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NATIONAL ENERGY POLICY

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

FEBRUARY 28, 2001

Serial No. 107–11

Printed for the use of the Committee on Energy and Commerce

(

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

COMMITTEE ON ENERGY AND COMMERCE

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

TOM DAVIS, Virginia

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

JANE HARMAN, California

DAVID V. MARVENTANO, Staff Director

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

JOE BARTON, Texas, Chairman

CHRISTOPHER COX, California

STEVE LARGENT, Oklahoma

Vice Chairman

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

GEORGE RADANOVICH, California

MARY BONO, California

GREG WALDEN, Oregon

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

RICK BOUCHER, Virginia

RALPH M. HALL, Texas

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

JOHN D. DINGELL, Michigan

(Ex Officio)

(II)

2

C O N T E N T S

Page

Testimony of:

Campbell, Elizabeth, Director, Natural Gas Division, Energy Information

Administration .............................................................................................. 58

Gill, Jas, Vice President, Manufacturing, Cytec Industries, Inc .................. 106

He ́bert, Hon. Curt, Jr., Chairman, Federal Energy Regulatory Commission ................................................................................................................. 23

Hendrix, Walker, Council, Kansas Citizens’ Utility Ratepayer Board ........ 94

Hilliard, Jack, General Manager, Florence Utility, on behalf of American

Public Gas Association ................................................................................. 98

Jordan, Jerry, Chairman, Jordan Energy, Inc., on behalf of Independent

Petroleum Association of America ............................................................... 70

Littlefair, Andrew J., President, Pickens Fuel Corp., on behalf of Natural

Gas Vehicle Coalition ................................................................................... 82

Luxbacher, Roberta A., Vice President-Americas, Exxon Mobil Gas Marketing Co., on behalf of Natural Gas Supply Association .......................... 91

Reiten, Richard G., President and CEO, NW Natural, on behalf of American Gas Association ..................................................................................... 76

Silva, Patricio, Project Attorney, Natural Resources Defense Council ........ 110

Wadlington, Cuba, Jr., President and CEO, Williams Gas Pipeline, on

behalf of Interstate Natural Gas Association of America .......................... 66

Material submitted for the record by:

American Chemistry Council, prepared statement of ................................... 128

Smith, Terry, Chairman, California Independent Petroleum Association,

prepared statement of ................................................................................... 130

(III)

(1)

NATIONAL ENERGY POLICY

WEDNESDAY, FEBRUARY 28, 2001

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEE ON ENERGY AND AIR QUALITY,

Washington, DC.

The subcommittee met, pursuant to notice, at 1 p.m. in room

2123, Rayburn House Office Building, Hon. Joe Barton (chairman)

presiding.

Members present: Representatives Barton, Largent, Burr,

Whitfield, Norwood, Shimkus, Wilson, Pickering, Blunt, Bryant,

Radanovich, Bono, Walden, Tauzin (ex officio), Boucher, Sawyer,

Wynn, Doyle, John, Waxman, Markey, Gordon, Rush, McCarthy,

Barrett, and Luther.

Staff present: Miriam Erickson, majority counsel; Karine

Alemian, professional staff; Peter Kielty, legislative clerk; Andy

Black, policy coordinator; Sue Sheridan, minority counsel; Rick

Kessler, minority counsel; Ray Kent, minority professional staff.

Mr. BARTON. If everyone could take their seats, we will get started. We want to maintain the tradition of starting on time or starting as close to on time as is physically possible.

Congressman Boucher is on his way, and he will be here shortly.

We obviously have enough members to begin our opening statements.

I want to welcome our new Chairman of the FERC to our first

in a series of hearings on national energy policy. Today we are

going to focus on one of the commodities that is going to be important in that policy, which is natural gas. We are going to look at

all fuel sources with the purpose of identifying both production capability and what the demand for the particular fuel source is, and

look at any legislative or regulatory changes that need to be made

in order to explore, produce, distribute and use the specific energy

sources under consideration at this specific hearing.

Last night, in the State of the Union, the President said, ‘‘We

have a serious energy problem that demands a national energy policy.’’ I couldn’t agree with the President more. Those of you that

watched it on television and those of you that were fortunate to

perhaps be in the chamber would have seen that I was the first

person on his or her feet when the President said that.

At today’s hearing, we are going to look at natural gas. Future

hearings, working with our minority, which we will announce very

soon, we will cover coal, nuclear energy, crude oil and petroleum

products, hydroelectric and other renewable energy sources, conservation and energy efficiency.

2

Next week, we are going to have a hearing devoted specifically

to Members of Congress who have concerns about our energy policy

to come and testify before this subcommittee. We are going to have

a panel next week on Tuesday that focuses on the situation in the

electricity market in California and energy policy generally around

the country. Members that wish to testify are being notified today

by a dear colleague, and of course, we will do as many member

panels as are necessary to give every member an opportunity to

testify next week.

With regard to today’s hearing, natural gas is our cleanest burning fuel source. For a long time, it has been the fuel of choice for

residential heating, and in the last 10 years, new electric power

generations. Recently, however, the market has been pinched by

greatly increasing demand. The downturn in wellhead prices in the

late 1990’s discouraged some companies from producing and exploring for natural gas. That has led to a reduced growth rate in natural gas production. Because of that, we do import natural gas

today in the United States, primarily from Canada, but to some extent, overseas from our L&G sources.

It is time to take a look at rebalancing supply and demand in

an environmentally responsible manner in natural gas markets. It

is also time to make sure that natural gas can get where it is needed, which means that we need to focus on the transmission infrastructure. A healthy region cannot complain about high natural gas

prices, yet obstruct establishment of additional pipeline capacity.

We must also do our part to reauthorize pipeline safety law in a

responsible fashion.

I am pleased today to welcome Chairman Curt He ́bert to the subcommittee for the first time in his new capacity as permanent

Chairman of the Federal Energy Regulatory Commission. And I

want to take a point of personal privilege to let everyone know, in

no uncertain terms, that I fully support Chairman He ́bert being

the permanent Chairman of the FERC. I look forward to working

with him in the years ahead to craft a comprehensive national energy policy. And I am very confident that with his ability and the

Commissioners that are there and the new Commissioners that the

President’s going to appoint very soon, once they are confirmed by

the Senate, this subcommittee and your commission is going to

have a very cooperative working relationship.

So I don’t want there to be any concern about whether I support

Chairman He ́bert being Chairman He ́bert. He has got my total, unqualified support. This is going to be a very busy time for you and

your commission, but I know that you are up to the task.

I am also pleased on the next panel, a small panel of 10 experts,

which we have had to extend the table—you will notice our table

is I think a little bit longer than it normally is to get each of you.

Congressman Boucher and I have decided to do as many hearings

as we can where we have one panel so that all members have a

chance to ask questions and that people that are on the second or

third panel end up having to speak only to me and Congressman

Boucher. So we are going to try to do as many hearings as we can

with one panel, except when we have administrative officials like

Chairman He ́bert.

3

We are going to work in this subcommittee with other committees to hopefully craft a comprehensive energy policy for this country. We are going to focus today on natural gas. We know that for

the near term it is the environmentally responsible fuel of choice,

and as such, we need to give it serious consideration.

Mr. Boucher is not here yet. We will go to Mr. Doyle for an opening statement, and we will go to Mr. Bryant.

Mr. DOYLE. Thank you, Mr. Chairman. I want to thank you for

convening this hearing to examine a wide range of factors impacting natural gas markets, and to further determine the role of natural gas in a comprehensive, national energy policy. This hearing

should prove to be a valuable source of information as we move forward in fashioning a national energy policy that is mindful of all

energy sectors, assures reliable and affordable service, encourages

conservation, and maximizes new technology opportunities.

As we are all aware, natural gas prices have risen sharply during

the past year following a 15-year period of adequate supply and demand. Natural gas prices have risen dramatically at the wellhead

over the last year, which has translated into drastic increases in

heating bills for residential customers. And just as prices have increased, so has demand. This demand for natural gas has been attributed to a robust economy coupled with an environment that

supports the growth of natural gas-fired electricity generation. If

these dynamics sound familiar to the subcommittee’s previous dialog on electricity markets, that is because we are facing some of the

fundamentally same challenges involving generation, transmission,

and distribution.

A strong demand for natural gas is not a new-found discovery

but a trend that we have been aware of for some time. In the testimony we will hear today, numerous studies will be highlighted that

project U.S. gas consumption is expected to increase by 40 percent

by the year 2020. We also should not ignore the fact that currently

more than half of the present U.S. oil supply is imported, and without natural gas production, our oil import volume would be much

larger.

We should also be mindful of the fact that numerous scientists,

as well as the Presidential Committee of Advisors on Science and

Technology, have noted natural gas will remain a principal energy

source well into the next century. This, in part, is attributable to

the increasing demand for clean fuels and reduced emissions.

Mr. Chairman, while I am very much concerned about matters

involving increased drilling, adequate storage and pipeline safety,

I want to emphasize the importance of expanding options in terms

of recoverable resources. I am particularly interested in heightening efforts in the field of methane hydrates, and was pleased to

have my bill, The Methane hydrate Research and Development Act,

signed into law last year.

If I could tell you only one thing about the importance of research, identification, assessment, exploration, and development of

methane hydrate resources, it would be this: If only 1 percent of

the methane hydrate resource could be made recoverable, the

United States could more than double its domestic natural gas resource base. And when a new abundant resource is found that

meets a growing demand with a greater level of efficiency, conVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 E:\HEARINGS\71501 pfrm04 PsN: 71501
4

sumers will not only have a greater selection of options but more

affordable costs as well.

In addition to potential as an abundant and affordable energy

source for consumers, methane hydrate deposits also represent a

challenge to conventional oil and gas extraction. Hydrates influence

physical properties of ocean sediments, particularly, it strengthens

stability. Characterizing hydrate formation and breakdown is critical for the safety of deep offshore drilling and other deep sea operations.

While I strongly believe that methane hydrate should play a

strong role in our long-term energy policy, we must be quick to act

in responding to our short-term energy needs. I have been a strong

proponent of LIHEAP and have lent my support to recent efforts

to obtain supplemental funding and increase what will be appropriated in response to the overwhelming demand for assistance.

But we must find ways to enhance these types of efforts, and we

must act quickly. Just like my fellow members of the subcommittee, my constituents and small business owners are struggling in dealing with the rising costs of natural gas. One resident

has seen her gas bill reach $600 for 2 months, up from $89 a

month last year. And one small business owner’s recent gas bill

topped $5,000, an amount more than doubled the cost of last year’s

bill.

It is my sincere hope that today’s discussion will assist us in our

efforts to not only move through this period of price volatility but

also in making sound, long-term decisions that will foster a national energy policy that places great import on affordable supplies.

Thank you, Mr. Chairman, and I yield back.

Mr. BARTON. We thank the gentleman from Pennsylvania.

We want to just make an editorial comment. The ranking member and the chairman’s opening statements are 5 minutes, and all

other members, according to the rules, are 3 minutes. Now, we are

going to be very generous, but we have got a lot of hearings to do

this spring, and we hope that most of our opening statements can

be within the general constraints of the rules.

The gentleman from Tennessee, Mr. Bryant, is recognized for an

opening statement.

Mr. BRYANT. Mr. Chairman, I have an opening statement, but I

would point out that Mr. Pickering, my friend from Mississippi, arrived before I did, if that makes any difference.

Mr. BARTON. I happen to notice you before I noticed him.

Mr. BRYANT. I understand that.

Mr. BARTON. We will recognize Mr. Bryant, and then our next

one will be Mr. Pickering on the Republican side.

Mr. BRYANT. Thank you, Mr. Chairman. I will try to get through

this speech in 3 minutes, although, for some of us in the southern

region, it is awfully difficult to——

Mr. BARTON. I understand.

Mr. BRYANT. [continuing] talk fast.

I have been listening to my friend from Pittsburgh’s opening

statement. I realize probably most of our opening statements are

going to sound an awful lot alike. And you are probably sitting out

there saying, ‘‘Well, they always do, and so why don’t you move

5

on?’’ But I do want to give my statement and indicate my appreciation for the chairman for holding this very important hearing.

Likewise, in Tennessee, there has been—including me, my bill

has increased dramatically over a comparable time last year. And

a number of constituents that I have, have called and written us

about bills that have tripled and quadrupled. And unfortunately, a

lot of folks don’t make the money that we make in Washington,

and they have more difficulty—much more difficulty—making

those payments. Even though they may be smaller in size, but it

is still three or four times what they are used to making. So this

is a very critical issue.

I have a more complete statement that I will give to the record—

I will hand it in after my comments—but I did want to add a couple of other statements.

I think we have to begin to recognize that in this country we cannot have our cake and eat it at the same time. And we have to,

I think, go toward a more balanced approach to the issue of energy.

I am very optimistic that this committee, through hearings like

this, will be of assistance to those in the Administration whose task

it is to develop a national energy policy, and I hope we can play

a part of that.

And a part of that policy has to include, at a minimum, relief on

our pipeline situation. I know that was a part of the reason—along

with several others that you will hear all about today—but that

was part of the reason we had a smaller supply to bump up against

this large demand that we had. We have to look at our policy, our

policies, the Federal policies on Federal pipelines, the environmental issues there. Obviously, where I come from, the property

rights issues are very big down there. All these come into play

when you are talking about pipelines. But we have to have more

pipelines out there to get this gas out to the distributors.

Other issues we have to look at are exploration, finding additional sources in this country and in the northern part, in Alaska,

offshore, again, in a balanced approach that will protect the environment. But I am afraid, as we face issues like we faced in California with electricity, that we don’t overreact, and we don’t move

too quickly, but yet we take a balanced approach and, again, be

aware of issues of the environment and protecting property rights,

but yet, knowing that we have a surging demand for power in this

country that for the foreseeable I don’t think is going to stop.

And it is up to Congress I think to set the lead in this, and I

know our good chairman from Texas is going to do that. And again,

I thank you for doing that and would, again, ask unanimous consent to put my full statement in.

Mr. BARTON. Without objection, so ordered.

Mr. BRYANT. Thank you.

[The prepared statement of Hon. Ed Bryant follows:]

PREPARED STATEMENT OF HON. ED BRYANT, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF TENNESSEE

Mr. Chairman, I would like to commend you for holding a hearing on the drastic

increases in the consumer cost of natural gas. Let me begin by saying, I was

shocked at how much gas prices have risen when I received my utility bill at my

home in Henderson, TN. Over the winter, I have heard from many of my constituents in Tennessee wanting answers as to why their utility bills had tripled, and in

6

some cases, quadrupled without warning. In the real world, families have to stick

to a budget. Real families can’t dip into a surplus, they have to plan ahead. These

huge increases in gas prices have put real families in a bind, and I hope this hearing will lead to some solutions.

Most experts agree that our nation is in the midst of a natural gas shortage. The

travesty is that our natural gas supply is plentiful, but because of stifling federal

regulations, we are unable to develop our nation’s resources.

Federal regulations that have hindered construction of new gas-fired power plants

need to be relaxed. Our nation is consuming more power than we are able to

produce. We should explore opening up 8% of the barren, frozen tundra in the Arctic

National Wildlife Refuge (ANWR) in northeast Alaska and off-shore areas in the Pacific Ocean and Gulf of Mexico to environmentally responsible oil and gas development. Also, without new pipelines, we cannot distribute gas across the nation, which

would affect prices. I support streamlining the regulatory process for pipeline approval, so that we can meet our energy needs. We must take advantage of our nation’s resources to control our own destiny in the ever-changing global market.

As our society becomes more technologically advanced, we are requiring more energy than ever before and as we move away from oil and coal power, demand for

natural gas will continue to increase. The good news is that natural gas-fired generation has a number of benefits. Among them is the fact that gas-fired plants can

be constructed faster than other power facilities, an advantage in this time of power

shortages. Additionally, gas plants have environmental advantages because they

produce fewer emissions of both pollutants and greenhouse gases. If Congress can

provide adequate incentives and enough attractive prospective territory to foster a

high level of drilling activity then we should have a much increased gas supply as

a result.

I hope that today’s hearing will help to direct this body towards developing a coherent national energy policy that will ensure our natural gas supply meets the current and growing demand.

Mr. BARTON. The gentleman from Virginia, Mr. Boucher, is recognized for an opening statement.

Mr. BOUCHER. Thank you very much, Mr. Chairman. I want to

commend you for scheduling today’s hearing on natural gas policy.

Under the chairman’s procedure, today’s hearing will be the first

in a series of hearings our subcommittee will conduct on our nation’s policies with respect to its major energy sources. And I want

to commend Chairman Barton for this useful approach at a time

when the need for a national energy strategy focusing on our domestic resources stands in stark relief.

Over the course of the last year, the price for natural gas has

doubled, resulting in sharp increases in residential consumer bills.

The sustained higher prices for gas and the extreme spot market

spikes we have experienced during the last year seem all the more

dramatic because of the unusually low price for natural gas in the

preceding years. Accordingly, I believe this is a timely hearing.

Many of our constituents are asking both for assistance and for explanations.

The effect of high natural gas prices is not confined to residential

heating bills. As a major fuel source for electricity generation and

the production of commercial fertilizer, it is clear that consumers

across the Nation may also be paying for increased gas costs whenever they turn on the lights or purchase food at the grocery store.

The data produced to this date, by the Energy Information Administration and by others, seems to indicate that for the most part

the cause of these increases is mainly a case of demand growing

faster than supply. Exploration and development of gas fields has

been increasing steadily since 1995; however, beginning in 1999,

the number of new wells has declined as low prices discouraged investment in exploration and development. Fortunately, the data

7

also suggests that the market is responding properly, and exploration and new development activity has been on the rise over the

past year as a result of the high price that gas is now commanding.

Nevertheless, I think it is appropriate that we examine various

approaches that our committee may undertake to aid in increasing

the supply of natural gas. Since the deregulation of price controls

and allocations, the tools at the disposal of this committee primarily relate to the construction and reliability of pipeline transportation of natural gas from the wellhead to the consumer.

While it appears that the Federal Energy Regulatory Commission is using its authority under Section 7[c] of the Natural Gas

Act to permit new pipeline facilities in an expeditious manner, I

look forward to learning whether there are ways to improve on this

process without compromising either public participation or necessary environmental protections. I am also interested in learning

more about the various proposals to make Alaskan natural gas

available to the rest of the nation, whether under authority of the

Natural Gas Act or the Alaska Natural Gas Transportation Act.

Finally, the price increases in California related to a pipeline explosion that took place last August indicate that the pipeline safety

and supply reliability are inextricably linked. And so I hope we will

hear from witnesses now and at future hearings about how our

pipeline safety laws and regulations can help guard against supply

disruptions. We will review these matters carefully so that we can

ascertain what, if any, changes to these acts are necessary and appropriate.

Perhaps even more important to this inquiry is the question of

natural gas demand. This committee has primary jurisdiction over

our nation’s energy conservation statutes and programs, and a

comprehensive review of our conservation policies is therefore warranted. While DOE efficiency standards for a number of consumer

appliances have undoubtedly served to reduce the demand for gas

by affecting electricity demand, we should ask if there is more that

needs to be done to promote conservation, particularly in the commercial and in the industrial sectors. Is the Federal Government

doing its part to limit demand for natural gas and gas-fired electricity at its own facilities? Are we offering the right incentives to

encourage the use of more energy- efficient products? These are

just some of the questions we may want to consider as this hearing

and our future consideration develops.

Many of our energy and environmental policies over the last few

years have encouraged the construction of natural gas-fired electricity generation. This may be fine, and there is no doubt that

combined-cycle, natural gas power plants enjoy a number of natural, economic advantages that have contributed to their growth

and expanded use. But at the same time that we have encouraged

increased reliance on natural gas for electricity production, we have

also put in a place a range of policies that have had the effect of

discouraging the use of other fuels, particularly coal. The result is

an unbalanced energy portfolio and an economy that may be too dependent on too few fuel sources.

We need to find ways to conserve electricity and the demand for

gas while encouraging the environmentally sound and efficient proVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HEARINGS\71501 pfrm04 PsN: 71501
8

duction of energy from coal and the general expansion of our national portfolio of energy sources.

Mr. Chairman, as I have said before, this subcommittee has a

long tradition of bipartisanship. In part, I think that is due to the

character of the people who have served here. But it is also because

energy issues are often more regional in nature than they are partisan. And so one of the challenges that I think we are going to face

in this Congress, Mr. Chairman, may lie in bridging the gaps between the producer and consumer regions of the Nation more than

in bridging gaps between people on the two sides of this aisle.

As I continue to work with you and other members of the subcommittee in examining our energy policies, and perhaps in considering legislation, I look forward to working with you to ensure that

we put in place balanced energy policies that serve the national interest.

Thank you, and I yield back.

Mr. BARTON. Thank the gentleman from Virginia. We now would

welcome an opening statement from the gentleman from Mississippi, Mr. Pickering.

Mr. PICKERING. Mr. Chairman, thank you. And I, too, want to

join you in welcoming the permanent chairman of FERC, a good

Mississippian, Curt He ́bert. And I look forward to working with

you as we address comprehensive energy solutions for our country.

And Mr. Chairman, I can think of no better place to start with

than natural gas, as we all see across the country the high prices

of natural gas are causing severe suffering among our residents,

and in agriculture, and particular in my State, poultry producers.

And then with the coming planting season, we know that the input

cost to fertilizer is going to be extremely high. So we are concerned

across the board as to how the energy situation is going to affect

our overall economy and our people. I look forward to hearing the

solutions.

I believe, though, that if we look at the problem we face now, the

old saying, ‘‘We have met the enemy, and the enemy is us.’’ We

have locked up, locked away, shut down, shut out our fuel sources,

our natural gas reserves, either on the coast, in the Gulf of Mexico,

in Alaska, and we need to find a way to unlock our reserves of our

energy sources so that we can increase our own independence and

our own supply and bring the prices down. We need to find a way

to bring common sense to environmental regulations and permitting and pipeline safety.

I look forward to meeting all those objectives with you and working with you, Mr. Chairman, as we go forth.

Mr. BARTON. Thank the gentleman from Mississippi. The gentleman from Ohio, Mr. Sawyer, is recognized for an opening statement.

Mr. SAWYER. You caught me by surprise, Mr. Chairman.

I would like to just take a moment to thank you and Mr. Boucher

for this series of hearings that we begin today and to welcome

Chairman He ́bert and our other panelists who will be with us

today. I have a longer opening statement. I would like to associate

myself with the remarks that were made both by you, Mr. Chairman and by our ranking member. They are thoughtful, and they

go to the depth of some of the problems that we face.

9

I would only reemphasize the importance of recognizing the linkage between natural gas and electricity. It is a growing linkage and

one that in many ways should point us toward an understanding

that it is sometimes easier to move natural gas by wire than it is

by pipeline, and more efficient as well. The whole set of issues that

surround infrastructure in natural gas is every bit as important as

the one that surrounds electricity. The question of siting and timely development of the ability to move energy from one place to another is critical and at the heart of a complex solution of a multidimensional problem.

With that, Mr. Chairman, I yield back the balance of my time.

[The prepared statement of Hon. Tom Sawyer follows:]

PREPARED STATEMENT OF HON. TOM SAWYER, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF OHIO

I commend the Chairman for having this hearing on natural gas as the first in

a series to address a national energy strategy. There are many recommendations

that Congress should carefully consider, including: expanding LIHEAP; expanding

natural gas infrastructure; development of new natural gas technologies; increasing

energy efficiency; and, assuring adequate supplies of natural gas.

I am confident that we will hear from the many witnesses today about the uncertain supply and increased demand for natural gas. Yet, I do not think that the issue

at hand is simply a supply and demand problem. When prices increased earlier in 2000 to $3.00 per unit (MMBtu), this supposedly

gave producers enough incentive to open the wells. I have been informed that the

cost of getting natural gas out of the wells is $2.85 per unit. Any additional costs

are associated transmission. While there has been more exploration, it is not clear

why the prices continued to rise to nearly $10 per MMBtu by December.

Were the additional costs of transmission so great that the price of natural gas

increased three times over? What will it take to improve the conditions of old lines,

and conduct new infrastructure development? Or is this price—which does not seem

reflective of the cost usually associated with natural gas—reflect something other

than transmission? Was there some other inefficiency in the market causing this unnatural increase in price?

The long-term projection for stable natural gas prices ranges from $3.00 to $3.50

per unit. I am interested to hear from our witnesses today how the fifteen cent to

sixty-five cent cost of transmission over production has been formulated. It is not

clear to me how these projected prices can be reconciled with the prices we saw in

the later part of 2000. I look forward to the testimony and thank our witnesses for

addressing this very important issue.

Mr. BARTON. Thanks to the gentleman from Ohio. The gentleman

from Kentucky, Mr. Whitfield, is recognized for an opening statement.

Mr. WHITFIELD. Mr. Chairman, thank you very much. All of us

are excited about the series of hearings as we explore the possibilities of putting together a national energy policy which has been

lacking in our country for some time. It is fitting that our first

hearing does focus on natural gas, particularly since throughout

the country, residential, commercial and industrial users have all

been reeling from the high prices of natural gas. And I have received this stack of bills from my district from people whose rates

have increased anywhere from 200 or 300 percent in 1 month. And

I haven’t had any issue in recent time that I have received so much

correspondence about.

I was reading Beth Campbell’s testimony, as well as others, and

she went through a number of reasons why natural gas prices have

increased, and there are many reasons for it. One that she mentioned was the passage of the Clean Air Act Amendments of 1990

and subsequent regulations affecting air quality standards. And we

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know also that the previous administration did have a bias, in my

view, for natural gas. I think it is important that we also, as we

form this policy, recognize that coal is our most abundant resource—nuclear fuel is providing 20 percent of all electricity produced in our country—and that our policy must include using all

of our resources, and do it in an equitable way.

So I look forward to this hearing and the others, and I yield back

the balance of my time.

Mr. BARTON. We thank the gentleman from Kentucky, and hope

we give enough financial resources to you and your personal life

that you can help pay those bills. I am sure they would appreciate

it. If you just send the check back when you answer the correspondence, that will help in your reelection effort in the next

election cycle.

We would like to hear from the gentleman from Minnesota, Mr.

Luther, for an opening statement.

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

Coming from Minnesota, I can assure you I share the concerns

of many here about the impact of natural gas prices on family

budgets in our State. I want to thank you, Mr. Chairman, for holding this hearing, and I assume subsequent hearings, looking into

this issue and particularly looking at real, long-term, responsible

solutions to this whole energy issue and particularly the natural

gas price issue that is plaguing us at the current time.

I am particularly pleased that you have included a broad range

of interests in the hearings, including a representative from FERC

and from a consumer interest. I think it is key that we have that

kind of a balanced view of the entire issue. And I thank you and

look forward to the testimony, Mr. Chairman.

Mr. BARTON. Thanks to the gentleman from Minnesota. Gentleman from Illinois, Mr. Shimkus, for an opening statement.

Mr. SHIMKUS. Thank you, Mr. Chairman. I would like my official

statement to be put in the record.

Mr. BARTON. Without objection.

Mr. SHIMKUS. And, obviously, we are talking basic economics, a

supply and demand equation. The last administration did have a

fuel of choice, and that was natural gas. And the demand has outstripped our available supply, and prices have skyrocketed. It is

not rocket science. I think what we have to do when we debate a

national energy policy is have a wide availability of fuels. Let the

market decide the most efficient use of those fuels. I don’t just tend

to agree that using natural gas and the transmission system is the

most efficient use. I think the market will decide that. And when

the market can decide it, then we will have lower prices across the

board for all our energy needs and not really directed or manipulated by legislators here.

My farmers are about ready to go into the field too, and we know

the natural gas role in fertilizers. And there is a price to be paid

for no national energy policy. And we are paying it right now, and

hopefully we will rectify that in the weeks ahead.

With that, Mr. Chairman, I yield back my time.

[The prepared statement of Hon. John Shimkus follows:]

11

PREPARED STATEMENT OF HON. JOHN SHIMKUS, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF ILLINOIS

Good morning, Mr. Chairman and to all whom have shown up this morning. I am

looking forward to this hearing today.

The Midwest has been hit particularly hard by high natural gas prices this win- ter. In some parts of Illinois, consumers are paying $1.00 per therm. The cold winter

that the Midwest experienced did not helps matters at all. The State of Illinois and

the natural gas utilities have taken numerous steps to help consumers pay their gas

bills, but none of these steps address the long term problem of supply.

One of the main reasons for Illinois’ high natural gas prices was the focus on

power generating and peaker plants to meet above-load demand. We have drawn

down stocks of natural gas that have been used as the heating fuel of choice in the

Midwest, and as a result doubled the price.

We should all be worried that a majority of power plants that are currently on

the drawing board are powered by natural gas. When our country starts to rely too

heavily on one particular fuel source, we run the risk of supply shortages and price

spikes. This is what we are seeing now. We have become too reliant on one or two

forms of fuel.

The high natural gas prices are also causing overseen problems in rural areas.

Natural gas is used to make fertilizer for our nation’s farmers. These high prices

have led to a shutdown of U.S. nitrogen plants, raising uncertainties over the price

and supply of nitrogen fertilizer this coming spring. Natural gas accounts for 60-

70% of the total cost of nitrogen. So this has been a double hit on farmers. They

are paying higher prices to heat their homes, like everyone else, then they are also

paying higher prices for their fertilizers.

I happen to think that our nation should not rely only on just one energy source

such as natural gas, coal, nuclear or renewables to generate power, but all of these

sources. It is the smart thing to do over the long haul. Just like any good retirement

portfolio, our energy industry should be diversified. Fuel diversity will lead to less

supply problems and more stable prices for consumers.

Again, thank you for having this hearing today Chairman Barton. I yield back the

balance of my time.

Mr. BARTON. Thanks to the gentleman. Gentleman from Louisiana, Mr. John, is recognized for an opening statement.

Mr. JOHN. Thank you, Mr. Chairman. You caught me in the

wrong chair here. Thank you very much for having this—— Mr. BARTON. If the gentleman will suspend. I am having a finger

pointed at me by the lady from the show-me State.

Mr. JOHN. And I yield, Mr. Chairman.

Mr. BARTON. I want the record to show that my staff said Mr.

John arrived before Ms. McCarthy. But if in fact Ms. McCarthy arrived first, we will certainly let the gentlelady from Missouri go before the gentleman from Louisiana.

Mr. JOHN. I will yield.

Mr. BARTON. Does that make you happier?

Ms. MCCARTHY. Well, it is not the first time that it has occurred,

Mr. Chairman, but I am delighted that Mr. John will honor that.

Thank you, Mr. Chairman. May I proceed?

Mr. BARTON. You may proceed, for 3 minutes, though.

Ms. MCCARTHY. Yes, sir.

I have it down to one little page. I want to thank you, and I also

want to thank Ranking Member Boucher for this series of hearings

and welcome the permanent chairman of FERC being with us

today.

I have been working on national energy policy issues since 1976

when I first became a State legislator, and I hope—while natural

gas is important to all of our districts right now, I hope we on this

subcommittee will be able to formulate a long-term view that includes renewed efforts on conservation, seeing how we can at the

Federal level provide incentives for developing fuel efficiency, and

12

taking advantage of technological advances that are already occurring on alternative fuel resources. I would like to see this subcommittee also take a good look at developing alternative indigenous resources for national security purposes as well as environmental ones.

And this subcommittee, thanks to your leadership, Mr. Chairman, did pursue an issue that Mr. Shimkus and I introduced and

passed on biodiesel fuel, which is helping our communities. And

Mr. Doyle referenced his methane hydrate success. There are others out there, and we need to be pursuing them and taking a good

look at how we can help them and develop them. And last, I think

any national policy should address reducing our carbon emissions

so that we can address the scientific concerns with regard to global

climate change.

So I look forward to working with you. I am glad that we are

going to have a series of hearings. I hope that we will take a longterm view, broad view, and also a view that will rise above politics

so that we can, indeed, put a national energy policy in place that

continues the economic opportunities in this country and allows us

to expand them.

Thank you, Mr. Chairman.

Mr. BARTON. Thank the gentlelady from Missouri, and profuse

apologies for going out of order. If you are on time next time, you

will go before I go.

We will give you the honor of making the opening opening statement.

The gentlelady from California, Congresswoman Bono, for an

opening statement.

Ms. BONO. Thank you, Mr. Chairman. I am very happy to be sitting on this subcommittee, and today is my first day back, as you

know. And thank you for your help in putting me on this subcommittee. I, like all Californians, have a grave interest in this

issue and where we are. And as I just heard my colleague before

me talk about global warming, I have got a bigger issue. And that

is, in Palm Springs when it gets to be 128 degrees in the summer.

This is a serious issue. And it is not about quality of life, it is about

life and death for these people. The threat of rolling blackouts in

California is a real one, and I have been assured by many in the

energy industry that it is guaranteed that we will be having these

blackouts. I don’t know how my people are going to survive this;

I do not know for the life of me—128 degrees. If you have ever felt

it, it is seriously like stepping into an oven. And I hope you all

come out to Palm Springs, but August wouldn’t be the best month

for you to come out and visit us.

But you know, I am also hearing people talking about supply and

demand and the problem we are having in transmission in the gas

pipelines. These issues are only coupled in California by the problems we are having with deregulation and the flaws in, perhaps,

fed deregulation. So I care deeply, and I also thank the chairman

for the time he spent in California with all of us in trying to begin

to tackle this issue. And I thank Chairman He ́bert for the time earlier with the California delegation as well.

But I am a little frustrated by my colleagues. And I mean that

with all utmost respect. But how people can say that this crisis

13

came without any forewarning, amazes me. I have a brother who

is a geologist who is an independent producer, and for 10 years or

20 years he has been screaming that this crisis is going to be here.

And here we are. And, again, in California, it is life and death. And

I, again, want to say that I am anxious to hear your testimony and

thank you for your being here today.

And with that, I yield back.

Mr. BARTON. Thank the gentlelady. Now we go to the very polite

gentleman from Louisiana, Mr. John, for an opening statement.

Mr. JOHN. Thank you, Mr. Chairman. Thank you for holding this

hearing. And I want to also welcome Chairman He ́bert. I heard you

were from Mississippi, but with a name like He ́bert, I guarantee

you, roots are in Louisiana somewhere. So welcome and good luck.

As we embark on what the President called a national energy

policy debate, I think that natural gas is part of the equation that

cannot be left out. And I believe that Americans, in a lot of ways,

are addicted to energy, whether it is gasoline, electricity and all of

the things that go with that, such as recharging our cell phones

and other things as we enter and embark upon an electronic economy. It is just going to get worse.

The gentleman from Illinois, Mr. Shimkus, talked about it as a

simple question of supply and demand. Well, I have a different

twist on it—well, not a different twist, but something to say about

it from the demand side. I believe we are not going backwards. I

think that demand is going to continue to increase, and there is

certainty in that. I believe that is where we will go; that is the avenue we will take. On the supply side, I don’t think it is as certain.

I think that we have a lot of questions to answer. We have a lot

of soul searching to do as we look at some of the problems we have.

You know, I have said this so many times to my constituents

back home in Louisiana. It makes me a little nervous to know that

only 2 years ago we had cheap natural gas, we had 70 cents a gallon gasoline, $10 a barrel oil, and look at the situation we are in

today. I have also stated that I believe strongly that America, being

the most powerful country militarily, technologically, and economically in the history of mankind, has a vulnerability, and it is energy. And I think it is that serious.

And I think that the embarkment that we are going to start in

a national energy policy is as critical as any issue that we will debate in the next coming years. It is just coming to light now because of the situation in California and because of gasoline prices.

We had the coldest winter in some years in Louisiana. We actually

had three freezes. So it was cold in Louisiana this year.

Mr. BARTON. Wisconsin has got great sympathy that you had 3

days of freezing.

Mr. JOHN. For us guys, it is cold, Mr. Chairman. For us guys,

it is cold.

But I believe that it is time to stop demonizing the domestic producers. They are part of the solution to the supply problems. Too

many times they have been looked at as being part of the problem,

but of course, I think it is going to become apparently clear that

they are going to be part of the solution to any sustained economic

growth as we open the doors of a new economy that is going to be

driven by electricity and fuel.

14

I also am anxious to hear a lot of the comments from some of

my colleagues. I have my good friend down in the audience that

represents Louisiana Chemical Association, Dan Born ́ e, who knows

all about what high natural gas prices mean to Louisiana industry.

We talked a little bit about how other industries are going to be

affected and the trickle down effect. Well, I can tell you that 40

percent of the U.S. ammonia is produced in Louisiana. Ninety percent of the cost of ammonia is natural gas. Ammonia makes fertilizer. Fertilizer feeds our fields for our farmers. The farmers will

feel this effect not only in the price of diesel fuel to run their tractors but in the cost of production.

So I am very excited about embarking on a national energy policy, and it is something that I believe is very, very important to the

national security of this country. So with that, I have a written

statement that I would like to put in the record.

Mr. BARTON. Without objection, so ordered.

[The prepared statement of Hon. Chris John follows:]

PREPARED STATEMENT OF HON. CHRIS JOHN, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF LOUISIANA

Mr. Chairman, I want to thank you for calling this hearing today on natural gas

issues. In deference to the numerous witnesses who are patiently waiting to testify

I will be brief with my remarks. However, I would like to comment on a couple of

the natural gas issues that I believe are critical in developing a comprehensive national energy policy.

First, if we want continued economic expansion of our new high-tech economy, demand side solutions cannot alone help our nation meet its energy needs. For too

long, many Americans have taken for granted that the fuel that heats their homes,

runs their cars, and recharges their cell phones is the end product of an expensive

and complex process which begins with extraction of gas, oil, coal or uranium. Any

comprehensive energy policy must look at supply-side issues and I am happy that

we have witnesses represented today who will talk about access issues which have

constrained our domestic producers from developing our nation’s resources base.

The single greatest factor in this winter’s high natural gas prices has been a lack

of domestic supply to meet growing demand. This comes as no surprise to those of

us who represent oil and gas producing congressional districts. Two years ago when

our domestic producers were being crushed by historically low oil prices, and massive job losses were taking place in our communities, the silence was deafening from

the rest of the nation. As long as gasoline prices and energy prices were low nobody

cared about the fact that our independents and major producers of oil and gas were

cutting jobs, cutting back on new investment, and abandoning marginally producing

wells. Well, Mr. Chairman, we reap the seeds we sow.

While the number of production rigs has doubled in the past two years, the effects

of low prices have not ended. Over 400 jobs have been lost in my congressional district in the last few months as oil and gas companies continue to cut costs and

streamline their business operations in preparation of receding prices when this new

production comes online.

Natural gas is a commodity and the best way to prevent huge swings in price is

to ensure that there is an adequate, stable supply base. It is time to stop demonizing our producers and recognize that they are a central part of any comprehensive

solutions we may develop. Moreover, if we want to meet growing demand, we must

address some of the access issues that prevent development of America’s natural resource base. Surely members from states tied up in moratoria do not believe their

lands are more important or valuable than those of states who are not covered by

these restrictions. It is unwise and short-sighted to have a few states bearing a disproportionate load for the entire nation—especially when we are talking about the

development of federal, not state, lands.

We must also make sure that the right incentives exist to maximize our domestic

supply base. This should include tax incentives for marginal and stripper wells to

keep them in production, an extension of the Section 29 nonconventional fuels tax

credit to encourage production of natural gas from tight rock formations and other

sources, and royalty relief in federal waters where appropriate.

15

While most access and tax policy issues are beyond the Jurisdiction of the Energy

and Commerce Committee, I believe it is important for this Committee to recognize

their importance in a comprehensive national energy policy.

Mr. Chairman, let me conclude by thanking you for inviting a representative of

the Louisiana Chemical Association to testify today. Sustained high natural gas

prices have affected many industries, but few more so than Louisiana’s ammonia

industry, which accounts for 40% of the U.S. production of ammonia. Natural gas

makes up 90% of the costs of producing ammonia and as a result of high prices,

several companies have been forced to shut down all or part of their ammonia production units. Most of the ammonia produced in Louisiana is used to make fertilizer,

so the effect of high natural gas prices will soon trickle down to our nation’s farmers—who are already struggling with low prices. Mr. Jas Gill knows my district well

having spent time in the community of Lake Charles working for the Olin Corporation. I would like to welcome him to the subcommittee and appreciate his testimony

here today.

Mr. Chairman, thank you again for convening this important hearing and I look

forward to working with you to craft a comprehensive national energy policy.

Mr. BARTON. The vice chairman, the distinguished gentleman

from Oklahoma, is recognized for an opening statement.

Mr. LARGENT. Thank you, Mr. Chairman. Today’s hearing on

natural gas issues is of particular interest to me. My home State

of Oklahoma is a large producer of natural gas; nevertheless, my

constituents are not immune from having to pay high natural gas

bills. In fact, the No. 1 complaint that I hear in my office from folks

back home is what am I going to do to lower their natural gas

bills?

I want to recognize one of our witnesses today who is on the second panel, Mr. Cuba Wadlington. Mr. Wadlington is the president

and CEO of Williams Gas Pipeline located in Tulsa. And Cuba, we

welcome you to the subcommittee.

Mr. Chairman, the U.S. is a country rich in both energy resources and the technology to develop them. Unfortunately, the

policies of our own Government are preventing much needed development of these resources from occurring. For those of you who follow British history, you may recall the popular expression, ‘‘Taking

coal to Newcastle.’’ Newcastle was a center of English coal production. The phrase was coined to indicate the absurdity of taking a

product to a place that had plenty of it.

But that is exactly what happened in the late forties when the

British government nationalized the coal industry. Shortages and

rationing resulted, and taking coal to Newcastle became a grim reality. Similarly, the United States today with its vast supplies of

oil, natural gas, timber, and other natural resources is suffering

shortages and high prices because of restrictions imposed by our

own Government.

I read with interest the testimony of one of our witnesses today,

Mr. Patrick Silva, from the Natural Resources Defense Council. It

is the NRDC’s position that we can solve our natural gas supply

problems by maximizing the benefits of building energy-efficient

buildings and manufacturing energy-efficient heating and water

heating equipment. I agree that it will help alleviate some demand

problems, but it is not the silver bullet.

The NRDC apparently would like us to believe that if we maximize existing natural gas supplies, we can continue to be energy

self-sufficient. I infer from that sentiment that the NRDC opposes

any exploration or production of potential natural gas deposits, parVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 E:\HEARINGS\71501 pfrm04 PsN: 71501
16

ticularly if they happen to be in areas that the NRDC deems to be

environmentally sensitive.

Mr. Chairman, you know all too well that our domestic oil and

natural gas industry has suffered job losses in the tens of thousands over the last decade. I am afraid that until the oil and natural gas worker becomes himself an endangered species, the environmental community will continue to bite the hand that feeds our

energy requirements. My goal is for this subcommittee to develop

a comprehensive, common sense, environmentally sound, long-term

energy policy. Otherwise, I fear that the next popular expression

will be, ‘‘Taking oil and gas to Tulsa.’’ Thank you, Mr. Chairman.

Mr. BARTON. Thanks to the gentleman from Oklahoma. We now

welcome from the balmy badger State, Mr. Barrett of Wisconsin for

an opening statement.

Mr. BARRETT. Thank you very much, Mr. Chairman. I was getting choked up listening to Mr. John talked about the three freezing days.

Thank you also for holding this important hearing, and thanks

to the witnesses for being here today to discuss natural gas and the

nation’s overall energy policy.

Soaring natural gas costs, along with the high price of crude oil

and other fuels, have put this country’s energy policies under the

microscope, and rightly so. I am hopeful that this afternoon’s hearing will point to some sound solutions for meeting this country’s

long-term energy needs.

To date, I am afraid that some have been looking too hard in the

wrong place for solutions. Although gas production on some public

lands is certainly needed, expanding production in the country’s

most environmentally sensitive areas for a limited amount of gas

or oil is not sound public policy nor is it what the majority of American people want.

Any truly effective energy policy must include meaningful demand management incentives and significant infrastructure improvements, as well as initiatives to ensure an adequate energy

supply. The crisis in California, in particular, suggests that we

must work with the States to ensure a diversified fuels portfolio

that includes coal, hydroelectric, and renewable sources in addition

to natural gas.

Of utmost concern to me are the ways in which energy policy and

the fuels market impact the nation’s consumers. Major utilities in

my home State of Wisconsin are seeking retail rate increases upwards of $72 million to offset the rising costs of natural gas. Residential prices for natural gas, as everyone here knows, have already doubled this year. And while everybody’s pocketbooks are affected, many low- income families, many moderate-income families

and seniors living on fixed incomes have been truly overwhelmed

by their gas bills this winter in Wisconsin.

An energy assistant program director in my State recently reported that thousands of households are confronting heating bills

that are higher than their monthly incomes. Faced with heating

costs that range from nearly $200 to almost $700 a month, seniors

and working families are being forced to make unacceptable

choices, like cutting spending on groceries, medical prescriptions,

17

and other necessities in order to pay their heating bills. I realize

that this is a complicated issue, but we certainly have to do what

we can to work together.

And again, I thank the chairman for holding these hearings and

hope that we can help the people in this country because they deserve the help. And I would yield back the balance of my time.

Mr. BARTON. We thank the gentleman from Wisconsin. We recognize the gentlelady from New Mexico, Congresswoman Wilson, for

an opening statement.

Ms. WILSON. Thank you, Mr. Chairman. I think, probably, our

perspective on energy policy will depend, as the ranking member

said, a lot on regional perspective. And as a New Mexican, we are

an energy-producing State. We produce coal and gas and oil and

uranium—at least, we used to produce uranium. We still have the

uranium. We have plenty of public lands, more than almost any

other State, except Nevada and Alaska. We sell wholesale power to

States like California, and we are on the same grid as California,

which certainly send chills through a lot of New Mexico’s spines.

And we have two Department of Energy national laboratories,

where some advance research on energy supply and efficiency is

done.

But like my colleague from Oklahoma, I also have constituents

who are facing high energy bills, high natural gas bills, fears about

what being on the same grid as California is going to do. And let

us face it, while we are starting off these hearings talking about

natural gas, all of these issues are interrelated, because one of the

reasons that gas prices are high is because of the increase in demand for electricity as produced by natural gas power plants. And

so energy policy, as a whole, we are going to have to tackle. And

we need—for the first time in a decade, I think we have the opportunity to craft a national energy policy.

That policy must produce dependence on foreign oil and foreign

sources of energy. It must allow for responsible exploration and increased supply of energy as the American economy grows. And it

must demand, and probably put in statute, interagency coordination on matters affecting American energy supply and also curbs to

demand.

In this country, the EPA and the Department of Agriculture and

the Department of the Interior can all make decisions unilaterally

that affect American energy supply without having to take into

consideration its effects on the economy or our energy policy. We

need to put in statute a mechanism to make that not possible to

do anymore, so that agencies cannot protect their vested interest

without looking at what it will do to the entire economy and to the

supply of energy.

It certainly was made very clear in our hearing last year on

hydro licensing and the way so much water goes down spillways in

this country just because it is so hard to license a hydro dam. So

we have a shortage of energy in California which depends on hydro

power. We have hundreds, if not thousands, of dams that are regulated by States that have no turbines on them. And the reason they

don’t have any turbines and that electricity is going down the spillway is because it is such a hassle to be licensed to put a turbine,

because as soon as you put a turbine on a dam, it becomes federVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 E:\HEARINGS\71501 pfrm04 PsN: 71501
18

ally regulated. And the Federal Government can order you after 7

or 8 or 9 or 10 or 12 years to breach that dam, even if it has been

there for hundreds and hundreds of years.

California made terrible mistakes in how it did deregulation, and

there will be good lessons for us to learn there. But there are also

lessons to learn in research and development. We lose more electricity in the transmission of power from New Mexico to California

than is consumed by the entire State of New Mexico. Think of that

for a moment and how that would make a difference to rolling

power outages in the State of California. So whether it is the efficiency of the light bulb or the pilot light, which in this beginning

of the 21st century should probably be much more efficient than

they are, I think there is advantages to investing in research and

development as part of a comprehensive energy policy.

And finally, I will say what others have said before me, but we

really need to do this, and that is to rethink nuclear energy as a

country. I have seen some things said publicly and some stories in

major newspapers and television in the last several months that I

thought I would never see, that tell me that people really are perhaps now willing to rethink the role of nuclear energy in reducing

America’s reliance on foreign oil. And I look forward to that challenge.

Thank you, Mr. Chairman.

Mr. BARTON. Thanks to the gentlelady. I think that is the longest

opening statement you have ever made. You have probably been

associating with Mr. Markey a little bit too much.

Ms. WILSON. Mr. Chairman, it would have been funnier if I—— Mr. BARTON. It was eloquent. Actually, I thought it was well

done, so I am not being critical. We appreciate the thought you put

into that.

The gentleman from Tennessee, Mr. Gordon, is recognized for an

opening statement.

Mr. GORDON. Thank you, Mr. Chairman. This is an important

hearing. I think it is time to get on with it.

Mr. BARTON. I do love Bart Gordon of Tennessee.

The gentleman from Georgia, Mr. Healthcare, Congressman Norwood.

Mr. NORWOOD. Thank you very much, Mr. Chairman. I have this

tremendous opening statement, and I know you are dying to hear

it. However, I would like to just submit it for the record, and in

summary, conclude by saying I do, as all of us do, appreciate your

interest in a national energy policy. I am delighted that our new

President is interested in a national energy policy. And I heard one

of our colleagues earlier say I hope we can keep politics out of it.

I think politics has gone a long way to get us into the mess we are

today.

The people of the 10th District of Georgia want me to come to

these hearings and learn. They want to know why their gas bills

are so high. They want to know why their gasoline bills are so

high. And I think at the end of the day we are going to determine

that all Americans want all the energy they possibly can use at a

low cost. However, there are some Americans who want to use candlelight energy and be warmed by a nice fire. And we are going to

have to go through that, and that may involve some politics. But

19

at the end of the day, the American people, I believe the majority

of the American people, want you and President Bush to develop

a sound, sensible energy policy for this nation so we won’t have the

terrible things that are happening in California happen in the rest

of our States.

So I thank you, Mr. Chairman, for this hearing.

Mr. BARTON. Well, the EPA has determined by regulation that

candlelight is a point source pollutant and subject to various regulations, so that probably won’t be very viable as an alternative.

Seeing no other members present—oh, in the nick of time, the

gentleman from Massachusetts is recognized for a 3-minute opening statement.

Mr. MARKEY. Thank you. I appreciate it. It is more interesting

this way. I remember back in 1978 when we were debating the bill

which would decontrol the price of natural gas, and it was going

to come down to a two or three vote margin in the House. For all

of you out there nodding your head, you have been gainfully employed for a long period of time. Congratulations.

But it was a close voting. Tip O’Neill came to me out on the

House floor. He knew I was on this committee. And I really felt

that in the Senate version they had taken out too much money for

conservation and too much money for rapid transit. So I wasn’t

really convinced it was a perfect bill. And Tip put his arm on me,

and he said, ‘‘Eddie, I need your vote.’’ I said, ‘‘Tip, I can’t be with

you.’’ He said, ‘‘Eddie, I need your vote. We can’t have President

Carter be defeated on this.’’ I said, ‘‘The bill isn’t quite good

enough. If only it was better. When the bill is better, I will be with

you.’’ He said, ‘‘Eddie, I need your vote.’’ I said, ‘‘Tip, on this one,

you are not right.’’ He said, ‘‘Eddie, when I am right, I don’t need

you.’’

‘‘Let me think about that,’’ I said.

So as the years went by and I reflected upon the wisdom of the

great man, I realized that he was right, that I should have voted

for that bill, which I didn’t at the time. And in fact, in my last conversation with him, which was right before NAFTA, I reminded

him of that conversation 15 years before, and I told him that I

would vote for NAFTA because my President wanted it, and it was

close. And whenever it is close, you should give it to the President

in your party. So I did that.

But with different—excuse me?

Mr. BARTON. Remember that when it is close, your President will

get your vote.

Mr. MARKEY. I didn’t say my chairman. I did not say my chairman.

My chairman is different, although, if you are, okay, I am more

than willing.

We have had new breakthroughs in natural gas. Sable Island off

of the coast of Nova Scotia makes it possible for us in New England, for the first time, to be at the front end of the pipeline. There

is only 3 million people who live in Quebec. We are their customers. So that is good news for us, and it is going to lead to a

very rapid conversion of the New England economy to one which

is very much based upon natural gas, as Sister Carita taught us

in the sixth grade at the Immaculate Conception Grammar School,

20

from our friends, the Canadians, the longest unprotected border in

the world.

And so, for us it is good news in natural gas. Something that we

were told was in short supply back in 1978, it turns out is abundant; it is plentiful. In fact, so abundant that it could be used for

New England in the future.

In addition, the natural gas resources down in Trinidad could

also be tapped if other ports—as Boston does it in my district, in

Everett, Massachusetts, where there is an L&G facility—could be

constructed along the East and the Gulf Coast. I think we could

largely solve our energy problems if other parts of the East and

Gulf Coast were willing to build L&G ports, liquefied natural gas

where the gas is frozen biogenically and then transported by cargo

ships up into the heavily populated areas of our country.

So we in Boston, in my district, we are one of the few areas that

have this right now. But I think that given the fact that Trinidad

has this supply, that BP is in control of it and quite optimistic

about its long-term abundance, then I think we should move in

that direction as well. In other words, as long as we are creative

and working together, and not automatically saying that we should

go to the pristine areas of Alaska in order to drill before we have

exhausted other more pragmatic and consensus areas, then I think

we can work together.

It would be quite unfortunate if we went to an uneconomic area

for drilling in the heart of the Arctic Refuge before we went to the

places where I think we can all agree and work together to build

a common pulse.

And I think you for holding this hearing, Mr. Chairman, and I

yield back the balance of my time.

Mr. BARTON. We thank the gentleman. We tell that story in

Texas as a Sam-Rayburn-talking-to-Lyndon-Johnson-when-he-wasa-young-con gressman story. I have heard that before but not from

the Tip O’Neill-Ed Markey version.

Mr. MARKEY. Well, Tip O’Neill tells it as James Michael Curly

telling it to him.

And John McCormick telling the story to Sam Rayburn.

Mr. BARTON. Right. It is probably part of the Texas-Boston, the

Austin-Boston axis.

We promised to introduce no bill to drill under Boston Common

from this subcommittee. You have my word on that.

The gentleman from California, Mr. Radanovich, is recognized for

an opening statement.

Mr. RADANOVICH. Thank you, Mr. Chairman. I have no opening

statement, just looking forward to the testimony. Thank you.

Mr. BARTON. Seeing no other members present—whoops, Mr.

Waxman has just arrived. Does Mr. Waxman wish to make an

opening statement? Okay.

And the full committee chairman, Mr. Tauzin, you wish to make

an opening statement?

Chairman TAUZIN. Not on the record.

Mr. BARTON. Then the chair would ask unanimous consent that

all members not present have unanimous consent to put their

opening statements in the record. Hearing no objections, so orVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 E:\HEARINGS\71501 pfrm04 PsN: 71501
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dered. Mr. Walden has presented his statement. He will be back

shortly.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OREGON

Mr. Chairman, I’m from a hydro rich area of the United States where 70% of our

energy comes from our abundant hydro resources. It is the most inexpensive energy

there is, and it is renewable. However, we in the Northwest region are having a

drought, and that coupled with current energy markets in the West is having a devastating effect on Oregon’s economy and the rest of the Northwest.

In a year like this when we are projecting merely 59% of normal water levels and

we are shipping power to our neighbors to the south we have found that power diversity is becoming critical. Because 70% of our electricity comes from hydro, some

30% comes from coal, nuclear and natural gas fired generation. This puts us in a

very critical situation this summer.

I am happy to say that we are looking at a number of new projects in Oregon

that will be gas fired. Most of these plants will be located in my district because

a large natural gas pipeline goes right down the center. They are an important part

of meeting our region’s growing needs. I also know that by state statute we have

a CO2 mitigation fund that will keep these plants from leaving a very large footprint

on our environment.

But our situation at this moment in the Northwest is dire. Increases in the price

to heat homes has created an impossible situation for those families of lower incomes. They cannot afford two, three, or four times their normal heating bill. In addition, we have some farmers that grow specialty crops for dry goods that can’t dry

their crops because current gas prices add to much to their costs.

Here is what I hope to learn from this hearing. I want to know about gas supply.

Do we have adequate supplies to meet the ever increasing demand? If our gas supplies are enough, do we have the means to get it out? Are there laws in the way?

If there are, what can we do on the federal level to rectify the situation? And, do

we have the capacity in our pipeline infrastructure to deliver the natural gas to its

final destination?

The Northwest is meeting increasing demand by diversifying its energy sources.

I hope that this hearing will enlighten all of us on how we can allow that to happen.

With that Mr. Chairman, I’m anxious to hear what the panels have to say and

yield back the remainder of my time.

PREPARED STATEMENT OF HON. W.J. ‘‘BILLY’’ TAUZIN, CHAIRMAN, COMMITTEE ON

ENERGY AND COMMERCE

Mr. Chairman: I would like to commend you for holding this first of a series of

hearings on a comprehensive national energy policy. I think it is fitting that we

begin with natural gas. We need to increase the supply of natural gas and get more

of it to consumers.

Natural gas is currently the fuel of choice for new electric power generation. The

experience in California has awoken the rest of the country to the fact that electricity is something we cannot take for granted.

Natural gas is environmentally friendly. When burned, it emits far fewer pollutants than other fossil fuels.

Natural gas is abundant, if we can get to it. About 85% of our current consumption is produced domestically. The remainder largely comes from Canada.

High natural gas prices can have a ripple effect through our Nation’s economy.

A good example is what we experienced this past winter in my home state of Louisiana. You see, in addition to electricity production and heating, natural gas is used

as a feedstock to produce chemicals, which in turn are used for all sorts of products.

One such chemical is anhydrous ammonia. Companies in Louisiana produce about

40% of our nations anhydrous ammonia. This chemical is used to produce an infinite

number of commercial products, as our witness Mr. Gill will testify to today. One

important use of anhydrous ammonia is to make nitrogen fertilizer, which is critical

for crop yield, particularly corn.

CF Industries is a farmer-owned cooperative that operates a world scale nitrogen

fertilizer plant in my district. CF supplies about 1⁄3 of all the nitrogen fertilizer

needs for farmers in the U.S. When gas prices soared this past December, CF had

to shut down over half of its production in Louisiana because it could not cover its

cash production costs. Natural gas, as it turns out, is by far the primary cost compoVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00025 Fmt 6633 Sfmt 6621 E:\HEARINGS\71501 pfrm04 PsN: 71501
22

nent in producing anhydrous ammonia, and in turn nitrogen fertilizer. This directly

affects our Nation’s farmers and the goods we all take for granted.

Making choices to open and close manufacturing plants based on the supply of

natural gas is no way to run a business. The market will return natural gas prices

to reasonable levels if we let it. This means examining old policies in light of modern technologies, and pursuing new policies that will allow supplies to better keep

pace with demand. The situation of companies in Louisiana demonstrates the need

for a comprehensive hemispheric energy policy. Our country cannot afford to put

strategic industries like these out of business.

I look forward to hearing the testimony of our witnesses today.

PREPARED STATEMENT OF HON. RALPH M. HALL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF TEXAS

Mr. Chairman and Members of the Committee: I thank you for scheduling this

hearing on natural gas policy—the first of what I expect to be many hearings on

the development of a comprehensive national energy policy.

Natural gas is a clean, relatively abundant and domestic fuel that this country

is banking on to meet much of our incremental energy needs in the 21st century.

However, while government policy has had the effect of promoting the use of natural

gas, the policies affecting the development of natural gas resources and the delivery

of gas from where it is found to where it is consumed are profoundly weak and backward.

If the industry is to meet the projected demand—some say an increase of up to

35 trillion cubic feet in twenty years from the current levels of 22 trillion cubic feet

today—it can’t be business as usual from this point forward.

The investment that needs to be made in this industry is huge—$150 billion for

transmission and distribution alone. And that doesn’t even count the additional billions needed upstream by the exploration and production sector. And it’s not just

investment that’s needed.

If you come to my part of East Texas you will not have to go far to meet someone

who used to be in the oil business. He or she may be a former production company

executive, deckhand or roughneck. They’re not in the business now because the infrastructure to support exploration and production has almost been wiped out. Low

oil prices did that. And these folks have learned their lesson. Most of them have

found jobs at places like Wal-Mart where the pay is least steady, and they’re probably not coming back until they have confidence that this government cares enough

about the price of crude oil and natural gas to enact policies to stabilize prices.

The brain drain in the petroleum industry has been unbelievable. The confidence

to enter the business is not there. The best example I know of is at the University

of Texas at Austin. There are so few students in the petroleum engineering program, and the demand for them now is so great, that I’m told at least one company

is already hiring students in their junior year and paying them a salary. And I

thought only athletes turned pro in school.

Mr. Chairman, we won’t get that 35 trillion we need if we don’t open up some

public lands for exploration and production; if we don’t streamline the FERC permitting process for new pipeline construction; if we don’t enact some tax provisions to

create sufficient incentives for producers to drill and produce gas in mature horizons

where the yields from even new wells continues to decline.

And we can’t count on the Canadians or the Mexicans to meet our incremental

needs for the future. They have their own ideas about how they want to use their

gas, and it probably doesn’t include us as much as we might wish. We have to build

the confidence of our people back in order to build the infrastructure to deliver the

natural gas that this country needs.

If the best and the brightest of our young people continue to see that the oil and

gas business is a losing proposition, we won’t get that 32 trillion. And the impact

on the nation—in terms of jobs elsewhere not created or lost—will affect the economic wellbeing of this country.

Thank you Mr. Chairman. I yield back the balance of my time.

Mr. BARTON. We now would like to welcome the Chairman of the

Federal Energy Regulatory Commission, the Honorable Mr. He ́bert

from Mississippi. Your statement is in the record in its entirety,

and we recognize you for such time as you make consume to elaborate on that statement. Chairman He ́bert.

23

STATEMENT OF HON. CURT HE ́ BERT, JR., CHAIRMAN,

FEDERAL ENERGY REGULATORY COMMISSION

Mr. HE ́ BERT. Thank you, Chairman Barton. It is good to be here.

Let me open by telling all of you it is certainly my honor to be here.

I certainly want to apologize to the members, Congressman Bono,

Congressman Radanovich and Waxman, who heard me earlier

today in a meeting we had with the California members who were

concerned what is going on there. But I am pleased to be invited

on this, and I appreciate your leadership, Mr. Chairman, on this

issue.

I don’t think there is anything more important to America right

now than energy policy. In my testimony today, I would like to

make three basic points. First, the Commission’s primary role in

the natural gas industry is to ensure that adequate pipeline infrastructure is available to serve the growing demand for natural gas

at just and reasonable rates. Since the Natural Gas Wellhead Decontrol Act of 1989, the Commission has had no jurisdiction to regulate the prices charged by natural gas producers at the wellhead.

The Commission retains only limited jurisdiction over certain sales

for resale in interstate commerce. The Commission’s primary natural gas jurisdiction is, one, to authorize the construction of interstate pipeline transmission in storage facilities; two, set the rates,

terms and conditions of service for interstate transportation and

storage of natural gas.

Second, while the recent increases in natural gas prices are a

matter of serious concern, natural gas deregulation has been an extremely successful long-term policy. And the fundamental structure

of natural gas markets remain sound. Beginning in 1984, competition in the natural gas industry has led to 15 years of prices that

were lower than anyone anticipated in America. In fact, the low

prices lasted for so long that it was easy to forget the inherent

tendency of energy markets toward boom and bust cycles.

The deregulation of wellhead prices, together with the Commission’s Open Access Transportation Program, has produced a robust,

flexible, and responsive natural gas market. Already producers

have responded to higher prices with increased drilling. Although,

there is inevitably a time lag between increased drilling and a supply response, the increase in gas supplies hopefully will, over the

next several years, help moderate the recent price increases. Increasingly too, customers are adjusting.

For example, we hear of electric generators actively reconsidering

their exclusive reliance on natural gas for new plants. Several

members mentioned exactly that concern today and how diversity

and changes in fuels is important. Everyone has a role to play in

helping drive demand and supply back together in better balance.

I will not make any predictions about what prices will be in the

future, but I firmly believe at this point that allowing the competitive wellhead market to work continues to be the best way to obtain adequate gas supplies at the lowest, reasonable prices for

America.

Third, the Commission, we can help mitigate price increases by

exercising its jurisdiction over the certification of new pipeline

projects to ensure that newly developed supplies can reach the

market quickly and where needed. Adequate natural gas pipeline

24

transmission and storage capacity is critical to support the continued functioning of the competitive market for the gas commodity.

As new gas supplies are developed in response to the continued

growth in natural gas consumption and increased prices, new pipeline facilities will be necessary to allow those supplies to reach the

market. I pledge my continued support of the construction of new

pipeline infrastructure to meet these critical needs. And I will do

everything I can to ensure that the commission processes certificate

applications for proposed pipeline projects as quickly as possible.

For example, in response to the present situation in California,

the Commission is responding as quickly as possible to any applications to construct new capacity. In the last 7 months, the Commission has issued certificates for three projects with total capacity of

almost 119,000 MCF a day of capacity that could benefit the West.

Several more certificate applications are pending, and the Commission is committed to moving quickly on these projects as well. The

Commission is prepared to adopt additional procedures for expedition if they will help to alleviate the present emergency. Of course,

any actions the Commission takes, Mr. Chairman, to expedite new

capacity for gas to serve California and the West can only be effective if there is available local capacity to deliver gas downstream

of the interstate pipeline.

The availability of sufficient, local take-away capacity, however,

is a matter that is within the control of the States, not the FERC.

For example, it appears that the intrastate gas transportation network in Southern California is constrained, and this, to some extent, may have affected gas prices in that area, which are among

the highest in the nation. I urge the State of California, and its

leadership, to expedite its consideration of proposals to relieve

those constraints and provide relief to California consumers. The

Commission will cooperate with the States in order to ensure that

new facilities subject to State jurisdiction are properly integrated

in the interstate grid.

Aside from the current situation in California, there is also a

critical need to provide transportation for newly developed gas supplies to reach all U.S. markets. One major potential new source of

gas is in the arctic regions, including the north slope of Alaska. The

Commission conditionally approved the Alaskan Natural Gas

Transportation System in the late 1970’s pursuant to the Alaskan

Natural Gas Transportation Act. The U.S. portion of the ANGTS

comprises three segments which were issued a conditional certificate by the Commission in December 1977. Originally, the ANGTS

was scheduled to be completed by January 1, 1983. However, to

date, only the eastern leg and a portion of the western leg have

been constructed and placed in operation.

I strongly support the construction of a natural gas pipeline from

the north slope of Alaska to the lower 48 States. If constructed, an

Alaskan pipeline would provide unprecedented economic energy security and environmental benefits to the United States by bringing

a very large supply of additional gas to the domestic market. I am

fully committed to acting on any request for the construction of

pipeline infrastructure to deliver this gas to the North American

consumers. I well understand that the ongoing development of CaVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 E:\HEARINGS\71501 pfrm04 PsN: 71501
25

nadian and Alaskan natural gas supplies is critical to U.S. national

and energy security.

In conclusion, I assure you I recognize, Mr. Chairman, the critical importance to your constituents and the constituents of all the

members of this committee of having an adequate natural gas

transportation infrastructure. And we at the Commission will do

our part to ensure that new pipelines can be built to support a

growing industry, and that natural gas transportation supports

flexible, innovative markets.

I am confident that States and other Federal agencies will also

do their parts to put in place local infrastructure and to mitigate

short-term hardships. To me, Mr. Chairman, the mitigation can be

done most efficiently up front before the process begins. I am also

eager to engage in a team effort with executive agencies that will

also play a major and coordinated role in the environmental review

of any proposals. It is critical that any regulatory overlap be minimized, and that all agencies work together in a coordinated and efficient manner.

Mr. Chairman, the people of America need a one-stop shop to facilitate their energy needs. I emphasize that the Commission’s

Open Access Program for natural gas transportation has resulted

in a vibrant, transparent, liquid competitive market for natural

gas. It is critical that we continue to develop the same type of competitive, comparable markets for electric energy and transmission

as well, and do so as expeditiously as possible.

Mr. Chairman, those are my opening remarks. I do have with me

General Counsel for the FERC, Kevin Madden to my left, who is

here to make sure, since we are a quasi-judicial agency, I don’t step

out of the bounds on cases pending before us. Thank you.

[The prepared statement of Hon. Curt He ́bert, Jr. follows:]

PREPARED STATEMENT OF HON. CURT HE ́ BERT, JR., CHAIRMAN, FEDERAL ENERGY

REGULATORY COMMISSION

Mr. Chairman and Members of the Subcommittee: Good Afternoon. I am Curt

He ́bert, Jr., Chairman of the Federal Energy Regulatory Commission (Commission).

I am pleased to be invited to this hearing on natural gas issues and the role of natural gas in national energy policy.

In my testimony today, I would like to make three basic points. First, the Commission’s statutory role in natural gas markets focuses principally on transportation, not commodity prices. The Natural Gas Wellhead Decontrol Act of 1989 completed the deregulation of the prices producers charge for gas sold at the wellhead

in 1993. As a result, the Commission has no direct authority to regulate the prices

charged by natural gas producers. The Commission retains only limited jurisdiction

over certain sales for resale in interstate commerce. The Commission’s primary natural gas jurisdiction is to: (1) authorize the construction of interstate pipeline transmission and storage facilities; and, (2) set the rates, terms, and conditions of service

for interstate transportation and storage of natural gas. In short, our central role

in the natural gas industry is to ensure that adequate pipeline infrastructure is

available to serve the growing demand for natural gas at just and reasonable rates,

terms and conditions of service, and without undue discrimination.

Second, since wellhead decontrol and the Commission’s open access transportation

program, there has been a well-functioning, competitive market for the sale of the

natural gas commodity. From the mid-1980s until this winter’s heating season, competition among natural gas producers and others has resulted in readily available

supplies at prices lower than during gas price regulation. This winter prices have

risen because of an imbalance between supply and demand, due to a number of factors discussed later. However, the current high prices should provide the necessary

market signal to producers to increase production. Already there are reports that

producers have significantly increased drilling activity. Although there is a time lag

between increased drilling and a supply response, the increase in gas supplies hopeVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00029 Fmt 6633 Sfmt 6621 E:\HEARINGS\71501 pfrm04 PsN: 71501
26

fully will, over the next several years, help moderate the recent price increases. As

reported on Monday of this week, the futures contract price has dropped by about

50 percent, from almost $10 an MMBtu (million Btu) earlier this winter to about

$5 an MMBtu (Gas Daily, ‘‘Bid week prices coast narrowly into weekend’’ February

26, 2001). While this is probably due to warmer weather and recent decreases in

storage withdrawals, these are clear signs of a well-functioning market. I will not

make any predictions about what prices will be in the future, but I firmly believe

that allowing the competitive wellhead market to work is the best way to obtain

adequate gas supplies at the lowest reasonable price.

Third, notwithstanding the fundamentally sound nature of the natural gas market, the Commission can help mitigate price increases by exercising its jurisdiction

over the certification of new pipeline projects to ensure that newly developed supplies can reach the market. One of my top priorities as Chairman is to ensure that

needed energy infrastructure is built. If increased gas supply is to help bring prices

down, there must be adequate transportation facilities to move newly developed gas

supplies to delivery markets. Also, current bottlenecks limiting the transportation

of natural gas to areas where demand is highest must be eliminated. I will do everything in my power to ensure that the Commission quickly processes certificate applications for new pipeline projects that will meet these needs. To that end, Commission staff is looking at creative ways to expedite the processing of applications for

new pipeline capacity to serve critical areas of the country. However, to the extent

transportation bottlenecks are within state jurisdiction, the states must similarly

undertake to improve their infrastructure. I assure you I recognize the critical importance to your constituents, and to our country, of having an adequate natural

gas transportation infrastructure.

I will now turn to the specifics of these matters in greater detail.

I. THE FEDERAL ENERGY REGULATORY COMMISSION’S ROLE IN NATURAL GAS MARKETS

The Commission’s role in the natural gas industry is largely defined by the Natural Gas Act of 1938. This Act gives the Commission authority to grant permission

to construct new interstate natural gas pipelines and related facilities, such as storage and compression. It also authorizes the Commission to set the rates and terms

of service for the resale and transportation of natural gas in interstate commerce.

Regulation of retail sales and local distribution of natural gas is a matter under

State control, as is the production and gathering of natural gas. Controls on the

wellhead price of natural gas, which the Commission previously regulated pursuant

to a 1954 Supreme Court decision, were gradually phased out by the Congress. This

started with the Natural Gas Policy Act of 1978, and culminated in the Natural Gas

Wellhead Decontrol Act of 1989, which lifted all remaining wellhead price controls

as of January 1, 1993. The Commission still retains jurisdiction over certain sales

for resale in interstate commerce, but that jurisdiction now accounts for only a portion of the overall natural gas market. However, that jurisdiction is limited to sales

for resale by interstate pipelines, intrastate pipelines, local distribution companies

and their affiliates, unless the sales are from their own production or from sources

where we have a free trade agreement such as Canada and Mexico. In 1993, the

Commission authorized these sales to be made at negotiated, that is, market-based

rates. Although the Commission, in limited circumstances, could amend the authorizations to provide for some other pricing method, I do not believe that this would

provide effective relief to consumers, as sellers would find ways to move their supply

to unregulated sales. Price controls on FERC jurisdictional resales would merely

distort the market in the same way they prompted the industry to shift supplies

from the interstate market to the intrastate market before the NGPA.

The Commission also authorizes natural gas pipeline siting and construction if

found to be in the public convenience and necessity under section 7 of the Natural

Gas Act. Consideration of factors under the National Environmental Policy Act

(NEPA), other appropriate statutes, and landowner interests must be taken into account before approving a natural gas pipeline project. In addition to its certificate

jurisdiction, the Commission has authority, delegated by the Secretary of Energy,

over the siting and construction of facilities for the import or export of natural gas

under Section 3 of the Natural Gas Act, as well as authority under Executive Order

No. 1045 to issue Presidential Permits for such facilities if they are located at an

international border.

II. COMPETITIVE NATURAL GAS COMMODITY MARKETS

The oil embargo of the mid-1970s, coupled with heavy-handed price regulation by

the Commission (then the Federal Power Commission), led to shortages and supply

curtailments of natural gas in the interstate gas market in those years. In response

27

to these critical supply shortages, Congress passed the Natural Gas Policy Act of

1978, which began the decontrol of natural gas commodity prices.

In 1985, the Commission required open-access, non-discriminatory transportation

of non-pipeline natural gas across the U.S. natural gas pipeline grid. In 1989, the

Congress enacted the Natural Gas Wellhead Decontrol Act of 1989, which ended all

remaining wellhead price controls as of January 1, 1993. In 1992, the Commission

took further steps to ensure a well-functioning natural gas market by requiring

interstate natural gas pipelines to unbundle, or separate, their transportation service from their own sales service. That removed the opportunity for pipelines to discriminate in favor of their own ‘‘merchant’’ business by providing a higher quality

transportation service as part of their bundled transportation and sales service.

Subsequently, pipelines exited the natural gas sales business completely and transferred their sales contracts to their marketing affiliates.

The Commission also established a program to permit holders of transportation

capacity to resell their unused pipeline capacity rights, called ‘‘capacity release,’’ creating a valuable and efficient secondary transportation market. Since then, the

Commission has been monitoring the gas transportation and storage of natural gas

to ensure the most efficient and effective natural gas delivery infrastructure for consumers. Last year, the Commission, in Order No. 637, revised its open access transportation regulations relating, among other things, to scheduling procedures, capacity segmentation, and pipeline penalties. When these changes are fully implemented, they should give shippers added flexibility to make more efficient use the

existing pipeline grid.

As a result of the pro-competitive policies pursued by both the Congress and the

Commission, the natural gas commodity market is truly competitive. There are

about 8,000 producers operating over 300,000 wells in the United States. In addition, the North American natural gas markets have been integrated, thus permitting an increasing contribution of Canadian gas to meet U.S. market growth, as well

as U.S. gas sales to Mexico, increasing markets for U.S. producers. Natural gas buyers in general are no longer limited to buying from one pipeline. Instead, they have

a wide range of supply options and various transportation and storage options. In

addition, an active financial market has developed to allow buyers and sellers to

hedge against price volatility, depending on their tolerance of risk.

Although different sources quote different numbers, no one disputes that this competition has produced substantial consumer benefits. In addition, reserve prospects

for natural gas appear to be very promising. Estimates range from 1,200 trillion

cubic feet (Tcf) to 1,700 Tcf, the equivalent of a 55-75 year supply at current and

projected requirements. Pro-competitive policies, technological innovation, especially

in discovery and drilling techniques, environmental policies, and low prices have led

to increased demand for this clean-burning fuel, especially in the electric generation

area.

Unfortunately, the other side of this bright picture is that spot wellhead prices

for natural gas have roughly tripled since 1999, when natural gas was routinely

traded in the $2.50-3.00 per MMBtu range. While the price increase has focused a

lot of attention on the natural gas industry by lawmakers and regulators, I believe

the market itself has responded, without any need for new laws or new regulations.

Producers of natural gas have already undertaken efforts to increase the supply of

natural gas, and the number of active natural gas rigs has more than doubled in

the past year and a half. While there is usually a lag bringing this new production

on line, the increase in new drilling should help balance supply and demand.

In sum, the operation of the interstate natural gas market appears sound, as evidenced by the dramatic increase in drilling activity in response to market signals.

III. WHY ARE NATURAL GAS PRICES SO HIGH THIS WINTER?

As explained above, natural gas is now a commodity that is sold in an open market where the laws of supply and demand determine the price. Weather, economic

growth and the price for other fuels are all factors that affect the demand for gas.

This winter several factors converged at once to produce very high spot natural gas

prices.

Demand for natural gas has increased in all sectors over the last decade due to

economic growth. In addition, a significant number of new electric generators has

come on-line in the last few years that are fueled by natural gas. While these generators produce power in an environmentally friendly way using clean-burning natural gas, they are creating a year-round demand for a commodity that has traditionally been used more in the winter than in the summer. Increased use of gas by electric generators has also affected overall demand in the winter.

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Weather is also a factor that affects the demand for natural gas. After much

warmer than normal winters in many areas of the country for several years, temperatures in November and December of this past year either were below, or well

below, normal in all but five states. This significantly increased the demand for natural gas, as well as other heating fuels, such as propane and fuel oil.

Although the demand for natural gas has grown in recent years, the supply has

somewhat lagged behind this demand. After the prices for natural gas and oil collapsed in 1998, producers invested less capital in the exploration and production of

natural gas. In January of 1998, there were over 633 drilling rigs in operation. By

April of 1999, after a sustained period of low gas prices, the rig count dropped to

362. While there are plentiful reserves in the ground, maintaining adequate deliverable gas supplies requires a steady drilling program. The reduction in gas drilling

reduced supply. This trend was reversed in late 1999. Although there were 905 active drilling rigs on February 16 of this year, historical experience shows there is

a time lag (between three months to eighteen months or more) between increased

drilling and a significant supply response.

Finally, while spot prices have spiked to $20 per MMBtu, or even higher in some

areas of the country this winter, it is important to understand that local distribution

companies and end-users need not, and generally do not, buy all their gas on the

spot market. Today’s competitive market provides gas purchasers a number of options for achieving greater price stability than is available on the spot market. Gas

purchasers can, for example: (1) enter into long-term supply contracts; (2) purchase

gas during cheaper, off-peak periods and place it in storage for use during peak periods; (3) forward contract using gas futures; and, (4) purchase financial hedging instruments. Through such strategies, gas purchasers can keep their overall gas costs

substantially below spot market levels. For example, in January of this year, when

spot market prices at New York City gates rose above $18 per MMBtu, the overall

gas costs of the two major New York local distribution companies, Con Edison and

Brooklyn Union, were in the $8 to $10 per MMBtu range.

IV. PIPELINE CONSTRUCTION

Adequate natural gas pipeline transmission and storage capacity is critical to support the continued functioning of the competitive market for the gas commodity. If

that market is to ensure an adequate supply of natural gas at the lowest reasonable

cost, all gas sellers must be able to reasonably reach the highest-bidding gas buyers,

and all gas buyers must be able to reach the lowest selling producers. For this to

continue to occur, it is clear that additional pipeline capacity must be built. As new

gas supplies are developed in response to the continued growth in natural gas consumption and increased prices, new pipeline facilities will be necessary to allow

those supplies to reach the market.

I pledge my continued support for the construction of new pipeline infrastructure

to meet these critical needs, and I will do everything I can to ensure that the Commission processes certificate applications for proposed pipeline projects as quickly as

possible.

For example, in response to the present situation in California, the Commission

is responding as quickly as possible to any applications to construct new capacity.

We are also encouraging applicants to work closely with staff at the earliest stages

of project development to expedite the certification process. Early staff involvement

may include getting a head start on meetings with stakeholders and the preparation

of environmental documents. For the appropriate projects, this may significantly

speed the certification process.

In the last seven months, the Commission has issued certificates for three

projects, with total capacity of almost 119,000 Mcf/d of capacity, that could benefit

the West. Several more certificate applications are pending and the Commission is

committed to moving quickly on these projects, too. The Commission is prepared to

adopt additional procedures for expedition if they will help to alleviate the present

emergency. The Commission is actively pursuing ways to expedite the approval of

infrastructure needed to serve California and the West, including raising the current dollar limit on automatic authorizations. This will allow pipelines to construct

needed facilities automatically, as long as they comply with environmental regulations.

Of course, any actions the Commission takes to expedite new capacity for gas to

serve California and the West can only be effective if there is available local capacity to deliver gas downstream of the interstate pipeline. The availability of sufficient

local take-away capacity, however, is a matter that is within the control of states.

For example, it appears that the intrastate gas transportation network in southern

California is constrained and this may, to some extent, have affected gas prices in

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that area, which are among the highest in the nation. I urge the State of California

to expedite its consideration of proposals to eliminate those constraints and provide

relief to California consumers. Pipelines should coordinate their efforts with local

distribution companies, public utilities and state officials. The Commission will cooperate with the states in order to ensure that new facilities subject to state jurisdiction are properly integrated with the interstate grid.

Aside from the current situation in California, there is also a critical need to provide transportation for newly developed gas supplies to reach all U.S. markets. For

example, the Energy Information Administration (EIA) projects a significant increase in imports of natural gas to the United States from Canada. Delivering that

gas to U.S. markets will require increased pipeline capacity.

Another major potential new source of gas is from the Arctic regions, including

the North Slope of Alaska. I strongly support the construction of a natural gas pipeline from the North Slope of Alaska to the lower-48 states. If constructed, an Alaska

pipeline would provide unprecedented economic, energy security, and environmental

benefits to the United States by bringing a very large supply of additional gas to

the domestic market. It has been estimated that there are at least 26 trillion cubic

feet of natural gas in the North Slope of Alaska, which would be a very significant

addition to our Nation’s energy supply. I am fully committed to acting on requests

for the construction of pipeline infrastructure to deliver this gas to North American

consumers. I well understand that the ongoing development of Canadian and Alaskan natural gas supplies is critical to our nation’s energy needs and security.

Aside from the above described certificate proceeding, there is currently no application on file with the Commission concerning an Alaska natural gas pipeline. However, under the direction of Chairman Hoecker, the Commission’s staff prepared a

report reviewing the history of proceedings under the Alaska Natural Gas Transportation Act (ANGTA), including the statutes and relevant orders. I have not yet an

opportunity to review that report in detail. As I have already emphasized, my main

goal is to ensure the construction of needed pipeline infrastructure to allow new gas

supplies to reach market.

V. CONCLUSION

The recent increases in natural gas prices are a matter of serious concern for gas

customers and indeed for the nation as a whole. Nonetheless, natural gas deregulation has been an extremely successful long-term policy and the fundamental structure of natural gas markets remains sound. Beginning in 1984, competition in the

natural gas industry has led to fifteen years of prices that were lower than anyone

anticipated. In fact, the low prices lasted for so long that it was easy to forget the

inherent tendency of energy markets towards boom and bust cycles. The nation’s

competitive policy has also produced a robust, flexible and responsive natural gas

market. Already, producers have responded to higher prices with increased drilling.

Increasingly, too, customers are adjusting. For example, we hear of electric generators actively reconsidering their exclusive reliance on natural gas for new plants.

Everyone has a role to play in helping driving demand and supply back into better

balance. We at the Commission will do our part to ensure that new pipelines can

be built to support a growing industry and that natural gas transportation supports

flexible, innovative markets. I am confident that states and other federal agencies

will also do their parts to put in place needed infrastructure and to mitigate shortterm hardships.

Thank you. I will be happy to answer any questions you may have.

Mr. BARTON. Well, we thank the Chairman for his participation,

and we thank you for bringing your General Counsel.

The Chair would recognize the full committee chairman, the gentleman from Louisiana, Mr. Tauzin, for 5 minutes for whatever

purpose he desires.

Chairman TAUZIN. Thank you, Mr. Chairman. I wanted to join

you, Mr. Chairman, first, in the strong support for Chairman

He ́bert’s position as Chairman of the FERC. I hope the administration confirms that as a permanent chairmanship, not just because

he’s not only fully competent and qualified but because he is an

He ́bert, because his father comes from Algiers, Louisiana, right

near my district.

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More importantly, Chairman He ́bert, the focus of today’s hearing

on natural gas is critical. I am not sure most people know, but I

know you know this, that Louisiana is one of the highest per capita

users of natural gas in the country, by and large a consumer State

as much as a producer State. That in this year of high natural gas

prices, CF Industries—former-owned co-op, produces one-third of

the nitrogen fertilizer that is critical to the farm community this

year—had to shut down half of its production because of the high

cost of natural gas.

So we have not only a home consumer heating issue, a home consumer electric issue, we now have huge impacts on jobs and the

production of fertilizer that is going to be critical to economic recovery as we enter the planting season.

What are your predictions about the supply of natural gas to

plants like CF Industries? Are these high prices going to be sustained, you think, through the spring or do you think we see some

hope of moderation in the near future?

Mr. HE ́ BERT. Mr. Chairman, it is my thought that you are going

to see some moderation. I don’t think there is any question that,

specifically in certain regions, there are tight supplies.

For instance, we just got a press release on El Paso. I have got

it around here somewhere. But they are talking about the fact that

you have 14.4 Bcf that was bid on, total bids that were placed,

when actually there is 1.22 Bcf available. So you see what is chasing what, and you see where we can be on our supply situation.

Many of the pipes are running full. There are many things that we

can do at the FERC.

As you know, in the past 31⁄2 that I have been at the FERC, I

have talked to you and numerous other members—my good friend

Congressman Pickering and the Chair himself, and Congressman

Largent, as well as Congressman Sawyer, about my concerns about

pipelines, and how, in fact, that we need to be careful and we need

to be forecasting 5 and 10 and 15 years out forward. Congressman

Markey, his situation up in the Northeast as well, we are looking

at an increase of somewhere even close to as much as 80 percent

that they are going to need out by the year 2015, and this is serious. I think it is serious in the Southeast, I think it is serious in

the Northwest and in the West, and I think it is serious in New

England.

Chairman TAUZIN. A couple of quick questions. One, do you need

any more legislation to move the Alaskan Natural Gas Pipeline or

are current authorities good enough for the Commission to move it

forward?

Mr. HE ́ BERT. How did I know you were going to ask me that

question? The statute was passed at a very different time in America. It was passed at a very different time on environmental issues;

it was passed at a very different time on pricing issues. There are

lots of questions as to whether there more to be done there. I certainly can’t answer that for you. I will tell you that the times are

very different. Certainly, we have the potential of getting a filing

under the statute, and certainly we have a potential of getting filings outside the statute.

Chairman TAUZIN. Let me make it easier.

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Mr. HE ́ BERT. I will tell you, we will act on those filings as expeditiously as we can, as soon as we can. I do think it is important that

we sure ourselves up domestically.

Chairman TAUZIN. Yes, I was going to suggest that if you could

comment to the committee in writing as to what, if any, legal

changes need to be made to the structure of the authority if in fact

those are needed, and how this committee might assist you in moving that project.

Mr. HE ́ BERT. Mr. Chairman, if I might add, or ask you, would it

be all right if I speak to the clarifications that come up that you

might address as opposed to me making those clarifications for

you?

Chairman TAUZIN. Oh, I understand.

Mr. HE ́ BERT. I get a little uncomfortable doing that, but I will be

glad to give you clarification.

Chairman TAUZIN. I fully understand. If you can simply point to

the areas where this is doubt or confusion or perhaps the need for

clarification.

Second, you can’t order an electric natural gas driven turbine

anymore in this country without being on a 2-year waiting list.

Natural gas has become such a fuel of choice for electric generation, primarily I assume because of a number of reasons, but most

of all environmental concerns with clean air. Are we anywhere, in

our projections, near satisfying the demands of the next 5 and 10

years in natural gas with current levels of production or are we

going to have to rely upon more and more natural gas coming in

from Canada, the Caribbean and other available sources in our

Hemisphere?

Mr. BARTON. The gentleman can answer the question, and it will

have to be the chairman’s last question.

Mr. HE ́ BERT. I don’t even think it is debatable. I think it is clear

that especially if you start looking at 5 and 10 years out that we

need additional supply, period, without exception.

Chairman TAUZIN. Thank you, Mr. Chairman.

Mr. BARTON. Did you conclude your answer?

Mr. HE ́ BERT. I was trying to be short. I know you prefer it that

way.

Mr. BARTON. I was stunned. I mean, an He ́bert talking to a Tauzin.

Mr. HE ́ BERT. And I talk fast too.

Mr. BARTON. And you have got 15-second answers—unheard of.

Chairman TAUZIN. If he had been a Beaudraux, we would be

here all day.

Mr. BARTON. The Chair now recognizes the distinguished ranking member, Mr. Boucher, for 5 minutes of questions.

Mr. BOUCHER. Thank you very much, Mr. Chairman. Mr. He ́bert,

welcome to the committee today. The unfortunate situation in California has generated some commentary and suggestions from some

sources that transmission companies that also have their own gas

to sell have discriminated in favor of their own product and against

that of a competitor, either by withholding transmission in order

to increase the price in a way that favored the owner of the transmission company or by allocating transmission so as to discriminate in favor of the gas that the transmission company owns. And

32

I would like to spend just a few minutes with you this afternoon

gaining an understanding of the legal structure in which these

kinds of concerns are addressed, and asking also for your view of

what the right public policy is in terms of how these matters might

be handled.

First of all, can we agree that under existing Federal law it is

illegal for a company that owns transmission and also has its own

gas to sell to discriminate in the award of transmission in favor of

its own product to the injury of its competitor who is also seeking

to sell gas? Is that illegal under current law?

Mr. HE ́ BERT. Yes, it is.

Mr. BOUCHER. And there would be no need, therefore, to augment the statute in any way to further address that particular

practice; would that be your view?

Mr. HE ́ BERT. I think that is fairly clear.

Mr. BOUCHER. Let me give you another situation. Let us suppose

that the company owns transmission and also has its own gas to

sell. And instead of simply favoring its own product in terms of the

award of transmission, what it does is withhold the transmission

for the product of its competitor; it constrains transmission. And

the effect of doing that is to increase the price of its own product,

and it is doing that for that purpose. But, of course, it is injuring

the consumer because the price is going up for the end product,

and at the same time it may be injuring competitors who are not

able to get their gas into the transmission stream. Now, would that

practice, in your view, be illegal under current law or is some augmentation of the statute necessary to address that?

Mr. HE ́ BERT. Well, you are right in that we regulate it and it is

tightly done so, but as far as it being illegal under the law, no.

Mr. BOUCHER. Do you think that should be illegal under Federal

law?

Mr. HE ́ BERT. I guess that would depend on whether or not you

believe we are doing an adequate job.

Mr. BOUCHER. Well, let me ask the question this way: Do you believe that you have adequate statutory authority to address the

practice?

Mr. HE ́ BERT. I do believe that. Yes, sir, I do.

Mr. BOUCHER. And do you think that you have been addressing

the practice adequately using those authorities?

Mr. HE ́ BERT. I think we have.

Mr. BOUCHER. Is that a position that is universally held or is

there some controversy about whether or not you have been doing

that adequately?

Mr. HE ́ BERT. If there is some controversy—I am assuming you

may be speaking of one of my colleagues—I am uncertain——

Mr. BOUCHER. Well, I am actually not, but you want to tell me

about——

Mr. HE ́ BERT. No. I am uncertain as to if one of them may disagree with that.

Mr. BOUCHER. Okay. Generally, though, there is an agreement

that you are doing an adequate job in policing that practice, and

you are not asking for additional statutory authority with respect

to it?

Mr. HE ́ BERT. Right.

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Mr. BOUCHER. Let me ask you about permitting of new transmission lines. And my simple question is this: To what extent does

the increase in price to the consumer of gas that would be occasioned by the cost of building new transmission capacity influence

your decision about whether or not to permit that construction at

the outset? Is that part of your——

Mr. HE ́ BERT. I want to make certain I understand the question.

Mr. BOUCHER. Is it part of your analysis, in other words, to examine whether or not a result of new transmission being constructed will be an increase in price to the end user?

Mr. HE ́ BERT. We look at the need, and then certainly we have to

look at the environmental side of it. But as to the price on the front

end, it is not something that we in a regulated sense look at, no.

Mr. BOUCHER. And so if there were appearances before your

agency by people who said, ‘‘Don’t build this transmission line because there is already adequate capacity, and by simply duplicating

existing capacity there will be an ultimate increase in price,’’ you

would not take that into consideration in determining whether or

not to permit the line?

Mr. HE ́ BERT. I think you may be getting into the question of

need, and certainly we look into the question of need. It is one of

the criteria necessary——

Mr. BOUCHER. So you would address that from the standpoint of

need rather than from price solely?

Mr. HE ́ BERT. Correct.

Mr. BOUCHER. Okay. Mr. Chairman, this has been very informative. Mr. He ́bert, thank you. And I believe my time has expired.

Mr. BARTON. The Chair would recognize himself for 5 minutes.

I am going to go through a series of questions, try to do it fairly

quickly. You can elaborate in writing, but we want to try to get

some things on the record while we can. Do you feel that in terms

of pipeline siting authority any new legislation or clarification is

needed by this subcommittee and full committee?

Mr. HE ́ BERT. Not on pipeline siting, where you are trying to remove any and all obstacles at the FERC level. I would like an opportunity to go through that with a little finer comb and respond

to it.

Mr. BARTON. Okay. What about the issue of L&G terminals being

built in the United States and importing liquified natural gas? Are

there any Federal issues there that we need to clarify in terms of

legislation, or do you feel the existing statutes are adequate if we

set as a policy goal an increase in L&G terminal capacity in this

country?

Mr. HE ́ BERT. Yes. The siting is the real question. I mean, we

have State issues but nothing on the Federal side other than the

siting itself.

Mr. BARTON. In terms of any projections—and of course we have

a witness on the next panel from EIA—does your agency independently do any projections of pipeline capacity that would be necessary to meet expected increase in demand for natural gas

throughout this country?

Mr. HE ́ BERT. No, none at all.

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Mr. BARTON. So that is purely—you respond, you react when a

proposal to build a new pipeline is presented, but you don’t try to

project the capacity requirement?

Mr. HE ́ BERT. Right. We let the market influence that, then when

the filing comes before us, we take the filing into consideration.

And then all the relevant information will come in from the filing

party and intervening parties.

Mr. BARTON. Okay. From California, there has been a concern

addressed to members of a committee that held an informal series

of meetings last week that the transmission charge that certain

pipelines are charging at the border of California drives the overall

price upwards to $50 in MCF. They claim that it is not a commodity charge; that it is an actual transmission charge that is resulting in the $50 MCF price, and it is an issue that is right at

the border between California and surrounding States. Is the

FERC aware of such concerns? And if so, do you have any active

investigation underway?

Mr. HE ́ BERT. Yes, Mr. Chairman, I am aware of it. We do have

a filing before us. We have several filings before us pertaining to

California. I have instructed the staff to get those up and out as

soon as possible and hopefully no later than the end of this spring.

Now, acting expeditiously, I would love to speak on the issue with

you, but since it is a pending matter I have got to be very—— Mr. BARTON. Based on Federal law, the wellhead price, the commodity price for natural gas, is unregulated, and the FERC doesn’t

have any authority. But under existing law, the FERC still has authority over the transmission charge in interstate commerce; is

that correct?

Mr. HE ́ BERT. Correct.

Mr. BARTON. So if, in fact, there was a finding that the transmission charge was unjust and unreasonable, the FERC could step

in and set a ceiling on that, a rule on that; is that correct?

Mr. HE ́ BERT. We do have jurisdiction over those transmission

rates.

Mr. BARTON. Okay. I think I have several other questions, but

I have got the main ones on the record. So I am going to yield back

some of my time. And we would recognize Mr. Sawyer for 5 minutes, or Mr. Doyle. Mr. Doyle was ahead of Mr. Sawyer. Five minutes.

Mr. DOYLE. Thank you, Mr. Chairman. I just have two questions.

Chairman, you have highlighted the distinct jurisdictions that

FERC and the Office of Pipeline Safety have. Is this structure of

dual oversight working effectively, and if not, what adjustments

could be made?

Mr. HE ́ BERT. Yes. I want to make certain you do know now Pipeline Safety is through the Department of Transportation. I know

you know that. We do everything we can to facilitate concerns of

consumers when it comes to safety because it is a big issue when

we look at siting pipelines. But the pipeline safety itself goes strictly through the Department of Transportation and not us.

Mr. DOYLE. Thank you. One other question. You are of the mind,

from your testimony that I have read, that what has happened

with prices, that despite the increase in prices, you feel we have

a well functioning market existing in natural gas. And that, if anyVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 E:\HEARINGS\71501 pfrm04 PsN: 71501
35

thing, that what we should be doing is accelerating the certification

of new pipeline projects. Do you think that pipeline construction

should take primacy amongst all the other efforts? Is that what you

think the top priority is?

Mr. HE ́ BERT. I never—I would never use the word ‘‘primacy.’’ I

think several people—I know Congressman John used it; I heard

Congressman Sawyer use it. I think ‘‘balance’’ is the appropriate

word. And I think when we get out of balance, looking at the need

versus the environmental and the landowners, I think that is when

we get in trouble. I do think in certain areas of the United States,

we have been out of balance for the last couple of years. We have

got to find that adequate supply. We have to be able to have the

infrastructure to not only transport it, but then deliver it, transporting it being me, delivering it actually being the State side.

So I don’t want to say that supply is any more important than

the environment, but it is as important as the price you are willing

to pay. In other words, if you get out of balance and you say you

are not going to site, be it pipelines, or electric transmission, or

generating facilities, then you know you are going to pay a higher

price because in fact you are going to have scarcity. So in that

sense, when you find scarcity, I do believe it is important to make

building infrastructure a priority, but the laws are pretty clear that

you still got to give an abundant amount of attention to environmental and landowner concerns.

Mr. DOYLE. Thank you. Mr. Chairman, I yield back.

Mr. BARTON. Thanks to the gentleman. We recognize the gentleman from Mississippi for 5 minutes for questions.

Mr. PICKERING. Mr. Chairman, in my opening comments and in

your opening comments, you talked about Alaska and the reserves

that we have available to us if we only had the pipeline to transport it to the 48 lower States. In the Gulf of Mexico on the eastern

side of the Gulf there are significant reserves at the Destin Dome

and other reserves in the eastern part of the Gulf of Mexico. What

is necessary to see those reserves unlocked, and what is the potential or what is the size or the scope of those reserves to your knowledge?

Mr. HE ́ BERT. I don’t know the size of the reserves. I will provide

that for you. But I will tell you, when it comes to markets—and

we look around the entire United States when it comes to exploration and production—what we tend to do at the FERC is let the

market make that decision. We don’t like to make a decision as to

where it should come from because, quite frankly, with the opportunity to transport, you can almost take it from anywhere and put

it anywhere absent problems of siting. So we would let the market

require that.

I will tell you, quite frankly, when we start moving into metropolitan areas where we are seeing some of the need now to deliver

some of this supply, it is very difficult. But as far as the supply

itself and how we move it and when we move it, we let the market

determine that. But as far as what the reserves are themselves, I

will get back with you on that and give you that information.

Mr. PICKERING. Does the FERC have any relevant permitting to

pipelines that would take the natural gas from offshore, say, to

36

Pascagoula, Mississippi or Mobile, Alabama, or refining, and then

from there to distribution?

Mr. HE ́ BERT. We have had several cases in the last few years,

Congressman Pickering, on exactly how that should be treated. It

gets into the issue of gathering. If it is transportation of a product,

yes, we do. If it is gathering of that product, no, we don’t.

Mr. PICKERING. Is the FERC currently involved in any of the attempts to produce the Destin Dome or any of the other reserves in

the Eastern Gulf?

Mr. HE ́ BERT. Well, we have been involved in the Destin Pipeline.

Other than that, I don’t know if we have any involvement at this

time. If so, I am unaware of it.

Mr. PICKERING. One other quick series of questions. As you

know, last year we had extensive discussions, and the subcommittee marked up an electricity restructuring initiative which

focused primarily on incentives for transmission and reliability and

those types of efforts, the linkage between natural gas and going

back to electricity. What can you see in those efforts that we can

do as we put together a comprehensive energy bill that would give

us greater reliability, transmission capacity as we look at natural

gas or other electricity-producing opportunities?

Mr. HE ́ BERT. I think anything that you can do that would move

the Federal Government and local and State agencies toward a

spirit of cooperation and working together, try to create that onestop shopping. I think the thing that is most difficult for the industry, which in the end means it is very difficult for the American

public because they can’t get that adequate supply to them in time,

is the fact that they have to go with so many people with their fingers in the pie, so many regulators, so many agencies, so many associations.

If there were a way to understand that we must have one vision

together, understanding that, quite frankly, my considerations are

very different than EPA’s and they are required to be under the

law. But let us see if we can’t figure out some way to cooperate,

somehow have an understanding together so we can expedite these

processes.Any clarification you can give there legislatively, I think

would be great.

As you know, one of the things that I have continued to talk

about, and actually I was pleased to hear several members in here

talk about, is the incentives—how do you incent the industry? I

mean, I think any direction you could give in that indication would

be wonderful. Quite frankly, if we see a need, be it in the West,

be it in the Northeast, be it in the Southeast, and we don’t see that

need being met, what would be wrong with us giving the proper

signal on the transportation end, and maybe even providing another 200 basis points to get someone interested in providing that

opportunity?

Because the point I don’t think could have been made better than

was made by Congressman Bono. And that is, the last thing we

want is for the lights to go out to some extent to where it is not

quality of life but it is, in fact, life. So we must get about the business of that, and I would be glad to work with you and the committee to any extent possible to provide that.

Mr. BARTON. The gentleman’s time has expired.

37

Mr. PICKERING. Thank you, Mr. Chairman.

Mr. BARTON. The gentleman from Ohio, Mr. Sawyer, is recognized for 5 minutes for questions.

Mr. SAWYER. Thank you very much, Mr. Chairman. Thanks also

for the comments in response to Mr. Pickering. His question goes

very much at the kind of concern that I have in both natural gas

and electricity around the question of capital formation in order to

do the kind of investment that it is going to require in order to provide the delivery and reliability of service that we are talking about

in both energy arenas.

It seems to me that given particularly the long lead time necessary for that kind of infrastructure investment, that we face a

particularly important standard of analysis in trying to forecast

both the availability of supply, the demand, and the prices that

surround that. It is central to capital formation.

What can you tell me in terms of how those forecasts are developed, and more to the point, how accurate they have been in recent

years in terms of anticipating those several dimensions of supply

and demand?

Mr. HE ́ BERT. I think typically over the last few years, most people have challenged numbers that showed the demand to the extent that we have seen. But I think what we have learned is that— I think it was Congressman John that said we had an addiction to

energy.

Mr. SAWYER. Yes.

Mr. HE ́ BERT. We certainly appear to have that. How many TVs

do we have in our homes, how many telephones and computers and

alarm clocks?

Mr. SAWYER. Who would ever have anticipated that computer

consumption of electricity and the size that that has achieved in

just the last 5 years?

Mr. HE ́ BERT. So I tend to believe most of the numbers. If you are

asking me when the numbers come in and the numbers appear to

be a little high, what is our skepticism now, because of comments

made earlier, I would rather have additional capacity than be low

on capacity. So it is my point now that we must aim high. And as

tough and as difficult as that is to do, the last thing we want to

do is hear stories like we just heard in Palm Springs.

Mr. SAWYER. As a matter of decisionmaking, I couldn’t agree

with you more. My question, though, is how did the performance,

the forecasting performance, over the last 5 years compare to the

reality that played itself out? If you don’t have those numbers, I

completely understand.

Mr. HE ́ BERT. I will provide for the record what I can find for you

on that.

I just don’t have anything off the top of my head. I think if you

look in some regions—you look in Pennsylvania, it looks like, evidently, the numbers they depended on were pretty good. If you look

at the Southeast, they look in pretty good shape too. If you look in

the West, I don’t think they could have anticipated a lower than

average rainfall, the lower than average snowpack combined with

the increase in demand.

Mr. SAWYER. Has the analysis been sufficient, adequate, to the

work that you have to do as a regulator?

38

Mr. HE ́ BERT. I think it has.

Mr. SAWYER. Thank you, Mr. Chairman. I yield back.

Mr. BARTON. Thanks to the gentleman from Ohio. We would now

go to Mr. Bryant from Tennessee for 5 minutes for questions.

Mr. BRYANT. Thank you, Mr. Chairman. Mr. Chairman, I think

we all agree that the domestic natural gas consumption is expected

to increase at a faster rate than production over the next number

of days, and that FERC regulates the construction of new natural

gas pipelines pursuant to acts of Congress.

Among other things, FERC considers environmental impact

statements pursuant to the National Environmental Policy Act, Endangered Species Act, Fish and Wildlife Coordination Act, The

Coastal Zone Management Act, as well as others, including an increasing amount of landowner protests. In addition, pipelines must

comply with numerous State permits and procedures.

Now, critics have claimed that the lack of interagency coordination, duplicative requirements and conflicts between Federal and

State agencies make the pipeline construction process increasingly

difficult. FERC has attempted to alleviate this problem by reviewing its own internal procedures. It is also beginning to establish a

collaborative process for construction applications. Could you tell

me briefly what that is?

Mr. HE ́ BERT. Well, Congressman Bryant, we are still working on

the collaborative process; we have got to do a little massaging

there. But I will tell you, when it comes to the cooperative spirit

of trying to get everyone working together, I think that is moving

in the right direction. I was speaking to the Natural Gas Council

yesterday. We just got everyone together in the same room trying

to resolve some difficulties, understanding we have got to provide

some opportunities here. I think it is serving us well, and I think

we have got to do more of it.

I will tell you that when it comes to certificating a pipeline and

moving forward with that project, what slows us down—we can

make the decision on need generally in about 5 or 6 months. What

slows us down is the environmental part of that, and that is why

we do it later. So what we are trying to do is we are trying to get

these parties together before they file. And if we get them together

before they file, then they come together with one route. It makes

it so much easier on us because one of the great things—and you

pointed out all the agencies we have to work with.

One of the things that really slows us down, and almost doubles

the amount of time you have to spend at FERC, is when you

change a routing process. So if we can get that cleared up on the

front end, it certainly helps us. I think what we have done with

landowners last year is a wonderful thing too. Now we are requiring notice—three days after they get a docketed number—to landowners. So landowners are going to be aware.

The thing I have tried to tell the industry is, even though I am

a lawyer, I think it is a bad idea to send a lawyer with a bunch

of papers in his hand knocking on the door, talking about you as

a landowner and how we are about to take your land. So let us

send some people with some people skills understanding that people, quite frankly, are real sympathetic and non-understanding

39

sometimes about—or they are not sympathetic and not understanding about losing their property and being compensated for it.

But there has been improvement through this cooperative spirit.

I pulled some numbers, and it looked like 10 years ago, it was taking—I think the numbers came actually from 1990. It was taking

us around 400 days in most circumstances to get these certificates

out. We have almost cut that in half; we are down around 200. It

was like 383, and now I think the number was like 194 or something like that. So that in fact is helping.

Mr. BRYANT. I have talked a lot, and others have mentioned— you emphasized in your statement the need for pipeline—streamlining that process. Another issue you address, and we have ignored it so far, is the storage capacity issue. Can you just briefly

tell us what that situation is as we head into a hot summer?

Mr. HE ́ BERT. Again, the storage capacity, depending on what region you are looking at, could obviously be different. I think it may

have been Congressman Largent who talked about the rupture

with El Paso and what happened there. You had the storage drawn

down there because, quite frankly, they were drawing down to help

California out to keep California on its feet while you were dealing

with the ruptured pipeline. So it depends on what region you are

talking about. Most circumstances, the storage levels were down.

Another indication in California was not so much only that you

had these units running and that they are gas-fired units, but you

have got these gas-fired units, whereas they might have at one

time run at 25 and 30 percent of capacity because, quite frankly,

they are older units—around 40 years old in some circumstances— they are running them at 75 and 85 percent of the time, so it is

taking up much more energy. Especially if you look at the West as

a whole, they haven’t had any new generation to come online even

though you have seen more natural gas being used because of demand. You have had some QF units come on, but other than that,

you have not had a new generation to speak of.

Mr. BRYANT. Is there a——

Mr. HE ́ BERT. So when it comes to the storage, that storage is

being drawn down pretty heavily.

Mr. BRYANT. My question was, Is there a replenishing effort

going on, or will there be? Can you guess?

Mr. HE ́ BERT. Well, we have—— Mr. BARTON. This will have to be the last question.

Mr. HE ́ BERT. We are about to enter into a shoulder period, so

that replenishing period is about to start. It should start within, I

would guess, the next couple of weeks, I would hope, depending on

the weather. But we will know more about that about half-way

through the spring to see exactly how much we can replenish.

Mr. BRYANT. Thank you, Mr. Chairman.

Mr. HE ́ BERT. And I will report back to you on that.

Mr. BARTON. Thanks to the gentleman from Tennessee. I want

the record to show that if Congresswoman McCarthy was here, it

would be her turn to ask questions.

But since she is not here, we would go to the gentleman from

Louisiana, Mr. John, for 5 minutes.

Mr. JOHN. Are you sure, Mr. Chairman? Thank you. I have a

very brief question that I asked to the panel in last week’s hearing.

40

And it deals with the big controversy over in California with

FERC’s role and the controversy of what is happening in California

as it relates to the transmission grid that California is trying to

take control over in exchange of bailing out some of their utilities.

Could you maybe comment on where we are as far as that whole

issue goes? Because I feel that there are some ramifications further

down the road.

Mr. HE ́ BERT. We issued an order December 15, and in that order

we gave certain instruction to California telling them what they

needed to do, even to the extent of their board, on the ISO board.

We have certainly seen them move in different directions there.

Now, it looks as if California may in fact be trying for the State

to purchase their transmission. If that transmission is acquired by

the State, it is my belief that we see a filing by the State of California as to that circumstance, and we will deal with it as expeditiously as possible. I will give them an up or down answer on that

as expeditiously as possible.

Let me tell you where my concern lies. I think when we are looking at remedies for California, or the West as a whole, because I

don’t think we can any longer just talk about California; I do think

we have to talk about the West as a whole. To me, there are almost

two things that you always need to look at on any remedy: Is it

increasing supply or is it decreasing demand? And if the remedy

is not doing one of those two things, then I think you have to ask

yourself, in fact, what is it doing?

And beyond that, we issued an Order 2000, which set up our regional transmission organizations which I believe are going to be

the framework that is going to make our electric grid work, and it

is going to make it work reasonably well. We need for Order 2000

to be followed. We need for there to be a regional transmission organization in the West. I think we have to be careful when it comes

to single-State operators of these transmission systems, and we

have to do what is in the best interest of the region when the region depends on one another.

I don’t think it is any secret that they do depend on one another

in the West. So we will have to look at that carefully, but we will

have to make sure that it follows Order 2000 and it is moving toward a regional transmission organization as well as the——

Mr. JOHN. You may be wondering why a gentleman from Louisiana would be so interested in what happens in California. I

think the gentlelady from California would agree with me that if

California were a country, it would be the fifth or sixth or seventh

largest economy in the world. So I believe that even though we live

hundreds of miles away, I think California is important to our

country as a whole, and what happens over there should be of concern from New York, all the way across our land.

Getting back to the grid real quick, if the Governor of California,

and the legislature and all the authorities are successful in taking

over the transmission grid, would it or would it not, in effect, result

in your not having regulatory authority over that grid because now

it would be, in effect, state-owned?

Mr. BARTON. Would the gentleman yield on that?

Mr. JOHN. Yes.

41

Mr. BARTON. To add to that question, isn’t it also true, before

they could do that, the FERC would have to approve it?

Mr. HE ́ BERT. That is true. We would have to approve it; there is

no question about that.

Mr. JOHN. That is the heart of my question.

Mr. HE ́ BERT. Your contingency is based on our approval.

Mr. JOHN. Right.

Mr. HE ́ BERT. So it is hard for me to consider the contingency

based on that. I am not certain whether or not we would approve

it.

Mr. BARTON. I think the gentleman’s question is, assuming that

it became reality—forget how we get there, but it became reality—

is it not true that a State that owned its transmission grid would

not be FERC jurisdictional?

Mr. JOHN. And then that is really the bottom line. You would obviously have that consideration raised in your deliberation as to

whether to approve it. But if it were to happen.

Mr. HE ́ BERT. Let me answer both questions. Only if we

approve——

Mr. BARTON. I am trying to help clarify the gentleman from Louisiana’s question.

Mr. HE ́ BERT. I think the issue—and I understand the issue is

does the State own it, do they not. But the issue in the end is going

to be do we approve it or not. So I am not certain anything else

matters. But let me say this: It is fundamentally important, I believe, if we are going to have an energy system that works, that

we move toward comparability and open access. And you have got

to do what it takes to get there. And that is why you have got to

move toward these regional transmission organizations.

Mr. JOHN. Okay.

Mr. BARTON. Well, I want the chairman to know—and we may

do a specific hearing on this. But if and when we do, I have great

concern that a State entity is not subject to some—a State-owned

entity is not subject to some jurisdiction. And normally, within a

State, the State would have jurisdiction over the municipality or

something like that. But if the State owns the grid in that State,

they are subject to no jurisdictional authority. And that is of concern to the chair.

Mr. JOHN. That is correct.

Mr. HE ́ BERT. I understand your question. And our bootstrap in

California right now, our legal bootstrap, is the ISO itself. I want

to be very careful—I am not trying to avoid you; I would love to

answer your question. But I have only got two colleagues, and if

I have someone raise a point that I have already decided on an

issue that is going to end up in front of me, I am very concerned

about that.

Mr. BARTON. Help is on the way.

Mr. HE ́ BERT. I know. I know, and I appreciate that.

Mr. BARTON. You have got two more people coming.

Mr. HE ́ BERT. So the last thing I want to do with the crisis in the

Northwest and in the West is to take myself out of the picture so

decisions cannot be made. So I want to be careful about this. We

will have to approve that transaction.

42

Mr. JOHN. I know my time is up, but I still would like, it seems

to me, a very simple answer, that if you do approve it, regardless

of how you get there, would it, in fact, no longer be under your regulatory power? And I understand that there would be a lot of legal

maneuvering to get to that decision, but forget about that.

Mr. HE ́ BERT. The problem is, I think where you are coming down

is, are they a public utility or not. And if the State owns it—— Mr. JOHN. Maybe so.

Mr. HE ́ BERT. [continuing] they may not be a public utility. But

I don’t want to make that decision for you, but I will say this. Absent them being a public utility, there are still provisions under the

Federal Power Act that bootstrap us in.

Mr. BARTON. And the gentleman’s time has expired.

Mr. JOHN. Thank you, Mr. Chairman. We are going to go to Mr.

Whitfield from Kentucky for 5 minutes.

Mr. HE ́ BERT. We lawyers always find a way in if we want in.

Mr. WHITFIELD. Thank you, Mr. Chairman. I noticed in your testimony you are talking about responding as quickly as possible to

any applications to construct new capacity relating to California.

Are there new applications specifically related to the situation in

California? I notice that you say right now you have three—you

have issued certificates for three projects in the last 7 months. Are

there others in the pipeline now?

Mr. HE ́ BERT. Yes, sir. We have five pending, but it is my understanding that we are going to have more before us very soon.

Mr. WHITFIELD. And these three projects that you refer to, where

are they located in your testimony?

Mr. HE ́ BERT. I would have to provide you with that because I

don’t know that off of the top of my head.

Mr. WHITFIELD. Okay. You also talk in here about raising the

current dollar limit on automatic authorizations. What is the dollar

limit on that now?

Mr. HE ́ BERT. We had talked about moving it. We had had several

occasions. I want to make sure—30 million is where we are talking

about moving it to, but currently it is at 15.

Mr. WHITFIELD. Fifteen? And you are thinking about moving it

to 30? And would that require a vote of the commissioners?

Mr. HE ́ BERT. I would have to get the agreement of my colleagues,

yes.

Mr. WHITFIELD. Okay. And that is something that you all will be

considering, I take it?

Mr. HE ́ BERT. I hope quickly. I understand help is on the way

also.

Mr. WHITFIELD. What is the significance of having an automatic

authorization compared to the regular process?

Mr. HE ́ BERT. Well, it just—you know, the process is so much

quicker. If they have the automatic authorization, we would be able

to get it—I mean, they are going to have certain compliances they

are going to have to make, but other than that, we can move them

through the door quickly. I don’t know what—as far as when we

start them. Yes, I mean, they have got their NEPA requirements.

But for that, they are automatic.

Mr. WHITFIELD. Okay. But they still have NEPA and other environmental requirements. And also, you made the comment that it

43

appears that the Intrastate Gas Transportation Network in Southern California is constrained. And I was just wondering what do

you mean by that?

Mr. HE ́ BERT. Well, what happens, when we have an interstate

pipeline, and we bring it—let us say we bring it at the border, and

they have got a intrastate, strictly a State line, if that State line

cannot handle the capacity that we make available to them, it

doesn’t matter how much capacity we make available because they

cannot deliver to the end user.

Mr. WHITFIELD. And that is the situation in California right now.

Mr. HE ́ BERT. We understand that may be.

Mr. WHITFIELD. Okay. Now, it is my understanding that there is

very little natural gas used in New England. Is it your understanding that that is caused by unreasonably strict environmental

regulations, landowner protests, uncooperative State agencies, or

what is the answer to that?

Mr. HE ́ BERT. Well, they have been dependent for a very long time

on fuel oil, as you know. That has been their resource that they

have decided to use. We have attempted to get additional pipelines

in there, and we have done some of that. We are always trying to

do more. As you know, if you would bring more natural gas, it

would do two things for you. One, it would clean up the environment; two, it would give you a choice of fuels. If you have got a

choice of fuels, you are going to lower the demand; therefore, lower

the price. So we think that is a good idea.

Mr. WHITFIELD. All right. Mr. Chairman, I yield back the balance

of my time.

Mr. BARTON. We thank the gentleman from Kentucky. I would

recognize the gentleman from Massachusetts for 5 minutes for

questions.

Mr. MARKEY. Thank you, Mr. Chairman, very much. Mr. Chairman, there are 26 trillion cubic feet of gas up in Prudhoe Bay Field

area. Why hasn’t that pipeline been built by the industry to bring

it down in to the lower 48? They were approved to build the pipeline in 1982. The EIS was finished. The Government finished its

job; it is all done. There is only, according to this, only 1 trillion

cubic feet of gas in the Arctic Refuge, and yet they are making a

big deal out of going into the Arctic Refuge, but they have had permission to bring down the 26 trillion cubic feet from Prudhoe Bay

for 18 years. Why haven’t they done it?

Mr. HE ́ BERT. Well, I think primarily that kind of goes back to my

opening remarks where I talked about how we go through boom

and bust cycles, and then, in fact, when we see it swing back, we

see the E&P pick back up. Same thing, pipelines as well. When it

comes to delivering that product, if the price is at such a point

based on the cost it takes to build and transport the infrastructure,

it doesn’t get done.

Mr. MARKEY. But I am saying, they could have built it right

along the oil pipeline. It is already constructed. Has it been a 19-

year bad cycle of natural gas? That is not the way I view the natural gas market.

Mr. HE ́ BERT. Well, prices have been pretty low for a substantially

long period of time.

44

Mr. MARKEY. So would it be your opinion that it is unlikely that

we will ever see that pipeline come down from Alaska, given our

past 19 years where they haven’t built it. See, ordinarily, we are

told, well, the Government, they are inefficient. But here, we finished the whole process, the EIS, everything. Said build, and in 19

years they haven’t build. And yet, we are being told we have to go

to the rest of the Alaska which is pristine wilderness and allow

them to start over there as well with their footprint.

Mr. HE ́ BERT. Yes. This is one of the conversations I continue to

have with people to make them understand why the incentives and

the price signals are important.

Mr. MARKEY. No. That is rhetorical question. I am making a rhetorical point that we should never permit them to go to the Arctic

Refuge until they have done the Prudhoe Bay because if they can’t

make Prudhoe Bay cost effective, how in the world are they going

to make the Arctic Refuge cost effective? You know, they have had

19 years in an already approved pipeline route, and they haven’t

done that. So that is the only point. And there is only a fraction

of the energy over there. So I am just making a rhetorical point.

I understand your price signal point.

Mr. HE ́ BERT. No, no. If I may answer because I respectfully don’t

agree with it, because I think there is a way to transport at an economical cost and give the right incentives price signals to the industry to do exactly that.

Mr. MARKEY. But the industry vehemently disagrees with you for

19 years.

Mr. HE ́ BERT. Oh, I don’t disagree that they have not wanted to

do it for some period of time because of price signals.

Mr. MARKEY. Yes. Nineteen years, 19 years of bad price signals.

What are good price signals?

How high does the price of natural gas in America have to go before they have an incentive to build the pipeline down from 26 trillion feet of cubic—— Mr. HE ́ BERT. I won’t debate it with you, but I will just say that

I think the economics have changed on that model.

Mr. MARKEY. Well, I am saying, let us hope they first do that,

though. Let us come in for that before they ask for the refuge. Do

you understand my point? They should first get the approval and

start the construction on that before they do the refuge; don’t you

agree with that?

Mr. HE ́ BERT. I hear your point.

Mr. MARKEY. I hear your point. Yes, thank you.

Now, let us go to New England. You say there is a pipeline constraint in California. Are there pipeline constraints in New England?

Mr. HE ́ BERT. I mean, we have got some congestion problems as

far as a constraint on capacity, comparable bottlenecks.

Mr. MARKEY. If California a 10 on a scale of 10, what do you

think the pipeline constraints for New England are? Just so we get

a little bit of a preview of coming attractions.

Mr. HE ́ BERT. You are trying to get me in trouble.

Mr. MARKEY. Comparably.

Mr. HE ́ BERT. I don’t think it is comparable at this point to what

you have seen in California.

45

Mr. MARKEY. So maybe a 5 on a scale of 10 or a 2? Where would

you put it?

Mr. HE ́ BERT. I would say less.

Mr. MARKEY. Less than that. Okay, good. Thank you. Less than

five or less than two?

Mr. HE ́ BERT. How about four?

Mr. MARKEY. Four is a good answer. Okay? I am not too worried.

I know that FERC is also considering whether or not to impose an

$8.75 per kilowatt month installed capacity of the I-cap charge in

New England; Massachusetts delegation, Maine, Senator Reed

from Rhode Island, just about everyone in New England on utility

commissions—— Mr. HE ́ BERT. That is pending, and I have received your communications. And I am very much—we are on top of it.

Mr. MARKEY. I appreciate that very much. And I appreciate the

consideration that you have given to it thus far. Let me see if I

have got another question.

Mr. BARTON. The gentleman’s time has expired, but we will give

him 1 more minute if he’s got a burning question.

Mr. MARKEY. Again, just to focus in on this a little bit more.

Sable Island has about 6 trillion cubic feet. They have just make

another strike in an adjoining field very recently, another 1 trillion

feet. The Canadians just announced that last week. If New England and the Northeast fills the pipeline capacity to bring that natural gas in, are you optimistic about our ability to be able to have

a reliable source of energy for the next generation?

Mr. HE ́ BERT. We have got proposals that are going to deliver that

gas. But I will tell you that I am optimistic if we can have it delivered, but as you know, it is very complex and difficult bringing

those type structures and facilities into metropolitan areas, but we

are going to work through that as expeditiously as possible. But I

would ask for great coordination, and I would guarantee mind with

State and local representatives of associations and agencies.

Mr. MARKEY. We have already got 400 million cubic feet a day.

Are you confident that we can expand that capacity in the next

couple of years?

Mr. HE ́ BERT. I hope so.

Mr. BARTON. With Congressman Markey’s support, it will be

easier, won’t it?

Mr. HE ́ BERT. It will be easier. It is kind of like a tap on the

shoulder.

Mr. MARKEY. Thank you, sir.

Mr. BARTON. I would be happy to engage in a discussion with my

colleague from Massachusetts about some of those questions he

asked on the Alaskan natural gas pipeline. I didn’t want to infringe

on the right of the Chairman of the Commission, but there are

some answers out there.

Mr. MARKEY. He probably wouldn’t have minded.

Mr. BARTON. The gentlelady from California is recognized for 5

minutes.

Ms. BONO. Thank you, Mr. Chairman. I am sorry that my colleague, Congressman John, has left. He said he doesn’t know why

he is concerned with the price of energy in California, but it is clear

he wants to retire to California, and it is probably to my district.

46

So I am glad that he does care. But I also enjoyed his questioning.

I was writing the same question for myself to ask you and was disappointed when he got to it first.

But I appreciate how definitely you have avoided answering the

question about the Governor’s proposal to buy the transmission

line, and I understand why. But you have done a good job of not

answering that question.

My question is more about cost plus price controls. And I know

we are hearing this a lot with, of course, electricity. And I don’t

want to sound like I am advocating for or against this proposal, but

I think that we are clearly seeing support in California delegation

for this, and I am concerned that it is a proposal that is going to

perhaps help us short term but hurt us down the road. And I

would like to know your views on cost plus price controls.

Mr. HE ́ BERT. Let me give you this caveat up front, if I may. I do

have an open mind, although, I have to be careful about saying I

have an open mind, because I was in a conversation with someone

in the media 1 day, and we talked and talked and talked, and I

said, ‘‘I will consider; I haven’t seen it proved to me.’’ And we were

talking about the price cap issue. I said, ‘‘Well, if you have got to

talk me into it, you have got to convince me there won’t be shortterm harm as well as long-term harm, because that is in fact what

we have seen.’’ But I said, ‘‘Other than that, I will consider it.’’ And

then the headlines of the ‘‘San Francisco Chronicle’’ was that

He ́bert to Consider Price Caps. I want you to know I do have an

open mind when it comes to cost plus.

The difficulty is this: We are in an energy age of how quickly can

you get it done. I have got great cases from 1993 forward right now

at the FERC. I don’t think California can wait 8 years to solve this

problem; as a matter of fact, I know you can’t. There are other difficulties in that there is public power, quite frankly, that I don’t

have any jurisdiction over. There is an added question, in fact, that

I am not sure how I determine the cost basis of some of these marketers. I am not sure what the cost basis is of a computer and an

algorithm and a telephone. Also, the tracking of the energy is very

difficult. It is very difficult because it changes hands so many

times.

Now, there are things that we are going to do, and that this is

why Order 2000 and the RTO process is important. Because we

have not been certain to date what we need to do with market

monitoring and how we need to monitor the market entirely. Is it

a broad view? Is it a narrow view? I can tell you that we have limited resources, and I want you to know we have been committed

to California and the Northwest to such an extent that we have got

a backlog of 2,000 cases right now that I have had to put special

attorneys on to try to deal with those cases because, quite frankly,

those people deserve their day in court too, and we have got to

move them forward. So we have got limited resources.

We have got a study coming up which is going to tell us what

more we need to do with market monitoring, because we know we

don’t have that right. The RTOs—we had the vision in Order 2000

to know that we didn’t have the resources, so the RTOs are going

to do their market monitoring as well. So it is important that we

look at it in that sense.

47

That is a long answer to your question, but it is a very long process, and my point is, I don’t think you have a long time.

Ms. BONO. Right. I am hearing from everybody that blackouts

are guaranteed this summer. And I am hoping that my constituents recognize that. And nobody has addressed this issue, and perhaps you are not the right person to. But in my district there was

a neighborhood without power for an entire weekend. And SCE

didn’t want to get out because they couldn’t afford to get the people

out on overtime to restore the power to these people. And perhaps

this isn’t your question, but I hope somebody somewhere along the

line starts asking, what would happen in the event of a catastrophe?

I understand Seattle just had an earthquake a little bit ago of

6.4. That is what I heard. So maybe I will be embarrassed and find

out it wasn’t true, and hopefully it wasn’t. But I am curious to

know too what the contingency plans are here should there be disruption in the transmission. Are we thinking about that? How are

we going to be able to react and resupply the gas or the electricity,

whatever it might be? Are we thinking at all about worst-case scenarios?

Mr. HE ́ BERT. Well, my guess is that I am probably not the answer. I think that is probably something a little closer to FEMA

than it would be to me. But I will tell you, while being chairman

of the State commission, one of the things I did was to ensure that

each and every utility that operated within that State had emergency plans in how to deal with exactly that. They had them file

them with us. I think most States are doing that. I think FEMA

is probably involved in that, although, I don’t know that. But that

would be a very difficult situation, and we certainly do need to

have a grasp on that.

And it would be my hope that the transmission companies themselves have that. But certainly, if we set these regional transmission organizations up, they are going to have that type plan.

That is going to be something that they, quite frankly, cannot live

without, because they are going to make their living off throughput. They are going to make their living off volume. They are going

to make their living off reliability and performance. And that is

why they are so important.

But I will commit to you this in California and the Northwest as

a whole: We are trying to squeeze every megawatt that we can out

of that system. We will do anything and everything we can. We are

looking for ideas. We are looking for people to bring it to us. That

will help, but all we can do is remove regulatory obstacles, regulatory impediments. It still doesn’t solve the supply problem. That

can’t come from us; it has to come from someone else. But when

it comes to delivering that supply, we can certainly help there. But

I will do anything and everything I can. We are looking for ideas;

we invite that. But I assure you, if we get a filing, it will happen

sooner rather than later. And if I agree with it or don’t agree with

it, it will come out.

Mr. BARTON. The gentlelady’s time has expired.

Ms. BONO. Thank you.

Mr. BARTON. The gentleman from Maryland, Mr. Wynn, is recognized for 5 minutes.

48

Mr. WYNN. Thank you, Mr. Chairman. Mr. He ́bert, I was initially

going to ask you about the administrative barriers to pipeline construction that have been commented upon today, but then after listening to Mr. Markey’s question and your response about the impact of price signals, it seemed to me that I ought to ask I guess

a more basic question. What is the greater impediment, administrative obstacles, for unprofitable price signals?

Mr. HE ́ BERT. Well, I think right now what you have is you have

very good price signals. Price signals are good. At a time when

prices are very low, you kind of have the opposite, but now you

don’t have that.

Mr. WYNN. Okay. Now, I think you also said that because it is

somewhat cyclical, the natural gas that Congressman Markey referred to, people just didn’t move on it, notwithstanding that, apparently, the administrative barriers have been overcome, the lack

of, I guess, a long-term profitability picture inhibited the construction. Is that a fair assessment?

Mr. HE ́ BERT. Yes. I think the price signals were not there at that

point. I don’t think they thought they could deliver it and not only

add value to the system but probably to their shareholders.

Mr. WYNN. Is it your opinion that the current price signals are

sufficient to move that natural gas to stimulate the construction of

that pipeline?

Mr. HE ́ BERT. I can’t answer that. I will let the market answer

that. But I will tell you, I have to believe that the price signals are

very good. And I will tell you, from the time that I spent with the

investment community in New York, they are excited about the opportunity.

Mr. WYNN. Well, it seems to me it is difficult for us to develop

an energy policy if we don’t really know what the factors or forces

are that are going to determine whether or not existing and approved pipelines get constructed in a timely manner given the

build-out time. I mean, how do we develop an energy policy? And

you can say you can’t comment on that. If not you, who?

Mr. HE ́ BERT. I am not sure I understand what you are asking.

Do you want me to comment on why the pipelines work or don’t

work or—— Mr. WYNN. Well, I want you to basically extend—and the chairman indicated there are answers, and I would love to hear them— why approved pipelines from substantial quantities of natural gas

have not been constructed to bring that gas on line.

Mr. BARTON. Would the chairman of the Commission yield?

Mr. HE ́ BERT. Oh, absolutely.

Mr. BARTON. One possible answer might be that the delivered

cost to the expected market has got to be equal or lower than the

delivered cost of existing supplies that are already serving that

market. And in the case of Alaska, when you add the build-out, the

actual capital costs to construct a natural gas-only pipeline, then

you have to liquify it if you take it down to Valdez. You have got

to figure the cost of the tankers to terminal. Then once you get it

in lower 48, you have got to figure the delivered cost to Chicago

or wherever the expected market is.

The bottom-line cost is—the numbers I remember—you were showing natural gas delivered come in around $9 to $10 in MCF

49

at the time the market was delivering at $3 to $4. So it was noneconomic. On the other hand, if it looks like natural gas prices in

lower 48 are always going to be the $4 to $5 to $6 in MCF before

delivery, just at the wellhead, that same project then becomes economic if there is an expectancy that the market is going to stay at

that level. That is one possible answer to the question.

Mr. HE ́ BERT. And if you want to make sure and deliver that

supply——

Mr. WYNN. I wanted to thank the chairman, first, for the answer.

Then I was going to follow up with a series of questions.

Mr. BARTON. I would be happy to.

Mr. HE ́ BERT. The chairman can, obviously, get into areas that I

can’t get into. I can’t say, should you take it to a boat and move

it, should you have a longer pipeline, should you go east, should

you go west, north or south. I can’t answer those things. We look

for them to bring us the filings, and we will look at those filings,

and we will move forward on them. But I will tell you, I think it

is a bottom-line decision of, do you think it is important to sure

yourself up domestically or not knowing, in fact, that the signals

are there that you need more pipes.

Mr. WYNN. Okay. If I could jump in——

Mr. HE ́ BERT. And that is not always upstream; it could be downstream.

Mr. WYNN. Okay. If I could just jump in then. You say that the

price signals are favorable now, and that is the dominant factor.

Would you say—and I guess I followed in on Kevin Tauzin’s line

of questioning. Do we need legislation to address these administrative obstacles, or is it really determined by the market as opposed

to this other stuff we have been hearing about?

Mr. HE ́ BERT. Again, I would like to stand by my earlier statement in that I would rather not talk about obstacles. I would rather—and I will copy you on it as well—what the clarifications and

questions might be as to differences in the time the statute was

taken into effect and today. It is quite different.

Mr. WYNN. If I can pursue a couple of things about these administrative obstacles. There was a notation that they are duplicative

requirements. What are those?

Mr. HE ́ BERT. I am sorry?

Mr. WYNN. Are there duplication requirements? Are there duplicative requirements?

Mr. HE ́ BERT. Oh, yes, there are many agencies involved in this

process, if that is your question—who is going to take the lead role,

who is going to cooperate.

Mr. WYNN. Well, the duplication, what is necessary to eliminate

the duplication with all these agencies involved?

Mr. HE ́ BERT. Again, I would have to give you clarification on that

after this, and I will do that.

Mr. WYNN. Okay. Similarly, the conflict between the Federal

agencies and the State agencies, how is that likely to be resolved

or how should that be resolved?

I mean, that is the million dollar question. We just try to work

together cooperatively and try to share information and do as much

work up front as possible and move forward.

50

And I know this is dangerous territory. But if we are serious

about developing a national energy policy, does the Federal Government have to become more dominant in this process, or should

we pull back, for that matter, and defer more to the States? I am

trying to get at which approach gives us a better energy policy that

moves this pipeline construction process along quicker.

Mr. HE ́ BERT. There are two parts to that answer. One is, I think

it is always best if the Federal Government, or any government,

can be less prescriptive as opposed to more prescriptive. Okay? And

I think their role has to be to try to remove obstacles and impediments to facilitate efficiencies and speed of getting things done,

while at the same time understanding that we have obligations to

two things that are very important: landowners and the environment.

The other part of that question is, if you look at natural gas, we

certainly have siting authority on natural gas pipelines. We do not

have siting authority for electric transmission lines.

Mr. WYNN. All right. Thank you, Mr. Chairman. I yield back the

balance of my time.

Mr. LARGENT. The gentleman’s time has expired. I am going to

yield myself 5 minutes as it is my turn to ask questions. Your last

statement is exactly where I want to go.

Mr. HE ́ BERT. I knew I shouldn’t have said that.

Mr. LARGENT. Yes. FERC does have the power or authority of

eminent domain in siting natural gas pipelines; is that correct?

Mr. HE ́ BERT. That is correct.

Mr. LARGENT. And do you think they should have that authority?

Mr. HE ́ BERT. Absolutely.

Mr. LARGENT. And do you think they should also have that authority for siting electric transmission lines?

Mr. HE ́ BERT. Here I go. Once upon a time when I was chairman

of the Mississippi Commission, I took very strong positions that in

fact States should retain that authority. I was chairman of the Mississippi Commission, and quite frankly we had not moved toward

competition at that point. I was the only one actually on the commission that was trying to move quickly in that direction.

Now that I am at the FERC—not that I have Potomac fever—

I think you just have to answer the basic question, is electricity

going to be an interstate commodity or is it not? And if it is, you

have to treat it like one. I do think it is important that we give

as much deference to States as possible so that they understand

that they are in the mix and they are involved.

I do think, again, that is where the regional transmission organizations can play a role because they can work through this together. You could have representatives from each State trying to

figure out where they go with this planning, and that way, one

State, perhaps, could not veto a line going through that is going to

benefit all, because the one thing we are learning through this entire process is, as goes Mississippi, so goes Oregon. And so we are

all in this big boat together, and we are going to sink or swim together. So for that reason, I have to say it is probably time to move

forward, as much as I hate it.

Mr. LARGENT. Well, I want to work with you on that, and see if

we can’t come up with a common sense, middle ground on——

51

Mr. HE ́ BERT. You and I have had great discussions on that.

Mr. LARGENT. Yes. Let me go back to an issue that was raised

by Congressman Boucher in his questioning because, in my mind

anyway, he left the impression that this gaming the system by the

use of the transportation and natural gas is taking place where

somebody owns both production and—or gathering and transportation, and they are rigging the system to favor themselves to increase prices. Is that, in fact, taking place, to your knowledge?

Mr. HE ́ BERT. We have a pending case, so I have to be careful. I

do want to make a clarification, because I may have confused you

a little bit, and I want to think about how I answered Congressman

Boucher. I think he may have been talking about prices, and I was

talking about rates. We do have jurisdiction over the rates, but as

you know, sometimes it is rolled in, so the price itself, we may not

have full jurisdiction over it.

Mr. LARGENT. Okay. Well, let me ask the question this way: If

that were occurring—in other words, if somebody was gaming the

system to benefit themselves or to increase prices in the natural

gas arena, what tools does FERC have to address that type of

abuse? Do you have tools available, and what are they?

Mr. HE ́ BERT. We do have tools to address that. As a matter of

fact, one of the things that we are doing to check in to see exactly

what has happened and what is the conduct in the United States

right now, is we have got an affiliate conference coming up on

March 15. We are going to gather exactly that type information

and see what the conduct is. I will have more information for you

at that point; I do not have it right now.

But I will tell you, when you see these numbers like I talked

about with El Paso, the number of bids that came in for the available capacity, then at the same time you look, and you see pipes

running full, it doesn’t lend you to believing that, but that is not

to say that it has not or could not occur.

Mr. LARGENT. Okay. Well, go to the tools that the FERC has access to addressing that type of market abuse if, in fact it happened.

What could FERC step in and do if they found a company or entity

guilty of that?

Mr. HE ́ BERT. I mean, through Section 311, we have got discouragement penalties, so we could certainly do that. But it would take

a finding of that type behavior.

Mr. LARGENT. This will be my last question. Do you have the

power to order divestiture of the transmission?

Mr. HE ́ BERT. It is questionable.

Mr. LARGENT. Okay.

Mr. HE ́ BERT. I hate to give you that answer, but I will get you

more information on it, but it is questionable.

Mr. LARGENT. Okay.

Mr. HE ́ BERT. I am just not comfortable giving you a yes or no on

it.

Mr. LARGENT. Well, thank you, Mr. Chairman. It is good to be

able to call you Mr. Chairman. We are glad you are in the position

you are in. Thank you.

Mr. HE ́ BERT. Thank you.

Mr. LARGENT. And I yield back my time and recognize Congressman Rush from Illinois for 5 minutes.

52

Mr. RUSH. Thank you, Mr. Chairman. Chairman He ́bert, I certainly appreciate your time and your patience here. But I want to

go back to something that you stated earlier in your testimony,

that aside from natural gas markets, reactions to warmer weather

and decreased storage withdrawals, lower futures prices indicate

the beginning of the end of this winter’s crisis. And, of course, this

crisis, we seem to be moving away from the crisis now, but my

question is, will the increase in drilling be enough to overcome low

winter storage combined with summer gas-fired generation by next

winter? Are we going to have the same issues next winter that we

had this winter?

Mr. HE ́ BERT. I think that is a great question, getting prepared

for next winter. I will tell you that I think what is being projected

at this point is going to prepare us better for next winter. That is

not to say that we will not have problems next winter. I still think

there is much work to do. And that is why I continue to take the

position that we need to expedite any and all filings that come before us and move as quickly as possible, and work cooperatively

with all the Federal and State and local agencies.

Mr. RUSH. You also discussed FERC’s commitment to maintain

an adequate gas network. And I must say that in Chicago we have

been fortunate that we benefit from the remnants of tremendous

industrial infrastructure. How important were delivery issues over

this past winter? And second, would you share with us the extent

to which the current infrastructure is adequate or not adequate in

the Midwest?

Mr. HE ́ BERT. I can’t speak to take away capacity. I can speak to

the interstate pipelines. And you are right, you are very fortunate

where you are. You have a literal spaghetti bowl of pipelines there.

I think you have got about five pipelines coming through there, so

you are fortunate. I think you are in good shape on your interstate

pipelines. There are other opportunities, which, certainly, every

choice you get gives you better and more options. I know you understand that. As far as the take-away, I cannot answer. There is

always more that the States could be doing.

Mr. RUSH. Well, although we have this tremendous infrastructure in place, our prices—and this might not be a question that you

can address—but our prices increased at the same rate that other

regions’ cost of heating oil increased. And I just want to know, if

we have got the infrastructures in place, there was no residual benefit to the customers.

Mr. HE ́ BERT. Well, I think there was, but I think you didn’t get

to see some of it because some of what you are getting and much

of what you are getting actually is gas we don’t regulate; it is Canadian gas. So you are seeing it come down. But the good news for

you is you did not have any firm transportation interrupted. So you

didn’t have any firm customers interrupted.

Mr. RUSH. Thank you, Mr. Chairman. I yield back.

Mr. LARGENT. The gentleman yields back, and we recognize the

gentleman from Georgia, Mr. Norwood.

Mr. NORWOOD. I have got two very simple questions. One, I think

that a farmer from Georgia might ask you, and one maybe a fisherman from New England might ask you. So feed me back the anVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00056 Fmt 6633 Sfmt 6602 E:\HEARINGS\71501 pfrm04 PsN: 71501
53

swers so I can go home and explain it. Can you see that chart over

there?

Mr. HE ́ BERT. Yes.

Mr. NORWOOD. The part I would like for you to look at is just

from late 1999 until today. That is a rather amazing spike in my

view. And my guess is that either demand increased greatly over

the last 12 months or supply went down. Something strange had

to happen to spike that like that. I would just like to know your

opinion as to what really has happened in the last 12 months that

has increased this cost so dramatically over the last 20 years. Did

demand really go up that much in the last 12 months?

Mr. HE ́ BERT. Primarily, what you see right there is the electric

generation, the influence of the electric generation. Not everyone

saw that price. And I know you see that, but certainly not everyone

saw that price.

Mr. NORWOOD. Well, my farmer did. So now take it from there.

Are you saying by electric generation, demand went up then? Is

that what has happened?

Mr. HE ́ BERT. Well, there is no question there is increased demand.

Mr. NORWOOD. And it caused that big a spike in the last 12

months?

Mr. HE ́ BERT. At the wellhead.

Mr. NORWOOD. Now, was that demand or is that a decreased

supply? It has to be one or the other, doesn’t it?

Mr. HE ́ BERT. Yes. I mean, EIA, certainly I guess since they put

it together, they can give you the information on how they came

to that conclusion. But certainly, it is either demand or supply;

there is no doubt about that.

Mr. NORWOOD. That is right. Now which is it? Who knows that?

If you don’t know, tell me——

Mr. HE ́ BERT. I am hoping EIA knows it.

Mr. NORWOOD. Give me your best guess.

Mr. HE ́ BERT. No, let me—you had a lot of different factors. And

actually, we issued a report on this period. Not only did you have

increased demand, you had a situation where you had colder than

normal weather over the last few years.

Mr. NORWOOD. Well, that is demand.

Mr. HE ́ BERT. Well, but you had hydro facilities, quite frankly,

that didn’t have the ability to run like they could in higher rainfall

and higher snowpack years.

Mr. NORWOOD. That is demand.

Mr. HE ́ BERT. So you had these electric generators running at levels, as I said earlier, whereas, normally they may have been running at 25 and 30 percent; here they are running at 80 and 85 percent. And they are much older, very inefficient units.

Mr. NORWOOD. So if we get some nice rain and hydropower

comes back into play, that is going to come back down?

Mr. HE ́ BERT. There is no question it would have helped.

Mr. NORWOOD. Do you think it will bring it half-way down or all

the way down?

Mr. HE ́ BERT. I couldn’t answer that. It would have helped a lot

in the West.

54

Mr. NORWOOD. So your basic answer then seems to be that it is

both; that the demand went up for various reasons, and our ability

to supply other forms of fuel went down. But our ability to supply

natural gas sort of stayed the same.

Mr. HE ́ BERT. It is a combination of those factors, but it is also

a combination of—when you ask why is your demand where it is

and why is your supply where it is, you are just seeing the balance

swing back where your E&P is picking up again, where you are

going to be in a supply situation. Quite frankly, it is going to help

you here. At the same time, if you look at the demand, you have

got a situation where supply is chasing demand, especially in some

regions, especially in the West with no end in sight, which is pushing the volatility up.

Mr. NORWOOD. Well, quickly, can we increase supply?

Mr. HE ́ BERT. You better increase supply or decrease demand.

And I don’t see any way——

Mr. NORWOOD. Can we increase supply?

Mr. HE ́ BERT. Absolutely, you can.

Mr. NORWOOD. We have the ability?

Mr. HE ́ BERT. Yes.

Mr. NORWOOD. Politically we can do that.

Mr. HE ́ BERT. I can’t answer that.

Mr. NORWOOD. That is the interesting question. My next question is actually for Mr. Markey. Had he been given 30 minutes, I

know he would have asked this, so I will try to help him out. Besides, I have a friend or two in New England. And it has sort of

been asked, but we didn’t exactly get the answer. Is it true that

in New England there is a lack of natural gas?

Mr. HE ́ BERT. Not now, but there was. They have remedied some

of that. Certainly, they could use more natural gas. And if they

want to change fuels, they are going to have much more natural

gas.

Mr. NORWOOD. Well, how long has it been that they have been

short of natural gas, 2 years, 5 years?

Mr. HE ́ BERT. Well, they had a problem delivering it, was their

problem. They are solving some of that. We had the Maritimes——

Mr. NORWOOD. Well, that is sort of where I am getting at. You

said you had attempted to bring pipelines into New England. Is

that what you mean by they had a hard time delivering it; there

wasn’t enough pipelines?

Mr. HE ́ BERT. You are trying to get me in trouble when I leave

here, aren’t you?

Mr. NORWOOD. No, sir; I am not. Give me the same 30 seconds

Markey had, a little longer.

Mr. LARGENT. You have already had it.

Mr. HE ́ BERT. I think it is two things. One, it was the deliverability. Now, they have got the new source of supply from Sable,

which is obviously helping them.

Mr. NORWOOD. So it wasn’t environmental problems, environmental regulations or uncooperative State agencies up there, or

landowner protests? None of that affected it?

Mr. HE ́ BERT. In individual cases that was present.

Mr. NORWOOD. Sorry, that red light is on. Thank you, sir.

55

Mr. LARGENT. The gentleman’s time has expired. I recognize the

gentleman from Missouri for 5 minutes.

Mr. BLUNT. Thank you, Mr. He ́bert, Mr. Chairman. In the reverberations of all this through the economy, I want to ask just a

question or two about propane. As a derivative, those propane

prices, which Southwest Missouri where I live, a lot of people don’t

have access to natural gas pipelines, so they use that derivative.

There have been some suggestions that greater storage capacity,

tax incentives for storage capacities and things like that would

keep some alternatives that you can stockpile a little more effectively out there. Do you have any thoughts on that or want to talk

about propane just a little bit?

Mr. HE ́ BERT. We don’t regulate propane but for the transportation of it, and that is very small. But I will tell you this: To me,

it is not necessarily and issue of propane; it is an issue of diversification of fuels. I think that is important. And I don’t care if you

are talking about new technologies, if you are talking about renewables, if you are talking about nuclear clean coal; I think it is all

important. And many people in the gas industry even right now

will tell you that it is important that we, for strategic reasons and

defense purposes, have diversification of fuels, and that we are

very sympathetic to that and understand where we go with an imbalance.

Mr. BLUNT. Well, there may be some—that may be a case where

just simply some tax policies on the depreciating storage facilities

or something a little faster would allow that alternative to be out

there and set aside in a way that creates some balance in the market, and balance in the market is very much part of this problem

I would think.

Mr. HE ́ BERT. I think anything you can do to, one, remove obstacles, and two, to give incentives on the front end is much better

than having consumers complain about lights being off, stuck in

elevators, and paying three and four times their normal bills. I

don’t doubt that at all, and I totally agree.

Mr. BLUNT. Thank you, Mr. Chairman.

Mr. LARGENT [presiding]. The gentleman yields back. The gentleman from Oregon is recognized for 5 minutes, Mr. Walden.

Mr. WALDEN. Thank you, Mr. Chairman. I apologize for not being

able to be here sooner. We were having a delegation meeting from

Oregon, talking about the hydro problem and the energy crisis affecting the region with our Governor.

I was wondering if you could give me a little better idea. You

mentioned about the hydro system contributing to the demand side

of this equation in terms of price at the wellhead. I am curious

since our region’s 70 percent hydro, our supply, what you are seeing out there. I know we have got 60 percent average snowpack

right now that may contribute down the line. But I thought we had

stayed pretty constant in our power production, and in fact had exceeded the biological opinion to be able to shove power into California when they were in their greatest need.

Mr. HE ́ BERT. Well, part of the problems you have got is you are

drawing down on this, and you are going to have a problem on your

water for this next summer. Now, I know you know that. That is

probably one of the things that you talked about today.

56

Mr. WALDEN. Yes.

Mr. HE ́ BERT. I think there were some glitches on the hydropower

systems as far as the amount of energy they were producing, what

was being drawn down, where it was being sent. When you do that,

you are going to experience some volatility on the natural gas

prices.

Mr. WALDEN. Okay. You may have already covered this, but have

you gotten into the need for additional transmission capability of

the pipelines and what you see there?

Mr. HE ́ BERT. Absolutely. And I want you to know, this is not my

chart. I know I am being asked about it, but I think someone else

is going to testify about this chart. I think that is why it is up

there. I might would have turned it around had I known some of

this was coming back.

Mr. WALDEN. Could you speak to pipeline capacity——

Mr. HE ́ BERT. Sure.

Mr. WALDEN. [continuing] and what needs to be done, and how

soon it needs to happen? I had a meeting this morning with some

folks who were saying they were able to look at 10-year contracts

for nearly double what they have got running through their line

now. And I am curious: What is it we can do to help facilitate making sure the delivery system works? And if I can get back to you

at some point on hydro relicensing and hydro system and power

line capacity too.

Mr. HE ́ BERT. Right. And I will be glad to meet with you privately

too. I am always willing to do that. But I will tell you, as I have

told some others earlier, especially in the Northwest, you have had

a lot of different reasons that have made it difficult to get new

pipes out there. A lot of people want to just primarily blame it on

environmental, landowner. I think that is some of it. I think you

have had what some may call an imbalance. You haven’t sited any

new generation, other than some QFs, out there to speak of, especially in the West.

But there is also the situation that hydropower has been such an

influential factor out there. And quite frankly, when you have a lot

of rain and you have a lot of snow, it keeps those gas prices down

pretty good out there, so it makes it a little tougher and a little

less reasonable for some of these people to bring their market out

there. So I think some of this, whereas, yes, it is doing some damage right now, I think it is sending some price signals to some people who are going to be ready to get about the business of doing

something out there.

Mr. WALDEN. And I know you have heard this elsewhere, but I

am hearing it from my farmers like my friend from Iowa is hearing

as well, about the price of fertilizer going through the roof too when

it comes to gas prices. So to the extent that you have got solutions

for us as to how we get more gas out there and get that price down,

we certainly welcome—I know you have got some of that in your

testimony.

Mr. HE ́ BERT. And the one thing I have continued to tell the committee, and I would tell you as well, there is only so much we can

do. If I get a filing, I can get a interstate pipeline to you. And one

thing I cannot do is anything about your intrastate pipelines with

57

the take-away capacity. I can transport it to you; I cannot deliver

it.

Mr. WALDEN. One of the issues that keeps coming up is the need

to have a better working relationship among the Federal

agencies—— Mr. HE ́ BERT. No question.

Mr. WALDEN. [continuing] when it comes to these siting issues.

And especially out in the West where so much of our land is Federal owned, or managed, or some of us might say mismanaged on

occasion. But it seems like these agencies approach it in a sequential order. And you just get finished with one, and then you have

got to start on the next one, on all these siting issues. And I know

you know this for pipelines, but it is certainly going to hit us. If

we could put generation capacity on in Wyoming and Montana, but

there isn’t the capacity on the electrical grid to ship it to where it

needs to go, we are going to have to string more lines.

Mr. HE ́ BERT. Absolutely.

Mr. WALDEN. Can you describe for me how the Administration

is approaching that?

Mr. HE ́ BERT. I cannot tell you how the Administration is approaching it. As you know, we are quasi judicial, and we have to

be very careful in our conversations with the Administration. Because much of this has to do with pending actions, especially in the

Northwest. But I will tell you, we are trying to remove any and all

obstacles, impediments that we can.

If you have an idea, if there is an incentive, if there is a reason

to provide some incentive to get an interstate transmission system

up, we want to work with you on that. We do think Order 2000

is fundamentally important, that you have a regional system that

works. We are going to try to squeeze every megawatt—like I was

telling Congressman Bono a little earlier—out of the system.

Mr. WALDEN. Good. Because the great conflict that will arise immediately is the snowpack at 60 percent, the reservoirs are down.

We drained them lower to provide power under Federal order, to

ship power to California. We are not going to see those reservoirs

come back up. And we have got all the environmental species

issues, going to clobber us this summer. Thank you, Mr. Chairman.

Mr. LARGENT. The gentleman’s time expired. Chairman He ́bert,

we appreciate your indulgence. Thanks for joining us here. We look

forward to working with you in the months to come. And there

have been some questions that you have agreed to respond to.

Mr. HE ́ BERT. I will take care of those.

Mr. LARGENT. We would ask that you do that expeditiously.

Mr. HE ́ BERT. Absolutely.

Mr. LARGENT. We thank you, and excuse you, and call our next

panel.

Mr. HE ́ BERT. Thank you.

Mr. BARTON. Well, ladies and gentlemen, welcome. I want to

apologize in advance for putting 10 of you on one panel. Mr. Boucher and I had tried to think of a way to make sure that there were

members here to hear your testimony, and we have adopted a onepanel rule, except when we have a Federal cabinet level appointee.

And you have seen with Chairman He ́bert, the opening statements

took about an hour, his statement took about 10 minutes, and then

58

we took 11⁄2 hours to question him. So I do apologize for asking you

to go through this.

But the good news for having you all in one panel, we have got

5 or 10 members who are actually here, and if we split you into

two panels, those of you unlucky enough to be on the third panel,

you would be stuck with Mr. Boucher and myself. So we do get

greater participation by doing it this way.

We are going to start with Ms. Campbell. We will give you 6

minutes, then we will go through, give everyone else 6 minutes.

Then we will come back and do questions. And I do ask you try

to stay within your 6-minute limit because with 10 people, 6 times

10 is 60. That is an hour of just pure listening to you give your

opening statements.

Having said that, this is the meat and potatoes of this hearing.

The focus of the hearing is on the natural gas industry today, supply demand, regulatory system. And the answers and your testimony that you give is going to have a significant impact on the policy recommendations that we make on a bipartisan basis to the

President on a comprehensive national energy policy.

So with that, we will start with Ms. Campbell, who is the director of the Natural Gas Division of the Energy Information Administration. Your testimony is in the record in its entirety. We now recognize you for 6 minutes to elaborate on it. Welcome to the subcommittee.

STATEMENTS OF ELIZABETH CAMPBELL, DIRECTOR, NATURAL GAS DIVISION, ENERGY INFORMATION ADMINISTRATION; CUBA WADLINGTON, JR., PRESIDENT AND CEO, WILLIAMS GAS PIPELINE, ON BEHALF OF INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA; JERRY JORDAN,

CHAIRMAN, JORDAN ENERGY, INC., ON BEHALF OF INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA; RICHARD G. REITEN, PRESIDENT AND CEO, NW NATURAL, ON BEHALF OF AMERICAN GAS ASSOCIATION; ANDREW J.

LITTLEFAIR, PRESIDENT, PICKENS FUEL CORP., ON BEHALF

OF NATURAL GAS VEHICLE COALITION; ROBERTA A.

LUXBACHER, VICE PRESIDENT-AMERICAS, EXXON MOBIL

GAS MARKETING CO., ON BEHALF OF NATURAL GAS SUPPLY

ASSOCIATION; WALKER HENDRIX, COUNCIL, KANSAS CITIZENS’ UTILITY RATEPAYER BOARD; JACK HILLIARD, GENERAL MANAGER, FLORENCE UTILITY, ON BEHALF OF AMERICAN PUBLIC GAS ASSOCIATION; JAS GILL, VICE PRESIDENT, MANUFACTURING, CYTEC INDUSTRIES, INC., AND

PATRICIO SILVA, PROJECT ATTORNEY, NATURAL RESOURCES DEFENSE COUNCIL

Ms. CAMPBELL. Thank you, Mr. Chairman, members of the committee. I appreciate the opportunity to appear before you today.

The Energy Information Administration, EIA, is an autonomous

statistical and analytical agency within the Department of Energy.

We do not take positions on policy issues, but we do produce data

and analysis that are meant to help policymakers as well as the

public. Our views do not represent those of the Department or the

Administration.

59

The committee has requested information about recent prices for

natural gas, EIA’s projections for natural gas supplies, and what

the Nation might do to assure adequate supplies in the future. Our

surveys, short-term energy outlook containing quarterly projections

for the next two calendar years, and annual energy outlook providing projections to 2020 are the basis of today’s testimony.

Natural gas prices are measured in several ways. There are spot

market prices for immediate sales, long-term contract prices, and

futures market prices. There are also price measurements made at

different points in the supply system, at the wellhead or at the city

gate, and at different geographic market locations and also for different consumer groups. Our home bills reflect the price of the gas

commodity purchased by local utilities or marketers in a mix of

spot and long-term contracts, charges for shipment to the city gate

by interstate and intrastate pricelines, storage charges, and

charges for local distribution company services.

At the beginning of the supply chain is the wellhead price, the

figure over there. During 1998 and 1999, wellhead gas prices hovered around $2 per 1,000 cubic feet. Spot gas prices in the supply

region, generally the Henry Hub area, which are usually slightly

higher than the composite wellhead prices comprised of spot and

longer-term sales prices, began rising this summer. Spot prices

were above $5 per 1,000 cubic feet in the fall more than double the

average spot price a year earlier, all prices in nominal dollars.

Later, spot prices reached as high as $10.53 on December 29 of last

year. Since that point, spot prices have fallen and were below $6

during the last 10 days. Some regional markets, most notably California, have experienced particularly high prices this year.

The sustained high national prices are due to a number of factors. First is the strong demand for natural gas. Preliminary data

for 2000 indicate that U.S. natural gas consumption reached a

record 22.7 trillion cubic feet, passing the previous high in 1972.

The high levels of demand are related to the strong economy in

2000 and the return of cold winter weather in late 2000. Production of natural gas also rose last year to approximately 19.1 trillion

cubic feet. The gap between consumption and production was

closed by record levels of gas imports primarily from Canada. Production appears to have increased throughout 2000 as a result of

successful drilling and well completion.

Strong demand for gas in summer 2000 meant that smaller

quantities were injected into storage for use during this winter’s

peak demand. Following strong heating season demand recently,

data as of February 16th indicate that national storage levels are

33 percent below the 5-year average and storage in the West region

is 56 percent below its 5-year average. While end-of-season storage

will be at or near a record low, there were concerns in December

and January when the temperatures had been coldest that working

gas storage would be depleted by the end of the heating season.

This fear contributed to the price spikes at that time.

Regional storage and pipeline capacity are also part of the explanation for prices seen across the nation. Storage and pipeline capacity nationally have been adequate to meet most peak-day demands during recent winters. However, the California market and

the Northeast region are examples of areas where in recent years

60

concern about supplies or deliveries led to price competition. By

contrast, production increases in Rocky Mountain States during recent years have resulted in constraints for gas existing in the region. This has resulted in that region having the lowest average

natural gas spot prices in the Nation.

Turning to the future. EIA projects that this winter, the November through end of March period, wellhead natural gas prices will

average about $6.10 per 1,000 cubic feet, more than two and a half

times the price of the previous winter. Assuming normal winter

and continued low storage levels, the annual average wellhead

price for the year 2001 is projected to be about $5 per 1,000 cubic

feet. In 2002, we expect the storage situation to improve somewhat

leading to a decrease in the price to $4.50. Domestic natural gas

production for 2001 and 2002 is expected to rise in response to the

high rates of drilling the past year.

Mr. BARTON. Ms. Campbell, could you try to summarize in the

next 55 seconds.

Ms. CAMPBELL. Yes.

Mr. BARTON. I know it is hard to ask you to do this within 6 minutes.

Ms. CAMPBELL. All right. In the outlook for 2020, natural gas

consumption is expected to increase to reach almost 35 trillion

cubic feet, and consumption increases are expected in all sectors,

but the most rapid growth is expected for electricity generation.

Domestic natural gas production is expected to increase to 29 trillion cubic feet in 2020 with the gap being closed with increases in

import. And EIA does not propose or advocate any particular policies or programs.

Our testimony notes a number of areas that have changed in the

last 15 years which have contributed to increases in demand or

changed the supply situation. We also note that the assumptions

that were used underlying the forecasts are a continuation of current policy and regulation. And that is made because of EIA’s requirement to be policy neutral, but that we have also assumed continuing technology improvements and substantial increases in investments.

[The prepared statement of Elizabeth Campbell follows:]

PREPARED STATEMENT OF BETH CAMPBELL, ENERGY INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY

Mr. Chairman and Members of the Committee: I appreciate the opportunity to appear before you today to discuss current and future natural gas prices and supplies

in the United States.

The Energy Information Administration (EIA) is an autonomous statistical and

analytical agency within the Department of Energy. We are charged with providing

objective, timely, and relevant data, analysis, and projections for the use of the Department of Energy, other government agencies, the U.S. Congress, and the public.

We do not take positions on policy issues, but we do produce data and analysis reports that are meant to help policy makers determine energy policy. Because we

have an element of statutory independence with respect to the analyses that we

publish, our views are strictly those of EIA. We do not speak for the Department,

nor for any particular point of view with respect to energy policy, and our views

should not be construed as representing those of the Department or the Administration.

The Committee has requested information about:

• Recent high and fluctuating prices for natural gas

• EIA’s projections for natural gas supplies in the future

• What the Nation might do to assure adequate supplies in the future.

61

Each month EIA prepares information about natural gas supply, consumption,

and prices derived from a variety of respondents and data sources. It also updates

its Short-Term Energy Outlook, which contains quarterly projections through the

next two calendar years, taking into account the latest developments in energy markets. The Annual Energy Outlook provides projections and analysis of natural gas

consumption, supply, and prices through 2020. The projections in this testimony are

from the Short-Term Energy Outlook February 2001 (STEO) and from the Annual

Energy Outlook 2001 (AEO2001), published by EIA in December 2000. These projections are not meant to be exact predictions of the future, but represent a likely energy future, given technological and demographic trends, current laws and regulations, and consumer behavior as derived from known data. These EIA products are

the basis of the information provided today.

Recent Natural Gas Prices

Natural gas prices are measured in several ways. There are spot market prices

for immediate sales, long-term contract prices, and futures market prices. There are

also price measurements made at different points in the supply system—for example, at the wellhead or the citygate—and at different market locations throughout

the United States including the Gulf Coast, the U.S.-Canadian border, or the Northeast. Prices are also measured for different end-user groups—residential, commercial, or industrial consumers and electric utilities. Our home bills reflect the price

of the gas commodity purchased by local utilities or marketers in a mix of spot and

long-term contracts, charges for shipment to the citygate by interstate and intrastate pipelines, storage charges, and charges for local distribution company services.

At the beginning of the supply chain, however, is the wellhead price. During 1998

and 1999 wellhead gas prices hovered around $2 per thousand cubic feet. Spot gas

prices in the supply region, which are usually slightly higher than the composite

wellhead price comprised of spot and longer-term sales prices, were generally below

$3 per thousand cubic feet. Preliminary data for last summer indicate that overall

wellhead prices were above $3.60 per thousand cubic feet (Figure 1) and spot prices

averaged more than $4 per thousand cubic feet. Spot prices remained above $5 per

thousand cubic feet in the fall. This was more than double the average spot price

a year earlier, all prices in nominal dollars. In late November, gas spot prices (as

measured at the Henry Hub in southern Louisiana—a major pipeline interconnection and transshipment point) moved past $6 per thousand cubic feet, reaching as

high as $10.53 on December 29, 2000. Since that point spot wellhead prices have

fallen and were below $6 throughout the week of February 19, 2001. In addition to

higher prices nationally, some regional markets have experienced particularly high

prices. California has experienced the highest of the regional prices.

The sustained high national prices are due to a number of factors. The first of

these is the strong demand for natural gas throughout 2000. Preliminary data for

2000 indicate that U.S. natural gas consumption reached a record 22.7 trillion cubic

feet (Tcf), passing the previous high of 22.1 Tcf in 1972. The year-to-year increase

in consumption from 1999 to 2000 was almost 1 Tcf. The high levels of demand the

past year are related to the strong economy in 2000 and the return of cold winter

weather in late 2000.

The industrial sector accounts for about 40 percent of U.S. natural gas demand,

followed by the residential, electric utility, and commercial sectors. Natural gas consumption peaks in the winter due to residential and commercial space heating demand. Electric generator demand, however, peaks in the summer when gas-fueled

generators are in greatest use. Another contributing factor for high prices of natural

gas has been the high price of crude oil. Some industrial consumers and power generators are able to switch between natural gas and distillate fuel oil or residual fuel

oil. The rise in natural gas prices has usually followed the rise in crude oil prices.

Production of natural gas also rose last year but was more modest than the consumption increase. Preliminary data indicate that the year-to-year increase, about

0.5 Tcf, resulted in production of approximately 19.1 Tcf. The gap between consumption and production in 2000 was closed by record levels of gas imports, primarily

from Canada. Production appears to have increased throughout 2000 as the result

of successful drilling and well completion. Gas drilling rig activity remains high and

should result in increased production in 2001 and 2002.

Strong demand for gas in summer 2000 meant that smaller quantities of natural

gas were injected into storage for use during this winter’s peak demand. At the beginning of the winter heating season on November 1, 2000, natural gas in storage

was about 7 percent below the average 5-year level (Figure 2). Data as of February

16, 2001 indicate that national storage levels are 33 percent below the average 5-

year level and storage in the West region is 56 percent below its average 5-year

level. Nonetheless, it now appears, presuming that withdrawals for the rest of FebVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00065 Fmt 6633 Sfmt 6621 E:\HEARINGS\71501 pfrm04 PsN: 71501
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ruary and March are average, that U.S. working gas storage will remain above 500

billion cubic feet at the end of March 2001. While end-of-season storage will be at

or near a record low, there were concerns early in January 2001, when the temperatures had been coldest, that working gas storage would be depleted by the end of

the heating season. This fear contributed to the price spikes at that time. Concerns

about storage levels in the West region remain.

Regional storage and pipeline capacity are also part of the explanation for the regional differences in prices seen across the nation. Storage and pipeline capacity nationally have generally been adequate to meet most peak-day demands during recent winters. However, there are some points on the system where capacity constraint and bottleneck problems could arise during severe weather periods, if incremental demand increases beyond local capabilities. The California market and the

Northeast region are examples of areas where concern about supplies or deliveries

led to price competition for available supplies. By contrast, gas production increases

in Rocky Mountain States during recent years have resulted in constraints for gas

exiting the region. This has resulted in the region having the lowest average natural

gas spot prices in the nation.

Supply problems in California for natural gas-fired electricity generation have

helped to increase natural gas prices and have frequently caused interruptible customers to be cut off in that State. The situation in California is characterized by

low natural gas storage, natural gas pipeline bottlenecks, high electricity demand,

and low availability of alternative means of electricity generation, e.g., hydropower

and nuclear electric power.

The Outlook for Natural Gas

Short-Term Outlook. EIA projects that this winter spot wellhead natural gas

prices will average about $6.10 per thousand cubic feet, more than two and one half

times the price of the previous winter season (all prices expressed in nominal dollars). Assuming normal weather and continued low underground storage levels, the

annual average wellhead price in 2001 is projected to be about $5 per thousand

cubic feet (Figure 3). In 2002, we expect the storage situation to improve, leading

to a decrease in the average annual wellhead price to $4.50 per thousand cubic feet.

Domestic natural gas production for 2001 and 2002 is expected to rise as production

responds to the high rates of drilling experienced over the past year. Production is

projected to increase by 5.4 percent in 2001 and 2.5 percent in 2002.

The Outlook for Natural Gas to 2020. AEO2001 provides an integrated projection of U.S. energy market trends for the next two decades on an annual basis. Natural gas consumption is expected to increase at an average rate of 2.3 percent per

year. Increases are expected in all sectors, but the most rapid growth is for electricity generation, where natural gas use (excluding cogenerators) is projected to

grow from 3.8 to 11.3 trillion cubic feet between 1999 and 2020 (Figure 4). Unlike

oil, domestic natural gas production, with its larger and more accessible resource

base, is expected to increase from 18.7 trillion cubic feet in 1999 to 29.0 trillion

cubic feet in 2020 to meet growing domestic demand. Increased production comes

primarily from lower-48 onshore conventional nonassociated sources, although onshore unconventional production is expected to increase at a faster rate than other

sources. In order to fill the gap between domestic production and consumption, net

natural gas imports are expected to increase from 3.4 trillion cubic feet in 1999 to

5.8 trillion cubic feet in 2020. Net liquefied natural gas imports are projected to increase from 0.1 to 0.7 trillion cubic feet by 2020; however, most natural gas imports

are by pipeline from Canada. In EIA’s reference case, average natural gas wellhead

prices are projected to eventually return to the historical trend and gradually increase thereafter, driven by natural gas demand growth, particularly in electric generation, and the natural progression of the discovery process from larger and more

profitable fields to smaller, more costly ones. Average lower-48 wellhead prices are

forecast to increase at an annual rate of 2.0 percent from 1999 levels. Because of

expected improvements in transmission and distribution efficiencies, average delivered prices are expected to increase by only 0.5 percent annually.

Electricity consumption overall is projected to grow by 1.8 percent per year

through 2020. Generation from both natural gas and coal is projected to increase

through 2020 to meet growing demand for electricity and offset the decline in nuclear power expected from retirements of some existing facilities. Assumptions about

electricity industry restructuring, such as higher cost of capital and shorter financial

life of plants, tend to favor the less capital-intensive and more efficient natural gas

generation technologies. The natural gas share of total generation is expected to increase from 16 to 36 percent between 1999 and 2020 but coal is expected to continue

to be the leading fuel for electricity generation.

63

The Future for Adequate Supplies of Natural Gas

EIA does not propose or advocate any particular policies and programs. We do

note that, in general, there are a wide range of policies that could alter the energy

future described in the AEO2001. In this section, EIA presents a summary of recent

changes in energy markets, policies, and technologies that affected natural gas consumption and supply and also summarizes the assumptions used in the AEO2001

which contribute to the forecast of balanced growth in natural gas consumption and

supply. These provide indications of the kinds of policies and programs which could

contribute to adequate supplies of natural gas.

Between 1986, when gas consumption had fallen to 16.2 Tcf and the new peak

in gas consumption last year, a number of important changes in energy markets,

policies, and technologies occurred. These included:

• Deregulation of wellhead prices begun under the Natural Gas Policy Act of 1978

and accelerated under the Natural Gas Wellhead Decontrol Act of 1989;

• Improvements in exploration and production technologies and reduction in their

associated costs, improving the return for exploration and production efforts;

• Increased imports from Canada and pipeline investment to support those movements;

• Federal Energy Regulatory Commission (FERC) Orders 436 (1985), 636 (1992),

and 637 (2000) separating commodity purchases and transmission services and

affecting access to shipping capacity;

• Investment in major pipeline construction expansion projects from 1991 through

2000 adding about 50 billion cubic feet per day of capacity; and

• Passage of the Clean Air Act Amendments of 1990 and subsequent regulations affecting air quality standards for industries and electricity generators in nonattainment areas.

Assumptions underlying the forecasts for natural gas in the AEO2001 include the

following:

• Continuation of Federal, State, and local laws and regulations in effect on July

1, 2000. (This assumption is made because of EIA’s requirement to be policy

neutral.) This includes policies regulating access for oil and gas development;

• Continued improvements in exploration and production technologies at historical

levels to aid in and lower cost for discovery and development of resources, particularly offshore deepwater resources and onshore conventional gas;

• Substantial increases in drilling and pipeline investments and drilling crews necessary to meet these gas production levels (e.g., 23,400 gas wells drilled in 2020

instead of the 10,500 in 1999); and

• Timely permitting decisions and adequate capital to allow increased pipeline capacity to deliver new supply to expanding gas markets.

Together these overviews of past changes and assumed future changes indicate

the variety of factors which could influence energy supply and demand in the future.

Conclusion. In the near term, we expect annual average natural gas prices to

be higher in 2001 than in 2000 but to decline in 2002. Storage volumes of natural

gas are low and replacement of gas in storage will contribute to strong summer

2001 demand and higher gas prices that will make storage for next winter costly.

Thank you, Mr. Chairman and members of the Subcommittee. I will be happy to

answer any questions you may have.

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65

66

Mr. BARTON. We want to thank you. I am sure we will have

questions for you.

We want to recognize Mr. Cuba Wadlington. If Steve Largent

were here, he would give you a more formal introduction. But we

welcome you to the subcommittee. Your testimony is in the record

in its entirety, and we would like to recognize you for 6 minutes

to elaborate on it.

STATEMENT OF CUBA WADLINGTON, JR.

Mr. WADLINGTON. Thank you, Mr. Chairman. I am here on behalf of the Interstate Natural Gas Association of America. INGA is

a trade association that represents the Interstate Natural Gas

Pipeline which transports over 90 percent of the natural gas that

is consumed in the United States.

Natural gas provides 25 percent of the energy consumed in the

United States, including 16 percent for electric generation. Because

of the significant role natural gas is playing in improving air quality, many experts have called natural gas the preferred fuel. The

natural gas industry is facing a number of challenges today—high

natural gas prices as a result of lower prices in the past and low

supply. At that time, the red count failed dramatically and segments of the production services industry went out of business. I

would defer any further comments on that to my producer friends,

but that is one of the huge challenges that we are facing.

Regarding natural gas pipelines, we have experienced no significant delivery problems this winter, but the interstate natural gas

pipeline system is nearing the critical stage throughout the country. We seriously need to move forward to build significant infrastructure in order to meet the current demands and the future demands for the utilization of natural gas.

EIA has estimated that natural gas will increase from the current 22 plus TCF to something in the neighborhood of 30 TCF as

we approach the end of this decade. As a representative of interstate pipelines, the first goal of any energy policy is to have an adequate supply of natural gas. Currently, the United States is able

to meet 85 percent of the demand through domestic supplies in the

lower 48, both on and offshore. Almost all of the remaining 15 percent of supply comes from Canada. Although Mexico has some significant natural gas reserves as well, demand for natural gas is

growing at such a fast rate that Mexico will need to import natural

gas from the U.S. in order to keep up.

Liquefied natural gas is projected to remain a small incremental

addition to natural gas supply for the foreseeable future. We need

to look at and develop our resource base if we hope to meet this

demand.

I commend the current Administration for creating an energy

task force under the Vice President Cheney to review actions that

have been, or could be taken, by various Federal departments and

agencies that can effect energy supply and infrastructure as the

Administration review and develop these recommendations to Congress regarding energy policy.

INGA also strongly supports expedited approval of a natural gas

pipeline to bring natural gas from the north slope of Alaska to the

lower 48 States. While such a pipeline project is an expensive, mulVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00070 Fmt 6633 Sfmt 6602 E:\HEARINGS\71501 pfrm04 PsN: 71501
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timillion dollar proposition, INGA believes that the market is ready

to support the investment that would be required to build a new

natural gas pipeline.

I also cannot stress enough the importance of building new pipelines. The current natural gas pipeline infrastructure will not support a 32 CF market. There simply is not enough capacity. The

INGA Foundation completed a study in 1999 called Pipeline and

Storage Infrastructure Requirements for a 32 CF U.S. Gas Market.

This study estimated that our industry would need to invest about

$34 billion in interstate pipeline and storage infrastructure development between 1999 and 2010 just to keep up with the market

as it is going. INGA estimates that it currently takes about 4 years

on average to obtain approvals for a construction of a new natural

gas pipeline. INGA can support a study by FERC on the impediments that delay the review, certification and construction of interstate natural gas pipeline projects. This study should consider the

approvals and permits required from other Federal departments

and agencies, as well as from States.

INGA would like for FERC and the Council of Environmental

Quality, with FERC as the lead agency, to form an interagency

task force to develop a memorandum of understanding to expedite

the environmental review in permitting of interstate natural gas

pipelines. This would be an example of the one-window approach

that Chairman He ́bert talked about as part of his testimony.

Finally, INGA supports the R & D efforts between DOE and the

Office of Pipeline Safety to develop improved and new technologies

to better assess any enhanced pipeline safety.

While INGAA member companies have been supporting pipeline

safety research for over 50 years through both the Gas Technology

Institute and the Pipeline Research Committee, we’re pleased that

DOE is focusing on research for pipeline safety. INGAA believes

that it is important that DOE coordinate these efforts with the Office of Pipeline Safety as well as the above research committees to

maximize the bang for the buck of these new investments in order

to bring and enhance new technologies to the market.

Mr. Chairman, I want to thank you and the other members of

the House Commerce Subcommittee on Energy and Air Quality for

providing INGAA an opportunity to tell you what the Interstate

National Gas Pipeline would like to see in a national energy policy.

There are a number of other issues and incentives that your committee should consider as you debate energy policy, including ways

to increase energy efficiency, but please make no mistake, we need

to address both supply and demand and the infrastructure requirements to get the supply to the markets if we want to continue to

provide consumers with reliable energy at reasonable prices.

[The prepared statement of Cuba Wadlington, Jr. follows:]

PREPARED STATEMENT OF CUBA WADLINGTON, PRESIDENT AND CEO, WILLIAMS GAS

PIPELINE ON BEHALF OF THE INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA

Mr. Chairman, my name is Cuba Wadlington. I am President and CEO of Williams Gas Pipeline. I am here today to testify on behalf of the Interstate Natural

Gas Association of America (INGAA). INGAA is the trade association that represents interstate natural gas pipelines in the United States, the inter-provincial

pipelines in Canada and PEMEX in Mexico. These pipeline systems transport 90

percent of the natural gas consumed in the United States.

68

Williams, through its subsidiaries, connects businesses to energy and to communications. The company delivers innovative reliable products and services through

its extensive networks of energy distributing pipelines and high-speed fiber-optic

cable. Williams Gas Pipeline has five interstate natural gas pipelines that deliver

natural gas from coast to coast in every geographic region of the United States. On

any given day, Williams Gas Pipeline delivers to market 17%-20% of the natural

gas that flows in the United States.

Thank you for providing me this opportunity to testify before you today.Natural

gas provides 25 percent of the energy consumed in the United States, including 16

percent of electricity generation. Because of the significant role natural gas is playing in improving air quality, many experts have called it the preferred fuel.

Before discussing the issues we believe are important to the interstate natural gas

pipelines regarding the development of a national energy policy, I would like to give

you some background on the natural gas industry. Wellhead natural gas prices

were, as you know Mr. Chairman, regulated for many years. We all know that the

history of wellhead price regulation in the U.S. was a dismal one where prices were

held artificially low, causing a significant natural gas shortage in the mid 70s. Congress enacted the Natural Gas Policy Act in l978. This law began the process of decontrolling these wellhead prices. Ten years ago, Congress saw fit to repeal all remaining federal economic regulation of natural gas production. The Federal Energy

Regulatory Commission (FERC) followed up shortly thereafter with its Order No.

636, which unbundled pipeline transportation services from the natural gas commodity, and removed pipelines from the gas merchant function. Interstate pipelines

no longer own the natural gas moving through their systems; rather, they market

capacity on their pipelines in much the same way that airlines sell seats on their

aircraft. The rates charged by interstate pipelines, however, remain regulated by

the FERC. In the years since this restructuring has occurred, interstate pipelines

have become more efficient, reduced their costs and created and offered new services

while significantly increasing the volume of natural gas transported. On average,

the transportation segment represents less than 16 percent of the price consumers

pay for natural gas. In the current market, this share is even less.

Competition for natural gas works. We are moving more natural gas today than

we ever have before, approximately 23 Trillion cubic feet per year.

TODAY’S NATURAL GAS ENVIRONMENT

The natural gas industry is facing a number of challenges today. Higher natural

gas prices have occurred as a reaction to the extremely low petroleum and natural

gas prices of a little over a year ago. At that time, the rig count fell dramatically

and segments of the production services industry went out of business. I will defer

to my producer friends for more comments on this. But this period of higher natural

gas prices has created a climate of concern and calls for re-regulation by some at

both the federal and the state levels.

Regarding natural gas pipelines, we have experienced no significant delivery problems this winter. We are doing our best to safely and reliably ensure that our customers continue to enjoy the benefits of using natural gas to hear their homes and

run their businesses. But we face a number of challenges. We need to continue to

develop our pipeline and storage infrastructure. To do this we will need to have

availability of capital, continued flexibility to meet the challenges of a changing

market and mitigation of impediments to pipeline construction.

FUTURE NATURAL GAS DEMAND

The Department of Energy’s Energy Information Administration estimates that

use of natural gas will increase from 23 Tcf today to 30 Tcf shortly after 2010 (a

32 percent increase in gas demand). Other experts forecast a similar growth in gas

use.

The largest area of growth is expected in electric generation, which, as stated

above, currently uses natural gas to fuel 16 percent of electric generation, followed

by the industrial sector. The primary reasons for the large growth in the gas segment of the power generation market are the relatively low cost of gas-fired generation, the low air emission characteristics of those facilities, and the reduced timeframe it takes to permit and build those facilities. Following is a chart that shows

the benefits that accrue from using natural gas in a 300 Megawatt electric power

plant.

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Comparative Emission Levels From a 300-Megawatt Power Plant

Existing Coal BoilerNew Coal

Boiler

New Gas-Fired

Combined- Cycle

NOX Emissions (lb/MMBtu) .................................................................................... 0.50 0.18 0.04

SO2 Emissions (lb/MMBtu) ..................................................................................... 1.20 0.42 0.00058

Particulate Matter (lb/MMBtu) ................................................................................ 0.11 0.04 0.0029

CO2 Emissions (lb/MMBtu) ..................................................................................... 205 205 125

ENERGY POLICY

Mr. Chairman, I thank you for holding these hearing to discuss what energy policy is needed to assure consumers of an adequate supply of natural gas at reasonable prices. As a representative of interstate pipelines, the first goal of any energy

policy is to have an adequate supply of natural gas. Currently, the United States

is able to meet about 85 percent of demand through domestic supplies in the lower

48, both on and off shore. Almost all of the remaining 15 percent of our supply

comes from Canada. While the Canadians have done an admirable job in developing

their natural gas production and transportation markets, they alone cannot provide

the vast quantities needed to support future market needs. Although Mexico has

some significant natural gas reserves as well, demand for natural gas is growing

at such a fast rate (approximately 11 percent per year) that Mexico will need to import natural gas from the U.S. in order to keep up. Some liquefied natural gas is

currently being brought into the United States and some of INGAA’s member companies are looking at developing new LNG import facilities as an option, but LNG

is projected to remain a small incremental addition to natural gas supply for the

foreseeable future. We need to look at and develop our resource base if we hope to

meet this demand.

Mr. Chairman, I brought the chart behind me in today to illustrate the point I

am trying to make. Natural gas is a domestically produced fuel, yet a quick glance

at this chart from the National Petroleum Council clearly indicates that a great deal

of the Lower 48 is prohibited from new exploration and production, primarily because of environmental concerns. The irony, of course, is that natural gas is growing

in importance precisely because of its environmental benefits for use in generating

electricity or fueling industrial operations.

INGAA supports other incentives such as an expansion and extension of Section

29 tax credits to encourage development of new and unique energy sources. In 1999

4.87 Trillion cubic feet of our natural gas came from non-conventional resources resulting from Section 29 credits. This is 26 percent of the natural gas produced in

the lower 48 states. INGAA also would like to see additional incentives such as expensing of geological and geophysical expenditures for small producers to stay in

business and help increase our domestic natural gas supply.

There have been other Administration policies that have impacted the ability of

producers to gain access to lands such as the U.S. Forest Service Roadless initiative

which failed to take into account the impact these regulations could have on energy

production, development and transportation. I commend the current Administration

for creating an energy task force under Vice President Cheney to review actions that

have been or could be taken by various federal departments and agencies that can

affect energy supply and infrastructure as the Administration reviews and develops

recommendations to Congress regarding energy policy.

INGAA also strongly supports expedited approval of a natural gas pipeline to

bring natural gas from the North Slope of Alaska to the lower 48 states. While such

a pipeline project is an expensive, multi-billion dollar proposition, INGAA believes

that the market is ready to support the investment that would be required to build

a new natural gas pipeline in Alaska. I remind the Committee that permitting and

construction of this project should begin soon as we expect the completion of this

project to take up to eight years.

I also cannot stress enough the importance of building new pipelines. The current

natural gas pipeline infrastructure will not support a 30 Tcf market. There simply

is not enough capacity. The INGAA Foundation completed a study in 1999, Pipeline

and Storage Infrastructure Requirements for a 30 Tcf U.S. Gas Market. This study

estimated that our industry would need to invest about $34 billion in interstate

pipeline and storage infrastructure development between 1999 and 2010 just to keep

up with where the market is going. Expenditures for new pipelines and pipeline expansions were $2.2 billion in 1999 and $2.5 billion in 2000. Two new pipelines were

brought on line last year—the Alliance Pipeline bringing natural gas and natural

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gas liquids to the Chicago area from Alberta, Canada, and the Maritimes Northeast

Pipeline bringing natural gas from Sable Island, off the East Coast of Canada,

through Maine and into the Boston area.

The Merrill Lynch map that is behind me, and also enclosed with this testimony,

shows the new proposed projects at FERC as of September 2000. The blue lines are

the existing interstate natural gas pipeline infrastructure while the arrows describe

the proposed additions to the pipeline network.

INGAA estimates that it currently takes about four years, on average, to obtain

approvals for and construction of a new natural gas pipeline. I want to commend

Chairman Hebert and FERC for the work they have done to expand the use of the

blanket certificate process and permit use of expanded rights-of-way where necessary during pipeline construction. However, INGAA can support a study by FERC

of the impediments that delay the review, certification and construction of interstate

natural gas pipeline projects. This study should consider the approvals and permits

required from other federal departments and agencies as well as from the states.

INGAA would like for FERC and the Council on Environmental Quality, with

FERC as the lead agency, to form an interagency task force to develop a memorandum of understanding to expedite the environmental review and permitting of

interstate natural gas pipelines. This task force should use NEPA documentation

and its scoping process as the basis of decisions, identify and agree on review and

decision timing, and contain a conflict resolution process.

INGAA supports a study of federal rights-of-way to determine the feasibility of

their use as right-or-way for new pipeline or other transmission capacity.

Finally, INGAA supports establishment of an R&D effort between DOE and OPS

to develop improved and new technologies to better assess and enhance pipeline

safety. While INGAA’s member companies have been supporting pipeline safety research for over 50 years through both the Gas Research Institute (now the Gas

Technology Institute) and the Pipeline Research Committee, we are pleased that

DOE is focusing on research for pipeline safety. There may be some valuable research at the DOE labs that could ultimately be applied to help us inspect and monitor our pipelines. INGAA believes that it is important that DOE coordinate its efforts with the Office of Pipeline Safety as well as the above research committees

to maximize the ‘‘bang for the buck’’ of these new investments in order to bring enhanced and new technologies to market.

Mr. Chairman, I want to thank you and the other Members of the House Commerce Subcommittee on Energy and Air Quality for providing me the opportunity

to tell you what the interstate natural gas pipelines would like to see considered

in a national energy policy. There are a number of other issues and incentives that

your Committee should consider as you debate energy policy including ways to increase energy efficiency. But, please make no mistake; we need to address both

sides of the equation—supply and demand—if we want to continue to provide consumers with reliable energy at reasonable prices.

Mr. BARTON. We want to thank you for your testimony and your

charts on the natural gas pipeline infrastructure in the country.

Now I want to welcome Mr. Jerry Jordan who is appearing on

behalf of the IPAA, Independent Petroleum Association of America.

Mr. Paul Gillmor who is a member of the full committee and a

subcommittee chairman says to give his personal well wishes to

you. He served with you briefly in the Ohio, I think the Ohio Senate, and said that you did all the work and he took all the credit.

So he wanted me to let you know he’s delighted that you’re here.

We will put your statement in the record in its entirety and we

would ask you to summarize in 6 minutes.

STATEMENT OF JERRY JORDAN

Mr. JORDAN. Thank you, Mr. Chairman, members of the committee. I am Jerry Jordan, President of Jordan Energy and Chairman of IPAA. Today, I’m testifying on behalf of IPAA, the National

Stripper Well Association and 32 cooperating State and regional associations, oil and gas associations. These associations represent

thousands of independent oil and natural gas producers in the

United States. Independents drill 85 percent of the wells drilled in

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the U.S. and produce 40 percent of the oil and 65 percent of the

gas.

Currently, natural gas prices, as we know, are twice what they

were a year ago and they were even higher in the last 6 months.

This testimony is intended to address the causes of these extraordinarily high natural gas prices and describe what the industry is

doing to address the supply problems which gave rise to the prices.

Additionally, I will list actions that can and should be taken by

the Federal Government to help alleviate the problem and encourage increased production, exploration and production for natural

gas. I want to emphasize first that the supply and demand situation that has caused these high prices was both foreseeable and

predicted, although the severity was underestimated by most experts. The conditions giving rise to the market situation were recognized by both industry and government experts as early as 1999.

Early that year, a broad-based group of industry experts met in the

White House with Cabinet level government officials and warned

them of the severe plight of the producing industry. At that time

the focus was on oil, but the likely impact on natural gas was also

described. At that meeting, we strongly suggested that a high level

interagency task force be created to address the problems and develop a national energy policy. Fortunately, that has now been

done.

Specific curative actions were also suggested. At that time, we

were specifically and unequivocally told let the market work and

certainly it has.

The issues giving rise to our concerns about the natural gas market were next described in the study and report of the National Petroleum Council that was issued in December 1999. The important

conclusion in that report is that the resource base in North America is adequate to meet the increasing demand for many decades,

but it also found that the industry’s ability to tap that resource effectively was conditioned on one, a healthy natural gas industry,

and two, sound government policies. We had neither at the time

that report was released.

The industry was coming off nearly 2 years of depression, caused

by the ruinously low oil prices of 1998 and 1999. The oil and natural gas segments of our industry are inherently intertwined. Consequently, when oil prices plunge, drastic reductions of exploration

budgets were imposed by our producers because drilling under

those conditions made no economic sense. Gas exploration was adversely affected by the cuts as well.

Meanwhile, as the industry’s capabilities were hard hit, natural

gas demand continued to increase at a rate beyond all earlier predictions. Over 95 percent of new electric power plants planned and

being built across the country will be powered by natural gas. This

trend reflects the Federal policies of recent years which have discouraged coal, nuclear and hydro projects. All of these factors combine to create the natural gas market situation which has triggered

the high prices.

The industry has responded promptly to the improved market

signals. The number of rigs employed in the search for natural gas

has more than doubled in the last year and thousands of new engineers and other employees are being hired by our service compaVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00075 Fmt 6633 Sfmt 6602 E:\HEARINGS\71501 pfrm04 PsN: 71501
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1 Colorado Oil & Gas Association; East Texas Producers & Royalty Owners Association; Eastern Kansas Oil & Gas Association; Florida Independent Petroleum Association ; Illinois Oil &

nies, but recovery will take time because of the exploration of the

process—because of the complexity of the exploration process, the

huge capital needs of the industry and more importantly, because

of the land access impediments imposed by the Federal agencies.

These two issues, access to capital and access to nonpark Federal

lands are the primary factors which are slowing recovery. Much of

the nation’s natural gas reserves underlie government-controlled

land, both on and offshore. Access to these reserves has been severely restricted, primarily because of fears of environmental harm.

But those fears are largely based on 30-year-old technology. Using

modern, 21st century methods, these resources can clearly be developed in an environmentally sound manner—sound and sensitive

manner.

IPAA believes that the Federal regulatory process must identify

and recognize the impact of regulatory actions on energy supplies

and future energy decisions. This means that there must be coordination among the relevant agencies like the Department of Energy,

Department of Interior and the EPA as issues are considered and

decisions are made. A realistic balance must be struck among the

interests and responsibilities of those agencies.

Finally, the other big impediment to industry recovery is a shortage of capital, especially for the small and mid-size producers. The

NPC study concludes that capital expenditures for domestic exploration and production must increase by approximately $10 billion

per year. The Federal role in capital access is largely an issue of

tax reform. For the industry to meet its future capital needs it will

need to increase the use of outside capital. The tax code is a significant factor in encouraging investment of that capital. Therefore,

the Administration and Congress need to consider and enact provisions designed to encourage new production and maintain existing

production.

Congress has in the past considered a mix of reforms that have

had widespread support. They even passed once, but were part of

a veto package. These are needed to increase production by independent producers because their cash-flow available for reinvestment in new exploration is limited to their net production revenues.

In conclusion, it is time for this country to take its energy supply

issues seriously and develop a sound energy policy that realistically

balances our country’s competing interests. Certainly, there is room

in such a policy for effective energy conservation and production of

the environment.

Energy production is an essential component. Independent producers will be a key factor and the industry stands ready to accomplish our common goals if policies allow us to do our job.

I want to thank you for allowing me to testify.

[The prepared statement of Jerry Jordan follows:]

PREPARED STATEMENT OF JERRY JORDAN ON BEHALF OF THE INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA AND THE NATIONAL STRIPPER WELL ASSOCIATION 1

Mr. Chairman, members of the committee, I am Jerry Jordan, President of Jordan

Energy, Inc. of Columbus, Ohio and Chairman of the Independent Petroleum AssoVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00076 Fmt 6633 Sfmt 6621 E:\HEARINGS\71501 pfrm04 PsN: 71501
73

Gas Association; Independent Oil & Gas Association of New York; Independent Oil & Gas Association of Pennsylvania; Independent Oil & Gas Association of West Virginia; Independent Oil

Producers Association Tri-State; Independent Petroleum Association of Mountain States; Independent Petroleum Association of New Mexico; Indiana Oil & Gas Association; Kansas Independent Oil & Gas Association; Kentucky Oil & Gas Association; Louisiana Independent Oil &

Gas Association; Michigan Oil & Gas Association; Mississippi Independent Producers & Royalty

Association; Montana Oil & Gas Association; National Association of Royalty Owners; Nebraska

Independent Oil & Gas Association; New Mexico Oil & Gas Association; New York State Oil

Producers Association; Ohio Oil & Gas Association; Oklahoma Independent Petroleum Association; Panhandle Producers & Royalty Owners Association; Pennsylvania Oil & Gas Association;

Permian Basin Petroleum Association; Tennessee Oil & Gas Association; Texas Alliance of Energy Producers; Texas Independent Producers and Royalty Owners; and Wyoming Independent

Producers Association.

ciation of America (IPAA). Today, I am testifying on behalf of the IPAA, the National Stripper Well Association (NSWA), and 32 cooperating state and regional oil

and gas associations. These organizations represent the thousands of independent

petroleum and natural gas producers that drill 85 percent of the wells drilled in the

United States. This is the segment of the industry that is damaged the most by the

lack of a domestic energy policy that recognizes the importance of our own national

resources. NSWA represents the small business operators in the petroleum and natural gas industry, producers with ‘‘stripper’’ or marginal wells. These producers are

the linchpins to continued development of domestic petroleum and natural gas resources.

Today’s hearing addresses a fundamental issue—what actions are needed to improve the nation’s natural gas supply. This testimony will focus first on several key

factors that influence future energy issues, second on actions that need to be taken

to improve the future domestic supply.

During the past three decades the United States has become more dependent on

energy and more dependent on foreign energy. While there have been numerous efforts to define a national energy policy, none have been successful. Today, the world

is operating with its tightest supply of petroleum and the United States is facing

tight natural gas supplies. Now is the time to clearly address national energy policy

and build the program that is needed to meet future demand.

A NATION DEPENDENT ON FOSSIL FUELS

Like it or not, the nation will be dependent on fossil fuels for the foreseeable future. In particular, petroleum and natural gas currently account for approximately

65 percent of the nation’s energy supply—and will continue to be the significant energy source. Natural gas demand, for example, is expected to increase by more than

30 percent over the next decade.

INDEPENDENT PRODUCERS—THE LINCHPIN TO FUTURE DOMESTIC PETROLEUM AND

NATURAL GAS

It is important to recognize that the domestic oil and natural gas industry has

changed significantly over the last fifteen years. The oil price crisis of the mid1980’s and policy choices made then triggered an irreversible shift in the nature of

the domestic industry. Independent producers of both oil and natural gas have

grown in their importance, and that trend will continue. Independent producers

produce 40 percent of the oil—60 percent in the lower 48 states onshore—and

produce 65 percent of the natural gas. They are becoming more active in the offshore, including the deep water areas that have previously been the province of the

large integrated companies. At the same time those large companies are now mainly

focusing their efforts overseas, in addition to Alaska and the offshore, because they

are aiming their investments to seek new and very large fields. Domestic energy

policy must recognize this reality.

RECOGNIZING THE ROLE OF THE MARKET

Future energy policy should rely on market forces to the greatest degree possible.

For natural gas the market is strong and active. Natural gas supply is essentially

North American and overwhelmingly from two countries that rely on private ownership and the free market—the United States and Canada. Currently, exploration

and development of natural gas in both countries is being aggressively pursued

when the opportunities are there, and can be accessed. In the United States drilling

rig counts for natural gas are running at rates that are as high as they have ever

been since natural gas drilling was distinguished from petroleum. The principal constraints are finding the capital to invest, getting access to the resource base, finding

74

competent personnel, and obtaining rigs. If the market is allowed to work, it will

continue to draw effort to produce this critical resource for domestic consumption.

Oil, however, is a different situation. In making decisions regarding developing

domestic petroleum resources, the nature of the world petroleum market must be

recognized. Although the United States remains the second or third largest producer

of petroleum, it is operating from a mature resource base that makes the cost of

production higher than in competitor nations. More importantly, most other significant petroleum producing countries rely on their petroleum sales for their national

incomes. For them, petroleum production is not driven by market decisions. Instead,

their policies and their production is determined by government decisions. Most are

members of OPEC, the Organization of Petroleum Exporting Countries. Several are

countries hostile to the United States like Iraq, Libya, and Iran. Even those that

are generally supportive of the United States, like Saudi Arabia and Kuwait, are

susceptible to unrest from both internal and external forces.

Thus, the market price for petroleum will be largely framed by production decisions driven not by the market, but by the politics of these countries—both by internal issues and global objectives. United States domestic policy decisions must reflect

this reality—looking to this factor in taking actions that can affect domestic production and producers. But, more importantly, it must recognize that a healthy domestic oil production industry is also essential for a healthy domestic natural gas industry, because they are inherently intertwined.

For example, the failure of the United States to recognize the need to respond to

the low oil prices of 1998-99 resulted in adverse consequences for both oil and natural gas production. The nation has lost about 10 percent of its domestic oil production—most of which has been made up by imports from Iraq. And, in addition, the

tight natural gas supplies this year are partially attributable to the drop in natural

gas drilling in 1998-99 when oil prices were low and capital budgets for exploration

and production of both oil and natural gas were slashed by producers because drilling under those conditions made no economic sense.

It is equally important to recognize that while all of these factors influence the

ultimate prices of oil and natural gas, it is the commodity markets that have the

final say. The role of these markets has emerged from a minor factor in the mid1980s, when oil and natural gas trading began, to the dominant force today. While

many people want to point toward OPEC or big oil, the ultimate price maker is the

trading floor of the commodity markets. This has added a new volatility to oil and

natural gas prices. Its impact is still poorly understood but must be considered.

PROVIDING ACCESS TO ESSENTIAL CAPITAL

The nation must avoid making bad policy choices like it has in the past. For example, because oil and natural gas exploration and production are capital intensive

and high-risk operations that must compete for capital against more lucrative investment choices, much of its capital comes from its cash flow. The federal tax code

is a key factor in defining how much capital will be retained. In the late 1970’s and

early 1980’s when oil prices were high and drilling activity was soaring, the industry was hit by the Windfall Profits Tax that pulled a net $44 billion from the industry at a time when it could have been invested in new exploration and production.

In addition, in 1986, when the industry was recovering from the low oil prices of

that year, the Alternative Minimum Tax (AMT) was created. The AMT sapped capital from the industry when it was desperately needed. From 1986 to 1997 (before

the latest price crisis) domestic oil production dropped by 2 million barrels per day—

roughly 25 percent of 1986 capacity. Thus, those tax policies stifled the industry at

a time when U.S. energy demand was increasing significantly.

Instead of such counterproductive tax actions, the Administration and Congress

need to enact provisions designed to (1) encourage new production, (2) maintain existing production, and (3) put a ‘‘safety net’’ under the most vulnerable domestic production—marginal wells. Congress has considered a mix of tax reforms that have

widespread support. They include provisions to allow expensing of geological and

geophysical costs and of delay rental payments that encourage new production, extending the net operating loss timeframe and revising percentage depletion that assist both new and existing production, and a countercyclical marginal well tax credit

when prices fall to low levels. All of these are programs that independent producers

need because their revenues are limited to their production

Beyond these immediately needed policy changes, new tax policies must be developed to encourage renewed exploration and production needed to meet future demand, particularly for natural gas. In 1999 the National Petroleum Council released

its Natural Gas study projecting future demand growth for natural gas and identifying the challenges facing the development of adequate supply. For example, the

75

study concludes that the wells drilled in the United States must effectively double

in the next fifteen years to meet the demand increase. Capital expenditures for domestic exploration and production must increase by approximately $10 billion/

year—roughly a third more than today. Generating this additional capital will be

a compelling task for the industry. As the National Petroleum Council study states:

While much of the required capital will come from reinvested cash flow, capital

from outside the industry is essential to continued growth. To achieve this level

of capital investment, industry must be able to compete with other investment

opportunities. This poses a challenge to all sectors of the industry, many of

which have historically delivered returns lower than the average reported for

Standard and Poors 500 companies.

In fact, as the past year has shown, capital markets have not shifted to supporting

the energy sector. For the industry to meet future capital demands—and meet the

challenges of supplying the nation’s energy—it will need to increase both its reinvestment of cash flow and the use of outside capital. The role of the tax code will

be significant in determining whether additional capital will be available to invest

in new exploration and production in order to meet the $10 billion annual target.

PROVIDING ACCESS TO THE NATURAL RESOURCE BASE

National energy policy must also recognize the importance accessing the natural

resource base. In 1999 the National Petroleum Council in transmitting its Natural

Gas study concluded:

The estimated natural gas resource base is adequate to meet this increasing demand for many decades . . . However, realizing the full potential for natural gas

use in the United States will require focus and action on certain critical factors.

Much of the nation’s natural gas underlies government-controlled land both offshore

and onshore. Policies in these areas have constrained or prohibited access largely

based on fears of environmental harm. But, these resources can be developed in an

environmentally sound and sensitive manner. The Department of Energy recently

released a comprehensive report, Environmental Benefits of Advanced Oil and Gas

Exploration and Production Technology, demonstrating that the technology is available. And, it is being employed, when exploration is allowed.

Without policy changes, the nation may not be able to meet its needs. Currently,

over 75 trillion cubic feet (TCF) of natural gas in the offshore is off limits to development because of moratoria that are based on technologies that have been replaced

decades ago. The rationale for these moratoria is outdated and inaccurate; there

must be a reassessment of these decisions in the context of today’s technology and

tomorrow’s needs.

Even in those offshore areas of the Gulf of Mexico that are open for development,

the federal policies that determine royalties will also significantly define the extent

to which development will occur. For example, over the past half-decade, Gulf of

Mexico development has soared, partly because of the Deep Water Royalty Relief

Act that specified how royalties would be determined for a set time period. This allowed producers to plan their investments better. However, the Deep Water Royalty

Relief Act was largely used by large integrated companies and its specific provisions

expired in 2000. Now, as independent producers are also seeking deep water opportunities, the planning window is narrow and the policies are less certain. On the

Outer Continental Shelf, marginal properties remain that could be developed if the

royalty policies were right. All of these issues need to be addressed with the full

understanding that independent producers will be increasingly willing to develop

these areas as large integrated companies look toward the Ultra-deep Water and

overseas for the large fields that they need to find.

Onshore, over 100 TCF of natural gas is under government controlled land in the

Rocky Mountains. An inventory of these resources is underway. It is an important

first step. But, it is equally important to understand that access to these resources

is limited by more than just moratoria. The constraints differ. Monument and wilderness designations prohibit access to some areas. Regulations like the Forest

Service roadless policy and prohibitions in the Lewis and Clark National Forest are

equally absolute.

At the same time the permitting process to explore and develop resources often

works to effectively prohibit access. These constraints range from federal agencies

delaying permits while revising environmental impact statements to habitat management plans overlaying one another thereby prohibiting activity to unreasonable

permit requirements that prevent production. There is no single solution to these

constraints. What is required is a commitment to assure that government actions

are developed with a full recognition of the consequences to natural gas and other

energy supplies. IPAA believes that all federal decisions—new regulations, reguVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00079 Fmt 6633 Sfmt 6621 E:\HEARINGS\71501 pfrm04 PsN: 71501
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latory guidance, Environmental Impact Statements, federal land management

plans—should identify, at the outset, the implications of the action on energy supply

and these implications should be clear to the decision maker. Such an approach does

not alter the mandates of the underlying law that is compelling the federal action,

but it would likely result in developing options that would minimize the adverse energy consequences.

THERE’S NO SHORT TERM FIX—RECOVERY WILL TAKE TIME

Any realistic future energy policy will take time. There is no simple solution. The

popular call for OPEC to ‘‘open the spigots’’ failed to recognize that the low oil prices

of 1998-99 reduced capital investment from the upstream industry all over the

world. Only Saudi Arabia had any significant excess production capacity and no one

knew just how much or whether the oil was of a quality that it could be refined

in most refineries. The collateral damage of low oil prices on the natural gas industry is affecting gas supply today and will until the industry recovers. The producing

industry lost 65,000 jobs in 1998-99. While about 40 percent of those losses have

been recovered, they are not the same skilled workers. If measured by experience

level, the employment recovery is far below the numbers. Less obvious, but equally

significant, during the low price crisis equipment was cannibalized to keep operating

and support industries were decimated. It will take time to develop the infrastructure again to build new drilling rigs and provide the skilled services that are necessary to rejuvenate the industry.

CONCLUSION

Overall, attracting capital to fund domestic production under these circumstances

will be a continuing challenge. This industry will be competing against other industries offering higher returns for lower risks or even against lower cost foreign energy

investment options. The slower the flow of capital, the longer it will take to rebuild

and expand the domestic industry.

Providing access to the resource base will be critical and requires making some

new policy choices with regard to federal land use.

These two issues are the ones that are particularly dependent on federal actions,

and should be the immediate focus of the next Congress and the next Administration.

It is time for this country to take its energy supply issues seriously and develop

a sound future policy. Certainly, there is room in such a policy for sound energy

conservation measures and protection of the environment. But, energy production—

particularly petroleum and natural gas—is an essential component that must be included and addressed at once. Independent producers will be a key factor, and the

industry stands ready to accomplish our goals, if policies reflect that reality.

Mr. BARTON. Thank you, Mr. Jordan.

We now want to hear from Mr. Reiten. Mr. Reiten is President

and CEO of Northwest Natural. He’s testifying on behalf of the

American Gas Association. I understand you’ve got a meeting with

the Governor of Oregon at 4:45, so after you give your oral statement, whenever you feel you need to leave to make that appointment, you are welcome to go, but your testimony is in the record.

We would ask you to summarize it in 6 minutes.

STATEMENT OF RICHARD G. REITEN

Mr. REITEN. Thank you, Mr. Chairman for this opportunity.

Northwest Natural is a local gas distribution company in Oregon

and Southwest Washington. I am here and pleased to be here on

behalf of the American Gas Association.

Mr. BARTON. Would you suspend—does the gentleman from Oregon wish to more formally introduce our witness? I meant to give

you that opportunity.

Mr. WALDEN. Given the time constraints, Mr. Chairman, I would

just like to welcome Mr. Reiten to this Panel and I think you’ll be

pleased with his testimony.

Mr. BARTON. All right.

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Mr. WALDEN. Thank you, Mr. Chairman.

Mr. REITEN. Thank you, I was expecting some harassment, Mr.

Chairman. It didn’t happen.

I’m pleased to be here on behalf of the American Gas Association

to discuss the need for national energy policy and focus on issues

that are important to the natural gas utility industry. The American Gas Association is made up of local gas distribution companies

delivering every day gas to 56 million homes across the country.

Why do we need a national energy policy? Events in the Western

States this year, including my own, demonstrate unmistakably that

we cannot take for granted the balance of energy supply and demand. Across the entire country, consumers are feeling the impact

of natural gas prices caused principally by an imbalance of supply

and demand, brought about by an unusually cold winter, November

and December being the coldest in the last 50 years. Storage concerns and the California situation and with all of the discussion,

I’d like to point out that California uses 70 percent of the gas used

in the West and over the 12 months trailing December, they were

using 50 percent more gas than the year before for electric generation and that caused some real concerns nationally about prices

and I think psychologically led to some of the higher prices as well

as the storages and other issues.

With respect to price, let me say first that gas utilities, local gas

utilities do not profit from higher gas prices. We earn a return of

the cost that we incur in providing gas to our customers. Wellhead

gas price increases, which during December were up more than 400

percent, those revenues were passed on back to the gas producers.

There were no added margins from higher gas prices for local gas

distribution utilities, although we must deal with the customers.

Demand for energy is growing in this country. We can see that

the prices have been escalating across the board. Dependence on

foreign oil is increasing, now approaching 60 percent. Refining capacity is stressed. We have regional shortages of refined fuels. We

have it in the Northwest. And energy delivery infrastructure, pipelines and electric transmission lines are constrained in some areas.

All of these factors lead to tighter supplies of energy and higher

prices.

A comprehensive national energy policy can ensure that these

are addressed and certainly, hopefully, all of our public interests

can be balanced in this process.

The White House has formed a National Energy Policy Task

Force, chaired by Vice President Cheney to develop the guiding

principles for an energy policy and to coordinate the various agencies that are involved in implementing that policy. This is a critical

first step.

Legislation is needed to establish free market solutions, relying

on a diversity of fuels, not just only natural gas to reduce exposure

to price spikes and shortages, but also to reduce dependence on foreign oil for national security, and to improve the environmental

quality of energy use.

What are the appropriate policies for natural gas? Two recent

studies, the National Petroleum Council study and AGA Foundation’s ‘‘Fueling of the Future’’ study set the stage for a serious consideration of Federal and State policies affecting natural gas. Both

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studies project a significant increase in natural gas demand over

the next 20 years, actually a 50 percent increase to 32 trillion cubic

feet. Increased use of natural gas, especially in end use applications can lower oil imports and reduce overall energy consumption

and lower CO2 emissions, relieving some strain on the electricity

grid.

Equally important, these studies identify we’ll have to have them

for the Nation to capitalize on the opportunity natural gas presents. As the NGSA and the IPAA witnesses are pointing out here,

vast reserves of natural gas exist within the borders of the United

States, but much of it is not available for exploration and production.

To meet the demand for natural gas over the next 20 years, the National Petroleum Council estimates that $150 billion must be invested in transmission and delivery infrastructure. Two-thirds of

that, approximately $100 billion will be needed in my sector, the

local distribution companies. So we heard from Mr. Wadlington

about $34 billion or more will be needed for interstate pipelines to

make sure we get that natural gas to the markets where it is needed.

So we need to expedite review and approval of these facilities

and a Federal inter-agency agreement concerning environmental

reviews, such applications could make sure that appropriate balance between environmental protection and economic prosperity is

achieved.

Lead times can be shortened and efficiencies gained without

threatening the environment. In my State, for instance, it takes 24

months for clearance and construction permitting, construction and

startup of a $2 billion semiconductor factory. It takes 42 months

to get approval and build a state-of-the-art gas fired power plant.

Now ask me, will both have acceptable impacts on the environment? It’s a process problem for the energy industry built in over

time and a comprehensive national energy policy can hopefully

help fix this problem for us.

Tax incentives make sense to encourage needed expansion of delivery infrastructure, shorter depreciation schedules for investment,

and infrastructure would help finance needed construction.

We also need to expand the use of new technologies to enhance

the efficient use of clean fuels such as natural gas. Federal policy

should measure the total efficiency of energy technology from the

source to the field in the use of the energy. I want to make a strong

point here. Fifty percent of the BTU content is lost in using gas to

generate electricity to do a job such as heating water as compared

to using gas directly to heat that water which is 92 percent efficient.

Mr. Boucher commented earlier about the possibilities. Here is a

real live example. There are 100,000 electric water heaters in our

service territory that can be converted from electric to gas in homes

that have gas furnaces and that amounts to 400 megawatts of electricity.

Congress should expand and strengthen protections for consumers and families. The national energy policy should extend and

expand low income home energy assistance program, the LIHE program and a comprehensive national energy policy can guarantee

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the clean, secure, affordable supply of energy that’s needed for economic growth and prosperity.

Mr. BARTON. Mr. Reiten, can you summarize?

Mr. REITEN. I’m ready to summarize.

Mr. BARTON. Okay.

Mr. REITEN. The members of the American Gas Association will

work with Congress, with consumers and with its partners in the

energy industry to accomplish this goal and I do very much appreciate the opportunity to comment here.

Mr. BARTON. We appreciate that.

Mr. REITEN. Thank you, Mr. Chairman.

Mr. BARTON. Feel free to exist whenever you need to meet with

the Governor.

Mr. REITEN. Thank you.

[The prepared statement of Richard G. Reiten follows:]

PREPARED STATEMENT OF RICHARD G. REITEN, PRESIDENT & CEO, NW NATURAL ON

BEHALF OF THE AMERICAN GAS ASSOCIATION

Good afternoon, Chairman Barton and members of the subcommittee. I am

pleased to be here today to present the views of the American Gas Association on

national energy policy legislation and the role of natural gas.

AGA represents 185 local natural gas distribution companies, which deliver natural gas to 50 million customers in the United States. NW Natural is the largest

natural gas distributor in the Pacific Northwest. We are headquartered in Portland,

Oregon and serve Western Oregon and southwestern Washington State.

Ample, reliable energy supply at affordable prices is key to providing economic

and national security for Americans. AGA recognizes that, while the United States

has tremendous energy resources, America’s current energy supply and infrastructure will not, in the future, sustain our growing economy. Therefore, we need to act

now to meet our country’s energy needs for the 21st Century.

Current Market Conditions

Natural gas prices have increased dramatically over the past year. A year ago the

average price for natural gas was less than $2.50 per thousand cubic feet, currently

it is about $5.00 at the Henry Hub. However, during the heart of the winter heating

season, average prices spiked at over $10. Why has this happened? Three words:

supply, demand and weather. Drilling for natural gas declined in 1998 and 1999 in

response to extremely low prices. Demand for natural gas continued to grow, causing supply to become tight. Prices began to rise this spring. Then record cold weather across the country in November and December, on top of wholesale price increases, created very high gas bills for residential gas customers. Prices are beginning to moderate, but until there is a significant increase in production, they are

likely to remain at relatively high levels.

Natural gas utilities do not profit from higher prices. We buy and resell natural

gas to our customers without any price mark-up. However, we are the face—and the

bill—that the customer sees. Until this past year, customers have been used to

steady or declining natural gas bills. Over the past decade the real price of natural

gas has actually decreased, even as demand increased. This is mostly attributable

to technological breakthroughs that have made it easier and less expensive to locate,

produce and deliver gas—breakthroughs that we believe will continue into the future.

The sharp increase in natural gas prices over the past year has commanded the

attention of the American people. The reasons for this increase are well known to

the natural gas industry and are perhaps better addressed by the producer representatives testifying today. They include the low natural gas prices in 1998 and

1999 that led to a decline in natural gas drilling coupled with increased demand

for natural gas by all consuming sectors. The record cold weather in November and

December of last year increased residential consumption and the preference for natural gas for almost all new electric generation continues to grow demand from that

sector. Relatively high oil prices and the environmental attributes of natural gas

coupled with a strong economy also drove up demand for natural gas in industrial

markets.

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Natural Gas Distribution Industry Policy Priorities

Given the current energy situation, it is highly appropriate that Congress focus

on establishing a national energy policy. Two studies—The National Petroleum

Council’s 1999 study on Natural Gas and the AGA Foundation’s ‘‘Fueling the Future’’ study released in early 2000—set the stage for a serious consideration of federal and state policies affecting natural gas. Both of these studies project a significant increase in the demand for natural gas over the next 20 years under a favorable policy environment.

But equally important, particularly in light of today’s environment and the need

for supply sufficient to meet a growing demand for gas and electricity, these studies

identify what will have to happen for the nation to capitalize on the opportunity

natural gas presents. The events of this winter dramatically demonstrate that now

is the time to consider and implement many of the recommendations of the ‘‘Fueling

the Future’’ study.

‘‘Fueling the Future’’ essentially recommends that natural gas be allowed to compete fairly and freely against other fuels;

• that access to new supplies of natural gas shall not be unduly restricted so that

natural gas can continue to be delivered at a reasonable and competitive price;

• that the natural gas delivery infrastructure maintain its ability to deliver gas

safely and reliably, all the while expanding to meet growing demand;

• that new natural gas technologies and markets such as distributed generation receive support, including federal RD&D support, to ease the demand on the electric grid;

• and that RD&D also continue to support technological advances in the exploration, production, and delivery of natural gas in order to keep down costs—

and keep down the price of gas.

In the wake of this winter’s record cold demand, these central goals seem to take

on an even more immediate importance. AGA believes that the nation’s present energy situation—both gas and electric—underscores the importance of an energy policy that utilizes each fuel in our national portfolio to its best advantage.

AGA has developed an outline of legislative provisions that we believe will accommodate and facilitate the development of an expanded natural gas market, which

would benefit the nation through increased economic and energy efficiency, enhanced energy security and improved environmental quality. As distributors of natural gas to the consumer, we have focused on infrastructure expansion and renewal,

new end-use technologies and energy efficiency, and protecting low-income consumers. Adequate, reasonably priced gas supply is obviously a high priority for the

natural gas utility industry. However, we have not made any specific recommendations on gas supply issues and generally support the initiatives proposed today by

NGSA and IPAA.

Assistance to Consumers

National energy policy legislation must address the needs of consumers. Over the

long term, consumers will benefit from policies that assure that energy supplies are

available at reasonable prices. We also need to assure that low-income consumers

are able to afford the energy they need. AGA is a long time supporter of the Low

Income Home Energy Assistance Program. LIHEAP helps consumers pay their energy bills. It is generally available to households with incomes less than 150% of

the poverty level. In recent years, this program has been able to assist about 4 million households. The typical LIHEAP recipient is elderly, disabled or a family with

young children. The average recipient’s household income is less than $10,000 a

year.

This winter, the base program funding was increased by $300 million to $1.4 billion and releases of emergency funds increased the available funds to $2.25 billion.

However, applications for assistance have increased by 27 percent over last year according to a survey released this month by the National Energy Assistance Directors’ Association (NEADA). Even with the increased funding provided by the federal

government this year, the NEADA survey found that funds will not be sufficient to

offset the rapid increases in caseloads resulting from higher home heating costs this

year.

There is an immediate need for a supplemental appropriation for LIHEAP to assure that moneys are available for the remainder of the heating season and for possible spikes in electricity prices this summer. We also urge the subcommittee to

raise the authorization level for the LIHEAP base program to at least $3 billion for

FY2002 and future years and to expand funding for weatherization and state energy

programs, as provided in legislation introduced by Representative Markey and Senator Bingaman earlier this month.

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Many of our small business customers have had difficulty with rising energy costs

as well. We are supportive of legislation introduced by Senator Kerry to provide lowinterest loans to small businesses adversely affected by high energy bills and we

urge the House to work with the Senate to pass this legislation early this session.

Infrastructure Renewal and Expansion:

As natural gas demand increases by up to 60% over the next 20 years, the National Petroleum Council estimates that $150 billion must be invested in transmission and delivery infrastructure. Two thirds of that, approximately $100 billion,

will be needed in the delivery sector, and $50 billion will be needed for interstate

pipelines, to make sure natural gas can get to markets where it is needed. This infrastructure includes pipelines, underground storage facilities, peak shaving plants,

and LNG plants.

This level of investment is unprecedented for the natural gas utility industry. Accomplishing it will present many challenges. Timely and efficient expansion of the

energy infrastructure is, however, absolutely essential to meeting America’s energy

needs.

The federal government can facilitate these infrastructure investments being

made in a timely fashion through favorable tax policy. AGA has proposed that the

costs associated with siting and construction of new gas distribution, storage and

transmission infrastructure be allowed accelerated depreciation over a seven year

period.

A second infrastructure issue that requires federal attention is the siting of new

interstate transmission pipelines and distribution lines. While most of the distribution lines are subject to state siting regulations, many larger lines cross federal

lands and are subject to permitting delays due to the lack of interagency coordination. We concur with INGAA’s recommendation that FERC and all other federal

agencies involved in the environmental review of interstate pipeline applications

enter into an interagency agreement to expedite processing of applications. We

would also include deadlines for each agency to complete its required actions and

recommend that such deadlines be given teeth by requiring that all concerned agencies take action on an application by a date certain or be deemed to have assented

to the application.

Third, increased federal funding for research and development to enhance pipeline

and distribution reliability and to increase the operational efficiency of the pipeline

and distribution infrastructure will be critical to our efforts to deliver natural gas

to the customer safely, efficiently and reliably.

New Technologies and Energy Efficiency

We must continue to improve natural gas end-use technologies and to develop new

technologies to provide industrial, commercial and residential consumers with environmentally friendly gas equipment that conserves energy and lowers fuel bills.

Great strides in efficiency have already been made. The average homeowner uses

16% less natural gas than in 1980 due to more efficient gas appliances and better

insulated homes.

Federal energy policies should measure the total efficiency of energy technologies,

from the source of the fuel to the use of the energy. 50% of the energy benefits are

lost in using gas to generate electricity to do a job, such as heating water, as compared to using gas to heat the water. Natural gas used directly in homes, industries

and businesses is inherently efficient. Recognizing this inherent efficiency of the direct use of gas is an example of what we mean by an energy policy that utilizes

each fuel in our national portfolio to its best advantage.

Federal spending on gas related RD&D should be increased to support advanced

end-use equipment such as fuel cells, microturbines, cooling and NGVs. As new

products are developed, tax incentives are appropriate to stimulate market acceptance of selected highly efficient and environmentally beneficial gas technologies.

The federal government can lead by example through funding a vigorous implementation of the Federal Energy Management Program and the use of efficient gas

technologies to replace outdated, less environmentally friendly equipment. Legislation establishing a new DOE grant program to increase energy efficiency in school

buildings will also assist in reducing energy demand and reducing costs to an important sector.

Finally, AGA recommends that the federal government coordinate its energy policy development at the highest level. We commend President Bush for establishing

a task force on Energy Policy Development, led by Vice President Cheney and consisting of the Secretaries of the major Cabinet agencies concerned with energy, the

environment and the economy. We are hopeful that this task force will not only set

the parameters of a viable long term national energy policy, but will establish poliVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00085 Fmt 6633 Sfmt 6621 E:\HEARINGS\71501 pfrm04 PsN: 71501
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cies and procedures that will assure that all Federal agencies consider the impact

their programs have on the nation’s energy security.

Mr. Chairman, AGA is committed to working to enact a bipartisan, consensus,

market-based national energy strategy that will ensure the future security, comfort,

and economic well being of our nation’s citizens by meeting their energy needs,

without sacrificing the quality of our environment. AGA will work with the Congress and other policy makers, with consumers and its partners in the energy industry to accomplish this goal.

Mr. BARTON. We now want to welcome Mr. Andrew Littlefair. I’m

not sure how he got on the Panel, it was certainly without my permission since he is a good friend of mine. The last time I talked

to you, you were heading the Delegate Negotiations for the Dole

Campaign in Texas for State-wide Delegates to the National Convention in 1996 and my name wasn’t on the list.

Mr. LITTLEFAIR. So designing an energy policy is going to be a

lot easier, Mr. Chairman.

Mr. BARTON. But it is good to have you. It was Texas’ loss when

you moved to California. I’m sure you’re going to give us very informed testimony about the possibility of using natural gas to

power a vehicle. So your testimony is in the record in its entirety

and in all sincerity, we do welcome you before the subcommittee.

STATEMENT OF ANDREW J. LITTLEFAIR

Mr. LITTLEFAIR. Thank you, Mr. Chairman, members of the subcommittee. My name is Andrew Littlefair and I’m President of

Pickens Fuel Corporation. Pickens Fuel owns and operates over 35

natural gas fueling stations in California and Arizona. I also serve

on the boards of both the National and California Natural Gas Vehicle Coalitions.

Before I begin, I would like to thank you, Mr. Chairman, for your

support of NGVs and your commitment to the causes of clean air

and NG security. You set the example for all of us by insisting that

the best way to reduce our reliance on imported oil and to promote

clean air is through the private sector.

The government needs to set policy priorities, stick to those priorities and provide the private sector the right incentives to get the

job done. If the economic signals are right, the private sector will

make the correct decisions that will result in cleaner air and reduce dependence on foreign oil.

Now let me turn to the role that the natural gas vehicles can and

should play in helping achieve both of these national priorities.

Today, NGVs are one of the most effective ways to reduce urban

air pollution. Vehicles contribute one half or more of the emissions

that cause smog. Although gasoline and diesel engines have continued to get cleaner, today’s NGVs are substantially cleaner for every

criteria of pollutant. In fact, one natural gas refuse truck in Southern California is the equivalent to remove 325 vehicles from the

road.

Light duty NGVs already are certified to California Super Ultra

Low Emission Vehicle Standard and now may be counted toward

meeting that State’s zero emission vehicle requirement which is

electric vehicles. Heavy duty NGVs produced only a tiny fraction of

the particulates and other air toxics produced by diesel engines and

that will continue to be true through this decade and beyond.

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It is in part because of this that the South Coast Air Quality

Management District recently put into place a number of policies

to encourage fleets to switch to cleaner alternatives, especially natural gas. Now all taxis serving John Wayne Airport where I live

in Orange County, are powered by natural gas.

In Southern California, no new diesel trash trucks can be purchased starting in July. All the shuttle vehicles and parking lot

buses of Los Angeles International are moving toward being 100

percent natural gas. As larger trash hauling fleets in the four counties all around Los Angeles are converting to natural gas. I’m

sorry, all the larger trash hauling fleets in the four counties around

Los Angeles are converting to natural gas.

The majority of the larger transit bus fleets in the State have selected the natural gas path. In fact, at least 30 percent of all transit buses on order in the United States today are natural gas

buses. Significantly, a desperately needed new power plant in California can now be built because of the emissions offsets that the

developers of the plant have acquired by agreeing to help Waste

Management, Inc. add 120 new natural gas trash trucks.

Another benefit of NGVs is reduced oil imports and we all know

that problem. That’s why it’s important to remember that each

NGV displaces 100 percent of the petroleum that vehicle otherwise

would use. NGVs can and should be a significant part of the solution to oil dependence.

Mr. Chairman and members of the subcommittee, the bottom

line is that the increased use of NGVs simultaneously addresses

our need for clean air and energy security needs. Unfortunately,

the NGV market has grown much slower than expected. Our No.

1 challenge continues to be what you, Mr. Chairman, found in 1996

when you headed the Speaker’s Task Force on Natural Gas Vehicles, namely, economics. And because of the low production numbers NGVs generally cost more than their gasoline or diesel counterparts. Light duty NGVs, for example, cost between $3,000 and

$5,000 more and heavy duty NGVs can cost up to $50,000 more.

If the demand for NGVs increase significantly, that incremental

cost would come down. While demand has increased, it hasn’t increased enough. The Energy Policy Act of 1992 is intended to help

stimulate demand. However, the Act covered only a small segment

of the vehicle population and it’s filled with loopholes. As a result,

EPAC’s effect on the alternative fuel vehicle market has been much

less than anticipated.

Another economic factor is that when customers purchase NGVs

they are not financially rewarded for the societal benefits that are

produced, namely, cleaner air and reduced oil dependence. There’s

a market failure here and that’s perhaps an appropriate role of the

Federal Government to correct such failures and make sure that

the vehicle buyers and users receive accurate economic signals.

That’s why the NGV industry has supported tax incentives to lower

the cost of NGVs for consumers, especially fleets. In the last Congress, two bills were introduced to provide tax incentives for alternative fuel vehicles, Senate Bill 2591 and H.R. 2522 in the House.

We also urge Congress to support the NGV market through various appropriations. For example, more money is needed for DOE’s

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Clean Cities Program and grants from the Clean Cities State Energy Program to co-fund alternative fuel vehicle incentives.

Another critical area is the appropriations for NGV RD&D. Because of the Chairman’s leadership, 6 years ago DOE and the NGV

industry jointly prepared and endorsed a 5-year NGV RD&D plan.

Unfortunately DOE never adequately funded that plan. This year

DOE and the NGV industry created an RD&D plan for the next 5

years. We urge Congress to ensure that the plan receives necessary

funding.

Mr. Chairman, there’s more that can be done and should be

done. My written statement contains a list of those items. Thank

you very much.

[The prepared statement of Andrew J. Littlefair follows:]

PREPARED STATEMENT OF ANDREW J. LITTLEFAIR, PRESIDENT, PICKENS FUEL CORP.

INTRODUCTION

Mr. Chairman and Members of the Committee, my name is Andrew J. Littlefair.

I am the President of Pickens Fuel Corp. (PFC). PFC, incorporated in 1997, owns

and operates over 30 natural gas fueling stations in Southern California and Arizona. In California, the PFC network serves an area from San Francisco in the

north to Orange County in the south to Riverside and San Bernardino Counties in

the east. In Arizona, PFC owns four stations in the greater Phoenix area, including

a state-of-the-art liquefied natural gas (LNG) fueling station in Tempe.

In addition to my position with PFC, I also am a Board Member of the Natural

Gas Vehicle Coalition, the national trade association dedicated to promoting new

markets for natural gas vehicles. I also serve on the Board of the California Natural

Gas Vehicle Coalition, an organization dedicated to increasing the use of natural gas

vehicles in California.

I appreciate the opportunity to discuss the benefits to America of increased use

of natural gas as a motor vehicle fuel and why it is critical that government do more

to support natural gas and other alternative transportation fuels.

Natural gas vehicles help achieve the important U.S. policies of cleaner air and

increased energy security. They also represent a significant new export market for

U.S. manufacturers since concern about urban air quality is now worldwide and

U.S. NGV technology is the best in the world. Finally, investment in the development of NGV technology and fueling infrastructure serves as a catalyst to improving

the U.S. economy.

While most people are familiar with the benefits of natural gas for electric power

generation, heating homes, and cooking, fewer people are aware that it also is an

excellent fuel for transportation. NGVs today represent some of the most technologically advanced and cleanest transportation vehicles in the world. NGVs were the

first vehicles certified under California’s demanding low, ultra low, and now super

ultra low emission vehicle standards. Natural gas powered vehicles of all different

makes and models are now available from the majority of automobile, truck and bus

manufactures. For example, Caterpillar, Cummins, Detroit Diesel and John Deere

all offer a line-up of natural gas engines for heavy-duty vehicles, including transit

buses, school buses, and over-the-road trucks. This is in stark contrast to several

years ago when the only NGVs available were aftermarket conversions.

While the future for natural gas vehicles—in the U.S. and throughout the world—

is bright, much more must be done at the national level if we are to significantly

reduce this country’s reliance on imported oil and capture the environmental benefits of greater NGV use. Ultimately, only the private sector can bring about the

changes necessary to move the US economy away from its overwhelming reliance

on petroleum motor fuels. If the US is to realize significant reductions in the

amount of petroleum used in the transportation sector, the private sector must develop the new innovative alternative fueled vehicles that are needed. The private

sector also must invest in the infrastructure necessary to fuel alternative fuel vehicles.

Government nevertheless must support the evolutionary process of moving beyond

petroleum reliance. Government needs to set the policy priorities, remain firm in

holding to those priorities, and provide the private sector with the right incentives

to move quickly to get the job done. The Congress needs to expand incentives for

all alternative fuels, including measures that will bring down the cost of acquiring

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alternative fuel vehicles and using the fuels. Congress also should adopt incentives

that support the development of alternative fuel infrastructure so users will have

places to fill up their alternative fuel vehicles.

The NGVC and other alternative fuel industries supported passage of S. 2591, the

Alternative Fuel Tax Incentives Act, during the 106th Congress, and we are working toward introduction of similar legislation in the 107th Congress. This bill provides tax incentives to lower the cost for consumers of owning alternative fuel vehicles. If enacted, the tax incentives will stimulate market demand for alternative fuel

vehicles (such as NGVs) and will put us on the road to a self-sustaining market for

nonpetroleum fueled vehicles. PFC and the NGVC urge Congress to act quickly and

enact incentive legislation this year. We also urge the Congress to continue to fund

the Department of Energy’s Clean Cities Program, which has been an important

catalyst in developing new markets for alternative fuel vehicles, and to expand

funding for NGV RD&D.

1. The Need to Reduce Our Dependence on Foreign Oil is Greater Than Ever

Reliance on petroleum imports threatens US economic stability and energy security. It also continues to distort US foreign and military policy. The fact that the

US imports too much is not new, however. Reliance on foreign oil was a major impetus for the passage of the Energy Policy Act (EPAct) of 1992. Despite the passage

of that law, the US today relies even more on oil imports than it did in 1992. Since

EPAct’s passage, oil imports have gone from less than 50 percent of total oil supply

to nearly 60 percent of supplies. Reliance on foreign oil has grown due to two factors. The first is continued decline in domestic production. Once the world’s dominant producer of oil, US oil production has steadily declined since 1970. The second

factor is continued growth in domestic demand for oil. The US’ is now the world’s

largest importer and consumer of oil.

Congress should be extremely concerned about our reliance on foreign oil. Previous supply disruptions and price spikes resulted in US economic recession. In fact,

the recent increase in oil prices is a major factor in our current economic slowdown.

Threats to oil security also prompted the 1991 Gulf War. Persian Gulf and OPEC

member countries continue to supply an important part of US crude oil and petroleum imports. The latest EIA figures indicate that in 1999 the US relied on OPEC

members to provide 48 percent of imported crude oil; Persian Gulf states alone provided 27 percent of total oil imports. EIA’s long-term forecast indicates that, by

2020, OPEC is likely to provide 56 percent of US crude oil demand and that Persian

Gulf exporters will provide 30 percent of total oil imports. OPEC and Persian Gulf

exports also make up a significant component (currently 40 percent) of world oil

supply. OPEC’s share of world oil supplies is expected to reach almost 50 percent

by 2020, according to EIA’s latest forecast.

Persian Gulf exports in particular are of concern since this region has generally

been unstable and continues to be the source of geopolitical conflicts. The past 12

months alone has seen a number of troubling developments in the Middle East and

Persian Gulf region. A recent report by the Center for Strategic and International

Studies (‘‘The Geopolitics of Energy into the 21st Century’’) says that the ‘‘risk posed

by supply interruptions will be greater’’ in the next several decades than it was at

the end of the last century. The report also says that ‘‘military conflict will remain

a threat to most energy-producing regions, particularly the Middle East where almost two-thirds of the world’s oil resources are located’’ and that ‘‘at least 10 of the

14 top oil-exporting counties run the risk of domestic instability in the near to middle term.’’

Iraq continues to be a special source of concern to the stability of the Middle East.

EIA figures indicate that in the recent past Iraqi oil production has provided as

much as four percent of world oil demand. This is a significant volume of oil and

its removal from international markets at a time when reserve stocks are low could

significantly affect world oil prices. Over the next two decades, the EIA projects that

Iraq will more than double its oil production, ensuring that it will continue to be

an important player in international oil markets. The curtailment of world oil production by OPEC members demonstrates the serious consequences of even small

disruptions in the supply of oil to international markets, and proves that OPEC is

capable of acting cohesively to control international oil markets. OPEC’s market

power will continue to grow as its share of world oil production increases. As last

year’s events have demonstrated, the economic effect of supply disruptions is not

limited to any one region but rather reverberates across international commodity

markets. Disruptions of oil supplies from the Persian Gulf and from OPEC members

will still result in much higher prices being paid for oil imports regardless of their

country of origin.

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An additional concern is the growing demand for oil among developed and developing nations. It is estimated that demand for oil worldwide may double as a result

of economic expansion and growing vehicle populations in developing nations, especially China. This increased demand is expected to place significant upward pressure on world oil prices. The CSIS report also states that China’s increased reliance

on Persian Gulf oil could lead to tensions with the US.

The US reliance on foreign oil has a significant impact on the economy. Petroleum

imports result in fewer dollars spent at home and more sent overseas. In 2000, petroleum imports accounted for some $90 billion (up from 1999’s $59 billion) of the

US trade deficit. This figure does not begin to account for the huge military costs

associated with ensuring secure supplies of foreign oil or the environmental costs

associated with transporting and using oil.

All of these factors point to the inescapable conclusion that it is in the US’ best

interest to develop alternative fuel sources for its economic needs.

2. EPAct’s Petroleum Displacement Goals Have Not Been Achieved

The Energy Policy Act of 1992 (EPAct) was intended to create a viable alternative

fuels market. Its goal was to reduce US petroleum and crude oil imports and increase energy security by promoting reliance on domestic fuels. In part as a result

of that law, today, the type and number of alternative fuel vehicles being sold, as

well as the number of alternative fuel stations, has grown. The US is the world

leader in the field of alternative fuel vehicles and fueling infrastructure. The US

automakers should be commended for their impressive array of low-polluting, alternative fuel vehicles.

However, the law has failed to produce a sufficient shift away from reliance on

petroleum motor fuels during the past decade. EPAct set a national goal of replacing

10 and 30 percent of the petroleum used in light duty vehicles with non-petroleum

alternative fuels by 2000 and 2010, respectively. A report released last year by the

US General Accounting (GAO) indicates that, unfortunately, even after almost eight

years of EPAct implementation, alternative fuel use accounts for a very small

amount of overall motor fuel demand. According to the 1998 figures compiled by the

GAO, total alternative fuel use—including the oxygenated blending stocks for gasoline—accounts for less than 4 percent of all highway gasoline use. This is far short

of the EPAct goal of 10 percent displacement by 2000. The amount of alternative

fuel that is used in alternative fuel vehicles is even less. GAO reported that alternative fuel use in alternative fuel vehicles displaced only about 334 million gallons

of gasoline or less than 0.3 percent of total gasoline consumption. The vast majority

of the remaining amounts of non-petroleum fuel used in the country are comprised

of MTBE or ethanol that is added to gasoline to meet the reformulated gasoline requirements of the Clean Air Act.

If the US is to achieve its energy security goals, it must look to new programs

and new initiatives to encourage greater use of alternative transportation fuels.

Now is the time to act. US automakers and engine manufacturers currently are offering the most extensive line-up of alternative fuel vehicles and alternative fuel engines. The number of AFVs operated in the US could rapidly expand if appropriate

incentives are provided to help offset their initial higher costs.

3. The Transportation Sector: The Key to Energy Security

There are many initiatives underway to expand the use of alternative fuels in various energy sectors. All of these are important. However, it is especially critical that

alternative fuels penetrate the transportation market. Since the 1970s, all major energy-consuming sectors other than transportation have significantly reduced their

dependence on petroleum. Today, the transportation sector remains almost totally

dependent on petroleum motor fuels. The US transportation sector is responsible for

more than two-thirds of all petroleum consumption and an astonishing 15 percent

of world oil demand. The only way to break free of the reliance on petroleum fuels

is to increase the use of alternative fuels. Efforts to increase fuel efficiency are laudable and should be pursued. However, increasing energy efficiency of vehicles will

not improve energy security. Improving fuel efficiency will simply slow-down the

current growth in oil consumption. Fuel efficiency does not provide energy consumers with alternative options for fueling their vehicles. A gasoline or diesel vehicle that gets 60 or even 80 miles per gallon is still 100 percent reliant on petroleum

supplies.

Increasing the use of alternative fuels provides consumers with real options when

it comes to supply disruptions or price hikes. Each NGV displaces 100% of the petroleum that otherwise would be used to fuel that vehicle. The US cannot wait for the

next supply disruption or price spike to create the necessary fueling infrastructure—

those efforts must begin now. Given the significant amount of energy consumed by

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the domestic transportation sector, a strong US market for alternative fuels would

put downward pressure on international oil prices. In addition, exports of US alternative fuels technologies would not only bolster our own economy but would further

reduce world-wide dependence on foreign oil, further lessening the market power of

certain oil exporting nations. News of growing international interest in alternative

fuels increases daily. Countries such as China, Chile, Egypt and Mexico increasingly

are looking at alternative fuels to combat air pollution and reduce oil imports.

4. The Environmental Benefits of Natural Gas Vehicles

Natural gas is one of the cleanest alternative fuels. More importantly, this technology is readily available today. When compared to average petroleum vehicles,

NGVs reduce exhaust emissions of carbon monoxide (CO) by 50%, carbon dioxide

(CO2) by 20%, non-methane organic gas (NMHC) by 88% and nitrogen oxides (NOX)

by 66%, and produce 20% fewer greenhouse gases. NGVs have been certified to be

substantially cleaner than traditionally fueled vehicles. Several models already meet

or exceed California’s ultra-low emissions vehicle (ULEV) and super ultra-low emissions vehicle (SULEV) standards.

The dedicated natural gas Honda Civic GX, which is produced at Honda’s plant

in Ohio, illustrates the excellent environmental advantages of natural gas vehicles.

The Honda GX is the cleanest internal combustion engine powered vehicle ever commercially produced. The American Council for an Energy Efficient Economy’s ‘‘Green

Book’’, which is a consumer environmental guide to cars and trucks, rates the

Honda Civic GX (along with the hybrid Honda Insight) as the ‘‘Greenest Vehicle of

2001.’’ The natural gas Civic is so clean that it now qualifies in California for credits

toward that state’s zero-emission vehicle sales requirement.

Ford, DaimlerChrysler, General Motors and Toyota also produce light duty natural gas vehicles that are certified to some of the most demanding emission standards in existence.

Heavy-duty vehicles powered by natural gas also are much cleaner than comparable diesel vehicles—generally reducing emissions of particulate matter by 90

percent and nitrogen oxides by more than 50 percent. Natural gas engines also

produce significantly less air toxic emissions. A recent study prepared by Argonne

National Laboratory found that natural gas vehicles reduce emissions of air toxics

by 60-70 percent compared to diesel and gasoline powered vehicles. It is important

to note that Argonne’s study did not consider diesel particulate matter emissions,

which the U.S. Environmental Protection Agency classifies as a mobile source air

toxic. Including diesel particulate matter emissions would have substantially increased the overall air toxic benefits produced by natural gas vehicles since they

emit far fewer particulates than diesel and gasoline powered vehicles.

Regulatory agencies across the country increasingly are looking to natural gas engines to displace diesel engines as an effective strategy for reducing pollution. Officials in Southern California, for example, have decided that natural gas or other alternative fuels should power most new heavy-duty vehicles because of growing concern about air toxic and other emissions. In addition, many transit agencies around

the country have decided to exclusively rely on natural gas and other alternatively

fueled buses when purchasing new buses for their fleets. In fact, the majority of the

larger transit agencies in California have chosen to select the natural gas bus approach.

Proponents of petroleum vehicles have questioned the continued need for alternative fuel vehicles since the US EPA recently announced plans to make gasoline

and diesel fueled vehicles of all sizes much cleaner. While there is no question that

conventionally fueled vehicles have gotten cleaner and will continue to do so, additional reductions will continue to be necessary to offset the increased number of vehicles that will be added to America’s roads and the increased growth in average

vehicle miles traveled (both projected by the U.S. Department of Transportation).

Meanwhile, NGV technology will continue to advance, and NGVs will continue to

get cleaner, thereby maintaining their environmental advantage over their petroleum counterparts.

In addition, many people believe that eventually the internal combustion engine

will be replaced by fuel cell and hydrogen fueled vehicles. Natural gas vehicles offer

an excellent (and possibly, the only logical) bridge strategy to this future. Natural

gas can be used to supply the needed energy for fuel cell vehicles. In fact, virtually

all fuel cells in commercial operation today use natural gas to supply their hydrogen. As fuel cell vehicles enter the market, natural gas could be converted into hydrogen and delivered into the vehicles at existing natural gas refueling stations.

Therefore, the NGV infrastructure that is developed today, including the existing

pipelines, fueling stations, and fuel storage systems used for vehicles, can be used

to support the hydrogen future.

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More immediately, natural gas vehicles can provide critical emission reductions

today. The recently finalized EPA heavy-duty emission standards will not be fully

implemented until 2010. Those regulations also are contingent on very controversial

provisions regarding diesel sulfur levels. The petroleum industry has indicated that

they intend to fight the standards, especially the sulfur reductions for diesel fuel.

It is possible that the emission benefits of the proposed rule will not be available

until some time after 2010, if at all. Natural gas heavy-duty vehicles already meet

the particulate matter levels called for in the proposed rules and are years ahead

of diesel engines in terms of reducing NOX and air toxic emissions. Natural gas vehicles are available now and they can deliver superior emissions performance with

the added advantage of petroleum displacement.

5. The State of the Natural Gas Vehicle Market

More than 100,000 natural gas vehicles are in use in the U.S. today. These vehicles are owned and operated by the federal government, local and state governments, and increasingly private fleets. These vehicles include passenger cars, light

duty trucks, school buses, transit buses, refuse haulers, and many other types of vehicles. The majority of the new natural gas vehicles placed in-service today are produced by original equipment manufacturers (OEMs). Such well-known companies as

Daimler Chrysler, Ford Motor Company, General Motors, Honda, Toyota, Blue Bird,

Thomas Built and Freightliner are manufacturing these vehicles. Nearly every manufacturer of transit buses now offers a line-up of natural gas buses. In addition,

heavy-duty natural gas engines are now available from Caterpillar, Cummins, Detroit Diesel, John Deere and Mack.

While the number of NGVs in-use is still small in terms of the overall vehicle population, it is growing at an impressive rate. Since 1992, the number of natural gas

vehicles in-use has increased four-fold. More impressive, the total amount of fuel

consumed by these vehicles has increased more than six-fold. Today, natural gas vehicles displace more than 90 million gallons of gasoline a year, representing about

27 percent of all alternative fuel that is consumed in alternative fuel vehicles.

The natural gas vehicle industry has primarily targeted urban fleets in its effort

to grow the market for natural gas vehicles—including taxicabs, refuse haulers,

school and transit buses, airport shuttles and urban trucks. These types of fleet vehicles have been targeted because they tend to be high fuel use vehicles and their

fuel consumption and refueling patterns make them the best choice for early introduction of alternative fuels. Suppliers of natural gas are looking for customers that

will use sufficient amounts of fuel to justify the capital investment in retail and private fueling. Another advantage of focusing on high fuel use fleets is that replacing

these vehicles with alternative fuels provides the greatest amount of emission reductions.

The transit bus market is one area that has seen tremendous growth for natural

gas. There are now more than 4,000 natural gas powered transit buses in service

in the US. Major cities like Los Angeles, New York, Atlanta, and Cleveland are ordering hundreds of new natural gas buses. Washington, DC just recently announced

that it would be purchasing 100 natural gas buses for its fleet. For the last few

years, natural gas bus orders have approached almost 20 percent of new nationwide

bus orders.

Airports also are increasingly moving to natural gas. Dallas-Fort Worth, John

Wayne (Orange County, CA), Logan (Boston), Los Angeles International, Denver

International, and Baltimore-Washington International all have or will soon have

very large natural gas programs. Airports are looking to natural gas powered vehicles to minimize the environmental impact of vehicles that operate at the airport

or service the airport.

Despite this substantial growth and the fact that NGVs are commercially available, NGV market growth has been far slower than expected. The primary barrier

has been the purchase price of the vehicles. NGVs generally cost more than their

gasoline or diesel counterparts. Light-duty NGVs for example, generally cost $3,500

to $5,000 more; heavy-duty NGVs cost from $25,000-$50,000 more. If the demand

for NGVs increased significantly, the economies of scale that would come from mass

production would lower the incremental cost for NGVs. The Department of Energy

estimates that light-duty NGVs would cost approximately $800 more than comparable gasoline models when mass-produced.

This was part of the impetus behind the alternative fuel vehicle provisions of

EPAct. EPAct requires federal, state, and fuel provider fleets to acquire light duty

alternative fuel vehicles when they replace their existing fleet vehicles, and this has

resulted in a significant increase in overall AFVs. These programs, however, only

cover a very small segment of the vehicle population and have major loopholes. As

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a result, EPAct’s impact on alternative fuel vehicle purchase and use (and overall

petroleum replacement) has been much less than anticipated.

Another economic factor that has hindered the growth of the NGV market is that

many of the benefits of NGVs are what economists refer to as ‘‘positive

externalities.’’ When customers purchase NGVs, they help reduce overall air pollution, our dependence on foreign oil, our balance of trade, etc. Unfortunately, while

vehicle purchasers must incur the full cost of buying these vehicles, they are not

economically rewarded for the societal benefits that are produced.

California and a number of other state governments have put in place incentive

programs to help correct this market failure. For example, since designating diesel

exhaust as a toxic contaminant several years ago, California has moved expeditiously to accelerate the introduction of heavy-duty alternative fuel vehicles. California has created incentives for lower-emission vehicles and has funded the replacement of diesel-powered vehicles with cleaner technologies like natural gas. California also has encouraged the development of emission credit trading programs.

These programs potentially allow users of cleaner technologies to receive payments

for the emissions reduced by their vehicles. Mobile-for-stationary emissions trading

could be an especially valuable economic program for purchasers of NGVs. In one

example, a new power plant built in California was able to secure 1⁄3 of its NOX

offsets from a fleet of natural gas refuse trucks operated by Waste Management.

The amount received for the offsets paid for the incremental price of the trucks.

This project has been heralded for its innovativeness and ability to generate significant emission reductions.

Another exciting project involving Waste Management will soon produce liquefied

natural gas at a landfill in San Diego, California. The LNG will be used in Waste

Management trucks. Most recently, California officials have turned their attention

to replacing the state’s aging school bus fleet with new, alternative powered buses.

Many of these buses will be natural gas powered.

6. Government’s Role in Promoting Increased Use of Natural Gas Vehicles

There are a number of policies and programs that the federal government could

and should put in place to accelerate the growth of the alternative fuel vehicle industries. Some are refinements of existing programs; some are new. Many fall within the purview of the U.S. Department of Energy or Environmental Protection Agency. However, all require congressional leadership in terms of continued authorizations and/or appropriations.

Financial Incentives

• Tax Incentives. Congress should adopt meaningful tax incentives for the purchase

of alternative fuel vehicles, the use of alternative fuels, and investments in infrastructure. The NGV industry supported S. 2591, the Alternative Fuels Tax

Incentives Act, introduced in the last Congress by Senators Hatch, Jeffords,

Rockefeller and others. It also supported a similar bill, H.R. 2522, introduced

by Congressmen Camp, Levin and others in the House of Representatives.

These proposals are market-driven non-regulatory approaches to promoting alternative fuel vehicles and their use. A credit against income taxes is provided

for individuals and businesses for the acquisition of alternative fuel vehicles.

The amount of the credit depends on the environmental benefits the vehicle provides. A credit against income taxes also is provided to retail sellers nationwide

for the sale of alternative motor fuels. • Increase Funding for Local Alternative Fuel Projects. Congress should provide substantially more funding for the State Energy Program Grants. This program,

which is part of DOE’s Clean Cities initiative, is helping state and local communities expand their alternative fuel vehicle activities through new and innovative strategies. It is the single most important federal program providing financial assistance on a competitive basis to AFV projects. • Support the Green School Bus Program. Recent studies indicate that children

riding on older school buses are exposed to potentially dangerous levels of emissions. Legislation is needed to provide school districts with funding to replace

diesel school buses with alternative fuel buses, especially older school buses

that may not meet today’s safety standards. • Provide More Financial Assistance to State and Local Government Fleets. Congress should provide state and local governments matching funds for AFV acquisition for their fleets, with a higher level of matching for states that commit

to a higher percentage of AFVs in the state’s fleet.

Research, Development and Demonstration (RD&D)

• Expand Funding for Alternative Fuel RD&D. Significant R&D is still needed on

alternative fuel vehicles to (1) improve engine efficiency, (2) further reduce enVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00093 Fmt 6633 Sfmt 6621 E:\HEARINGS\71501 pfrm04 PsN: 71501
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gine emissions, (3) reduce the cost and improve the reliability of fueling infrastructures, and (4) demonstrate alternative fuel systems in new applications.

DOE’s programs in this area should be substantially expanded in line with the

new Five-Year NGV RD&D Plan developed jointly by the NGV industry and

DOE. • Expand Alternative Fuels as Part of Existing Advanced Automotive Technology

R&D. The use of alternative fuels could play a very important role in the deployment of advanced automotive technologies, such as hybrid and fuel cell vehicles. Existing federal advanced vehicle programs, however, have focused on

liquid (primarily, petroleum-based) fuels for these vehicles. Congress should

provide additional funding for RD&D on gaseous fuels for advanced technology

vehicles.

Environmental and Societal Benefits

• Accelerate Mobile to Stationary Credit Trading. Congress should require that EPA

move quickly to expand the inclusion of mobile source offsets in its stationary

source permitting programs and include guidance to the states on how to implement such programs to ensure that total emission levels are actually reduced. • Ensure that States Receive SIP Credit for AFV Programs. Congress should encourage EPA and other agencies to ensure that states receive the full emission benefits of NGVs in their State Implementation Plans based on best-in-class assumptions, and that EPA should ensure that it incorporates the latest information on alternative fuel vehicles into its emission models.

Market Development

• Coordinate State, Federal and Municipal Acquisition of AFVs. Coordinating state,

municipal and federal fleet acquisition of AFVs would produce greater demand

and facilitate the acquisition of AFVs. The placement of federal AFVs also

should be coordinated with covered state fleets. Congress should direct DOE to

undertake such an effort, and all other federal agencies to participate. • Fix the Problems Associated with Federal Procurement of AFVs. Currently, federal

agencies are required to buy alternative fuel vehicles, but are given no additional funds to cover the incremental cost of such vehicles. Congress should provide funding through DOE to cover the incremental cost of AFVs for the federal

fleet. GSA should also be urged to reform its practice regarding charging federal

agencies the full incremental cost of AFVs in the first year of the vehicle lease.

• Build Up International Markets. Developing countries can make good use of alternative fuel technology to avoid pollution problems and build sustainable transportation systems. U.S. firms are in a prime position to license alternative fuel

technology to foreign firms to the mutual benefit of the U.S. and its trading

partners. This increased demand will help support U.S. manufacturers. Congress should support efforts by DOE and the Department of Commerce to help

U.S. companies capitalize on these market opportunities.

• Identify Key Market Segments. Some fleets are much better suited to use alternative fuels than others, but much of the detailed data on these markets is not

available. For programs and policies to be most effective, it is necessary to have

a detailed understanding of the key market segments where AFVs can be most

competitive (e.g., transit buses, trash haulers, school buses, delivery fleets, postal fleets) and produce significant local benefits such as lower emissions and

positive contribution to the local economy. Congress should support efforts by

DOE and other agencies to develop this important information.

CONCLUSION

On behalf of Pickens Fuel Corp. and the Natural Gas Vehicle Coalition, I appreciate the opportunity to provide our views on these critical issues. It is clear that

the US must take steps to lessen its dependence on foreign oil. Natural gas vehicles

can help to significantly reduce dependence on foreign oil. It also is clear that America’s urban areas must reduce their levels of air pollution. Natural gas vehicles are

the cleanest vehicles commercially available today. The US currently has the best

technology in the world for using alternative transportation fuels. It is critical for

the US to capitalize on this technological edge and begin to move alternative fuels

into the marketplace. As explained in our written statement, government incentives

continue to be necessary to make this happen. With government incentives and

leadership, the private sector can greatly expand the market for alternative transportation fuels.

Mr. BARTON. Thank you. We do appreciate that and some of

those things we worked on 4 or 5 years ago we’re going to really

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try to do this year. Timing is everything and the timing is right

to move on some of that, I hope.

We now want to welcome Ms. Roberta Luxbacher who’s Vice

President-Americas for Exxon Mobile Gas Marketing. She’s appearing on behalf of the Natural Gas Supply Association and I think

you were in my meeting in Houston.

Ms. LUXBACHER. Yes, I was.

Mr. BARTON. Last week, where we talked about the comprehensive energy policy.

Ms. LUXBACHER. Yes.

Mr. BARTON. So your testimony is in the record in its entirety

and we welcome you before the subcommittee and would ask that

you summarize in 6 minutes, please, ma’am.

STATEMENT OF ROBERTA A. LUXBACHER

Ms. LUXBACHER. Thank you, Mr. Chairman. I’m here today

speaking on behalf of the Natural Gas Supply Association which

represents major integrated and independent producers.

Mr. Chairman, the NGSA and all its members are looking forward to working with your committee and welcome this opportunity to present our views for developing a national energy policy.

As you know, natural gas is one of our nation’s most robust and

important energy sources. Over a year ago, the National Petroleum

Council estimated recoverable natural gas resources in the lower

48 States at over 14 trillion cubic feet. At the current rate of domestic consumption, this is equal to more than 60 years of gas supply. Producers, of which there are over 8,000 in the United States

are individually doing all they can to economically develop these resources to meet current and projected demand for natural gas. The

number of operating gas drilling rigs has more than doubled from

April 1999 when gas prices were at a 5-year low. Producers are actively exploring new frontiers such as Canada, Alaska North Slope,

deepwater Gulf of Mexico and coal bed methane in our Western

States. And we are proactively developing and applying new technology.

However, our country’s energy needs cannot be met by the producers’ actions alone. A clear and comprehensive long-term approach to energy policy is needed. The energy policy decisions of

today must avoid the missteps of the past and serve the long-term

strategic interests of the country. Our country’s economic growth is

tightly linked to having reliable and competitive sources of energy.

As we look at developing a national energy policy, there are a

number of areas of importance to the NGSA producers: first, access

to natural resources that underlie public lands; second, a balanced

regulatory frame; and third, policies that encourage development of

a diverse portfolio of energy supplies.

Now turning to the first area, access to public lands. The facts

are well known. An estimated 40 percent of undiscovered natural

gas is located on land owned by Federal and State governments.

Access to government land is restricted. Outside of the Central and

Western Gulf of Mexico, producers are prohibited access to virtually all Federal lands offshore. About 9 percent of resource bearing lands in the Rockies is completely off limits and another 32

percent is subject to significant restrictions. Worst of all, restricVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00095 Fmt 6633 Sfmt 6602 E:\HEARINGS\71501 pfrm04 PsN: 71501
92

tions are increasing. The previous Administration’s Executive

Order to remove 60 million acres from potential development without any consideration given to possible future energy supplies is a

flaw in the rulemaking process. This ruling further contributes to

the loss of access to Federal lands in eight Western States where

access had already declined 60 percent between 1983 and 2000.

The United States is the only major consuming nation that significantly prevents access to its own energy resources. Rather than excluding resource-rich lands, the focus should be on using advanced

proven technology and operating practices to increase supplies in

an environmentally responsible manner.

In addition to land access, a balanced regulatory framework is

needed which should be guided by certain core principles:

Primacy of markets. Supply and demand are best managed

through free competitive markets and private sector initiative. Predictability. Government policy should create a predictable operating

and investment environment for energy suppliers.

Environmental responsibility. Free-market based incentives provide the best foundation for cost-effective environmental solutions.

Efficiency. Government policy should encourage the efficient use

of energy by insuring a level playing field for competing sources of

energy. For example, policies that allow the government to prematurely withdraw lease permits and retain producer funds obviously undermine supply development. On the other hand, government policy that encourages market-based development and use of

new technologies to increase supplies and the use of energy more

efficiently and cleanly have a positive impact.

Finally, the U.S. must have policies that encourage the development of all economic sources of supply on a level playing field. Economic energy will in turn help sustain economic growth, create jobs

and protect our national interests.

Exploration to expand supplies in currently available areas requires enormous investments with highly uncertain outcomes. At a

minimum, market-based incentives for deep water production and

technology development should be considered as apart of a national

energy policy.

Last, we need support for the development of our frontier resources. For example, natural gas from Alaska has the potential,

as we’ve discussed at this hearing, to play a significant role in

meeting our nation’s energy demand. However, Alaska presents

huge technical and economic challenges. We need the support of

the Federal Government, States, Canada, local communities and a

host of other parties all working in concert to achieve success.

In conclusion, let me emphasize that we have major untapped

natural gas resources here at home, resources we can access in

ways that are economic and environmentally sound. To do this requires a balanced and economically sound energy policy. As you

and your committee work to forge such a policy, Mr. Chairman,

please be assured of the NGSA’s strong support and commitment

to work with you toward that end.

Thank you.

[The prepared statement of Roberta A. Luxbacher follows:]

93

PREPARED STATEMENT OF ROBERTA A. LUXBACHER ON BEHALF OF THE NATURAL GAS

SUPPLY ASSOCIATION

I am Roberta Luxbacher, Vice President-Americas for ExxonMobil Gas Marketing

Company.

I am here today speaking as Chairperson, on behalf of the Natural Gas Supply

Association, which represents major integrated and independent producers.

Mr. Chairman, the NGSA and all its members are looking forward to working

with your Committee and we welcome this opportunity to present our views for developing a national energy policy.

As you know, Mr. Chairman, natural gas is one of our nation’s most robust and

important energy sources. Over a year ago, the National Petroleum Council estimated recoverable natural gas resources in the Lower-48 states at over 1,400 trillion

cubic feet. At the current rate of domestic consumption this is equal to more than

60 years of gas supply.

Producers, of which there are over 8000 in the United States, are individually

doing all they can to economically develop these resources to meet current and projected demand for natural gas.

The number of operating gas drilling rigs has more than doubled from April of

1999, when gas prices were at a five year low, to over 900 today.

Producers are actively exploring new frontiers such as Canada, Alaska North

Slope, deepwater Gulf of Mexico and coal bed methane in our western states and

we are proactively developing and applying new technology.

However, our country’s energy needs cannot be met by the producers actions

alone.

A clear and comprehensive long-term approach to energy policy is needed. The energy policy decisions of today must avoid the mis-steps of the past, and serve the

long-term strategic interests of the country. Our country’s economic growth is tightly linked to having reliable and competitive sources of energy.

As we look at developing a national energy policy there are a number of areas

of importance to the NGSA producers.

• First, access to natural resources that underlie public lands.

• Second, a balanced regulatory framework.

• And third, policies that encourage development of a diverse portfolio of energy supplies.

Now turning to the first area... access to public lands.

The facts are well known:

• An estimated 40 percent of undiscovered natural gas is located on land owned by

federal and state governments.

• Access to government land is restricted. Outside of the central and western Gulf

of Mexico, producers are prohibited access to virtually all federal lands offshore.

About 9 percent of resource-bearing land in the Rockies is completely off limits,

and another 32 percent is subject to significant restrictions.

• Worst of all, restrictions are increasing. The previous Administration’s Executive

Order to remove 60 million acres from potential development without any consideration given to possible future energy supplies is a flaw in the rulemaking

process. This ruling further contributes to the loss of access to federal lands in

eight western states which, for instance, declined 60 percent between 1983 and

2000.

The United States is the only major consuming nation that significantly prevents

access to its own energy sources. Rather than excluding resource rich lands the

focus should be on using advanced proven technology and operating practices to increase supplies in an environmentally responsible manner.

In addition to land access, a balanced regulatory framework is needed, which

should be guided by certain core principles.

• Primacy of Markets: Supply and demand are best managed through free competitive markets and private sector initiative.

• Predictability: Governmental policies should create a predictable operating and investment environment for energy suppliers.

• Environmental Responsibility: Free-market-based incentives provide the best

foundation for costeffective environmental solutions.

• Efficiency: Government policies should encourage the efficient use of energy by insuring a level playing field for competing sources of energy.

For example policies that allow the government to prematurely withdraw lease

permits and retain producer funds obviously undermine supply development.

94

On the other hand government policy that encourages market based development

and use of new technologies to increase supplies, and use of energy more efficiently

and cleanly would have a positive impact.

Finally, the U.S. must have policies that encourage the development of all economic sources of supply on a level playing field. Economic energy, will in turn help

sustain economic growth, create jobs and protect our national interest.

Exploration to expand supplies in currently available areas requires enormous investments with highly uncertain outcomes. At a minimum market based incentives

for deepwater production and technology development should be considered as a

part of national energy policy.

Lastly, we need support for the development of our frontier resources. For example, natural gas from Alaska has the potential to play a significant role in meeting

our nation’s energy demand. However, Alaska presents huge technical and economic

challenges. We need the support of the Federal Government, states, Canada, local

communities and a host of other parties all working in concert to achieve success.

In conclusion let me emphasize that we have major, untapped natural gas resources here at home—resources we can access in ways that are economic and environmentally sound. To do this requires a balanced and economically sound energy

policy.

As you and your Committee work to forge such a policy, Mr. Chairman, please

be assured of the NGSA’s strong support and commitment to work with you toward

that end.

Thank you.

Mr. BARTON. Thank you very much.

We’d now like to hear from Mr. Walker Hendrix who is counsel

for the Kansas Citizens’ Utility Ratepayer Board. He’s representing

a consumer viewpoint. Your testimony is in the record in its entirety. We would welcome you to elaborate for 6 minutes.

STATEMENT OF WALKER HENDRIX

Mr. HENDRIX. Thank you. Mr. Chairman, members of the committee, I’m Walker Hendrix and I’m the Consumer Counsel for

what they call the Citizens Utility Ratepayer Board. And I represent residential and small business customers and as you could

expect, I’ve had a few calls this winter with the prices being what

they are.

In my former life, I was also President of the Eastern Kansas Oil

and Gas Association and I’ve been involved in natural gas litigation, so I guess I have some familiarity with property rights.

If we’re looking at the winter, this winter’s problems, I think it

all ties back to the fact that we’ve had a number of mild winters

and we’ve had low prices. And those low prices have caused at least

in my State a certain amount of complacency with respect to putting into effect conservation and weatherization programs. And we

had those programs in the late 1970’s and the early 1980’s. I don’t

know what caused us to abandon them, but I suspect the price had

something to do with that. At the same time, drilling and exploration have declined, I think, as a result of low prices. In my State,

one of the largest producing areas is the Hugotonon Gas Field, one

of the largest in North America. We relied on that field for a good

deal of production. Unfortunately, that field is in decline. So in

order to restore production, we really do have to find new areas in

order to meet the increased demand for natural gas.

This year, I think the price of natural gas spiked because there

was a perception about storage. I don’t think storage was utilized

to the extent that it could be used and I think, in part, because of

the price of flowing gas there really wasn’t any urgency in putting

gas into storage and having a physical hedge against that price.

95

As you probably understand the way that they price natural gas,

they do it through automatic adjustment clauses, so when that

price spikes up, it’s automatically passed through to the local distribution company. In turn, the local regulatory bodies pass that

through automatic flow mechanisms and the consumer gets that

price directly. It really has no anticipation of that price. And even

if they do have anticipation of that price, they really take little care

with respect to what they’re going to do in an extreme environment

like we’ve had this past winter. We made public announcements in

the State of Kansas. Unfortunately, those public announcements

started in August and nobody paid too much attention to it. But

I still have people who call me up and say why didn’t you warn

us about these prices? And in fact, we don’t have real good price

signals with respect to natural gas and unfortunately, the consumer finds out about it after the fact and they do not begin to

take conservation measures until that price spikes up.

I guess you have to deal with the demand side. I think we need

to increase conservation and weatherization. We need to provide

better price signals and I think one problem that we had this winter is fuel switching. Large users who had the capability of switching fuels did not switch fuels. They had been lulled into complacency and they did not have alternative fuels on hand in order to

be able to shift. And we got into a situation at least in Kansas that

was somewhat perilous because we didn’t have our larger producers converting to other fuels. Late in December, they started to

do that which eliminated some of the pressure on the price of gas,

but you have to look at that.

On the supply side, I think one of the things that’s going to be

critical is the fact that we’re building so much generation that is

fueled by natural gas you could have winter heating natural gas

competing with gas for electric generation especially if we expand

our electric generation with natural gas. That’s going to be a very

interesting time. We could very well see with respect to electric

generation where the summer price is higher than the winter price

and that’s certainly going to be a deterrent to putting gas into storage. Because of the inadequacy of the deliverability that we have

in this country, we cannot simultaneously put gas in storage and

also meet the needs of electric generation.

Pipeline capacity constraints, I think there needs to be an investigation to determine where those constraints are and we should alleviate them. So I encourage anyone who is willing to do an investigation to make a determination with respect to that issue.

The final issue is that I have deals with hedging. As a public official in Kansas, we’ve thought about hedging the price of gas. The

problem with hedging it is that if we hedge the price too high,

we’re subject to some criticism because we’ve locked in a price

that’s too high and if the market price drops below that price,

hedging becomes a difficult alternative in terms of public official response.

With those comments, I conclude. Thank you very much for your

time.

Mr. BARTON. Well, the answer is not to hedge it too high. You

know.

Mr. HENDRIX. You tell me which price you want to——

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Mr. BARTON. No, no. That’s not my job. If you do it wrong

though, I’m going to comment on it.

[The prepared statement of Walker Hendrix follows:]

PREPARED STATEMENT OF WALKER HENDRIX, CONSUMER COUNSEL, KANSAS CITIZENS’ UTILITY RATEPAYER BOARD

My name is Walker Hendrix. I am the Consumer Counsel for the Kansas Citizens’ Utility Ratepayer Board (CURB). My office advocates for the lowest public utility

rates which may be established for residential and small business customers in

Kansas. Like most consumer offices, CURB has been extremely preoccupied with the

concerns of ratepayers over the spiking price of natural gas during this winter season. CURB is a long time member of the National Association of State Utility Consumer Advocates (NASUCA). NASUCA is an organization of 42 state utility consumer advocate offices form 39 states and the District of Columbia.

I. INTRODUCTION

This winter has made us aware of our vulnerability to high natural gas prices.

This Committee’s desire to explore various issues relating to natural gas is very

timely. For the most part, we, as a nation, became extremely complacent about our

natural gas supply. Mild winters and relatively low natural gas prices masked any

concern which we might have had about the availability of natural gas.

With low prices and an apparent abundant supply of natural gas, utility weatherization and conservation programs which had been present in Kansas during the

late 1970’s and early 1980’s were discontinued. This lack of conservation effort also

coincided with less exploration and drilling on the part of oil and gas producers. The

low prices meant that we relied on existing sources supply for the natural gas we

needed. Unfortunately, the existing supplies, like the Hugoton Field in Southwest

Kansas were in decline. Additionally, as the economy prospered, the demand for

natural gas rose, and the country committed to using natural gas for the generation

of electricity.

As the commodity markets began to recognize that there was some shortfall in

the storage of natural gas going into the winter heating season, a colder than normal winter aggravated the prices which were reflected on the commodity exchanges

and drove the indices to record highs. Because many of the gas purchase contracts

used by the industry provided for automatic escalation based on the NYMEX or related price indices (e.g., Inside FERC), the higher prices were instantly reflected in

the purchase prices paid by local distribution companies. Also, because Kansas allows local utilities to flow through the cost of gas to consumers, the ratepayers experienced dramatic increases in the cost of natural gas during the winter seasons. Despite the numerous public announcements which were made about the prospect of

rising natural gas prices this winter, very few consumers took action to reduce their

overall consumption of natural gas.

In the aftermath of this winter’s rising natural gas prices, it is apparent that our

national energy policy was not sufficient enough to permit an organized response

to the conditions which existed. Because of the complexity of the issues related to

stabilizing the price of natural gas, it is not an easy task to develop a comprehensive energy plan. It is the hope of CURB, however, that the committee will take

careful action in attempting to minimize the impact of spiking prices on consumers.

The committee must evaluate policy options with the goal of increased supply and

deliverability of natural gas as well as increased conservation efforts and efficient

use of this resource. By minimizing future supply and demand imbalances, volatility

in price can be reduced and price spikes like those experienced this past winter will

hopefully be avoided.

II. DEMAND SIDE POLICY

While it is unavoidable that demand for natural gas will increase over time, especially given the increase in gas fired electric generation capacity, the goal of a national energy policy should be to insure efficient use of our resources, and to maintain incentives and programs that allow maximum flexibility in times of market constraints.

1. Conservation and Weatherization Incentives. Conservation of energy, while

once a national energy policy priority, has diminished in stature in the last decade.

Where utilities once offered energy efficiency audits, offered advice on efficient energy use and provided low interest loans for new furnaces, insulation and windows,

as well as other appliances and lighting, these programs, at the local utility level,

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have all but disappeared. Many of the consumers hardest hit by the spike in natural

gas prices this winter live in homes that would benefit from energy efficiency improvements. We must increase our efforts to give consumers the ability, and financial support, to upgrade the energy efficiency of homes and businesses. Conservation

and wise use of our natural gas resources must once again become a national policy

priority.

2. Price Signals. Consumers must receive accurate and timely price signals. Consumers have shown the ability to react to high prices by adjusting consumption patterns. There is ample evidence that, in response to the high gas prices this winter,

consumers lowered their thermostats, closed off unused home space, purchased additional insulation and updated their furnaces and windows. (There is also this same

type of evidence of consumer reaction to increased electricity prices in the San

Diego, California area) Where we have failed, even though in Kansas resources were

devoted to warning consumers of impending high natural gas prices, is to get the

message through to consumers before the first big gas bill hits. Much of the conservation effort was in response to gas bills that were three to seven times higher

than ever before. Consumers need to receive price information early, so that consumers can act to conserve, rather that having to react after the first bill comes due.

3. Fuel Switching. One of the lessons learned this past winter is that many industrial customers and other large natural gas consumers no longer maintain an alternative fuel supply that can be relied upon as a backup when natural gas is constrained and prices are high. With natural gas prices being low for a long period

of time, perhaps its was not economic to maintain a backup supply. However, the

lack of fuel switching ability kept many customers in the market that historically

would have moved to alternative fuels. The flexibility to move to alternative fuels

has the effect of freeing up gas supply in the market, and minimizing price spikes.

The lack of this flexibility was perhaps a strong contributing factor to the price

spike this winter. Incentives should be provided to insure a reasonable level of fuel

switching ability is maintained by large customers. Maintaining a high level of fuel

switching ability will provide maximum flexibility, at a national level, in times of

crisis.

III. SUPPLY SIDE POLICY

Low natural gas prices, and warmer than normal winter temperatures in the last

few years have masked the failure of natural gas supply and deliverability to keep

pace with increased demand. While the current high prices are a potent incentive

for exploration companies to get back in the market, and should have the effect over

time of bringing natural gas supply back in balance with demand, exploration alone,

without the ability to deliver new supplies to market in a timely manner, is not

enough. Effort must be made at a national level to insure that growth in new gas

supplies, and the ability to deliver these supplies to market is maintained in an

even fashion, rather the in the boom or bust type of cycle that we have experienced

recently.

As a long term concern, we should also keep in mind that we are not far away

in time from a point where natural gas fired electric generation facilities may be

competing with traditional winter heating customers for natural gas supplies and

pipeline capacity in the winter months. Not only must we be concerned with adequate supply and deliverability for traditional winter heating consumers, we must

not lose sight of the fact that our future energy supply mix will likely include gas

fired generation in the winter months.

1. Increased Exploration and Deliverability. Exploration for new natural gas supplies must be combined with the ability to deliver any new discoveries to market

in a timely manner. While current high prices may provide enough incentive to invest in natural gas gathering facilities and pipeline capacity in the short run, in the

long run, a national policy must be developed that provides an incentive to make

sure exploration, gathering facilities and pipeline capacity keep pace with demand,

even at times when prices are low. Incentives must be developed that will keep our

supply base and deliverability growing in a consistent and reasonable manner.

2. Pipeline Capacity Constraints. A concerted effort must be made to evaluate the

existing interstate pipeline facilities and determine whether physical constraints impeded delivery and artificially increased gas prices to consumers. Where constraints

exist, incentives must be maintained that will insure that expansion is accomplished

and constraints are minimized over time.

3. Storage Capacity. It is clear that, as a nation, we are becoming more dependant

of natural gas storage facilities to meet the winter peak needs of consumers. Flowing gas is inadequate to meet demand on a peak day. Effort must be made to increase gas storage facilities as well insuring that storage is full and ready for winter

98

consumption. One of the contributing factors in this past winter high prices was the

fact that storage levels were low compared to past levels, and withdraw of gas from

storage was fairly rapid during the November and December cold snap. This created

the perception, whether right or wrong, that not enough storage gas would be available to meet all of the winter needs.

IV. FINANCIAL INSTRUMENTS AND HEDGING

Hedging is an issue which has received much attention in Kansas. The principle

problem which must be addressed is how to fund a plan to hedge the price of natural gas. Most consumers want the lowest possible price for natural gas and are unwilling to endorse a plan which would lock in a price which is higher than the market price. Notwithstanding, Kansas has set up a pilot program which would permit

a minimal contribution on the part of ratepayers in order to build a pool of funds

to purchase options which would, in turn, attempt to place a ceiling on price to be

paid for natural gas during next winter’s season. With this winter’s spiking prices,

however, the spreads on the options and the amount of protection which can be afforded appears to be extremely limited.

With respect to hedging, there is a good deal of concern that the price which is

obtained will be higher than the cost of natural gas next winter. A mild winter could

conceivably cause the price to decline below the strike price for the options to be

purchased. Should this scenario unfold, the hedging plan would come under some

attack by causing customers to pay more for natural gas than would have to be paid

in the market. This would be a double whammy because customers would be picking

up the cost of the options as well as paying a higher price for natural gas. Consumers could obviously provide greater protection by increasing the amount of

money to be spent on options or futures, but the risk of loss is so great that it does

not seem likely that CURB would support committing large sums to fund a hedging

plan in Kansas.

Hedging is not a practice that allows public officials much comfort. Although there

are an infinite number of approaches, the risk of losing money does not make the

subject readily acceptable. This is the reason that a pilot project was selected and

only a minimal amount of resources will be used to establish a hedging program

in Kansas.

V. CONCLUSION

Perhaps we have been lulled to sleep after so many years of abundant, inexpensive natural gas supplies. Clearly, this winter was a wake up call. This is a unique

opportunity to consider national energy policy goals and potential programs that

will accomplish those goals. Prices merely reflect imbalances in supply and demand.

The policy goal of minimizing supply and demand imbalances over the long term

can, and must be accomplished. Maintaining consistent growth in the supply and

deliverability of natural gas accompanied by incentives that encourage conservation

and efficient use, as well as maximum flexibility to switch between fuels, will insure

that supply and demand remain in balance over time, and that consumers will be

protected from the types of prices we now know can occur when supply and demand

are not in balance.

Thank you for the opportunity to offer this testimony today.

Mr. BARTON. We now want to hear from Mr. Jack Hilliard who

is General Manager for the Florence Utility. And he’s testifying on

behalf of the American Public Gas Association which represents

about 4.5 million consumers of gas that’s purchased through municipalities.

Your testimony is in the record in its entirety and we would welcome you to elaborate on that for 6 minutes.

STATEMENT OF JACK HILLIARD

Mr. HILLIARD. Thank you, Mr. Chairman. I seem to be the only

one with a dialect here, as a Southerner, so I’ll ask the——

Mr. BARTON. Sounds good to me. And Mr. Boucher doesn’t have

a problem with it either.

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Mr. HILLIARD. Well, I’ll ask the Northern Congressmen here to

listen slow and I’ll ask the Southern Congressmen here to listen

fast. So I’ll try to get through this.

Mr. Chairman, my name is Jack Hilliard and I am the General

Manager of Florence Utilities in Florence, Alabama. I’m appearing

on behalf of American Public Gas Association.

Mr. BARTON. Put the microphone very closely to you, Mr. Hilliard.

Mr. HILLIARD. Okay, of which Florence is a member. APGA is a

national association of approximately 1,000 publicly owned local

gas distribution companies in the United States serving as you said

4.6 million natural gas customers.

We thank the chairman and the committee for the opportunity

to allow the public gas perspective to contribute to the national debate on energy policy. As not-for-profit entities owned by and directly accountable to our citizens, we have a consumer perspective.

APGA members still buy and resell gas, whereas many investor

owned distributors have stopped doing this under retail deregulation. As smaller purchasers of energy commodities and transportation service we know first hand how market power affects consumers. I know several members of this subcommittee are very

well acquainted with their public gas systems. I especially want to

thank Congressman Norwood, he’s not here right now, of Georgia,

for the leadership that he has provided APGA on tax legislation.

He introduced the Municipal Utility Fairness Act last session

which is now included in Senator Murkowski’s comprehensive

package announced this week.

APGA joins those calling for a comprehensive energy policy. We

need more natural gas in the long run. In the short run we have

not experienced the natural gas supply crisis. We have had a natural gas pricing crisis. We think our first step must be to identify

precisely the causes of high natural gas prices that have threatened our nation’s economy. Natural gas is a linchpin to the nation’s

energy policy. Congress must assure Americans that it is fairly

priced.

The story is this, last winter we paid a wholesale price for about

$2.50, $2.50 per MMbtu for gas. That price rose dramatically

through the year to $6 on December 1. Then by the end of December, gas reached $10. By March, the price has fallen to about 50

percent of that level end of December. We have never seen anything like this. This is crazy. By comparison, such a rate of increase would send gasoline prices at the pump to $5 per gallon.

The record jump in natural gas prices is fueling inflation and Mr.

Greenspan has expressed his concern about the impact on consumer demand.

In Florence, we paid $1.1 million for our gas supply in January

of 2000. And we paid $5.4 million in January 2001. As a result,

many of our customers are using all of their disposal income, plus

some savings just to pay the heating bill. Just this week I received

a call from an 82-year-old young lady. She told me she had the

choice of either buying food, buying her prescription medicine or

paying her utility bill. One of our largest industrial customers, a

global industry that manufacturers ceramic tile told us last week

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that if we could not get the price of gas down substantially, they

were closing their Alabama manufacturing facility.

Many public gas systems that merely flow through the cost of

natural gas are caught in a cash-flow squeeze. Prices increased so

dramatically this winter that rates did not keep pace with prices

demanded by suppliers. APGA members have depleted reserves to

pay their gas supply bills.

NYMEX and new private exchanges run by mega energy companies—sorry—even prices broke records, record after record this

past winter. There’s been no shortage of natural gas. There have

been no curtailments this winter like there were electricity blackouts in California. Every firm customer that wanted to purchase

gas could only at exorbitant prices.

Cavalier explanations that this past year’s roller coaster prices

for gas were simply the result of operation of laws of supply and

demand are really not credible. The increases in demand that we

have experienced cannot justify the level of prices that we pay. The

question we are asking Congress to focus on is, will additional supplies of natural gas in the future prevent the price spikes that we

faced this year, this past year? I know some of you have asked that

question earlier.

Congress should use its investigative powers to determine whether the market allows manipulation by speculators and today’s integrated energy companies.

My testimony specifies some lines of inquiries that focus on the

dramatic increase in the trading of natural gas on public exchanges

like NYMEX and new private exchanges run by mega energy companies. APGA does not seek to play the Washington blame game,

rather, there are serious questions about the operation of the natural gas market that should be asked and answered.

We do not seek to find a bad guy, but desire to prevent this episode from replaying itself—— Mr. BARTON. I hate to cut you off, but you’re about a minute

over. Could you summarize in the next 30 seconds, please, sir.

Mr. HILLIARD. Yes sir. As Chairman Barton has recognized, fuel

diversity for electric generation appears to be the only sound policy

for our nation. Our nation is relying almost exclusively on natural

gas to fuel new electric generation needs. It may very well be that

our nation has stumbled into dependence upon natural gas that is

making demand fundamentally more inelastic so that prices will

have a strong tendency to be excessive for a long time to come.

In conclusion, let me iterate the plain truth. Our customers, your

constituents are angry. They do not understand why their natural

gas costs so much. And frankly, neither do we. It is our hope that

a congressional investigation will provide the country with some

necessary answers that must be precede the adoption of the new

energy policy.

Thank you, Mr. Chairman.

[The prepared statement of Jack Hilliard follows:]

PREPARED STATEMENT OF JACK HILLIARD ON BEHALF OF THE AMERICAN PUBLIC GAS

ASSOCIATION

My name is Jack Hilliard, and I am the General Manager of Florence Utilities

in Florence, Alabama. I am appearing on behalf of the American Public Gas Association (APGA), of which Florence is a member. APGA is the national association of

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over 572 municipal and other publicly-owned local distribution systems in thirty-six

states. APGA members own and operate natural gas distribution systems serving

their communities. They include municipal gas distribution systems, public utility

districts, county districts, and other public agencies that have natural gas distribution facilities. There are approximately 1,000 publicly-owned local gas distribution

companies (‘‘LDCs’’) in the United States, serving more than 4.6 million natural gas

customers.

We thank the Chairman and the Committee for the opportunity to allow the public gas perspective to be heard. We hold some views that depart from the positions

held by the investor-owned LDCs. Publicly-owned gas systems are not-for-profit retail distribution entities owned by and directly accountable to the citizens they

serve. Also, APGA members remain in the resale business whereas many investorowned distributors have departed the gas acquisition function under retail deregulation.

EXECUTIVE SUMMARY

APGA joins those calling for a sound, comprehensive, environmentally responsible

energy policy. We do not believe that there is one solution or a silver bullet to relieve the hardship that high natural gas prices brought to Americans over the last

six months. We believe, however, that Congress can take steps that will increase

the supply and deliverability of natural gas, bring down prices, and ensure that adequate and reliable supplies reach our customers when needed.

We also believe that the first step Congress should take now is to investigate the

reasons why many Americans are paying natural gas prices that are 400% higher

than what they paid last winter. By comparison, such a rate of increase would send

gasoline prices at the pump to $5 per gallon. The increases in the price of natural

gas this past year have not been incremental—they have been breathtaking and historic. Natural gas is the lynchpin to our Nation’s energy policy. Congress must assure Americans that it is fairly priced.

APGA submits that the answers go beyond the simple laws of supply and demand.

Yet, APGA does not seek to play the Washington ‘‘blame game.’’ Rather, there are

serious questions about the operation of the natural gas market that should be

asked and answered. We do not seek to find a ‘‘bad guy,’’ but desire to prevent this

episode from replaying itself.

IMPACT OF RECENT NATURAL GAS PRICES

Last week, the Labor Department reported that the record jump in natural gas

prices drove up the cost of living by 0.6% in January; this seeming revival of inflation sent stocks plummeting. On February 13, 2001, Federal Reserve Chairman

Alan Greenspan testified to the Senate Committee on Banking, Housing, and Urban

Affairs that consumer demand has been depressed by higher energy prices, specifically natural gas. He said:

The sharp rise in energy costs pressed down on profit margins still further in

the fourth quarter. About a quarter of the rise in total unit costs of nonfinancial, nonenergy corporations reflected a rise in energy costs. The 12 percent rise in natural gas prices last quarter contributed directly, and indirectly

through the effects on the cost of electrical power generation, about one-fourth

of the rise in overall energy costs for nonfinancial, non-energy corporations; increases in oil prices accounted for the remainder.

Energy production and consumption is inextricably tied to economic growth. High

natural gas prices are a threat to our Nation’s economy today and may well continue to be in the future. We are increasingly dependent upon natural gas not only

to heat our homes and run our factories, but also to generate electricity.

The economic impact of excessive natural gas prices is no surprise to public gas

systems that have been buying this excessively priced gas. In Florence, we paid $1.1

million for natural gas in January 2000 and $5.4 million in January 2001. As a result, many of our customers are using all of their disposable income, plus some savings, just to pay the heating bill. Industrial customers that rely on natural gas have

seen huge increases in production costs. One of our largest customers, a global industry that manufactures ceramic tile, told us last week that, if we could not get

the price of gas down substantially they were closing their Alabama manufacturing

facility. Nearly all of APGA’s members have the same story to tell because gas that

cost less than $2.50 per MMBtu in January 2000 cost $10.00 per MMBtu in January

2001.

It is worth noting that many consumers have not yet seen the full impact of these

higher prices. Many public gas systems have delayed passing through these costs

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to cushion the price shock. Many gas distributors offer level payment plans. Those

consumers will see increasing levelized payments for months to come.

These extraordinary gas prices are harmful to the distribution business. These

higher prices are driving up the rate of uncollectible accounts because some consumers simply cannot pay their bill. Consistent with local ‘‘turn off’’ policies, thousands of consumers will be shut off after the weather warms. Some of those customers will not return. Many public gas systems that merely flow through the cost

of natural gas are caught in a cash flow squeeze. Prices increased so dramatically

this winter that rates did not keep pace with prices demanded by suppliers. APGA

members have depleted reserves to pay their gas suppliers. Some have taken out

costly new lines of credit. Some of these costs will be passed along to consumers,

and some of these costs will be absorbed, thus draining the ability of the city to respond to future emergencies.

CONGRESS MUST INVESTIGATE RECENT NATURAL GAS PRICES

We have witnessed an increase in demand for natural gas that has burst the socalled ‘‘gas bubble’’ that kept prices low in the 1990s. We did experience cold weather this winter. This winter’s prices should have been higher than last winter. But

natural gas prices began their historic rise last spring. No one predicted—and no

one has justified—how high prices went this winter. There is reason to question

whether more than the laws of supply and demand have been at work in natural

gas markets. Today, prices for March deliveries have dropped to 50% of the level

of prices in January. This volatility is very suspicious.

Even as prices broke record after record, there has been no shortage of natural

gas. There have been no gas curtailments this winter like there were electricity

blackouts in California. There have been no natural gas shortages like there were

in the 1970s. Every firm customer that wanted to purchase gas could—only at exorbitant prices. Cavalier explanations that this past year’s roller coaster prices for gas

were simply the result of the operation of the laws of supply and demand are not

credible. The increases in demand that we have experienced cannot justify the level

of prices that we paid. APGA believes that the absence of any real shortages in the

presence of tremendous price increases suggests a very real possibility of price manipulation.

In the short run, we have not experienced a natural gas supply crisis; we have had

a natural gas pricing crisis. Without question, we need more natural gas in the U.S.

in the long run. The Energy Information Administration’s (EIA) Annual Energy

Outlook 2001 predicts a 62% increase in the demand for natural gas by the years

2020. The projected demand for natural gas for electric generation makes the need

for more gas supplies in this period beyond question. The question we are asking

Congress to focus on is: will additional supplies of natural gas in the future prevent

the price spikes that we have faced this past year? Or will we repeat this pricing

crisis that is doing great harm to our Nation’s economy today?

HAS CONGRESS KEPT ITS BARGAIN?

When Congress decontrolled the price of natural gas at the wellhead, the promise

was for a competitive market and lower prices. That appeared to work for a few

years, but it is not working today. The United States is clearly committed to reliance upon competitive markets to allocate energy supply. Yet, as we believe the past

year has demonstrated, these markets are not perfect. Nor are they typical. The demand for natural gas is fundamentally inelastic. People who heat their homes and

businesses with a natural gas furnace have no real substitute for natural gas. Although APGA is not aware of any current studies, the experience of our members

is that industry often does not maintain an alternative fuel source that can be substituted on the basis of price. This winter should demonstrate just how price sensitive industry is today.

Moreover, today we see the near total dependence on natural gas to serve incremental electric generation demand. This electric demand is similarly price inelastic.

Many new gas-fired plants reduce costs by not installing alternate fuel capability,

and the demand for electricity is great. It may very well be that our Nation has

stumbled into a dependance upon natural gas that is making demand fundamentally more inelastic so that prices will have a strong tendency to be excessive for

a long time to come.

We call on Congress to examine the consequences of price decontrol. If an investigation finds that the market is not protecting the best interests of consumers and

the American economy, Congress must act. APGA does not advocate reimposition of

wellhead price controls at this time. Rather, other creative ‘‘fixes’’ to market distortions should be implemented once the root causes are discovered. And, certainly, any

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1Letter of Melanie A. Kendadine, Acting Director, Office of Policy, DOE, to Leslie B. Enoch,

President, APGA at p. 2 (July 6, 2000). 2Letter of James Hoecker, Chairman, FERC, to Leslie B. Enoch, President, APGA at p. (July

18, 2000).

illegal conduct associated with these high prices must be punished. The goal should

be to ensure that American natural gas consumers do not experience another year

like this past year.

APGA has already asked the federal agencies responsible for regulating energy for

answers. APGA requested the Department of Energy (DOE) and Federal Energy

Regulatory Commission (FERC) to determine the reasons gas prices were rising so

quickly in June 2000, when natural gas had only doubled in price. DOE responded

that the laws of supply and demand were at work so that it had a ‘‘reasonable expectation that prices will moderate over time.’’ 1 Chairman James Hoecker told

APGA that ‘‘while I expect the market to make appropriate adjustments over time,

the Commission will strive to ensure that natural gas prices are set by market

forces in an open and freely competitive market.’’ 2 It is time for Congress to act

now.

We note that H.R. 712, which was referred to the Energy and Commerce Committee on February 14, 2001, would provide for a study by the National Academy

of Sciences (NAS) to determine the causes of recent increases in the price of natural

gas. APGA is not certain whether a NAS study, or a Government Accounting Office

(GAO) study, would be the most efficient route. We tend to believe that Congress,

itself, should use its own investigative powers to bring answers as soon as possible.Market Power Concerns

We in APGA know a thing or two about market power because of who we are.

The typical municipal gas system has two overriding characteristics: the natural gas

that it purchases is delivered to the community through a single interstate natural

gas pipeline, so there is no competition for that transportation service; and second,

the typical municipal gas system is a smaller volume purchaser that buys most of

its gas in the winter months and resells it to heat homes, hospitals, and factories.

Its buying power is dwarfed by users like electric generators. We are very susceptible to market power. Therefore, I would like to make a few comments about how

market power is contributing to the natural gas pricing crisis.

Until approximately fifteen years ago, almost all of the natural gas in interstate

commerce was purchased by interstate pipeline companies from producers and then

resold to distributors and end users at regulated prices. The Federal Energy Regulatory Commission (FERC) kicked pipelines out of the sales (or merchant) business

in 1993, so that distributors had to make all of their purchases of natural gas in

a deregulated market. This spurred the development of new natural gas marketing

companies that became dominant middlemen between producers that owned natural

gas assets and distributors, like APGA members, that sell to ultimate consumers.

At the onset of this new competition, APGA members were greeted by many new

market players offering to sell gas and manage pipeline capacity from many new

entrants that sought to fill the void created by the federally-mandated departure of

interstate pipelines from the field. Since 1993, though, the number of sellers of natural gas has declined remarkably. We now see an industry resembling the airline

industry, with a handful of dominant participants that keep merging with one another. The potential for the abuse of market power is growing.

These mega-marketing companies now sell most of the natural gas consumed in

the U.S. Their names are Enron, El Paso, Dynegy, Williams, Reliant, Coral, and

Duke. Most of these players are the same companies that recently have extracted

monopoly-type profits for power sold into California. Further, these entities now

have multiple corporate interests. One affiliate sells gas, another transports it, another purchases it to generate electricity. This vertical integration may be generating excessive market power.

In the past two years many public gas systems have been told by their incumbent

marketer that they were no longer interested in the municipality’s business. Serving

small towns with gas apparently is not nearly as profitable as selling huge quantities of gas to electric generators. Elementary economics tells us that a dwindling

number of sellers will yield higher and higher prices for residents of communities

served by public gas systems. APGA is concerned about this trend.

And retail deregulation is not the solution. In Ohio, Pennsylvania, and Maryland,

gas marketers have dropped residential consumers this winter like hot potatoes.

APGA’s study of Georgia’s retail gas deregulation demonstrates that prices to consumers have not declined, and most consumers wish deregulation had never been

passed by the state legislature. In fact, if the past year teaches us anything about

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3Statement for the Record of the APGA Before the U.S. Senate Committee on Energy and

Natural Resources Hearing on the Status of Natural Gas Markets (Dec. 12, 2000).

regulation, it is that states should go slow on deregulation initiatives until their consequences are better understood.

AREAS FOR INVESTIGATION

Growing, vertically integrated energy giants are exercising market power in new

and dynamic ways. The methods may not yet be clear but the proof may be in their

profits. Congress should use its investigative powers to determine whether these entities have engaged in price manipulation that may have caused Americans to pay

excessive prices for natural gas this past year. This investigation should focus on

how prices for natural gas are established in a deregulated market. APGA suggests

the following lines of inquiries.

1. Natural gas has become one of the ‘‘hottest’’ commodities for traders and speculators. APGA understands that the amount of gas traded on the New York Mercantile Exchange (NYMEX) is many multiples of the physical capacity of our Nation’s delivery system. There appears to be a correlation between the amount of activity on NYMEX and price volatility. Congress should determine whether this activity causes American consumers to pay excessive prices for gas. NYMEX’s own

rules for trading natural gas should be evaluated.

2. NYMEX recently implemented after-hours ‘‘Access Trading.’’ APGA understands that a considerably smaller volume of trading can significantly move the

market on Access Trading than is the case during NYMEX open trading, causing

the next day’s market to open at a price significantly different from the previous

day’s settlement price. APGA further understands that this has occurred with some

regularity. Congress should determine whether this trading has contributed to the

excessive increase in natural gas prices that the Nation has experienced.

3. Natural gas is also traded increasingly on private exchanges. Enron, Reliant,

and others perform billions of dollars of energy financial transactions each year. The

impact of this relatively new phenomenon on prices paid by consumers is not well

understood. APGA is concerned that the largest sellers of natural gas are increasingly also making a market for gas sales, and that there is the potential for manipulation of prices through this means.

4. Much natural gas is priced under daily and monthly indices in the open market. Many APGA members, for example, purchase their gas at the so-called ‘‘Index

Price.’’ The methods used to establish these indices is an appropriate area for investigation. If there are too few buyers and sellers, or if buyers and sellers have skewed

motivations, the resulting index will be distorted.

5. For the natural gas business to grow, more reserves must be developed. APGA

understands that producers lost the incentive to explore for gas when prices were

depressed in recent years. Yet, the modest increase in prices experienced in the beginning of 2000 appeared to be adequate to throw the throttle wide open on exploration and production efforts. APGA understands that prices in the range of $3.00

per MMBtu are adequate to stimulate supply efforts.3 So what accounts for the

prices that are multiples of that price level? With the participation of marketers so

pervasive, gas that sells for $10 per MMBtu does not necessarily return $10 to natural gas producers on whom we rely to explore and develop new gas reserves. And

if producers retain the full price, the resulting revenue has been much more than

producers could have possibly invested in new exploration, so that some are using

the monies to repurchase stock rather than find new supplies. Congress should

question whether the monies paid by consumers are funding adequately further exploration and development necessary to supply the Nation with natural gas in the

long run.

6. Mega-marketers have affiliates in the electric generation business. As has been

noted widely, our Nation is relying almost exclusively on natural gas to fuel new

electric generation needs. This dependence appears to be putting quite a bit of upward pressure on prices paid by all natural gas consumers. To put it bluntly, the

largest sellers of gas are increasingly our major competitors for the purchase of gas,

and they may have relatively little concern for its price because of the price at which

they can sell the resulting gas-fired electricity. If major purchasers of gas lack an

incentive to obtain the lowest price, the impact on the market is perverse. All aspects of the use of natural gas for electric generation and the relationship of marketing affiliates should be better understood.

Finally, Congress must remember that the interstate transportation of natural

gas remains subject to regulation under the Natural Gas Act for good reason. There

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ity of American markets because only one interstate pipeline renders the service

there. There are no choices in those markets. Multiple pipeline connections do not

necessarily eliminate pipeline market power either. Although the FERC has appeared to recognize this economic reality even as it has embraced so-called lighthanded regulation in recent years, its policies are often harmful to captive shippers.

Congress must exercise vigilant oversight over this agency to ensure that interstate

pipelines are not permitted to exercise their monopoly power.

Congress should be alarmed at the consequences of the great consolidation of

interstate pipeline companies. In the past decade, more than two dozen independent

pipeline companies have been merged into a handful owned by El Paso Energy, Williams, Enron, and Duke. Some consumers have invested capital to make a new pipeline connection only to see its traditional supplier acquire the new pipeline. These

issues could well be the subject of another hearing.

NEED FOR A COMPREHENSIVE ENERGY POLICY

APGA calls on Congress and the President to enact new energy legislation that

will produce desirable results in the short- and long-term. We agree with Chairman

Barton that all energy options must be explored. All of the policies and activities

must be consistent with the following overarching goals:

• Our nation’s energy policies should strive to ensure an affordable, reliable and secure supply of energy.

• Our nation’s energy policies should promote the most efficient use of an energy

source.

• Our nation’s energy policy should rely on a balanced portfolio of source fuels.

• Our nation’s energy policy should be consistent with sound environmental practices.

In the short term, Congress should commence an investigation of recent natural

gas prices, as discussed above. As noted, natural gas is the key to the Nation’s energy future, and it must not be subject to price manipulation. In the course of this

review, it may become clear that public data on the operation of energy markets

should be expanded. The Department of Energy’s Energy Information Administration (EIA) may require additional resources to provide data adequate to monitor the

energy market.

APGA believes that higher energy prices require an increase in funding for the

Low-Income Home Energy Assistance Program (LIHEAP). APGA concurs with Senate Resolution 26 calling for supplemental appropriations for LIHEAP, and supports

the goal of H.R. 683/S. 352, the Energy Emergency Response Act of 2001, to increase

LIHEAP funding to $3.4 billion for each of fiscal years 2001 through 2005.

APGA supports legislation that clarifies that long-term, prepaid purchases of natural gas by public entities can be funded with public debt. These transactions enhance reliability and yield lower prices for consumers.

The federal government also can invest in more research and development for the

natural gas industry. Our Nation’s energy policy should provide tax credits for distributed energy resources, including but not limited to natural gas fuel cells, turbines, microturbines, reciprocating engines, and natural gas cooling and desiccant

systems. Federal government agencies should review existing rules and standards

periodically to ensure that promising technologies, such as distributed energy resources that offer diversity of supply and other benefits are not discouraged from

market entry.

Similarly, our Nation’s energy policy should increase federal funding for research,

development, and demonstration for sustained and improved natural gas system reliability and integrity, infrastructure expansion, and reasonable natural gas prices

and rapid commercialization of new on-site natural-gas equipment advances that

would provide lower emissions, greater North American energy reliability, and sustain America’s leadership in energy technologies.

At the same time, the Congress should commence a new initiative to encourage

energy conservation. Any balanced policy must create correct financial incentives to

enhance energy efficiencies. Along with energy conservation goes the development

of equipment so that demand can be price-responsive in a timely fashion.

Finally, we must determine the most environmentally sound methods of increasing energy supplies for our country. These are very difficult determinations, and

APGA sees the debate as just beginning. Although natural gas burns cleanly, the

environmental price to be paid to produce the next incremental amount may be

more than the production of clean coal, or even nuclear power. The key question

may be, however, assuming environmental hurdles are cleared: what entities will

construct these expensive base load plants? As the franchise-based utility structure

dissolves in the U.S., will other entities step in to fill that void? To date, there is

106

no evidence that the market will support the construction of such plants. The less

costly natural gas-fired units are all that we are seeing today.

It is becoming increasingly clear that the single greatest flaw in current energy

plans for the U.S. is the near complete reliance upon natural gas as the ‘‘fuel of

choice’’ for electric generation. It appears to APGA to be folly for our Nation to build

new power plants that can burn only natural gas. We cannot prudently create a

giant new class of consumers whose demand is wholly price inelastic—without almost guaranteeing increases in gas prices in the market. Fuel diversity for electric

generation appears to be the only sound policy for our Nation. In addition, we must

ensure that there is sufficient pipeline capacity to prevent capacity constraints in

key markets from causing enormous increases in the price of delivered gas controlled by marketing companies at state borders and city gates. It is important to

note that we are in the beginning of this expansion of gas-fired electric generation.

Only a fraction of what generation capacity is planned were operational in 2000. A

new energy policy must address all available sources of energy as well as energy

conservation.

In conclusion, let me reiterate the plain truth: our customers—your constituents—

are angry. They do not understand why their natural gas costs so much. Frankly,

neither do we. Nor have the federal agencies charged with regulating energy provided good answers. It is our hope that a Congressional investigation will provide

the country with some necessary answers that must precede the adoption of a new

energy policy.

Mr. BARTON. Thank you, sir.

We now want to hear from Mr. Jas Gill, who is the Vice President of Manufacturing for CYTEC Industries in Westwego, is that

right, Louisiana, which happens to be in Congressman Tauzin’s

District. Chairman Tauzin’s District. My understanding is that

you’re a manufacturer that produces fertilizer, is that correct?

Mr. GILL. Produces ammonia.

Mr. BARTON. Ammonia. Produces ammonia. We welcome you.

Chairman Tauzin wanted to be sure that I gave you a personal

welcome on his behalf since he couldn’t be here this afternoon. We

put your testimony in the record in its entirety and we would welcome you for 6 minutes to elaborate on it. And really be—flip that

switch and speak clearly into the microphone.

STATEMENT OF JAS GILL

Mr. GILL. Thank you, Mr. Chairman, and the committee. I really

appreciate the opportunity to be able to talk to you.

I’m here today to be presenting the Louisiana Chemical Association, an organization of 74 companies that are in the business of

chemistry. At over 100 locations across Louisiana, we manufacture

the building blocks that go into every consumer product you can

imagine. We directly employ some 30,000 men and women, 24

hours a day, 7 days a week and 365 days a year and account for

another quarter million jobs in the State. I have served as LCA’s

Chairman and remain on its Board of Directors.

Louisiana’s chemistry business ships over $20 billion worth of

products annually, ranking behind Texas and New Jersey. Over

one third of these shipments are exported and help narrow America’s trade deficit.

We use natural gas, and we use a lot of natural gas. In fact, the

industrial sector accounts for almost 10 percent of all the natural

gas consumed in the United States. We use it as feedstock, sometimes called raw material, for some of the most basic building

blocks in chemistry, ethylene, and for other critical production

pathways like ammonia.

107

We also use it to efficiently and in an environmentally sound

manner generate electricity and steam which in turn are used in

the production of caustic soda and chlorine, one of the world’s most

versatile, beneficial products of chemistry. When chlorine is joined

with natural gas derivatives, it appears in everything from contact

lenses to prosthetic devices to computers. Chlorine and caustic soda

combine to bleach paper white and are found in the bleaches used

in the homes. For feedstock and generation purposes, industry of

Louisiana uses nearly 1 trillion cubic feet of natural gas a year and

this does not include the natural gas used in the public utilities

that provide us with huge blocks of electricity.

As I mentioned earlier, natural gas is used as a raw material or

feedstock for consumer product building blocks. In this context,

natural gas is like wheat and flour are to a bakery shop. If Mr.

Tauzin were here, he’d understand that. A baker makes bagels,

bread, rolls and yes, Mardi Gras King Cakes from his raw materials. From derivatives of natural gas, industry makes dinnerware,

auto parts, furniture, foam insulation, appliances, pens and pencils,

pipe, paints, food wrap, roofing, house siding, safety glasses, detergents, rocket fuel, CD-ROMS and just about everything else from

drilling mud conditioners to life saving pharmaceuticals.

And then there’s ammonia, one of the most critical products that

comes from natural gas. This portion of my testimony addresses

the concerns of Louisiana Ammonia Producers. This is a group of

seven companies that operate eight facilities in Louisiana that

produce 40 percent of the ammonia consumed in the United States.

Eighty percent of the ammonia is used in the fertilizer industry to

provide food stuff and fiber for the United States and to the world.

The high demand for natural gas that has led to high natural gas

prices has had devastating impact on the ammonia industry this

winter. One of our processors at the CYTEC plant makes anhydrous ammonia which itself is a raw material for the manufacture

of several specialty chemical products on the site I manage. Therefore, I’m very familiar with this segment of the industry.

When producers purchase natural gas to make ammonia, it is

measured in British Thermal Units or BTUs. As you’re aware, the

price of natural gas went from approximately $2 per million BTUs

1 year ago to around $10 per million BTUs this past December. In

other words, the price of basic raw material more than quadrupled

within a year. Natural gas makes up over 80 percent of the cost

of making ammonia and this does not include the additional costs

associated with the purchase of gas for public power. There simply

is no way that these higher costs could be absorbed or passed along

in higher fertilizer prices.

As the direct result of natural gas prices, one Louisiana ammonia

plant closed in the latter part of 2000. In addition, all but two of

the Louisiana eight remaining ammonia facilities were completely

idled for much of December, all of January and part of February.

The two that continue to operate did so at reduced rates. Future

construction plans are also shelved for the time being.

When our plants reduce production or are shut down completely,

our employees and their families suffer economically. Beyond this,

however, is the problem these curtailments portend for the nation’s

farmers who may face shortages of and high prices for fertilizers.

108

These costs will invariably reverberate in the American economy

and mean high prices for essential foodstuffs. Natural gas prices have declined to $5 and $6 and four of our

ammonia producers have resumed partial producer. The two that

have continued producing are now at full capacity. One of our

members continue to be completely shut down.

We have reopened to help meet farmers’ spring needs for fertilizer. However, natural gas is still around three times the cost of

gas prices last year and the future remains guarded.

While this winter has been a terrible time for the ammonia industry, we’re deeply concerned about what will happen to natural

gas prices during the heat of this summer and the cold next winter.

Already, we’re anticipating plants reducing production with some

additional shutdowns during the summer months.

There’s a continuing concern for other chemical sectors as well.

Polyvinyl chloride producers of Louisiana, for example, have either

curtailed production because of high gas prices or are considering

to do so.

Without a reliable and stable supply of natural gas at reasonable

prices, Louisiana’s chemical industry cannot stay globally competitive. This is especially true when foreign governments subsidize

natural gas inputs into their production processes and are able to

export commodities to U.S. price well below our manufacturing

costs.

Mr. BARTON. Mr. Gill, you’re about a minute over. Could you try

to summarize in the next 30 seconds, please, sir?

Mr. GILL. Yes sir. We ask you to develop an energy policy that

recognizes it is in the nation’s interest to place high priority on natural gas by first, acknowledging the essentiality of natural gas as

a feedstock, raw material, and building block that is critical to the

business of chemistry and to the American economy.

No. 2, encouraging domestic exploration in previously untapped

areas to enable our competitive market system to work, thus assuring an abundant supply of natural gas at rational prices.

Third, and for the longer term, creating Regional Economic Clusters. These clusters would fully develop and utilize local and regional natural resource bases so as to protect our local economies

and employment and our national economic, agricultural and defense interests by leveraging technological capabilities to assure

global competitiveness and the effective investment of capital.

Thank you very much.

[The prepared statement of Jas Gill follows:]

PREPARED STATEMENT OF JAS GILL, VICE PRESIDENT, MANUFACTURING, CYTEC

INDUSTRIES, INC.

Mr. Chairman and members, good afternoon, and thank you for the opportunity

to discuss a subject of vital concern to America’s national interest in general and

to the Louisiana economy in particular.

My name is Jas Gill. I am the Vice President of Manufacturing for CYTEC Industries, Inc., located at 10800 River Road in Westwego, Louisiana.

CYTEC is a specialty chemicals and materials company. Our chemical complex at

Fortier that I manage has more than 550 fulltime employees working in maintenance, administration and eight different production units.

I have the privilege of being a constituent of Chairman Tauzin of Chackbay, Louisiana, and a former constituent of one of your newest members, Congressman Chris

John of Crowley. My testimony will, therefore, be bi-partisan not only by desire, but

by necessity.

109

I am here today representing the Louisiana Chemical Association, an organization

of 74 companies that are in the business of chemistry. At over 100 locations across

Louisiana, we manufacture the building blocks that go into every consumer product

you can imagine. We directly employ some 30,000 men and women, 24/7/365, and

account for another quarter million jobs in the state. I have served as LCA’s Chairman and remain on its board of directors.

Louisiana’s chemistry business ships over $20 billion worth of product annually,

ranking behind Texas and New Jersey. Over one-third of these shipments are exported and help narrow America’s trade deficit.

We use natural gas. We use a lot of natural gas.

In fact, Louisiana’s industrial sector accounts for almost 10% of all the natural

gas consumed in the United States. We use it as feedstock, sometimes called a raw

material, for some of the most basic building blocks in chemistry—ethylene, for instance—and for other critical production pathways like ammonia.

We also use it to efficiently and in an environmentally sound manner generate

electricity and steam which, in turn, are used in the production of caustic soda and

chlorine, one of the world’s most versatile and beneficial products of chemistry.

When chlorine is joined with natural gas derivatives, it appears in everything from

contact lenses to prosthetic devices to computers. Chlorine and caustic soda combine

to bleach paper white and are found in the bleaches used in our homes.

For feedstock and generation purposes, industry in Louisiana uses nearly one trillion cubic feet of natural gas a year. And this does not include the natural gas used

by public utilities that provide us with huge blocks of electricity.

As I mentioned earlier, natural gas is used as a raw material or feedstock for consumer product building blocks. In this context, natural gas is like wheat and flour

are to a bakery shop. A baker makes bagels, bread, rolls and, yes, Mardi Gras King

Cakes from his raw materials. From derivatives of natural gas, industry makes dinnerware; auto parts; furniture; foam insulation; appliances; pens; pencils; pipe;

paints; food wrap; roofing; house siding; safety glass; detergents; rocket fuel; CDROMs; and just about everything else from drilling mud conditioners to life-saving

pharmaceuticals.

And then there is ammonia, one of the most critical products that comes from natural gas. This portion of my testimony addresses the concerns of the Louisiana Ammonia Producers. This is a group of seven companies that operate eight facilities

in Louisiana. They produce 40 percent of the ammonia consumed in the United

States. Eighty percent of that ammonia is used for fertilizer that farmers apply to

provide food and fiber to the United States and to the world.

The high demand for natural gas that has led to high natural gas prices has been

devastating to the ammonia industry this winter.

One of our processing plants at CYTEC makes anhydrous ammonia which in itself

is a raw material for the manufacture of several specialty chemicals produced on

the site I manage. Therefore I am very familiar with this segment of the industry.

When producers purchase natural gas to make ammonia, it is measured in British

Thermal Units, or BTUs. As you are aware, the price of natural gas went from approximately $2 per million BTU one year ago to around $10 per million BTU this

past December. In other words, the price of our basic raw material more than quadrupled within a year.

Natural gas makes up over 80 percent of the cost of making ammonia, and this

does not include the additional costs associated with the purchase of gas or public

power for electricity. There was simply no way that these higher costs could be absorbed or passed along in higher fertilizer prices.

As a direct result of high natural gas prices, one Louisiana ammonia plant closed

in the latter part of 2000. In addition, all but two of Louisiana’s eight remaining

ammonia facilities were completely idled for much of December, all of January and

part of February. The two that continued to operate did so at reduced production

levels. Future construction plans at these facilities have also been put on hold.

When our plants reduce production or shut down completely our employees and

their communities suffer economically. Beyond this, however, is the problem these

curtailments portend for our nation’s farmers who may face shortages of... and high

prices for...fertilizer. These costs will invariably reverberate in the American economy and mean higher prices for essential foodstuffs.

Natural gas prices have declined to $5 to $6 per million BTU recently and four

of our ammonia producers have resumed partial production. The two that continued

producing are now near full capacity. One of our members continues to be completely shut down.

We have reopened to help meet farmers’ spring needs for fertilizer; however, natural gas is still around three times the cost of gas prices last year, and the future

remains guarded.

110

While this winter has been a terrible time for the ammonia industry, we are deeply concerned about what will happen to natural gas prices during the heat this summer and the cold next winter. Already, we are anticipating plants reducing production with some additional shutdowns during the summer months.

There is continuing concern in other chemical sectors as well. Polyvinyl chloride

producers in Louisiana, for example, have either curtailed production because of

high gas prices or are considering do so.

Without a reliable and stable supply of natural gas at a reasonable price, Louisiana’s chemical industry cannot stay globally competitive. This is especially true

when foreign governments subsidize natural gas inputs into their production processes and are able to export commodities to the US priced well below our manufacturing costs.

We ask you to develop an energy policy that recognizes it is in the national interest to place a high priority on natural gas by:

First, acknowledging the essentiality of natural gas as a feedstock, raw material,

and building block that is critical to the business of chemistry and to the American

economy; and

Second, encouraging domestic exploration in previously untapped areas to enable

our competitive market system to work, thus assuring an abundant supply of natural gas at a rational price; and

Third, and for the longer term, creating Regional Economic Clusters. These clusters would fully develop and utilize local and regional natural resource bases so as

to protect our local economies and employment and our national economic, agricultural and defense interests by leveraging technological capabilities to assure global

competitiveness and the effective investment of capital.

Thank you for your attention, and I will answer any questions you might have

at the appropriate time.

Mr. BARTON. Thank you, Mr. Gill.

Last, but certainly not least, we want to welcome Mr. Patricio

Silva who is a Project Attorney for the Natural Resources Defense

Council. And we give you the award for looking the sharpest at 5

o’clock in the afternoon. I don’t know how you do that, but you look

like you’re fresh and ready to go. So we put your statement in the

record in its entirety and we welcome you to elaborate on it for 6

minutes.

STATEMENT OF PATRICIO SILVA

Mr. SILVA. Mr. Chairman, thank you for the opportunity to appear today and I’m sure to the benefit of everyone and their relief

as well, I’m going only going to take about two or three.

I am the Midwest Activities Coordinator for the Natural Resources Defense Council and my testimony or my remarks will address the contribution natural gas can make to an environmentally

and economically sound national energy policy. I’m also the co-author of NRDC’s recently released energy report, ‘‘A Responsible Energy Policy for th 21st Century’’ available on our website and attached for the record which details what we regard as a sensible,

sustainable, national energy strategy.

The Natural Resources Defense Council is a national nonprofit

organization of scientists, lawyers and environmental specialists

dedicated to protecting public health and the environment. Founded in 1970, NRDC serves more than 400,000 members.

Of the three fossil fuels that dominate the U.S. energy market,

natural gas is by the far the cleanest burning fuel. It is therefore

a key part of NRDC’s energy policy—the bridge to greater reliance

on cleaner and renewable forms of energy.

But natural gas is not sufficiently clean to be considered the

long-term answer to America’s energy needs. In particular, exploVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00114 Fmt 6633 Sfmt 6602 E:\HEARINGS\71501 pfrm04 PsN: 71501
111

ration and production of natural gas can cause substantial and irreversible harm to sensitive ecosystems.

Increased energy efficiency in homes and factories not only would

lower consumers’ energy bills, it would free up large amounts of

natural gas to help meet the needs of new highly efficient combined-cycle—combustion and steam turbine—power plants. Stronger and better-enforced building codes augmented by tax incentives

for constructing buildings that exceed code requirements would pay

a double dividend: lowering heating and electric bills, and providing for less pollution. For example, tax incentives for the construction of energy efficient buildings and for manufacturing energy-efficient heating and water-heating equipment could save approximately 300 trillion cubic feet of natural gas over a 50-year period.

It’s important to point out that with natural gas that the issue

is less about the need to find new supplies than the need to develop

infrastructure to deliver existing supplies to market. Development

of a safe, comprehensive pipeline infrastructure is critical. NRDC

believes that pipelines should be constructed and operated in an

environmentally sensitive manner with strong safety measures and

oversight whenever possible along existing routes. For example,

plans to construct an offshore pipeline off the Arctic National Wildlife Refuse coastal plain should be rejected. Instead, if Prudhoe Bay

gas supplies are needed to serve the markets in the lower 48

States, any Prudhoe Bay natural gas pipeline should follow the

Trans-Alaskan Pipeline System and the Alaska-Canadian Highway

right-of-ways; undergo a thorough, new environment impact statement review; comply with all U.S. and Canadian environmental

laws and incorporate the best pipeline safety and environmental

measures.

Despite assertions from drilling proponents, it is not necessary to

drill in sensitive areas to meet America’s energy needs. For example, industry is pressing to drill in sensitive areas of the Outer

Continental Shelf, including offshore Alaska, the eastern Gulf of

Mexico and areas where a moratorium on drilling has been in place

for many years. But such drilling is unnecessary because 70 percent of the nation’s estimated undiscovered economically recoverable Outer Continental Shelf oil and gas is located outside of these

areas.

In particular, the Central and Western Gulf of Mexico contains

some of the largest reserves and there are no restrictions on exploration or leasing in those areas.

Domestic natural gas has rebounded from its historic lows in

early 1999 as earlier testimony has indicated. Rising natural gas

prices are driving the renewed interest in natural gas exploration

in existing production regions, in Oklahoma, Texas and Kansas.

What we hear from the industry time and again is that shortages

of skilled labor and a reluctance to invest in new drilling equipment is currently one of the main constraints on increased natural

gas production. This indicates that access to public land is not necessarily a chief or principal constraint.

One of the areas of highest concern for NRDC are some of the—

excuse me.

I’d just like to actually wrap up. Natural gas——

112

Mr. BARTON. You’re doing real good and you’re the last one,

so——

Mr. SILVA. Okay, let me go back. Remember, you asked me to do

this.

Mr. BARTON. I know. We want a complete record and you’ve been

a very patient person.

Mr. SILVA. Natural gas production on some public lands will continue to be necessary, but some areas within the Federal public

land system merits special protection. Existing protections for

areas such as the Rocky Mountain Front and wild National Forest

roadless areas should be maintained. Other unique and irreplaceable areas also merit protection, even though they are currently

open to production.

Most onshore and offshore Federal public land is the property of

all Americans and are managed by the U.S. Forest Service and the

Bureau of Land Management and the Minerals Management Service. Despite assertions to the contrary, onshore and offshore Federal public lands being closed, almost 95 percent of Federal public

lands in the Rocky Mountains managed by the Bureau of Land

Management are open today to exploration and production leasing.

Similarly, more than 80 percent of estimated undiscovered economically recoverable offshore gas resources are open to exploration. Few Federal onshore lands are off limits to any harmful activity, including oil and gas leasing and development. Many have

already been leased and many are being developed.

I’ll wrap it up right there.

[The prepared statement of Patricio Silva follows:]

PREPARED STATEMENT OF PATRICIO SILVA, PROJECT ATTORNEY, NATURAL RESOURCES

DEFENSE COUNCIL

KEY RECOMMENDATIONS:

• Maximize the benefits of existing natural gas supplies by increasing efficiency:

provide tax incentives for the construction of energy-efficient buildings and for

manufacturing energy-efficient heating and water-heating equipment. • Develop and maintain infrastructure to deliver gas supplies: adopt a comprehensive pipeline approach ensuring that pipelines are constructed and operated in

an environmentally sensitive manner, with strong safety oversight, full compliance with all environmental laws and, whenever possible, along existing routes. • Reject plans to construct an offshore pipeline along the Arctic National Wildlife

Refuge coastal plain. • Plan an Alaska gas pipeline if needed to deliver Prudhoe Bay gas to the lower

48 states that follows the Trans-Alaska Pipeline System and the Alaska-Canadian Highway right-of-ways; complies with all U.S. and Canadian environmental laws; has a thorough, new environmental impact statement; and incorporates the best pipeline safety and environmental measures. • Do not drill in sensitive offshore areas, including the moratorium areas, off Alaska

and in the eastern Gulf of Mexico. • Maintain existing protections for sensitive onshore public lands and extend protection to other special places.

My name is Patricio Silva, and I represent the Natural Resources Defense Council, where I am the Midwest Activities Coordinator on energy and air quality matters. Thank you for the opportunity to appear before you today. My testimony will

address the contribution that natural gas can make to an environmentally and economically sound national energy policy.

I have been active on national energy policy issues for over seven years. Recently

I have been involved with the siting of natural gas-fired combined cycle combustion

turbines power plants and natural gas pipeline expansions across the United States.

I am also co-author of NRDC’s recently released energy report, ‘‘A Responsible Energy Policy for the 21st Century,’’ available on our website www.nrdc.org and attached for the record, which details what we regard as a sensible and sustainable

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1 Interlaboratory Working Group, Scenarios for a Clean Energy Future (Oak Ridge, Tennessee;

Oak Ridge National Laboratory and Berkeley, California, Berkeley National Laboratory (ORNL/

CON-476, LBNL-44029)) (November 2000). The ‘‘Advanced’’ electricity scenario shows total gas

demand increasing from current levels of about 22 Tcf to 26 Tcf in 2010, while total CO2 emissions are reduced. 2 John Schuenemeyer, USGS, Assessment Results, The Oil and Gas Resource Potential of the

Arctic National Wildlife Refuge 1002 Area, Alaska. USGS Open File Report 98-34 (1999). Chapter RS Table RS14. 3T.J. Glauthier, deputy secretary of energy, testimony before the Senate Committee on Energy

and Natural Resources, September 14, 2000.

national energy strategy. I hold a bachelor’s degree in government from Colby College and a juris doctor from the University of Arizona College of Law.

The Natural Resources Defense Council is a national nonprofit organization of scientists, lawyers, and environmental specialists, dedicated to protecting public health

and the environment. Founded in 1970, NRDC serves more than 400,000 members

from offices in New York, Washington, Los Angeles, and San Francisco.

Of the three fossil fuels that dominate the U.S. energy market, natural gas is by

far the cleanest burning fuel. It is, therefore, a key part of NRDC’s energy policy—

the bridge to greater reliance on cleaner and renewable forms of energy.

MANAGING SUPPLY BY REDUCING DEMAND

But natural gas is not sufficiently clean to be considered the long-term answer

to America’s energy needs. In particular, exploration and production of natural gas

can cause substantial and irreversible harm to sensitive ecosystems. Increased energy efficiency in homes and factories not only would lower consumers’ energy bills;

it would free up large amounts of natural gas to help meet the needs of new highly

efficient combined-cycle (combustion and steam turbine) power plants. Stronger and

better-enforced building codes augmented by tax incentives for constructing buildings that exceed code requirements would pay a double dividend: lower heating and

electric bills, and less pollution. For example, tax incentives for the construction of

energy efficient buildings and for manufacturing energy-efficient heating and waterheating equipment could save 300 Tcf of natural gas over 50 years.1

INFRASTRUCTURE ISSUES

It is important to point out that with natural gas the issue is less about the need

to find new supplies, than the need to develop infrastructure to deliver these supplies to market.

Increasingly, it is getting the existing gas supplies to the market that is the biggest challenge. Development of a safe, comprehensive pipeline infrastructure is critical. NRDC believes that pipelines should be constructed and operated in an environmentally sensitive manner, with strong safety measures and oversight, and,

whenever possible, along existing routes. For example, plans to construct an offshore

pipeline off the Arctic National Wildlife Refuge coastal plain should be rejected. Instead, if Prudhoe Bay gas supplies are needed to serve markets in the lower 48

states, any Prudhoe Bay natural gas pipeline should follow the Trans-Alaska Pipeline System and the Alaska-Canadian Highway right-of-ways; undergo a thorough,

new environmental impact statement; comply with all U.S. and Canadian environmental laws; and incorporate the best pipeline safety and environmental measures.

EXISTING SUPPLY

Despite assertions from drilling proponents, it is not necessary to drill in sensitive

areas to meet America’s energy needs. For example, industry is pressing to drill in

sensitive areas of the Outer Continental Shelf, including offshore Alaska, the eastern Gulf of Mexico, and areas where a moratorium on drilling has been in place for

many years. But such drilling is unnecessary because 70 percent of the nation’s estimated undiscovered, economically recoverable Outer Continental Shelf oil and gas

is located outside of these areas.

Some have also suggested that natural gas production is a reason to drill in the

Arctic National Wildlife Refuge. In reality, industry interest in the Artic Refuge is

driven by its desire to produce oil, not gas. The Arctic Refuge is estimated to contain

less than 7 Tcf of natural gas resources; about a three-month supply by the time

the resources could be developed.2 By comparison, the Prudhoe Bay production area

is estimated to contain 32 Tcf to 38 Tcf of natural gas resources.3 Gas produced in

Prudhoe Bay is currently reinjected because there is no way to transport it to market. If a natural gas pipeline were built to connect Prudhoe Bay to the lower 48

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4 Energy Information Administration, Annual Energy Outlook 2001, DOE/EIA-0383(2001) (December 2000), pp. 30-32. 5 Jim Yardley, ‘‘Oil Patch Comes To Life As Natural Gas Prices Climb,’’ New York Times, December 16, 2000 pp. A1, A16. In December 2000 some 1,090 drilling rigs were reported in service, with more than 800 drilling rigs exploring for natural gas, a significant increase over a year

ago when fewer than 400 drilling rigs were reported in service, but still modest in comparison

to the 1970s and 1980s when more than 4,500 drilling rigs were reported in service. 6The Bureau of Land Management is responsible for administering oil and gas exploration

and production leasing on all onshore BLM lands, while the Mineral Management Service of

the Department of Interior manages oil and gas leasing on the outer continental shelf surrounding the US coastline. They are separate sections of the Department of Interior. 7The Rocky Mountain region consists of Colorado, Montana, New Mexico, Utah and Wyoming—the five Western states that are significant oil and gas producers.

states it would take at least 30 years before all of the natural gas could be brought

to market.

Domestic natural gas exploration has rebounded from historic lows in early 1999,

when 371 natural gas drilling rigs were reported in service as wellhead prices fell

below $2 per Tcf. As wellhead gas prices recovered, and then doubled, natural gas

exploration surged; 840 natural gas drilling rigs were reported in service in November 2000.4 Rising natural gas prices are driving the renewed interest in natural gas

exploration in existing production regions in Oklahoma, Texas and Kansas.5 Shortages of skilled labor and reluctance to invest in new drilling equipment currently

are limiting natural gas production, indicating that access to public lands is not a

constraint.

Most onshore and offshore federal public lands, the property of all Americans, are

managed by the U.S. Forest Service, the Bureau of Land Management and the Minerals Management Service.6 Despite oil industry assertions that onshore and offshore federal public lands are closed to exploration and production of oil and natural

gas, 95 percent of federal public lands in the Rocky Mountain region managed by

the Bureau of Land Management are open to exploration and production leasing.7

Similarly, more than 80 percent of estimated undiscovered, economically recoverable offshore gas resources are open to exploration. Few federal onshore lands are

off limits to any harmful activity, including oil and gas leasing and development.

Many have already been leased and developed.

SPECIAL PLACES AT RISK IN THE WESTERN UNITED STATES

The areas of focus for natural gas exploration in the lower 48 states onshore include the Rocky Mountain region, where in addition to reserves associated with oil

deposits, unconventional resources such as tight sands and coalbed methane are attracting particular attention. The Bureau of Land Management, as of July 2000,

had issued 12,000 drilling permits for coalbed methane exploration in the Wyoming

Powder River Basin to 112 companies, with 6,000 wells drilled and 2,500 in production. This amount of activity significantly exceeds forecasts for coalbed methane exploration and production. According to a 1995 BLM forecast, approximately 5,000

coalbed methane exploration wells would be drilled; two years ago the forecast

jumped to 10,000; and last year, to 15,000. By mid-1999, the forecast hit 30,000,

and, by the spring of 2000, 50,000 to 70,000 wells were projected for the Powder

River Basin on private, state and federal lands.

When widespread oil and gas leasing occurs in the Rockies, the result is heavyduty industrialization. Well fields, which can cover extensive acreage, are accompanied by a dense web of power lines, pipelines, waste pits, and new or upgraded

roads, along with processing plants and other production facilities. All this activity

displaces deer, antelope and other wildlife species from their native ranges and has

ruined wilderness values on millions of acres. Every year, visibility is significantly

impaired in many places on many days by emissions from industrial operations.

These same emissions have contributed to acidification of sensitive bodies of water.

Natural gas production on some public lands will continue to be necessary, but

some areas within the federal public lands system merit special protection. Existing

protection for areas such as the Rocky Mountain Front and wild National Forest

roadless areas should be maintained. Other unique and irreplaceable areas also

merit protection, even though they are currently open to exploration and production.

For example, hidden away in the southwestern part of Wyoming, the Red Desert

boasts a unique and spectacular landscape—one of the most remarkable in North

America. The area has stunning rainbow-colored rock formations, towering buttes,

prehistoric rock art and outstanding wild lands. It is home to the largest pronghorn

antelope herd in the lower 48 states as well as a rare desert elk herd. For centuries,

the Red Desert has been a sacred place of worship for the Shoshone and Ute tribes

and it contains remnants of the Oregon and Mormon Pioneer trails. Oil wells, pipeVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00118 Fmt 6633 Sfmt 6621 E:\HEARINGS\71501 pfrm04 PsN: 71501
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8 U.S. Department of the Interior, Minerals Management Service, Outer Continental Shelf Petroleum Assessment 2000 (2000) p. 5, and Gulf of Mexico Assessment Update. Assumes mean estimates of undiscovered, economically recoverable resources at $18/barrel oil, $2.11/Tcf gas.

lines, excessive roads and other industrial facilities already mar some of the surrounding desert land. In response to industry applications to lease, the Interior Department recently committed the BLM to develop a proposal that focuses on protecting the area’s outstanding natural, cultural and aesthetic wonders.

Another example, Utah’s fabled red rock country, is one of the last unspoiled wilderness areas outside of Alaska. Its red-hued massive cliffs, arches, towers and

other rock formations support bighorn sheep, mountain lion, pronghorn antelope,

peregrine falcons, golden eagles and other wildlife species as well as ancient Native

American ruins. Last year BLM attempted to lease more than 30,000 acres of sensitive, irreplaceable wild lands in red rock country—bringing them closer to industrialization and the certain destruction of their wilderness, wildlife and other values.

Still another special place is the area in and around Vermillion Basin in northwest Colorado—one of the state’s most stunningly beautiful and isolated regions. Its

wild landscape is dotted with banded cliffs, desert mountains and rugged badlands.

The area is surrounded by oil and gas development that threatens to encroach into

Vermillion Basin. Despite the passage of time, the area looks much as it did when

the Ute Indians’ ancestors first hunted and lived there. If oil and gas development

pressures are permitted to intrude further on the unique de facto preserve, the landscape will be changed forever.

OFFSHORE LEASING, EXPLORATION AND DEVELOPMENT

From Big Sur to the spectacular coast of Maine, to the Florida Keys and back to

Alaska’s Bristol Bay, some of America’s most important national coastal treasures

have been protected so far from offshore oil and gas development by Congress and

by two presidents—George H.W. Bush and Bill Clinton.

Large reserves of natural gas are located in the federal waters of the central and

western Gulf of Mexico, which are open to oil and gas leasing. This area is estimated to contain 60 percent of the undiscovered economically recoverable oil resources and 80 percent of the undiscovered economically recoverable gas resources

estimated to be available in the entire United States Outer Continental Shelf (OCS),

according to the Minerals Management Service.8 Thus, protecting sensitive offshore

areas, including the moratorium areas, offshore Alaska and the eastern Gulf of Mexico still leaves the vast majority of the nation’s Outer Continental Shelf oil and gas

available to the industry.

Some argue that natural gas development on the Outer Continental Shelf should

be promoted, including in the moratorium areas, most notably off the Atlantic and

the west coast of Florida. They argue that the risk of oil spills is negligible, and

that environmentally sound development can take place. Their argument ignores

the reality that oil spills are not the only environmental concern related to OCS development. Offshore gas development, like oil development, causes substantial environmental damage. Furthermore, leases for natural gas exploration also could open

the door to oil development.

Beginning in the George H.W. Bush administration and continuing throughout

the 1990s, the Interior Department emphasized the need to proceed on a consensus

basis with OCS activities. NRDC strongly agrees with this approach and submits

that consensus has been clearly established on the appropriateness of OCS activities

in most areas of the country. This consensus has been reflected in the consistently

broad, bipartisan support for the existing congressional moratoria on leasing outside

the central and western Gulf of Mexico. The moratoria have been endorsed by an

array of elected officials from all levels of government and diverse political persuasions, from former Gov. Christine Todd Whitman of New Jersey to Gov. Jeb Bush

of Florida and Gov. Gray Davis of California.

Political support for the moratoria in the affected states stems from concern over

the severe environmental, social, economic and cultural damage associated with offshore oil and gas development, including:

Onshore damage: The onshore infrastructure associated with offshore oil or gas

cause significant harm to the coastal zone. For example, OCS pipelines crossing

coastal wetlands in the Gulf of Mexico are estimated to have destroyed more coastal

salt marsh than can be found in the stretch of land running from New Jersey

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9 Boesch and Rabalais, eds., ‘‘The Long-term Effects of Offshore Oil and Gas Development: An

Assessment and a Research Strategy.’’ A Report to NOAA, National Marine Pollution Program

Office at 13-11. 10MMS, 2000. Gulf of Mexico OCS Oil and Gas Lease Sale 181, Draft Environmental Impact

Statement (DEIS), pp. IV-50. 11MMS, 2000. Gulf of Mexico OCS Oil and Gas Lease Sale 181, Draft Environmental Impact

Statement (DEIS), p. IV-50. 12 Id. 13 Id., p. IV-32. 14 Id., p. IV-32-33. 15 Id., p. IV-40.

through Maine.9 Moreover, the industrial character of offshore oil and gas development is often at odds with the existing economic base of the affected coastal communities, many of which rely on tourism, coastal recreation and fishing.

Oil spills: If offshore areas are leased for gas exploration there is always the possibility that oil also will be found, creating the risk of oil spills. According to MMS

statistics, some 3 million gallons of oil spilled from OCS oil and gas operations in

73 incidents between 1980 and 1999.10 Oil is extremely toxic to a wide variety of

marine species, including marine birds, mammals and commercially important species of fish. In the wake of the devastating Exxon Valdez oil spill, scientists at the

National Marine Fisheries Service’s Auke Bay Lab found that concentrations of

polycyclic aromatic hydrocarbons (PAH)—the most toxic component of oil—as low as

1 part per billion were toxic to juvenile pink salmon.

Water pollution: Drilling muds are used to lubricate drill bits, maintain downhole

pressure, and serve other functions. Drill cuttings are pieces of rock ground by the

bit and brought up from the well along with used mud. Massive amounts of waste

muds and cuttings are generated by drilling operations—an average of 180,000 gallons per well.11 Most of this waste is dumped untreated into surrounding waters.

Drilling muds contain toxic metals, including mercury, lead and cadmium. Significant concentrations of these metals have been observed around drilling sites.12

A second major polluting discharge is ‘‘produced water,’’ the water brought up

from a well along with oil and gas. Offshore operations generate large amounts of

produced water. The Minerals Management Service estimates that each platform

discharges hundreds of thousands of gallons of produced water every day.13 Produced water typically contains a variety of toxic pollutants, including benzene, arsenic, lead, naphthalene, zinc and toluene, and can contain varying amounts of radioactive pollutants. All major field research programs investigating the fate and effects of produced water discharges have detected petroleum hydrocarbons, toxic metals and radium in the water column down-current from the discharge.14

Air pollution: Drilling an average exploration well generates some 50 tons of nitrogen oxides (NOX), 13 tons of carbon monoxide, 6 tons of sulfur dioxide, and 5 tons

of volatile organic hydrocarbons. Each OCS platform generates more than 50 tons

per year of NOX, 11 tons of carbon monoxide, 8 tons of sulfur dioxide and 38 tons

of volatile organic hydrocarbons every year.15

CONCLUSION

Natural gas is the cleanest burning fossil fuel. NRDC supports increased utilization of natural gas in high efficiency combined combustion turbine for the generation of electricity. Energy efficiency should be the primary source of this incremental

natural gas supply to the power sector. NRDC supports responsible expansion of

natural gas pipeline infrastructure where needed. NRDC opposes, and sees no need

for, natural gas development in sensitive areas.

Mr. BARTON. Thank you. You’re very conscientious. You hit it

right on the button.

The Chair is going to recognize himself for 5 minutes in the

question period and we are going to hold everybody to 5 minutes,

but if you want to ask additional questions, we’ll certainly try to

do that.

My first question is a general question. According to EIA numbers that I have, we are importing about 20 percent of our natural

gas. How many people think that it would be a good policy to adopt

a goal of being self-sufficient in terms of natural gas production

and consumption? In other words, that we actually produce the

natural gas that we consume in this country?

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Who wants to take a shot at that? Ms. Luxbacher?

Ms. LUXBACHER. I’ll be glad to.

Mr. BARTON. Just turn that on.

Ms. LUXBACHER. Just turn it on? We’re importing, as you know,

natural gas from our neighbor to the north, Canada, so we have

very good relations.

Mr. BARTON. And LNG.

Ms. LUXBACHER. And then a small bit of LNG that comes obviously from many places around the world. So directionally, there’s

a cost if you say I want to become 100 percent energy efficient and

produce all of our natural gas from here. We in the base case have

a land access issue.

So generally, we would say that’s not the goal. The goal should

be to have policies that promote and allow us to produce economically our resources here in this country and to work with our

neighbors to the north and potentially to the south on increasing

the gas flow back and forth between the two countries, because

Canada now and into the future is going to be a very viable supply

for this country.

Mr. BARTON. Mr. Jordan, do you want to—— Mr. JORDAN. Yes sir. I believe that we all recognize that we’re

now importing over 55 percent of our oil and while I believe that

we have to look at our gas situation as a North American box, so

to speak, so that we’re talking about both Canada and the United

States and of course, as well as Alaska, lower 48 and—— Mr. BARTON. That just means the House is going out of Session.

Mr. JORDAN. Thank you. I think it’s important that we adopt

long-term policies that encourage getting our supplies mainly from

that North American area. I think that while we obviously have to

have the LNG we have today and I know there’s some LNG

projects that are already now on the books and they’re being financed, probably as we speak, I’m sure some of those are going to

be necessary, but I would hate to see the day that our domestic industry would be saddled for natural gas like we are for oil, so that

I think that it’s very important and we’re so far from doing it now,

I think it’s very important that we emphasize North America to the

extent possible.

Mr. BARTON. Without answering the question whether we should

do it as a national policy, if it were adopted as policy to be selfsufficient in natural gas, could we do it?

Mr. JORDAN. I believe that the National Petroleum Council study

shows us that we could do it and I think the industry studies show

that we could do it, but we’d have to have the right kind of——

Mr. BARTON. But we couldn’t in oil.

Mr. JORDAN. That’s right.

Mr. BARTON. We just don’t have the capability in oil, but the

Panel would agree we do. Whether we should or not is an open

question, but that we could be self-sufficient in natural gas?

Mr. JORDAN. It looks to us like we could. Now there’s better experts than I am.

Mr. BARTON. Now on the economics of the Alaska Gas Pipeline,

my guess would be those that support it would want to do a pipeline that was actually a pipeline all on land and we didn’t have to

liquify at Valdez and then transport that. Can we do a natural gas

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pipeline from Alaska that is totally—well, obviously, we can’t, be

totally on U.S.—we have to go through Canada at some point in

time.

Is the route that was certificated in the 1970’s, is that the most

economic route or would we want to look at a different route that

would go more toward the east through a larger part of Canada?

Who wants to answer that question? Ms. Luxbacher?

Ms. LUXBACHER. I’ll be glad to answer that. Right now we have

a joint producer group in Alaska looking at that very question,

what is the most economic pipeline that can be built from the Alaskan North Slope to bring that gas in through Canada and then into

U.S. markets. And not only the most economic, but along with the

least environmental impact, the goal being to deliver the gas competitively into the marketplace. And it can come over land. There’s

two primary routes, a southern route that goes south through Alaska and that’s the Alaskan Highway route and then there’s a northern route that goes through Beaufort and down through the

McKinsey Valley of Canada.

Mr. BARTON. And if you choose a northern route, then we’d have

to do additional legislation or an additional environment impact

statement?

Ms. LUXBACHER. It’s our understanding at this time that that

would not be necessary. FERC has indicated and I think Chairman

He ́bert’s comments are they believe they have the ability and are

willing to look at that route also.

Mr. BARTON. My time has expired. I’ve got one more question.

According to EIA, the next 20 years we’re going to need 393

gigawatts of additional generating capacity for electricity in this

country. I think a gigawatt is a thousand megawatts. Is that right?

So I tried to convert that, gigawatts to megawatt power plants

and I came up that we need, if you assume a 500 megawatt power

plant, we need to build 800, approximately 800 500-megawatt

power plants which is approximately 40 per year. EIA says that 92

percent of those are going to be fired by natural gas.

Now EIA may be right. EIA may be wrong, but their base case

is nuclear power is not an option and coal is not an option because

of environmental concerns. But assuming that EIA is right, do we

have the production capacity in this country to produce enough additional natural gas to fire 40 additional 500-megawatt natural gas

combined cycle power plants per year each year for the next 20

years?

Who wants to answer that question? Mr. Jordan?

Mr. JORDAN. I again refer to the National Petroleum Council’s

study. I believe that if we had the right kind of policy—what we’ve

done is we put all our eggs in the natural gas basket and we’ve

closed the lid of the basket so that we do not—so that we’re not

able to access some of the larger areas that we need to access and

it’s a multitude of—it’s not one policy or one decision that locks us

off from that acreage. It’s a combination of endangered species

issues, roadless policies, monument designations, etcetera. All

these decisions have blocked us off from that. We can’t do it we

don’t make the right kind of balance. And the thing that I think

we have to change our philosophy on is we can, we sent people to

the moon, etcetera. We’re a can do country. We can both produce

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the gas that we have and protect the environment to the extent

even further than advocates want to.

Mr. BARTON. It just seems that like if EIA is even close and

they’re a very conservative agency in their assumptions that we’re

sucking up all our natural gas for power generation and not leaving any for Mr. Littlefair to power his vehicles. We’re not leaving

any for Mr. Hilliard to heat his homes and cook their food and

we’re not leaving any for Mr. Gill to use in his ammonia process.

I mean we really need to think through this because that’s a lot

of electricity and saying that natural gas is going to fire it all, we

have the question, can we produce it in an environmentally responsible way that Mr. Silva is concerned about. There’s just a lot of

issues here.

I’m going to recognize Mr. Boucher for 5 minutes.

Mr. BOUCHER. Thank you very much, Mr. Chairman. I want to

join with you and simply say a word of welcome to this Panel and

to thank each of you for your patience and for taking the time to

educate this committee. You’ve done an excellent job and the material you’ve presented to us will be extremely helpful as we evaluate

this set of issues.

Ms. Campbell, I want to give you, just if you would, briefly to

recap gas prices as they stand today and according to current projections, what gas prices will be next year and perhaps through the

year 2005. They’re roughly at $5, $6, I think, at the present time

and where do you see those going over the course of the next 5

years?

Ms. CAMPBELL. The forecast for this year, 2001, is approximately $5. And then there’s a decline that’s expected for the year 2002 to about $4.50. At this point in time we do have projections for those

prices to continue to decline through the rest of the decade and

then to begin to resume a slight increase over—out to the 2020

time period.

Mr. BOUCHER. You say a decline over the balance of the decade.

That’s some number lower than $4.50.

Ms. CAMPBELL. Yes.

Mr. BOUCHER. What is the valley that you expect these prices to

achieve?

Ms. CAMPBELL. Actually, the forecast at this time sees some fall- ing to the $3 range and then resuming.

Mr. BOUCHER. What year do you expect them to reach the $3

range?

Ms. CAMPBELL. We actually expect it to reach below $3 in approximately 2004 and then to build again.

Mr. BOUCHER. Okay, why do they build again?

Ms. CAMPBELL. Well, they build again because in response partly

to the earlier comment by the Chairman, we do have a very strong

forecast for demand and increased electricity generation. We do expect that is the area in which demand will grow most and natural

gas will, I think, take a market share of approximately 36 percent

by the end of our forecast period, 2020, where it is now something

in the order of 16 percent of electricity generation. So that’s a very

strong additional source of demand.

Mr. BOUCHER. And did the Chairman correctly cite your statistic

when he said that the projection is that 90 percent of the new elecVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00123 Fmt 6633 Sfmt 6602 E:\HEARINGS\71501 pfrm04 PsN: 71501
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tricity generating capacity will be gas-fired? Is that your conclusion?

Ms. CAMPBELL. Yes, that is correct. However, I should note that

in the year 2020, I’m glad you confirmed the Chairman, in the year

2020, coal will still be our leading fuel for electricity generation.

Mr. BOUCHER. I’m sorry, will you say that again?

Ms. CAMPBELL. Coal will still be our leading fuel for electricity

generation in the year 2020.

Mr. BOUCHER. And so I guess you would say that the other 10

percent of new generating capacity is fueled by something else. Is

that coal?

Ms. CAMPBELL. Coal has a small increase in its market share as

well and I think there’s an expectation of new alternative renewable resources.

Mr. BOUCHER. I’m a little bit surprised at your pessimism with

regard to coal as a fuel for new electricity generation.

I personally know of a number of large investor-owned utilities

that are now looking very seriously at coal as the fuel for new

plants that they are planning. There are a number of independent

power producers that are now planning to build coal-fired facilities

and I think you might want to take another look at that projection

because we’re going to have a hearing on that very subject and examine coal as a fuel and I think you will see there is a considerable

body of opinion that coal is going to be a more substantial fuel for

new coal-fired, new electric-generating plants than perhaps your

numbers suggest.

Well, thank you very much. I appreciate your testimony today.

Mr. Hilliard, I want to give you an opportunity to talk a little

bit more about the concerns that you have that perhaps the significant increase in gas prices has not been driven entirely by the legitimate supply and demand equation. As you have suggested in

your testimony that perhaps there’s been some market manipulation and you’ve suggested a course of inquiry for this committee to

examine whether or not that manipulation is taking place and we

appreciate that suggestion.

Let me ask you if you have any evidence or examples or if you

want to even talk about hearsay, you know, this is not a court,

you’re entitled to do that. You’re not under oath.

We would be interested in knowing what you believe may be

happening in the market as a way, perhaps, to enlighten the inquiry that we could undertake.

Mr. HILLIARD. I know that when the AGA, for instance, for an

example, when you see an AGA storage report come out and it

shows us that we have very little gas in storage and if the weather

looks like we’re able to put gas into storage, the market goes up.

And if we see the weather turning warm where we’re looking at,

maybe some electric generation going on, we see the market pricing

go up. And so those are some of the things that we see that lead

us to believe that there might be some market manipulation going

on. And certainly an increase in price from what we’ve seen, $2.50

to $10 is more than, certainly much, much more than it takes to

see the drilling rig activity going. In fact, we were seeing drilling

activity go at $4 and $5, turn on real strong.

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Mr. BOUCHER. So your evidence is really more anecdotal and

you’re just suggesting that perhaps there’s a problem. You don’t

have any direct allegation of a problem?

Mr. HILLIARD. I don’t have a direct allegation, but I think that’s

something that we need to look at, that Congress needs to look at

to make sure that we’re not carrying forward a problem in the national energy policy. We need to understand what happened in the

marketplace and if there was some manipulation in the market, we

need to fix that before we carry it forward in a national energy policy.

Mr. BOUCHER. Thank you, Mr. Hilliard. Thanks, Mr. Chairman.

Mr. BARTON. Before we recognize Mr. Bryant, Mr. Jordan, if you

came back out of this hearing and went back to Ohio and were

fired up to drill more natural gas wells, how long would it take you

to get a rig to drill an existing site? If you called your contractor

tomorrow and said, I want a rig, how long would it take?

Mr. JORDAN. Unfortunately, I’m not characteristic. Ohio is a very

small oil and gas patch and we have a fairly good situation. There

aren’t very many people drilling and I could probably get a rig

probably within 60 days.

Mr. BARTON. In Texas, it’s about 6 months right now, 4 to 6

months.

Mr. JORDAN. I realize that and I’ve heard that from our members. And we’ve drilled——

Mr. BARTON. So I should come to Ohio and rent your rig up there

and then haul it down to Texas because I could get it in 2 weeks.

Mr. JORDAN. I wouldn’t be surprised. But it varies. It’s very localized and it depends on where your rigs are and I know how bad

it is for people like in Midland and East Texas where there’s a lot

of activity and I’ve heard lots and lots of——

Mr. BARTON. And Louisiana.

Mr. JORDAN. And Louisiana, that’s right.

Mr. BARTON. I know Mr. Hilliard is not implying that people

would withhold rigs from the market, but it’s very difficult now because prices were so low, now that they’re back up, people want to

drill sites can’t get the equipment and I know one site in Louisiana

that somebody’s been trying to get drilled for several years and nobody was interested because of the economics. Now that the economics are right, they can’t get a rig. So it’s kind of a self-defiant

purpose.

Mr. Bryant for 5 minutes.

Mr. BRYANT. Thank you, Mr. Chairman. I too would like to follow

up with Mr. Hilliard a little bit. I don’t think there’s any question

that the long-term situation that we’re all talking about today beginning with our Chairman and the first Panel and all of you

agree, well, maybe an exception or so here, agree that long term,

our demand is going to dramatically increase and I guess how we

address that in terms of the supplies is at issue. But if I might devote a little bit of time to what Mr. Hilliard mentioned and Mr.

Boucher followed up on, I’ve had the same type of complaint from

some of the distributors back in my District about this possible manipulation and I’m just—Mr. Hilliard, your association, you’re

president of what association?

122

Mr. HILLIARD. No sir, I’m not the president. I’m just

representing——

Mr. BRYANT. Okay, how many members are in that association?

Mr. HILLIARD. There’s about 572 members of the association.

There’s about 1,000 municipal systems in the country.

Mr. BRYANT. And these are the people who distribute the gas to

the individual houses?

Mr. HILLIARD. Yes, that’s right.

Mr. BRYANT. During this time we’re talking about in December,

January, did anyone actually have a shortage or was there always

gas to purchase?

Mr. HILLIARD. I’m not aware of any shortages of firm gas, of

someone who was purchasing gas on a firm basis. I’m not aware

of any shortages of natural gas on that basis if you were willing

to pay the price.

Mr. BRYANT. That’s what I was told by one of the biggest purchasers in Tennessee that in times past, when there were shortages, they literally could not keep the gas flowing through the

pipes. But this time there was gas to be purchased, but then again

you had to pay a premium price for that.

Is anyone here familiar with an example of where there actually

was a shortage that nobody could purchase power?

Mr. Hendrix?

Mr. HENDRIX. I think in the latter part of December in the midcontinent area if you went out and tried to buy gas, it was very

difficult. You might have been able to buy it at $13 an Mcf. And

those were the initial bids that came in at the beginning of the

trading day. If you didn’t buy it on those bids, the price would

probably relax itself back down to $10, but because the people with

alternate fuel capabilities weren’t switching at the tail end of December, if we had gone into January and had the same extreme

cold that we had at the tail end of December, it probably would

have had to have been some curtailments because there just was

no gas available in the mid-continent area or at least in the Kansas

City area and that’s based on talking with the LDCs that were out

in the market every day. But it didn’t transpire and once the fuel

switching capability did start kicking in, and the weather moderated in January, we were home free.

Mr. BRYANT. I would agree, I think, with Mr. Hilliard and I don’t

know—Mr. Boucher is gone, but it’s possible that we might have

that as a future, some consideration for future hearing just to look

at that.

I think we all know how the markets work and the mercantile

exchange. Certainly I was told by someone who used to trade in

that commodity that that’s what happened in this case. He’s pretty

confident—of course, he’s not there anymore so I don’t know. Obviously, there are all kinds of other factors that figure into opinions

by people. But certainly, hopefully, just a one time situation and

I know we’re here today to talk about the bigger picture. And I was

glad to hear Mr. Boucher. I don’t have coal in my State, in Tennessee, that much, but Mr. Whitfield next to me stepped out and

he always is a defender of coal. I think again from your calculations, I think the possibility, the probability of using coal in the fuVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00126 Fmt 6633 Sfmt 6602 E:\HEARINGS\71501 pfrm04 PsN: 71501
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ture to help, I think, is perhaps underestimated and I certainly

hope so. I think coal is a very viable product, fuel for future use.

I had a question also, Ms. Campbell, for you, just for my clari- fication. I noticed in some of your numbers you had on the $9 cost

percentage on a dollar, the breakdown, like 35 percent was the cost

of the gas. Do you remember those numbers? And 47 percent was

the cost of the distributor’s tariffs and so forth and then 18 percent

was a long-haul on the dollar.

Ms. CAMPBELL. I think you’re referring to material that was prepared and presented in this brochure?

Mr. BRYANT. It could have been. It’s in a document like this in

my material.

Ms. CAMPBELL. Yes. We prepared a number of these brochures

early in the fall and have updated them accordingly, trying to determine exactly what the components of residential consumer costs

are. That may be what you’re referring to?

Mr. BRYANT. Could you explain to me? Mr. Reiten, I think is

gone, but he said, if I understood correctly, that this was kind of

a pass through for the distributors? I understand local distributors

don’t make a lot of money. They recapture some of their investment, but what is this—are they the ones that are paying, account

for 47 percent of the dollar? What is that 47 cents?

Ms. CAMPBELL. Those charges change over time. We have had to

update the estimates of exactly how much of the residential consumers bill is accountable for the commodity price versus the interstate shipping price and how much of it is from the local distribution companies charges and the taxes and things of that type.

So it has changed over the course of the last few years and in

the last year, particularly. When we did this looking at the winter

of 1999, of course, the prices of natural gas were quite low, the

commodity cost was very low. And that meant that the shipping

costs and the local distributions costs were much higher proportion

of the total cost for the consumer. But this has changed this winter. That’s what has happened.

Mr. BARTON. The gentleman’s time is expired. The gentleman

from Oklahoma, Mr. Largent is recognized for 5 minutes.

Mr. LARGENT. Thank you, Mr. Chairman. Mr. Campbell, I have

a question for you. If we were to turn back the clock to December

1999 or January 2000, what was the EIA predicting the gas, the

price of gas for February of 2001?

Ms. CAMPBELL. I need to phone a friend. Higher, but not this

high is what they advised me.

Mr. LARGENT. Give me a range, $3?

Ms. CAMPBELL. Certainly, I would have thought that it would

have been no higher than that, given what we had seen in the previous winter, this year.

Mr. LARGENT. Mr. Wadlington, I had a question for you. You

have your chart up here and we appreciate that. I guess I just need

an explanation because it seems as if there’s an apparent conflict

here because I’m reading Mr. Silva’s testimony and here he says ‘‘despite oil industry assertions that onshore and offshore Federal

public lands are closed to exploration and production of oil and natural gas, 95 percent of Federal public lands in the Rocky Mountain

region managed by the Bureau of Land Management are open to

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exploration and production leasing.’’ And that Rocky Mountain

area is in the footnotes, consists of Colorado, Montana, New Mexico, Utah and Wyoming. And yet, your chart kind of leads one to

believe that there’s 137 trillion cubic feet that is at least restricted,

if not inaccessible because of Federal regulations.

Mr. WADLINGTON. That is correct. The Rocky Mountains have

significant deposits of natural gas and the National Petroleum

Council has estimated at 137 trillion cubic feet is unavailable because of restrictions for drilling.

Mr. LARGENT. So does that mean that you just can’t drill there

or you just can’t drill there economically because of the restrictions?

Mr. WADLINGTON. It means you can’t drill there because of the

restrictions. If they remove the restrictions, you could economically

develop the gas.

Mr. BARTON. I’ve been told that in New Mexico in the San

Ducrane Basin the problem is not the drilling permit. The problem

is to build a road to the site to bring the pipe in, But the Bureau

of Land Management won’t let them build a road. So it may be

some of this is, Mr. Silva is correct and it’s not off limits for drilling

permits, but because of the various permits on transportation and

infrastructure improvement, you just can’t get those. Would that be

a possible answer?

Mr. WADLINGTON. I think it’s all of the above, would be the way

to categorize it. You have the inability to drill for environmental

reasons. You have the inability to build roads for environmental

reasons. You have——

Mr. BARTON. Because if you can’t get to it, it doesn’t matter if

you’ve got the permit to drill.

Mr. WADLINGTON. Right.

Mr. LARGENT. Mr. Silva, that would lead me to you to say

wouldn’t this statement in your testimony be a little misleading to

say 95 percent is open for drilling, but when in reality it’s open,

you can go drill there, but you can’t transport it out of the drilling

site or you can’t even get equipment to the drilling site because

there’s no roads that are allowed to be built. There’s a restriction.

As the Chairman said, you can’t even build a road to get the equipment in there. Wouldn’t that be a little bit misleading, this 95 percent figure then?

Mr. SILVA. Not in the context of the actual applicable regulations

and what a developer wants to drill in the area has to apply.

Mr. LARGENT. Wait, that sounds like a lawyer answer.

Mr. SILVA. I’m sorry, I am a lawyer.

Mr. LARGENT. I’ve met more lawyers that apologize for being lawyers, but go ahead.

Mr. SILVA. It’s that season. First of all, I’d be happy to provide

written detailed explanation from the staff that specializes in this

issue.

Mr. LARGENT. Thank you.

Mr. SILVA. But my understanding with it is that there is development on many Federal public lands and there are different sets of

regulations for National Forests Service properties and for Bureau

of Land Management. The restrictions vary depending on which reVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00128 Fmt 6633 Sfmt 6602 E:\HEARINGS\71501 pfrm04 PsN: 71501
125

gion and what the management plan status is for oil and natural

gas development.

In many cases, there are very few restrictions and I’d just like

to note on the NPC chart there, the footnote actually specifies that

approximately of that, 137 that they—31 Tcf are closed to development and then a note that 112 are available with restrictions.

Now I haven’t reviewed the NPC natural gas study, but if they’re

calling, having to file for a permit, getting it approved and then the

separate road construction permit, if they’re defining this as being

restrictions, meaning that they impede immediate access within a

60 or 90 or 120 day period, then that statement, I guess, would be

accurate, the way they put it, but if you’re actually recognizing that

there are, and this applies also to offshore leasing, most of the permits are actually handled within about 180 days.

Now whether there are ancillary permits that they have to go

through and I’m totally passing right by State and off the top of

my head, Colorado, Montana, New Mexico have quite different regulations.

Mr. BARTON. I am told and I haven’t verified this, but on Federal

lands in the west, you have to get 321 different permits. That’s a

number I’ve been told, 321. Now if that’s even half true, you know,

in a technical sense we have a lot of the sites that are accessible,

but in a real sense if you have to get that many permits and each

permit takes so many months, then they’re really not available.

Mr. LARGENT. This will be my last question too, Mr. Chairman,

but I guess that would lead me to this question, Mr. Silva, and I’d

appreciate you getting back with me on this, two things. Would you

agree and your organization agree with me that it’s permissible to

drill, but in reality you can’t get a permit to get to the drilling site,

would your organization agree that that is not accessible gas?

Second of all, would you agree that if you have to get 321 permits before you can drill that that also would be deemed

unaccessible reserves?

Mr. SILVA. Just as an aside, I would be fascinated to find out

where the 321 figure comes from because that’s—I think it’s quite

obvious that if you can’t get physical access to a lease area to get

the equipment on there. Now, I do know——

Mr. LARGENT. So you’re saying even you would think that’s not

accessible?

Mr. SILVA. That would not be accessible. I do know of regions

where there have been leases granted where there actually—the

geography doesn’t provide for a road into the area and they have

been forced to helicopter the equipment in and how they got the

gas out or oil or whether or not it was simply for purposes for drilling an exploratory well to find the periphery of a particular deposit

or for other seismic research purposes, I’m not aware. But I know

there have been a few examples of those in the literature. But certainly, in both cases, that’s not accessible.

Mr. LARGENT. Thank you. Thank you, Mr. Chairman.

Mr. BARTON. The gentle lady from California is recognized for 5

minutes.

Ms. BONO. Thank you, Mr. Chairman, and also thank you all and

the Panel for staying so long. My question is for Mr. Jordan. What

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would be the impact of cost plus price controls on the independent

producers?

Mr. JORDAN. I think we have a history. Any price controls have

a history of basically creating a shortage. We have a great deal of

history that shows us that. That’s what developed. I got to go

through the last natural gas situation back in the 1970’s where

there really truly was a shortage and was created by the price controls under the Natural Gas Act which were later rescinded.

The price controls basically stifle the very thing we have to have

which is more drilling. And what we did when price controls were

taken off back in 1978, but actually price controls had sort of

slipped away even before that, what we did was we started drilling

so many wells that we created what we called in our industry the

so-called gas bubble and that gas bubble just about killed all of us

because we essentially were, people were going broke all over the

country. And I’ll show you a graph here which shows, it’s my favorite graph because it shows that the number of so-called registered

and oil operators in this country, the people that get the permits

in Ohio, Pennsylvania, West Virginia, California, etcetera, fell from

about 13,000 in 1984 to 2,000 in 1999. The reason for this and I’m

always asked why it is, it’s mergers, acquisitions, bankruptcies and

obituaries and if our industry is so great and we’re running off

with so much money, why have we had this result? And until that

graph showed that increase and we started to drill again, and we

started to improve the number of wells drilled, this was going to

continue and that’s what created this crisis and if we had price

controls we would go right back into this same situation.

Ms. BONO. Second question also for Mr. Jordan. In your testimony you say that capital markets have not shifted to supporting

the energy sector. In your opinion, what are the reasons for this

when prices for natural gas are at an all time high?

Mr. JORDAN. What I was basically saying was that for small and

medium sized producers capital access still remains a very difficult

situation. I’m not quite sure why. For a long time it was because

the returns in our industry did not measure up to returns from

other investments, especially during the dot com period. And we

basically couldn’t get capital. Now I believe most of the time we

drill essentially off our cash-flow. The problem is that the small

and medium size producers don’t have that much cash-flow and

they often have a bigger appetite. And the little guys drill a lot of

the wildcats, even when the big guys do some great geology, they

often get the little guys to go and take the chances, ultimately to

drill those wildcat wells. And those are the people that have the

capital formation problems today, not necessarily the whole industry.

Ms. BONO. Thank you. Are there tax reforms that are specific to

marginal wells and can you explain why marginal wells operate on

a different financial basis than large producers?

Mr. JORDAN. Yes, I can. Is that addressed to me?

Ms. BONO. Yes sir, it is.

Mr. JORDAN. I welcome the opportunity. We have a lot of our reserves for old, marginal, very low producing wells in this country.

They’re very low. When prices fall to very low levels, those wells

tend to get plugged or abandoned or essentially fall into disrepair.

127

If we do not—if we have what I would call a triggered marginal

well tax credit, for instance, and there are a lot of ways you can

do it, which would only apply if the price of natural gas fell to some

relatively low level and it would essentially move to protect those

wells to keep them from being plugged prematurely because once

that old well is plugged, those reserves that remain and those wells

may produce forever. Ohio has the largest number of—of what we

call stripper gas wells of any place in the Union, so I’m very familiar with those kind of wells.

We keep them alive by tender loving care, but when times get

as bad as they were about 2 to 3 years ago, we couldn’t even, there

are just not enough economic incentives to keep the wells going. So

the reason that the margin well tax credit has been suggested as

a way to keep those wells from being prematurely plugged is because it’s about the only thing we can do to protect them.

I personally don’t like tax gimmicks to do things, but I think this

is a realistic way to protect marginal wells and for that reason I

certainly support the position of our membership that supports

that.

Ms. BONO. Thank you. Thank you, Mr. Chairman.

Mr. BARTON. That concludes our questions. I am very tempted

with this many experts and me the only one with Congresswoman

Bono to have at you again, but it’s almost 6 o’clock and you all

have planes to catch and dinner to eat.

I do want to challenge you with one thing. We’re going to do a

series of energy hearings in this subcommittee in the next 2

months and at the conclusion of that we are going to attempt to

come up with a comprehensive energy strategy in conjunction with

the Senate and the President. So I want you to go back to your associations and think through the role that natural gas should play

in a comprehensive energy strategy. Some of the questions that I

ask, should we try to become self-sufficient in natural gas production? Should we make some specific allocations for end uses? What

do we need to do in the capital market? Are speculators such a

large part of the natural gas futures market that we need to work

with the SEC and the markets to try to put some limits on who

plays in those markets?

On the environmental side, I hope our environmental community

will work with us to look at some tradeoffs here. I think you can

make an argument that the production sector is some of the most

environmentally sensitive folks in the country and if we can be met

halfway by environmental allies, we can probably come up with a

way that both sides feel that they’re in a win-win situation.

Natural gas is in the envious position as far as I know there’s

not too many folks that object to increased use of natural gas because it is an environmentally benign fuel source. We don’t have

that situation with coal. We’re going to have to work very hard to

bring coal back in a big way. We certainly don’t have that with nuclear power. We’re going to have to work very hard to bring nuclear

power in as an option. We don’t have the luxury on the oil side to

actually say okay, we want to become independent. Can’t happen.

But natural gas is the one thing that’s on the table right now, it’s

23 percent of our energy consumption. The resource base is there.

The environmental issues are much clearer and much easier to

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1The American Chemistry Council represents the leading companies engaged in the business

of chemistry. Council members apply the science of chemistry to make innovative products and

services that make people’s lives better, healthier and safer. The Council is committed to improve environmental, health, and safety performance through Responsible Care, common sense

advocacy designed to address major public policy issues and health and environmental research

and product testing. The business of chemistry is a $460 billion enterprise and a key element

of the nation’s economy. It is the nation’s largest exporter, accounting for ten cents of every dollar in US exports. Chemistry companies invest more in research and development than any

other business sector.

work with, so this is one that short term and long term has a lot

of potential.

So think through some of these issues with your associations,

check with Mr. Boucher and myself, any member of the subcommittee on either side of the aisle that you feel comfortable with

because in anybody’s calculus, this is going to be a big part of our

energy strategy.

With that, I want to thank you. We’ll probably have written

questions. We hope that you answer them expeditiously because

the President’s Task Force on Energy wants to make its recommendations to the President within the next 2 months.

This hearing is adjourned.

[Whereupon, at 5:42 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

PREPARED STATEMENT OF THE AMERICAN CHEMISTRY COUNCIL

The American Chemistry Council 1 welcomes the subcommittee’s examination of

the nation’s highly volatile natural gas markets and hopes this hearing marks the

beginning of a much-needed and long overdue focus on developing a long-range national energy policy.

The business of chemistry supports energy policies that will achieve two major

goals: ensure environmental protection, now and for future generations; and provide

reliable and affordable energy to all Americans.

A comprehensive national energy policy is vitally important to the business of

chemistry. Natural gas and other energy inputs are the lifeblood of our industry.

We use natural gas and other energy products as raw materials that go into thousands of products that make people’s lives better, safer, and healthier and to fuel

our operations. In fact, the business of chemistry converts some $20 billion in energy inputs into more than $200 billion in products found in every American home,

office, and automobile.

Many of the products we make from natural gas and other energy inputs help to

make the nation more energy-efficient. Insulation materials and lightweight plastics

are two examples of energy-saving products made from energy raw materials. The

business of chemistry will play a vital role in making America a more responsible

energy-using nation.

Reliable and affordable energy has helped make America’s business of chemistry

globally competitive. We are the nation’s largest export industry. Selling into global

markets supports nearly one-third of the one million Americans employed by the

business of chemistry.

Unstable markets and rising domestic energy prices are pricing key segments of

the business of chemistry out of world markets. In the span of one short year, America’s business of chemistry balance of payments (trade surplus) has shrunk by 60

percent and may result in extended plant shutdowns and layoffs.

Here a few examples of how recent volatility in natural gas and electricity markets is disrupting operations at chemistry facilities across the country.

• A chemical plant in Chicago has recently seen dramatic increases in natural gas

prices. In the year 2000, natural gas spending was 6.5% of the manufacturing

budget and today, with nearly the same output natural gas, now consumes 20%

of the plant’s manufacturing budget. Spending on natural gas has now overtaken the plant’s spending on wages.

• A small Louisiana electro-chemicals producer eked out a modest operating profit

of about $700,000 dollars in 1999. In 2000, the producer lost about $500,000.

In 2001, if the plant operates at budgeted rates throughout the year, it will lose

at least $6,000,000. The cause of the mounting operating losses is rapidly escaVerDate 11-MAY-2000 08:35 Sep 28, 2001 Jkt 010199 PO 00000 Frm 00132 Fmt 6633 Sfmt 6621 E:\HEARINGS\71501 pfrm04 PsN: 71501
129

lating energy costs. The plant’s cost of power increased by 32% in 2000 and is

expected to increase by another 40% in 2001, and there is no relief in sight.

• Because of the exceedingly high cost of electricity in the Seattle Washington area,

local production of liquid nitrogen and oxygen via an Air Separation Plant was

shut down. On some days the cost of power spiked to more than 35 times the

normal price. Without local production, hospitals and industry in general are

faced with shortages. Oxygen and nitrogen are products vital to public health

and the safe operation of many industries such as the refining and chemical industries. Many end users of oxygen and nitrogen in the western United States

who can get industrial gases are faced with surcharges, distribution fees, and

shortages.

• An elemental phosphorus plant near Pocatello, Idaho, employing 440 employees

and many contract workers, scaled back operations because of high electricity

costs. The plant uses four huge electric arc furnaces to melt rock in extracting

phosphorus during the production process. Approximately 100 employee and

contractor jobs were displaced. Normally the plant’s annual electricity cost is

$45 million which translates to $125,000 per day. If the plant were to operate

at full production today, which it cannot afford to do, that electricity cost would

be approximately $750,000 per day or $275 million on an annualized basis.

• A composites manufacturer (produces unsaturated polyesters) experienced utility

costs of $513,653 in January 2000. In January 2001 its costs were $1,067,095.

That’s an increase of $554,342. Almost all of this is due to the price of natural

gas. Styrene is the manufacturer’s number one raw material—the USA has

gone from being the low-cost supplier to the high-priced supplier in under 5

months, mainly driven by increases in natural gas prices. The same company’s

emulsion plant experienced a 67% increase in energy cost mainly due to natural

gas. In January 2000, the company paid $305,600 for natural gas purchases. In

January 2001, the bill was $759,6000.

Last year will be remembered as the year the economics of natural gas fundamentally and dramatically changed. Short-term conditions (largely weather related) can

be blamed for prices quadrupling in the span of months and gas stocks falling to

one-third of historic levels.

The short-term crisis in gas markets has masked the beginning a long-term structural shift in the economics of natural gas. The Energy Information Administration

projects that demand for natural gas for generating electricity will triple over the

next two decades even as other uses for gas (residential heating, industrial processing) also grows.

• Total natural gas demand is expected to increase from 21.4 trillion cubic feet in

1999 to 34.7 trillion cubic feet in 2020, about 3.2 trillion cubic feet higher than

projected in AE02000.

• The expected increase in natural gas demand through 2020 is primarily due to

projected rapid growth in demand by electric generators, which is expected to

triple between 1999 and 2020, excluding cogenerators.

It’s easy to understand why power-generators are increasing their use of gas to

make electricity. It is a clean-burning fuel, and gas-powered electricity generation

can be built for far less than other fuel sources.

Supplies of natural gas are simply not keeping pace with demand. Stocks are at

historic lows. According to a leading investment house, ‘‘. . . for the next 18 months

to two years, we believe we’re in a $5 MMBtu world simply because the gas industry

can’t grow output.’’

If this forecast comes true, key segments of the business of chemistry will be

forced out of business. According to a report prepared by Chemical Market Associates, Inc. and Purvin and Gertz, Inc., ‘‘. . . domestic natural gas prices that remain

above $4.00 per MMBtu will severely damage US-based chemical producers’ ability

to participate in world trade... Additional plant closures, loss of direct and indirect

sector employment, reduced investment in US capacity and an increase in imports

would dominate the domestic scene.’’

What is happening in domestic gas markets is unique to North America. Other

markets have enjoyed stable energy prices.

The time has come to restore long-term balance to US energy markets. The American Chemistry Council supports a comprehensive national energy policy that ensures

environmental protection and promotes a diverse, flexible, and affordable energy supply.

We recommend the following actions:

• Balance supply and demand for energy products. Natural gas is a remarkably efficient and clean-burning fuel source. Not surprisingly, it is in high-demand to heat homes, fuel factories, and create electricity. Today, there is simply

130

not enough natural gas to go around. New supplies must be responsibly developed, and new energy-efficiency incentives are needed to ease demand growth. • Develop all available and viable energy sources. The US needs a diverse and

flexible energy supply base. The nation should encourage research and investment in clean and efficient coal, nuclear, and natural gas technology while increasing investment in non-traditional and renewable energy sources. • Encourage the development of efficient power generation. Government

policies should encourage the production of electric power by high-efficiency

methods such as cogeneration. Existing statutes with this intent, such as the

Public Utilities Regulatory Policies Act, should be maintained through the transition to competitive utilities markets.

• Improve energy distribution and transmission channels. Our energy distribution

infrastructure is inadequate to the task at hand. New intra- and inter-state

pipelines for natural gas are needed. The interstate transmission grid for electricity needs to be upgraded and expanded.

The business of chemistry will play a vital role in bringing balance to America’s

energy markets. We will build on a 25-year record of achievement by making our

manufacturing processes even more energy-efficient. We will make the nation’s energy supply more secure by expanding our investment in advanced electricity cogeneration technology. Additionally, we will help the nation become more thrifty in its

energy use by developing next-generation, energy-conserving materials, such as insulation products and lightweight plastics.

We stand ready to work with the subcommittee to formulate a comprehensive national energy policy that will insure all Americans have access to reliable and affordable energy.

PREPARED STATEMENT OF TERRY SMITH, CHAIRMAN, CALIFORNIA INDEPENDENT

PETROLEUM ASSOCIATION

Mr. Chairman, distinguished members of the committee, thank you for allowing

me to share my thoughts on this issue of critical importance to California’s economic

health and well-being.

I am submitting testimony to the committee today on behalf of the California

Independent Petroleum Association—a non-profit trade association representing

over 450 independent producers of oil and natural gas, service companies, and royalty owners operating in California. California produces about 40% of the oil it

needs, the remainder comes from Alaska and foreign producers. California is the

fourth largest producing state behind only Louisiana, Texas and Alaska and has the

largest untapped reserve base for oil production in the lower 48 states. We believe

that given the right conditions, we could produce more.

Today’s topic is of critical importance to the members of my association. For many

independent producers in California, electricity accounts for over 60% the cost of

doing business. California oil is costly to produce because it requires steam injection

driven by natural gas to get it out of the ground. California producers also use a

lot of electricity to pump the oil out of the ground. Environmental rules prevent

them from using crude oil to make electricity so they use natural gas or electricity

fired by natural gas. High natural gas prices and unreliable supplies of electricity

have resulted in making California crude costly to produce—and are threatening to

severely curtail the amount of oil California produces on an annual basis.

What happened to California’s electrical system that has resulted in the problems

we see today? As someone representing large consumers of electricity, I would offer

the following insights.

The problem, in essence, comes down to heavy-handed regulation by the CPUC,

exceptionally stringent environmental siting guidelines and a low return on investment that kept new power plants from being built in California during the past

twelve years. Over the past ten years, few people anticipated the strong demand for

electricity brought about by a surging economy and technology infrastructure. California policymakers thought that other neighboring western states would sell us

their excess power if California couldn’t keep up with its own demand. They didn’t

anticipate the growth of neighboring states’ economies and the fact that neighboring

states might want to keep their power for their own use.

In 1996, when the California Legislature passed legislation deregulating California’s electrical market, it did so only partially. Not all of the market was deregulated, just the generation portion. Utilities like PG&E were required to sell their

generation so they wouldn’t be seen as competing with independent power producers

or holding back the new electricity market. In addition, the law imposed a mandatory rate freeze that has been in effect during the past couple of years. The rate

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freeze was intended to allow the utilities to recover, from businesses and consumers

like you and me, all the past costs of purchasing infrastructure and facilities. This

also shielded ratepayers from the true cost of providing electricity.

This arrangement worked as long as wholesale power costs were lower than the

rates utilities were allowed to collect from customers. But, when wholesale power

costs rose, the utilities tried to get the rate freeze removed by the California Public

Utilities Commission so they could pass along the true cost of wholesale power to

their customers. Except for a small rate increase, the Governor, Legislature, and the

CPUC have all rejected this appeal thereby forcing the utilities to continue assuming the price differential of how much they purchase power for and how much they

can recover. To compound the problem, the new regulatory structure set up by AB 1890—the

legislation that created the deregulated market—put a price cap on what independent power producers could charge for their power and restricted the ability of

these same producers and the utilities to enter into long term contracts.

Finally, all of these factors converged at the same time natural gas prices began

reaching historically high levels. Higher than expected demand throughout the west,

reduced supplies, and disruptions on major pipelines serving California all served

to drive prices up, further exacerbating the generators’ cost of producing electricity.

All of these trends have manifested themselves into the current crisis facing the

committee today.

Having identified the problem as we see it, where do we go from here? California’s independent producers believe we can be part of the solution if allowed the proper

opportunities. As companies based and operating in California, we believe we are

uniquely situated to mitigate the strains that are being placed on the supply side

of the energy equation. Given the proper combination of regulatory relief and incentives, we believe we can increase our levels of both oil and natural gas production

beyond their current levels.

According the California Division of Oil and Gas, California continues to have

some of the largest proved reserves of oil and natural gas anywhere in the United

States. Proved reserves over several trillion cubic feet (tcf) have been identified

along the West Coast of the United States while over 3 tcf of proved onshore reserves have been identified to date. With the advent of new, increasingly accurate

technology, new reserves of oil and gas are being found throughout the state in

areas previously thought to be unproductive.

Despite the presence of such substantial reserves and the state’s rapidly growing

demand for increased supplies of natural gas, in-state production in California today

accounts for only 10—15% of the state’s total annual natural gas needs. In the past,

California production has accounted for as much 25% of the state’s total needs.

Although much this trend can be contributed to some of the same factors I referenced earlier’ stringent environmental laws, high drilling costs, historically low

gas prices throughout the 1990’s and labor shortages—many experts believe a large

part of the decline can be tied directly to the policies of the state’s two major utilities: Pacific Gas and Electric (PG&E) and the Southern California Gas Company

(SoCal Gas).

Existing law provides the utilities with almost exclusive authority in setting the

terms and conditions under which pipeline connections for new natural gas wells

are accommodated. Historically, many producers have felt that the utilities have

used this authority to stifle California production and limit competition in favor of

taking larger supplies of gas from out of state sources such as Canada, the Rocky

Mountains, and the Southwest.

For the past ten years, independent producers throughout the state report experiencing delays of six months to a year before receiving utility approval to install a

new pipeline interconnect for newly completed wells. Overly burdensome and expensive terms of conditions imposed by the utilities as a condition of new interconnections are now thought to be the rule rather than the exception. In many cases, producers have elected to simply abandon new exploratory projects rather than try to

meet the demands being imposed by the utilities.

One of the largest impediments to increasing gas production in California are the

utility’s own management policies relative to its existing pipeline infrastructure.

Representatives from PG&E recently announced that the company would no longer

be adding any new metering systems along its pipeline system in Northern California. If enacted, the new PG&E policy would require all new wells to be connected

through an existing metering site along the pipeline—requiring, in some cases,

miles and miles of new pipelines to be constructed in order to connect a remote exploratory well. Given such terms and conditions, most exploratory projects would become automatically unfeasible. In an related move, PG&E has also recently embarked on an ambitious plan of ‘‘retiring’’ large sections of its pipeline gathering and

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delivery systems—further limiting the potential points of interconnection for new

gas wells. Many of the sections being targeted by the utility continue to remain in

operational condition. The companies that will be hardest by these new policies are

in the Northern Sacramento Basin—one of the most proliferate dry gas fields in the

United States and the source of over one-third of all the natural gas produced in

California.

Significant evidence suggests that much of California’s long-term gas needs could

be addressed by expanding production and reforming the regulatory relationship between the independent producers and the utilities. Suggested reforms that could

help accomplish this goal include:

• Strengthening the California Natural Gas Policy Act by establishing mandatory

timeframes under which a utility must respond to a producer’s request for a

pipeline interconnection.

• Encouraging new exploration activity by requiring the utility to install new metering sites, rather than requiring producers to construct miles of new pipeline for

every exploratory well.

• Allowing producers to expedite the installation of new interconnects by authorizing them to shoulder costs such as pipeline construction and labor costs if the

utility’s workforce is already overburdened.

• Facilitating the development of new pipeline gathering infrastructure that enables

more gas to get to market.

• Requiring the utilities to sell off existing gathering systems to interested producers and co-ops and to provide the producers the authority to maintain and

service the gathering systems.

By making some of these minor changes that will facilitate the ability of California producers to get their gas to market, we believe we can begin to help mitigate

at least one element of the problems driving our state’s current crisis.

In closing, independent oil and gas producers are price takers and have no ability

to set the price of crude at the wellhead where we produce it. Independent oil and

natural gas producers are like energy farmers. We take our commodity out of the

ground and sell it for the market price set by OPEC and other producing countries,

usually to an independent refiner or integrated oil company who then refines it into

products like gasoline. As such, our members are extremely vulnerable and can be

dramatically impacted by any combination of events that force their costs to suddenly rise. We appreciate the committee’s attention to this extremely serious matter

and stand ready to work with you in finding the proper solutions.