry about backup in the past. We’ve never had a

power failure, other than a couple of times in the winter of heavy

rains and storms, whatever, have cut our power.

So what happened was we called immediately for refueling because we found out as our transformer melted down, we found out

that we were going to be down for 12 to 24 hours before PG&E

could bring in and replace our transformer. And they had 100
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transformers burned up that day in the Bay area that they had to

replace because of the low voltage and high current. So they were

busy replacing transformers.

Well, when we found on that our fuel provider for the diesel fuel

could not make a fill for about 24 hours at our plant site because

they had gotten so many calls from every other plant site in the

area, so we were looking at our generator going down, which takes

down our power to our purifiers. So we actually sent people out to

buy 5-gallon buckets, barrels, whatever, gas cans and go to diesel

stations and pump diesel fuel. And we actually hand-loaded our

diesel tank all night long. Our VP of technology was on top of the

diesel tank, filling it himself, along with me.

So, you know, it was one of those situations where you don’t expect it, and we handled it, but it was dangerous. It was dangerously close.

Now, in my prepared statement I wrote that what had happened

financially was if those purifiers go down, there is about a 6-month

lead time. We have 10 of them. They are $60,000 apiece. Nobody

carries those on their shelves because they are custom-designed

items, and they are expensive, and they normally don’t go down.

We could have been out of business for at least 6 months if those

things had all failed. You know, obviously that is catastrophic.

That could be devastating. Who knows what would have happened

financially to our company.

But anyway, what we did do, we have a very small emergency

power generator because in the past we have only needed it for life

safety equipment, lighting and communications equipment, and

these gas purifiers. We are in the process of expanding, just because we’re growing so fast. We are trying to increase production

about five times this year alone, and we are in the fiberoptic industry, which has grown like crazy. So anyway, we are looking at increasing our generator capacity for backup anyway. Now we are

looking at instead of just increasing the generator to handle life

safety and a few key items, we are looking at the potential to put

a diesel generator—that should scare a lot of people—big enough

to provide our whole production capacity during these projected

brownouts or blackouts, I should say, over the next 2 to 4 years in

our area.

So, you know, nobody wants to run diesel. We are looking at natural gas, but there are challenges with natural gas, too. The pipeline in our area may not be able to handle a generator big enough

to handle all of our power. So kind of just to net it out, we have

gone back and increased the capacity of our infrastructure in our

plant site to, you know, handle, you know, shutdowns and other

things. But also we would like to see from the Federal level any—

what are they called, lobbying, or whatever it takes to promote the

swift permitting and installation of power plants in our area and

in the whole West Coast, California in particular.

We are severely undergenerated in our area, and we’re also low

on transmission. If you generated the power outside of the Bay

area, and you tried to run it in on the lines, they can’t even handle

it on the power lines in our area currently because it takes so long

to permit and install power lines that the power companies are

fighting that battle as well. It takes up to 7 years to install a new
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high-voltage power transmission line into our—into any area, and

we are low on both. So we need help speeding up power plant installations and transmission project installation.

In particular, there is one right now that is kind of a hot button

in our area. Calpine and Bechtel are trying to put in a plant in

South San Jose, the Metcalf Energy Center, 600-megawatt naturalgas-fired power plant. Some of the constituents in their area, one

company and one neighborhood group, are going at it with a

NIMBY idea that they don’t want it in their backyard. And nobody

does, but we all need power. So we would like to see, you know,

the streamlining of that permitting and installation process.

Also, I sit on the Silicon Valley Manufacturing Group Energy

Task Force, which is a conglomeration of not only high-tech companies, but other companies, as well as Hanson concrete plant up in

the Saratoga foothills. And we’re—as a group, we are trying to reduce power demand on hot days. Our problem is not the winter;

our problem is the summer with electricity demand. We’re working

to reduce and curtail power demand on those hot days. And we

have even seen some companies like Hewlett-Packard just recently

was able to reduce voluntarily 20 percent of their power demand

on the grid just by taking measures of turning off lights, raising

temperature, turning on generators and whatnot. And even the

Electric Power Research Institute which has a local office was able

to reduce power over 20 percent.

So we are doing a lot locally to reduce power, but we need help

with increasing the power supply into our area as well. Thank you.

Mr. BURTON. Thank you, Mr. Lane.

[The prepared statement of Mr. Lane follows:]
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Mr. BURTON. Mr. Hamilton.

Mr. HAMILTON. Thank you very much. Thank you. My name is

Dave Hamilton. I’m the policy director with the Alliance to Save

Energy, a nonprofit, bipartisan coalition of government, business,

environmental and consumer leaders dedicated to improving the

energy efficiency of our economy, and I am here to be the good

news guy. I’m here to talk about the things that can be achieved

on the demand side.

In the spirit of your asking for recommendations about what the

Federal Government can do, what I would say first and foremost

is not to ignore the demand side. The administration has put forward many recommendations that have been based on that, but

our urging to you is to not dismiss it out of hand.

People are paying more attention to energy right now than they

have in 20 years, but if you are a homeowner and have to drive

to work over a long distance or heat with fuel oil or natural gas,

you know you are paying substantially more for subsistence expenses than you were last year. If you live in areas, as we just

heard, vulnerable to electric supply disruption, you could be paying

three times what you were paying last year.

I read an article a couple of days ago that said we are not in an

energy crisis, we are simply seeing a normalization of prices that

were abnormally low for most of the decade, the 1990’s. Frankly,

if you’re a homeowner or a person on a fixed income, this is a crisis, and I don’t think we should downplay that at all.

I’m going to address each of the spheres and, because of the time,

just try to make a couple of points on each. But I want to talk

about energy efficiency as an economic driver and something that’s

produced really substantial economic results that have not been

widely disseminated. EIA rates the amount of energy that was

saved through existing energy efficiency measures as 26 quadrillion

BTUs in 1999. If you look at that size recycled or displaced energy,

that is more than we generate with coal, more than we generate

with natural gas, more than we generate with nuclear power. Energy efficiency has taken hold and has made a substantial difference to the American economy.

Second thing, energy efficiency, because it exists in every different way that you use energy in the economy, it is hard to quantify. You have to take each measure and look at it and see what

it produced. But the RAND Corp. did a study for the California Energy Commission this year which was released in March which

looked at California energy efficiency measures over the last 20

years and concluded that those measures had produced 1,000 percent per capita return on that investment. And the gross State

product in 1995 would have been 3 percent less without the inclusion of energy efficiency measures which had been put in over time.

There is—also, these measures avoided a massive increase in

point source pollution from not having to build power plants. And

the study also talks about how lowered energy intensity, which is

fewer dollars per unit of economic output, is fertilizer for economic

growth because $1 for keeping the lights on is not as productive as

$1 invested or $1 spent on innovation. And freeing up dollars to reinvest in the economy is a highly productive use of capital.
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And frankly, Mr. Chairman, demand management kept the lights

on in California this summer. Interruptible service contracts, energy efficiency, basically hand-to-mouth attempts to keep the lights

on were facilitated completely by demand management. And when

we look back at the summer of 2000, it was the demand side which

kept us away from a crisis in California.

When we talk about crude oil supply, Mr. Chairman, there is an

inexorable equation going on. Domestic supply is going to fall over

the long term; domestic demand is going to increase over the long

term. We are going to have to import more oil, or we are going to

have to change the way we do transportation and some of our heating things. It is not—it is not, you know, a huge thing to understand. We have to either figure out different fuels to power motor

vehicles on, or we have to make sure that each motor vehicle uses

less than they would otherwise.

You know, it is a long-term decision, and you can make decisions

about domestic supply, to pump it up in the near term, but over

time it is going to fall.

You know, and now we have a revitalized OPEC that appears to

have actually gotten organized and appears to be having some success at keeping prices up. So I’m not sure that we can rely on a,

you know, disorganized OPEC in the way we were in the early

1980’s.

We talked a lot about heating fuels and why prices are the way

they are. As a homeowner, all you can do at this point is try to

make sure that your home is as energy-efficient as possible. Make

sure that your home is as well-insulated as possible, that you have

a set-back thermostat that can control when you need heat and

when you don’t. Make sure your furnace and boiler is cleaned and

tuned. There is not much that consumers can do now except to try

to batten down the hatches and do the best they can.

A lot has been said about natural gas today, but we made a huge

national wager on natural gas. The vast majority of projected new

generation is in natural gas not because of an administration mandate, but because combined cycle gas turbines have become the

cleanest, cheapest way to generate electricity, and utilities have

opted for that as a business decision.

You know, we are now out on a limb with natural gas supply,

and Mr. Pursell’s results are disturbing over time. This volatility

was not restricted by EIA, and it changes almost all of their longterm forecasts. And you can’t separate natural gas from electricity

reliability. Brave new world predictions about electric competition

predicted a kind of vast superhighway of electricity where buyers

and sellers from distant regions of the country could trade and

lower prices for everybody. We don’t have a superhighway. We are

trying to put rush hour traffic through local two-way roads, and it

is not working.

California got hit hard this summer, but the Midwest and the

East dodged a bullet because of mild summer temperatures. New

transmission and generation are needed, but lead times leave us

vulnerable—in a vulnerable state for many years. I listened to Virginia Power executives talk about 15 years in the friendly era of

monopoly that it took them to get a transmission upgrade from
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planning to juice in the wires. We’ve got to figure out something

to do between now and then.

Demandside management saved this Nation 30,000 megawatts of

power in the 1990’s. Half of that was done by energy efficiency.

Two-thirds of it was done between 2 and 3 cents a kilowatt hour,

and that is at the spending rate at the high point of $3 billion a

year by utilities. That spending rate with utility energy efficiency

programs has dropped by 70 percent. Demandside management expenditures have dropped by 40 percent.

The new basically—as States have deregulated, it is no longer in

the interest of the utility, because they are not vertically integrated, to save energy to avoid having to build new power plants.

If you are a distributor now—— Mr. BURTON. Mr. Hamilton, let us get to some questions. We will

probably have some questions based upon the statements that you

made.

Mr. HAMILTON. OK.

[The prepared statement of Mr. Hamilton follows:]
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Mr. BURTON. Let me start with Mr. Shays.

Let me then start. I have a few questions here. I was looking at

your map, Mr. Pursell, when you put that on the screen. We can

put that up on the screen again if you have that close by.

Mr. PURSELL. That’s exhibit I.

Mr. BURTON. Exhibit I, yes. And when I looked at that, it looks

like there are huge, huge gas reserves in the continental United

States. And this doesn’t show Alaska. I imagine there are some up

in Alaska as well, aren’t there?

Mr. PURSELL. Yes, sir.

Mr. BURTON. How many years of natural gas supplies do we

have, do you think?

Mr. PURSELL. The estimates vary.

Mr. BURTON. Give me a rough idea.

Mr. PURSELL. Probably 40 or 50 years.

Mr. BURTON. Minimum?

Mr. PURSELL. Minimum.

Mr. BURTON. So we have a 40 or 50-years’ supply of natural gas

that we could tap into right now. Why aren’t we tapping into it?

Mr. PURSELL. Currently the United States is running at record

natural-gas-directed drilling. We have well over 800 drilling rigs

today drilling for natural gas. The prior high was back in 1997,

around 640 rigs. The industry has responded to the pricing. The

issue is trying to meaningfully grow production in the near term.

It has to do with the decline rate of the underlying base, which we

estimate the current base production declines at about 23 percent

per year. But in perspective, on a 50-BCF-a-day productive base,

the industry has to replace about 12 BCF a day just to stay flat.

Now we are trying to achieve 2 to 3 percent volume growth.

Mr. BURTON. No, I understand. But it seems to me if we have

this large reservoir of gas, we could put more wells, more well-drilling apparatuses into service and drill to get the production up. I

mean, is that a problem, producing the additional gas?

Mr. PURSELL. It is in existing basins. If you look at the decline

rate trend graph in the Gulf of Mexico, what happens in a maturing basin as you apply new technology, 3D seismic technology,

more efficient horizontal completions, the target size for new reservoirs becomes smaller and smaller, but yet we more efficiently

produce those, and that combination creates these accelerating decline rates.

So it is difficult in a mature basin like the Gulf of Mexico to

meaningfully achieve production growth. So even though you have

some economic projects, they are not the kind of projects you need

to achieve the kind of growth we project over the next 10 years,

which says you probably have to access some of these areas that

are—historically been off limits because that is where you can presumably find these larger reservoirs.

Mr. BURTON. I guess that is what I am trying to get at. Some

of these reservoirs that are off limits would be more productive.

Mr. PURSELL. Yes, sir.

Mr. BURTON. Why are we not drilling in those areas?

Mr. PURSELL. There are not Federal lease sales in the areas that

are shaded offshore due to environmental restrictions.
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Mr. BURTON. So the environmental restrictions are keeping you

from drilling in areas where you have large reservoirs of gas?

Mr. PURSELL. Large potential reservoirs, yes. You don’t know

until you go drill it, but the geoscience folks will tell you that there

are some real opportunities there.

Mr. BURTON. It’s there. So the problem with increasing our natural gas production right now in large part rests with environmental

restrictions?

Mr. PURSELL. Yes, sir.

Mr. BURTON. Why are those environmental restrictions there? I

don’t understand that, because natural gas is supposed to be such

a clean-burning and efficient energy source. Why are they restricting the drilling? I mean, what’s the environmental problem?

Mr. PURSELL. That’s a question for somebody else. I don’t know

what the significant issues are, other than they are restricted. I

mean, and ultimately anywhere you find natural gas, you do have

the potential to find oil. That may indeed be the concern.

Mr. BURTON. Uh-huh.

In California, Mr. Lane, you said your plant was all but shut

down. You had a transmission that was burned up.

Mr. LANE. Our main transformer from the power company

burned up.

Mr. BURTON. Your transformer was burned up, and you were

hand-carrying diesel fuel to keep the operation going so that vital

components of your business weren’t destroyed. And it was going

to cost you something like around $6 million if they were destroyed.

Mr. LANE. They were about $60,000 each, times 10. But the bigger hit is the production loss, 6 months at our second quarter rate

would be about $220 million.

Mr. BURTON. You said something about the problem with the

power plant that was being debated right now out there being built

which would help eliminate part of the energy shortage that you

have, and also transmission lines being built quickly to bring in

more through the grid system.

Mr. LANE. Exactly. There are two projects currently in the permit process, and one of them has already gone through some of the

hearings.

Mr. BURTON. What is the problem with the permit process out

there?

Mr. LANE. Well, I don’t know exactly, but I know that it takes

a lot of time to go through, and there is a lot of public hearings

and a lot of opposition.

Mr. BURTON. How long has it taken so far?

Mr. LANE. I know that power lines take about 7 years to go

though the process from the start of conception or, you know, the

permit application phase through the actual installation and power

phase. Power plants themselves take between 3 and 4 years to put

in.

Mr. BURTON. Just talking about red tape it has to go through at

Federal and State level to get the thing done.

Mr. LANE. A lot of it is State. I know a lot of it is State level,

but there is Federal as well.
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Mr. BURTON. Mr. Hamilton, you said something that kind of

troubled me a little bit. You said that the consumer this year

should batten down the hatches. I guess what you are projecting

is that there is going to be some real energy shortages this winter,

and we are going to have some people that are going to be really

suffering if they don’t do some of the things that you talked about,

like making their homes more energy-efficient, because there is

going to be shortages around the country. So that is your conclusion?

Mr. HAMILTON. Yes, absolutely. I mean, EIA expects a minimum

of 27 percent price increases for natural gas. I mean, I heat my

home with natural gas.

Mr. BURTON. Twenty-seven percent increase in natural gas.

Mr. HAMILTON. Over last year. This is retail price.

Mr. BURTON. And this is nationwide?

Mr. HAMILTON. I believe it was an average, yes.

Mr. BURTON. Do you have any figures like that for oil price projections this winter?

Mr. HAMILTON. I’ve got them in there, but I can’t quote them

from memory.

Mr. BURTON. Well, can you give me a rough idea?

Mr. HAMILTON. Because inventories for fuel oil are so low, you

know, I think they basically said that it could be worse.

Mr. BURTON. Than last year?

Mr. HAMILTON. Definitely worse than last year. Could be worse

than 30 percent.

Mr. BURTON. Well, if somebody can give me—is there anyone

who can give me a more accurate figure than that? I see some people in the audience shaking their heads.

Mr. SANTA. Chairman Burton, I would point out to you that according to the figures that we have from the U.S. Census Bureau,

based on average rates of consumption and pricing, this year it

should cost about $1,000 to heat an average home. I would—and

that is in 1984 adjusted dollars. I would point out to you that in

1984, it was about $1,300 to heat with oil.

So it’s even with the price being at the height that it is right

now——

Mr. BURTON. Give me a comparison with last year.

Mr. SANTA. Last year it was about $500.

Mr. BURTON. So it is going to be double last year.

Mr. SANTA. That’s right, but not yet back to the price of the early

and mid-1980’s——

Mr. BURTON. I understand, but people who are living in these

homes today are not concerned about 15 or 20 years ago. They are

concerned about last year as opposed to this year and their income

level.

Mr. SANTA. Sure they’re not. Their income levels, however, have

moved up from $31,000 average to $56,000 average. So things have

changed for them, too, haven’t they?

Mr. HAMILTON. I found a passage, which is that residential heat- ing oil prices are projected to average $1.31 per gallon, or about 30

cents more per gallon compared to the same period last year.

Mr. BURTON. So you are looking at at least 35 percent increase.

Mr. Waxman.
85

Mr. WAXMAN. Thank you, Mr. Chairman.

Our country experienced the energy crisis in the 1970’s, and here

we are as a Nation heavily reliant on oil as a major source of energy. Americans have seen a spike in the prices of natural gas and

electricity. Mr. Hamilton, what in your view is the main reason

why our country is vulnerable to these energy price hikes?

Mr. HAMILTON. As the chairman and others said in their opening

statements, we basically had an energy policy of wishful thinking

for a number of years, and the wishful thinking was that prices

would stay low, and we did not prepare, and it’s deja vu all over

again. If we take short-term, stopgap measures to deal with it, we

are going to be in the same spot in 10, 15, 20 years.

Mr. WAXMAN. What in your view should we be doing to lessen

our dependence on oil?

Mr. HAMILTON. On oil specifically I believe we should raise CAFE

standards. We should make our motor vehicles more efficient. We

should have automobile standards of 45 miles a gallon and light

truck standards of 34 miles per gallon. We spent a decade building

better technology to implement this. Ford and GM have made announcements that they will voluntarily raise the fuel economy of

SUVs. It is not going to be enough. We need—you know, the price

of crude is a combination of heating and transportation and everything, but the bite of transportation has to be lessened if we’re

going to be able to lessen our dependence on foreign sources.

It is the equation I talked about earlier. Domestic demand goes

up, domestic supply goes up, imports have to go up unless we reduce demand.

Mr. WAXMAN. Mr. Pursell, I don’t really have a question—let me

just ask you this. As I understand from your company documents,

your clients include USX, Capital Corp., Brown & Root, Sungroup

Energy Services, Andrews Petroleum, Gulf Canada Resources,

Union Pacific Resources, Petroleum Geosciences, and dozens of

other companies with interests in oil and gas prices; is that right?

Mr. PURSELL. That’s correct.

Mr. WAXMAN. And as I understand your testimony, you think

that one of the ways to deal with this problem is to allow drilling

in the outer continental shelf. Now, there has been bipartisan support in the Congress to not allow drilling off our shores. It seems

to me that there has been little evidence that if we gave up our

shores to drilling, that we are going to solve this crisis. A lot of people, consumers particularly, say that what we need to do is to look

at consolidation of the industry and mergers of gas producers. Do

you think that that’s a factor?

Mr. PURSELL. I mean, ultimately with natural gas—and I hope

to answer the question. With natural gas you don’t have the specter of OPEC out there to add production by simply turning a

valve——

Mr. WAXMAN. The problem is that I have only a limited time.

But my question to you specifically is one solution you think would

be to allow our beaches, shorelines, and outer continental shelf to

be a source of new drilling. But some people say what is going on

is the industry is changing. They are merging, they are consolidating. Do you dismiss that consolidation and merger trend as any
86

reason for us to look at this crisis as maybe being attributable to

that?

Mr. PURSELL. Yes. I think the lack of ability to grow supply is

a function of key maturing basins. It is a function of reduced activity level in response to $1.60 natural gas and $10 oil. And there

is a—although the industry has indeed picked up activity, there is

a lag effect, and I would propose that supply and demand will

meet, and they will meet violently if supply growth doesn’t occur.

Mr. WAXMAN. It just strikes me that if we are looking at supply

and demand, that this country should have been looking for energy

conservation, renewable energy and related matters. But the Congress has consistently appropriated less for energy conservation

and renewable energy than was requested by the President. For

energy conservation, Congress appropriated $870 million less than

was requested. For renewable energy, Congress appropriated $425

million less than was requested. That’s a total appropriation of $1.29 billion less than requested by the President. Mr. Hamilton, what difference would an additional $1.29 billion

have made in these accounts? And could that money have made a

difference in the lives of people who are now fighting these high energy costs?

Mr. HAMILTON. Yes, it could have made a difference. The first

thing that happened in the fiscal year 1996 budget was that lowincome weatherization was cut by 50 percent. That was a chop in

half of a program to make the houses of low-income Americans

more energy-efficient and thus less subject to price volatility.

On the technology side, the Department of Energy EPA programs

such as Energy Star and other programs—I can point to six tech- nologies that have resulted in GAO-audited studies of over $40 billion returns to the U.S. economy. The entire investment in energy

efficiency and renewable energy has been less than $20 billion over

20 years. So that is just six technologies of the hundreds that have

emerged from Department of Energy and the EPA and the national

laboratories.

Federal expenditures on energy efficiency R&D have yielded tremendous results. I would have to think that a greater expenditure

on them would have yielded more results.

Mr. WAXMAN. Thank you, Mr. Chairman.

Mr. BURTON. Mr. Shays.

Mr. SHAYS. Thank you, Mr. Chairman.

Mr. Santa, I’d like you to first mention—discuss the issue of

carry.

Mr. SANTA. Yes, Mr. Shays. The concept of carry works like this.

In a wholesale market, you need to have a certain amount payment

from the market to both store your product and to inventory or finance your product. Generally speaking, in round figures those

each cost about a half a cent a month. So, therefore, a normal carry

market will have, let’s say, over a 5-month period of time, a 5-cent

differential. Let’s say from August to January that would be about

a 5-cent differential. That’s a carry market in that market or something like that.

A rational, reasonable wholesaler can put product and is encouraged to put product in the market into his storage. If it’s not there,

he can’t. It’s not that he doesn’t want to; he can’t put it in there.
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It’s crazy. It’s insane. Right now we are in that place where product now is about 3 cents a gallon higher than product in January.

Mr. SHAYS. Isn’t it likely that the product in January will even

be higher than it is today?

Mr. SANTA. Not necessarily so, because the market that we work

with right now, the New York Mercantile Exchange, is an infinitely

efficient, albeit merciless, price discovery mechanism. It is giving

us a message. The message is the price of oil right now is too high,

and it is going to come down in the fullness of time. It may not

be tomorrow. It may not be next week.

Mr. SHAYS. So we will agree that it is too high now, and the expectation is it may be a little less in January.

Mr. SANTA. That’s right.

Mr. SHAYS. But if you are not buying now, who is buying now

to inflate that price?

Mr. SANTA. Actually the only individual—group buying right now

is you, Mr. Congressman. The Federal Government is out buying

2 billion barrels for the Regional Petroleum Reserve, and quite

honestly is it is having the effect of keeping the market up right

now. That will pass. You will get your oil. And some of it is in New

Haven already, and some of it in New York already. When you get

your oil, I think the market will start to back off.

Mr. SHAYS. Now, when I and others had suggested that we have

a reserve and that we tap the reserve—one that we have, a home

heating reserve here up in the Northeast, and that we tap the petroleum reserve in Louisiana, you and others came to us and said

that’s not a great idea. Explain why.

Mr. SANTA. Well, I can’t speak to the strategic one in Louisiana

because it’s a little bit removed from our function, but I can speak

to the regional one.

Mr. SHAYS. OK. Let’s do the regional one, and then maybe someone could speak to it.

Mr. SANTA. As regards the regional one, there are two issues that

are concerning to us about that. First is what is happening right

now. Just buying it is propping up the market. Then we wonder

when and how this product will reenter the market. It hangs like

the sword of Damocles over all of us people in the wholesale business who are wondering when and how it will come out. It is very

disconcerting if today you buy a product at $1.05 a gallon, and tomorrow that gets released, and all the sudden the market falls to

95 cents, that could hurt a fellow if you bought 20 or 30 or 40 million gallons of product. It could hurt very badly.

So I’m not saying the government will be indiscreet about that,

but I don’t know how they are going to do it. And that is why I

suggested to Secretary Richardson, why don’t you guys stay in the

tax business, we’ll stay in the oil business. You give us a tax incentive when we do not have a carry, and we’ll take care of the oil.

And then if things work out nicely, then you get your tax incentive

back.

Mr. SHAYS. Before I get to the Louisiana, if someone else would

answer that, the concept of basically you’re buying futures—you

are trying to protect—you’re trying to guarantee your customer a

price. They guarantee you demand. You’re basically just hedging

your bet. You’re just basically committing to a price, and then your
88

consumers have to pay for that price. They benefit clearly if price

goes up, but then they probably logically think, my gosh, why am

I paying more? Just walk me through that concept.

Mr. SANTA. First of all, let me state that this concept can apply

to my colleagues to the left here if they are buying natural gas or

diesel fuel or electricity, because all of those commodities are now

traded on the Mercantile Exchange. Let’s go to the question of that

customer, the end user, and that is the person, as I mentioned earlier, we need to help out a lot. They just don’t know.

They do not realize that in today’s market they can buy supply,

and they can sell risk if they wish to. What we do when we give

them a capped price, and we sell them risk, we go to the commodity market. We buy a financial derivative. It costs us a couple, 3

cents a gallon, whatever the price happens to be. We buy that derivative, build it into the price. Now, what John Q. Homeowner

gets is a beautiful thing. He gets a thing called a capped price, and

a capped price is very simply one that will go no higher than some

certain amount, and if the market backs off, it will go lower.

Mr. SHAYS. They will get the lower benefit?

Mr. SANTA. Yes. It is a win-win deal. They can’t go wrong. But

they have to commit. They can’t play around. And that is the big

lesson of our market today. Hop shopping for energy is a very, very

dangerous thing to do. Our new energy price discovery and distribution markets are intensely efficient. It has changed this way,

Chris, since 20 years ago——

Mr. SHAYS. We are going to have to close up because of the red

light. Just finish your point.

Mr. SANTA. Twenty years ago we were driving around a Buick

sedan, and that is what it was to buy energy. Today we’re driving

an Indy 500 car. It is a way different thing. It is built by different

people, run by difficult people and used by different people for different things. We still get the energy out the end, but it is a way

different vehicle. And right now people are trying to use that Indy

500 car to drive down to the supermarket and buy some paper towels. It doesn’t work that way. It doesn’t work that way. It works

well, but it doesn’t work that way.

Mr. SHAYS. Thank you.

Thank you, Mr. Chairman.

Mr. BURTON. Mr. Tierney.

Mr. TIERNEY. Thank you, Mr. Chairman. I just have to say that

I am always fascinated that all the free-marketers have sort of

come around that want to get government out of their lives are

now wondering what happened to government when this crisis

started. In fact, I think with this Republican majority, government

has been out of your lives, and here you are.

Mr. Santa, you indicate that you think what’s needed is the government to write you a check in order to cover the carry so that

it will help the supply situation. Is that pretty much your situation?

Mr. SANTA. I’m suggesting this is an alternative to having a regional petroleum supply. We have done it before. Back in the energy crises of the 1970’s, we came up with a——
89

Mr. TIERNEY. We may have done it before, but tell me—I assume

that you are a big free market person, right? You love the beauty

of the market and how it works efficiently and all that?

Mr. SANTA. That’s how we live.

Mr. TIERNEY. How would writing you a check or giving you a tax

incentive or whatever be part of the free market?

Mr. SANTA. Well, if there is an inordinate concern on the part of

government about the supply of product—— Mr. TIERNEY. I’m not talking about the inordinate concern of the

government. I’m asking you—it is your recommendation—or how

our writing you a check or giving you a tax incentive comports with

the beauty of the free market being able to take care of itself.

Mr. SANTA. I think that the market will take care of itself. And

you know why? I’ve been at it 60 years, and I have never, ever,

ever shut off one of my customers, unlike electricity or natural gas.

Mr. TIERNEY. So you are not advocating that there be a tax incentive?

Mr. SANTA. Not really. I offer it as an alternative. I offer it as

an alternative.

Mr. TIERNEY. Mr. Hamilton, this Republican majority has been

trying for a number of years to get rid of the Department of Energy. That was part of their big thing in the beginning when Newt

Gingrich came in and he wanted to get rid of the Department of

Energy. In fact, they filed a bill, I think, every year since they have

been in the majority to get rid of the Department of Energy. Is that

your idea of good energy policy particularly in light of what is going

on now?

Mr. HAMILTON. We oppose the abolition of the Department of Energy, mostly because of the positive programs in the Office of Energy Efficiency and Renewable Energy. Without passing judgment

on—and believe me, the oil guys believe that the Office of Fossil

Fuels is just as important as do—you know, as do kind of other

areas concerned with the Department of Energy.

Somebody has got to work—the Federal role of working with the

private sector to make sure that they are aware and incorporating

plans for new technology that would better their bottom line, reduce their emissions, and, you know, improve their competitive status has been an extremely important role to play. If you look at the

Office of Industrial Technologies, they have sat down with their

seven more energy-intensive industries and said, what are your

R&D plans; how do you see the Federal Government playing a role;

how do we help; and ultimately work on the goal of waste reduction

and energy efficiency.

In buildings, in industrial, in helping the Federal Government

use less energy, that office of the Department of Energy has been

indispensable.

You know, I’m not going to pass judgment on the environmental

management section of DOE, but there are other areas that have

more opposition.

Mr. TIERNEY. Thank you.

Mr. Santa, I could go back to you for a second and that idea, one

of the things that you threw out about doing something to cover

the carry cost. Would it be just as reasonable to talk about giving

a loan with lower interest to cover that period of time? I think you
90

mentioned you would like to have some incentives to cover that period of time at least just once, and afterwards it would revert back.

Would it make any sense to talk in terms of a loan program with

low or no interest to people to cover that period of time and then

have it payable back and get over the hump?

Mr. SANTA. Congressman, quite honestly I had not pondered

that. It might work. All I am saying is that this is a financial

transaction. There is a couple different ways we can do it. The way

that you suggested doing it is certainly one way.

But if I may point out, I think there is somewhat of a long history of subsidizing agricultural product prices, I’m really not that

familiar with it, and quite honestly, I didn’t agree it very much

whatever. But that is what you guys do. Maybe there is a way we

could do that instead of the Regional Petroleum Reserve.

Mr. TIERNEY. If we do nothing—if we go back to the free market

deal here, if we do nothing, how long does the pain last, and how

severe does the pain get before the market rights itself?

Mr. SANTA. I think that is an excellent question. If you would

just go back to 1996, we had a situation almost exactly the same

as this when there was almost no storage at this time of year, and

the prices were bumping up some. Believe it or not, that market

went into the tank in January 1997, dropped like a rock. It could

happen again.

My sincere suggestion would be I don’t think we need those

things. I don’t think the market needs those things. I think when

there is demand, supply will come and fill it. Yes, there will be a

price differential you have to pay, but quite honestly, as you probably know, we were paying prices for energy 18 months ago that

were roughly equivalent to what we paid in 1939. That’s OK. That

was the year of cheap energy. This is the year of expensive energy.

I’m sorry it will go down. There are only two things we know about

the price of oil. It goes up and it goes down. And we don’t know

when or in what order.

And with all due respect, even all these wonderful people here,

we just don’t know. We try to predict as best we can. We do the

best we can. We work hard to get that product here, but we really

don’t know.

Mr. TIERNEY. Thank you.

Mr. BURTON. Mr. Souder—oh, excuse me, Mr. McHugh.

Mr. MCHUGH. Thank you, Mr. Chairman.

To my recollection, nobody has seriously proposed eliminating

the Department of Energy for about 5 years now, but given the activities of the Chinese at the atomic labs, given the fact that our

national energy policy seems to be comprised of begging the Saudis

to do better, I’m not sure that we shouldn’t revisit it.

But in any event, Mr. Hamilton, you made some comments with

respect to your recommended levels of CAFE and fuel efficiency

standards for autos and for trucks. Autos was 40——

Mr. HAMILTON. Forty-five.

Mr. MCHUGH. Forty-five. And trucks was 34. If those standards

were imposed and we could in some miraculous way have them in

effect fully tomorrow, what would that do to the price of oil here

in the United States?
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Mr. HAMILTON. If we could do it miraculously tomorrow, I think

it would reduce it significantly. I think it is roughly an equivalent

increase in efficiency that we undertook with the 1975 CAFE law,

which, in fact, has lowered our oil use 3 million barrels a day.

Mr. MCHUGH. I understand that, but what does dramatically

mean? Give me how much per barrel.

Mr. HAMILTON. I can’t——

Mr. MCHUGH. So you have not examined that to that detail?

Mr. HAMILTON. No, not to that level.

Mr. MCHUGH. I don’t want to pose an unfair question. Thank

you.

Mr. Pursell, your map—and there is no need to take the time to

put it back up. I’m sure we have all looked at it very carefully. I

don’t think any of us—certainly I don’t want to see us take an environmentally reckless policy toward some very sensitive lands in offshore locations, but in your technical opinion, is there a way to access these kinds of reserves that have to this point been off limits

to you for environmental reasons in a way that is environmentally

responsible?

Mr. PURSELL. Yes, sir. There is no question that it can be done.

I may be a bit biased. I started my career in Alaska. I think it is

done right there. I think it can be done right down south.

Mr. MCHUGH. You feel absolutely confident of that?

Mr. PURSELL. Yes.

Mr. MCHUGH. Thank you very much.

Mr. Lane, you mentioned from the point of beginning of the regulatory process to the end of the construction and operation of a

transmission line, it takes 7 years?

Mr. LANE. That was according to Don Hall of PG&E.

Mr. MCHUGH. You have no reason to doubt that figure?

Mr. LANE. No, because I have seen it in our area when they

started the Los Esteros transmission project, which—to feed 230

KV power from Newark substation, which is in Fremont just north

of San Jose, down to northeast San Jose. That project in entirety

is going to take 7 years from the time they applied for a permit

to the time it actually becomes live, hopefully in the summer of

2002.

Mr. MCHUGH. And in your opinion, beyond the construction time

and such, the majority of that period is devoted to environmental

and regulatory review, correct?

Mr. LANE. By far the biggest piece of it is. It is probably a 1-year

project, 11⁄2 years. They expect to start it hopefully spring of 2001,

actual installation, and be done summer of 2002.

Mr. MCHUGH. So 51⁄2 to 6-year period for environmental regulation only.

Mr. LANE. Exactly.

Mr. MCHUGH. Do you feel that the environmental concerns—and

I would be the first to admit are legitimate—that that can be done

in a compressed time?

Mr. LANE. Yeah, definitely. I think it can be done in less than

half that time.

Mr. MCHUGH. Mr. Hamilton, do you agree with that, or do you

think it takes 6 years to do this?
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Mr. HAMILTON. As I mentioned in my testimony, I was at a reliability forum in which a Virginia Power executive talked about a

15-year project that it took from planning to getting juice in the

wires. So I think 5 to 6 to 7 years might be optimistic.

Mr. MCHUGH. I’m sorry, sir, and I apologize, I was out of the

room when you presented most of your testimony, and I did not

hear it on that point. I don’t know the reference you’re making. My

question is on an environmental review of a project of a transmission line, is 6 years absolutely what we have to have, or you

don’t think it could be done any—— Mr. HAMILTON. I’m not an expert—I’m not an environmental expert on siting. I am not—or offshore drilling or anything else. I

work on energy efficiency. So I can’t say what is necessary or

what’s justified in any particular situation.

Mr. MCHUGH. Let me suggest I don’t think 6 years is very efficient to do anything in terms of review and regulation. And I think

we have come far out of balance in that regard. And I see my time

is up.

Let me just, if I may, Mr. Chairman, make a final observation.

There is a lot of talk here about averages, and I understand that

you have to have a common language to understand a problem. But

my dad used to say, you know, if you put one foot in a bucket of

boiling water and one foot in a bucket of ice water, on average

you’re comfortable.

It has been said that the price of oil today has gone up, but so

have incomes. Well, I would just say all I know is my district. My

district, the largest industry is the dairy farmer. The dairy farmer

today is receiving the exact same price for his or her milk that he

did 20 years ago. Not averages. Not adjusted. The same price. So

when we talk about 100 percent increase, a doubling in the cost of

energy not just to heat their homes, but to run their tractors, to

run their equipment, to keep the barns ventilated, it is devastating,

and it is this Congress’s moral responsibility to do something about

it now. And that’s why I’m very proud of you, Mr. Chairman, for

convening this hearing.

Thank you. I yield back.

Mr. BURTON. Thank you, Mr. McHugh.

Mr. Souder.

Mr. SOUDER. Thank you, Mr. Chairman. I wanted to ask Mr.

Tilman a couple of questions.

I missed your testimony, but I read through it. Had you been on

long-term energy contracts before? Because it said, I believe, that

you had decided to go to long term, and then you weren’t able to

get a long-term contract.

Mr. TILMAN. Well, what happened was, of course, like California,

Montana deregulated its electrical utility industry. Prior to that

time we were on a long-term contract with Montana Power Co. And

the way it worked in Montana, you had an opportunity to go out

and get into the market, and at that time the market was not interested in long-term contracts. Everybody was more or less kind

of feeling their way along to see how this was going to work out.

And for about the first 18 month it worked out pretty well. We got

some good energy prices. We had one contract that was for 6

months; one contract that was for 9 months. And during that proc-
93

ess, we were trying to get long-term contracts, and then all of a

sudden the price just ramped up. And what that did, which make

its real difficult, is that spot price ramped up that, started affecting

the long-term price.

Now, today I can go get a 5-year contract which will guarantee— we are kind of like the milk farmer, we can’t control the price of

copper; will guarantee that we will be out of business because we

cannot afford that price as it is today, because I can’t go sell copper for $10 a pound. It’s fixed by the world market, just like milk

prices is fixed in different areas. So I can get a contract, but the

price has ramped up and now is continuing to stay high for the

long term. It wouldn’t do us any good to get a long-term contract

right now because we would ensure ourselves of being out of business.

Mr. SOUDER. Mr. Santa, I’m interested in your response to that,

because I’ve seen this in the steel industry in my district as well

as we use a lot of copper because we are the magnet wire capital

of the country in northeast Indiana with Phelps Dodge and Ring

Magnet Wire and Essex and a lot of others who need the copper

and whose response would be to go overseas if necessary if we don’t

have domestic production. We had a similar with Steel Dynamics

where they had a huge spike in their energy cost. They had been

buying in the spot market, and by the time they wanted to go to

a long-term contract, it wasn’t feasible to do business.

What seemed to me—because our problem is we are not really

in free markets, we are in modified free markets. We restrict the

production of energy, the offshore drilling ban, coal ban, so we are

in a modified free market. And part of the dilemma here is that

it almost sounds like you are saying that while distributors, oil

companies ought to be allowed to have the prices move up and

down with the market, but what happens when your users don’t

have the flexibility to move up and down with the market?

Mr. SANTA. Well, that’s precisely why we have a program like a

capped price, and we offer it to our consumers, who have ultimate

choice. Do they want to take the risk with the price? Fine, do that,

I’ll sell you a noncapped price. Would you rather have the price

capped? We will do that for you. We have got that offer for you,

too. So it just depends upon the end user’s risk tolerance. And because we sell industrials and municipals and governments——

Mr. SOUDER. Let me ask another twist to that, because I understand the concept of risk tolerance. I have an MBA, and what they

taught me first and foremost in business school, that a company

can’t handle high levels of risk. You can try to plan different

things, but risk tolerance is a premium. But I can tell from talking

to people in my district, and as the case that Mr. Tilman talked

about, was there any precedent to suggest that you were going to

have a 600 percent jump? In other words, did the energy companies

come to any of their suppliers and say—you know, because historically weren’t these prices varying 10, 15 percent? So your risk management, any kind of accountant or planning person is looking at

a realistic range, and all of a sudden there is 600. Was there any

warning of what risk tolerance was likely to be in this situation?

Mr. SANTA. Well, I think perhaps there should have been. Prudent people might have recognized that it was coming. Eighteen
94

months ago is when there should have been a hearing somewhere,

someplace in the world about the crazy price of energy; $10 a barrel was absolutely nuts, way too cheap.

Consider the Persian Gulf countries. Unlike America they don’t

have the steel and computers. All they sell is oil. That’s it. The

rough equivalent for us is if all we sold in America was Ford

Tauruses, and people expected us on the world scale to sell them

for $638. That is what it would be like. That is what we were expecting Saudi Arabia to do, and others.

I am not here to promote crocodile tears for them in the Potomac.

I’m just telling you what was crazy was that price. So, therefore,

prudent people like ourselves, we try to be prudent, we recognized

that as a crazy price. We bought a lot of stuff then because the

price, it was too low. It was not realistic. Buying a commodity at

the same price as you could buy it in 1939, that’s crazy, Congressman. You shouldn’t do that. So it had to adjust back up.

I agree, I understand, we are compassionate. No one—I respectfully submit that very, very few people in the retail business are

as compassionate and close to our customers as the 10,000 heating

oil dealers coast to coast. We love them. We are crazy about them.

And we’ll crawl on our belly for them, and we will viciously try to

keep them.

The prices right now are higher than they were last year. Yes,

I agree. You are absolutely right. But relatively speaking, what

was crazy was last year’s price crazy low. This year’s price is not

crazy high. And there are options for our end users to cap those

prices if they wish to do so.

Mr. SOUDER. What I’d like to suggest, Mr. Chairman, and I am

sure this will come up continuing through the hearings, is that

while I’m sympathetic and understand the argument that is being

made, the fact is that we have many industrial users in the United

States and Indiana who cannot adjust. They simply don’t have the

flexibility to adjust to this much market, and that is why some of

us believe that additional energy resources need to be developed,

because we cannot exist with this type of thing. Copper prices

won’t go up. Ag prices won’t go up. Steel prices won’t go up.

My district produces pickups, RVs, boats. Are we going to deprive

consumers the choices because some people decided we are going

to restrict some energy development?

Mr. BURTON. The gentleman’s time has expired. We will go to

one more round at the request of the gentleman from Connecticut.

Mr. Shays.

Mr. SHAYS. Thank you, Mr. Chairman. Mr. Chairman, thank you

for having this hearing today and the hearing tomorrow. I look forward to the other panel. I apologize to some of the other members

there. We rarely get someone from the Northeast in New England

to respond to some questions, and I would like to ask Mr. Santa

some more questions.

First acknowledging this, that what I’m hearing you saying is

that the private heating oil companies may be cautious about maintaining large stocks of heating oil, especially if purchased at higher

prices, when the government could later enter the marketplace to

sell its reserves, potentially driving costs down.
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The irony to what you are saying to me is that while we want

there to be a stockpiling, we think we are going to have a stockpile

in reserve, and you’re telling me—and I want you to verify it—that

there is likelihood that you will not stockpile as much, and so they

kind of cancel each other out.

Mr. SANTA. That’s right. Right now that’s the case, Mr. Shays.

It will—it will settle out.

Mr. SHAYS. And I don’t hear you—just to respond to my colleague, you’re saying if the government is going to intervene, better

do it from the tax side rather than the purchase side?

Mr. SANTA. I only submit and suggest that to you because that

is what we look for you to do is to tax.

Mr. SHAYS. I understand. But the bottom line is I think I hear

you saying if you are going to be intervening and distorting the

marketplace, better to allow—your argument would be to allow it

through tax incentives, which we do in a whole host of ways.

Mr. SANTA. Certainly.

Mr. SHAYS. Let me just run through a few questions. One of

them that it is hard for me to frankly understand—not hard to understand, but I did not realize it was to this extent—you’re saying

in Stanford 20 years ago, where I basically spent 24—30 years of

my life, we had 7 storage terminals. Today there is just one.

Mr. SANTA. Right.

Mr. SHAYS. When I see more than one terminal, that is a different type of terminal?

Mr. SANTA. It could be, but there is only one functional one down

there.

Mr. SHAYS. Norwalk has gone from 7 20 years ago to 1 today;

and Bridgeport, 12 terminals, now 3.

Mr. SANTA. Right.

Mr. SHAYS. What I am seeing there? I am getting confused. I see

some at your facility. I go down the road a little further, and I see

some at other end of the throughway.

Mr. SANTA. Right.

Mr. SHAYS. Are those not all—— Mr. SANTA. There is mine on the west side and two on the east

side. That is basically it.

Mr. SHAYS. And you are all smart people. If you knew today— if you knew a few years ago what you knew today, would some of

those terminals still be there?

Mr. SANTA. Well, their not being there has a lot to do with one

of your next witnesses, the ExxonMobil folks. I don’t mean to single

them out particularly, but the world has changed. In 1980, in order

to find out the price of product, all you had to do was go to the

Wall Street Journal look up Exxon Cargo, New York Harbor, and

that was the price discovery. Today it is a whole different deal. You

go to that merciless Merc, and that is where you find the prices,

and it is a very egalitarian market.

Mr. SHAYS. I just want to understand. So you are saying you are

not going to take a risk of having it in the terminal because it is

going to fluctuate almost on an hourly basis, Or more on a minuteby-minute basis. I’m just trying to understand why there are less

terminals today than there were just a few years ago. And are you

suggesting that the price is too volatile?
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Mr. SANTA. The market is much more efficient. It is not that

there is less terminals because the price is volatile. The price is

volatile because there is less terminals. And back before 1980, an

important time, the beginning of the Merc, the Mercantile Exchange, before 1980 there was a tremendous amount of storage

maintained by these wonderful seven sisters and big major oil companies. And because there was so much of that, the oil price did

not move up much, it didn’t move down much. It was very predictable. Summertime down a little bit; wintertime up a little bit. That

was it.

Mr. SHAYS. Would anyone else like to respond to the questions

I asked? Anyone else?

OK. So to your knowledge, distributors across New England are

holding off buying home heating fuel because at this moment they

consider it too expensive?

Mr. SANTA. It’s not too expensive, Mr. Shays. It’s the configura- tion of the market. If product today was $1.05, and the Merc

had——

Mr. SHAYS. Relatively more expensive than it will be?

Mr. SANTA. Well, again, it has to do with the curve. If the market—if the Merc had a price 4 or 5 cents a gallon higher in January than today, fill them up. Everything you can get, buy it with

both hands. When it’s the other way around, you got to get your

head examined if you are going to buy any product because you are

going to lose.

Mr. SHAYS. Thank you.

Mr. SANTA. You’re welcome.

Mr. BURTON. Which one of my colleagues would like to go next.

Mr. McHugh, do you have more comments or questions? Or do you

want to wait for the next panel?

Mr. Souder, do you have comments or questions at the moment?

Mr. SOUDER. I appreciate your patience with us, because even

though I spent a lot of time with distributors in my district and

others, this is a very complicated subject to learn. But there was

one additional comment by Mr. Santa I wanted to followup on.

Are you saying that the reasons we partly did not have the fluctuations is that the large oil companies were cushioning that by

purchasing over a long period of time and storing it?

Mr. SANTA. Mr. Souder, it was a whole different world. The basic

supply of product came from large, integrated companies that took

it from all the exploration, right down to delivery to the home. We

started—we bought our franchise from Mobil Oil Corp. in 1940, delivering kerosene to homes. Before my dad bought it, Mobil delivered it to somebody’s home. So they did the whole thing, and they

were huge and wide and broad.

It’s another world. It is a very diffuse market. There is a lot of

players in it. There are very good players, but they play in a very

efficient market. They cannot allow any more than absolutely the

just-in-time amount of inventory, with the just right amount of

storage, with the just right amount of movement vehicles.

Mr. SOUDER. As you well know, I’m sure, Republicans love to ask

regulatory questions. How much—in other words, what you are

saying, because it is more complicated, because of just-in-time inventories, because we subdivide into different sectors, there is
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much more market responsiveness to the ups and downs of the

market. How much of that has been impacted by regulatory reforms that hit at some parts of the market that have distorted the

flow of things?

In other words, have the storage facilities had more regulation

on them than other parts? Because there has been—certainly part

of the disintegration is that some of the large oil companies have

gotten rid of some of the things that don’t give 10 to 20 percent

returns on investment, because some of these things have a narrow

hard investment. Have some of our regulatory decisions, in fact, because of this general flexibility in changes in market had a disproportionate impact on certain parts of the distribution system?

Mr. SANTA. That’s an excellent question, Mr. Souder. Let me just

point something out to you.

This is a very simple example here. We sell heating oil.

Mr. SHAYS. If he had not asked that question, this would have

been a waste of time.

Mr. SANTA. That is OK. This is a good, useful petroleum product.

We would have brought it home and used it again.

Once upon a time, we could just have kerosene and heating oil

in our facilities. Now we have heating oil dyed red, diesel fuel not

dyed red, diesel fuel .05 percent sulfur, heating oil that is no more

than 3 tenths of a percent of sulfur, in Connecticut. In Massachusetts it is different and in New York it is different. And then we

have kerosene. We have clear kerosene if we are going to use it for

a motor fuel, but if we are going to burn it in the heater in our

home, we are going to have it colored red.

This is nothing. Wait until the Mobil guys get up here and tell

you about RFG and winter blend and summer blend. It drives them

nuts. You keep chopping up the amount of storage that you have

got into smaller and smaller bits and it becomes a little less efficient.

You have to understand, Congressman, we are breaking our

backs to deliver energy to the American public. We have no animus

with them. We are not aggrandizing them. They are friends. That

is who we live off of. They bought this suit. We want to help these

people. So that is an example. I could give you a few more, but that

I think is one.

Look, your tax guys have a job to do, too. This is about taxes,

this is not about supply. The other stuff about the RFG in the gas,

that is about the EPA and about the environment. We understand

that, and we have been very compliant with you. We have done everything you want and are trying to help you as best we can.

But understand, there is a price we pay for that. The price we

pay is that it is not the old days. It is not the old days where

Mobil-Exxon has a billion, zillion, million gallons in storage and the

price will not go up or down. Now it is different.

Mr. SOUDER. How do we tell our constituents which parts of the

rise in the cost are the price that we pay for doing these things?

Because we are not able as a Nation or as individuals to actually

make these decisions. In other words, if you get an RV or SUV,

then this is what it may do to your fuel prices in the winter in another part of the sector. We are not being presented with those

choices, even in Congress.
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Mr. SANTA. Congressman, the best thing you can do is consumer

information, letting them know what their choices or tradeoffs are,

helping them understand they can buy product or risk. There is a

great opportunity to buy product here.

Think about this: I mentioned this to you a while ago. The majority of my customers neither knew there was any dislocation of supply nor any rise in price last year. They had nothing to do with it,

it was all set. Holy cow, that is pretty terrific. Don’t you wish your

steel mill could say that same thing? We can. We can do it, but it

takes a little bit of commitment.

One of the things that just drove us nuts last year is the typical

thing the gas industry does. They have these interruptibles. They

do not contract with us, so when the gas company gets to the point

where they cannot supply anymore, they can do something we can’t

do, they can cutoff demand. That is very nice. Then they expect us

to come up with all the product to fulfill the demand that is still

there.

Believe me, we try, but I am respectfully submitting to you that

it is unrealistic, because this is 2000 and not 1970. It is unrealistic

to think that we have that kind of product or storage or people or

infrastructure to move into those kinds of things.

Mr. BURTON. The gentleman’s time has expired.

Mr. Tierney.

Mr. TIERNEY. Mr. Santa, I had to step out for a second. I apologize for that. In my absence, some people understood that you

made an inference, that but for the strategic reserve in New England, you would be full up in your storage.

Mr. SANTA. You skipped a couple of dots in the middle there,

Congressman.

Mr. TIERNEY. Could you fill me in?

Mr. SANTA. What I was saying is that right now one of the few

active buyers in the Northeast market is the Federal Government.

With an active buyer and demand, that helps keep price up.

Mr. TIERNEY. Before there was any type of storage, there was

still going to be a shortage of inventory, is that right? There was

a shortage of inventory that led to consideration of that, right?

Mr. SANTA. With an evaporated market, that is what you have

got. That is how it works.

Mr. TIERNEY. It is not the fact that because somebody is considering having a reserve, that creates a shortage.

Mr. SANTA. Oh, no. You have got that right.

Mr. TIERNEY. Who would you suggest is responsible for the interruptible contract situation?

Mr. SANTA. I think it is an unrealistic posture, both on the part

of the end users as well as on the part of the natural gas utilities.

Neither of these are malevolent individuals, but they generally are

not realistic about what—the way the world really works.

An interruptible customer that actually interrupts and contracts

with his product—and by the way, I supply millions and millions

and millions of gallons to just those kinds of people, they have no

problem. Their prices do not spike. Their supply is fine. Everything

is great.

Where it is unrealistic is if an end user maybe just doesn’t want

to switch from oil to gas, doesn’t want to go to the trouble, bid the
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oil thing, ‘‘I will just run the natural gas.’’ They are playing a dangerous game because they are interruptible. They can be interrupted. They ought, as a prudent person, just contract for it.

Mr. TIERNEY. Assuming that they are not acting as prudent people, do you have a remedy that you could recommend with respect

to them?

Mr. SANTA. Well, I would say that there are two things that

could be done, Congressman. No. 1, you might suggest or mandate,

whatever, that they have sufficient storage, alternative fuel——

Mr. TIERNEY. Government regulation?

Mr. SANTA. Well, perhaps; maybe a tax incentive to do it.

Mr. TIERNEY. That is government, too, right?

Mr. SANTA. Already, by the way, natural gas is government-regulated.

Mr. TIERNEY. But you are asking for more——

Mr. SANTA. I am suggesting, why do we not just enforce the regulations that exist?

Mr. TIERNEY. Is there an existing regulation that would disallow

interruptibles?

Mr. SANTA. No.

Mr. TIERNEY. Is there a regulation that would require them to

have an inventory on hand for it?

Mr. SANTA. That would be a good idea. In New York State——

Mr. TIERNEY. There is not one existing.

Mr. SANTA. No. New York State is working on one now.

Mr. TIERNEY. Your remedies are regulation, or write them a

check and give them an incentive?

Mr. SANTA. I guess so. I guess you could say that.

Mr. TIERNEY. What else do you recommend? Anything else?

Mr. SANTA. That they contract for interruptible service.

Mr. TIERNEY. To cause them to contract for that? What do you

use as leverage to get them to do that?

Mr. SANTA. There are very extensive tariffs written for the marketing of natural gas. I don’t know why this could not be a clause

that is put into there. It would make a lot of sense I think for all

parties involved. I think it would be helpful to them.

Mr. TIERNEY. When you made the comment earlier that this was

about taxes and not supply, you were holding up your vials there.

Could you expand on that, what you were referring to?

Mr. SANTA. Oh, sure. It is very important for the Federal Government to collect, I think, about 18 cents of tax on a gallon of kerosene from users of motor fuel.

Mr. TIERNEY. Is that a useful tax for the government to have?

Mr. SANTA. It is appropriate. It is the Federal Government planning for the highways. This is for highway use, by the way. Believe

it or not, there are people in this world that cheat, that sometimes

do not pay their taxes as they should. So therefore, to make it very

clear, literally, figuratively, who is and is not paying the tax, they

have—we dye the stuff that is off road.

So therefore, woe betide that unfortunate individual who finds

this in his motor fuel tank when the Federal tax guy stops into the

truck stop and does a sample at the tank. So that is what that is

all about.
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Please understand me, I am not criticizing the Treasury or IRS

or anyone else, they have to figure out how to get their stuff. All

I am saying is that this just adds another—it just divides the storage capacity again and again, because we cannot store this with

this. It takes three drops of red to change 1,000 gallons to that

color.

Mr. TIERNEY. Would you recommend some sort of a tax that

blended over them so you didn’t have to have different dye and different storage?

Mr. SANTA. I think that might be one good idea, Congressman.

Another thing that we are advocating quite a bit, I mentioned that

there is a difference in the sulfur content. This one in my right

hand has 0.05 percent sulfur, this one has 0.2 percent sulfur. We

prefer to use this one for heating oil. This is diesel fuel, this is

heating oil. We prefer to use this one for heating oil with the low

sulfur because we think it is better for our customers, better for the

environment, it is a better product. Why not? Let’s get together on

that. Let us make a single fuel that has a single sulfur requirement. It might help. It would not hurt.

Then would we then get by the tax thing? I am not sure. I am

not in that business, I am in this business. Sorry.

Mr. BURTON. The gentleman’s time has expired. We are just

about to wrap up with this panel. I want to thank you.

Mr. SHAYS. I would like to point out to Mr. Tierney that he is

just a typical constituent in my district. Now you know why I am

the way I am.

Mr. TIERNEY. Your constituents at least acknowledge that there

is some need for some regulation some of the time.

Mr. SANTA. My terminal is right up the creek from Chris’s house.

Mr. BURTON. Let me end the discussion with this panel. There

were 231 refineries in 1982. Now it is down to 155, and now they

have to diddle around with different types of gasoline, different

components in the gasoline and oil.

It has to be a problem because of government regulation. There

has not been a new oil refinery built in 25 years. That seems to

me like it has to create a problem.

We talked about electricity rates in Montana going up 500 percent for industrial users, driving at least one industry out of business, temporarily, anyhow. We have 17 times in California, near

San Jose, where there have been stage 2 alerts, and it has cost a

lot of money to one company out there.

Government regulation and environmental concerns have, according to Mr. Pursell, taken a lot of the natural products that can

be, according to you, Mr. Pursell, produced environmentally safely

off the market. It seems to me that we ought to revisit those regulations that are taking things that can be environmentally produced—produced in an environmentally clean way back in the market so we can increase the supply, and because of the law of supply

and demand, reduce the price.

Government regulation, Mr. Tierney is right, there needs to be

some. We can’t let somebody rip off the public and run prices up

just because they want to make an extra dollar, so there needs to

be some regulation. But most of us on this side of the aisle, at

least, and many on the other side of the aisle believe we are over-
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regulated when we are facing an energy crisis like we are facing

this winter. And most people agree, we are going to have a tough

winter, especially if it is very cold up North, in the Northeast, out

in the Northwest, and that we need to revisit some of these regulations so we can get more production for the fuels that are going to

be needed by the American consumer: oil, gas, electricity, and everything.

I want to thank you very much for being here. If you have any

suggestions that you think we can look at that you have not talked

to us about today, would you please put those in writing and get

them to me and my chief of staff, and we will present those to the

officials at the Energy Department and the EPA, Environmental

Protection Agency, to see if maybe we cannot get some review of

some of the things that are causing you heartburn and hurting the

American public.

With that, thank you very much. We will relieve this panel.

We will welcome our next panel. If you can just give us about

5 minutes, we will be back with the next panel.

[Recess.]

Mr. BURTON. Back on the record. We will reconvene.

Our next panel consists of Mr. Bob Slaughter, who is the general

counsel and director of public policy for the National Petrochemical

and Refinery Association; Mr. Curt Hildebrand, vice president of

project development for Calpine Corp. of Pleasanton, GA; Mr. Steve

Simon, president of Worldwide Refining and Supply for ExxonMobil

Corp. in Dallas, TX; and Mr. David Hawkins, director of air and

energy program for the Natural Resources Defense Council.

Would you all please stand up and raise your right hands?

[Witnesses sworn.]

Mr. OSE. Mr. Chairman, I just want to make one correction to

your introduction. It is very eloquent, but those of us from California like to claim California, Pleasanton, south of San Francisco, not

in Georgia. Georgia is a great State, but we prefer California.

Mr. BURTON. It is California?

Mr. OSE. It is California.

Mr. BURTON. You don’t like Georgia?

Mr. OSE. I love Georgia, but I love California more.

Mr. BURTON. It is a good thing you said that. You would be in

big trouble.

I apologize to Mr. Hildebrand. You have a nice tan and glow, so

I figured you probably came from one of those sunny places.

Mr. HILDEBRAND. I thought I might be getting transferred or

something.

Mr. BURTON. I apologize. I will fire whoever put that on there.

We try to keep our opening statements to 5 minutes. If you go

a little bit longer, that is fine. I appreciate very much all of you

being here.

We will start with you, Mr. Simon.
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STATEMENTS OF STEVE SIMON, PRESIDENT, WORLDWIDE REFINING AND SUPPLY, EXXONMOBILE CORP., DALLAS, TX;

BOB SLAUGHTER, GENERAL COUNSEL AND DIRECTOR OF

PUBLIC POLICY, NATIONAL PETROCHEMICAL AND REFINERY ASSOCIATION; CURT HILDEBRAND, VICE PRESIDENT,

PROJECT DEVELOPMENT, CALPINE CORP., PLEASANTON,

GA; DAVID HAWKINS, DIRECTOR, AIR AND ENERGY PROGRAM, NATURAL RESOURCES DEFENSE COUNCIL

Mr. SIMON. Chairman Burton, members of the committee, I am

Steve Simon, president of ExxonMobile Refining and Supply Co.

The divisions and affiliated companies of ExxonMobile Corp. operate or market their products in the United States and about 200

other countries.

In the interests of your time, I will summarize my remarks and

ask that my written testimony be submitted for the record.

Since my area of expertise is in the refining and supply of petroleum products, I will focus on that segment of the business. But in

addition, in response to your request, although not in my area of

direct expertise, I will also provide some remarks on natural gas.

Due to antitrust and competitive concerns, I hope you will understand that I cannot discuss company specifics regarding inventory,

supplies, and pricing.

ExxonMobile certainly understands the importance of heating oil

to homeowners, business, and government. Subject to all the factors that impact supply and demand in the world oil market, we

remain committed to continuing to meet all our contractual commitments to supply heating oil to our distributors.

Barring any unforeseen or extraordinary circumstances, we expect that heating oil supplies will be sufficient this year to meet

our wholesale distributor needs if the market is allowed to work.

A lot has been reported recently regarding heating oil inventory

levels. On average, however, 85 to 90 percent of heating oil supplies over a normal winter come directly from refineries. Only 10

to 15 percent of the seasonal demand is typically met by drawing

down inventory.

Low inventory levels at this time are not necessarily predictive

of inventories in December or January, when the winter heating

season will peak. With the end of the summer driving season,

ExxonMobile is currently increasing production of distillates, and,

in fact, are now producing 10 to 15 percent more than we were at

this same time last year. We have also taken steps this year to improve our ability to move heating oil from our Gulf Coast refineries

to the Northeast.

Congress has taken a major step to try to avoid a repeat of last

winter’s temporary supply disruption by establishing and beginning

to fill a Northeast heating oil reserve.

We have significant concerns about government intervention in

the marketplace. A sudden, severe weather pattern was the primary cause of the situation last winter. A regional reserve would

not necessarily help when unusual weather conditions prevent

home heating oil from being moved into individual northeast markets.

We strongly encourage members of the committee and other

Members of Congress to carefully consider what impacts establish-
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ing a northeast heating oil reserve will have on industry’s ability

to react to all the market forces of supply and demand.

Like heating oil, natural gas prices are driven by the principles

of supply and demand, as well. Rising demand for natural gas is

being experienced across all demand segments of the market, particularly with regard to new electric power generation plants. This

comes in the wake of the dramatic fall in commodity prices in the

1998–1999 timeframe, and the resulting lack of investment capital.

It takes time to recover from a significant decline in investment,

but individual producers have reacted aggressively to bring more

supply to the market.

ExxonMobile, for example, has a majority interest in two major

projects that have started up this year. Sable Offshore in eastern

Canada and Diana Hoover in deepwater Gulf of Mexico are bringing over 600 million cubic feet per day of additional supply into

North America.

Recent fluctuations in natural gas prices are the market’s way of

balancing supply and demand. In all energy sectors, the market

must be allowed to work.

In a broader sense, while we recognize regulations are necessary,

they should attempt to strike the right balance between what at

times can be competing goals: reliable affordable energy versus a

cleaner environment. The National Petroleum Council said it best

in their report entitled ‘‘U.S. Petroleum Refining: Assuring the

Adequacy and Affordability of Cleaner Fuel.’’ The assessment is blunt. These changes will be very expensive.

They are probably impossible to complete in the proposed timeframe. They will lead to worsened supply rigidity, and there is a

real risk of increased price volatility and more serious local shortages.

Proceeding so quickly on so many fronts with so many special

cases is a recipe for recurring supply and price crises. The Federal

Government needs to employ sound science coupled with rigorous

cost-benefit analysis, and proceed at a pace that allows investments

to be made in an orderly fashion that does not further threaten the

supply of fuels to U.S. consumers.

In conclusion, the energy industry needs a consistent set of rules

and a level playing field in order to continue to provide quality

products to consumers in a timely fashion and at competitive

prices. Consumer interests are best served by industry and State

and Federal Government working together and considering the full

range of impacts on consumers when proposing regulatory requirements.

I will be happy to answer any questions the committee may have.

Mr. BURTON. Thank you, Mr. Simon.

[The prepared statement of Mr. Simon follows:]
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Mr. BURTON. Mr. Slaughter.

Mr. SLAUGHTER. Thank you, Mr. Chairman. My name is Bob

Slaughter. I am here on behalf of the National Petrochemical and

Refiners Association. We represent virtually all U.S. refiners, as

well as petrochemical administration companies that have processes similar to refineries.

While the NPRA is working extremely hard right now, all of our

membership is working hard to make petroleum products readily

available at affordable prices to consumers—as a matter of fact, the

refining industry, according to the latest API statistics, is still

working at 95 percent of capacity, and has been varying between

95 and 96 percent of capacity, which is essentially full out—for

some time, in order to produce as much product as possible, first

for the gasoline season, but now increasingly for the home heating

oil season.

We do believe that given that situation, supplies will be tight

this winter. It looks as if they will be tight across several different

types of energy, as has been discussed here this morning. But we

do believe that given moderate weather, that we will get through

all right.

We know, of course, from last winter’s experience that the combination of a very sudden and sharp cold spell caused some particularly logistical problems, which created some difficulties for a period of time. But we want you to know that the industry, all our

refiners are working full out to try to make products that consumers will need during this period.

Over the long-term, though, we have to say that we don’t want

to be alarmist, but we think that the midwestern experience this

summer and the intervene experience last winter could be omens

for the future. Today’s refineries have little excess capacity and the

number of few fuel types that must be delivered to different locations increases the potential for temporary supply disruptions and

increased volatility.

The overall U.S. refinery utilization rate is almost 95 percent,

very close to the operational maximum, but there is no longer a

surplus in U.S. refining capacity overall. As the chairman has

pointed out several times today, no new refineries have been built

in roughly the last 20 years. Most of the refineries were built more

than 25 years ago. The number of U.S. refineries has been decreasing.

Refiners have tried to meet demand, continue to meet demand by

adding capacity at existing sites, but EPA is taking steps to make

that increasingly difficult to do, and, in fact, is retroactively questioning the actions that were taken to meet some of this capacity

in the past.

One problem, refining is far from the most profitable aspect of

the energy business. Generally, over the last 10 years the average

return on investment in refining is 5 percent, which is not much

better than you can do in a passbook savings account.

More than $7 billion has been spent on the last decade alone to

comply with environmental regulations, and a National Petroleum

Council study done in the 1990’s indicated that the environmental

expenditures that the industry was facing at that time essentially
113

exceeded the book value of the entire industry, so they are significant.

This is not going to stop. There are a host of new fuel requirements that we face in the next 5 to 7 years. We have a chart here

that we call our regulatory blizzard chart. It shows basically all the

different regulatory initiatives that the industry faces over the next

10 years.

The blizzard actually is becoming an avalanche, and some of our

people are saying that it may end up being a perfect storm, because

we are looking at at least three major initiatives that we know we

are going to face: one to reduce gasoline sulfur, one to reduce diesel

sulfur, and another very probable initiative that will do something

to account for reduction or elimination of MTBEs in gasoline. The total expenditures of all three programs will approach $20

billion across the industry, and, incredibly, they are all having to

be done in the same timeframe. So you can see that the situation

that we have been dealing with over the last 10 to 15 years is only

going to be continued and in effect, magnified over the next 10.

We have another chart we want to point out to you. One of our

member companies, CITGO, prepared the second chart. It shows

you the different types of summer gasoline that company has to

produce right now. They have to produce nine types of gasoline to

address varying State and Federal programs. That translates into

27 different grades of gasoline that have to be sold in isolated fuel

islands.

We know that having such islands is a problem because if additional supplies are available nearby but cannot be sent where they

are most needed due to differing fuel specifications, we have supply

problems with resulting price hikes. We saw some of that happen

in the Midwest this summer, and it is the problem that results

from the so-called balkanization of the fuel market.

To really sum up a lot of our message today, we just believe

there is a disturbing lack of coordination between our energy and

environmental policy objectives. The pursuit of a number of increasingly stringent environmental programs in a piecemeal and

uncoordinated fashion has stretched the refining and distribution

system to its limit, resulting in greater potential for tighter supplies and increased market volatility.

Just to specifically mention some things that are going on now—

and this is not improving, it is getting worse—EPA is moving forward with a regulation to reduce sulfur in diesel fuel, which is extremely expensive.

We do not believe, as a matter of fact, that the level they have

chosen for us is technologically feasible. We have advocated a 90

percent reduction which we think the industry can do without any

adverse impact on supply. They are insisting on a 97 percent reduction, and studies indicate that results in a 12 percent shortfall

in diesel supply when that is implemented.

Obviously, there are significant implications from a shortfall in

highway diesel supply, but that is exactly where that EPA regulation takes you.

Another part of it basically regulates emissions from heavy

trucks. We were amazed to read the comments of Cummins Engines, the largest manufacturer of engines. Cummins basically says
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EPA—it has no idea how it will technically be able to do what the

EPA is asking of it on the engine side.

They also believe EPA has underestimated the cost of the program for engines by a factor of six, and that people will simply not

be able to afford those engines if they find that they are able to

do it. Therefore, all of the benefits that are alleged for that rulemaking are illusory.

The agriculture community has come into EPA with concerns

about that rule, and the fuel industry has as well, but EPA has

told us they will finalize that rule by the end of the year, and they

will not be changing the timeframe or the number. So obviously,

we are not learning from some of the problems in the past.

We also have some difficulties on the Hill. We are going to have

to do something on that MTBE issue. Unfortunately, there are

some people who want to combine that issue with an environmental agenda which will make gasoline more expensive, and at

the same time, another agenda, which would actually mandate fuel

components for us.

That is something that would make gasoline more expensive and

would have an impact on supply at just the time we think that

would be worse for Federal policies and for consumers, so we are

working that issue hard. We are trying to keep away from mandates. We would like to go to sensible performance standards.

It is not that we are not absolutely committed to making environmental progress. Emissions from refineries have been reduced 74

percent, and more has to be done, but we do think there needs to

be coordination and we need to have more reasonable environmental policies.

Thank you, Mr. Chairman.

Mr. BURTON. Were all the comments you made in your opening

statement—do we have those?

Mr. SIMON. Yes, sir.

[The prepared statement of Mr. Slaughter follows:]
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Mr. BURTON. We are going to have the head of the EPA here as

well as the head of the Energy Department, and I want to make

sure we ask them those questions.

Mr. Hildebrand.

Mr. HILDEBRAND. Thank you, Mr. Chairman, members of the

committee. I appreciate the opportunity to provide testimony today

on this matter of national importance.

My name is Curt Hildebrand. I am vice president of project development with Calpine Corp. Calpine is a leading independent

U.S. power company. We are headquartered in San Jose, CA.

Calpine is the Nation’s largest producer of green power or renewable power. Our future development objectives are the most ambitious in the Nation.

Our company is targeting to build and operate a modern 40,000

megawatt portfolio throughout the country by the end of year 2004.

This development program will be sufficient to supply the electrical

needs for 40 million Americans, and require a capital investment

on the order of $20 billion.

First, I would like to make a few opening remarks about the

changing nature of the electric industry. Second, I will review the

key benefits of achieving a healthy and competitive marketplace for

electricity. Last, I would like to recommend important modifications to present to U.S. EPA in terms of their permitting process

based on our experiences.

The generation, transmission, and distribution of electricity is

the third largest industry in the United States. There are presently

750,000 megawatts of generating capacity in the United States,

and demand for electricity is currently increasing at an annual rate

of a robust 3 percent per year.

The electric industry has been restructured at the wholesale

level, the wholesale level nationwide, and retail restructuring is

proceeding in most States.

Industry uncertainty regarding past and future regulations has

led to a virtual standstill in power infrastructure investment. During the 1990’s, as we heard earlier, demand for electricity surged

30 percent while supply grew by only 6 percent. Power shortages

are becoming commonplace throughout the Nation.

Calpine believes that building new plants is vital to the wellbeing of our country, and the Congress should promote this transition from outdated, inefficient, and highly polluting plants to vastly

cleaner and more efficient plants that Calpine and others are building around the Nation.

Moving on to my second point, I would like to highlight the four

major benefits that a modern competitive power industry can provide.

First, reduce costs to consumers. We are now capable of generating power with 40 percent less fuel, given technological advances.

Fuel is the largest component of variable operating costs for power

plants, so that translates into dramatically reduced costs to consumers.

Second, conservation of resources by burning 40 percent less fuel.

We are conserving that for future generations. We heard earlier

about how important that will be.
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Three, enhanced system reliability. We heard about the power

shortages that struck my home region of the Bay area, and these

are indeed dramatic. The 1-day worth of outages in Silicon Valley

is estimated to have cost local businesses $75 to $100 million. So

without new plants, we are really incapable of providing the level

of reliability that high-tech and modern industry demands.

Last, fourth, improved environmental quality. Technological innovations have led to dramatic environmental improvements and

the generation of power as well. Plant emissions that leave smog,

acid rain, and global warming can now be reduced by 50 to over

the 9 percent. I have detailed in my statement a closer examination

of these environmental benefits.

Finally, I would like to make recommendations regarding improvements about the Federal review and permitting of new power

plants. It is widely feared by energy experts that our Nation will

face increased power shortages in the future. While our facilities

show great promise in helping to solve this looming crisis, we are

subject to a burdensome regulatory permitting process which has

hindered our ability to build modern, environmentally friendly facilities in a timely manner.

Unfortunately, we are frustrated in attempting to build these

plants because current permitting procedures allow for the imposition of automatic stays on construction on power plants, even when

these stays are based on inaccurate, frivolous, or unsubstantiated

claims.

To solve the problem and to encourage the building of new and

better power plants, Calpine believes that U.S. EPA regulatory programs should be streamlined to allow environmental permit appeals to be considered on an efficient and effective basis. Furthermore, any appeal of the Federal Prevention of Significant Deterioration program required under the Clean Air Act should not result

in an automatic stay of construction.

I want to clearly emphasize, our company is fully committed to

satisfying all appropriate regulatory review procedures, including

the PSD review. However, the current permitting process imposes

unreasonable delays on the construction of new power plants at

critical points in the process.

I go on in my testimony and depict an elaborate, detailed summary of a project that Calpine permitted in Sutter County, in Congressman Ose’s district. We first proposed this project in 1997. In

the interests of brevity, I will summarize the testimony very briefly.

As part of the local, State, and Federal review of that project,

Calpine submitted an application for a PSD permit to EPA in January 1998. Over the course of the next 18 months that permit was

reviewed by EPA, along with various State and local entities.

The EPA received only one negative comment from a single individual with regard to that permit. That individual lived over 100

miles away from the project site. It was all information that was

considered during the normal course of the hearings and proceedings on the project.

The individual then filed an appeal once the final PSD permit

was issued. Calpine had begun construction. This was the first new

project to be licensed in the State of California. It was a milestone
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project to establish new best available control technology thresholds. It was the cleanest plant ever. Yet, this 11⁄2 page appeal was

sent to Washington and the project was forced to cease all construction activities.

We went through a great effort to try and have that appeal

heard as rapidly as possible. It took about 31⁄2, almost 4 months

before that appeal was denied and was found to have no merit

whatsoever. That put us back into construction in December. That

is our rainy season. We lost roughly 6 months of construction activity.

We have since been requested by numerous entities, including

Sacramento, to try and get that project online for next summer, as

early as possible next summer. We have gone to double shifts. We

are working at night to bring that project online, but again, we feel

that this frivolous appeal cost us, Calpine, and the citizens of California dearly. We ask that that be reconsidered.

In conclusion, if our Nation is to meet increased demand for electricity at affordable rates while still meeting our ambitious environmental goals, we must foster the construction of new clean

power plants.

Companies such as Calpine understand that in order to construct

a new plant, the company must be prepared to implement some of

the most stringent pollution control technologies in the world. We

are prepared to meet these challenges.

However, we are at a loss trying to cope with the permitting

process that tries to work against new plant construction, and allows individuals to stall construction even after their concerns have

been fairly considered.

Clearly defined, standardized, and set deadlines must be established for EPA to complete their review of PSD permit applications.

Thank you.

Mr. BURTON. Thank you, Mr. Hildebrand.

[The prepared statement of Mr. Hildebrand follows:]
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Mr. BURTON. Mr. Hawkins.

Mr. HAWKINS. Thank you, Mr. Chairman. Mr. Chairman, we are

in a period of tight energy supplies and high energy prices. It is

not the first time we have been here. Today we are hearing claims

that environmental regulations are to blame for some of these problems, and if we roll back or waive certain requirements, that somehow we will produce new supplies and solve our problems. That is

not the first time those claims have been made, either.

I was around in 1973 when the President and others at the time

of the first oil embargo stood up and basically said the environmental regulations, the Clean Air Act, were to blame, and that

they should be modified. Congress fortunately did not take the

President’s advice, and had they done so, we would have increased

pollution but we would not have solved our problems.

In 1979, at the time of the Iranian revolution, we had another

episode of the same supply constraints and another episode of accusations against environmental regulations, calls to the Energy Regulation Board, all aimed at focusing on a rapid expansion of supply

in order to solve our problems.

Mr. Chairman, I would suggest that a more robust, more durable, certainly less politically contentious and more supportive of the

public health and environmental aspirations of the American public—a path that will work better on all those regards is one to drill

our most reliable source of energy, which is the energy we waste.

We waste a tremendous amount of energy still today. We have

opportunities to improve our supplies of energy by reducing the

amount we waste. Just a statement of the obvious, no consumer

values a kilowatt of electricity or a gallon of gasoline or heating oil

for itself. We pay money for these things because of the services

they provide us: mobility, comfort, lighting, communications, and

other qualities of life.

If we can find ways to constantly improve our ability to provide

these services and use less energy, we win. We win environmentally, we win economically, we win from a standpoint of national security.

Or we can try the recommendation for short-term crash efforts

to produce a burst of new supplies. We don’t think that that will

solve our problem. The compound interest rate is inexorable, and

if we keep on growing, we will always outgrow our ability to

produce new supplies.

If we manage the rate at which we increase our dependence on

energy, or better yet, improve our economy’s ability to produce dollars without consuming kilowatts or Btus, we win. We manage our

own future and our own destiny because we have more leverage on

managing demand than we do on supply.

For example, the United States is about 12 percent of the world’s

oil production, but we are 25 percent of the demand. That means

we have more leverage by changing our demand than we do by production. Every percentage change in our demand has twice the leverage as a percentage than it does if we tried to supply our way

out of this problem.

Mr. Chairman, you asked the witnesses two questions: What can

Congress do? And what can the administration do? Here are some

answers that I would give.
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First, Congress can enact a comprehensive electric restructuring

bill that has elements that will help solve these problems: first,

programs to rebuild support for efficiency, programs which have

suffered at the hands of deregulation. The second program is to

promote supplies of renewable energy as part of the portfolio of

electric generators. Third would be strong anti-pollution requirements, which will create real economic incentives both to use less

energy, to use it more efficiently, and to build the kind of new, efficient power plants that Mr. Hildebrand has been talking about.

Second, Congress can enact tax incentives for efficient buildings,

efficient vehicles, and co-generation investments.

In the other body, Senator Smith has introduced Senate bill

2718. In this body, Congressman Matsui has introduced 2380.

These bills would save enormous amounts of energy and then enormous amounts of money for American consumers by creating tax

incentives to upgrade existing facilities and to build new, efficient

facilities.

Next, something that both Congress and the administration can

address is to upgrade the vehicle efficiency standards for fuel efficiency. These standards are dramatically out of date, and unfortunately, since 1995, Congress has enacted riders that have prevented the administration from upgrading the vehicle’s CAFE

standards.

We think it is logical to move ahead now. We have the technology. We are seeing manufacturers get out in front of the government, but what they are offering, as the previous witness indicated,

will not solve their problem. But we could save another 3 million

barrels a day of oil by updating and modernizing our CAFE standards.

One thing Congress could do is simply not enact the rider this

year, let the administration explore what the options are for modernizing those standards.

Another important administration program are the efficiency

standards for appliances and equipment. A number of those standards have been issued. Many of them have been issued in a negotiated fashion with the manufacturers, so that everybody wins.

These programs deserve even higher priority. They deserve more

support from Congress, and they deserve even higher priority from

the administration.

These and other actions will make our economy less dependent

on large volumes of energy and less vulnerable to supply disruptions and price spikes. They are durable solutions, and I would

urge you to consider them.

Mr. BURTON. Thank you, Mr. Hawkins.

[The prepared statement of Mr. Hawkins follows:]
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Mr. BURTON. We will now go to the extended questioning.

Mr. McHugh, the gentleman from New York.

Mr. MCHUGH. Thank you, Mr. Chairman.

Mr. Hawkins, let me start with you. You reference 3 million barrels of petroleum a day saved by higher CAFE standards. Did I

hear you correctly?

Mr. HAWKINS. Yes, sir.

Mr. MCHUGH. Could you source that for me?

Mr. HAWKINS. There are several different sources. The Presidential Commission on Energy’s report has that value. The American Council for an Energy Efficient Economy also has that. I can

give you citations.

Mr. MCHUGH. I would appreciate that. I would like the sources.

If you have the opportunity—I know there are opposing views to

that. If you have any sources that suggest that is an unreasonable

one—I know that is not your objective, but I would appreciate

those, as well.

How many barrels of oil a day do Americans consume presently?

Mr. HAWKINS. About 19 million.

Mr. MCHUGH. 19 million? Does the rest of the table agree with

that?

Mr. HILDEBRAND. Yes.

Mr. MCHUGH. I don’t see any objection. Thank you very much.

Let me start with Mr. Simon, now.

Mr. Simon, you mentioned that your company is beginning to

build stockpiles now that we are through the summer driving season.

Mr. SIMON. That’s correct. We are producing all the distillate

that we can in our refineries today. We are carrying inventories

sufficient to meet our customer requirements, and then we are also

selling stock.

Mr. MCHUGH. The API reported yesterday that distillate fuel inventories, which include heating oil, are, in the recent calculation,

about 1161⁄4 million barrels. That is 20 percent less than last year’s

level. Do you think that is an accurate figure?

Mr. SIMON. Yes. I do think it is important, though, too, when we

compare against last year, to remember that last year was an extraordinarily low inventory year. If we look at the last 5 years, I

think it might be a more accurate way of looking at it. It is still

on the low side.

Mr. MCHUGH. That was going to be my next question. Do you expect to hit—if you are telling me that last year was low, and you

are 20 percent below last year——

Mr. SIMON. I’m sorry, the other way around.

Mr. MCHUGH. You used the word ‘‘low.’’ Do you mean high?

Mr. SIMON. I stand corrected. If we look at the last 5 years and

make that comparison, it does not look as low, relatively speaking,

as it does.

Mr. MCHUGH. Are you going to hit the last 5 years average in

stockpiles?

Mr. SIMON. If we look at the current rate of inventory billed and

project that into the November timeframe, it will end up in that

band but toward the low end of that band.
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Mr. MCHUGH. Compared to last year, you expect to be 20 percent

below?

Mr. SIMON. I think it would be difficult to predict exactly where

we are going to be, but I would come back to a comment that Mr.

Santa made. I think it is an important one.

When we look back at the 1996–1997 winter and we look at the

inventory levels that we have today, which are essentially where

we were then, we got through that winter really with no problems.

So it is difficult to predict, obviously, what weather is going to do.

That could have a major impact.

But given a normal kind of winter, which 1996 and 1997 was,

which was actually colder than what we have seen over the last

few years, we were able to accommodate that with inventory levels

about where they are today.

Mr. MCHUGH. You said during your testimony that supplies will

be sufficient. I understand there are vagaries that you cannot predict. None of us here are God, in spite of what we say during election years.

But what concerns me is what is the nexus between sufficient

supply and consumer cost. You said in 1996 and 1997—I don’t believe you are telling me that the price of a gallon of home heating

fuel is going to be the same this year as it was in 1996 and 1997?

Mr. SIMON. No. No one can really, I don’t think, predict what it

is going to be at that particular point in time.

What I was trying to address is the supply side of this. I am not

smart enough to figure out what the price is going to be, but I do

think from a supply standpoint, we are planning for normal winter

conditions, and I think we will meet the supply requirements,

given that circumstance.

Mr. MCHUGH. The best you can say to consumers is you are optimistic that they are not going to see a missed delivery of home

heating fuel, but you are not going to suggest what the price will

be?

Mr. SIMON. No, I am not going to try to predict that.

Mr. MCHUGH. Do you have a disagreement with those on the

first panel, as has been reported by virtually every oil analyst that

I have had the opportunity to read, that the price of home heating

fuel is going to be 20 percent or higher next year—I think 20 percent is probably at the low end of that spectrum—than last year.

Mr. SIMON. I have been in this business long enough to know

that I am not in a position to predict what oil prices are going to

do or what the price might be 2 or 3 years into the future.

Mr. MCHUGH. Is there anybody in your company who is?

Mr. SIMON. No. We do not take a position on prices.

Mr. MCHUGH. You just take them, you don’t take a position? I

am confused.

Mr. SIMON. In other words, we do not take steps in anticipation

of price moves one way or the other. What we look at is what is

the most economic way of filling supply requirements, to do that

at the lowest cost and a competitive cost.

Mr. MCHUGH. It is hard to believe your stock is doing so well.

Let me ask you, the Saudis and the other OPEC nations have

suggested their target is $28 a barrel of oil. Obviously, if we look
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at the North Sea crude yesterday, it was $33.63 a barrel. We are

not there.

Do any of your gentlemen, and I am not picking on you, Mr.

Simon, but you are in the oil end of this, do you think there is anything the Saudis can possibly do and the OPEC nations can possibly do to hit a $28 a barrel target that is going to, in any way,

positively affect the heating season this year, given where we are,

almost at the end of September? That was No. 1.

No. 2, they just did an increase in production. As you well know,

that did not move the market at all. In fact, after that the market

actually went up. How much production increase would they have

to put on the world market to bring it to $28 a barrel?

Mr. SIMON. I am certainly not in a position, Congressman—I

know you would like for me to be, but I am not in a position to

say what impact a certain volume of oil is going to have and what

price might be established.

Mr. MCHUGH. Do any of you gentlemen have an opinion on that?

Mr. HILDEBRAND. No.

Mr. MCHUGH. Do any of you gentlemen have an opinion on what

the price of product will be this winter for the average consumer

in the Northeast for a gallon of home heating fuel?

Mr. SLAUGHTER. Mr. McHugh, all I can offer you is essentially

what the Energy Information Administration is saying currently on

that. You know, it is difficult for the industry to make price projections or supply projections, but the current EIA estimate is that

heating oil on the East Coast will average about $1.32 and diesel

about $1.51 per gallon, and that is an increase of 12 to 15 cents

per gallon over last year’s figure.

Those are the EIA’s figures.

Mr. MCHUGH. OK we talked a bit about environmental regulation, Mr. Hawkins, you seemed to disagree with those who suggest

that maybe the environmental—regulatory environment has gone

too far.

You may have heard on the last panel where it was stated that

the average time for the permitting construction of a transmission

line in this country today is 7 years. Do you think that’s a reasonable amount of time?

Mr. HAWKINS. Actually——

Mr. MCHUGH. Pardon me, I don’t mean to interrupt you, but I

want to get the second phase of that. Remembering that 51⁄2 to 6

years of that was totally from regulatory requirements.

Mr. HAWKINS. Yeah, I did hear the—I heard the testimony. I did

not hear a source for it. And I actually would be skeptical if that,

in fact, was an accurate figure. I’d be interested in seeing what the

statistics are. I doubt that it’s 6 years of regulatory permitting. But

I don’t have a contrary figure to you.

Mr. MCHUGH. I gave you the benefit of the doubt on your

sourcing. Let’s give the gentleman the benefit of the doubt. And I

just want to finish up with Mr. Hawkins and then come to you.

Let’s say it is accurate, do you think that is reasonable? That’s all

I’m asking. I’m not asking you to verify it, just asking your opinion.

Mr. HAWKINS. I don’t think it should take that long to get government review of any project.
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Mr. MCHUGH. We are in agreement, thank you. Yes, sir, Mr.

Hildebrand.

Mr. HILDEBRAND. Speaking from experience, from experience in

California, a major new transmission project will require typically

7 years, and I hate to use the phrase ‘‘fast track.’’ You can see 10

to 15 years as I think was mentioned earlier, if at all. There’s no

guarantee anymore of getting it done, period.

Mr. MCHUGH. Mr. Hawkins, do you think that’s excessive? Assuming that Mr. Hildebrand is accurate?

Mr. HAWKINS. I don’t think there is—there’s no argument about

the value of speeding up decisionmaking processes. That’s not— that’s not the issue. The question is what—in which ways do you

try to speed up the decisionmaking process. If it’s restricting public

participation, I have a problem with that. I think that public participation is important. It implies a responsibility on the part of the

public.

The story Mr. Hildebrand told is one that is disturbing. But one

story shouldn’t be the basis of policy. We should look more rigorously at the overall pattern of these proceedings and see analytically what can be done to speed up the decisionmaking process.

Mr. BURTON. The gentleman’s time has expired.

Mr. MCHUGH. Thank you, Mr. Chairman.

Mr. BURTON. Mr. Tierney.

Mr. TIERNEY. Thank you, Mr. Chairman. Mr. Chairman, today’s

high energy prices are obviously causing a lot of economic hardship, and I think we heard a lot of that on the first panel that testified. But there’s one sector I suspect the gentleman may be able

to talk about is one sector of the economy that is profiting quite

a deal from the high prices, and that seems to be the oil and the

gas industries.

My understanding is that for the first half of this year, the 10 largest oil companies made over $20 billion in profits. And profits

in the second quarter were nearly three times higher than last

year. So while American consumers around the country seem to be

suffering from these increases in the price of petroleum products,

Mr. Simon, for instance, Exxon appears to be making record profits. Can you tell me how much Exxon made in profits just in the

second quarter of this year?

Mr. SIMON. Yes, I can. A little over $4 billion, which is up about

138 percent from where we were last year.

Mr. TIERNEY. And how much does Exxon expect to make this

year?

Mr. SIMON. We don’t have a projection for the full year, but I

would like to put that in perspective, if I might, Congressman.

When we compare against last year, I think it is important to remember that last year was a low year in terms of profitability, and

so I think a year-to-year comparison can be somewhat misleading

in that regard.

Mr. TIERNEY. Nonetheless, you are 138 percent above last year

in profits?

Mr. SIMON. That’s correct. But again, put in the overall perspective, I think it is important to look at overall timeframe and look

at investment over that timeframe, and we are below the Standard

& Poors as an industry.
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Mr. TIERNEY. A recent Business Week article reported that although the price of oil has been climbing, some of the largest oil

companies have actually been producing less oil. The article quotes

a Merrill Lynch analyst as saying the lack of production increase

from non-OPEC sources is a big reason why prices remain high.

The Business Week article notes that Exxon and Royal Dutch

slashed their oil exploration and production budgets by more than

30 percent in the first half of this year.

Is that accurate that in the first half of this year, Exxon cut its

oil exploration and production budgets?

Mr. SIMON. We cut our exploration and projection budgets. But

at same time, I think you have got to look at the merger that we

incurred at that point in time. And when you look at where we

were as a single company, that would not be the case.

Mr. TIERNEY. No, but it’s the case that once you were together,

you actually did less than you had done individually.

Mr. SIMON. That is correct, and that is one of the advantages of

combining the two organizations.

Mr. TIERNEY. The Business Week article further states that

money managers have pressured oil company executives, and I

quote, not to not overspend in the pursuit of production increases.

The article quotes one of these managers as saying, we give them

money, they produce a lot more, and the price goes down.

Was one of the reasons that Exxon cut its oil exploration and

budgets to keep supplies low and prices high?

Mr. SIMON. No, certainly not, Congressman. We are pursuing all

the opportunities that we have available to us, and I think we are

pursuing those very aggressively. I think we’ve had a fair amount

of success in that regard, and we are proud of that, in fact, you do

not see, I don’t think, ExxonMobil quoted in terms of production increase. And when you look at who we have been able to produce

relative to what we have produced, and certainly what we would

hope to do in the future, we would expect to be growing production.

And I think our track record speaks well in that regard. We’re actually looking——

Mr. TIERNEY. It has not been increasing, but you cut your production; is that right?

Mr. SIMON. The expenditure. But I think you have to look at the

efficiency of those expenditures and what we’re producing as a result of that. What we are doing, it isn’t a question of cutting the

amount, but it is pursuing every opportunity that we have and how

effectively we are able to do that, and the result that we get from

$1 of expenditure. And when you look at that, I think our track

record speaks very well. And you are actually looking at expanding

our opportunities to do that right here in the United States.

Mr. TIERNEY. Well, if you had not cut your exploration production budgets, would it be fair to say that you might have produced

more?

Mr. SIMON. Again, Congressman, we are pursuing all the opportunities we feel are economic and available to us. We are not holding back.

Mr. TIERNEY. So you are not exploring all of them, you are just

exploring all the ones that you feel are economically——
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Mr. SIMON. Those that we feel have a viability, those are the

ones that we’re pursuing, and we’re not leaving any one of those

behind.

Mr. TIERNEY. The Business Week article also says that BP cut

its production by 4 percent and Texaco and Occidental Petroleum

cut their production by 7 percent. Do you have an idea why these

companies are doing that in the face of the supply shortages that

we see?

Mr. SIMON. I really can’t speak for those other companies, Congressman.

Mr. TIERNEY. Well, one of the root causes for today’s energy

prices is too much reliance on fossil fuels, I would presume, particularly oil. And that seems to leave us vulnerable to market manipulations by OPEC and perhaps to underproduction by some of

our domestic firms. Different people have made statements, energy

leaders, that seem to be willing to embrace new technologies. For

example, Michael Bowlin, who is the CEO of Arco, told us in February 1999, at a talk at an energy conference in Houston, TX: We

have embarked on the last days of the age of oil. He went on to

discuss the need to convert our carbon-based energy economy to a

hydrogen-based energy economy.

And in 1999, Ford Motor Co. chairman, William C. Ford, Jr.,

went on record saying: I expect to preside over the demise of the

internal combustion engine. Ford has announced that they will

have a fuel cell powered vehicle for sale and on the road in 3 years.

Earlier this month Saudi Arabia’s foreign oil minister, Sheik

Ahmed Zaki Yamani said in an interview: The stone age came to

an end not for lack of stones, and the oil age will end, but not for

a lack of oil.

So all of those quotes seem to indicate that some industry leaders

believe that a future doesn’t depend so heavily on oil, but that

might be expected. Does ExxonMobil share the view?

Mr. SIMON. We believe that oil and gas is going to be a very

major source of energy for the foreseeable future. And certainly

we’ve got to do all we can to develop those sources. This does not

mean that we’re not looking at other aspects.

Mr. TIERNEY. What are you doing, in fact, for the future of—— Mr. SIMON. We are working with automobile manufacturers and

look at hybrid engines and other technology there and working

hand in glove with those and looking at how they might develop

and what part we would play in that.

Mr. TIERNEY. Can you define for me ‘‘looking at.’’ When you say

looking at those things——

Mr. SIMON. In other words, studying the options and how it

might be done, how it might be done most efficiently and effectively

and how we would work together in that regard. But I think it

would be a mistake to feel that that is going to be a short-term solution. I think we’ve got to continue to take advantage and explore

all the opportunities for oil and gas that we’ve got in front of us

as well.

Mr. TIERNEY. Mr. Hawkins, do you think that ExxonMobil is

doing enough to develop fuels in the new technology area?

Mr. HAWKINS. ExxonMobil is in business to make money, and if

the market isn’t sending them a signal that they can make money
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off of more environmentally friendly technologies, then they’re not

going to do it. And they’re not going to do it no matter how much

we try to embarrass them. And that’s a shame. But there are ways

to get the market to send those signals. We can price energy according to all of the environmental harm that it produces. We can

invest in efficiency so that we make ourselves less vulnerable to

the supply side the equation.

I think that the major fossil fuel producers are going to wake up

to the fact that in the foreseeable future, and that is in the next

couple of decades, we are going to be looking seriously at a carbon

constrained global economy because of climate change. It is a real

problem, and the smart companies are starting to think about diversifying their supply. They aren’t going to turn around and

produce huge supplies tomorrow, but the smart companies are

thinking about diversifying their supply. And they will start to put

themselves in a position to produce alternative supplies, more environmentally friendly supplies.

The question is whether they’ll do it in time to avoid a lot of disruption. That is where Congress can help, by helping to send policy

signals that say to these companies, these multinational companies

that the United States is serious about these issues and it wants

to join the world community in being serious about these issues.

Mr. TIERNEY. Thank you. Mr. Chairman, you mentioned earlier

that the environmental regulation were causing high energy prices.

And to support your position you thought that the complaints from

oil companies and others that were being raised by the cost of complying with environmental regulation. I think we have had a little

experience, though, that the industry has been known to overstate

the cost of complying with environmental regulations in the past.

One example of that is when we were considering the Clean Air

Act of 1990, industry after industry came before Congress and said

that the cost that the law would virtually bankrupt the economy.

Of course, nothing like that happened. As another example, Mr.

Simon, you represent ExxonMobil. When the Congress was considering the reformulated gasoline provisions of the Clean Air Act,

Mobil wrote to the Congress that the requirements shouldn’t be

adopted because, and I quote: The technology to meet these standards simply does not exist today. That proved to be completely

wrong.

The reformulated gasoline provisions went into effect in 1995,

and have brought some pretty good benefits for clean air.

There are other examples. The utility industry grossly exaggerated the cost of acid rain provisions. The chemical industry said

that phasing out CFCs would cause massive disruptions. The auto

industry said that they couldn’t meet the new tailpipe standards,

yet each of those statements was proven wrong.

The industry sometimes can remind us of the person that cries

wolf. Why should we give any credence to the complaints about the

Clean Air Act that have been made today? Any of you gentlemen

want to address that?

Mr. SLAUGHTER. Mr. Tierney, I would like to say one thing. It is

very difficult to estimate the cost of some of these programs, particularly across an entire industry and important products such as

we are talking about. Just this summer in the midwestern gasoline
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crisis, the industry was criticized for underestimating the costs of

the reformulated gasoline program. The fact is that it’s difficult to

see, but there are a number of situations that came together that

we had indicated might come together, and it took a long time for

them to happen, but with the introduction of the new product this

summer, they did, and at that time. We were criticized basically

that our numbers were too low.

So it is difficult to get them right, but we do our best. And sometimes the situations that we feel may occur don’t occur, sometimes

it takes them awhile. But, you know, this summer at least we had

some serious repercussions from the Clean Air Act and the reformulated gasoline program, and at that particular point, it seems

that our numbers were too low.

Mr. BURTON. The gentleman’s 10 minutes have expired. Let me

yield to Mr. Souder and ask if he will give me 30 seconds.

Mr. SOUDER. I had been happy to yield to the chairman.

Mr. BURTON. Let me just say, Mr. Tierney has the impression

that I’m not concerned about the environment. I think the reason,

one of the main reasons that I wanted to hold these hearings was

to point out that we don’t have a really long-term energy policy

that’s been well thought out. Obviously, you know, I think you’re

going to see some changes. You already see, I think, Honda making

a hybrid engine, a part electric and part internal combustion engine, and I think you are going to see other industries, other car

companies, and so you are going to see us heading in the direction

that you want to.

But in order to do that in a way that’s constant and reasonable,

it seems to me that we have to have a long-term energy policy. We

don’t have that. The administration, I believe, should have led in

this direction, and they have not. And that’s one of the reasons we

are having—this is to not point fingers at the administration or at

Congress, but to say that we’ve got to have a policy. But that begs

the question of do we have a short-term energy policy to deal with

the crisis we are going to have this winter? I mean this winter, we

are going to have spikes in energy prices in the northeast, in the

west, all over this country. And so we have to look at not only the

long-term program and come up with an energy policy, but we also

have to deal with what is real today, and that is, a lot of people

are going to be suffering this winter because we did not take a

hard look at this earlier.

Mr. TIERNEY. Well, just if I might, Mr. Chairman, I hope that

this is an indication that the majority party is going to start funding the projects that the administration has had for its long-term

policy that you have been cutting each one of the last 5 years, and

you are going to get off the concept of cutting the Department of

Energy, because that will go a long way helping us on the longrange policies. Thank you.

Mr. BURTON. Yes, sir, Mr. Tierney. I won’t get into a big debate

about that. We will get into that some other time.

Mr. SOUDER. I have a series of questions, but I want to ask Mr.

Simon a followup on this exploratory budget question.

If I understood what you were saying correctly, you said that one

of the benefits of the consolidation was you were able to reduce

your exploratory budget. And I guess a fundamental question is
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you pointed out that your market price and your profitability as a

company is a lot based on your return on investment.

If you saw that additional drilling and production would be profitable but would reduce the return on investment, would you not

produce? In other words, it is a lower level of profit than you already had.

Mr. SIMON. Well, we’ve got profit targets that we have in making

our investment decisions. And if that met an investment target

that we had, we would go ahead with it. Certainly.

Mr. SOUDER. Because, well that’s a logical business decision. You

can see why many Americans, including me, are very concerned

about consolidations. Because what we are in effect saying as we

move to an oligopolistic situation where fewer and fewer people

control production, that when we then have price run-ups because

production is short, that people aren’t willing to drill, even though

they can make money, but they don’t hit their target of how much

money they wanted to make, we have put ourselves in a very awkward situation.

And as someone who is very pro capitalist and very pro not having government overregulate, we are going to have to look at this

question of return investment and acceptable levels of profitability,

or you are going to wind up getting the same thing that happened

to Standard Oil the first time around because we cannot tolerate

not developing energy resources that potentially can be developed

at a profit.

Mr. SIMON. And if I gave that impression, that is not the case.

Those energy opportunities that we have that meet our hurdle rate,

we are pursuing those. But one of the advantages, I think that our

chairman pointed out at the time of the merger, is that we’re able

to look at our portfolio, to high grade that, to end up with opportunities where you can do things more efficiently, more effectively,

can combine technologies now that we did not have before. And

really, get more bang for the buck. So to do the same thing that

we would have done before, we should be able to do more efficiently, more effectively, pursuing the same opportunities that we

would have pursued before but at lower costs. And I think that ultimately ends up benefiting the consumer.

Mr. SOUDER. It is important for the record to show that you, once

again, said your hurdle or your mark. And earlier when you compared yourself to the Standard & Poors index on your rate of return over 5 years, you said it was slightly below.

Mr. SIMON. Over a 10-year period, that’s correct.

Mr. SOUDER. So you do have a rate of return goal and a profit

goal. That is not just that you made profit, which is understandable, but becomes more of an obligation when you are in a highly

regulated industry where, in fact, not developing every opportunity,

regardless of where the rate of return, if there is a profit, becomes

more of a public policy question. I don’t want—if you want to make

another—— Mr. SIMON. Yeah, I’m not in a position, obviously, nor would I

want to share what our DCF—— Mr. SOUDER. Compared to the Standard & Poors.

Mr. SIMON [continuing]. In terms of our investment position what

our DCF return criteria would be.
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Mr. SOUDER. The company wouldn’t want to fall below the Standard & Poors. You used that as a marker.

Mr. SIMON. That is a return on investment. And you can have

different DCF return criteria, you know, versus what you would

have on an ongoing return on investment. However, I guess what

I’m saying is if you take the same criteria that we had before and

apply it now, but with the combined technologies and our ability

to get more bang for the buck than what we were capable of doing

before, pursuing the same opportunities with the same hurdle rate,

we are able to do that for less.

Mr. SOUDER. Mr. Slaughter, one of the things that it looks to me

like, one of the choke points is in the refining area. Have you seen

refiners go out of business? Their profits are down. Are they showing a different profit rate than other areas of the industry?

Mr. SLAUGHTER. As I mentioned, Mr. Souder, the average rate of

return for the refiners for the last 10 years is about 5 percent. The

fact of the matter that the aggregate profit numbers that are used

for the quote, unquote, oil industry for this year, of course, include

other sectors. Refiners are making—are profitable, generally this

year. That’s somewhat of a rarity. There are a number of our members, for instance, our smaller members, who have not been profitable over the last several years. So this year has been one opportunity to make some money for them to stay in business.

On the average, over the last several years, roughly two refineries a year have gone out of business. They tend to be of different

sizes. And as I pointed out earlier, there has been some ability to

increase capacity at existing sites so that we can keep even with

the refining capacity. But the problem is, as you know, the demand

for petroleum products is increasing. So just by keeping even, in effect we fall behind. So, yes, it is a relatively good year for refiners.

Not astronomical. There are no astronomical years for refiners.

Mr. SOUDER. Mr. Simon, if you take Exxon and Mobil together,

is your domestic refining capacity greater or less than a year ago,

and how many have you closed?

Mr. SIMON. I will have to get back to you, Congressman, exactly

in terms of the two companies and where we were 2 years ago. I

don’t have that information. But I would speculate that our refining capacity is at least equal to or perhaps more. And what we

have been able to do over a period of time is to, with new technologies, and application thereof, is to expand the ability to refine

products with existing equipment. And I think that’s been a very

important aspect, and what Mr. Slaughter is saying here in terms

of how we can meet increased demand with existing refineries.

Mr. SOUDER. You feel you have the continuing ability to do that

or you’re suggesting, in other words, you have maxed out in your

ability to redo existing refineries? I think Mr. Slaughter also suggested that some of those were being revisited as to whether or not

those were going to be allowed to stand.

Mr. SIMON. And that latter point is a very important one. I do

think that there is going to be additional, what we call creep in industry, as you discover and apply new technologies. We are continuing to find ways to get more and more out of existing equipment. But some of that grandfather equipment, as it has been

called, we were operating under one set of rules and regulations to
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go back down, and retroactively apply new source review requirements to those can certainly impede that process, and it is something we in industry are very much concerned about.

Mr. SOUDER. Do you expect to build any new ones, or at this

point, are you—let’s say that the demands are still there, you have

to revisit, in fact, you may have to actually reduce some of the capacity gains that you had. Do you have any plans to build any new

refineries?

Mr. SIMON. No, we do not. What we are focussing on again is

how do you get more out of existing equipment? And we are very

concerned about anything that would impede that process.

Mr. SOUDER. Why wouldn’t you look at any new refineries?

Mr. SIMON. Well, one factor is, I think we are able to meet demand requirements by getting more and more out of our existing

equipment, and by adding new equipment from time to time to existing facilities as opposed to going into a new one.

Now, certainly the permitting process and all the problems associated with that, I would think would make any company think two

or three times before even thinking about putting in a new refinery.

Mr. SOUDER. Are your refinery operations similar to the national

average at 5 percent compared to your other, that would be substantially under other ExxonMobil operations, and would that be a

factor in whether or not you build additional refineries?

Mr. SIMON. Certainly the return levels in refining—and I’m not

going to say what ours is, but in terms of the return levels in refining certainly limits what you’re able to do in terms of investment,

not only certainly in new ones or thinking about that, but even in

existing refineries.

Mr. SOUDER. Thank you.

Mr. BURTON. The gentleman’s time has expired. Mr. Waxman.

Mr. WAXMAN. Thank you, Mr. Chairman. One of the biggest environmental and energy problems we face is global warming. According to the National Academy of Sciences, worldwide temperature

increases are, quote, undoubtedly real, and the intergovernmental

panel on climate change indicates that there is now reason to believe it is human induced.

I have been very pleased to see that many major U.S. corporations are beginning to recognize the threat posed by global warming. For example, over two dozen companies, many Fortune 500

companies, have joined the Pew Center’s business environmental

leadership council in order to help find solutions to climate change.

Unfortunately, ExxonMobil isn’t one of these companies. Contrary to the world’s scientists, ExxonMobil has taken the point of

view that there is insufficient scientific evidence to believe that climate change is real.

Mr. Simon, why is ExxonMobil taking this head-in-the-sand approach to global warming? Why isn’t your company joining with

British Petroleum, Sunoco and Shell to help find solutions to global

climate change?

Mr. SIMON. Congressman, although there are a number of scientists that have that opinion, there are an equal number of scientists who have a different opinion as well. We are not saying it

is not a problem. We are saying let’s take the time to study it, to
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understand whether it is or not before we take dramatic steps. And

in the meantime, we are saying let’s take those kind of steps which

make sense, but are ‘‘no regrets’’ kind of steps, so where we do

something, it doesn’t end up being in the wrong direction, it is consistent with where we ought to be going anyway. And energy conservation is one of those.

Mr. WAXMAN. Mr. Hawkins, do you have any thoughts on this

subject?

Mr. HAWKINS. I would only comment that given what Mr. Simon

said before, because of the dynamics of the business, energy efficiency may be a ‘‘no regrets’’ step, but for ExxonMobil to put money

into it it has got to meet their hurdle rate, which is what Congressman Souder was pointing out. That is a problem. We have encountered that with other companies where something that they can actually make money on and reduce pollution doesn’t get done, not

because they’re bad people, but because that investment can earn

more money somewhere else. And that’s the dynamic of the system.

So that’s what we need policy for. We need to have targets and

incentives that change behavior that otherwise would flow from the

hurdle rate decisionmaking that Mr. Simon described.

Mr. SIMON. Congressman, may I add to that, too? I would like

to point out, because I think this is where we are consistent with

one another, that we are pursuing very aggressively energy reduction steps within our own facilities. And, yes, we don’t do that unless it’s attractive and makes money to do it. That’s true. We don’t

do it just for the sake of doing it. But we have a hurdle rate for

those kind of projects that, as low as anything else, that we are

doing in our company. So that’s an area where I do think we’re taking an aggressive approach, and there is a ‘‘no regrets’’ approach

and consistent with addressing the issue that you are talking

about, if indeed it ends up after further study being substantiated,

that it is, indeed, the problem that we think.

Mr. WAXMAN. I guess British Petroleum, Sunoco and Shell think

there is a reason to do more than ExxonMobil. And while you continue to want to have it studied, they feel they have enough information to move forward. Is that a fair statement?

Mr. SIMON. Yes, and that wouldn’t be the only area where we

might disagree as competitors, Congressman. There is a number of

them where we don’t agree on.

Mr. WAXMAN. The only problem with environmental legislation is

that unless we require everybody to do something, it’s not profitable to spend that extra money to reduce pollution or reduce emissions of any sort. So you put yourself in a competitive disadvantage

if you are the one trying to reduce pollution. That’s why Mr. Hawkins would say you need policy decided by government and applied

in an equal way on everyone.

Let me go on to another subject, and that is reformulated gasoline. Earlier this year the price of clean burning gasoline, known

as reformulated gasoline [RFG], rose in the Midwest at a rate significantly higher than the rate of gasoline price increases in the

other areas of the country. RFG prices in Milwaukee and Chicago

were, at times, 50 cents higher than the price of RFG gas in other

parts of the country. At the same time, some were suggesting that
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the Clean Air Act regulations played a major role in these increases.

Mr. Simon do you believe that the Clean Air Act regulations

played a major role in the RFG price increases that Chicago and

Milwaukee experienced a few months ago.

Mr. SIMON. I think it certainly did have a factor in that, Congressman. When you look—and Mr. Slaughter mentioned it a while

ago. Certainly we did go into a new production of reformulated gasoline phase 2 during that period. That was more difficult to

produce. You’re able to produce less out of a barrel of crude. It required new equipment, new investment that took time to start it

up. That investment had a higher cost as well.

Now in the two particular areas that you’re talking about, reformulated gasoline in those two areas are made with ethanol. Now,

because of the supply shortages which occurred, because we went

into a period where we had low inventories, as I mentioned before,

we had to put in new equipment. It took time to start that up and

learn how to operate it. We came out of an extraordinarily cold

snap at the end of the winter. So again we hadn’t converted over

to gasoline production to a major extent. There were also pipeline

problems in the area which contributed. Also, there was the uncertainty around Unical patents which affected this. But all of those

affected reformulated gasoline in general.

Mr. WAXMAN. Exclusively in those two areas or everywhere?

Mr. SIMON. In the Midwest. Now what happened in those two

areas, however, was that there the reformulated gasoline is made

with ethanol. The problem we had was how do you get products or

supplies from other parts to go in to make up for this shortage of

supplies in that area?

Mr. WAXMAN. Well, let me ask you this question, because there’s

evidence that indicates that it wasn’t environmental regulations at

all that caused the Midwest gasoline price spikes. At a June 29th

committee hearing, EPA Administrator Carol Browner testified

that the cost of producing RFG could not account for the high price

differentials in the Midwest. She stated that independent analysts

had found that the cost of producing RFG costs only between 4 to

8 cents per gallon more than conventional gasoline.

She also testified that after June 12th and 13th meeting between

EPA, DOE and oil suppliers in Chicago and Milwaukee region, and

then the June 15th announcement that EPA and DOE were going

to ask the Federal Trade Commission to investigate the price of

RFG in that region, suddenly the wholesale price for RFG in that

region dropped over 38 cents per gallon.

ExxonMobil is involved with supplying gasoline to the Chicago

and Milwaukee area, I presume, isn’t it? And why did the wholesale prices for RFG drop so dramatically in Chicago and Milwaukee

in the days following the announcement that the Federal Trade

Commission was going to investigate whether price gouging was occurring in that region?

Mr. SIMON. Let’s first of all discuss why they went up. And those

were the factors that I just mentioned and ticked off. It is not a

cost-based system. That’s not what established the price. It was a

market established price that cleared demand and supply. So it

was the market forces that drove the price.
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What changed the price was getting additional supplies into that

area. We took steps before any mention was made of any kind of

FTC investigation, and let me mention what those were. In our

Baton Rouge refinery in the Gulf Coast, what we were able to do

is to produce the same kind of components that are required to

blend with ethanol in the Midwest. That’s a very difficult thing to

do, because we are not tooled up in our other refineries to do this.

We were not tooled up to produce those same components in other

refineries in the circuit.

But after taking extraordinary steps in Baton Rouge, we were

able to get more supplies into the Midwest to address the supply

problem.

That decision was made well in advance of any kind of investigation or any mention thereof. It takes about 20 days round trip to

make that. The supplies got in there about the time that that was

mentioned. We also worked to improve the production or

producibility of that grade in our Joliet refinery. We put all of our

technical expertise in there.

Mr. WAXMAN. If I could interrupt you, it sounds to me like what

you are saying is that it wasn’t the cost of producing the reformulated gasoline; it was the cost of trying to get in the position of

doing it and getting that supply there. That is contrary to me to

the argument that it was the environmental requirement of producing RFG that caused that price spike. And it’s just curious to have

that timing right at the same time the Federal Trade Commission

was going to investigate.

Now the Federal Trade Commission is going to investigate and

we’ll find out from their analysis what caused the Midwest gasoline

price volatility. I hope the FTC is able to shed light on that situation. I think a lot of people would be really concerned if the price

was artificially high, and just because there was suddenly going to

be scrutiny on why it was high, it suddenly dropped. But, given

your explanation, it wasn’t the cost of the RFG, it was the transportation and the infrastructure to get that supply to the people in

the Midwest that you ironed out to get that lower reduction.

Mr. SIMON. No, what happened, Congressman, was that when we

had to produce this new grade, we had to put in new equipment

at our Joliet refinery, specifically designed to produce the kind of

components you could then blend ethanol into to make the reformulated gasoline. One of the issues we had, and others in industry

as well, is when you tried to startup that new equipment, we had

problems, technical problems on how you get lined out, it took time

to do that. That was a contributing factor.

So I’m saying the regulations from that standpoint was a contributing factor to the supply problem issue that we had. There were

others, I admit. The pipeline problems that we had. The fact that

we were at low inventory levels coming out of winter. All of those

were factors as well. But the reformulated gasoline was a factor in

that. We were not tooled up to do that in the Gulf Coast.

Mr. WAXMAN. I appreciate what you’re saying, I just want to ask

Mr. Hawkins if he has anything to say on this.

Mr. HAWKINS. Just one comment on this. To hear the testimony,

you would think that this requirement was a surprise. But it

wasn’t. I mean, this rule was adopted half a dozen years before the
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June 2000 date. It was the product of a negotiated rulemaking. It

provided lots of flexibility. The program was on the books. The ethanol use in the Midwest was on the books.

The most charitable thing you can say is they screwed up. They

were running this thing too tight. They did not prepare far enough

in advance. This is not a policy failure. This was a market failure.

It was a glitch, and when—and as Mr. Simon has testified, essentially it was a supply demand thing. It wasn’t a cost-driven thing.

The market would bear a higher price, it did not bear it for very

long, and when people got upset, they figured out a way to react

and get the price back down.

But the price was not a function of cost. It was a function of

what the market would bear until it wouldn’t bear it anymore. But

the more interesting point is this requirement was not a surprise.

This was one of the better regulatory programs because it was

worked out through a regulatory negotiation. It has lots of flexibility. The trading of obligations, all the market-based principles. So,

you know, that, I think, is the unfortunate observation about this

glitch.

Mr. SIMON. But again, I would go back to what came out of the

NPC study, and one of the facts pointed out there was that when

you have these different kind of fuel requirements, and you have

sort of a boutique approach or a Balkanized approach so that different parts of the country have different requirements, what happens when you get into a supply shortage or disruption like we got

there, you cannot just move supplies in from another part of the

country to meet that. It takes longer to make those adjustments.

Yes, we did have problems in starting up some of this equipment,

and that is another thing that came out of the NPC study is when

you put more and more stringent requirements upon us, requiring

more and more capabilities out of the equipment in our refineries,

we are going to have more difficulties in doing that. We are going

to have problems. And the more stringent those are and the more

difficult they are to produce, the more these kinds of issues and

problems we can expect to have in the future. That’s why we’ve

said that it’s very, very important that when we look at these regulations, that we look at the cost-benefit of those and be sure that

we take into account when you do that, it can result in some of

these kind of situations.

Mr. BURTON. The gentleman’s time has expired.

Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman. Are we going to have another round of questions?

Mr. BURTON. What’s that, sir?

Mr. OSE. Are we going to have another round of questions?

Mr. BURTON. If you desire.

Mr. OSE. Well I’m just not quite sure where to start, I have so

many here.

Mr. BURTON. Mr. Ose, being the fellow that you are and the

friend of mine, I’m going to give you all the time you want.

Mr. OSE. Mr. Simon, as I understand it, ExxonMobil operates in

an investment climate regulated by the SEC. Is that not correct?

In effect, your shareholders would go to the SEC if ExxonMobil did

something inappropriate in terms of shareholder interests?
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Mr. SIMON. I would presume so.

Mr. OSE. Is the allocation of capital in pursuit of profitable investment by ExxonMobil one of those areas that the SEC would

look at in terms of a shareholder suit?

Mr. SIMON. I wouldn’t think so, Congressman.

Mr. OSE. So if I owned stock in ExxonMobil and you took

ExxonMobil capital, and you invested in production where you did

not make a profit and I sued you, the SEC wouldn’t be interested

in that?

Mr. SIMON. I really couldn’t respond to that. But I think if we

did those kinds of situations, the shareholders would vote with

their feet and we wouldn’t end up with those shareholders. They

would sell out and go somewhere else.

Mr. OSE. So all the various pension fund investments and IRAs

and 401(k)’s that have a little pieces of ExxonMobil in their portfolio might very well suffer a loss if you did not allocate your capital efficiently?

Mr. SIMON. I think if we did not allocate our capital efficiently

and perform well within our industry as we have done, that we

wouldn’t end up with the shareholders that we have and it would

certainly impact our stock price.

Mr. OSE. Now I’ve heard a lot of talk today that ExxonMobil has

earned a whole bunch of money. Now, if I understand correctly, you

earned $4 billion.

Mr. SIMON. $4.53 to be exact.

Mr. OSE. What is your total amount of assets?

Mr. SIMON. Well, that——

Mr. OSE. Well, is it $1billion.

Mr. SIMON. About a 13 percent return on investment.

Mr. OSE. Say around $35 billion in assets?

Mr. SIMON. I’d have to get back to you on the exact number, Congressman.

Mr. OSE. My point is that 13 percent on equity is less than say

State Street Bank, based in Mr. Tierney’s district and—or Wells

Fargo Bank, now based in Minnesota, but used to be based in L.A.

on their equity, just seems kind of silly to me to look at the absolute number rather than the return on equity. Because, I mean,

you can really twist the spin, so to speak.

And I just wanted to make that point, Mr. Chairman, is that

when you talk about absolute numbers, you need to understand

what it is that is generating those numbers. You can’t just say,

well, Exxon because it is making 4-point-whatever billion, is making too much. You have to look at—I mean, it may be they are

making too little. If they are $100 billion of assets and they are

only making 4.4 percent, I’m going to take money out of their stock

and put it in the bank because I can get 6 percent there.

I just want to make that clear, because oftentimes those of us

who have the privilege of serving here, and I have to be clear, I

mean I’m not very far removed from having to allocate capital for

profitable purpose, a year and a half. Those of us who have the

privilege of serving here kind of lose touch with what the reality

is, and the reality is that ExxonMobil has not only fiduciary, but

statutory requirements for how you use your capital, otherwise, you
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are going to be subjected to shareholder suits if you misuse or

abuse that responsibility. And I just wanted to make that clear.

Mr. SIMON. And that’s a very good point, Congressman. I guess

we are more concerned frankly than shareholder suits in that regard, is being sure that we perform well relative to our competition

in our industry, because, as you point out, if you look at our industry and you compare it with Standard & Poors over the last 10

years, it is actually a little bit below.

Mr. OSE. You are below. Let me ask another question. A lot of

times one of the things that large corporate America has to deal

with is the amount of capital tied up in inventory. That is a drag

on return. Much of corporate America has kind of reversed the traditional supply demand analysis for delivering product to the market and now actually look at it in terms of demand-supply dynamics. So supply demand dynamic versus demand-supply. In other

words, figure out your demand, and rather than tie up a huge

amount capital in inventory, you funnel your supply accordingly, so

you don’t have a bunch of gas sticking in some tank somewhere.

Mr. SIMON. I understand. Right.

Mr. OSE. It’s something that’s relatively recent in the financial

markets, and maybe some of the people here don’t understand how

it works. But it has a direct bearing on the ability of millions of

Americans to enjoy a successful portfolio, because it increases the

rate of return that those people get on their investments, increases

the value of their portfolios and allows them ultimately, when they

retire, to have a higher level of retirement security.

Mr. BURTON. If the gentleman would yield, I hope you are not

talking to me. I hope I understand what you are talking about.

Mr. OSE. I’m talking to Dennis.

Mr. BURTON. I understand. I understand.

Mr. OSE. You made me lose my train of thought, Mr. Chairman.

Mr. Simon I’ve got a couple more questions. Refinery capacity in

the United States—domestic refinery capacity in the United States

in 1983 I’m told is 16.46 million barrels a day. I think that is Mr.

Slaughter’s testimony, written testimony. And domestic refining capacity in—domestic U.S. refinery capacity in the year 2000 is 16.3

million barrels a day; is that correct? So we have had no increase

in refining capacity in 17 years. In fact, we have had a decrease;

is that correct?

Mr. SLAUGHTER. That’s right.

Mr. OSE. Now, as a businessperson, if we have a decrease in supply, what happens to price?

Mr. SIMON. If you have a decrease in supply, the price goes up.

Mr. OSE. Thank you. I’ve returned from Alice in Wonderland.

Thank you. Now, the energy business, particularly as it relates to

gasoline, serves product into different markets. For instance, in my

area, Sacramento, the Central Valley, we have a nonattainment

zone. We have certain specifications. Mr. Slaughter, I’m coming at

you. We have certain fuel specifications that we have to meet, and

those are different specifications than exist in, say, Las Vegas, NV,

or name a city in Idaho or whatever. So we—Boise, thank you. I

want to go back to the points that you made about how did you respond to the Chicago dislocation in the market. If I understand you

correctly, and you aren’t communicating this very well, but I want
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to make sure I understood you correctly—the refinery that you relied on in Louisiana to bring the additional supply up the Mississippi River, if you will, to Chicago, was originally outfitted to

produce fuel for a different market?

Mr. SIMON. That’s correct.

Mr. OSE. And it took X number of days to change the manufacturing process, the cracking the petroleum.

Mr. SIMON. You’re absolutely right.

Mr. OSE. So that you could then produce fuel that met the attainment, the ozone attainment requirement for Chicago.

Mr. SIMON. That’s correct.

Mr. OSE. That is an environmental requirement, is it not?

Mr. SIMON. It is indeed.

Mr. OSE. So it is directly related to the environmental requirements that you referenced in your testimony?

Mr. SIMON. That’s correct.

Mr. OSE. All right. The issue of whether or not Carol Browner

or some other Federal agency was direct cause of a reduction in the

retail price of fuel, I have to tell you, I find that a stretch. Especially given your testimony that ExxonMobil, in particular, had actually moved to change the manufacturing process in Louisiana to

provide the supply that would allow the Chicago retail market to

come down.

Mr. SIMON. That’s absolutely right, and I would add to that, Congressman, we also, in our Joliet refinery, we put every bit of technical expertise that we had in there to try to increase the supply

of that product. That was well before any mention of any investigation was made, in addition to the steps that we initiated in Baton

Rouge refinery as well.

Mr. OSE. Mr. Simon, I’m from California, so I don’t know the

Midwest market very well, but I will tell you for debate’s sake I

don’t believe you. How do you prove that? Do you have documentation that you can share with this committee, either notification to

Louisiana to get on with the work or inspections of the work that

was ongoing in Louisiana, or something to put to rest this idea that

Carol Browner saying that she was going to ask for an investigation was the cause of the decline in the price of fuel in the retail

market in Chicago?

Mr. SIMON. Well, certainly we could go back and show the FTC,

for example, the steps that we had initiated in Baton Rouge and

the timing of those. And I would also add that we worked very

closely with the FTC on their investigation. We welcomed that investigation. We provided them with all the documents that they’ve

requested, and we want to work with them in any way we can because we’ve got nothing to hide on this. We are very anxious to

have the investigation. We are very anxious to have that completed. And we would hope it gets the same kind of publicity when

it is completed that it got when it was initiated.

Mr. OSE. You know, I’m not ordinarily given to strong terms, but

I am a year and a half removed from having to run a business. And

business owners respond to market dynamics. And in this case, it

is clear to me on the basis of your testimony here that Exxon responded to a market dynamic, notwithstanding Secretary

Browner’s pronunciations later on.
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Mr. SIMON. Absolutely. You heard Mr. Santa, and I tell you we

feel the same way about it. Our end consumers and customers are

the most important thing to us that we’ve got. That’s the best asset

that our corporation has. In contrast to trying to hold back or restrict supplies, we were doing everything we possibly could to increase supplies into that area.

Mr. OSE. Mr. Chairman, I’m going to—give back to you and let

you go—— Mr. BURTON. We will give you more time in a second round. We

will now yield to the gentleman from Cleveland.

Mr. KUCINICH. Thank you very much, Mr. Chairman. Question

for Mr. Slaughter. I want to speak about the reformulated gasoline

and the Unical patents, and I’m wondering your thoughts as to

whether or not Unical, those patents for reformulated gasoline are

partly to blame for rising gasoline prices?

Mr. SLAUGHTER. We’d have to say that we do, Congressman.

Mr. KUCINICH. That you do what?

Mr. SLAUGHTER. They do have something to do with price increases with cost increases. It’s difficult to quantify. As you know,

I know you have legislation on the subject of the patent. They essentially have patents which are being contested in the courts now.

There are a series of patents. If they are upheld, they can have the

impact of causing a substantial—substantial for gasoline profit

margins—increase in the price of gasoline. They’re essentially the

product of a public policy process in California and elsewhere, but

Unical, as you know, has gone forward to patent this. I should add

that NPRA has filed an amicus brief against the patents and I

should tell you that.

Mr. KUCINICH. I am aware of that, actually. Are you aware that

the Attorney General can now order licensing of certain technologies for the attainment of clean air standards?

Mr. SLAUGHTER. Yes.

Mr. KUCINICH. And so how do you feel about a bill which—I introduced a bill which is called the Lower Gasoline Prices Through

Technology Access Act of 2000. And the bill would allow the Attorney General to require a mandatory license for reformulated gas

patents and still permit a reasonable profit. Several refiners have

expressed interest in this solution that provides them with fair access to clean air technologies.

What’s your position on taking that particular direction?

Mr. SLAUGHTER. Well, you know, preferentially, we believe that

the patent was wrongly granted and we would like to see the patent struck down by the courts. As for the legislation, we are looking

at that. And we haven’t got an opinion on it at this time. I understand that there have been some discussions. Your staff’s had discussions with some companies, but we have not taken a position on

it. And I think that those of us who are involved in the litigation

would like to see the outcome of the litigation.

Mr. KUCINICH. So when patents are not reasonably available, or

no alternative exists and substantial competition is reduced, you

know the Attorney General can determine that in order to bring

about cleaner air, can ask the district court to order the licensing

the patent. What we are trying to do is set the stage so she has

the legal authority to do it, specifically with respect to reformulated
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gas because the current technologies included in the law are stationary sources, hazardous pollutants, things like that.

Mr. SLAUGHTER. I wanted to commend you for introducing that

legislation, because I think it has increased the attention to what

is going on, and what the question is in the case of the patent. And

we’d like to continue to talk with you and your staffer about it. But

I don’t believe that at least our association is ready as yet to endorse.

Mr. KUCINICH. I would like to go to Mr. Simon right now.

I represent a district in Ohio, Cleveland, and a few months ago

when the price was going toward $2 a gallon, meeting friends,

neighbors, constituents at the gas pump, people were very concerned, because as the price of gasoline starts to go up, for a lot

of people it really does affect their quality of life, because America

is so dependent on gasoline.

We say to those families—I worry that if the gas prices keep

going up, it is going to cause them to change their whole standard

of living.

What do you say to people?

Mr. SIMON. Again, a very large component of the price increase

is the underlying crude cost required to produce the motor gasoline.

We have talked already in this hearing about steps that we can

take to try to address that; for example, making more acreage

available to drill, and more access, to the point where we can reduce our dependence on foreign oil and become more self-sufficient,

and have the ability to perhaps impact to a greater degree the

price, the underlying cost of the product, the crude.

The other thing I would say, Congressman, is that it is a very,

very competitive market. We and our competition must take every

step we can to try to lower the cost of product to our end consumer

just in order to be able to stay in the business.

Mr. KUCINICH. Why do you have to charge so much for gasoline?

I think a lot of people would like to know that. Why do you have

to charge so much?

Mr. SIMON. In the case that you are talking about, the market

establishes what the price is. The price is what is required to balance the supply and demand.

In the particular aspect that you are referring to, demand for

supplies were short. They were short for the reasons that I pointed

out earlier. It took a longer period of time to get more supplies in

there to where the price became impacted then and we could lower

it when we got more supplies, and it took the price down to a lower

level that was then required to equate supply and demand.

Mr. KUCINICH. I am just wondering if there are any other instances in business where you do not keep your supply up so that

you can make a profit because the demand is exceeding the supply?

Mr. SIMON. As I commented before, there is nothing more important to us—your constituents are our constituents. They are our

consumers. There is nothing more important to us than that. That

is the greatest asset I think our corporation has.

We feel a very strong obligation to supply our customers with

supplies on a dependable, competitively priced basis.
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Mr. KUCINICH. Did you ever sit around in our meetings and say,

you know, I just think we are charging too much for this gasoline,

because people can’t afford it?

Mr. SIMON. Again, we don’t establish independently what that

price is, Congressman. We are in a free market environment. The

free market establishes that price. What we feel an obligation to

do is to provide our customers with reliable supplies on a competitively priced basis. We do everything we can to do that.

Mr. KUCINICH. It is possible that a free market could take the

price over $2 a gallon, to $3 a gallon?

Mr. SIMON. When you see what happened in the Midwest this

summer, that is exactly what happened.

Mr. KUCINICH. That being the case, is it possible that price controls are the only way that the average American family could be

relieved from this——

Mr. SIMON. I think in the long term——

Mr. KUCINICH. This threat of a high price for gasoline?

Mr. SIMON. When you interfere with the free market system, it

creates distortions, and in the long term it is to the detriment of

the end consumer.

Just look at what happened here. I think the free market

worked. Prices were high because supplies were short. We already

talked about the steps that we took, the higher-cost steps, the more

difficult steps we took to try to get more supplies into that region.

I think in a relatively short period of time, and I am not trying

to minimize the pain the end consumer went through during that

timeframe, but in a relatively short period of time when you look

at what we did, we got additional supplies in there. The free market worked. It was allowed to work, it responded, and prices went

down.

Mr. KUCINICH. Would it be said that a business that was anticipating what the market would be—because we are talking about

summer here. People were getting ready to take their summer vacations. Everyone knows that during the summer there is a greater

demand. We all know that. That is not a surprise, particularly in

the Midwest. That is when people go on vacation.

So all of a sudden during the summer you are telling people

there is not enough gasoline to go around, folks. Well, back home

they are saying, wait a minute. You know we are going on vacation

during the summer. How come you are hitting us now, telling us

you don’t have the gas and you are going to charge me more? People have trouble believing that, Mr. Simon.

Can you see from our point of view how people would say, hey,

these guys are gouging us?

Mr. SIMON. I understand that. What happened in this particular

case, again, we had some pipeline outages. Nobody could have predicted those. We again started up some new equipment in refineries required to meet this new grade of gasoline. It took time to get

that lined out. We had not anticipated that.

But it is not surprising you are going to have those kinds of

issues and problems. We had some refinery outages of industry

that nobody had anticipated, so there are going to be situations and

times when unforeseen circumstances occurred. If those had not oc-
183

curred, the supplies would have been in much better shape, but

they occurred.

Mr. KUCINICH. But your production, as has been said in the Business Week article I mentioned in my opening remarks, and Mr.

Tierney mentioned in the questioning, if the domestic production

starts to go down, to cut down a little bit—— Mr. SIMON. Domestic production of crude oil?

Mr. KUCINICH. We are talking about the domestic production of

your product here.

Say if it went down a bit, and what I am asking, we are targeting OPEC now as saying that it is holding on and not producing

what they should, but in fact, OPEC apparently has stepped up

production to the response of the administration, yet domestically,

we are not seeing the same response.

Do you see any kind of responsibility to the American people that

when there is a market problem, that you should kind of accelerate

production so that the prices will not be so high?

Mr. SIMON. Let’s just talk about one of the main topics of this

committee, and that is the price of heating oil. What we have already covered today is that our refineries in the United States are

operating at all-out capacity. We are maximizing our production of

heating oil, so we are responding to that situation. I think our

track record as an industry is pretty good in that regard. We are

proud of our record in that regard. I think we do respond, and I

think we respond well.

Do we have problems with gasoline—— Mr. KUCINICH. What about gasoline?

Mr. SIMON. In gasoline, again, we were in a situation where had

we not had these disruptions, which were unforeseen, of pipelines,

if our equipment had come up and operated perfectly, which was

new equipment and you can foresee from time to time having those

kinds of problems with new technology and new equipment that

you startup—these are the kinds of things the NPC study and we

have pointed out could occur, and you should expect to occur when

you put in new regulations, and it takes time to be able to get

there.

Mr. KUCINICH. One final question. I will make this very quick.

Can American consumers now expect to see the price of gasoline

come down?

Mr. SIMON. I am not going to anticipate or project what the price

of gasoline is going to do because that is a function of a number

of factors, very importantly of which being crude oil. I have no idea.

I cannot predict what the price of crude oil is going to do.

Mr. KUCINICH. Thank you.

Mr. BURTON. The gentleman’s time has expired.

Mr. LaTourette.

Mr. LATOURETTE. Thank you, Mr. Chairman. I want to pick up

where Mr. Waxman was a little while ago, if I could.

Mr. Hawkins, I know that the RFG 2 requirements are nothing

new. I had them back at 5 years, you put them at 6. One of the

reasons that I think this hearing is so important, and the chairman’s call for a national energy policy is so important, is that

maybe the oil companies engaged in bad judgment. Maybe there

are some circumstances Mr. Simon has talked about.
184

But I think we get into a difficult time when you have St. Louis,

MO, for instance, asking for a waiver of the RFG II requirements.

They get it. Certainly the oil companies are aware that similar requests for waivers have been made by the legislature and Governor

of Illinois, and the same thing in Wisconsin. Maybe they took a

gamble that the EPA would issue a waiver and they lost.

Not to shortsheet the other difficulties they have described today,

but perhaps we need to be consistent and not have a map like the

Citgo map that looks like that old game of Risk that I used to play,

where you have all the different colors of pieces.

Back in the days when I started to drive, you had high-test and

regular. Now you have 26, 27 different blends of gasoline that a refiner may be responsible for, depending on where he or she is shipping throughout the country. So maybe the distribution problem is

somewhat hampered by our regulatory scheme.

Mr. Simon, I want to get to you for a second, because I was disappointed in your responses to Mr. Ose, not that your responses

were not good. But when Mr. Waxman was talking, you know, we

had Ms. Browner here in June and she made that observation.

She specifically said, ‘‘I certainly think it is fair to note that on

the date that the FTC . . .’’ which I think was the day after the

administration’s letter, which followed after our investigation into

other letters, ‘‘prices did drop. That is a fact.’’

I noted at that hearing in June that Mr. Kucinich and I sent a

letter 3 days before Ms. Browner’s, and I was hoping, and he and

I had caused the price of gasoline to fall in the Midwest, and we

could take credit. People say, not to pussy-foot around it,

ExxonMobil dropped its wholesale prices in June because you were

scared of an FTC investigation.

Mr. SIMON. No, we did not. The price was established by market

factors. It had nothing to do with the announcement of any investigation.

Mr. LATOURETTE. The FTC has issued its interim report, and I

will read you a couple quotes, one from a member of this committee

who is sadly not here at the moment, either.

The report says, ‘‘Staff is examining supply and inventory to determine if supply was manipulated by an agreement or understanding, such as that insufficient product was available to meet

increased summer demands in the Midwest, and prices spiked as

a result.’’

Mr. Tierney, who asked you some questions earlier, said at that

June hearing, ‘‘If there is enough oil out there and they choose to

keep their inventories down and then create more of a demand so

they can jack up their prices, why should we, the government,

share the blame with them?’’

I guess rather directly, again, did ExxonMobil collude with other

oil companies in June of this year, in the days leading up to the

June 8 deadline for RFG II, to restrict supply to the Midwest to

jack up your prices?

Mr. SIMON. Absolutely not. In fact, Congressman, as I said before, I think we took extraordinary steps to try to increase supplies,

certainly not restrict them.
185

Mr. LATOURETTE. Those were sort of the softballs or beachball.

Now I have something that is really making the blood boil of the

folks in Cleveland, OH.

That is that on Labor Day, right before Labor Day, the crisis has

come and gone, we weathered the storm, we heard about the pipeline, we heard about RFG 2. But there is a gas station on the corner by my district office, and on the Wednesday before Labor Day,

gas was $1.42. You have to remember, Ohio is not an RFG State.

We did not have any new regulations.

On the Thursday before the people that Mr. Kucinich referred to, gas up the buggy to go away for Labor Day, it goes to $1.69; the

same gas, the same gas station, no deliveries.

When you talk to the gas station owners, here is what we are

told, not only for what happened in June but also what happened

on Labor Day: As supplies get short, the big companies such as

yours, such as BP Amoco, have an obligation to keep faith with

their company stations, that is, the ones that you operate. And so

in the spot market you see a fluctuation between the price that you

sell to your direct distributors, and the spot market has a discrepancy.

The Energy Information Administration indicated in June it was

the highest they had seen in a while, about 21 cents-per-gallon difference between what a jobber could buy gas for as opposed to what

you were supplying your company-owned station.

As a result, the guy that owns Joe’s Gas Station buys gas at 21

cents a gallon higher, and he or she then has to pass that on. I understand that, because that is the cost to them of putting the gas

in the hole to sell to me when I gas up the car.

Why, then, do the big boys, you included, have to take your price

of gasoline to that exact same price, when that does not reflect

what you were paying for gas or the cost that it would require you

to sell for gas to maintain the profit margin that you have described with Mr. Ose and everybody else?

Aren’t you making a business decision that if you can get away

with an extra 20 cents a gallon because there is a discrepancy in

the spot market, you are going to take the dough and run?

Mr. SIMON. Congressman, I would suggest that the price is established, again, by market mechanisms, market factors. The supply

and demand is what drives that price. If we charged higher prices

than our competition or higher prices than what the market would

bear, we would lose customers. We would lose business. So we price

competitively. That is what we do. That is what we strive to do.

It is not a cost-plus business, it is a business that is driven by supply and demand, and there are market forces that establish that

price.

Mr. LATOURETTE. Are you telling me that your company does not

make a greater profit when there is a difference in the spot market

between what you can supply gasoline to your ExxonMobil gas stations as opposed to the independents and jobbers who sell to the

independents?

Mr. SIMON. We look at every segment of our business separately.

The retail end of the business buys product from us in refining and

supply, and that product goes either into a dealer operator or distributors or their own outlets, so they are the ones who then make
186

those decisions. They are the ones who want to be sure that we

keep our customers supplied and supplied with prices competitively

priced, so that they can, in turn, compete against other dealers and

people in the same business segment.

Mr. LATOURETTE. Let me ask you this: Didn’t the price spikes

that we saw in the Midwest in June of this year amount to really

millions of dollars more in profit for the oil companies?

Mr. SIMON. It added to profitability, it certainly did.

Mr. LATOURETTE. About 80 percent profits are up?

Mr. SIMON. I don’t have a specific number in terms of what that

would have been.

Mr. LATOURETTE. Again, I have heard the questions asked about

Chicago and Milwaukee. I understand about the difficulties that occurred there.

Again, back in Ohio, we didn’t have any new gasoline requirements, and the question that people asked is why did our gas go

from $1.50 to $2.30 when there was no RFG 2 problem, you didn’t

have a Joliet problem, you didn’t have a Louisiana problem.

Here is what people suspect. Tell me if I am wrong and dispute

me of the notion. They suspect that you could take that gas up in

pipeline or truck, however you wanted to get it out of Ohio, up to

Chicago and sell it for $2.30, as opposed to selling it for $1.60 in

Ohio.

Mr. SIMON. There is no question about the fact that as prices are

high in one area versus another, and you can move supply from

one area to another, that that is going to attract. That is how the

free market works. That is how things get back into equilibrium.

Mr. LATOURETTE. Again, are you aware of any practice that is

prevalent on your industry where on the Thursday before a summer weekend you just take the price up?

Mr. SIMON. No, I am not aware of any—I would have to look into

the specific situation to which you are referring, but again, we

price based upon what market pricing is, and that is the way we

establish the prices in any given market.

Mr. LATOURETTE. What about in one of these four corner arrangements where you have a gas station on all four corners, and

the guy across the street, say he is a BP station, he goes to $1.80

and you are at $1.60. What do you do? What does the ExxonMobil

do on your southeast corner? Do you have a policy that covers that?

Mr. SIMON. No, we don’t have a policy. We look at all the competitors in a given area. We look at what we feel to be the result

if we raise or lower our prices in terms of volume that might be

attracted or lost. We try to make independent profit decisions in

each one of those cases.

It is done on a case-by-case basis. There is no general rule or

general application of any kind of policy. It is trying to look at each

situation and decide what is the right price in that particular market, and what would maximize the volume and the profitability.

That is the kind of factors that go into that decision.

Mr. LATOURETTE. During our June hearing, some of our friends

on the minority side of the aisle indicated that perhaps the oil companies’ profits had increased 200 percent or 500 percent. That is

not true. I think you said about 136 percent.

Mr. SIMON. 132 percent second quarter this year versus——
187

Mr. LATOURETTE. I had seen the published report that it was 117

percent. A little over 100 percent.

Mr. SIMON. That may have been the year to date, because we

were up 108 percent in the first quarter and 132 percent in the second quarter, so it might have been half year this year versus half

year last year you are referring to.

Mr. LATOURETTE. So it is not 200 or 500 percent as some people

have claimed, but again, when people in Cleveland, OH that Congressman Kucinich and I represent, are paying $1.90, $2, nothing

funny, nothing fancy is happening in Cleveland, OH, why should

they not have been upset that you have been able to increase your

profitability from last year over 100 percent?

Mr. SIMON. Again, when you look at the segment of the business

we are talking about here, and that is the refining and marketing

segment of the business, we are comparing against a very, very depressed period last year, so I think it could be very misleading comparing period to period. I think it is more appropriate to look at

it over a longer term.

Mr. LATOURETTE. Your return on investment in this segment of

your business is about 31⁄2 percent this year, and it was about 7

last year, and about 7 this year, so you would like us to average

those years and say that over the last 2 years, you have done about

41⁄2, 5.

Mr. SIMON. What I am saying is that when you look at return

levels, I think it is appropriate in our business, where it is very cyclical in nature, to average those over a longer period of time than

to just look at quarter to quarter.

When you look at the percentage increase, and again, when we

are talking about the percentage increase here, this is the company

total profits, and you have to remember that last year was a depressed period relative to profitability for our company and the industry.

Mr. LATOURETTE. Last, with the chairman’s indulgence, there

are some people—and I understand the Explorer and the Wolverine

pipeline, and I not only understand, I accept, unlike some of my

colleagues.

But there is a sneaking suspicion that you all took advantage of

a bad situation to make a ton of cash in June out of the pockets

of people in the Midwest of this country. What do you say to them?

Mr. SIMON. Again, when you look at the downstream piece of our

business and you look at the increase in crude costs that are underlying the products, we do have higher margins this year, but we

have not fully recovered the amount that crude has gone up. So the

profitability of the downstream segment of our business, again,

when you look at the total part of our business, and it is below the

Standard & Poor over a 10-year time period, and you look at the

downstream business, it is even lower than that.

So when you look at the profitability, the return levels, and then

you factor into that as well the tremendous amount of investment

that we are going to have to be making over the next several years

to meet these higher requirements from an environmental standpoint, I would suggest that the profits are certainly not exorbitant,

by any means.

Mr. BURTON. The gentleman’s time has expired.
188

Does the gentleman have one more question?

Mr. LATOURETTE. Just an observation. I guess the lesson is when

something goofy happens in Chicago or Milwaukee next time, we

should just plug up the pipelines, keep all the gas in Ohio, and sell

it for $1.60. Thank you very much.

Mr. BURTON. I yield to Mr. Ose, and maybe Mr. LaTourette has

a few more. But I would ask, the Saudis increased production by

800,000 barrels a day just recently. You would think with that increase in production, there would be a corresponding decrease in

the price of oil, at least in a relatively short period of time. Yet,

shortly after that increase took place the price of oil went up.

Can you explain that?

Mr. SIMON. I cannot explain that, but I can say that there are

other factors operating on price other than the physical availability

of barrels. There is a lot of speculation going on in the market at

the same time, and I think that is certainly having an impact on

prices, as well.

Mr. BURTON. The thing is, it is very disconcerting to people who

know they are going to get hit with higher fuel costs this winter

when they see production increased, and at the same time, instead

of a decrease, they see an increase in the cost of oil. It makes no

sense to them, and quite frankly, I don’t understand it, as well.

Maybe Mr. Ose can explain that to me.

Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman. I was listening to the other

side and I looked at the agenda, and the title of today’s hearing is ‘‘Potential Energy Crisis in the Winter of 2000.’’ It jogged in my

mind some of Mr. Slaughter’s testimony on page 5 that I want to

explore a little bit with you, if you would, please.

On page 5 of your testimony, you are talking about the new

emission requirements that EPA is putting forward, particularly as

it relates to on-road diesel fuel.

The question I have—I mean, in your testimony or your written

testimony, your written statement, you say—I am synthesizing

here—‘‘this may very well compound the shortage of fuel in the

near term and cause even greater price spikes.’’

Is that accurate?

Mr. SLAUGHTER. Yes, it is. You know, we have three major initiatives, basically, that the industry is working with at the same time.

One is a mandated reduction in gasoline sulfur, which is a time

rule that has to be implemented roughly by 2006. The proposed

diesel rule, which was final, according to EPA, this December, will

have to be implemented by March 2006. Plus, there will be whatever has to be done on a State or Federal level or MTBE—the

MTBE issue.

Those have impacts on refining plans, and basically you have a

4-year planning period in which refiners will have to do things in

order to have the fuel at those times. So they will have an immediate impact, of course not only on the psychology of refiners and

the perception for refiners as to whether there is any chance that

we are actually going to be reasonable about environmental policies

any time in the future, but also on the requirement that refiners

actually spend money to make plans to change the factories, to

make these new fuels.
189

Given the permitting process that we are facing at EPA, it will

have an immediate impact on the companies.

Mr. OSE. The interesting part of this, Mr. Chairman, is even

under—you can pick your time line, but Mr. Slaughter, your testimony here says that ‘‘engine manufacturers,’’ the actual people who

make the engines that will use the fuel, ‘‘have pointed out that the

technology to achieve those emission reductions is not yet available

and may well prove infeasible.’’

Are they saying they cannot make an engine that will use this

fuel?

Mr. SLAUGHTER. Yes.

Mr. OSE. I want to be clear. Are the engine manufacturers, the

experts in the field, the guys whose livelihood—the men and

women who work on the line whose livelihood is at stake, they are

saying they cannot make an engine that will work on the fuel that

EPA is requiring?

Mr. SLAUGHTER. Actually, the engine is driving the fuel, Congressman. What has happened is that EPA has chosen particularly

difficult and unique requirements for engines in the 2007 timeframe, and then is saying this fuel is necessary to make these technologies work.

If you look at the comments of Cummins Engine, the largest

manufacturer of engines, they say ‘‘we have no idea what technology it is going to take to come up with this kind of engine performance in 2007. It requires several different technologies which

work together in ways they have never been known to do, and it

has never been tried.’’

Then, however, EPA is telling us that they know what the answer is, and that they know that those engines can be done and

they know what fuel is necessary for those engines.

Mr. BURTON. If the gentleman will yield briefly, let me say that

Cummins Engine Co. is in Indiana, and they are experts. They

really know.

Mr. OSE. Mr. Chairman, obviously they don’t know what they are

doing because EPA says——

Mr. BURTON. That is the point I wanted to make. If they have

people over at EPA that know more about diesel engines than they

do at Cummins, they had better get them down there, because they

could sure use those engineers.

Mr. SLAUGHTER. Cummins make the point that they have been

in business 80 years and don’t know how to do this, and they don’t

quite understand how EPA does.

The same thing happens on the fuel side. If people could actually

make the diesel sulfur that they are asking people to make, you

frankly will end up with a 12 percent shortage. That is a national

average. The study that was done indicates that the shortage in

the Rocky Mountains is 37 percent of supply, and because it is a

unique standard, the lowest in the world, there will be no availability of imports to make up for it.

Mr. OSE. Given the price—what is the phrase—the price flexibility, the relationship between supply and demand——

Mr. SIMON. Elasticity.
190

Mr. OSE. The price inelasticity or the price elasticity, whichever

way you want to go, of fuel, if you have a 12 percent shortage, what

sort of a price increase do you have?

Mr. SLAUGHTER. Well, judging from some of the questions we

had, we instead would be asked how much it would cost us to make

that, assuming that we could.

But as you know, if you haven’t got enough of something, then

essentially the price rises to whatever level it has to to try to allocate supply and demand. I can tell you that the particular study

which has been done by Charles River Associates indicates that the

marginal cost of diesel under that scenario they believe is in the

area of at least 15 cents more.

Mr. OSE. So the truckers who drive our freeways and who deliver

goods to our houses and our factories and our schools and our

stores would be basically asked to finance EPA’s desire here to the

tune of 15 cents a gallon more for fuel than they are paying at

present?

Mr. SLAUGHTER. That is true. And since most of our goods and

services are delivered using diesel, which is our prime commercial

fuel, actually all of us would be paying for it.

Mr. OSE. What is the science behind this, behind EPA’s—— Mr. SLAUGHTER. Just briefly, the difficulty is—first of all, the industry is 100 percent in agreement that sulfur needs to be reduced

in fuels. It interferes with catalytic technologies.

Basically, the idea on diesel is to provide after-burners, which is

a catalytic-related technology which scrubs the emissions. But the

question, the EPA is basically pushing a type of after-burner technology which has never been known to work, and is the one particular technology which, to the extent that anyone has experience

with it in the laboratory, is extremely sulfur sensitive.

So they have used that fact to drive sulfur levels—their level is

15 parts per million that they are proposing as a cap. The current

standard is 500. The industry has recommended 50, which is a 90

percent reduction. EPA is insisting on taking us to 15. The distribution system cannot even deliver 15 ppm sulfur diesel because

it has to go through the same pipes that carry other products with

far higher sulfur levels.

So we don’t know how we are going to do this, but this EPA is

going to mandate that it happen by making this rule final by the

end of the year, rather than looking into these problems.

Mr. OSE. So this is actual rulemaking that is underway and published in the Federal Register for comment?

Mr. SLAUGHTER. The comment period has gone final, and they

wouldn’t even give us extra time to supply comments. Several of

the industry stakeholders have asked for additional time to comment, and we were not even given that. The only thing EPA has

had to say is that they will not change the number, they will not

change their timeframe, and it will be made final by the end of the

year.

Mr. OSE. Mr. Chairman, I have two other items, if I may.

Mr. Hawkins, I am not adverse to your position about efficiency

and conservation, but the empirical data is that we are doing far

more today with the same amount of refined oil than we did in

1983, and we are still short. That is the empirical data today. We
191

had 16.4, something or another, million barrels a day of refinery

capacity in 1983, and we have 16.3 million refinery capacity now,

and we are short.

It just seems to me that while we focus on efficiency and conservation, we also have to find some way of increasing supply. I

don’t know how to reconcile the empirical data that says we are

doing far more with the same amount with your observation earlier, and I think your exact words is that we cannot produce our

way out of this problem. We obviously have to have more production.

Mr. HAWKINS. First, I think it is—on this refinery capacity point,

I think it is important to say that the witnesses from the oil industry—I did not hear them say that prices would be lower if we had

more domestic refining capacity than we currently have. I think

they would have a tough time making that argument.

One of the largest factors in the price of gasoline or refined products is the price of crude oil. Crude oil is a global commodity. Having more refineries on shore in the United States is not going to

affect the price of crude.

Mr. OSE. Would you argue that our economy is going to demand

a certain level of fuel delivered to this country, whatever it is?

Whatever the economy demands is going to be delivered here?

Mr. HAWKINS. The economy will demand an amount of fuel that

is needed to meet the needs. How much fuel, that is, is going to

be a function of technology and the way we use fuel and how efficiently we use fuel.

I said in my testimony, nobody goes out and hugs a barrel of oil

because they like the feel of hugging a barrel of oil. They like what

the—the services that the oil provides. If we can find a way of delivering those services with fewer barrels of oil, that is what we are

saying should be our primary emphasis.

We have proven that it can work, but we haven’t tapped the potential. We have much more tapping of the potential of supply than

we have tapped the potential of demand reduction.

If you will indulge me just to comment on your questions on the

diesel issue, the problem that Members of Congress have in evaluating the industry assertions about what the effects of some impending regulation is, it is a problem because the industry does not

have a very good track record at predicting what the effects would

be.

It is not because they are liars, it is part of the dynamic of the

system. If you are out there evaluating an impending regulation,

there is a tendency to be conservative. If you are working for a

company and you are working and trying to cost out for your boss,

well, what could be the possible outcome, there is a tendency to do

a worst-case analysis. It tends to be a worst-case analysis because

until the policy objective has been set down as a real world objective, you don’t have the experience of having tried to mobilize the

resources to figure out how to do it.

The reason that we have this litany of examples where the industry has predicted a price of x and the actual price from the rule

has been much less than x, it is, again, not because they are liars,

but because once the rule was adopted, all of a sudden people say,

this is real. We have to figure out how to make it happen, and we
192

have to figure out how to make it happen at a much lower cost

than we originally forecast because that is too expensive, and

speaking out and doing it.

Mr. OSE. I think I can accept some of that.

Mr. BURTON. If the gentleman will yield, I would just like to

make one comment. I cannot, for the life of me, foresee why

Cummins Diesel would say they can reduce it by 90 percent and

they cannot reduce it by 97 percent. Because if they say they can

reduce it by 90 percent, then they can go ahead and do it the other

7 percent, if it is feasible. Why would they say 90 percent and not

97 percent unless they really believe that?

Mr. HAWKINS. Actually, Mr. Chairman, the 90 versus 97 is the

refiners’ argument. It has to do with the amount of sulfur taken

out of the fuel. The engine——

Mr. BURTON. I think the engine company is saying they cannot

make an engine that will function properly if you go to 97 percent.

Mr. HAWKINS. Actually, it is the opposite, Mr. Chairman.

Mr. BURTON. I don’t think that is what I heard.

Mr. HAWKINS. The engine manufacturers are saying that the less

sulfur in fuel, the better.

Mr. SLAUGHTER. The engine manufacturers, Mr. Chairman, basically are saying that they believe that new technologies, these new

technologies, will require lower sulfur diesel fuel. However, they

are saying the number that has been picked by EPA is driven by

the technology that EPA is requiring in the engines. Cummins is

saying that they do not know how to make the engines that EPA

is saying are going to be needed—are going to require this ultralow diesel sulfur gasoline.

Mr. BURTON. Correct me if I’m wrong, didn’t Cummins say that

they could meet the requirements by building an engine that would

be 90 percent——

Mr. SLAUGHTER. No, sir. It is the oil industry, the refining industry—they have offered a 90 percent reduction in the current sulfur

level.

Mr. BURTON. So the engine company has not said they cannot

make an engine that would be 97 percent efficient, fuel efficient?

Mr. SLAUGHTER. They have not really put it in those terms. What

Cummins has said is that the engine that will—basically what EPA

has done is it has set an emission rate for certain engines.

Cummins has said, we haven’t the slightest idea how to do that,

and in our history, in Cummins’ history of entering into

rulemakings, they have never gotten to this point in a rulemaking

before where they simply did not know if they could do what EPA

has asked them to do. They didn’t know if it is technically feasible.

As a separate question, EPA has told people, not only do we

know that these emission limits are right and that engines will be

developed that can meet them, we also know those engines will require ultra-low sulfur diesel.

The parallel there is the insensitivity of the agency to the experts

on both the fuel side and the engine side as to whether what they

are requiring is feasible. It is not the numbers themselves.

Mr. BURTON. We will talk to Ms. Browner about that tomorrow.

Mr. Ose.
193

Mr. OSE. In the interest of full disclosure, I know where Mr.

Simon works and I understand Mr. Slaughter, and I certainly am

familiar with where Mr. Hildebrand works. I just want to make, in

the interest of full disclosure, public the disclosure statement from

Mr. Hawkins, because I could almost surmise that there was some

impugning of the motives behind the testimony.

I just want to make sure that we are all clear on who—where

people get their livelihood. I specifically would like to enter into the

record the witness’s Truth in Testimony Disclosure as it relates to

Mr. Hawkins, as the others have.

Mr. Hawkins, I don’t quibble over where you come from, but I

do know that you have a somewhat different perspective. I just

want to make it clear that that exists.

Mr. BURTON. We will put that in the record.

Mr. OSE. I want to come to my friend, Mr. Hildebrand, finally.

Mr. BURTON. Are we about finished?

Mr. OSE. We are almost done.

Mr. BURTON. Very good.

Mr. OSE. Mr. Hildebrand works for Calpine, Mr. Chairman, and

Calpine is a private entity using private capital to try and produce

product delivered into a number of different electric markets, one

of which is California, with a facility under construction in my district.

It is a large facility. It went through a long public review process,

at the end of which we got a last-minute challenge from someone

in San Francisco. So we had an environmental document, we had

the board of supervisor, we had community testimony, experts on

all sides, and then we had a 4-month delay, the result of which was

that one person from 100 miles away came in and challenged the

problem.

Mr. Hildebrand was far more gentle in his description of what

happened, but that is the basic fact. To suggest that it was not subjected to public review out in the open is inaccurate. It was subject

to public review, a lengthy series of hearings, and in fact, it is now

under construction.

The point I want to discuss with Mr. Hildebrand is implicit in

all of these arguments, as it relates to electricity, is that if we

make more plants, then we have higher pollution, because the

plants generate pollution. But in fact, and—I will ask you the question, Mr. Hildebrand—the plant that you are building in Sutter

County, if you use x generation of megawatts in Sutter County versus x on existing plants somewhere else, what is the efficiency

ratio, if you will, in terms of pollution output from the respective

plants?

Mr. HILDEBRAND. As I alluded to earlier, the technological advances are dramatic. We are now capable of reducing nitrogen oxygen emissions, compared with the average fossil-fueled plant in operation today, nationwide by 97 percent. We can reduce sulfur dioxides by over 99 percent, CO2 by over 50 percent. That is global

warming.

The biggest issue we face when we try to site a power plant is

just that, Congressman. The common thought in the public’s eye is

‘‘power plant equals pollution.’’ With these new, modern power
194

plants, just the opposite is true. We actually have a cleaning effect

on the overall region’s air.

For the Sutter power plant, as part of the overall record for that

case upon which the decision was based by the California Energy

Commission, formal evidentiary hearings, a very litigious process,

we entered into evidence a study that was conducted for the Sutter

power plant. It looked at the whole region, what power plants were

in operation, what their heat rates were, their efficiencies, what

their permit emissions rates were; with that plant in operation and

with it out, what the net impact was of having a new single 600-

megawatt power plant in Sutter County on the overall California

regional economy and air pollution shed.

We were permitted 206 tons a year of nitrogen oxide emissions,

but by being so efficient, we were turning off plants for much of

the year in areas around us. The net benefit was a reduction in the

region of over 2,400 tons of NOx emissions annually.

Mr. OSE. Mr. Hildebrand, was this all disclosed in the process

through Sutter County? For instance, the environmental document,

did it have it in it or not?

Mr. HILDEBRAND. That was entered as evidence in the final

record. That was expert testimony.

I just want to touch real briefly, Congressman, on the economic

benefits. By reducing the cost of power statewide, by having this

lower cost project in the grid, the net impact in the first year of

operation of the Sutter power plant was forecast to reduce the cost

to California ratepayers by $400 million in its first year of operation.

Mr. OSE. The reason I brought this up is that we had in the

record what the positive, beneficial aspects to air quality were for

the nitrous oxide and the like. Now, Calpine is required to get a

PSD permit, prevention of significant deterioration.

Mr. HILDEBRAND. Correct.

Mr. OSE. That permit would allow them to construct the plant

in the first place.

One of the challenges we ought to explore tomorrow, and I am

hoping we do, is that EPA has spent the last 6 or 8 years trying

to issue the rule under which PSDs can be put forward. They are

updating the rule. They said in 1991 or 1992—they said in 1992

that they were going to issue a new rule. The new rule has not

been issued yet.

The net result is that Calpine cannot build plants, or anybody

else cannot build plants because they cannot get this permit. So in

effect, EPA stands like Horatio at the bridge saying no, no, no, the

net impact of which is we cannot reduce nitrous oxide in our air

quality.

Is that a——

Mr. HILDEBRAND. That is an accurate assessment.

Mr. OSE. Mr. Hawkins disagrees with you.

Mr. HAWKINS. The PSD rules have been on the books since 1980.

They are in effect. The agency in 1992 began a process to look at

ways to both streamline the existing rules and improve the environmental performance of those rules. That has been a stakeholder

process that has been going on.
195

There have been a number of occasions when the agency was

prepared to go forward with a change to the rule and the industry

objected to it. That is not preventing the permitting of facilities

under the existing rules. Those rules are going forward, and in fact,

it is the rare facility that actually has to get a Federal PSD permit.

Most facilities are able to either net out a review or avoid a Federal

new source review and instead go through a State permitting process. Certain large facilities do, of course, have to get a PSD permit.

But the environmental community has supported and urged the

prompt issuance of these rules. The problem is that, in my view,

there are many in the business community that do not like the outcome of an improved environmental performance.

Mr. OSE. The business community does not like the outcome of

an improved environmental performance?

Mr. HAWKINS. Because it places more obligations on them. That

is their fear.

Mr. OSE. That is a broad brush, Mr. Hawkins.

Mr. HAWKINS. I am reacting to the reactions that the business

community participants in this process have provided. They have

opposed the issuance of the draft regulations that the agency had

publicized for release and for publication. They objected to the fact

that one of the changes in the rules was that Federal land managers who were charged with protecting air quality in national

parks and wilderness areas would be given an opportunity to participate in the permitting process more effectively than they currently can, because obviously you don’t build a power plant in a national park, but you do build them near national parks, and the

problem is that those national park air quality readings have been

degraded as a result of the inability of the Federal land manager

to get the State permitting agency to pay attention.

So the agency proposed rules that would allow the Federal land

manager to be notified of these projects and to have an opportunity

to submit comments on the record that would not bind the State

agency, but the State agency would have to consider them.

The industry did not like those, and that has been one of the reasons that they have been opposing this. There are other reasons,

as well. But this is not the agency just sitting on its hands deciding

that it won’t issue a rule. It has been trying to come up with a rule

that will both improve environmental performance and streamline

the process. The difficulty is that people have not felt enough of a

need to come together and agree on a set of rules that everybody

will say, yes, that works for me.

Mr. BURTON. Mr. Ose, we can probably ask Ms. Browner some

of these questions tomorrow.

Mr. OSE. I think so. I do want to share with you one tiny piece

of information.

Mr. Hawkins mentioned the national parks. This actually deals

with national forests. I am aware, because of the relationship with

people in my district, that Calpine has been attempting to develop

a geothermal project on Federal leases in the Klamath National

Forest in northern California since 1996.

The NEPA review for the project by the Bureau of Land Management, the U.S. Forest Service, took over 2 years to complete. The

final environmental impact statement found that the project had no
196

unmitigatable impacts on the environment. That means they could

all be resolved. However, it would have a negative impact on spiritual uses of the area by Native Americans. Upon issuance of the

EIS in October 1998, the agencies—and that would be the Bureau

of Land Management and the Forest Service—then took 20 months

to issue their decision to approve the project.

The agency’s decision was then appealed by project opponents to

both the U.S. Forest Service and the Interior Board of Land Appeals, which rules on appeals involving BLM decisions. The U.S.

Forest Service issued its decision to deny appeals in September

2000, but the Interior Board of Land Appeals decided to issue a

stay, so that no development activity can proceed until it rules on

its appeal.

Now, this Interior Board of Land Appeals normally takes 18 to

24 months to make its decision. This is a project that has no

unmitigatable environmental impacts within the EIS, other than

the spiritual uses of the area by Native Americans. We are looking

at a 6-year permitting process at a cost to the proponent of $3 million for a relatively small renewable energy project that utilizes

natural energy production.

Mr. BURTON. I think Ms. Browner ought to be asked that question tomorrow.

Mr. OSE. I do want to say, Mr. Chairman, you have been very,

very generous with time today, and thank you for that.

Mr. BURTON. It is only because of your intellect.

Mr. OSE. I yield back.

Mr. BURTON. I would just like to ask Mr. Hawkins one last question. I see that you are getting—or Market-Based Energy Transformation gave you—I guess it was an EPA grant they received of

$1.13 million from 1996 to 1999, and Promoting Energy—Economies in Transition was another EPA grant for almost half a million

dollars, from the 1995 to 1999 time period.

Did you get new grants since that time from them, from the

EPA?

Mr. HAWKINS. We have grants from all the government agencies

that typically run about 2 to 3 percent of our annual budget in

total. I asked actually before coming up here this morning whether

we had the summary for the fiscal year that just ended, and I was

told we don’t have that information, but I will be happy to provide

it to you when we have it.

Mr. BURTON. Would you?

Mr. HAWKINS. I do know that our funding level is—for the last

year is not significantly different than it was in prior years. And

frankly, Mr. Chairman, as a matter of policy, organizational policy,

we have deliberately kept these funding grants and contracts from

the Federal Government at a very low level, precisely because we

did not want to be in a position where our policies—our policy advocacy could somehow be inferred to be a result or dependent upon

the existence of Federal grants or contracts. That is why we have

kept it at a very low level, only a couple of percent of our total revenue.

Mr. BURTON. That is interesting. Your total revenue must be an

awful lot, because this is $13⁄4 million.
197

Mr. HAWKINS. Over 3 years. Our annual budget is about $30 million a year.

Mr. BURTON. Is that right?

Mr. HAWKINS. Yes.

Mr. BURTON. Where do most of your funds come from?

Mr. HAWKINS. They come from foundations and membership.

Mr. BURTON. What is the organization? Is it the National Resources Defense Council?

Mr. HAWKINS. That’s right.

Mr. BURTON. Is that the organization that has this large membership that provides this revenue?

Mr. HAWKINS. Yes. We have about 400,000 members. We have

about 175 people on staff, four offices. We started 30 years ago, in

1970.

Mr. BURTON. That is a big organization. That is very interesting.

But you do get 13⁄4 million, and you say it is about the same levels

as it has been?

Mr. HAWKINS. That is my expectation. I don’t have the numbers,

but as soon as our New York office provides them to me, I will provide them to you.

Mr. BURTON. We would like to have that.

I want to thank all of you for being so patient. I really appreciate

your candor. Some of the things that you have talked about, Mr.

Slaughter and Mr. Simon and Mr. Hildebrand, we are going to address before the head of the EPA and the Energy Department tomorrow, and hopefully maybe we can streamline some of the problems that you have to face so you don’t have to face them quite as

severely in the future.

With that, we stand adjourned.

[Whereupon, at 6:21 p.m., the committee was adjourned.]

(199)

POTENTIAL ENERGY CRISIS IN THE WINTER

OF 2000

THURSDAY, SEPTEMBER 21, 2000

HOUSE OF REPRESENTATIVES, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

The committee met, pursuant to notice, at 12:35 p.m., in room

2154, Rayburn House Office Building, Hon. Dan Burton (chairman

of the committee) presiding.

Present: Representatives Burton, Gilman, Morella, Shays,

McHugh, LaTourette, Sanford, Hutchinson, Terry, Ose, Ryan, Waxman, Sanders, Kucinich, Tierney, Allen, and Schakowsky.

Staff present: Kevin Binger, staff director; Daniel R. Moll, deputy

staff director; James C. Wilson, chief counsel; David A. Kass, deputy counsel and parliamentarian; Sean Spicer, director of communications; Josie Duckett, deputy director of communications; S.

Elizabeth Clay, Nicole Petrosino, Nat Weinecke, and Carolyn

Katzen, professional staff members; Robert Briggs, clerk; Robin

Butler, office manager; Michael Canty, legislative assistant; Leneal

Scott, computer systems manager; John Sare, staff assistant; Maria

Tamburri, assistant to chief counsel; Corinne Zaccagnini, systems

administrator; Phil Schiliro, minority staff director; Phil Barnett,

minority chief counsel; Kristin Amerling, minority deputy chief

counsel; Ellen Rayner, minority chief clerk; Jean Gosa and Earley

Green, minority assistant clerks; and Greg Dotson, minority counsel.

Mr. BURTON. The hearing will come to order.

We are expecting other Members here shortly but, because of the

time constraints that Secretary Richardson and Ms. Browner have

today as well as Mr. Hoecker, we will go ahead and get started.

I will start off by letting my distinguished senior colleague from

the International Relations Committee, Mr. Gilman, make an opening statement.

Mr. GILMAN. I want to thank you, Chairman Burton, for this series of hearings on this oil crisis that is affecting all of our regions,

but particularly the Northeast region. I want to thank our witnesses, Secretary Richardson of our Department of Energy, our Administrator Carol Browner of the Environmental Protection Agency, and James Hoecker, chairman of the Federal Energy Regulatory

Commission. It is so good you are willing to come and share with

us some of your thoughts on how we can best resolve this crisis.

I just mentioned to Secretary Richardson that I just left a meeting with the Vice Minister of Energy in Venezuela who has offered

to be of help. I know that our Secretary of Energy has been meet-
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ing with some of the other OPEC nations. We, too, in our International Relations Committee are having bilateral meetings with

our OPEC nations, trying to convince them that this is not the way

to keep good will between our Nation and their oil-producing activities. Their manipulation of the market certainly does not help our

economy, nor our consumers, nor industry. We hope we can finally

convince them to open the spigot so that we are not going to be

confronted with all of these problems.

Energy Secretary Bill Richardson testified before our committee

and told us about his diplomatic efforts, and we hope that they will

produce results, and we look forward to hearing. Last winter, we

were told that the increase in the cost of fuel was a result of the

heavy winter. And over the past few months, the administration

told us that the prices of fuel went up due to increased travel this

summer and a host of other reasons. I think what we need most

for the American people right now is a strategic, forward looking

energy policy that takes into account that our seasons are not natural disasters, but something that occurs every year and is something that we should be planning for.

In the Short Term Energy Outlook for September, the Energy Information Agency reported that ‘‘Unless the winter in the Northeast is unusually mild and/or world crude oil prices collapse, substantial price strength gains for heating oil and diesel fuel are

highly likely.’’ Once again, it appears that mother nature has been

dictating the energy policy for the administration, rather than our

administration being proactive and creating and implementing both

a short and long term energy policy that takes winter weather into

consideration and plans for it rather than hoping for a mild winter.

So, we welcome having our Secretaries here and our Administrator here. Mr. Chairman, I again want to thank you and Ranking

Minority Member Waxman for conducting this series of hearings.

Mr. BURTON. Thank you, Chairman Gilman.

Let me start with the official business, besides your opening

statement, and say that a quorum being present, the Committee on

Government Reform will come to order.

I ask unanimous consent that all Members’ and witnesses’ opening statements be included in the record. And without objection, so

ordered.

I ask unanimous consent that all articles, exhibits, and extraneous or tabular material referred to be included in the record.

Without objection, so ordered.

And I ask unanimous consent that questioning in this matter

proceed under clause 2(j)(2) of House rule 11 and committee rule

14, in which the chairman and ranking minority member allocate

time to members of the committee as they deem appropriate for extended questioning, not to exceed 60 minutes equally divided between the majority and the minority. Without objection, so ordered.

Today, we return for our third day of hearings on problems in

our energy markets. Before I get into my statement too much, Ms.

Browner told me that her father, Michael Browner, is here today

and I wanted to acknowledge him. He is from Limerick, Ireland,

and now lives in Florida. Where are you, sir? Just wanted to recognize you and let you know we love Ireland.

[Applause.]
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Mr. BURTON. We welcome you to the good ole’ USA. I guess you

have been here for a while though.

Anyway, we are happy to have before us the Secretary of Energy,

Mr. Richardson, and Ms. Browner, the head of the EPA. We welcome you both back. You have been here before. We also have the

chairman of the Federal Energy Regulatory Commission, Mr.

Hoecker. This is the first time you have been before us, and we

welcome you.

Energy prices are soaring all around us—gasoline, home heating

oil, natural gas, electricity. We are seeing disruptions in supply.

And it seems like fires are erupting faster than we can put them

out. If this situation continues, every American family across the

country is going to feel the impact this winter and next summer.

No one is going to be immune.

Yesterday I spent some time talking about some of the early

warning signs we are seeing. But it is worth taking another look.

This summer, the price of reformulated gasoline shot up to over

$2 a barrel in the Midwest.

Last winter, the price of home heating oil more than doubled in

New England and the Northeast. This fall, inventories are at a 5-

year low. Prices are so high that distributors are going into the

winter with empty storage tanks.

The price of crude oil is now closing in on $40 a barrel. At the

beginning of last year it was $10 a barrel. Almost a 400 percent

increase.

The price of natural gas has tripled since last spring.

In Montana, electricity rates have gone up 500 percent for industrial users. We heard yesterday from a businessman who had to

shut down his business and lay off 300 people simply because they

could not pay their electric bills.

In San Diego, CA, electricity rates have tripled. Week after week,

the State of California has to turn off the power to many of its

large customers to keep the whole grid from crashing.

These problems are mounting one on top of another, and we have

seen no energy policy long term from this administration. What is

the administration going to do to help bring natural gas prices

down? What is the administration going to do to stop gasoline and

home heating oil price spikes? What is the administration going to

do to help restore stability to our electricity grid?

We need to deal with these problems. We have to have an energy

policy, and we have to have it right now. The administration simply does not have one.

Senior citizens living on fixed incomes cannot afford to see their

electric bills double or triple now or this winter. Low-income families cannot afford to pay twice as much to heat their homes. They

simply cannot do it.

We have some fundamental problems with our energy markets.

They are supply and demand problems. Demand keeps growing,

but supply is simply not keeping up. Oil refineries and electricity

generators, our transmission systems are practically bursting at

the seams. All it takes is one small disruption to put the entire system into a tailspin and send prices soaring. We saw that this past

summer in Chicago.
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Yesterday, we heard from professionals in the energy business.

We asked them about the obstacles they face, why they are having

trouble keeping up with demand. In almost every instance, the

story was the same—government over-regulation. In some cases, it

is State and local laws that create the problem. In many cases, it

is the Federal Government and Federal regulations.

We talked to a home heating oil distributor from New England.

He told us, first of all, that prices are so high that distributors cannot fill their storage tanks to get ready for the winter. They are

going into the winter with empty tanks. But he also told us one of

the strangest stories of red tape run amuck that I have ever heard,

and I have heard quite a few.

He brought with him four little bottles—and I want to show you

these bottles here, they are different colors, as you can see—four

little bottles of diesel fuel. They are all different colors. I asked him

to leave the bottles with me so I could put them on display and ask

you about them. The Federal Government makes the dealer dye

these fuels different colors and store them in different tanks, thus

necessitating more expenditures for tanks. The two red ones are

compliments of the Treasury Department. They are apparently for

off-road use. The Treasury Department makes the dealers dye

them different shades of red to make sure that no one cheats on

their excise taxes. The two clear ones are compliments of the EPA.

The EPA makes the dealers store them in separate tanks because

they have slight differences in their sulfur levels.

Dealers have a dwindling number of storage tanks because it is

not economical to build them anymore. At the same time, they have

to subdivide the tanks that they do have to hold these four different colored fuels. They have to have different trucks to haul the

different colors. And the kicker is this—they are all practically the

same fuel, the differences are very small.

I probably did not explain all of that very well. I have had it explained to me three or four times yesterday, but I am still not sure

that I get it. I do know this much, it is one of the more bizarre stories of government run amuck that I have heard. At a time that

they are facing a market that has been turned on its head, these

dealers should not have to deal with this kind of nonsense.

Now that is a fairly small problem. The problems that the gasoline industry is facing are much more serious. Under the Clean Air

Act and other Federal regulations, it is impossible to build a new

refinery in America. It has not been done in 25 years. In 1982,

there were 231 refineries in the United States. Today, that has

been reduced from 231 to 155.

Yet at the same time, refiners have to make as many as 15 different blends of gasoline to comply with the reformulated gas rules

during the summertime. So on the one hand, they cannot expand

their capacity to keep up with demand, and on the other hand, the

Federal Government is placing all of these additional demands for

specialty fuels on them.

We have a chart here of all the different fuels Citgo has to make

in one region. Can we put that up on the monitors? Do we have

that for the monitors? Oh, that is the only one we have is the big

poster. So I will draw your attention to the poster over there. You

can see the different colors. Their refineries are being stretched to
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the limit. Under those circumstances, all it takes is one little disruption to bring the whole system down. That is what happened in

Chicago and Milwaukee this summer and is going to happen again

unless we make some changes.

But that is not all. We were told yesterday that the EPA has a

raft of new regulations for gasoline and diesel fuels in the works.

They are going to take effect in the next few years. Industry is telling them that if they are hit with these new restrictions in such

a short time period, it is going to overload the system. It is going

to disrupt fuel supplies. Consumers are going to be hurt. But apparently not many people are paying any attention.

When I say that we don’t have a serious energy policy in this

country, that is exactly what we are talking about. Industry has offered solutions that would bring about dramatic reductions in sulfur and other pollutants, but that wouldn’t disrupt supply. The

EPA apparently is not interested. That is something that I and

other Members want to talk to both Ms. Browner and Mr. Richardson about today.

Yesterday, we heard from an executive who builds electric power

plants. His company is building a state-of-the-art facility in California. It sailed through the permit process. But under EPA rules, all

it takes is one person to file an appeal and the whole process is

brought to a screeching halt. One person who lived over 100 miles

away from this particular site filed an appeal and the project was

shut down for more than 4 months. And I want to tell you, the Sierra Club and everybody else was for the project, and evidently you

were. But the regulation that was in place allowed this one person

to shut it down for 4 months.

That has put an extremely large strain on California. The people

in California are now asking them to work double shifts to get that

generating capacity on line and they are trying to do it, obviously,

to avoid more blackouts now and in the future. Ironically, the EPA

has been working on new rules to streamline the appeals process

and weed out frivolous appeals since 1992. The new rules still have

not taken effect.

Now these are just a few examples of areas where the government can exercise a little common sense to help solve some of these

problems. But it is not happening. Nobody is saying we should repeal the Clean Air Act. Nobody is saying we should roll back the

clock. But how about just a little more flexibility for some of these

industries as we move forward?

These problems are not going to go away by themselves. The Energy Information Administration projects that natural gas prices

will go up another 23 percent this winter over current prices. They

estimate that home heating oil will go up another 31 percent this

winter. When families are seeing their electricity bills tripling, and

when businesses are laying people off because they cannot pay

their energy bills, something has to be done. If we do not develop

a tough energy policy and stick to it, we are just going to keep

lurching from one crisis to another.

The bottom line is this—we cannot bury our heads in the sand

anymore. We have to have a strong energy policy. Under this administration, we have not, unfortunately, had a strong energy policy. We have suffered for the past 8 years.
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We need a policy that will help us become more self-sufficient.

We have enormous deposits of oil and gas that are off-limits, and

I am going to ask questions about that in a few minutes. We have

sites in the United States that we have been told by experts, yesterday and before, that have tremendous deposits of natural gas

and oil that could be drilled in an environmentally safe way and

they are off-limits, we cannot get to them. And with all those reserves, some of them 50, 60, 70 years of reserves, it seems to me

that we ought to take another look at that.

We need to review some of these new EPA rules coming down

the pike to see if there is some flexibility that could be put in order.

I want to say once again to Secretary Richardson, Ms. Browner,

and Mr. Hoecker that we really appreciate your being here. We

have a lot of questions and I look forward to hearing your answers.

I understand that Secretary Richardson is under time constraints. We will try to meet his time constraints so that he can

get to other business that he has to do. But I do want to afford my

colleagues as much time as possible for questions. So we will start

with you, Mr. Richardson, and ask you for your opening remarks.

[The prepared statement of Hon. Dan Burton follows:]
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Mr. GILMAN. Mr. Chairman, may I ask permission to insert my

full opening statement in the record.

Mr. BURTON. Yes, that is fine.

Do other Members have opening statements real quickly? Oh, I’m

sorry, Mr. Waxman, of course you have one. And then I will ask

other Members if they don’t have an urgent need for opening statements, if they would put those statements in the record. But if they

do have opening statements they want to make, we will accede to

their wishes.

Mr. Waxman.

Mr. WAXMAN. Thank you very much, Mr. Chairman. We had a

hearing yesterday and at that hearing I said that we are looking

at a topic that has been neglected by the Congress for too long, and

that is the topic of an energy policy. I learned yesterday that there

is a bipartisan agreement that our Nation faces serious energy

problems. Members on both sides are worried about the impacts of

high energy prices on our constituents. And there are certainly

grounds for concern.

The price of crude oil has risen dramatically over the past year.

Last winter in the Northeast, the cost of heating a home with oil

soared. And prices could be even higher this year. And this summer in California, consumers in San Diego have faced electricity

bills that are two to three times higher than normal, and other

areas of the State have experienced brownouts.

Unfortunately, I also learned yesterday that there is no bipartisan agreement about the causes of these problems and how we

should address them. Chairman Burton and other Republican leaders blame the policies of the Clinton administration. Some even

claim that the Clean Air Act, one of our Nation’s most successful

environmental laws, is the cause of soaring energy prices. We had

one executive from an oil company tell us yesterday that we ought

to just let them drill off the coast of our Nation and set up oil wells,

that that would solve our problem.

These theories may make for good politics but they are basically

nonsense. The fundamental problem that our Nation faces is that

we are too dependent on fossil fuels in general, and oil in particular. This leaves us vulnerable to manipulation by OPEC and

threatens our economic and national security. And as we enter the

21st century, we are also burdened with an antiquated electric utility infrastructure.

Now these are not new problems. Gas lines in the 1970’s showed

us the dangers of excessive reliance on oil. But a combination of

factors—lower energy prices, anti-regulatory sentiment in the administration in the 1980’s and in the Congress in the 1990’s, and

a growing economy—have conspired to halt our progress toward alternative fuels, renewable energy, and energy independence. In

fact, we consume more oil, more gasoline, and more diesel fuel

today than we did 20 years ago.

The Clinton administration has proposed modest steps to reduce

our dependence on oil and other fossil fuels. The administration

has proposed tax credits to spur energy efficiency and research and

development partnerships with the auto industry to develop a new

generation of clean vehicles. And the administration has sent Con-
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gress electricity restructuring legislation. But even these needed

measures have met resistance in the Congress.

As a result, we have not formulated or implemented the kind of

comprehensive energy policy our Nation needs. The last time Congress enacted a comprehensive piece of energy legislation was 1992.

In recent years, the Republican leadership in Congress has even

gone so far as to call for the abolition of the Department of Energy

and the sale of the strategic petroleum reserve.

The States too have made mistakes. With hindsight, the deregulation efforts in California may have serious flaws, allowing energy

suppliers to manipulate the market and raise prices through the

roof.

But while we face serious problems today, the future could be

much brighter. Our energy policy may have stagnated, but technology has not. New energy technologies are on the horizon that

can strengthen our economy, protect our environment, and lessen

our dependence on oil and other fossil fuels.

Fuel cells, for instance, have made enormous strides in recent

years. This technology combines hydrogen with oxygen via an electrical chemical process to generate electricity without emitting any

air pollution or greenhouse gasses. The costs of this technology are

dropping and prototypes have been developed that can run automobiles or light buildings. And since fuel cells do not have to run

off of gasoline, they can reduce our dependence on foreign oil. I

would also like to point out that the distributor generation with

fuel cells avoids the need to construct high voltage transmission

lines that are often difficult to site and costly to build.

It will not be easy to shift course. We learned yesterday that big

oil and gas companies are making billions off of today’s high prices.

They hire countless lobbyist and give millions in campaign contributions to preserve the status quo. But if we have the political

will, we can craft a sound energy policy for our children, one that

relies on new technologies, energy efficiency, and renewable energy

to create new industries and jobs, provide greater energy independence, and protect the global environment.

The energy crisis of the 1970’s showed us the importance of developing forward-looking energy policies. But unfortunately, we

squandered that opportunity to reduce our dependence on oil and

implement needed changes in U.S. energy policy. I hope we will not

repeat that mistake again.

I yield back the balance of my time.

Mr. BURTON. Do other Members have opening statements that

they feel they want to make?

Mr. OSE. Mr. Chairman, I would be happy to enter mine into the

record, if it is agreeable to the other side to do all such statements,

so we can get to the witnesses.

Mr. BURTON. I always like to allow Members to make opening

statements if they choose to do so. The only problem is that Mr.

Richardson and Ms. Browner I think are under some time constraints and I would like to get to questioning as soon as possible.

But if you have an opening statement that you want to make—— Mr. OSE. I would be happy to submit mine to the record in the

interest of time.

Mr. BURTON. Without objection, so ordered.
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Anyone else have an opening statement?

Mr. Kucinich.

Mr. KUCINICH. I have an opening statement and I will submit it

for the record. I would just like to say that I represent Cleveland

and one of the things that is happening in our area is the price of

natural gas has gone up three times in a year.

When we look at the supply of natural gas, there seems to be

some real questions. I think all of us remember that the Federal

Energy Regulatory Commission presided over the deregulation of

natural gas wholesale rates, and we are now experiencing a steep

rise in natural gas prices, even before families are turning on the

heat.

We are also seeing the use of certain market mechanisms by natural gas companies where they are now offering long term contracts at reduced rates and variable rates to their customers while

they are asserting questions of whether they have an adequate

supply. The demand remains constant, the price goes up. In some

cases, demand has even exceeded that.

The question I hope to see answered in this hearing is what are

people supposed to do when it looks like Government is not adequately responding. The prices keep going up and up. I am hopeful

that we are going to see addressed in this hearing the question of

whether or not this free market approach that has been taken has

its limits. There are programs in place for low-income people, but

what about middle-income people and working people who are

going to see their whole way of living under attack with these

sharp price increases. Can Government just afford to stand on the

sidelines and let the natural gas companies and the oil companies

charge whatever they want. I hope not.

Mr. BURTON. Thank you, Mr. Kucinich.

Mr. TERRY. I’ll pass. I would like to give the witnesses a chance.

Mr. BURTON. Thank you. Ms. Schakowsky.

Mrs. SCHAKOWSKY. Thank you, Mr. Chairman. I will be very

brief.

I want to take this opportunity to publicly thank Administrator

Browner for her responsiveness to us during the time that the Midwest was suffering from differentially high gasoline prices this

summer, and her effectiveness in helping initiate an FTC investigation. Some may argue otherwise, but I do believe that the initiation

of that investigation itself helped to bring prices in line at least

with the rest of the Nation, as high as they may be.

And to Secretary Richardson, thank you for your responsiveness,

too. We had a meeting of our Energy Task Force with you and you

indicated your willingness to say that everything is on the table.

And to thank the Vice President for the initiation yesterday of the

concrete proposals that he made.

In Illinois, we are seeing natural gas prices at unprecedented levels. In July, they told us that last year’s bill of $410 would be $610

this year. They have revised that upward to $750 this year for the

same amount of gas that last year cost $410.

Finally, just a couple of sentences. If we want to point fingers,

I was not here when we deregulated natural gas but I was organizing around this issue with lots of consumers who were very concerned about it. It seems to me now that we are reaping the re-
211

wards of some of that. If we want to point fingers, we should look

at big oil and big gas and say how come, at a time when anyone

could predict shortages, that we were seeing a decrease in production and, remarkably, a dramatic increase in profits.

I think that we need to take steps as the Government, but it has

not been for lack of trying. I think now that we move more aggressively forward, that is important, but I think we need to question

big oil and big gas about their role. Thank you.

Mr. BURTON. It is the intent of the chairman to go ahead with

the hearing and have Mr. Shays take over the Chair when he

comes back. So if people want to go vote and come back to expedite

the hearing, that would be fine.

Mr. SANDERS. I will be very brief. No. 1, I want to thank our

guests for being here, and thank both of them for the excellent

work they are doing. Thank Mr. Richardson for meeting with the

New England delegation yesterday, and Ms. Browner for the outstanding work she has done for so many years.

I just want to inform both of them, they may or may not know,

that well over 100 Members of Congress from both parties sent a

letter to the President and congressional leaders outlining six basic

points that we would like to see action on, and action on immediately.

No. 1, Mr. Richardson, thank you for your efforts in moving the

Northeast Home Heating Oil Reserve forward. That is a request

that we made to you last year and the administration has moved

actively on that. I know that you need now authorization from the

Senate so there can be a trigger mechanism so that President can

release that oil. We have got to give that to the President.

No. 2, we must release oil from the Strategic Petroleum Reserve.

We have discussed that at great length. We have close to 600 million barrels sitting out there. There is an emergency. Middle-class

working families, elderly people cannot afford to see prices go higher and higher. Let us release some of that oil. That is why it is

there.

No. 3, I believe the administration has got to be more vigorous

in negotiating with OPEC. Americans lost lives bringing the Kuwait ruling family back into power, defending Saudi Arabia. They

cannot turn their back on us at a time of need and cut back production.

No. 4, with soaring prices, there must be a significant increase

in LIHEAP funding and the President must release as soon as possible a substantial amount of emergency LIHEAP money so the

people have the opportunity of buying oil before prices really hit

the roof.

Fifth, we all agree that we need much more vigorous long term

energy conservation. We are more dependent on the Mideast now

than we were 25 years ago. Ms. Browner, you and I discussed this

a couple of months ago. Vermont is beginning to try to do something. We can significantly lower the amount of energy that we are

utilizing in this country. It is an outrage that we are not.

Let’s go forward in those areas. We should give you the tools, you

should be vigorous in expounding that.

Mr. Chairman, thank you very much.

Mr. BURTON. Thank you, Mr. Sanders.
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We have a custom here of swearing in our witnesses. Would you

please rise and raise your right hands.

[Witnesses sworn.]

Mr. BURTON. Secretary Richardson, do you have an opening

statement?

STATEMENT OF BILL RICHARDSON, SECRETARY,

DEPARTMENT OF ENERGY

Secretary RICHARDSON. Chairman Burton, I want to thank you

for the responsiveness and graciousness that you have undertaken

with my schedule today. I appreciate it.

Mr. Chairman, our energy policy is based on: market forces, not

market making; diversity of supply, and robust diplomatic relations

with energy producing countries; on improving production and use

of traditional fuels through new technology; it is based on diversity

of energy sources, with broad investment in alternative energy

sources; it is based on increasing energy efficiency; and, last, in

preserving and fortifying our insurance policy against supply interruption, and that is our Strategic Petroleum Reserve.

Mr. Chairman, we have published two statements of our national

energy policy in the past few years. These documents serve as blueprints for our energy policies that we have put forward by the administration. What we need now is a bipartisan energy policy to

deal with the energy problems that many of you so ably outlined.

The main problem we have is volatility. Mr. Chairman, we need

such over-arching policies, especially today. In the past year, we

have seen substantial volatility in our energy markets. We have

endured supply and price problems in heating oil, in gasoline, and

in electricity. The year has not seen a season go by without an energy challenge. Every region of the country has shared in the increase in crude oil prices, and many regions have experienced specific problems on energy supplies.

It is essential that we recognize the importance of integrated, diverse energy supply and demand policies. Let me also state, Mr.

Chairman, in this robust economy, in the last 7 years, energy demand in this country, partially because of the robust economy, has

increased 14 percent. This has been an important factor.

With oil and gas markets, as you know, part of the administration’s efforts to address market imbalances, I have talked extensively with oil producing nations. OPEC and other producers have

heard our concerns and have boosted their output three times, with

the most recent increases to come on line in October.

Our latest data shows that there are about 3.5 million barrels

per day more oil on the market than at this time last year. That

is a significant addition to the world market. And according to the

Energy Department’s Energy Information Administration, the latest addition of 800,000 barrels per day, along with boosted production from non-OPEC producers, should enable the oil industry to finally begin rebuilding global stocks, which has also been a problem.

I say ‘‘finally’’ because, while more oil has come into the markets

over the past year, demand has grown much faster than anticipated, as I said, increasing by 14 percent in recent years. And as

demand has absorbed additional supply from the market, the oil in-
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dustry has been unable to refurbish stocks, even with, for example,

U.S. refiners working at 96 percent of capacity.

These factors have combined to result in a number of price increases across the range of petroleum products. We see this in the

crude market, which closed yesterday at $37.20, one of the highest

prices in a decade. We are seeing this at the gas pump, where drivers are paying an average of $1.56 per gallon, up over 30 cents

from last year, but down 12 cents from this past June when you

held your hearing.

And with distillate reserves already at levels far lower than

usual for this time of year, about 20 percent below last year, we

are facing the potential for another heating oil shortfall.

The administration is taking steps to meet these energy challenges. Most notably, the administration took the step of creating

a 2 million barrel Northeast Heating Oil Reserve, to be used to

augment supplies if they are needed. Sites have already been chosen and contracts for the oil were let last month, and oil is coming

into the reserve.

Mr. Chairman, let me be clear that we need the Congress to approve a reasonable trigger for releasing the heating oil in the reserve, as well as the funding to continue the reserve beyond this

winter. That has not happened yet.

We also continue to examine the option of swapping oil from the

Strategic Petroleum Reserve if the oil supply and supply conditions

warrant it. We have renegotiated oil delivery schedules for the

SPR’s royalty fill program so that millions of barrels of oil go into

the market instead.

Mr. Chairman, again let me remind you that Congress has delayed action to extend the Energy Policy and Conservation Act,

which authorizes the Strategic Petroleum Reserve and America’s

participation in the International Energy Agency. We need to get

that work done.

The administration has taken other aggressive measures. You

will recall that to help American families heat their homes last

winter, the President released all emergency Low Income Housing

Energy Assistance funds available for the year. He also asked Congress for $600 million more to replenish the reserve, funds which

were just approved in July.

Still, the House and Senate have underfunded our fiscal year

2001 request for weatherization assistance. Mr. Chairman, we have

found this to be an effective way for families to lessen their demand for heating oil and electricity and, in turn, lessen their winter energy bills. We need to have this critical relief increased in

conference.

We also reestablished an Office of Energy Emergencies at our

Department to coordinate with the States and other Federal agencies regarding energy-related crises. This helped us during the

summer when electricity demand was high. We addressed the issue

of supply through increased support for tankers; Small Business

loans for distributors and other small businesses impacted by high

prices; and encouraged refiners to increase production.

We have some budget needs. Mr. Chairman, we have these needs

and they are a priority.
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As I mentioned to you before, we have worked hard to escalate

domestic production of oil, to cultivate alternative sources of energy, and amplify energy efficiency, especially in transportation. In

fact, thanks to our vigorous research and development efforts, we

have taken recent strides on this latter point, strides that will help

reduce our dependence on foreign oil, continue to lessen pollution,

and keep our economic engine humming at home and in the world

marketplace.

For example, a major milestone is the Partnership for a New

Generation of Vehicles, where recently we have auto makers unveiling three concept cars which may reach 80 miles per gallon in

3 or 4 years.

At the Department, we just announced the third and final part

of our heavy vehicle truck research program. High efficiency, clean

diesel engines for 18-wheelers, whose drivers have been hit hard by

high oil prices. And a research project was recently launched with

the heavy-duty vehicle industry to develop more energy-efficient

trucks over the next 5 years, from pickups and SUVs to 18-wheelers.

As you know, Mr. Chairman, we are accelerating work in natural

gas, which has emerged as a competitive and critical fossil energy

resource. Our Energy Information Administration forecasts that demand for natural gas will grow by more than 4 percent in just 1

year.

So this is what we are doing: Working with the Interior Department and other agencies on simplifying access to public lands; we

have an interagency working group meeting at the White House to

pursue proposals on access to natural gas; and the administration

is working to streamline environmental review processes, develop

regional assessments of oil and gas resources, and advance technologies to produce on Federal lands.

In March, the President proposed tax incentives for oil and gas

production, delayed expense of what is called GNG expensing

which is more drilling for natural gas.

We need your support so we can do even more to get this relief

to consumers.

Earlier this year, the President sent a letter to the Majority

Leader of the Senate urging the Congress to work with the administration to enact the President’s pending energy proposals as soon

as possible. One chief component of the President’s energy initiative is a $4 billion tax package of tax incentives to encourage domestic oil and gas production, and for consumers to purchase more

efficient cars, homes, and consumer products. While this package

contains a number of viable solutions to our current challenges, solutions to be found right here in the United States, Mr. Chairman,

the proposal has been idled in the Congress for more than 2 years.

The President has also repeatedly asked for increased investments to meet our energy needs. In fiscal year 2001, the President

advanced a $1.4 billion investment in Energy Department programs, in energy efficiency, renewable energy, natural gas, and distributed power systems. But still the Congress has not backed

these investments, approving just 12 percent of the increase over

the last 7 years. Mr. Chairman, this simply is not acceptable.
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Right now, the President is requesting an additional $19 million

from Congress for low income home weatherization, funds which

were not included in the Supplemental Appropriations Act.

On electricity restructuring, I would like to finish by expressing

to you how disappointed I am that it appears Congress will adjourn

without acting on electricity legislation, which Mr. Waxman mentioned.

The President submitted comprehensive electricity restructuring

legislation to Congress 2 years ago. Unfortunately, the 106th Congress has failed to act on this or any other piece of electricity legislation. And you yourself mentioned the problems we are having

with our electricity grid.

Mr. Chairman, the Congress’ inability to adopt restructuring legislation has helped produce some of the difficulties seen in electricity markets in some parts of the country. Over the last several

summers, some utilities struggled to meet demand. They were

forced to cutoff interruptible customers and plead consumers and

businesses to conserve energy. In some instances, they were forced

to implement rolling blackouts to avoid complete collapse.

Mr. Chairman, as in our oil markets, unparalleled economic

growth has spawned burgeoning demand that outstrips supply.

And I know Chairman Hoecker is an expert on this issue and I am

sure he can tell you more.

We have seen the price spikes in California, the Pacific Northwest, and parts of New York. Enactment of Federal electricity restructuring legislation, as proposed by the administration, along

with several bipartisan proposals, would go a long way toward resolving this problem. It would help do so by establishing a Federal

‘‘rules of the road,’’ where generating companies have the certainty

they need on whether to invest in new power plans and transmission facilities. Moreover, our bill would help produce a more efficient interstate transmission system to enable the free flow of

power to where it is needed the most. The legislation would also

provide a funding source to make up for utility cutbacks in energy

efficiency programs.

In light of the problems we face, I would urge the Congress to

reconsider its inaction on electricity restructuring.

Mr. Chairman, again, thank you for listening, and thank you for

accommodating our schedules.

[The prepared statement of Mr. Richardson follows:]
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Mr. BURTON. Let me just say before we go to Ms. Browner, we

asked all of our witnesses to submit their statements to us ahead

of time. Unfortunately, I guess you could not do that. You wanted

to leave, Mr. Secretary, by 2 p.m. today because you have an appointment. Because the statements were not given to us, and because they take so long, it may necessitate us having another hearing next week, because we do have a lot of questions and we really

need to get those answered for the American people. And because

of the time constraints that you are under today, we may not be

able to get that done. So I wanted to apologize to you in advance,

because we are going to get the questions answered, and I am sorry

that it has taken this long.

Mr. WAXMAN. Mr. Chairman, maybe Mr. Richardson can stay

longer, because this is an important hearing. Or, if we need to, we

will have another one. But we did have a very, very long opening

statement by the Chair, and I followed him and made an equally

long one, not quite as long. But it is not fair for the witnesses to

have to sit through all of our openings. But Mr. Richardson was in

the House, he knows the way it works. So maybe he can stay a little longer, because we ought to get those questions asked and answered at this hearing.

Mr. BURTON. Absolutely.

Mr. WAXMAN. If he cannot, maybe we can get him back.

Mr. BURTON. That is absolutely correct.

So, Ms. Browner, you are recognized.

STATEMENT OF CAROL BROWNER, ADMINISTRATOR,

ENVIRONMENTAL PROTECTION AGENCY

Ms. BROWNER. Thank you, Mr. Chairman, members of the committee. It is a pleasure to be back before this committee. I welcome

this opportunity to discuss the administration’s belief that protecting the health of the American people is an essential part of good

energy policy.

This administration’s policy is to protect public health and to

promote a healthy economy. We believe that this is clearly achievable. We believe that we have demonstrated it over the last 71⁄2

years. We have achieved some of the greatest environmental

progress in the history of this country and, at the same time, we

have grown our economy in unprecedented ways.

I think a powerful example of this hand-in-hand relationship between a healthy economy and a healthy environment is provided by

the results of the work that this Nation has done under the Clean

Air Act Amendments of 1990. We are aggressively, and sensibly,

implementing this landmark public health protection statute,

which was enacted by Congress with bipartisan support and signed

into law by then President Bush. The result of this unprecedented

legislation is that we are achieving real public health benefits in

ways that are consistent with a healthy economy and take into account the need for reliable energy supplies.

Over the past decade, we have made great strides in cleaning the

air we breath while our economy is growing. Mr. Chairman and

members of the committee, if I might refer you to this chart. This

tells an incredible story. Between 1990 and 1999, the Nation’s

gross domestic product increased 32 percent. Fossil fuel consump-
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tion increased 13 percent. Vehicles miles travelled, the distance,

the miles we are driving our cars, increased 30 percent. At the

same time, the aggregate emissions of the six predominant air pollutants decreased by 9 percent. Now that is a real success story.

We are growing our economy, we are using more fuel, we are driving further, and yet our air is getting cleaner.

In addition, an unprecedented number of cities have met public

health based national ambient air quality standards since 1991; 39

of the original 42 carbon monoxide areas are now in compliance, 59

of the original 98 ozone areas, 68 of the 85 original fine particle

areas, all designated non-attainment, meeting standards today. Important public health standards.

The human health benefits of these emissions reductions required by Congress in the 1990 amendments are dramatic. The annual benefits in the year 2010, when the law is fully implemented,

will include 23,000 fewer incidences of premature death, 20,000

fewer cases of chronic bronchitis, 47,000 fewer cases of acute bronchitis, 22,000 fewer respiratory-related hospital admissions, 42,000

fewer cardiovascular hospital admissions, 4,800 fewer emergency

room visits for asthma. The list goes on and on. The public health

benefits of cleaning our air are dramatic. They are real.

Now the Clean Air Act recognizes that we cannot meet the public

health goals set by that important piece of legislation without reducing air pollution from sources such as coal fired power plants,

gasoline, and diesel fuels. I think it is important to note that there

are many in industry that have done their part, that have risen to

these challenges.

The utility industry dramatically cut acid rain-causing emissions

from powerplants while net electricity generation increased 28 percent. Oil refiners were successful in producing cleaner gasoline required by the Clean Air Act while the amount of gasoline supply

during the 1990’s continued a steady increase. Companies such as

BP Amoco have even gone beyond the legal requirements, committing to produce the new EPA required low-sulfur clean burning

gasoline 3 and 4 years earlier at current prices. Likewise, a number of our automobile manufacturers agreeing to lower their tailpipe emissions earlier.

Why are they doing this? Not just because it is good for the

public’s health, it is good for the bottom line. It is good for their

business.

In pursing the Nation’s public health goals, EPA takes the issue

of adequate energy supplies very seriously. Mr. Chairman, my written testimony contains a number of specific examples in which EPA

has provided regulatory flexibility in energy supply emergencies

and has pursued specific actions to reduce peak energy use. In addition, we work with industry and other stakeholders to craft flexible rules that allow for common-sense, for cost-effective compliance

strategies. Let me just share with you one or two examples.

Last year, the President announced our new tier II tailpipe emissions standards and low-sulfur gasoline requirements. These are

reasonable, they are flexible, they are cost-effective. The rule gives

refiners substantial lead time, on the order of 4 to 5 years. For

most refiners the phase-in begins in 2004 and continues through

2006. Small refiners get until 2008, and can apply for some addi-
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tional time if they can demonstrate a need. Flexibility is also provided through annual averaging and trading of credits among refiners, and credits for early reductions. There is a phase-in program

for gasoline sold in certain western States. Again, demonstrating

that you can both set and meet tough public health standards and

provide flexibility to industry in order to meet those standards in

a cost-effective manner.

We are also promoting a flexible approach for achieving required

NOx reductions in the eastern part of the country. These are the

NOx that travels, that contributes to the regional ozone pollution

problems. To further assure reliability, EPA is allowing States to

use a credit trading program. We are encouraging them. We would

ask Congress to give us some more authority so we can do that

more expeditiously. But in the meantime, we are working with

States to use what we have learned from the very successful, very

cost-effective acid rain emissions credit trading program and bring

that to bear on NOx and other air pollutants.

Mr. Chairman, members of this committee, no one is saying that

public health protections, pollution reductions are without cost. But

reducing pollution is an invaluable investment in the health of our

citizens and our environment. Time and time again, our air regulations we have been able to show the benefits far outweigh the cost.

For example, the new tailpipe emission cleaner fuel requirements, it is as if we are taking 164 million cars off the road. But

they are going to be there, each and every one of them. They are

just going to be cleaner, they are going to be polluting less. When

we look at the cost of meeting those standards, we estimate that

for every $5 invested, we will get $25 back in environmental and

health benefits for our families. We estimate that the acid rain program in the 2010 will have $48 billion in health benefits from reduced particle matters. We are talking about the particles that become embedded in the lungs, particularly of our senior citizens,

they can’t spit them out, they can’t cough them up, it can result

in premature death.

In 1999, EPA completed an extensive congressionally mandated

analysis of the cost and benefits of the Clean Air Act of 1990. Although, obviously, any such analysis involves all of the normal economic uncertainties, the central finding is that the benefits of that

act, as we have worked to implement that important piece of legislation, have exceeded the cost of meeting environmental standards

by a ratio of 4 to 1.

Mr. Chairman, if I might just in my time remaining highlight

some of the opportunities that I believe are available to this Congress to help address energy supply issues.

Energy efficiency. Since 1992, EPA and DOE’s Energy Star programs have been helping businesses and families select energy-efficient products that save money on energy bills while also helping

to conserve energy supplies and reduce air pollution at peak periods. Our Energy Star program has eliminated the need for almost

10,000 megawatts of peak summer generating capacity—10,000

megawatts—through energy efficiency. We have also through this

program saved businesses and consumers more than $4 billion on

their energy bills, and we have reduced air pollution.
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Now Congress has the opportunity to fund this program. Unfortunately, neither the House nor the Senate in the EPA appropriations bill has thus far provided the dollars to EPA which the President has requested—a $124 million increase for technologies, for

programs like Energy Star. And both the House and the Senate

thus far have failed to fund this incredibly cost-effective, sensible,

reasonable program.

If Congress had fully funded past requests for EPA’s Energy Star

programs, electricity demand this summer could have been up to

3,000 megawatts lower than it is currently, equivalent to the power

output of more than 10 average sized powerplants.

Congress also has the opportunity to promote energy efficiency

by supporting the President’s request for $85 million for a new

Clean Air Partnership Fund. This has not been included in our appropriations bill thus far. This is an initiative that would provide

much needed dollars to State and local governments to work with

their businesses to develop innovative energy efficiency strategies

such as investments in clean distributed power sources that do not

harm the air their citizens breath, but do increase power supply.

In addition, Mr. Chairman, I would like to renew the administration’s call for Congress to expeditiously send to the President comprehensive legislation to phaseout the fuel additive MTBE from our

cleaner burning gasoline. In June 1999, Mr. Chairman, EPA’s Blue

Ribbon Panel concluded that MTBE poses risks to our drinking

water. EPA believes that Americans deserve both clean air and

clean water and never one at the expense of the other.

We are encouraged, the administration, EPA is encouraged that

the Senate Environment and Public Works Committee has taken

action on a bill that is consistent with the legislative principles

that we put forward earlier this year. The current oxygenate requirements in the Clean Air Act should be replaced by a flexible

renewable fuel standards. This would allow all of us to work together to promote the use of ethanol, to do what we can to drive

the market for biofuels, for biomass. We have tremendous opportunity—rice straw, wood waste, other biomass. That can become an

important part of our energy supply in this country. This legislation would not only protect water quality, it is good environmental

policy, it is good energy policy, it is good foreign policy.

In closing, Mr. Chairman, we recognize that fuels, electric power,

clean air are important to economic well-being and the health of

the American people. We look forward to working with all Members

to move forward, as we have done in the past, to continue to set

the strong public health environmental standards that the citizens

of this country demand, to do it in common-sense, flexible manners.

Mr. Chairman, if I might, several points have been raised by you,

several points were raised yesterday. I look forward to sharing with

this committee the rest of the story. I am sure it is important to

all of us that we have a full record of exactly what has happened

so that as we move forward we do so with a base of knowledge.

Thank you again for the opportunity to be here.

[The prepared statement of Ms. Browner follows:]
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Mr. BURTON. Mr. Hoecker.

STATEMENT OF JAMES J. HOECKER, CHAIRMAN, FEDERAL

ENERGY REGULATORY COMMISSION

Mr. HOECKER. Thank you, Mr. Chairman, Congressman Waxman, and members of the committee. I want to express my thanks

for inviting an energy regulatory perspective to this hearing today.

And I commend you for holding it. It is timely and there is a clear

need to publicly examine the current price to consumers, the various forms of energy, and how we ought to respond to those prices

through markets, technology, and public policy.

I have spent much of the past several weeks testifying at or conducting hearings on the challenges we as a Nation face in this

area. We have heard stories of genuine hardship coming from high

electricity prices in California, and the expectation that the price

of natural gas will stretch the budgets of many households and

businesses this winter.

Yesterday I was in Ohio with Governor Taft and Alaska Governor Knowles discussing the causes and probable results of the

gas deliverability squeeze. In that case, many of the experts

present, me included, stated their belief that natural gas reserves

were adequate and that gas markets were capable of responding to

stabilize natural gas prices at lower levels over the next year. I

should note for the committee that gas markets have produced almost $200 billion in savings for the American consumer since 1985,

and I expect this to continue.

Electricity markets pose a different set of issues for regulators

and other public policymakers. That industry is undergoing a fundamental transition at the moment. It was clear in our hearings in

California that the electricity market there was dramatically out of

synch with the needs of the digital economy, the expectations of

public policymakers, and, most importantly, the economic wellbeing of average electricity customers in that State, and in San

Diego, in particular.

The causes and proposed solutions are complex and they include

the dramatic surge in demand growth in California. But it has become clear that the California electricity markets are not competitive during periods of peak demand, and that the efforts of State

and Federal Governments and even private corporations to anticipate and avoid this crisis have simply proven inadequate. There is

plenty of responsibility for this market and its prices to go around.

The FERC, which oversees the wholesale portion of all domestic

markets including California’s, has been aggressively investigating

the problem and looking for appropriate solutions. If that means

devising new ways to thwart market power, we will try to do that.

If that means changing market rules and wholesale market structures, then we will do that. If it means imposing stricter controls

on the ability of utilities or generators to collect market rates, then

we will do that. And if it means making rates subject to refund

until we can be reasonably confident Californians will get price signals instead of price shocks, then the Commission is likely to move

in that direction.

In the meantime, we have in effect capped wholesale markets in

that State. The State of California has fortunately also lifted its re-
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strictions on the ability of utilities to hedge in the market when

they buy power, and has adopted legislation to get retail rates back

to normal levels and to expedite the siting of new generation facilities.

I want to assure the committee that the FERC is, indeed, pursuing a consistent energy policy. It is, in fact, spelled out in our strategic plan, within the limits of our jurisdiction and within the limits of our role as an independent regulatory agency. The Commission has for many years promoted competitive energy markets.

Some call this deregulation. I don’t happen to be one of them. I

agree with Congressman Kucinich that there are indeed limits to

what free market approaches can obtain. But having said that,

lighter-handed regulation of energy markets is part of our approach. Monitoring markets to ensure they are competitive, efficient, and fair is another element. A third component is to ensure

adequate energy infrastructure, such as natural gas pipelines, consistent with sound environmental practices and environmental law.

We believe that this is a recipe for stable prices and energy security in the long-run. Today, Mr. Chairman, I believe that the FERC

is doing all it can.

However, we need Congress’ help. I have long advocated restructuring legislation that would untie our hands in promoting sound

electricity markets. My recommendations would provide: First, that

FERC have jurisdiction over all electric transmission in the country. We do not currently.

Second, that FERC have oversight of electric reliability. We right

now have no such authority.

Third, that we have expressed authority to promote regional

transmission organizations to govern the operation of the bulk

power market.

Fourth, we want broader FERC authority to remedy market

power abuses in energy markets. Currently, that authority is limited.

To that list I might now add additional FERC authority to retroactively correct extraordinary wealth transfers that can happen

when prices unexpectedly skyrocket and consumers cannot get out

of the way. We right now do not have that authority either.

Mr. Chairman, I want to thank you again for inviting me here

today. I will be happy to try and field your questions.

[The prepared statement of Mr. Hoecker follows:]
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Mr. BURTON. Thank you, Mr. Hoecker.

We will now go to our questioning. Let me start off by saying—— Mr. WAXMAN. Mr. Chairman, may I make a request. We were

going to have a half-hour each side of the panel. Why don’t we do

15 minutes each side of just Mr. Richardson, see if we can accommodate his schedule, and then go back to the other witnesses.

Mr. BURTON. Well, even if we did 15 minutes on each side, we

would not be able to get through all of our questions that we have

today. I think, because of the time constraints Mr. Richardson is

under, we have no option but to have another hearing and to bring

him back.

Mr. WAXMAN. Perhaps so. But he is trying to deal with an energy

crisis. I think the country would be better off if he were dealing

with that than sitting in the hearing answering questions that

might be asked now and answered now so he can get on with his

job.

Mr. BURTON. Mr. Waxman, there is an election coming up. If you

become chairman next year, you can run this committee. But right

now, you are not chairman.

Mr. WAXMAN. I gather what is happening is politics to be sure

you are chairman.

Mr. BURTON. Mr. Chairman, Mr. Waxman—[laughter]—we

would like to get on with the business at hand. Do you have any

more comments to slow us down?

Mr. WAXMAN. Mr. Chairman, may I inquire how we are proceeding?

Mr. BURTON. We are proceeding under the regular order.

Mr. WAXMAN. Is that a half-hour each side?

Mr. BURTON. That is absolutely correct.

Mr. WAXMAN. So before Democrats can ask a question, you will

go for a half-hour, but then we will have a half-hour.

Mr. BURTON. Mr. Richardson will then depart after their questions.

Mr. WAXMAN. Well is it your hope that he will depart after your

questions so we cannot question him?

Mr. BURTON. Regular order.

Mr. WAXMAN. It appears so.

Mr. BURTON. Mr. Richardson, we had 231 oil refineries and it

has declined down to 155 oil refineries. You said in your opening

statement that we are letting market forces dictate the price of oil.

When the oil industry people were here yesterday, they said one of

the problems that they have, they are operating at I think 96 percent of capacity right now, and one of the big problems that they

have is because they have not been able to build a new oil refinery

in the past 25 years. As a result, they are limited in supply they

can produce. And they tell me that they can build oil refineries and

gas production facilities that will comply with environmental

standards and keep the ecology clean, if the restrictions by EPA

and the Department of Energy are not so restrictive.

So I would like to ask you and Ms. Browner what we can do to

get more refineries in place to make sure that the demand is met?

Secretary RICHARDSON. Mr. Chairman, let me say that our policy

is to have a viable refining industry in this country. That’s No. 1.

A number of small refineries have closed in the past decade—poor
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economics and other investment problems. We have asked the National Petroleum Council, which is a group of energy executives, to

advise the Department of Energy, me on what we need to do to

have a viable refining industry in the country. They are expected

to complete a report for us this summer.

Now, it is our view, Mr. Chairman, that our refining capacity

right now is at 96 percent. It has gone up. We were concerned because it was in the low 90’s, it is now 96, some say a little bit more.

Total U.S. refining capacity has been expanding and becoming

more economically competitive. So what has happened also is new

refining capacity is likely to be at existing refineries along mainly

the Gulf Coast. So what we are seeing is refining capacity has been

added to existing refineries right now. That is how they have kept

pace with demand without building new refineries. Nonetheless, we

still are watching this very closely and we are looking forward to

the industry’s recommendations.

Mr. BURTON. Well, the industry was here yesterday. The indications from the industry was they would like to build new refineries,

they would like to increase capacity, and they cannot do it because

of environmental regulations. And they are very concerned about

that.

The other thing is, and I wish you would put up that natural——

Do you have a comment, incidentally, Ms. Browner, about that?

Ms. BROWNER. I do. I would like to respond, if the allegation is

for some reason public health air pollution standards stand in the

way of new refineries, I would like to respond.

Mr. BURTON. No, that is not what they said. They said they could

build refineries that were environmentally safe——

Ms. BROWNER. But that our rules were a problem.

Mr. BURTON. Yes.

Ms. BROWNER. I would like to respond to that allegation. May I?

Mr. BURTON. All right.

Ms. BROWNER. Thank you. I would like to make three points.

One is the same point that Mr. Richardson made, but we would

like to actually use a chart. In the last 5 years, while the number

of individual refineries, facilities has gone down, the refining capacity of the remaining 155–160 facilities has actually gone up. Part

of the reason it is going up is because we work with them to expand their those existing facilities and we do it in an expedited

manner, we do it in conjunction with the States.

I will give you an example. There are currently pending 12 permit applications to expand existing refineries, that is over the last

2 year period. Most of those permits, and they are issued by the

States with our concurrence, most of those permits have been

issued in 12 months. Of the 12 that have been received in the last

2 years, only 5 are currently pending, the others have been granted.

I will give you an example. We received one down in Texas in

March 2000. It will be done within the next 2 to 6 weeks. We received another one in July, we have asked for more technical information, we will then be moving forward. So we are moving through

the permitting process the expansion that the companies are deciding are best for them.
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The final point I would like to make, Mr. Chairman, is we are

always open to receive any permit application. We do not decide

what the applications should be, that is up to the companies. They

do it for a variety of reasons. In the last 25 years, not because of

the new Clean Air Act, not because of the old Clean Air Act, but

because of their business realities, they have chosen not to apply

for any new facility ground up but are rather expanding existing

facilities, and we are permitting those with all of the public health

protections.

Mr. BURTON. I know. But the argument that they made, Ms.

Browner, was that the environmental regulations, that they believe

are extraordinary, are such that they cannot do it in a profitable

way, and as a result, they have not been able to build those new

refineries.

But nevertheless, let me get on to another subject. Would you

put up that chart on the gas reserves. The gas companies, the natural gas producers said that their existing wells are producing at

lower and lower levels and they cannot meet the demand because

those wells are producing at lower levels.

Now we have, as you can see on that map, several very large gas

reserves in the continental United States. This is just in the lower

48, this is not showing what we have up in Alaska. But they told

us that if they could, and they can in an environmentally clean

way, drill these wells and get the oil, they said there is no question

that they can do it in an environmentally clean way and meet the

demand.

So my question is, why is it we are not drilling wells in those

areas which are off limits now because of the EPA?

Ms. BROWNER. I think three of the—— Mr. BURTON. Because of the Interior Department.

Ms. BROWNER. I do not want to answer for Interior. But I do

think it would be important to note—and natural gas exploration,

not home use of natural gas, residential use of gas, that does not

require any EPA permit. We are not involved in that process whatsoever. But exploration of natural gas in some instances may require a water pollution or air pollution permit from EPA.

Mr. Chairman, with all respect, I think three of the areas that

you are noting up there, I am having a hard time seeing this, but

I think three are actually offshore areas, and those obviously bring

with them particular issues of particular concerns, particularly to

the citizens of those areas, to the protection of their beaches.

Mr. BURTON. Let me get to Mr. Richardson because I am running

out of time, since he is in charge of energy policy.

The large reserve in the middle of the United States, if you excluded the ones that are offshore, according to the people who were

here yesterday, would provide a substantial amount of gas over a

long period of time, 10–15 years, if we were to drill that. And it

can be done in a very safe and environmentally safe way. Why are

we not exploring in that area?

Secretary RICHARDSON. Mr. Chairman, a lot of that is public

lands, that central area. Let me also mention to you, Mr. Chairman, that statistics for natural gas, we have had increased domestic natural gas drilling. We have I think a total now of domestic

drilling rigs are almost 800, the highest level in the last 15 years.
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And we have seen a nearly 60 percent increase in the production

of natural gas on Federal onshore land since 1992. I don’t know if

the map reflects that. We did open the natural petroleum reserve

in Alaska to gas development where we have 10 trillion cubic feet.

No, it is not on the map.

Oil production on Indian lands accounted for 25 percent of domestic production in 1999. But on natural gas, Mr. Chairman,

what happens is supply and demand dictate production levels.

Mr. BURTON. Let me just interrupt, because the gas producers

yesterday said that, and Mr. Hoecker may want to answer this too,

they said that they have their pipelines full at the present time,

I think 96 percent. They are concerned about additional pipelines,

No. 1; and No. 2, also getting more productive gas wells.

They say that the source is there. There is definitely a source of

gas. They could do it more efficiently. They said that more wells

could be drilled; 800 rigs out there right now simply isn’t going to

meet the demand. There are more wells that can be drilled. They

want to know why, and I do too, if this can be done environmentally safely, we are not doing it. So if you and Mr. Hoecker

could answer that, I think I am just about out of time.

Secretary RICHARDSON. Mr. Chairman, let me just add on natural gas, we have also proposed in the President’s package a tax

credit for natural gas drilling, it is called ‘‘geologic expensing,’’ which allows for better ability for the natural gas people to drill.

We think this is very important.

Mr. BURTON. Mr. Hoecker.

Mr. HOECKER. Mr. Chairman, that is a very accurate portrayal

of the amount of reserves we have, and in Alaska there is another

at least 35 trillion cubic feet of gas but no way to get it to the lower

48 except through some limited LNG facilities. Currently, we have

a deliverability problem, however. When prices collapsed a couple

of years ago a lot of people left the oil and gas production business,

a lot of wells were shut in, and production declined. It was a response to a variety of things that you can trace back to the collapse

of the Asian economy. But what that has meant is that we have

been using up that supply of cheap gas and have had very little

to replace it.

Now with gas prices escalating above $3, as the Secretary mentioned, there has been a dramatic increase in exploration, development. But there is a lag time of about 12 to 18 months. I do not

think that most interstate natural gas transmission systems are

full now, unless it means in the wintertime when they are taking

a lot of supplies out of storage. I think the situation is going to normalize itself, but the situation we are in today is the direct result

of the price collapse a couple of years ago and it is taking the gas

industry some time to recover.

Mr. BURTON. Mr. Shays.

Mr. SHAYS. Thank you. Welcome, all of you. I am somewhat reluctant getting into this issue because, if we are honest with each

other, it is Republicans and Democrats who are in this together

and both share blame. The administration shares blame, and Congress obviously has things it can do.

But as we do our specific issues, I am just interested to know,

the Energy Department, which does not have other distractions, I
266

am just interested why it was not giving the clarion call that we

were going to be having this problem. Why, as you admit, Mr. Richardson, why was the administration caught flat-footed on this?

Secretary RICHARDSON. Well, first of all, I never admitted that.

Second, we are not flat-footed. In your region, the domestic heating

oil crisis is the biggest problem. We have been pushing and we

have been saying that we needed a Northeast Heating Oil Reserve,

we have been saying that stocks are low, we have been working

with the home heating oil people and transportation, we have

asked for authority from the Congress to deal with this reserve

which is in your State, and we need it passed.

Mr. SHAYS. Let me just remind you though, you did have a meeting with New England Members, Mr. Sanders was leading the

charge and he was asking both that we utilize the Strategic Petroleum Reserve and he put forward the home heating reserve bill,

and to which we signed on. It was not an initiative of the administration. It was initiated by Mr. Sanders and which we all readily

agreed. It surprised me that it kind of came out from a rank and

file member and not from the administration.

But let me ask you this, why are you blaming Congress, and specifically Republicans, for the fact that the Energy Policy Conservation Act has not moved forward when it is Ms. Boxer that is holding up the bill? The last time I checked she was a Democrat.

Secretary RICHARDSON. Mr. Chairman, first of all, I did not

blame any Republican. I said the Congress has not passed this.

There have been a number of holds. You mentioned a Democratic

member, I was not aware of that. The other holds have not been

by Democratic Members. But I do not think we need to dwell on

that. We need this legislation passed. I need full authority for the

trigger on the Northeast Home Heating Oil Reserve, for the Strategic Petroleum Reserve. We need to pass it. I do not care what is

holding it up, we just need to get it done. This is for the national

interest. I am not trying to point fingers, I am just stating a fact.

It is not authorized.

Mr. SANDERS. Mr. Shays, would you yield?

Mr. SHAYS. No. If I could just continue my questions, please.

Yesterday we heard testimony about changes in the domestic oil

marketplace since the 1980’s resulting in a far less vertically integrated supply and distribution system. In your view, just who or

what is ‘‘big oil’’ and what is their role in today’s domestic energy

market?

Secretary RICHARDSON. The FTC conducted an investigation

about why the price differentials were so high in some parts of the

country. I think what the FTC in their preliminary investigation

concluded, and that is not a complete report because they still are

working on it, is that environmental factors, the reformulated gasoline 3 to 6 cents, were not the cause for this increase, for this spike.

The causes were several—transportation problems, pipeline problems, market problems. I think that was perhaps what your question refers to.

Mr. Shays, I am not here to blame any industry or any Members

or any causes. I just think that we need to work together to have

a comprehensive policy that deals with supply and that deals with

demand. We have 3 weeks to go in the Congress and there are a
267

number of necessary steps that need to take place. In the same

vein, the executive branch also has authority to take several steps,

some of which the President is considering, that deal with the

present crisis.

Mr. SHAYS. The President and the Vice President, which you

refer to as the Clinton-Gore administration, has been making

strong attacks against ‘‘big oil.’’ I just want to know what big oil

is and then we go from there.

Secretary RICHARDSON. Mr. Shays, this is a political campaign.

I am the Secretary of Energy for the Clinton-Gore administration.

I am not interested in blaming anybody. I want to fix the problem

and I want to fix it with you. I think it has been referred that large

oil companies have been doing quite well lately. Their profits are

up. The American people, I think rightfully so, had questions in the

Midwest about why the price spikes increased dramatically. The

price of oil is $38 a barrel. That is unacceptable.

Mr. SHAYS. Is big oil responsible for the $35-plus a barrel?

Secretary RICHARDSON. No. It is a variety of factors. It is the

market, it is many other reasons.

Mr. SHAYS. Well wouldn’t OPEC be the No. 1 reason?

Secretary RICHARDSON. No. I think that OPEC has been working

with us quietly. In the last three instances, they have raised production levels, not enough. We operate on the free market. OPEC

is a cartel. We opposed their production cuts in the past. But the

fact is that we have a demand problem.

Mr. SHAYS. Isn’t it true though that the administration earlier on was concerned with $10 a barrel and was encouraging OPEC to

limit supply to get that price up a bit?

Secretary RICHARDSON. No, that is flatly wrong.

Mr. SHAYS. You were not concerned about domestic production that started to go down because we could not produce at $10 a barrel?

Secretary RICHARDSON. Well, yes, of course. And I warned this and I am publicly on record as saying that $10 a barrel per oil is

not good. That is not good for the market, it is volatility, it hurts

a lot of States in our country that produce domestic oil and gas.

The stable price that I think is ideal is between $20 and $25. But

we think that the market should dictate those forces.

Mr. SHAYS. Two last questions. The Strategic Petroleum Reserve

which, admittedly, many Members of Congress encouraged you to

release, so I am not suggesting that I was not part of that and also

a part of the home heating reserve, there are others who respond

to our effort to do that with some concern, that it is a distortion

in the marketplace, as you just made reference to.

There is a concern that, for instance with the home heating reserve, the suppliers are not going to buildup a reserve and inventory it if they are concerned that all of a sudden the administration, whichever administration, decides to release it and significantly reduce price. So there is a sense that maybe we are actually

going to have less supply rather than more because of this reserve.

Secretary RICHARDSON. The home heating oil reserve is just 2

million barrels. That we do not anticipate would affect the market.

It is only there, as many of you constructively suggested, for supply

emergency. The language, the trigger authorizing me to use it, Mr.
268

Shays, is based not on the price but on the supply emergency. I

welcome that. I do not want to base it on price. I think it should

be on supply emergency.

What the home heating oil operators lack is an incentive, as you

said, to stock product reserve. We have to give them incentives to

do that. We have been working with them, transportation, a number of other measures, their interruptible contracts, and we have

a good dialog with them. Some have suggested, and I would welcome your thoughts, a tax credit for them to store home heating

oil, a small tax credit to give them an incentive to store it. Because,

as you said, they are not storing right now because prices are so

high.

Mr. SHAYS. Thank you. And what would be the trigger for releasing the Strategic Petroleum Reserve? What should be the trigger

so we know it is not a political decision?

Secretary RICHARDSON. Well, that is already in statute. The trigger is a national supply emergency. You are talking about the Strategic Petroleum Reserve? Because we have the Northeast Reserve.

Mr. SHAYS. Right.

Secretary RICHARDSON. There the language is supply interruption.

Mr. SHAYS. So it is a little nebulous though? In other words, the

President can do it and say there is an emergency.

Secretary RICHARDSON. Yes.

Mr. SHAYS. Let me just end with this question. In a recent appearance before the House Committee on International Relations,

you were asked if Governor Bush was responsible for today’s high

oil prices. Your answer was ‘‘No.’’ Is that still your position?

Secretary RICHARDSON. Governor Bush?

Mr. SHAYS. Yes.

Secretary RICHARDSON. No, it is not his fault.

Mr. SHAYS. Thank you.

Mr. BURTON. Mr. McHugh.

Mr. MCHUGH. Thank you, Mr. Chairman. Just to kind of fill out

the record on what Mr. Shays and you, Mr. Secretary, were talking

about on RFG. I am not familiar with the Federal Trade Commission study, but I am familiar with a study done by the Congressional Research Service that found that 25 percent of that—Secretary Browner is shaking her head, but I can read the English

language——

Ms. BROWNER. We would be happy to supply for the record, I

may actually have that with me——

Mr. MCHUGH. I would be delighted to have you supply all that

information. But still, the Congressional Research Service found

that 25 percent of that increase, which is not even a majority of

the increase but a substantial part, was due to that. And the Energy Information part of Secretary Richardson’s own Department of

Energy found, if I can read the English language correctly, ‘‘The

new product required a substantial change in the blend recipe and

in the characteristics of some of the components to make the new

product.’’ It went on to talk about the significant difficulties in that

reformulation on the price. You may want to forward that information to Secretary Richardson as well because apparently his DIA is

not aware of it either.
269

Mr. Secretary, I agree, we have to work together. I go home to

a part of the United States that encompasses the Adirondack

Mountains, hundreds of miles of Canadian border where it will be

snowing very soon. I do not think my people are concerned who is

right and who is wrong, and I am sure not going to check their

voter registration card before I see if we should help them. I know

you well enough to believe very strongly you share that sentiment

as well.

So I would like to talk a little bit less about the longer term approaches, not that they are unimportant, but rather what we can

do now to avert or at least ameliorate what will be a crisis of life

and death proportions in areas that are served by people such as

Congressman Sanders, myself, and many others.

I made the comment yesterday that it is hard to think about politics when it is snowing in your district 7 months out of the year.

It is hard to rationalize the current price of a gallon of oil based

on statistics that average it out over two decades when your main

industry, as is true in both Bernie Sanders’ and my district, is the

dairy industry and you are receiving the same price for your product today that you were 20 years ago. I would suggest that 100 percent increase in the cost of home heating fuel, 100 percent, approximately, cost increase in the price of diesel fuel that runs your tractors, that allows you to make a living, as meager as it is, is truly

an emergency. OPEC has talked about a target of $28 a barrel for oil. Where

do we stand, and by ‘‘we’’ I mean this country, on that target? Is

that a reasonable cost? We heard a lot yesterday from people in the

oil industry who said that the great anomaly was the $10 a barrel

of oil. Fine. Let’s accept that. Is $28 reasonable, or is that an objec- tive we should accept now? How do we react to $28 a barrel?

Secretary RICHARDSON. Congressman, what we have said is that $10 is too low, $30, now $30-plus, is much too high. What we have

said ideally is between $20 and $25. Naturally, $28 is better than

what exists today. Nonetheless, OPEC has established what is

called the price ban. Anytime it exceeds $28, and you mentioned

that $28, they would automatically increase production if it is I

think 20 days by 500,000 barrels. That has not always happened.

Our view is that the market should dictate these forces. But we

think that for producer and consumer countries $20 and $25 is

good for economic growth, to quell recessions, and to deal with the

basic supply and demand laws.

What has happened, Congressman, is a dramatic increase in demand throughout the world, it is not just our country. Europe and

Asia. And I share your concerns very much about your region. This

is why we think the Northeast Home Heating Oil Reserve is important. There is a real acute home heating oil shortage in the Northeast. We are very worried about it.

Mr. MCHUGH. And I was an early supporter of Congressman

Sanders’ bill, an original cosponsor, and I was proud to do so, and

I commend the President for creating it by Executive order. I think

it will help. I hope it will help. But I am not sure it is going to

be enough.

You talk about market forces. I am a Republican and generally

a market oriented kind of guy. But the market is not working suffi-
270

ciently right now. It seems to me when OPEC increases, as it did

about 2 weeks ago, their pledge of an additional 500,000 barrels,

and your North crude oil goes up to over $33 a barrel within hours,

we have got to do something more.

I am very concerned that the President, the administration has

not taken the steps nor seen fit to release the Strategic Petroleum

Reserve supplies. If we do not do that, thinking only in the short

term, what can we do to ensure that this winter will not be a catastrophe for many people in the colder climes of this country? What

other remedies are there short of hoping that OPEC will sufficiently increase production?

Secretary RICHARDSON. Congressman, we will continue to urge

OPEC to consider increasing production, because it is obvious that

the world needs more oil. Second, on the Strategic Petroleum Reserve, whether it is a sale or a swap or other proposals, the President is actively considering that right now. At this very moment a

decision is eminent. He may decide not to tap it. We have been

very reluctant to tap it in the past because of the language in the

legislation that it should be a national supply emergency. We used

it during the Gulf. We have used it very sparingly.

What else can we do, Congressman? I think we can work together on additional low-income energy assistance funds. I know in

your district you have a lot of moderate income and poor people

that could use this. And I am glad you mentioned the Northeast

Oil Reserve. We need to get that passed. Even with Executive

order, the trigger for its use is important. We also believe that

heating oil deliveries are very important that they take place without any transportation or pipeline problems. We work with the

Coast Guard to ensure their ready access into the harbors that

reach you.

We have had a number of emergency efforts in the event of a

home heating oil shortage. Exercises with regions and States to

deal with the problem, including I believe your State.

Mr. MCHUGH. I appreciate that. Shortages are one thing. Fuel

disruption is another. Affordability is the most important, and that

is what disturbs me. I think that is the key question here that is

being avoided. In fact, as one of the strongest supporters of

LIHEAP, there is an economic reality that the more you take out

of the market to LIHEAP, the higher price pressures you place on

people who are at the lower income levels who do not qualify, many

of whom live in my district. So that is not the answer either.

The final comment on this is that there has to be release of SPR.

There is no other way that I see, and it is not that I am unwilling

to entertain it for any reason, political or otherwise, but the only

way a crisis of price is going to be avoided—not supply interruptions, but affordability—is through SPR. So I hope you will continue to press that with the President, because that, it seems to

me, is the sole relief.

Secretary Browner, I am concerned about this proposed sulfur reduction in diesel. You talked about this issue and I wonder if you

could comment further on the issue of diesel.

Ms. BROWNER. Yes. In my written testimony I did speak about

the diesel. I would be happy to speak about it now.

Mr. MCHUGH. You did not in your oral testimony?
271

Ms. BROWNER. No. I was talking about last year’s rule to remove

sulfur from conventional gasoline, not from diesel.

Mr. MCHUGH. I misunderstood. I was reading while you were

speaking and I did not bring the proper nexus. I apologize. Well

let’s talk about the proposed reduction. That is a 98 percent reduction in the sulfur level of on-road diesel. I know I heard you speak

about the flexibilities and the opportunities that you are trying to

access and working with industry and such. It can come as no secret to you that the industry is very concerned, not just the diesel

producing industry but also the manufacturing industry that will

use these diesel supplies to power their machinery, is concerned

that, No. 1, the technology today simply does not exist to accommodate this kind of reduction.

In my chairman’s own State of Indiana, Cummins Manufacturing

has stated, ‘‘Cummins has been in this business for 80 years and

we don’t know if these standards can be met and what the total

cost is. How possibly can EPA? With no explanation or justification,

EPA has chosen to propose a regulatory scheme without the meaningful exchange of technical information and ideas that preceded

prior proposals. For such far-reaching standards, extraordinary and

as yet undeveloped technology will be needed and huge investments in time and in resources will be committed . . .’’ They go on

to say this is what they feel is an unachievable and unworkable approach.

The other thing that troubles me is that the Department of Agriculture asked that EPA should provide more information to demonstrate that fuel supplies to farmers in rural areas not be interrupted as the industry converts to the ultra sulfur diesel fuel.

The industry offered 90 percent. Apparently the EPA is insistent

on 98 percent and has refused to extend the public comment period, even when the administration’s own Department of Agriculture says this is ill-considered. I am curious how you would respond to those kinds of objections.

Ms. BROWNER. First of all, this effort to reduce pollution from onroad vehicles—cars, SUVs, diesel trucks and buses—has been the

work of the EPA and the administration for 7 to 8 years now. This

is not a new idea, this is not something we have come to lately.

Specifically with respect to diesel. Diesel fuel today has approximately 500 parts per million sulfur. It is a very, very high sulfur

content. With that high sulfur content comes a whole host of public

health, particularly respiratory, issues. We have made a proposal

to reduce the pollution that comes out of the tailpipes of large

trucks and buses. The way you change the pollution out of the tailpipe is you make adjustments in the fuel, you make adjustments

in the engine, you add things like catalytic converters.

You note that there are companies who have raised questions,

and we are in dialog with those companies, as we did when we set

the car and SUV standards last year. I would also like to note for

the record there are companies that are supporting our proposal.

For example, BP Amoco has written in support of the 15 parts per

million diesel fuel standard that we have proposed. There are manufacturers, the companies that will make the catalytic converters,

the companies that will make the technologies to meet the tailpipe
272

standards, they are supporting our proposals. There are even engine manufacturers that are supporting our proposals.

Having said all of that, this is a complicated undertaking. We

have been at it for many years. We are listening to all of the parties concerned. We are trying to honor requests from many, many

Governors. I do not think we have heard from a single Governor

who is opposing these proposals to help them clean up the air their

people breath. One of the most important things we can do at the

national level is to look at the on-road diesel fuel—and this is important because you are going to hear people talk about all diesel

fuel. We are talking right now about the diesel fuel that is used

on the road, not off the road, not in farming equipment, but in the

18 wheelers and the buses.

Mr. MCHUGH. So we go back to the division of fuel that the

chairman pointed out even further in his comments, and apparently 90 percent reduction voluntarily has been rejected, and you

refuse to extend the comment period. How can you talk about—— Ms. BROWNER. And let me note that is some companies’ position,

it is not all companies’ position. When you look at what comes out

of the tailpipe, if you want to clean up that goop, that stuff that

we all hate sitting behind, that fog, if you will, that comes out of

the large trucks, the diesel buses, you have to do two things. You

have to clean up the fuels. When you clean up the fuels, that allows you to put on the first ever catalytic converters. How many

of you knew that? Catalytic converters do not exist on the large

diesel trucks and buses. The clean fuel is necessary. I might just

point out while BP Amoco says 15 is fine, others in the industry

have said something higher, you should know where Detroit is, you

should know where the engine manufactures are. They want 5 ppm

of sulfur content, not the 15 which we have proposed.

So that is by way of saying this is a complicated issue. We are

engaged in a thoughtful process. We are committed to finishing

this because, and I think this is important, if there is one thing I

have heard over the last 71⁄2 years from CEOs in this country, it

is give them as much time as possible to meet environmental

standards. The sooner we finish, the sooner they know, the sooner

they can start looking at how to most cost effectively meet these

standards.

Second, we are working, for example, I had a lengthy meeting

with the CEO of Cummins yesterday. They have their position, but

we did take the time, despite their position of opposition, to hear

what they had to say about how we might be able to structure the

flexibilities. They may ultimately never agree with us, but we are

open to anyone who wants to bring us a proposal.

Mr. MCHUGH. So I assume that is a no, you will not extend the

comment period. That was my question.

Ms. BROWNER. We have not made any final decisions. We are reviewing everything that we have received. We are committed to

getting the public health benefits that will come from cleaner diesel

engines an fuels.

Mr. MCHUGH. So you may extend then?

Ms. MORELLA [presiding]. The gentleman’s time has expired.

In deference to the fact that we did give more time to this side,

we will extend to the minority side an extra 5 minutes. So I will
273

recognize Mr. Waxman for 35 minutes. And maybe another answer

yes or no could be part of a response to Mr. Waxman’s questions.

Mr. WAXMAN. Thank you very much for giving us the extra time.

We appreciate the witnesses being here. And I appreciate the

time under which Mr. McHugh addressed this issue, because what

he pointed out in his time was that we have got a problem in this

country and we need to work together on this problem. It is not a

Democratic or Republican problem. We are facing an energy crisis

in some parts of our country with heating oil prices and maybe

even availability being very, very high. We see electricity rates in

California, maybe other places, soaring. The gas prices are rising.

So we need to address these problems. It is our responsibility, both

the Congress and the administration.

We are seeing that we are greatly dependent on foreign oil and

we are able to be manipulated by OPEC. The way that Government

works is the President, and all of you represent the President and

his administration, proposes ideas, but then the Congress is supposed to dispose of these ideas. And the administration has proposed a number of initiatives that would help resolve our country’s

short and long term energy needs.

Secretary Richardson, I would like to begin by asking you about

some of these administration proposals. One of our basic safeguards against oil price manipulation by OPEC is the Strategic Petroleum Reserve. My understanding is that the President has

urged Congress to reauthorize the Presidential authority to utilize

the Strategic Petroleum Reserve in times of energy crisis. But Congress has not done so. Could you describe why the administration

believes reauthorization of SPR is important?

Secretary RICHARDSON. Mr. Chairman, the reauthorization of

Strategic Petroleum Reserve is essential because the ability of the

Secretary of Energy to advise the President when it is a case of national emergency shortages, you also have to manage the Strategic

Petroleum Reserve. We have 570-plus million barrels that has been

a very wise investment and you have to manage it, you have to replenish it, and you have to maintain it. So that full authority to

use it, the authority for the trigger in a national supply emergency

is needed. Plus, there have been a number of I think add-ons relating to the authorities relating to some energy initiatives here that

are part of that bill. And we need it passed. It is not passed.

Mr. WAXMAN. What are the consequences if Congress continues

to block this reauthorization of the Strategic Petroleum Reserve?

Secretary RICHARDSON. I think a questioning of the executive

branch’s, my authority to use the Strategic Petroleum Reserve in

time of emergency. We think that it is needed as a very urgent priority, along with the Northeast Home Heating Oil Reserve, the

trigger to use in case of an emergency. Let’s say sometime this winter in New England there is a home heating oil crisis and we have

not resolved this and I do not have the authority to use it.

Mr. WAXMAN. One of the other areas we can deal with the energy

crisis is to reduce our dependence on foreign oil by increasing energy efficiency, if we used our energy resources more efficiently and

effectively. Over the past several years, the administration has proposed tax breaks to encourage Americans to purchase energy effi-
274

cient cars as well as homes. What has happened to these initiatives, Secretary Richardson?

Secretary RICHARDSON. They have languished, $4 billion worth of

tax credits on energy efficiency for homes, for fuel efficient vehicles,

for buildings. Chairman Waxman, we think that we can dramatically improve our energy resources in this country by having increased energy efficiency, but you have to have incentives for that

to happen. The Partnership for a New Generation of Vehicles with

the auto companies to have more efficient engines, to have SUVs

that are 40 miles per gallon, a lot of the issues that Administrator

Browner has championed in fuel efficiency, they are lagging and we

need that to pass to have an energy policy that deals with the supply needs of the country but also with demand.

Mr. WAXMAN. So the administration proposed these ideas of some

tax incentives to become more efficient. The Congress has not acted

on them. It seems to me that what we see is we are not making

the progress toward energy independence that we could if Congress

would act to work with the administration to pass this legislation.

Secretary RICHARDSON. And you made an excellent point about

renewable energy. We have to reduce our dependence on foreign

oil; it is 57 or 58 percent now. If we invest in new technologies, as

you said, and we invest in wind, in solar, in biomass, in bioenergy,

in fuel cells, these are worthy investments. And only 7 percent of

the administration’s budget in that area in the past 7 years has

been funded.

Mr. WAXMAN. Let me draw your attention to the question of electricity restructuring. At yesterday’s hearing, we heard from witnesses who had recently experienced sharp rises in electricity rates

and brownouts. Two years ago, the administration proposed legislation that would have provided for restructuring of our Nation’s

electric utilities. Could you describe the key provisions of this proposal and how this proposal could help address some of the problems we currently face with our electricity system. Tell us, has

Congress acted on the administration’s proposal to modernize our

electric utilities?

Secretary RICHARDSON. Regrettably, one of the House chairmen

dealing with this issue said the electricity restructuring bill was

dead in the Commerce Committee, which is the main vehicle for

passage. We regret that.

What our bill does, Chairman Waxman, is increase competition,

it will improve the environment, it will save the customer money.

What we want to do is several things. One, deal with the fundamental problems that exist of inadequate transmission, generation facilities, improve energy efficiency efforts in our electricity

grid, push for independent power operators so that utilities and

other power sources can invest in electricity grid that is badly in

shape, that needs modernizing. What you have is a dramatic increase in demand and an electricity grid that has not had strong

authority and strong investments to keep it refurbished.

The bill gives Chairman Hoecker and FERC the authority to take

several steps to make our grid more reliable and efficient. That has

languished, too. And after the brownouts and blackouts around the

country, after the fact that over 26 States have already had restructuring legislation in their State legislatures, including Califor-
275

nia, the Federal bill would have had rules of the road that enabled

a lot of Federal statutes that are harmful to be removed. And, regrettably, this bill is not moving.

Mr. WAXMAN. Well what we have had is administration proposals

to reauthorize the Strategic Petroleum Reserve, to give tax breaks

for energy efficiencies, to have a partnership with the automobile

industry to produce cleaner and more efficient automobiles, we

have had proposals for electricity restructuring, we have had specific ideas from the administration and proposals for funding for

conservation and renewable energy. And none of that has been

moved in the Congress of the United States.

Now let’s look at what some of the things are that we have seen

in the Congress, initiatives here. Congress has not been receptive

to your energy proposals and I suppose it is because the leadership

in the Congress thinks it has some better ideas. I would like to get

your comments about some of these other ideas that they have.

Every year, since 1995, the Republican leadership has introduced

a measure known as Department of Energy Abolishment Act,

which would abolish the Department of Energy. What is your view

on whether this proposal would help advance energy policy. I know

it would cost you your job, but is this a constructive way for us to

deal with our energy policy, just abolish the Department of Energy?

Secretary RICHARDSON. Mr. Chairman, I am not going to be humorous. But sometimes I wonder whether that didn’t make sense

in light of my recent—[laughter]—but, no, course not. The Department of Energy has very valuable functions. It deals with our nuclear weapons, electricity, renewable energy. It deals a lot of very

important national security programs, with Russia, and nonproliferation programs. It is the ultimate science agency in the

Government. It is a very important department. That is not the

way to deal with the problem.

Mr. WAXMAN. Absolutely not. And we could laugh about it because it really is a laughable idea that the response of the leadership of the Congress of the United States, and sponsored by many

members of this committee, including one member who said the administration has failed, that their answer was to abolish the Department of Energy. And another answer they have had is let’s

allow drilling in the Arctic National Wildlife Refuge. Does that

make sense?

Secretary RICHARDSON. We are opposed to that, Congressman

Waxman, because we think that it is a very ecologically sensitive

area, the caribou and other wildlife we believe would be harmed.

We think there is sufficient other area in Alaska that could be

drilled that is already available that can properly deal with our energy needs. We think that there are some very, very sensitive parts

in the country. And by the way, the offshore drilling in California

and Florida was congressionally mandated. So it is not something

that came out just from one branch of the Government, it came

from both of us.

Mr. WAXMAN. Not only was it congressionally mandated, but it

was congressionally mandated on a very strong bipartisan vote.

Most Members of Congress, whether Democrat or Republican, do

not want to go out and have oil rigs off our coast. We do not want
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it in California, I do not think people on the East Coast want it,

and their representatives all across the country said no to that

idea.

Another way we can deal with this energy problem is to set up

standards for automobiles, they are known as CAFE standards,

Corporate Average Fuel Economy. That is to make sure that the

average fuel efficiency standards that we require for cars are going

to mean that we have less reliance on fuel. In fact, Honda has

brought a car to the market using a hybrid electric technology that

gets 70 miles to the gallon. Toyota will soon be selling a four passenger car that achieves over 60 miles to the gallon.

The Congress has blocked the Department of Transportation for

the last 5 years from even studying whether the greater fuel efficiency is feasible. As a result, fuel economy levels have stagnated.

And since the 1980’s, CAFE standards have only required that new

cars average 27.5 miles per gallon. Honda is getting 70. Congress

has said we are going to allow 27.5 miles per gallon, and light

trucks average 20.6 miles per gallon.

It just seems to me we need to be addressing our fundamental

energy problems, we need to address our dependence on imported

oil, and our reliance on an antiquated electric system. But Congress has not acted on these issues. Instead, we do nothing and

when something inevitably goes wrong, and we are now seeing our

system going wrong, we search frantically for someone else to

blame. And this is the political season. So what we have are hearings where one of the Members asked, the first question, why has

the administration failed to deal with the energy crisis. Well, that

is not taking responsibility that we all have, you have and we have

in the Congress of the United States.

Administrator Browner, I want to ask you some questions. Yesterday we heard a number of different claims from majority Members that suggested environmental regulations in general, and the

Clean Air Act in particular, are causing our energy problems. I

want to talk about some of these issues.

We heard there is simply too much red tape and environmental

regulation. We had a lot of colorful analogies. For example, the National Petrochemical and Refiners Association testified that EPA

has created a regulatory blizzard for the Nation’s refiners. Now you

addressed this issue earlier about this claim that you are not allowing permits for new refinery construction. Chairman Burton made

a big point of stating that no new refineries have been built since

the early 1980’s, and he alleged it was due to permit requirements

under the Clean Air Act. And he went on to blame the failure of

EPA to approve new refineries as one of the major causes of today’s

high gasoline prices.

Ms. Browner, do you know how many applications EPA has received since the early 1980’s to build new refineries?

Ms. BROWNER. For brand new ground-up?

Mr. WAXMAN. Brand new refineries.

Ms. BROWNER. We may have gotten one in 25 years. One.

Mr. WAXMAN. Is it possible for EPA to issue a permit for new oil

refineries if no one has applied for it?

Ms. BROWNER. No. It requires a company to come forward and

make an application. Many come forward to expand their existing
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facilities, and those get granted. But a new one would require a

company to come forward and make the application.

Mr. WAXMAN. I raise this question because I think it is highly

misleading to say that you are not giving permits for new refineries

and that is the reason for the problem.

Ms. BROWNER. It is completely misleading. They are not coming

to us. And I spend a lot of time with the petroleum refiners of this

country. We work closely with them on a lot of fuel issues. They

do not come in and meet with us on building new refineries. We

are there, we are available if that is what they want to talk about.

Mr. WAXMAN. But what they are talking to you about, and they

are getting permits from you, is to build not new refineries but to

consolidate and expand their existing refineries.

Ms. BROWNER. Yes.

Mr. WAXMAN. And that is the trend that I understand is continuing. Oil companies are not asking to build new facilities, they want

to modify and expand the existing ones. Can you tell us whether

that is happening and whether you are giving out permits. What

is happening with their efforts to expand and modify their facilities?

Ms. BROWNER. Absolutely, they are expanding their facilities. We

and the States do grant these permits. I think I mentioned earlier

that in the last 2 years we have had 12 applications for expansion

of existing facilities; 7 of those have already been issued, 5 are currently pending and we presume will be wrapped up in a timely

manner.

What is happening is you cannot just look at is it 200 facilities

and then 155. Uh, oh. You have to look at what are the 155 capable

of doing. And that is what that chart shows, their capacity is actually going up and we are granting the permits to allow that to happen. We would welcome a permit for a new refinery if someone

wants to bring it. We will give it the full review.

Mr. WAXMAN. And how long does it take?

Ms. BROWNER. For the expansions, most of them are managed

within 12 months, about half of them are managed within 5

months.

Mr. WAXMAN. I just want to cite for the record Citgo applied in

March and is expected to be approved within 2 to 6 weeks, Valaro

applied in July and is expected to be approved by the end of the

year, Exxon Mobil applied in June and is expected to be approved

by the end of this year.

Ms. BROWNER. Correct.

Mr. WAXMAN. And as I understand, there have also been two applications in Minnesota, one has been approved and one is pending.

Ms. BROWNER. Correct.

Mr. WAXMAN. Now let’s turn to the issue of electricity generation.

At yesterday’s hearing, we spent considerable time discussing California’s energy situation and new power plants that are currently

expected to come on-line. In that discussion, the Clean Air Act was

repeatedly blamed for the length of time it takes to site energy

projects. For instance, allegations were made that implied that it

takes 6 to 7 years to get a permit under the Clean Air Act to site

high voltage transmission lines. Another witness mentioned an
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anecdote of 15 years being required to site a high voltage transmission line.

Ms. Browner, we have investigated these allegations. They do not

appear to have any basis in fact. My understanding is that the

Clean Air Act permits are not required for siting of transmission

lines. Could you clarify for the committee whether there are any

requirements for transmission lines to be permitted under the

Clean Air Act.

Ms. BROWNER. There are no Clean Air Act requirements. There

are no Clean Air Act permits required to site a transmission line.

Those decisions are made by States under any number of laws that

they are responsible for. But we do not engage in the siting of

transmission lines.

Mr. WAXMAN. In the case of power plants, as distinguished from

transmission lines, there are Clean Air Act requirements.

Ms. BROWNER. Yes.

Mr. WAXMAN. The Clean Air Act does require that new power

plants be permitted under the Clean Air Act. Why is that the case?

Ms. BROWNER. The Clean Air Act looks at the emissions from

power plants and, based on those emissions, Congress required us

to set up a permitting program. But there, too, Mr. Waxman, it is

important to understand what the real facts are. We have, and the

States have received in the last 2 years, including some very, very

recently, 300 applications for electric turbines. Over 60 percent of

those have already been issued. They move through the process

very rapidly, again on the order of approximately 12 months, on average. The States take the first step in this. We frequently do not

become involved except to concur in what the State is requiring in

terms of pollution reductions. We all work together and it moves

very quickly.

Mr. WAXMAN. My understanding is that the Commission’s process rarely takes longer than 18 months. You say an average of 12

months.

Ms. BROWNER. Correct.

Mr. WAXMAN. I also understand that over the last few years hundreds of applications under the Clean Air Act have been filed for

new gas turbine electric generation. These applications have been

filed under the Prevention of Significant Deterioration part of the

Clean Air Act. How long does it typically take for a PSD permit to

be approved?

Ms. BROWNER. Again, those are moving on an average of 12 to

18 months.

Mr. WAXMAN. So what you are saying in essence is that, once

again, the facts just do not support the rhetoric we have been hearing.

Ms. BROWNER. If there is a 7-year permitting process, we are

happy to look at it. Our numbers do not show that. I do want to

remind all of the committee members that, because of the Clean

Air Act, you all made the decision that the States would have the

first bite at the apple. We see it only after they have come through

an initial process. We generally concur in what the States are

doing.

Mr. WAXMAN. Ms. Browner, we have gone through some of the

allegations with you right here on the record about the costs of the
279

Clean Air Act. What your answers indicate is that the allegations

of delays and high cost do not have much basis in fact. My experience is that this frequently happens when industry complaints are

closely scrutinized.

I have been in the Congress for 25 years. I sat on the committee

that dealt with the energy policies and the Clean Air Act, not this

committee, it is the Commerce Committee. And the fact is that industry regularly overstated the cost of complying with environmental regulations. When we were considering the Clean Air Act

of 1990, which passed almost unanimously, signed by President

Bush, we had industries come in and tell us that the costs to comply with that law were virtually going to bankrupt the economy. Of

course, nothing like that has happened.

And I want to give examples, because people forget what the

record is. Every time we have a hearing somebody comes and

makes the wild charges. Yesterday at this hearing we heard from

Steven Simon, a senior executive at Exxon Mobil, who raised concerns about the cost of EPA fuel regulations. But his company has

a history of exaggerating compliance costs. When we were considering the reformulated gasoline provisions of the Clan Air Act, Mobil

wrote to Members of Congress that the requirements should not be

adopted because, they wrote to us that ‘‘technology to meet these

standards simply does not exist today.’’ And then it turned out to

be completely wrong, untrue. The reformulated gasoline provisions

went into effect in 1995 and have brought about tremendous clean

air benefits. Just so people understand that.

In addition to trying to make new cars cleaner by emitting fewer

pollutants, we try to make the gasoline burn in a cleaner fashion

as well. That is the reformulated gasoline issue. Has that been a

success and have petroleum companies been able to comply?

Ms. BROWNER. It has been a tremendous success in terms of

cleaning the air and in a very cost effective manner. And we believe, and we have every reason to believe, that the low sulfur gasoline requirements which are now in place and will start to take

effect in 2004 will similarly be very cost effective. And just as an

example, let me point again to the fact that BP Amoco is already

selling the low sulfur gasoline, and not with a price differential.

They are already selling today what we are going to require all

companies to sell beginning in 2004 in a number of cities, and they

will be adding more cities to that list in the coming weeks and

months. That is I think a real testament to the fact that when we

set these standards, not only do we achieve a level of public health

and environmental protections, but we are doing it in a sensible

way that works for the businesses of our country.

Mr. WAXMAN. I just want to give another example of the kind of

statements we hear at hearings that turn out to be absolutely

wrong. The utility industry, when we were looking at trying to

adopt legislation to stop acid rain, they exaggerated the costs, the

chemical industry said that if we phased out chlorofluorocarbons it

would cause massive disruptions, the auto industry said they could

not meet new tailpipe standards. Yet each one of these statements

turned out to be wrong. Once we adopted that law, President Bush

signed that law, all these industry groups went ahead and not only

complied, but even did better than the law required under many
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circumstances. So I think it is important when we hear these exaggerations by industry groups to keep that in mind, especially when

their answer is to drill on our coastlines and go up and drill in

Alaska. That is their answer to the energy crisis.

Secretary Richardson, I am going to yield my time to some other

Members, but you made a statement I just wanted to ask you

about. And I know you do not want to blame anybody, you want

to be a statesman, you have been at the U.N. so you know what

being a statesman is all about, but I was sort of taken aback when

you said you don’t think OPEC should be held responsible for the

crisis that is happening in this country. I know we are to blame

ourselves when Congress does not act, we do not do anything to reduce our reliance on fuels. But OPEC is a cartel. They have a monopoly. They can turn on and off the spigot. They know that we

are dependent on their oil. Why don’t we just admit that they are

playing games with us?

Secretary RICHARDSON. Mr. Waxman, let me be very careful because I have to deal with these energy ministers all the time. I do

want to be clear. I believe that OPEC, the last three meetings they

had in which they were considering increasing production, they did

so. A lot of it was for their own reasons, but our quiet diplomacy

I believe worked. I think that they have acted responsibly in terms

of the increases, 3.5 million barrels more than existed at the time.

Obviously, the markets have not responded. The world needs more

oil.

So, I do not want to blame OPEC for the misfortunes of a world

that has dramatically increased demand and a number of intersected energy problems that we have. I believe our policy toward

OPEC, which is one of quiet diplomacy, constructive engagement

with them, pushing for increases in production—2.5 million in their

March meeting, 700,000 in their meeting in June, and 800,000 in

their last meeting, and possibly more soon—has worked. I think

Saudi Arabia has showed dramatically positive leadership.

Mr. WAXMAN. Mr. Secretary, I understand what you are saying.

But the answer to OPEC is for this country and the West to become less dependent on them. I hope the high prices that they are

forcing on us and the games they are playing will be a signal to

all of us that we have got to wake up and become more energy efficient and less dependent on foreign oil for our own economic wellbeing and our national security. I do not like the idea of OPEC

having that much control. We saw what happened in the 1970’s

and we are seeing the exact same thing again. The best way to stop

this is for us to take the actions that we need to take.

Secretary RICHARDSON. There is no question that markets and

not cartels should set prices, you are absolutely right. And we do

need to dramatically reduce our reliance on imported oil, there is

no question about that.

Mr. WAXMAN. I want to yield to Mr. Kucinich.

Mr. SANDERS. Could I ask how much time there is remaining on

this side?

Mr. WAXMAN. We are going to yield in a moment.

Mr. SANDERS. But there is a limited amount of time.

Mr. WAXMAN. But then we will go under the 5-minute rule.
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I am yielding to Mr. Kucinich a few minutes, and then we will

see if we can get to you, Mr. Sanders.

Mr. KUCINICH. I understand there is about 12 minutes left. I am

willing to go for 3 minutes.

First of all, I want to thank Secretary Richardson and also Carol

Browner, who I have had an opportunity to work closely with over

the last few years, for your work for this country. You have both

done an outstanding job and I really want to thank you for that.

I have not had the chance to work with Mr. Hoecker, so I want to

direct my questions to you. [Laughter.]

Mr. HOECKER. Thank you.

Mr. KUCINICH. We are told that natural gas now sells at a record

high of $5.22 per million British thermal units, more than three

times the $1.60 futures price in March 1999. Back home in Cleveland, this hearing gets kind of global at time, back home in Cleveland, OH, people are experiencing sharp increases for the price of

natural gas. And we know the difference between September and

January in Cleveland, trust me. Why are we seeing such a steep

rise in natural gas prices even before families are turning on the

heat?

Mr. HOECKER. Well, I think the explanation is the one I gave

earlier, that we have a deliverability squeeze. There is I think

one——

Mr. KUCINICH. What is a deliverability squeeze?

Mr. HOECKER. What it means is that the production from domestic wells has declined seriously as a result of a price collapse a couple of years ago, that the industry production area has not recovered from that yet, and that there will be a lag time till adequate

supplies reach the market to drive the price back down to more

reasonable levels.

Mr. KUCINICH. Our time is limited here, so excuse me for interrupting. But I want to ask you this question. In the meeting you

had yesterday in Ohio, the reporting that came out of that meeting,

that is cited in the Cleveland Plain Dealer here, says that there is

adequate supplies. So, on one hand, we have some people in the

natural gas industry saying we do not have adequate supplies, others are saying we do have adequate supplies. But we are seeing already anticipation of even higher prices.

My question to you is, I heard your remarks, how do you thwart

market power? Are you ready to exert pressures on the market to

keep the rates down? And are the rates subject to discipline by

you? And if you are monitoring them, what do you intend to do for

my constituents and for people in the Midwest who right now are

faced with some horrible choices in their households when these

rates start to go up? What is the Federal Energy Regulatory Commission going to do for the American people?

Mr. HOECKER. That is an interesting question. Our concerns

about the impact on retail customers is going to have to be addressed largely at the retail regulatory level in the States. You will

recall, Congressman, that Congress decontrolled the price of natural gas in the 1970’s and 1980’s. It is an unregulated commodity

and we have a real market out there. This market is reflecting a

supply demand imbalance right now.
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The problem perhaps is somewhat definitional in the sense that

I think everyone would agree this country has adequate natural

gas reserves, enough for decades and decades. What we do not have

is ample gas in the pipeline, in storage. And a lot of natural gas

now is traded in the forward markets on the NYMEX and the market is saying that its value is greater in the interstate market. We

do not control that.

Mr. KUCINICH. Thank you. I know there are other Members who

have questions. I thank you.

Mr. WAXMAN. We have practically run out of our time. But I

want to yield to Mr. Sanders 21⁄2 minutes, if we could, and then

we will see if we can get more time.

Mr. SANDERS. Thank you, Mr. Chairman. Two points. I want to

thank you for all of the work that both of you have done in so

many areas. But there is something that I want to raise to you

today.

I am going to read from a publication, and this is what it says: ‘‘Venezuelan proposal detailed at Washington meeting. The U.S.,

September 20th, rejected a proposal by Venezuela’s PDVSA in

which the state company would stock its crude storage terminal in

the Bahamas with heating oil and sell the additional distillate directly to the U.S. Government. ‘We appreciate the offer of storage,

but there is currently no need for storage of crude or product in the

U.S.’ a DOE spokeswoman told Platts.’’ Platts is the publication. ‘‘The spokeswoman said that while the U.S. welcomed PDVSA’s

offer to boost distillate production, the DOE urged Venezuela to put

the additional product on the market ‘as soon as possible’ rather

than attempting to make a direct sale to the U.S. Government.

‘There is no need for U.S. Government involvement in the purchase

of this distillate,’ this spokeswoman said.’’ As far as I know, we have a crisis in the Northeast regarding

home heating oil. If Venezuela is prepared to sell us this product

at a reasonable price, why don’t we buy it?

Secretary RICHARDSON. Congressman, we think they should put

it on the market. Venezuela has had proposals like this before.

What we like to see is distillate on the market. Venezuela has been

a constructive partner in a lot of these OPEC discussions, but it is

our view that while it is an interesting proposal, it would be better

accomplished by them putting this distillate on the market.

The second point I want to make, there will be a lot of reports

that India, Saudi Arabia, other parts of the world have sufficient

distillate that they want to sell us, that all we have to do is go out

and get it. Those reports have not been confirmed. So with this proposal that the Venezuelans, our friends, have been making, our

view is this is great, you have the distillate, put it out on the market.

Mr. SANDERS. I am not sure that I agree. Let me raise just two

other brief questions. I have very little time. Mr. Waxman raised

the question of OPEC being a cartel. Now I am not a great fan of

the WTO. But as I understand WTO rules, cartels are in violation

of free trade. I do not understand why the U.S. Trade Representative is running all over the world expounding—we had an agreement with China the other day about free trade. Why doesn’t somebody in the U.S. Government say this cartel is in violation of free
283

trade agreements. Why don’t we take them to the WTO? Are they

in violation of free trade? I think the evidence is overwhelming that

they are. Anyone disagree with me?

[No response.]

Mr. SANDERS. I am listening. If they are in violation—we just

passed the Free Trade Agreement with China yesterday. I voted

against it. Why aren’t we standing up to these guys?

I think there is something, I will pick up on something Mr. Waxman said before, there is something very, very strange about our

relation for OPEC. And let me be honest about it. I voted against

the war in 1991. But people shed blood there, we have thousands

of people who are suffering from Gulf War Illness today, I think

the Vermont Air National Guard is over there now protecting the

airspace. And I think that being treated in this way by our OPEC

‘‘allies,’’ who we supplied military equipment to, we prop up billionaire rulers, I do not know if they have allowed in Kuwait women

to drive yet or something, if they are making progress in freedom

in that respect, I think there is something funny going on and we

are not hearing the whole truth about it.

Let me just ask Ms. Browner a question. I want to applaud you for stressing what I think is the $64 issue, and that is energy efficiency. Can you very briefly, in the very little time that I have left,

just tell the American people what it would mean in terms of the

saving of energy in this country if we move forward boldly in terms

of energy efficiency.

Ms. BROWNER. I think the best thing to do is look at our track

record to date. For example, our Green Lights program is saving

during peak reduction in 2000 6,100 milliwatts. When we look at

programs from Green Lights to computers to other types of equipment we use in our homes, we believe that energy efficiency could

save the average American family on the order of $400 in annual

electric, home heating, etc.

Mr. SANDERS. If we became much more energy efficient, isn’t it

clear that we could break our dependency on Mideast oil to a significant degree?

Ms. BROWNER. We could certainly reduce it to a significant degree. I think there is this sense out there that somehow or another

we did this energy efficiency thing back in the 1970’s and we are

done. The technology has advanced, industry has advanced. There

are a number of things we can do and they are incredibly cost effective to do them, and yet we cannot get Congress to support our

funding requests so we can go out there and do it.

Mr. SANDERS. Thank you.

Mr. BURTON. The gentleman’s time has expired.

Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman.

Mr. BURTON. We will now go to the 5-minute rule.

Mr. OSE. 5 minutes. Thank you, Mr. Chairman. First of all, I

want to diverge a moment and thank Secretary Richardson. I

dropped him a note earlier because I did not know if I would get

time. But I want to thank you for the assistance in Sacramento on

the McClelland reactor. That project is a success and will continue

to be so, and your participation has been noted and is appreciated.

Secretary RICHARDSON. Thank you.
284

Mr. OSE. I want to look briefly at electricity into the California

market. Who among you is probably the most knowledgeable about

Bureau of Reclamation electricity—[laughter.]

Secretary RICHARDSON. Chairman Hoecker.

Mr. HOECKER. I am, sir.

Mr. OSE. All right. Mr. Hoecker, if I understand correctly, the

Federal Government has two agencies that are significant generators of electricity. One is the Corps of Engineers, the other is the

Bureau of Reclamation.

Mr. HOECKER. That is correct. Mostly in the Northwest.

Mr. OSE. You have got Bonneville, you have got Western Area

Power Administration, all the others. But they use facilities that

are controlled by the Corps or the Bureau.

Mr. HOECKER. Correct.

Mr. OSE. OK. The question I have as it relates to California is

there is the Sierra Nevada region and then there is the Desert

Southwest region, both of which contain Bureau and Corps projects

that generate electricity into the grid for use in California and

Western States. Is that accurate?

Mr. HOECKER. That is correct.

Mr. OSE. About 10 percent of their total generation is routed to

investor-owned utilities, 10 to 15 percent, the rest going to municipalities, water districts, and things of that nature. Is that accurate,

10 to 15 percent?

Mr. HOECKER. I do not know the exact numbers, sir, but certain

public power entities in the West have preference power. They have

first dibs on that production.

Mr. OSE. I have look at this recently, and suffice it to say that

after you follow the preferential allocation of the power, about 10

to 15 percent comes to the public market, it is sold through market-based rating, and distributed accordingly.

In June of this year we had a severe shortage of electricity in

California, the consequence of which was that San Diego’s consumers, those who rely on San Diego Gas and Electric, just got hammered in terms of cost of electricity. Are you familiar with that situation?

Mr. HOECKER. Yes. It has actually been worse in August and a

little bit in September. But June really hit San Francisco as well.

Mr. OSE. OK. I was going to get to August and September, and

I want to come back to that.

I have, Mr. Chairman, a limited amount of information about

Bureau projects and their power generation over the last 5 years,

starting in 1996. And what I want to get to is that if these facilities

are generating power into the marketplace, the benefit of which to

some degree accrues to the consumer in San Diego, then we ought

to in a period of significant price spikes run those facilities flat out

and we ought to be providing as much electricity into those markets as possible to keep the price down. Would that be a reasonable

assumption?

Mr. HOECKER. Yes, within respectable reserve margins, that is

probably appropriate.

Mr. OSE. A respectable reserve margin would be what, 5 percent,

10 percent?
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Mr. HOECKER. Well, it has changed over time. We used to think

reserve margins of 15 or 20 percent were appropriate. And in this

market, it is well below 10 percent.

Mr. OSE. OK. And that ties into stage I, stage II, stage III alerts

and how you figure out where the blackouts and burnouts go and

all that sort of stuff.

Well the point that I want to bring up is that we have the Hoover Dam in the desert Southwest region which is running I would

say over the past 5 years pretty much close to capacity. We have

the Davis power plant, same thing. We have the Parker power

plant, same thing. The Deer Creek power plant—these are all in

the desert Southwest region and the Bureau’s operations—same

thing. The Elephant Butte plant, same thing. The Navajo plant,

same thing. We are talking about hundreds of thousands of

megawatts of aggregate electric generation.

What I am curious about is why, when we have such severe electric shortages, we are not running Glen Canyon flat out. We are

running Glen Canyon at roughly 50 percent of capacity in the

June, July, and probably August timeframe. I do not understand

that. Who made that decision, and why?

Mr. HOECKER. That is information I do not have, sir. The Bureau

of Reclamation or the Corps may have it, but I don’t.

Mr. OSE. I would like to enter this into the record, Mr. Chairman.

Mr. BURTON. Without objection.

Mr. OSE. And perhaps copies can be distributed.

Mr. HOECKER. I do know that in the West generally this year it

has been a bad water year and a lot of major hydro facilities have

not run near their historic capacity.

Mr. OSE. I would probably concur with you and that is why I

checked the others. Navajo, granted, is largely coal fired. But these

others are in fact hydro plants and there is no significant variance

in their production levels. So I checked that hypothesis because I

was particularly concerned about that.

Mr. BURTON. The gentleman’s time has expired. We will get back

to you.

Mr. OSE. Thank you, Mr. Chairman.

Mr. WAXMAN. Mr. Chairman, I will yield my 5 minutes to Mr.

Tierney.

Mr. BURTON. Mr. Tierney.

Mr. TIERNEY. Thank you, Mr. Waxman, Mr. Chairman.

Mr. Richardson, I yesterday had an opportunity to question a

gentleman from Exxon Mobil about whether or not his company

had reduced production over the course of last year by some 30 percent, because that is what had been reported. And he, in fact, acknowledged that they had. And it has been reported that not only

that company but a number of other of our own domestic producers, so-called big oil, have been cutting our production. So I would

assume that it is not just OPEC and non-OPEC foreign oil producing entities that are not producing as much as we would like, we

have a problem here at home.

I then asked him whether or not they had made great profits.

And I think it is interesting to note that in fact the oil industry

has experienced significant benefits from increases in oil and gaso-
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line prices. The 10 largest oil companies reported tremendous increases in profits in the second quarter of 2000.

Overall, those 10 companies reported second quarter profits of $11.1 billion, a 182 percent increase compared to the second quarter of 1999. In the first and second quarters of 2000, total profits

for these 10 companies were $20.8 billion, exceeding the total annual profits for all of 1999. Second quarter 2000 profits for Exxon

Mobil was $4.5 billion, a 276 percent increase from second quarter

profits in 1999; for Chevron, their profits were increased 219 percent; for Conoco, it was 300 percent; Phillips Petroleum, 550 percent; Sunoco, 727 percent. Exxon, Chevron, and Conoco all reported

record profits in the second quarter of 2000.

Stock prices for these oil companies have obviously increased significantly. The average stock price for the 10 largest oil companies

has increased 14 percent. Companies with the largest increases in

stock prices were: Phillips Petroleum, 43 percent; Tosco, 23 percent; Ultramar Diamond Shamrock, 20 percent. And in addition to

oil companies, other companies have benefit from the increase in

oil prices as well. For example, Halliburton, the world’s leading

provider of oil field services, saw their stock price increase by 34

percent from January 1 to September 15, 2000. All this, Mr. Secretary, while they are reducing production.

My question to you, sir, is the administration dealing with these

domestic oil producers as well as with OPEC and non-OPEC foreign suppliers to make sure they are producing at the rates they

should be to keep our prices down and our fuel stocks available?

Secretary RICHARDSON. Congressman, I have had numerous

meetings with oil companies, big and small, urging them to increase production, urging them to get more product into the market, asking them what specifically we can do to help with their

transportation and access and regulations to just get more reserve

into the market, home heating oil, every possible product. Without

trying to defend the actions of anybody, I do want to point out that

a lot of these decisions they make on production are basically business decisions.

Mr. TIERNEY. I think their profits show that.

Secretary RICHARDSON. Yes. [Laughter.]

Their profit, you cannot compel them to increase production. You

can urge them, you can jawbone them, and we have done that.

Mr. TIERNEY. I appreciate your answer, Mr. Secretary. My point

is, and I think you have been very diplomatic, as is your bent, but

the fact of the matter is that while we hammer away at OPEC and

others, we have a problem right here at home from the big free

marketers who do not want any government involvement. But they

are not exactly doing things that would help this country at a time

of crises. I think that is important to note.

Ms. Browner, we talked about refineries, an there has not been

a refinery built in the Northeast area for that 25 year period because the companies have not applied. Does EPA have any regulations dealing with storage facilities?

Ms. BROWNER. For the bulk storage facilities and the underground storage tanks?

Mr. TIERNEY. Exactly.

Ms. BROWNER. Yes, absolutely.
287

Mr. TIERNEY. Can you tell me whether or not there have been

any applications to increase the storage capacity in the Northeastern area in the last recent period of time?

Ms. BROWNER. We should answer that for the record. We think

there probably has been. We are not aware of how much. So we

will answer that for the record.

Mr. TIERNEY. Mr. Secretary, the Northeast Reserve is being

planned and I know that there are two sites in New Haven, CT,

and one in Woodbridge, NJ. The common concern, and I know the

answer to this but I would like to hear you put it on the record,

the common concern from people is will that reserve, because it is

located in Connecticut and New Jersey, actually be beneficial to

Massachusetts and points North if it becomes necessary to use it,

and how will it get there, and so forth.

Secretary RICHARDSON. Congressman, it is for the Northeast.

Your area will be protected. We are working out all those contingencies right now. The progress on setting up the reserve is going

well.

Mr. TIERNEY. And last, the storage or suppliers, people involved

with that have been saying they have a problem with what they

call carry. In other words, if the price is higher in January than

it is right now, again, these are free market people who want the

Government to stay out of it, but they are saying now they have

a problem and what they really need is an incentive. So they would

like the Government to write them a check or give them a tax

break to help them on that carry.

While I can understand and appreciate that, and I am really

amused by their change in tone as to what they think the role of

Government is here, would it not be somewhat more reasonable or

fairer to the taxpayer if we gave them a low interest loan of some

sort or a revolving loan process. Do you think that is worth doing?

Do you think that is part of the solution to help them through this

carry period, and is that a reasonable way to approach it?

Secretary RICHARDSON. I think loans, and we have tried to put

them in touch with the Small Business Administration. A lot of

these home heating oil operators, as you know, Congressman, because I attended a meeting in your district——

Mr. TIERNEY. You did and Mr. Major did, who is here, and I

want to acknowledge him and Mrs. Shayjus for the great help that

they were.

Secretary RICHARDSON. They do OK. [Laughter.]

Mr. TIERNEY. They do great.

Secretary RICHARDSON. I think ways to incentivize them are not

harmful. We have not accepted the concept of a tax credit. It is

being considered, a small tax credit to get them, for instance, to

store more, to keep more in their stocks. They have not done so and

I think at that meeting they explained why. They said prices are

so high, if we stock, all of a sudden there will be price volatility

and we are out of business, so we do not want to do that.

So I think a tax credit, modest, triggered, may be something that

we are considering. Loans, certainly, government loans through the

SBA are something that we partially have but perhaps could expand. I just do not think, Congressman, that these small home

heating oil operators have been the villains in this whole process.
288

Mr. TIERNEY. No, and I am talking about the people that store

it, the suppliers, and they are not so small in a lot of cases and

they are looking to have their carry covered. I do not mind trying

to resolve that problem, but I just want to make the point these

are the people that want Government off their back. We are happy

to get involved in the right amount of Government intervention,

but perhaps a loan program might be better for the taxpayer than

a give-away.

Mr. BURTON. The gentleman’s time has expired.

Mr. LaTourette.

Mr. LATOURETTE. Thank you, Mr. Chairman.

Yesterday, Mr. Secretary, we had the oil companies here. And a

chart, I am going to ask the staff to put up in just a minute, I

think the representative was from Citgo, was who not at the hearing yesterday. But I made the observation that when I learned to

drive we had high test and regular gasoline, those were your

choices. Now this chart from Citgo was designed to illustrate all of

the different blends of fuel that may be required to be stored in different parts of the country to comply with various regulations.

You talked about jawboning and working with the oil companies

on issues of transportation. One problem that they talk about is the

fact that when we get to the winter driving season you need this

many blends of gasoline, in the summer driving season this many

blends of gasoline. I just had a company in my district called

Lubrizal come in and they want to pitch Mr. Perciasepe in a couple

of weeks on a new product that they are making called Purinox.

They claim that it reduces NOx emissions by 30 percent and particulate from diesel. I said this is great, means jobs, a lot of money

for where I am from. And they were going to go out to Mr. Waxman’s State. They said they were going to go pitch it to California,

too, because they have some air quality regulations that some of

the rest of us do not have.

Mr. OSE. That is my State, not Mr. Waxman’s.

Mr. LATOURETTE. It is Mr. Ose’s and Mr. Waxman’s State, and

many other people as well live in California.

Maybe this is for both Administrator Browner and you, Mr. Secretary. Can we maybe solve some of our infrastructure problems if

we go back to the notion that whatever gasoline you decide, Ms.

Browner, or your successor decides is the best for the environment

during the winter and summer, that we go to that rather than having these I think 29 different blends of gasoline, if I understand it

right. And whichever one of you wants to jump in.

Ms. BROWNER. I think the Secretary is telling me it is my area.

We do not disagree with you. I think that part of the challenge is

you need to separate out on this map those that are local that EPA

has absolutely nothing to do with. And as you well know, a lot of

cities, for a variety of reasons, have decided to kind of set their own

gasoline recipe, Detroit being one of the older ones but there is a

number of those up there. And when you talk about the 26 different blends, a large number of those actually are in fact local city

decisions.

I will make a suggestion, I do not suppose it will be popular with

all, but you could go to one clean gasoline standard for the entire

country. Part of the issue occurs because for reformulated gasoline,
289

which is about a third of the country versus conventional gasoline,

you do have issues in reformulated gasoline, depending on where

it is sold in the country, in terms of weather and volatility. You

could fix that by going to one clean gasoline recipe for the country.

What that would mean though is that you would have places who

do not necessarily need it to clean their air buying it, and that

would be objectionable I don’t doubt to some.

Mr. LATOURETTE. But my air does not stop at border of Ohio and

Pennsylvania.

Ms. BROWNER. That is right.

Mr. LATOURETTE. It goes all over the country, and those of us in

Ohio are blamed by those in the Northeast for polluting their air,

and we blame the folks in Wisconsin.

But the argument that was made by the oil companies that part

of the problems with spikes and delivery is we have all these boutique gasolines and they have got to swap out the pipelines and the

tanks and everything else, it seems to me that could be minimized

if we went to one blend.

Ms. BROWNER. Mr. LaTourette, I think it is important to understand it is Congress that named the cities that would get the cleaner gasoline. It was not the Environmental Protection Agency, it was

Congress. So we would require a change in the Clean Air Act.

Mr. LATOURETTE. That brings me to my next point. I want to

talk about the cities of Chicago, St. Louis, and Milwaukee. Again,

when we had the oil companies here yesterday. I suspect, and they

would not agree with me, but I suspect that they got caught taking

a gamble in June. They saw that you had granted an enforcement

discretion for St. Louis, and I think that they gambled that you

would follow suit in Chicago and Milwaukee and they lost.

Ms. BROWNER. There was no basis for them taking that gamble.

They do not use the same pipeline and the issues were different.

Mr. LATOURETTE. Maybe not. But since that time, and the question I have of you, have you had a chance to look at what the Congressional Research Service concluded relative to the statutory legality that was used to grant an enforcement for St. Louis and not

in the other cites? Have you had a chance to look at that or have

your folks looked at that?

Ms. BROWNER. Maybe there are two different Congressional Research Service memos. The one I have seen, and it may be the

same one that you are referring to, looked at Midwest gas prices.

I do not know that it looked at the legality of the situation in St.

Louis versus the other cities. I am not familiar with that. But I will

tell you why we did it for St. Louis. St. Louis had a pipeline go

down and——

Mr. LATOURETTE. I know they did. The Explorer Pipeline and St.

Louis got 70 percent of their gas from it. I just want, if you would,

I am looking at the memorandum of June 28, 2000. If you have not

seen that——

Ms. BROWNER. No, I have not. I have seen the June 16th one.

Mr. LATOURETTE. OK. If I could ask you and/or your staff to review it and respond to the Committee in writing as to their conclusion that the enforcement discretion exercised for St. Louis, MO,

was in violation of CFR 80.73, and that not granting it for Chicago
290

and Milwaukee when requested was also suspect. So any thoughts

that you have on that.

Ms. BROWNER. We would be happy to take a look at that.

Mr. LATOURETTE. Thank you. Mr. Chairman, my time has expired.

Mr. BURTON. Yes. Mrs. Schakowsky.

Mrs. SCHAKOWSKY. Thank you, Mr. Chairman. I wanted to focus,

as did Mr. Kucinich, who I appreciate has allowed me to go first,

and you, Mr. Chairman, as well, on natural gas. We face a real crisis of cost in Illinois. I showed this bill insert yesterday that I got

in July in my bill from Nycor that showed we should expect that

what we paid for $410 worth of gas last winter we could expect to

pay $610 this winter. That was in July. We understand that the

October prediction is going to be $750, from $410 to $750. This is

going to pose an enormous problem to not just poor families, but

to ordinary working families in my district and in the service area

of this utility company.

I have some basic questions about natural gas pricing. Considering we are talking about a 100 percent domestic market, why have

the spot well-head prices doubled? I do not understand that. Let

me just ask my questions. Why did production drop when the demand increase was predictable and predicted? Does the cost of natural gas track oil prices regardless of supply and demand? Is there

any relationship at all between the cost of production and the cost

to consumers?

I have to tell you, Mr. Hoecker, when I read your testimony I

was concerned about a rather complacent attitude that I felt was

expressed in that. You said that consumers are still saving money

on natural gas compared to pre-competitive prices. You say that

the Commission will be monitoring the gas supply and price situation very closely this winter to assure that competitive pipeline

transportation markets continue to work in the public interest. I do

not think we can explain to my constituents and consumers in our

area that any of this is operating in the public interest. They are

going to be wondering how the heck they are going to pay their gas

bills, particularly when they look at the profits of the gas companies, the fact that it is entirely domestic.

I thought that maybe you could clarify this and hopefully reflect

some of the urgency that I feel and I think many of my constituents feel.

Mr. HOECKER. Your question is a great question and it is one

that sort of tracks the sentiment that we heard in California 2

weeks ago when we were there on electricity prices. We are very

aware that this country runs on electric and natural gas, that we

need reasonably priced and stably priced supplies of energy, no

question about that. What I am hopefully getting across is that the

commodity itself, natural gas, has been decontrolled. And there are

lots of explanations as to why the price has varied this year compared to previous years. I know that is not very satisfactory to

American energy consumers.

What the FERC can do about that is to encourage our colleagues

at the State level—who are in charge of rate stabilization, and

LIHEAP, and in terms of ensuring that their utilities make prudent natural gas purchases—to exercise their authority with re-
291

spect to retail rates. And when I say the interstate natural gas

pipeline market, I mean exactly that. The piece of the pie that we

regulate is the interstate pipeline system that takes the gas from

the producer or the processor and delivers it to the city gate, to the

Washington gaslights of the world that distribute it.

Mrs. SCHAKOWSKY. Maybe Secretary Richardson then can deal

with the larger question of natural gas prices if you are only dealing with the pipeline.

Secretary RICHARDSON. Congresswoman, I am sorry. I was trying

to have a conversation with—— Mrs. SCHAKOWSKY. I think it is a similar question, why was production so low when we knew that we were going to have a problem and now prices are so high that we have a crisis?

Secretary RICHARDSON. Demand is high, No. 1. No. 2, U.S. gas

production has been relatively flat. Gas storage levels have been

below normal. And, basically, alternative fuel markets have been

very tight. So I think you have those four problems and the price

issue and the capacity issue.

Now the President will sometime very soon announce some initiatives from his Interagency Task Force on Natural Gas. We, as

I said, Congresswoman, have a proposal before the Congress on

what is called delayed geological expensing which will enable the

natural gas producers to drill more and have an incentive to drill

more. We also have up here infrastructure improvements for pipelines. As you know, there have been several pipelines that have

burst. We need to find ways to repair them, to get them functional,

to get them operational. That is an initiative that we need to deal

with, too. But those are basically the four reasons why we have

this spike in prices.

Mrs. SCHAKOWSKY. We look forward to an announcement by the

administration. Thank you.

Mr. KUCINICH. Mr. Chairman.

Mr. BURTON. Yes?

Mr. KUCINICH. Mr. Richardson has stayed about 1 hour and 15

minutes over what he originally was supposed to stay. I just wondered how will the Chair proceed here?

Mr. BURTON. After just talking to you, there are two more people

that have questions for him. I think Mr. Sanford and myself and

maybe one other. So that will be about 10 minutes. So if you could

stay 10 minutes, we should have you out of here, Mr. Secretary.

Ms. BROWNER. Do I get to go too?

Mr. BURTON. Well, we have a few more questions for you. If you

don’t mind staying for maybe another 25 or 30 minutes, we should

have everybody out of here. But I know he has to leave. So if we

can get you through in 10 minutes, then we will try to get you out

of here right away.

Mr. Sanford.

Mr. SANFORD. I thank the chairman. I apologize for the delay. I

guess I have just a couple of questions for both of you. It was interesting, the gentleman from Vermont I think raised a very interesting point, and that is we have an administration that has said it

advocates a rules-based system that comes with WTO, we have a

Trade Representative who is constantly arguing that very point,

and yet we have not seen a lot of activity from the standpoint of
292

doing something about OPEC members and the cartel that they

hold.

So I would simply ask you, as Secretary of Energy, have you

lodged a formal complaint with the WTO based on the cartel that

is held by OPEC?

Secretary RICHARDSON. No, and I would not do so, Congressman.

That would not be helpful. I do not think it constitutes WTO violation.

Mr. SANFORD. So a cartel held by OPEC colluding on prices does

not constitute a breach of the rules-based system as outlined by

WTO?

Secretary RICHARDSON. Our view is what is desirable is the free

flow of oil based on market forces. That is our position.

Mr. SANFORD. That is a wish list. That obviously does not exist

given what OPEC is doing.

Secretary RICHARDSON. Well, as I said before, OPEC, the last

three meetings they have held, they have taken decisions that are

positive for the international community—more production. We encourage them to do more because those are the signals that are

coming from this country and from the world. I prefer to maintain

a dialog with them rather than fighting them in courts.

Mr. SANFORD. OK. So no action taken on WTO. How about encouraging our administration to eliminate the no fly zone over

Iraq?

Secretary RICHARDSON. Why would we want to do that?

Mr. SANFORD. OK, no. How about elimination of military sales to

those OPEC members based on the fact that they are colluding on

prices of fuels coming back to the United States?

Secretary RICHARDSON. We, the United States, have a lot of strategic interests in the Gulf, including the containment of Iraq. We

have strong security relationships with Saudi Arabia, with Kuwait.

That would not be in our interest.

Mr. SANFORD. So that would be an action that you would not be

willing to take?

Secretary RICHARDSON. No.

Mr. SANFORD. And similarly, if not a case in the courts through

WTO, how about some kind of revoking of the normalized trade relations that they now enjoy with our country? Does that fall under

the same category?

Secretary RICHARDSON. Same category.

Mr. SANFORD. OK. I do not mean to be harsh on this, but my

point is that we are unwilling as an administration to ask these

things of a foreign country, in this case a group of foreign countries, colluding on oil prices to America’s detriment, while at the

same time, the remedy that you are offering in part suggests invading the Strategic Petroleum Reserve. To me, that does not make

sense. In other words, we will put our own military at risk by

bleeding down the Strategic Petroleum Reserve but we will not ask

this of a foreign country.

Secretary RICHARDSON. The President will decide in the next few

days what to do on the Strategic Petroleum Reserve. This use of

the reserve has been, as you know, extremely limited. It is a very

important decision but it is a few days away. It is based on whether the President believes in the home heating oil crisis the Amer-
293

ican consumer would be harmed. And he will not hestitate to take

the steps that are needed.

So, Congressman, we have been very, very judicious in the use

of the Strategic Petroleum Reserve. There was enormous pressure

to use it all year and we haven’t.

Mr. SANFORD. I understand that and I respect that. But my concern is we have been even more judicious in asking allies in the

Middle East to do certain things than to use our own Strategic Petroleum Reserve, which is I thought there for a very specific reason, and that is to be there in the place of military contingency.

Secretary RICHARDSON. Congressman, we asked Saudi Arabia to

increase production. They did. We asked OPEC countries to increase production. They did. That is good not just for the United

States, but for world markets. Now that does not mean we should

rely on their imported oil or their activities. But they are a reality.

They control a large supply of the world’s oil. Many of those countries we have strong relationships with—Saudi Arabia, Kuwait, Indonesia, Nigeria, United Arab Emirates, Qatar. We have strong relationships with them.

Mr. SANFORD. I understand.

Secretary RICHARDSON. There are some that we do not, we do not

talk to them—Iran, Iraq, Libya.

Mr. SANFORD. Right.

Mr. BURTON. The gentleman’s time has expired.

Mr. SANFORD. I had some more zinger questions though. Thank

you, Mr. Chairman.

Mr. BURTON. Let me just take my 5 minutes and let you get on

your way, Mr. Secretary. You just alluded to the Strategic Petroleum Reserve. Lawrence Summers and Mr. Greenspan oppose

using that. And of course the Vice President today called for releasing fuel from the Strategic Petroleum Reserve. You said the President would be making a decision on that. Do you have any opinion

you are going to express to him?

Secretary RICHARDSON. Mr. Chairman, any advice I give the

President is confidential. You know that. I would like to say that

Secretary Summers and I share the same view, that the use of the

Strategic Petroleum Reserve is very selective, that it has to be

under the right circumstances. I think our views are fairly similar,

and they have been. I saw that article. The President has a wide

range of options, including some of those that the Vice President

proposed, and a decision on whether to use the Reserve will be

made shortly, in a few days. That is all I can say.

My advice to the President is based on the fact of whether we

believe the American people would be harmed by, for instance,

home heating oil shortage, by high energy prices. I just had consumers and truckers and a lot of people talk to me. There are serious problems.

Mr. BURTON. I think you have answered our question. I understand the concern that you have for the American people and the

heating oil problems. But I guess after 2 days of hearings and listening to the people who testified yesterday, there is a divergence

of opinion on where the problem lies. The energy producers say

there is environmental regulations that are strangling them, there
294

is not enough pipeline capacity. There is a whole host of things

that they said which has been refuted or disagreed with today.

But here is how it appears to me, I do not know if it appears so

to my colleagues, but it appears to me that there really is no strategy for dealing with the natural gas problems. We have got in our

forests out West a lot of government-owned land where there is

great natural gas reserves which could be very efficiently pumped

out of the ground at higher levels than what they are getting in

the pipeline now. But we are not exploring them. So there does not

appear to be a strategy for natural gas. There does not appear to

be a strategy for the problems that the reformulated gasoline and

the many variety of fuels that are having to be made are causing.

There appears to be no strategy for increasing our domestic production of oil. We keep talking about dependency on foreign oil, we

have oil that could be pumped out of the ground in various parts

of the country environmentally safely that we are not going after.

And we continue—— Secretary RICHARDSON. On that, Congressman—— Mr. BURTON. Well, let’s just go through all these things and then

you can respond.

Secretary RICHARDSON. OK.

Mr. BURTON. So we are not reducing our dependence on foreign

oil. There is no strategy for speeding up the process of getting permits for electric power plants, according to the people yesterday.

The comments were that, with respect to the transmission lines, it

is taking up to 7 years. I will not go into all that again, but you

can respond to that. And there seems to be only a patchwork strategy for dealing with our home heating oil problems, such as the

Strategic Oil Reserve or the new storage facilities you are talking

about.

So it is frustrating to me when we have a hearing to hear one

thing from the industries and another thing from the Government.

And then when we, as Congressmen and Senators, try to put all

this together and try to decide what we can do to help, we get some

suggestions from you that are limited to legislation that is pending

before the Congress, some of which is being held up by people in

the other party, and we say what can we do to help the American

people. So I would like for you just to respond to that, if you would.

Secretary RICHARDSON. Congressman, I was not at your hearing,

but I have heard these complaints before. I think what we need is

we need action. You need to pass a number of initiatives that some

of these industries even advocate.

Let me start out with one. The industry has wanted oil and gas

credits for marginal wells. The President has proposed that. We are

for that. The Congress has not passed that. We have proposed tax

credits for energy efficiency, more funding for alternative sources

of energy, as I said, boosting our own people. We have proposed

electricity deregulation which most utilities in the country want.

For there to be whining and blaming the Government I think is

just wrong.

I think what you as the Congress needs to do, and I say it respectfully as somebody who was with you for 14 years, is sort out

the different points of view but look at the facts, and the fact is

that the President’s initiatives on a wide variety of supply and de-
295

mand energy policies have not been passed. You cannot blame us

for not having a policy when a lot of it, like elemental, the reauthorization of the Strategic Petroleum Reserve, this Northeast

Home Heating Oil Reserve, is not passed, is not approved.

Mr. BURTON. Well let me just conclude by saying that we have

got a problem. This winter there is going to be a spike in gas and

oil prices. Diesel fuel is up. The truckers around the country are

screaming to high Heaven and it is evidently going to get worse

with the new EPA requirements, at least this is what we are being

told. And so all I can say is that I hope we can—— Mr. TIERNEY. Would the gentleman yield?

Mr. BURTON. No, I will not.

Mr. TIERNEY. Are you going to just continue to misstate what we

have been listening to all afternoon, or at least give Ms. Browner

an opportunity to once again set the record straight?

Mr. BURTON. You had 7 minutes. Your time has expired.

Mr. TIERNEY. Sir, you have had more than ample time also. But

you are using it to create a misstatement of the facts.

Mr. BURTON. You are out of order. I am the chairman of the committee.

Mr. TIERNEY. That does not give you license to go out there and

misstate the facts or to go on and on beyond your time. Either

please give her the time to answer you to set the facts straight or

stop.

Mr. BURTON. We are going to give Ms. Browner the time to answer. Secretary Richardson is under time constraints and I was

making my comments within the allotted 7 minutes which you had,

which is more than the 5, and you interrupted me.

Now, as I was saying, Mr. Secretary, I hope that we can reach

some kind of agreement so that those spikes in oil and gas prices

this winter will not make a life unbearable for a large segment of

our population.

I want to thank you very much for staying beyond the time that

you said you could. We really appreciate your being with us.

I will now yield to Mr. Kucinich.

Mr. KUCINICH. Thank you, Mr. Chairman. Secretary Richardson,

thank you. And I want to thank again the other members of the

panel.

In listening to this exchange today, a few things have become obvious. With Secretary Richardson’s leadership, we asked OPEC to

increase production, and they did. The United States asked nonOPEC nations to increase production, they did. The United States

asked domestic producers to increase production, and they have decreased production. And as some of them have added, while they

are decreasing producing, they are saying the problem is the Clean

Air regulations. Domestic producers have decreased production and

their profits are going through the roof. Which means, when they

come back to the market with that oil they are going to make even

more money. Here is one Member of Congress who objects to that.

I would hope that the administration knows that they have another tool at their disposal if these domestic oil companies do not

respond, and that tool is price controls. Now I know that is heresy

in a free market economy. But as Mr. Hoecker said earlier, there

are limits to what a free market can do. Free market is wonderful,
296

but if people cannot afford to get to work in their cars, or they cannot afford to heat their homes, then we have to ask some questions

about the free market. We do not just keep going back to the people and telling them to pay more. That is not fair.

Mr. Hoecker stated that natural gas supplies for immediate consumption are short. How many months has FERC known about

this shortage, Mr. Hoecker?

Mr. HOECKER. Well the shortage, as you put it, is a shortfall in

winter storage. We have been watching it and it is largely within

historic tolerances. Right now, the gas storage for the Nation generally is around 70 percent full, which is down about 10 percent

from last year. The experts that I have consulted tell me that it

is going to pick up dramatically in the next few weeks.

Mr. KUCINICH. Well, Mr. Secretary had stated that production is

flat. I am asking you if FERC has investigated the possibility that

natural gas companies are under-producing natural gas to drive up

corporate profits, because that is what it seems the oil companies

are doing.

Mr. HOECKER. I can tell you that, based on our understanding of

the market, gas producers shut in their wells and basically went

home. A lot of people left the business at a time when natural gas

at the well-head was being priced at $1.60. The market was not

there for them, they quit producing. And now we are living with

the consequences of that.

Are they continuing to under-produce? At least on the gas side,

and a lot of these folks are the same folks that produce oil domestically, the rig count has doubled just in the last few months. So they

are back out there again. The difficulty is that the supply response

is going to lag 12 or 14 months until it hits the market. When it

does that, prices will come back down. I would also say that

the——

Mr. KUCINICH. Excuse me.

Mr. HOECKER. Sure.

Mr. KUCINICH. You assume prices are going to come back down.

Mr. HOECKER. I assume. I assume. I have to mention again that

we do not regulate the commodity. But this is what I have found

out because I am as concerned as you are, sir, about the price of

natural gas.

Mr. KUCINICH. What can you do when these gas companies are

pricing three times what they have priced before? And why is the

supply response so slow? What can you do?

Mr. HOECKER. What can we do? We can make sure that the

interstate pipeline market is equipped to deliver those supplies as

soon as they come back on-line. We have a very good, very efficient,

very adaptable interstate pipeline system that is very competitive.

Right now, the gas purchasers in your hometown can buy from different suppliers, from different basins. It is a very workable system. They can hedge, they can engage in financial instruments to

protect themselves against risk.

Mr. KUCINICH. You regulate interstate rates, right?

Mr. HOECKER. Interstate transportation rates.

Mr. KUCINICH. Right. You regulate those.

Mr. HOECKER. Yes.
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Mr. KUCINICH. OK. Can you do anything about the price of the

interstate rates? You monitor them.

Mr. HOECKER. We think the price of interstate transportation is

regulated and we have rate cases all the time. Could we, for instance, cap those rates or drive them down arbitrarily? Our statutes require us to do investigations and make those decisions based

on costs and the—— Mr. KUCINICH. Final question. Will you investigate?

Mr. HOECKER. We will look at them, yes, sir.

Mr. KUCINICH. Thank you.

Mr. BURTON. We are just about near the end here. We will yield

to the people who are remaining and then let our guests go home.

Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman. I want to go back to the

electrical markets with Mr. Hoecker, if I could.

This is a map, and it is difficult to read, but this is a map of the

Southwest United States. As you can see there, you have the

Desert Southwest region, you have the Sierra Nevada region, you

have the Rocky Mountain region, and you have the Upper Plains

region. If you look in the Desert Southwest region, you will see a

number of plants which I highlighted earlier, those being Elephant

Butte, Deer Creek, Parker, Davis, Hoover, and Navajo. And with

the exception of Navajo, those are primarily hydro facilities.

I want to go back to my central point here, and that is that these

are facilities that are under the control of the Bureau of Reclamation, which is one of the largest electric generators in the country

just by virtue of having all these facilities. The thing I specifically

want to reference is that in June and July of this year, compared

to June and July of last year, you will note a significant reduction

in the generation from Glen Canyon has occurred. And that corresponds almost exactly with the electric price spiking in southwestern California around San Diego.

So the issue is why did the Bureau of Reclamation, which is an

agency of the Interior Department, reduce by over half the electric

generation out of Glen Canyon in the face of severe price dislocations in San Diego?

Mr. HOECKER. Again, it is information I do not know. I suspect

it is because of the supply of water. But in all my hearings in California and investigations about California, the deliberate withholding of generation capacity from out of State is something that,

frankly, no one else has brought up.

Mr. OSE. I want to put to rest the supply of water issue, because

I checked that. Along the Colorado River, which is where Glen

Canyon is, where Hoover is, all along that Colorado River Basin,

there was no reduction at Hoover, there was no reduction at these

other plants up and down the Colorado, I mean, 2 or 3 percent but

not 50 percent.

So my question comes back, why did the administration allow a

50 percent reduction in the generating capacity at Glen Canyon in

the face of severe price dislocations in San Diego?

Mr. HOECKER. Well, with all due respect, that is something you

will have to ask the administration.

Mr. OSE. OK. I know the answer. I just wondered if anybody else

did. There was a law passed in 1991, Public Law 102–575, which
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the gentleman from New Mexico actually voted for, which directed

the Department of Interior to engage in some work along the Glen

Canyon stretch, the purpose of which would be to analyze the impact on the environment of low flow releases from Glen Canyon.

And it is very interesting because it is actually a very, very appropriate use of Government authority to investigate this. And in the

interest of protecting the consumer, the legislation gives the Secretary, in conditions of—let me find the exact words. ‘‘The Secretary may deviate upon a finding that deviation is necessary and

in the public interest to respond to hydrologic extremes or power

system operation emergencies.’’ Now I suspect that what happened

in San Diego qualifies under a power system operation emergency.

There was no hydrologic extreme.

So what we had was legislation passed by this Congress, supported by Mr. Richardson, by Mr. Waxman, and others that said

analyze this, but keep in mind that if we have price dislocations

in our markets that we serve, you have the ability to waive the requirement and jack up the generating capacity. Those circumstances came to pass and this administration ignored them. In

fact, for the first time on Monday of this week they actually did

grant a waiver, and the generation at Glen Canyon did in fact go

up in response to significant increases in demand in California.

I want to know why in June, July, and August—we do not have

the August number here, but I can guarantee you it is going to be

similar to the 200-odd thousand there—why in June, July, and August this administration sacrificed the interests of electric ratepayers in San Diego when they had the freedom to answer the call

for electric generation demand.

Mr. HOECKER. Well, you have me at a loss. I do not know the

answer to that.

Mr. OSE. Mr. Chairman, my time has expired.

Mr. BURTON. If you could get that information for us, it would

be very helpful.

Mr. HOECKER. I will ask the Department of Interior to help provide it.

Mr. BURTON. Mr. Tierney.

Mr. TIERNEY. Mr. Chairman, first, I would like to submit for the

record three documents. The first is a statement from the auto

makers calling for a clean diesel rule, the second is a press release

from the Engine Manufacturers Association, and the third is comments from the State and Local Air Pollution Administrators. Each

of these groups support the EPA low-sulfur diesel rule.

Mr. BURTON. Without objection.

Mr. TIERNEY. Ms. Browner, I was listening to what I thought

was a mischaracterization of the testimony we have heard today in

terms of EPA’s role in this situation. I would like to give you just

a moment or two to sort of recap for us and set the record straight

for the third or fourth time so that maybe we don’t have to hear

it again.

Ms. BROWNER. Thank you very, very much. First of all, with respect to permitting delays. You heard testimony apparently yesterday about all sorts of delays up to 7 years. That is not because of

any action by the Environmental Protection Agency. We do not site

transmission lines. We do not permit transmission lines. If you ac-
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tually look at the numbers, and we will provide all of the details

to you, and you are free to come and look at all of our records, we

are moving electric generating permits through the system, in cooperation with the States, on a 12 to 18 month basis. Whatever

delays there are, they are not because of the Environmental Protection Agency.

Second, I think it is important, and I thank the Congressman for

noting the support we do have on our proposal, but we have not

adopted a diesel standard yet. And for people to be talking about

what this will do before we have made any final decisions strikes

me as somewhat premature.

Our proposal would require these clean diesel fuels in 2006—not

tomorrow, not next year, but almost 51⁄2 years from today. We are

working with those in the industry who will work with us, as we

did on low-sulfur conventional gasoline, to incorporate a whole host

of flexibilities. I would note that on our low-sulfur gasoline rule,

this affects almost every refinery in the country. We get sued regularly at EPA, by environmental groups, by businesses, for the decisions we make. We were sued by one small refinery on that rule.

Not all of them, one. And we are looking to resolve that issue. I

think that is an indication of how well we worked with the industry to both meet the public health standards and provide the flexibilities.

There are other issues, Mr. Chairman, that you have mentioned

that I still would like the opportunity to clarify. I know you want

to have an accurate record. For example, you made reference early

on to the dyes and some other issues. I do not want to use the kind

gentleman’s time, but hopefully I will be able to share that with

you before the hearing ends.

Mr. TIERNEY. Thank you. I think somebody referred to it as corporate whining. I probably would not be that strong in the wording,

except to say that I think a lot of times businesses, because that

is their job to make a profit, they do these preemptive strikes in

trying to do something that they do not want to do.

Mr. Hoecker, you mentioned in the course of your testimony that

you could no longer effect the amount of gas that was in the supply

because it had been decontrolled. Was there a time when there was

some control or Government regulation on the supply of gas?

Mr. HOECKER. There was. Between 1954 and the late 1970’s

when the Natural Gas Policy Act was passed and for some period

after that because price controls were phased out.

Mr. TIERNEY. And if we had that law still in effect today, would

there have been some remedial action that could have been taken

to avoid what we have just gone through, a period of really depletion of supplies and a lag period waiting for it to build back up?

Mr. HOECKER. Ironically, when that law was in effect, the consequence of it was to create a chronic short supply in the country.

We had price controls at a point when production was continuing

to decline. Our reserve picture was very bleak in the late 1970’s.

We did not allow natural gas to be used for boiler fuel uses, that

is, for electric generation or industrial purposes. We did not allow

natural gas to be used for a variety of things. And we were curtailing supplies because we thought it was a very, very limited resource.
300

When the price of natural gas was decontrolled, what we found

is that we had an ample supply. People went out looking for it. And

I think I can say with confidence that the industry expects natural

gas supplies to be durable for the next half century, if not a whole

century.

Mr. TIERNEY. Yet we still find ourselves in a situation though we

have plenty of it, we cannot seem to get it when we need it.

Mr. HOECKER. Well, what happens is that when you create a

market you live with some of the vicissitudes of that market. To

use the words of the CEO of Anadarko yesterday when I was at

the conference in Ohio, he said the real energy crisis was when

natural gas was at $1.60 and oil was at $10 a barrel. For them,

that is true, because they just got out of the business. A lot of

small producers especially quit producing. That is an unfortunate

situation because cheap energy does two things: one, it diminishes

production, and it also disincents American consumers from being

efficient and conserving their energy resources.

Mr. BURTON. The gentleman’s time has expired.

Mr. TIERNEY. Thank you both.

Mr. BURTON. Let me just say, before I yield to my colleague, that

is one of the reasons why you need a long term energy policy. Because if you have these wide fluctuations in the spot price of oil or

gas, you have to have a long term policy that sets some kind of consistency. And we do not have that.

I yield to my colleague, Mr. LaTourette.

Mr. LATOURETTE. Thank you, Mr. Chairman.

Chairman Hoecker, Congressman Kucinich was here earlier, I

come from the same part of the country and the banner headline

of today’s Cleveland Plain Dealer was that people in greater Cleve- land are going to pay $70 a month more this winter for their natural gas bills as we heat our homes going into the winter. I listened

very carefully to your responses to everybody that has asked you

questions, but I want to talk about pipelines, which I think are

within the purview of your organization.

If the producers were finding it economically feasible to produce,

do we have sufficient pipeline capacity today to meet the needs particularly in the Northeast part of the country?

Mr. HOECKER. I believe we do. I think we are moving in the right

direction. The Commission has certificated 800,000 miles of interstate natural gas pipeline since 1995. That represents a delivery

capacity of about 7 billion cubic feet a day. And as the demand for

natural gas increases, we expect to get requests for more interstate

pipeline capacity. But we have certificated some major facilities in

an environment where landowner objections and environmental

problems are very important and those folks are very vocal, and we

have to take that into account.

Even pipelines that we have certificated for the Northeast are

not being built at their original design capacity because the project

owners have not been able to find a market for some of that original proposal. What that tells me is that we are doing it just about

right. That means that we are going to continue to consider applications for more capacity but that we are not going to do it at such

a rate that we are going to create a capacity glut which is going

to cost consumers a lot of money.
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Mr. LATOURETTE. You talked a little bit earlier about the natural

gas folks having the ability to hedge. Are you familiar with the

term interruptible contract?

Mr. HOECKER. I am.

Mr. LATOURETTE. Could you explain just for the committee’s

record what that is and how those work.

Mr. HOECKER. Well, an interruptible contract for pipeline transportation simply means that you buy at a lower rate and you take

the risk of being curtailed at some point if supplies are short or if

capacity is short.

Mr. LATOURETTE. In all markets that are volatile, folks use

things like hedging and futures to stabilize prices. Are those tools

available to the natural gas industry?

Mr. HOECKER. They are very available in the natural gas industry, yes.

Mr. LATOURETTE. Are there any disincentives that you are aware

of—governmental, tax, or otherwise—that prevent or inhibit the

natural gas folks from becoming involved in hedging or futures to

stabilize the price of natural gas?

Mr. HOECKER. The natural gas folks, by that you mean?

Mr. LATOURETTE. The producers.

Mr. HOECKER. The producers. No, I am not aware of any.

Mr. LATOURETTE. Thank you, Mr. Hoecker.

Mr. Chairman, I do not have any more questions. I would just

ask unanimous consent that the CRS report of June 28, 2000, that

I was chatting with Administrator Browner about be included for

the record.

Ms. Browner, I have made a copy for you, too, so that you can

take that with you.

Ms. BROWNER. Thank you.

Mr. LATOURETTE. And if somebody wants the balance of my time,

I am happy to yield it to them, or I will shut up and yield back

the balance of my time. Mr. Ose from California, who shares California with Mr. Waxman, as we all recall—[laughter]—I would be

happy to yield the balance of my time to you.

Mr. OSE. Thank you, Mr. LaTourette. The folks from Ohio have

always been generous, and I appreciate it.

Ms. Browner, do you think we need more electrical generating facilities in California?

Ms. BROWNER. I would not want to pretend to be an expert on

this issue.

Mr. OSE. But based on our summary’s experience.

Ms. BROWNER. Based on what I have read and what I have

heard, I certainly think that is a question that is worthy of very

serious consideration. But I in no way would want to—I am not an

expert on issues like that. I can certainly talk to you about, if you

want to have more generation, what might be some of the cleaner

types of generating facilities. But I am not an expert on the demand side.

Mr. OSE. Mr. Chairman, I see Mr. LaTourette’s yellow light has

come on. We will come back to the cleaner generating facilities on

my next round. Thank you.

Mr. SANFORD. Yes, ma’am. First, let me just check off the list,

I have got a bizarre question I have always wanted to ask you.
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That is, Al Gore’s book ‘‘Earth in the Balance,’’ and all that sort

of thing, there has been so much talk about a basically minor portion of that book that dealt with if you increase the tax on fossil

fuels, you could basically do more to clean up the environment than

anything else you could do out there. Agree? Disagree? Where are

you on that?

Ms. BROWNER. I think the work of, and I am sure the Vice President would agree with this, of cleaning up the environment requires a wide array of activities and tools, and that this administration has been doing its level best within the authorities granted

us to do just that.

Mr. SANFORD. But you would agree it would be one of the tools?

Ms. BROWNER. I did not say I agreed or disagreed.

Mr. SANFORD. Well, I am asking you to pick one.

Ms. BROWNER. I do not want to. [Laughter.]

Mr. SANFORD. Fair enough. Touche. That is what these exchanges are all about though is trying to get to the bottom line of

where folks—— Ms. BROWNER. I am not in charge of those policies. Again, I am

really happy to talk to you about clean air.

Mr. SANFORD. Well that is what we are talking about. The argument was that if you increase the tax on fossil fuels, you could do

more to clean air than anything else you could do out there. I am

asking your opinion on that.

Ms. BROWNER. I will tell you everything we are doing to clean

the air your citizens and all the citizens of this country—— Mr. SANFORD. I am sure you are doing many different things.

But I am asking your specific opinion on that one thing.

Ms. BROWNER. I am doing everything I can within the authorities

Congress has granted me.

Mr. SANFORD. So you just do not want to answer the question.

Ms. BROWNER. I am answering it within the area of my expertise

and——

Mr. SANFORD. I understand you are choosing not to answer it.

But I was just asking for your opinion.

Ms. BROWNER. Sir, I have an area of expertise and I am more

than happy to speak to my area of expertise. I have the utmost respect for our Vice President. He has been at the forefront of virtually every public health environmental issue in this country.

Mr. SANFORD. And I was not downing him. I was simply asking

your opinion on that part of the book. And you are saying you

choose not to answer. Fair enough.

Second question, supply and demand. Economics 101 would say

supply is in part controlled by regulations around that supply. In

other words, that is the funnel through which supply reaches end

product. There are all kinds of unintended consequences that go

with any piece of regulation. Since that piece of regulation is out

of bounds in terms of your willingness to answer it, I would

ask——

Ms. BROWNER. There is no regulation of that sort at the EPA.

Mr. SANFORD. We’re going there right now. That is, if you think

about the different pieces of regulations that have been promulgated by the EPA, some have had good consequences in terms of

raising or lowering fuel prices, some have had bad consequences.
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And I am asking you to do the David Letterman routine, which is

give me the top two that you think have raised fuel prices the

most, and the bottom two that have lowered fuel prices the most.

Ms. BROWNER. Can I suggest that these are complex issues. They

do not lend themselves, with all due respect, to a David Letterman

routine. I am happy to talk about the cost and the benefits of—— Mr. SANFORD. OK. We can take the David Letterman reference

out. But I would just ask if you would pick one or two that had

some very positive consequences.

Ms. BROWNER. Cleaner gasoline. Without a doubt, cleaning up

the Nation’s gasoline. Removing things like toxics, benzene, sulfur

are some of the most cost-effective things we can do to improve air

quality and to protect the public’s health, to reduce respiratory illness, to reduce premature death, to reduce asthma attacks in our

children. They are without a doubt some of the most cost-effective

things that we can do.

Now I said in my opening statement, and I am happy to say

again, I am the first to recognize that when we move forward to

protect the public’s health, to protect our environment, there are

costs. But they are pennies compared to the benefits that clean air

is bringing the people of this country. And there is study after

study, and I am not just talking about EPA’s study, there are studies after studies that—— Mr. SANFORD. Sure. And I would not dispute those at all.

Ms. BROWNER. And as one member noted earlier, the most

fascinating—— Mr. SANFORD. If I might, in that I only have 5 minutes and we

are down to about 1 minute left. If you were to pick out one thing

wherein there was an unintended consequence of EPA that resulted in higher costs to the consumer, what would that one thing

be from the standpoint of fuel price?

Ms. BROWNER. I will give you an example actually outside of the

Clean Air program. I will give you the example of brownfields.

Without a doubt, when this Congress adopted the Superfund legislation almost 16 years ago, an unintended consequence of that legislation were the brownfield sites, the lightly contaminated sites

that the developers, the bankers, the lenders, the cities would not

come to address. Now, fortunately, we have had a program to try

and solve that. We need Congress to give us some legislation. And

I do not dispute your premise that there can be both positive and

unintended consequences. I think that is a clear example of it.

One of the things we did—and Mr. Chairman, if I might have a

little bit of extra time here because I think this is an important

issue and I am sure the committee does, too—when we were setting the new tailpipe emission standards for cars and SUVs and

the fuel standards—that is what actually comes out of the tailpipe,

it is the catalytic converter, it is the engine, it is the gas you put

in that gets you the actual air quality benefits that you breath— we spent a lot of time, I personally spent a lot of time with both

industries that would be affected asking them how we could avoid

unintended consequences. And I will give you an example of an unintended consequence that I believe has, in fact, been avoided.

Detroit told us over and over again that they are about to have

a clean diesel engine for cars. They have got it in Europe, they can
304

bring it here, it could be two to three times more fuel efficient. But

we had to structure our standards to allow for that clean diesel engine. And we did that, and they have said that repeatedly.

We set up the program to meet the public health benefits. We did

not change anything we asked for on public health, but we avoided

a consequence of keeping those engines out. Now if we are going

to bring those engines in, we had to do that last year, this year we

have to get them the clean diesel gasoline, and that is the second

piece of it.

But we do look at both the intended consequences and the unintended consequences.

Mr. BURTON. The gentleman’s time has expired.

Before I yield my time to Mr. Ose, let me just say that we are

going to give you whatever time you need to respond to anything

that we have talked about earlier.

Ms. BROWNER. Great. Thank you.

Mr. BURTON. But you made the point that they have only received one application for a new refinery at the EPA in the last 25

years, suggesting that the lack of refinery capacity is industry’s

fault. It is so unprofitable to build a refinery in this country that

there really is not much point in submitting an application because

of the requirements. You can respond to this after Mr. Ose finishes.

This was I believe a misleading statement. And there is no strategy

for dealing with the fact that the refineries are strained to the

breaking point and they would like to expand and/or build new

ones.

Ms. BROWNER. If I could—— Mr. BURTON. Well, I am going to yield my time and then you can

respond as you wish.

Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman.

Ms. Browner, we started to discuss just briefly the air quality

issue and what the particulate matter discharge would be from any

given facility. In my district in California, we are under construction on a gas-fired turbine. I think the projected generating capacity being somewhere around 400 or 500 megawatts.

Ms. BROWNER. That is pretty common.

Mr. OSE. The issue there is that the nitrous oxide emissions on

that plant will be about one-twelfth of the emissions from a plant

of similar capacity elsewhere. Now the challenge that I see, and I

really want to talk about the Prevention of Significant Deterioration program, because the challenge I see is that if we are going

to encourage industry to create these plants that are so much more

positive on a relative scale for the environment and that can provide peak or swing power for our economy, one of the things it

seems to me we need to do is bring some certainty to that process

on the PSDs.

Now in this particular plant’s case, it went through local jurisdictional review, the board of supervisors there passed on it, there

was an environmental document, everything was real clean, simple, done. And then the current PSD process allowed a window

after that local review for someone to file an appeal. And the result

of that was an individual who lived roughly 100 miles away came

and filed an appeal over the, if I recall correctly, the air quality im-
305

pacts. And that cost 4 months immediately; in other words, there

was an immediate shutdown of construction. The appeal was eventually denied on the basis of lack of factual basis—— Ms. BROWNER. I think on the basis of standing. The complaint

was found to have no standing.

Mr. OSE. All right. The issue that I have is, is it possible for us

to take the PSD appeal process and correlate it to the appeal process in California law under SEQUA so you do not have that extension, if you will. Like, you have the SEQUA appeal process right

now, then you have the PSD appeal process. Is it possible for us

to take the PSD process and correlate it to the SEQUA process?

Ms. BROWNER. About half the States have done that, and we are

fully supportive of that. California has not chosen to do it.

Let me back up for a second because I think this is where some

of the confusion may exist between what people said yesterday. All

but one State now handles air permitting for all facilities. It is not

EPA, in the first instance. They use the Federal authority, but they

handle the day-to-day permitting process—application, review, and

granting. For the one State we do it, we also do it for Puerto Rico.

About half of the States have chosen to handle any appeals that

may come as a result of a permitting decision, half have not. If

they choose not to, then we are required to handle the appeals

process.

Mr. OSE. Can I ask your indulgence. My time is about to expire

and I want to go to one other question. And then the chairman is

going to allow you to respond—— Ms. BROWNER. The chairman said I could have whatever time I

needed.

Mr. OSE. The other issue I—— Ms. BROWNER. Excuse me. With all due respect, you have made

some statements that I think would benefit from an explanation.

Mr. OSE. And I am very interested in your response.

Ms. BROWNER. I would like to do it on the record in public, because this is a statement about an agency that I run and I feel like

we do not have the full story.

Mr. OSE. I am just looking for what can we do legislatively to try

and correlate those.

Ms. BROWNER. One possibility, as I have already pointed out, is

that half of the States handle the appeals process. California has

chosen not to. We are happy to work with them on doing it.

Mr. Chairman, I really feel strongly about setting something

straight here.

Mr. OSE. My only other question was——

Ms. BROWNER. The chairman said I could.

Mr. BURTON. We are not going to stop the clock on you.

Ms. BROWNER. I am going to be sitting here alone. I can see what

is coming.

Mr. OSE. No, you are not. I am going to be here.

Ms. BROWNER. Mr. Tierney is going to stay with me.

Mr. OSE. I will commit to staying because I am interested in your

answer.

Mr. BURTON. Well finish so she can answer.

Mr. OSE. OK. My other question was that we have a choice of

whether to import oil from foreign trading partners or increase pro-
306

duction somewhere, somehow here domestically. The question that

I have is that on a relative scale in terms of environmental consequence, are we better off importing oil where we do not have the

various air quality protections from foreign sources, or are we better off from an environmental standpoint producing more oil here

domestically subject to all of our regulations? It is obviously a hypothetical.

Ms. BROWNER. I think that is a legitimate question.

Mr. BURTON. The gentleman’s time has expired. We will allow

her to answer all of these questions.

Ms. BROWNER. I think that is a complicated question and I think

it is complicated by many factors. For example, the whole issue of

greenhouse gases is a global problem. It does not really matter

where the greenhouse gas comes from. We all will experience the

consequences of the warming or the changing of the Earth’s climate. So if you analyze it from that perspective, my attitude would

be you need environmental protections in all places to ensure that

you are not contributing to an increase in greenhouse gases.

I think it is hard to answer that absolutely. I do believe that all

of the work that we can do, that we do with other agencies to, if

you will, upgrade upward harmonization of environmental standards globally are of a benefit to all of us. I think we need, my

sense, when you look at our oil supply, we need a mix of domestic

and foreign. My sense is that there is a lot more we can do from

a domestic perspective in terms of energy efficiency, in terms of renewables. We have got a bill up here in terms of renewables in the

gasoline which would help our farmers, which would help our cities

who pick up all those yard clippings, they can turn it into biomass

and it can become part of a renewable fuels programs. So I think

it is a combination of activities.

If I might just return to the specific permit that you brought up.

Start to finish, it was 13 months from the time the final application

was submitted. A couple of points to note. First of all, twice the

company changed their application. They themselves changed what

they were looking for. And that does result, obviously, in additional

review. They made the changes. We were not even involved at that

point, the State was. EPA very quickly looked at what the State

had done and concurred. An appeal was filed. California does not

handle those so it came to us. Our entire time for the appeal

through our Environmental Appeals Board was 11 weeks. I am

happy to give you the dates that things were received.

But I would like to point out something. In the appeals board,

we appear as a party. We do not appear as the party filing the appeal. In this case, we appeared in support of the company against

the party filing the appeal. I think these are important facts that

have not been stated, as far as I can see from yesterday’s record.

It was simply the EPA stood in the way. We did not stand in the

way. We came in on the side of the company. We think these facilities are good facilities. We have been supportive of them. And I

hardly think a 13 month permitting process, where the company

themselves made adjustments, is an unreasonable permitting process.
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Now, I cannot speak to what local government requirements may

be. I cannot speak to what PSC requirements, or whatever you call

your State regulatory—what is it, a PSC out there?

Mr. OSE. That is Mr. Waxman’s PUC, not mine. [Laughter.]

Ms. BROWNER. I cannot speak to any of that. But I can speak to

what we do. And I would like the record to reflect that in the case

of the Clean Air Act requirements it was a 13 month process. I can

name a lot of facilities in your State. We have another one that was

a 14 month process, we have one that was a 16 month, we have

another one that was a 14 month. This one was 13 months.

I would also like to point out there are not many appeals to the

Environmental Appeals Board. Right now, I think we have three

pending for electric turbines. One was resolved I think in 10 days,

one was resolved in 31⁄2 months, and one is about to be resolved.

People do have rights. They should be able to raise questions if

they believe a mistake was made. We move expeditiously. And

where we have an opinion, we come in on the side of the company.

Mr. OSE. My question was is it possible to correlate the appeal

period under EPA with the appeal period under SEQUA?

Ms. BROWNER. If the State would take over the appeals process— it is their appeals process. They could incorporate whatever the

Federal appeals process would require I would think, they could

put it into theirs. They have chosen not to. I do not know why California made that decision, but that is the decision they made. And

we would be happy to talk to them about it.

Mr. BURTON. Excuse me. Let me just say the gentleman’s time

has expired. If we have more questions, any of us, for Ms. Browner

or Mr. Hoecker, all we have to do is write them and we will ask

them to respond for the record, and I am sure they will respond.

And as I said, Ms. Browner, if you have further things you would

like to clarify, we will be happy to listen.

Ms. BROWNER. I would. I would like to spend a moment clarifying one other point. You have been most kind to allow me the time.

You put up some bottles earlier with some dyes in them and suggested this was silly requirements on the part of IRS, I don’t know,

somebody, probably us. Let me explain why these dye requirements

exist.

These are not interchangeable fuels. One of these fuels has only

500 parts per million sulfur. The other is in excess of 300,000,

maybe higher. America’s truckers do not want that 300,000 parts

per million sulfur fuel, home heating, off road fuel in their trucks.

That is what the dye is for. It is also for the IRS to make sure they

are collecting the right tax. And I know we all agree that collecting

the right tax is not over-charging, not under-charging. But surely

we also agree in protecting the trucker and the public’s health.

That is what the dyes are for, so that when someone is moving the

product around they know are they dealing with a high sulfur content or a low sulfur content.

Now I also understand that there were some complaints about

this means that you have to drain a tank. Obviously, people have

residuals in their tanks when they bring in a new fuel. Surely, that

is not the problem. Mr. Chairman, with all due respect, I cannot

for the life of me understand why anyone who is involved in this

business would think that dyeing two radically different fuels, they
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are not slightly different, they are radically different fuels, is a

problem. Thank you.

Mr. BURTON. Thank you, Ms. Browner, Mr. Hoecker. We really

appreciate it. You have been very helpful and I appreciate your

being kind with your time.

Ms. BROWNER. Thank you.

Mr. BURTON. We stand adjourned.

[Whereupon, at 4:15 p.m., the committee was adjourned, to reconvene at the call of the Chair.]

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