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S. HRG. 109–287

WINTER FUELS OUTLOOK

HEARING

BEFORE THE

COMMITTEE ON 

ENERGY AND NATURAL RESOURCES 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

TO

DISCUSS THE WINTER FUELS OUTLOOK AND THE EFFECT OF HIGH 

PRICES THIS COMING WINTER

OCTOBER 18, 2005

(

Printed for the use of the 

Committee on Energy and Natural Resources 

(II)

COMMITTEE ON ENERGY AND NATURAL RESOURCES 

PETE V. DOMENICI, New Mexico, Chairman 

LARRY E. CRAIG, Idaho 

CRAIG THOMAS, Wyoming 

LAMAR ALEXANDER, Tennessee 

LISA MURKOWSKI, Alaska 

RICHARD M. BURR, North Carolina, 

MEL MARTINEZ, Florida 

JAMES M. TALENT, Missouri 

CONRAD BURNS, Montana 

GEORGE ALLEN, Virginia 

GORDON SMITH, Oregon 

JIM BUNNING, Kentucky 

JEFF BINGAMAN, New Mexico 

DANIEL K. AKAKA, Hawaii 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

DIANNE FEINSTEIN, California 

MARIA CANTWELL, Washington 

JON S. CORZINE, New Jersey 

KEN SALAZAR, Colorado

ALEX FLINT, Staff Director 

JUDITH K. PENSABENE, Chief Counsel 

BOB SIMON, Democratic Staff Director 

SAM FOWLER, Democratic Chief Counsel 

LISA EPIFANI, Counsel 

JENNIFER MICHAEL, Democratic Professional Staff Member 

(III)

C O N T E N T S 

STATEMENTS 

Page

Bingaman, Hon. Jeff, U.S. Senator from New Mexico .......................................... 4

Caruso, Guy, Administrator, Energy Information Administration ..................... 5

Corzine, Hon. Jon S., U.S. Senator from New Jersey ........................................... 3

Domenici, Hon. Pete V., U.S. Senator from New Mexico ..................................... 1

Downes, Laurence M., Chairman, American Gas Association ............................. 18

Kuhn, Tom, President, Edison Electric Institute .................................................. 9

Smith, Peter R., Chairman, National Association of State Energy Officials ...... 24

Sullivan, Jack, Executive Vice President and CEO, New England Fuel Institute, Watertown, MA ........................................................................................... 31

Talent, Hon. James M., U.S. Senator from Missouri ............................................ 4

APPENDIXES 

APPENDIX I 

Responses to additional questions .......................................................................... 63

APPENDIX II 

Additional material submitted for the record ........................................................ 71

(1)

WINTER FUELS OUTLOOK 

TUESDAY, OCTOBER 18, 2005

U.S. SENATE, COMMITTEE ON ENERGY AND NATURAL RESOURCES, Washington, DC. 

The committee met, pursuant to notice, at 10:05 a.m., in room 

SD–366, Dirksen Senate Office Building, Hon. Pete V. Domenici, 

chairman, presiding. 

OPENING STATEMENT OF HON. PETE V. DOMENICI,

U.S. SENATOR FROM NEW MEXICO 

The CHAIRMAN. Good morning, everyone. 

At the hurricane recovery hearing on October 6, I said that we 

need to have a realistic set of expectations about how long we 

should expect high energy prices, and we need to prepare for the 

prospect of shortages. 

The purpose of today’s hearing is to provide a foundation for this 

winter’s fuel costs expectations and to prepare us for what could be 

a very challenging winter. Now, I understand, with reference to the 

winter itself, a real cold winter, moderate winter, warm winter, everybody has got information and we are speculating. But nonetheless, since winter is coming, it seems to me we have to prepare our 

people for a challenging winter. 

The impact to residential heating bills is anticipated to be severe. 

We should hear more about that today from the witnesses. Home 

heating costs are expected to be well above last year’s levels, the 

result of a tight supply/demand balance that has been exacerbated 

by the hurricanes, Rita and Katrina. The industry has made, from 

what we can tell, very valiant efforts to recover from the storms, 

but I think we now understand that the depth of the disaster 

caused by these two hurricanes may take a very long time to recover fully. We were far from a strong energy situation when the 

storms hit us. That precarious state of energy has had a dark cloud 

over the economy and it has been so for quite some time. It also 

has an impact on our national security interests and probably will 

for years. 

The bipartisan energy bill was a long-term plan to start to answer those energy challenges. It is a good bill that will increase energy security through real emphasis on research and development 

and new technology, regulatory certainty, and resource diversification. However, it is obvious that if it would have been passed 4 or 

5 or 6 years ago, we would have seen the effects now. But that was 

not to be. 

2

So hurricanes Katrina and Rita have exposed an energy vulnerability that will show itself this winter and, at the same time, will 

permit us to examine the entire energy picture. 

Access to supply and the ability to move has been seriously compromised. I think you all know that. If we have a real cold winter, 

we could find ourselves with very, very high prices and I am not 

sure that any of you would agree, but we might, indeed, be looking 

at some kind of shortages, at least spot shortages, of heating oil 

and other products. 

A majority of the United States, 110 million households, are 

heated by natural gas. The EIA, Mr. Caruso, predicts that homes 

heated by natural gas can expect to see an average of 48 percent 

increases, roughly $350 more than in 2004-05. That is what I understand you will testify to today. We will ask you about that. 

If the weather is colder than expected, then these natural heating expenditures could rise, and we will ask you about that also. 

Many people have been focusing these days on the higher gasoline prices, and everybody is worried about that. Everyone on this 

committee is. But the price of natural gas, particularly this winter, 

is one of the most distressful energy challenges that we face. For 

those whose livelihoods are related to natural gas, it should be 

noted that if we translated the gasoline prices to the level of increases faced by natural gas increases over a period of time, 6 or 

8 years ago, then gasoline would be seeing a $7 a gallon price at 

the pump right now. That is to show you the terrific impact of natural gas on those that use it. So when we drive up to a station, 

we can brace ourselves for these high prices that are displayed 

there, but winter fuel costs could be real price-shockers that are 

not shown on any filling station pump, but when the bills come and 

the bills come to industry, it will be a tremendous problem that 

will face our country. 

I want to just mention that today we might push as hard as we 

can on conservation activities that Americans might pursue. Senator Bingaman and I have been talking seriously about what we 

can pursue and push in the conservation area. But I am just going 

to state two or three things that we have determined already. 

According to the American Chemistry Council, if every American 

would turn down their thermostats just 2 degrees, it would free up 

3 billion cubic feet of gas per day. That is a savings that we could 

get from three LNG terminals, if they were built, a rather major 

event. 

Other conservation steps we could consider are like lowering the 

thermostat on your gas heaters to 120 degrees. That would save 

consumers up to $45 a year and a lot of natural gas. 

Now, we can go on, but we will wait and hear from the witnesses, and we will put together our own approach to that, Senator 

Bingaman, as we move along. 

I would mention that along with conservation, there is one big 

thing we can do, and we have been told that, Senators. That is to 

move ahead rapidly with Lease 181 in the coastal area between 

Florida and Alabama. This is a very difficult political issue. I have 

no direct information, but I am hopeful that the President would 

move in this area since he has authority and that we could follow 

up with anything we need to do. That will not be included in the 

3

reconciliation bill. I think the Senators understand that. It will not 

be. 

Senator DORGAN. Mr. Chairman, might I just ask a question 

about Lease 181? While I support opening Lease 181, do you have 

any notion of what the potential reserves are there? 

The CHAIRMAN. Yes. Terrific. I do. In the Outer Continental 

Shelf, known as 181, and the non-leased portion of 181, which is 

now under a moratorium, there are approximately 7.2 trillion cubic 

feet of gas. That is in areas more than 100 miles from any State 

coastline. The estimated resources that I have spoken of, according 

to the API—1 trillion cubic feet would heat 1 million homes for 15 

years. So that is a huge contribution. 

But I would say one equally important thing is that even though 

that would take a couple years, we have been told that it would 

have a dampening effect because it is a known commodity that 

could be expected. 

Now, with that, I am going to let Senator Bingaman comment, 

and then we are going to the witnesses. 

Senator Bingaman. 

[The prepared statements of Senators Corzine and Talent follow:]

PREPARED STATEMENT OF HON. JON S. CORZINE, U.S. SENATOR FROM NEW JERSEY

Mr. Chairman, I would like to thank you for holding this hearing to address the 

incredible expense consumers will face heating their homes this winter. Consumers 

have already been hit hard by consistently rising fuel prices this past year—with 

prices at the pump rising by an astounding 37.3 percent in New Jersey. Now, in 

the wake of the disruption to our energy system caused by Hurricanes Katrina and 

Rita, the Energy Information Administration’s (EIA) winter fuels outlook shows that 

there is no end in sight for consumers, who will face drastic increases in residential 

space-heating expenditures. 

Mr. Chairman, as you know, winter fuel prices were already expected to be significantly higher than last year before the Hurricanes hit, worsening the situation. 

The EIA currently projects that consumers will see a 48 percent average increase, 

the equivalent of $350, over last year’s heating costs. These increases on top of the 

already skyrocketing gasoline prices are going to have a huge impact on consumers’ 

daily lives. And of course, middle- and low-income Americans will be hurt the most 

this winter—especially in states like mine, where the cost of living is already a huge 

burden for families. 

It is crucial, therefore, that we take immediate steps to mitigate the effects of 

high fuel prices this winter by increasing the appropriation for the Low Income 

Home Energy Assistance Program (LIHEAP) to $5.1 billion, the amount authorized 

in the Energy Policy Act of 2005. States such as New Jersey need the LIHEAP funding to provide relief to the most vulnerable Americans. Seniors and low-income families in New Jersey and across this nation should not be forced to make the choice 

between putting food on their tables and heating their homes. According to the Center on Budget and Policy Priorities, New Jersey alone would need $205.4 million to 

ensure that LIHEAP beneficiaries will not be affected by the spike in energy costs. 

M. Chairman, it is essential that we fully fund LIHEAP so that families will literally not be left out in the cold. 

Of course, while adequate LIHEAP funding is one of the most effective and immediate ways to help low-income consumers, we must also take other steps to alleviate 

high heating costs. Promoting energy efficiency in commercial buildings, air conditioners, water heaters and furnaces, and new homes is another one of the cheapest, 

fastest, and cleanest methods of reducing costs for families and businesses. I have 

consistently advocated investing in both energy efficiency and conservation programs and in fact, the inclusion of energy efficiency tax incentives in the Energy 

Policy Act was one of the few merits of the overall bill. 

Mr. Chairman, I also want to again take this opportunity to urge my colleagues 

not to use the winter fuels outlook as an excuse to begin developing new offshore 

supplies of oil and gas. The environmental and economic effects of drilling off the 

coast of a state like New Jersey—a state that depends heavily on the health and 

cleanliness of its beaches for tourism—far outweigh the possible benefits of drilling. 

4

In addition, it is misleading to suggest drilling is a short term solution to the drastic 

price increases this winter because development takes years and is not even guaranteed to lower prices in the long run. We cannot make hasty policy decisions, Mr. 

Chairman. Instead, we should, as I said, adequately fund the effective programs we 

already have in place. And of course, once immediate relief is provided, we in Congress must have a frank discussion on the most effective means of fixing our energy 

system so that consumers are not subject to the price volatility that they are expected to experience this winter. 

Again, thank you M. Chairman for holding these hearings. I look forward to the 

testimonies of the witnesses. 

PREPARED STATEMENT OF HON. JAMES M. TALENT, U.S. SENATOR FROM MISSOURI

We need increased fuel supply and diversity—Katrina shows our vulnerability due 

to concentration of fuel type (natural gas) and production location (concentrated 

area of Gulf of Mexico that is right down hurricane alley). 

Tight supply present even before hurricanes—elevated prices due to increased domestic demand for a clean fuel and a then cheap fuel that’s no longer cheap. 

As our witnesses will attest, energy demand is outstripping supply, driving prices 

higher. 

When balancing the environment and energy prices, there are always difficult 

choices to make. But we can and will find solutions. 

We need more natural gas production. We need more crude oil production—we’re 

sitting on a huge resource in ANWR that we simply must tap into. 

Nuclear will help, but it is 10 years or longer away. 

But I am puzzled as to why there is so little mention of coal in this debate, both 

as a source of supply for electricity generation and for vehicle fuels. Coal must be 

a big part of the solution. Peabody Coal, headquartered in my state, itself has the 

coal equivalent of a 10 year supply of natural gas. 

EIA data shows U.S. natural gas production increasing from 19.2 trillion cubic 

feet in 2000 to 21.8 Tcf in 2025, but demand growing much faster, from 23.3 Tcf 

to 30.7 Tcf over the same time period. It will be difficult to make up that difference 

even with a dramatic increase in LNG imports. And that’s not without its own risks. 

Dow Chemical President Andrew Liveris testified earlier this month to the difficulty in obtaining sufficient supplies of LNG, and the need to locate his plants 

elsewhere in places where energy costs are lower. We can’t continue to lose jobs to 

other nations because our energy costs are too high. 

Clean coal technology that is available now and can be on line in 2-3 years results 

in a cleaner gas product than natural gas. At a cost of $6.50/Mcf, coal gasification 

is well below current natural gas prices of around $14. And coal is available here, 

so it poses no risk of supply disruption (the largest natural gas reserves are in the 

Middle East, then Russia). 

All that is needed for coal is regulatory certainty and we’ll get the needed capital 

investment to produce an abundant supply of clean energy to add to our natural 

gas and other fuels for generators and liquids to increase the transportation fuel 

supply and bring down prices. 

As I noted earlier this month at the October 6 hearing on impacts of Katrina and 

Rita on the U.S. energy infrastructure, an adequate and diverse energy supply with 

lower prices means much stronger economic growth and risk taken out of the economy. That economic growth, because of the marvelous productivity of the American 

people produces wealth on the basis of which we can enhance technology, enhance 

conservation efforts, improve the environment, and take care of our coasts. 

We’ll end up with the growth, the jobs, the industry, the exports, and a better 

environment and a better community all at the same time by having faith and confidence in the productivity and the decent instincts of the American people. 

We’ve seen those instincts on display in response, just an immediate gut level response to Hurricanes Katrina and Rita, and we’ll see it again. Really all they need 

us to do is to unshackle them a little bit and they’ll go out and get us out of this.

STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR

FROM NEW MEXICO 

Senator BINGAMAN. Thank you very much, Mr. Chairman. I welcome all the witnesses. Thank you very much for being here. We 

have a very distinguished group of witnesses this morning. 

5

Mr. Chairman, as I view the hearing today, this is our best opportunity to try to focus on the upcoming winter and the next few 

months and what can be done in this short period to mitigate the 

very high prices we are seeing in home heating oil and natural gas 

and propane and gasoline at the pump. I think we are all anxious 

to try to identify some initiatives we could pursue that could have 

a long-term benefit for the country. I certainly want to work on 

that. But I think that the short term is where we need to have as 

clear a picture as we possibly can on what we are faced with and 

what actions we can take. 

So I appreciate your having the hearing very much and look forward to the testimony. 

The CHAIRMAN. Thank you, Senator Bingaman. 

I wanted to clarify one thing. Senator, I mentioned to you what 

if we went 100 miles out so that there would be less concern. I 

should clarify if that happened, if we did that, it is estimated that 

that would be approximately 6 trillion cubic feet of gas. If you just 

did the normal, it would be 7.2 trillion. It is estimated that 1 trillion will heat 1 million homes for 15 years. So that is the accurate 

situation. Thank you. 

Now we are going to proceed to the statements. Mr. Caruso, we 

will make your statement a part of the record, and we thank you 

again for your excellent work and for your help in this area. 

STATEMENT OF GUY CARUSO, ADMINISTRATOR,

ENERGY INFORMATION ADMINISTRATION 

Mr. CARUSO. Thank you very much, Mr. Chairman and members 

of the committee. It is a pleasure to be here to represent the Energy Information Administration once again and present our Winter Fuels Outlook which we released last Wednesday. 

It has now been 53 days since hurricane Katrina made landfall, 

and since that time, we have had about 60 million barrels of oil 

from our Gulf of Mexico shut in. That is averaging more than 1 

million barrels a day; more than 300 million cubic feet of gas shut 

in and continuing. 

The practical implications of that for the winter and for the 

world oil and gas industry is that we are operating in a world oil 

industry at about 84 million barrels a day today, with almost no 

unused capacity. What little there is is in Saudi Arabia and most 

of that is heavier sour crudes not really in demand. So we have 

this shut-in capacity fully used up. Our refineries are operating at 

high rates of utilization in this country and in the world, and many 

of our refineries have been shut in as a result of the hurricanes. 

So we go into the winter with considerable uncertainty about the 

supply of oil, gas and refined crude oil, natural gas and refined 

products. 

Our Winter Fuels Outlook reflects a baseline scenario for recovery of energy operations in the Gulf of Mexico based on information 

available to EIA as of last week. On the demand side, our projections are based on the latest weather forecasts from the National 

Oceanic and Atmospheric Administration’s Climate Prediction Center. 

This winter expenditures for residential space heating are projected to increase for all fuel types compared to year-ago levels. The 

6

average U.S. household can expect to pay about $260 more for 

heating this winter, and on average, we expect households heating 

primarily with natural gas to spend about $350 more this winter. 

That is about a 48 percent increase over last winter. For those 

heating with heating oil, about $380, or 32 percent more, and for 

propane, about $325, or 30 percent more. 

Electricity, which has a substantial amount generated by coal 

and nuclear, will have a much lower price impact, with only $38 

above last year’s average cost. However, expenditures for individual households will differ widely based on local weather conditions, the size, and energy efficiency of individual homes and their 

heating equipment. And then, as you mentioned, thermostat settings are very important. 

We expect natural gas and petroleum prices to remain high. 

Henry Hub spot natural gas prices are expected to average about 

$11.40 per thousand cubic feet this winter. For residential heating 

oil, prices are expected to average $2.54 per gallon this winter season. 

And for the transportation fuels, which continue to have relatively high prices, retail gasoline prices are expected to average 

close to $2.56 per gallon. That compares with this week’s average 

in the United States of $2.74. So we do see a trend down there. Retail diesel fuel prices are projected to average $2.71 per gallon. 

On the demand side, we expect total petroleum demand in the 

United States to be down a bit, about 1 percent this year. 

The CHAIRMAN. To be what? 

Mr. CARUSO. To be down about 1 percent this year compared 

with last, but to have some recovery in 2006, back to about 21 million barrels a day. 

Natural gas demand will also be down as a result of the direct 

impact of the hurricane, as well as high prices on industrial consumers. We do anticipate with the return to normal weather and 

the recovery in industrial consumption next year, natural gas demand will recover by about 3 percent in 2006. 

On the supply side, natural gas production, of course, is down directly as a result of the hurricanes and we expect a decline of 3 

percent this year compared with last, but an increase next year as 

we expect most of the Gulf of Mexico production to be back on 

stream by the end of first quarter 2006. 

Hurricanes have reduced our ability to inject natural gas in storage for the winter season. However, we do think that by November 

1 we will be at 3.1 trillion cubic feet, which is a normal storage 

level for the winter season. 

The CHAIRMAN. How do we store that? 

Mr. CARUSO. Mostly in salt domes and in old oil and gas fields 

that have been fully depleted. 

So we do anticipate there will be enough gas in storage to meet 

even a 10 percent colder-than-normal winter, Mr. Chairman. However, as you pointed out, the prices will be higher, as projected in 

our Winter Fuels Outlook. The full report is in the record. Thank 

you, Mr. Chairman. 

[The prepared statement of Mr. Caruso follows:]

7

* The Outlook has been retained in committee files. 

PREPARED STATEMENT OF GUY CARUSO, ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION

Mr. Chairman and Members of the Committee: I appreciate the opportunity to appear before you today to discuss the Energy Information Administration’s (EIA) 

Short-Term Energy and Winter Fuels Outlook, which we released on October 12. The 

text of this Outlook and some of the figures are attached to my testimony; the complete Outlook is available on our website at www.eia.doe.gov.* 

EIA is the independent statistical and analytical agency in the Department of Energy. We do not promote, formulate, or take positions on policy issues, but we do 

produce data, analyses, and forecasts that are meant to assist policymakers, help 

markets function efficiently, and inform the public. Our views are strictly those of 

EIA and should not be construed as representing those of the Department of Energy 

or the Administration. 

Even before Hurricane Katrina struck, crude oil and petroleum product prices 

were setting records. On August 26, the near-month price of crude oil on the New 

York Mercantile Exchange closed at over $66 per barrel, which was $23 per barrel, 

or more than 50 percent, higher than a year earlier. On August 29, as the hurricane 

made landfall, average gasoline prices stood at $2.61 per gallon, 74 cents higher 

than one year earlier, and diesel prices were $2.59, or 72 cents higher. Oil prices 

worldwide had been rising steadily since 2002, due in large part to growth in global 

demand, which has used up much of the world’s surplus production capacity. Refineries have been running at increasingly high levels of utilization in many parts of 

the world, including the United States. High production of distillate fuels and higher-than-average refinery outages this summer added to tightness in gasoline markets. 

Throughout the summer months, EIA warned about the potential adverse impacts 

of an active hurricane season on domestic energy supply and prices. These warnings 

unfortunately are being reflected in the challenging realities brought about by Hurricanes Katrina and Rita. The impact on oil and natural gas production, oil refining, 

natural gas processing, and pipeline systems have further strained already-tight 

markets on the eve of the 2005-2006 heating season. 

Projections are subject to considerable uncertainty. Price projections are particularly uncertain, because small shifts in either supply or demand, which are both relatively insensitive to price changes in the current market environment, can necessitate large price movements to restore balance between supply and demand. On the 

supply side, our Winter Fuels Outlook reflects a ‘‘Medium Recovery’’ or baseline scenario for recovery of energy operations in the Gulf of Mexico based on information 

available to EIA as of the end of the first week of October. On the demand side, 

the baseline projections incorporate the mean values for heating degree-days by 

Census Division as provided by the National Oceanic and Atmospheric Administration’s Climate Prediction Center. EIA also examines 10-percent colder and 10-percent warmer winter cases to provide a range of heating fuel market outcomes. 

This winter, residential space-heating expenditures are projected to increase for 

all fuel types compared to year-ago levels. On average, households heating primarily 

with natural gas are expected to spend about $350 (48 percent) more this winter 

in fuel expenditures. Households heating primarily with heating oil can expect to 

pay, on average, $378 (32 percent) more this winter. Households heating primarily 

with propane can expect to pay, on average, $325 (30 percent) more this winter. 

Households heating primarily with electricity can expect, on average, to pay $38 (5 

percent) more. Should colder weather prevail, expenditures will be significantly 

higher. These averages provide a broad guide to changes from last winter, but fuel 

expenditures for individual households are highly dependent on local weather conditions, the size and energy efficiency of individual homes and their heating equipment, and thermostat settings. 

Several factors are driving up winter prices and expenditures: first, international 

factors such as low spare crude oil capacity and political tensions contribute to uncertainty and low supply growth for crude oil and high crude prices; second, recent 

hurricanes and associated disruptions exacerbate already tight markets in oil, petroleum products, and natural gas; and, finally, winter weather affects consumption 

and consequently household expenditures. This winter, we are likely to have a 

slightly colder weather, as measured by population-weighted heating degree-days, 

relative to last winter. 

Overall, prices for petroleum products and natural gas are expected to remain 

high due to tight international supplies of crude and hurricane-induced supply 

losses. Under the baseline weather case, Henry Hub natural gas prices are expected 

8

to average around $9.00 per thousand cubic feet (mcf) in 2005 and around $8.70 per 

mcf in 2006. Retail gasoline prices are expected to average close to $2.35 per gallon 

in 2005 and about $2.45 in 2006. Retail diesel fuel prices are projected to remain 

high throughout the forecast period, averaging $2.45 in 2005 and $2.58 in 2006. 

Residential retail heating oil prices are expected to be $2.54 per gallon this winter 

season, a 32-percent increase over last winter, reflecting not only high crude oil 

prices, but also strong demand in the international market for distillate fuels. Residential electricity prices are expected to average 9.3 cents per kilowatt hour (kwh) 

in 2005 and about 9.5 cents per kwh in 2006, with significant regional differences 

depending on the fuel mix used to generate electricity in each region of the country. 

Under a colder weather scenario, prices for natural gas and all petroleum products 

are projected to be somewhat higher. 

Worldwide petroleum demand growth is projected to slow from 2004 levels, but 

still remain strong during 2005 and 2006, averaging 1.8 percent per year over the 

2-year period, compared with 3.2 percent in 2004. Moreover, only weak production 

growth in countries outside of the Organization of Petroleum Exporting Countries 

(OPEC) is expected. With the loss of production in the Gulf of Mexico from the hurricanes, production declines in the North Sea, and the slowdown in growth in Russian oil production, non-OPEC supply is projected to increase by an annual average 

of only 0.1 million barrels per day during 2005 before increasing by 0.9 million barrels per day in 2006. In addition, worldwide spare production capacity is at its lowest level in 3 decades. 

Total petroleum demand in the United States in 2005 is projected to average 20.5 

million barrels per day, or 0.9 percent less than in 2004. Average demand for the 

first half of 2005 was at about the same level as during the first half of 2004 because rapidly rising prices constrained motor gasoline demand growth, weather factors depressed heating oil demand, and relative price factors lowered residual fuel 

oil and propane demand. Hurricane-related disruptions combined with increased 

prices result in a lower projected demand for petroleum products relative to pre-hurricane predictions. Petroleum demand in 2006 is expected to average 21 million barrels per day, or 2.2 percent higher than in 2005. 

Total natural gas demand is projected to fall by 1.2 percent from 2004 to 2005 

due mainly to higher prices, but recover by 3.0 percent in 2006 due to an assumed 

return to normal weather (early 2005 was a relatively mild heating season in the 

Midwest) and a recovery in consumption by the industrial sector, which is projected 

to increase by about 6 percent over 2005 levels. Residential demand is projected to 

decline slightly from 2004 to 2005 mostly because of relatively weak heating-related 

demand during the first quarter, while industrial demand is estimated to decline 

by nearly 8 percent over the same period due to the much higher prices for natural 

gas as a fuel or feedstock. By 2006, both end-use sectors recover somewhat with residential demand estimated to increase 2.6 percent from 2005 levels and industrial 

demand increasing by 6 percent. The industrial rebound in 2006 is partly because 

of assumed reactivation of damaged industrial plants in the Gulf of Mexico region 

but also reflects renewed fuel demand growth as domestic industrial plants adjust 

to higher prices. Power sector demand growth continues through the forecast period 

along with electricity demand growth. The pace is slower that the 5.7-percent rate 

projected for 2005 because an unusually hot summer and high cooling demand 

boosted 2005 growth significantly. 

Domestic dry natural gas production in 2005 is expected to decline by 3.0 percent, 

due in large part to the major disruptions to infrastructure in the Gulf of Mexico 

from both Hurricanes Katrina and Rita, but increase by 4.2 percent in 2006. Working gas in storage as of October 7 was estimated at 2.99 trillion cubic feet, a level 

162 billion cubic feet (bcf) below 1 year ago but still 1.2 percent above the 5-year 

average. Although natural gas storage remains above the 5-year average, the double 

blows of Hurricanes Katrina and Rita reduced the peak storage achievable over the 

remainder of the injection season from what was expected previously. Expected 

working gas in storage at the end of the fourth quarter is expected to be about 2.5 

trillion cubic feet, 200 bcf below year-ago levels and about 50 bcf above the 5-year 

average. Hurricane recovery profiles that differ from the scenario used for this 

month’s baseline forecast would significantly affect the storage forecast. 

In conclusion, due to continued tight crude oil markets, hurricane-related supply 

disruption, and slightly colder weather, the average U.S. household can expect to 

pay about $260 more for heating this winter, mostly due to already tight supplies 

and the effects of the Gulf coast hurricanes. Our projections are subject to considerable uncertainty, as noted, depending in part on the rate of recovery in the Gulf 

of Mexico and on the weather. A winter that is colder than expected could substantially raise estimated expenditure increases; milder weather, of course, would lower 

estimated expenditures. 

9

This completes my testimony, Mr. Chairman. I would be glad to answer any questions that you and the other members of the Committee may have.

The CHAIRMAN. Thank you very much. Was that your entire 

statement? 

Mr. CARUSO. The full statement will be submitted for the record. 

The CHAIRMAN. All right. Thank you. 

Mr. Tom Kuhn, president of Edison Electric, it is good to have 

you before us again. Thank you for giving us your time. 

STATEMENT OF TOM KUHN, PRESIDENT,

EDISON ELECTRIC INSTITUTE 

Mr. KUHN. Thank you very much, Mr. Chairman and members 

of the committee. I very much appreciate the opportunity to testify 

at this very important hearing regarding the fuels outlook and 

ways to help consumers deal with higher energy prices. 

As Guy indicated, we are expecting a significant increase in fuel 

costs for home heating this winter, and this comes on the heels of 

extremely high prices for gasoline and other transportation fuels. 

The ripple effects of these higher prices are being felt throughout 

the economy and affecting all classes of customers, residential, 

commercial, and industrial. 

Many utilities are also being squeezed between high fuel costs 

and regulatory limits on electricity rates. Like consumers, these 

utilities are seeking to use natural gas as efficiently as possible 

and switching to more economical fuels wherever it is feasible. 

I would like to briefly address five key issues that are covered 

in depth in my testimony. 

First, LIHEAP. To help address significantly higher energy 

prices this winter, EEI strongly supports full funding for the LowIncome Home Energy Assistance Program in fiscal year 2006. 

LIHEAP helps pay the winter heating bills or summer cooling bills 

of low-income and elderly people, and unfortunately, the present 

funding level serves only 20 percent of the eligible population. The 

increased funding for the LIHEAP program is the most immediate 

and direct way that those in need may receive assistance this winter. The Energy Policy Act of 2005 authorizes LIHEAP funding at 

$5.1 billion. An increase in the base funding for LIHEAP would assure the States would receive the funds necessary to provide heating assistance this winter. 

Second, efficiency. And I am glad that you brought that up, Mr. 

Chairman. That is an extremely important part of the equation 

that we can address in the near term. America’s electric utility 

companies are leaders in encouraging energy efficiency. Over the 

past 3 years, we have invested more than $4 billion in numerous 

energy efficiency programs. Congress also should fully fund energy 

efficiency and conservation public information and outreach efforts. 

The energy bill authorized $90 million per year for 5 years for public education. Unfortunately, a major public education campaign 

now underway, supported by DOE, the Alliance to Save Energy, 

and a number of business and consumer groups, including a major 

contribution that we made from Edison Electric Institute, is severely underfunded. So to the extent that we can get greater funding for energy education and efficiency programs, I think that 

would be extremely helpful. 

10

Third, natural gas supply. We welcome recent legislation to natural gas supply in the long term via the Alaska pipeline and LNG 

sites, among others, but in the near term, we urge Congress to 

work with the administration and the States to increase natural 

gas supplies from our vast onshore and offshore resources including, as you mentioned, Mr. Chairman, from the unleased portions 

of leasehold 181 in the Gulf of Mexico. It is extremely important 

and I fully agree with you that that would have major psychological implications on the natural gas markets and affect the pricing. 

Fourth, fuel diversity. We commend you, Mr. Chairman, and the 

committee for recognizing the importance of fuel diversity as one 

of the guiding principles behind the energy bill that Congress 

passed last year. Low-cost, reliable electricity results, in part, from 

our ability to utilize a variety of readily available energy resources, 

coal, nuclear, natural gas, hydropower and renewable energy resources such as wind, biomass, and solar. And as the chart accompanying my testimony demonstrates, different regions of the country rely on some resources more heavily than others. 

When it comes to switching fuels in the short term, electric 

power plants are subject to economic engineering and environmental realities and constraints. For example, power plants built 

to use natural gas or oil cannot burn coal directly. Power plants 

with long-term fuel contracts may not be able to switch to another 

fuel or procure new supplies in a tight spot market. There are challenges to transporting enough coal to some plants. Nuclear power 

plants are operating at very high capacity factors, and upgrading 

applications and reviews are complex and require review and approval by the NRC. Environmental permits can limit the specific 

types of coal and oil that can be consumed. 

That said, there is some limited potential to reduce natural gas 

use by power plants. However, these opportunities often tend to be 

plant-specific and, where feasible, economics already are driving 

these actions to occur. Regulatory flexibility can help to maximize 

alternatives to natural gas in the short term, and our companies 

stand ready to work with regulators and policymakers to pursue 

reasonable opportunities. 

Finally, fuel mandates. EEI strongly opposes any efforts to ration 

fuel supply or dictate fuel choices for the electric utility industry. 

Both the Power Plant and Industrial Fuel Use Act of 1978 and the 

Public Utility Regulatory Policies Act, or PURPA, which dictated 

fuel choices and energy purchases to utilities adversely distorted 

electricity markets and impacted customers. This is among the reasons why EEI opposes any effort to limit utility access to natural 

gas for electric generation, to dictate what fuels should be used to 

generate electricity, or to federally mandate efficient dispatch. Further raising customers’ electricity bills is not a solution to higher 

natural gas prices. 

I thank you again for allowing me the opportunity to testify 

today, and I certainly would be pleased to answer any questions 

you might have. 

[The prepared statement of Mr. Kuhn follows:]

11

PREPARED STATEMENT OF TOM KUHN, PRESIDENT, EDISON ELECTRIC INSTITUTE

Mr. Chairman and Members of the Committee: My name is Tom Kuhn, and I am 

President of the Edison Electric Institute (EEI). EEI is the premier trade association 

for U.S. shareholder-owned electric companies and serves international affiliates 

and industry associates worldwide. Our U.S. members serve 97 percent of the ultimate customers in the shareholder-owned segment of the industry and 71 percent 

of all electric utility ultimate customers in the nation. We appreciate the opportunity to testify on the upcoming winter fuels outlook and ways to help consumers 

deal with high energy prices. 

EIA 2005-2006 WINTER FUELS OUTLOOK

The latest forecast from the U.S. Energy Information Administration’s (EIA’s) 

Short Term Energy Outlook, which was released last week, is predicting significant 

increases in fuel costs for home heating this winter. This comes on the heels of extremely high prices for gasoline and other transportation fuels. 

Customers who are part of the nation’s largest home heating sector—the 60 million households that use natural gas—could see their home heating bills go up by 

an average of almost 50 percent. The average natural gas household spent about 

$750 last winter to stay warm. This winter, it should expect to spend about $1,100. 

The price for heating oil, which is used by about eight-and-a-half million homes 

and is the dominant fuel source in the Northeast, is expected to increase about 32 

percent. The typical oil-heated home last year spent about $1,200 on heating bills. 

This year that cost could be as high as $1,577. 

The average cost of using electricity to heat homes is expected to be about 5 percent more this winter nationwide, affecting about 31 million households in the country, with higher costs in some regions. The average spent on electricity for heating 

last year was about $717, which would mean this year it will be about $755. This 

sounds relatively low, but the majority of electrically heated homes in the U.S. are 

in the South, which has a relatively short heating season, and southern homes also 

are more likely to use heat pumps, an efficient form of electric heating. 

Residential electricity prices are expected to average 9.3 cents per kilowatt hour 

(kWh) in 2005 and about 9.5 cents per kWh in 2006, with significant regional differences depending on the fuel mix used to generate electricity in each region of the 

country. 

Of course, consumers’ heating bills will depend largely on temperatures this winter. EIA’s estimates also are somewhat sensitive to how fast the oil and natural gas 

infrastructure in the Gulf of Mexico recovers from the two recent hurricanes. As of 

October 13, about sixty percent of the daily gas production in the Gulf of Mexico 

remained offline. By the end of the year, it is estimated that about one-fifth of natural gas production will still be offline, and EIA estimates that production will not 

return to pre-hurricane levels until March 2006. The hurricanes aggravated an already tight supply and demand situation. The wholesale price for natural gas is now 

trading between $13 and $14 per thousand cubic feet, which is roughly twice as 

high as a year ago. 

All classes of consumers—industrial, commercial and residential—are feeling the 

effects of high energy prices. High prices for natural gas, heating oil and transportation fuels are having a ripple effect throughout the economy. Utilities that use 

natural gas to generate electricity also are feeling the pinch. Electric utilities do not 

benefit from higher energy prices, since they are often ‘‘caught’’ between high fuel 

costs and regulatory limitations on electricity rates. Like consumers, these utilities 

are seeking to use natural gas as efficiently as possible and are switching to more 

economical fuels whenever it is feasible. 

ELECTRIC UTILITIES ARE HELPING ENERGY CONSUMERS

There are no quick and easy answers to our energy policy challenges. Increasing 

the supply and diversity of our nation’s available energy resources involves longterm solutions, many of which were included in the Energy Policy Act of 2005 

(EPAct 2005). We commend the Committee’s leadership in getting that legislation 

enacted. But there are additional steps that can be taken to reduce energy demand 

and help ease prices in the near term. Electric utilities are actively working with 

their customers, state and federal governments, and others to help consumers manage their heating bills through direct assistance and other programs to reduce demand and increase energy efficiency. 

Special Focus on Low-Income Consumers 

Low-income consumers are a special focus of the industry’s energy conservation 

efforts because they are especially vulnerable to high energy prices. According to the 

12

Department of Energy (DOE), low-income households spend 14 percent of their annual income on energy, while non-low-income households spend 3.5 percent. 

EEI strongly supports full funding for the Low-Income Home Energy Assistance Program (LIHEAP), which Congress authorized at $5.1 billion a year in EPAct 2005. 

LIHEAP helps pay the winter heating bills or summer cooling bills of low-income 

and elderly people. Increased funding for the LIHEAP program is the most immediate and direct way that those in need may receive assistance this winter. An increase in the base funding for LIHEAP ensures that states will receive the funds 

necessary to provide heating assistance this winter, as well as cooling assistance 

next summer. 

During extreme weather conditions, low-income consumers often are forced to 

choose between buying fuel to heat or cool their homes and buying food or medicine 

for themselves and their families. Since two-thirds of the families receiving LIHEAP 

assistance have incomes of less than $8,000 a year, the program clearly helps the 

people who need help the most. 

Unfortunately, funding shortages in the LIHEAP program threaten to disproportionately affect America’s poor, especially the elderly, whose health and well-being 

depend on a comfortable living environment, and who are more likely to suffer during brutal weather conditions. The present program of approximately $2 billion 

serves only 20 percent of the eligible population with average payments of $311 per 

family. 

An EEI survey shows that nationwide there are more than 800 programs available for low-income customers, including billing assistance, weatherization help, 

community development and outreach, and more. For many years, EEI member 

companies have established fuel funds to provide low-income households assistance 

with their utility bills, weatherization repairs and other programs, totaling over $1 

billion annually. This year, companies are redoubling their efforts, pledging millions 

more dollars for assistance and energy efficiency efforts, and working with state officials to implement energy savings education programs. 

Proactive Initiatives Benefit Consumers, the Environment, and the Nation’s Electricity System 

America’s electric utilities are among the nation’s leaders in encouraging the efficient use of energy. Since the early 1970s, electric utility programs and services 

have helped residential, commercial, and industrial customers take control of their 

energy bills. 

These efficiency efforts are making a difference. Over the past 15 years, electric 

utility efficiency programs have saved about 700 billion kilowatt hours (kWh) of 

electricity. That is enough to power almost 65 million homes for one year. Electric 

utilities invested more than $4.55 billion in energy-efficiency efforts between 2001 

and 2003 alone. Many of these activities are accelerating. In California alone, between 2006 and 2008, shareholder-owned utilities will be spending nearly $2 billion 

on efficiency programs and activities. 

These utility efficiency efforts are helping customers lower their electric bills, but 

that is just the beginning. Electric utility efficiency efforts also lead to fewer emissions, result in the more efficient use of generation and transmission assets, and 

reduce demand during peak periods, ultimately deferring the cost of building additional generation, and thus reducing consumer bills over the long term. 

Electric utilities around the country offer energy-saving tips and advice. Most also 

have special conservation and energy-management programs and incentives. These 

can include:

• Energy-efficiency rebates to make purchasing high-efficiency appliances, including lighting, heating, air conditioning and refrigeration, and industrial equipment, more affordable. 

• Low-interest loans to help consumers finance the purchase of high-efficiency 

equipment. 

• Online energy audits to enable consumers to analyze their energy use and get 

recommended adjustments from their own computer. 

• Home and commercial construction programs to offer incentives and training to 

encourage energy-saving designs and the installation of high-efficiency appliances, equipment, and lighting. 

• Advanced metering, variable pricing, direct load control and demand response 

programs to encourage industrial, commercial, and residential customers to reduce their electricity use during peak periods. Load control programs give customers a bill credit in exchange for allowing the utility to cycle their large energy-consuming appliances and equipment on-and-off, and demand response 

programs offer innovative rate options to shift electricity use to non-peak periods.

13

EEI and its members also have twice yearly workshops with major national customers where we compare notes on energy efficiency practices, experiences, and new 

ideas. EEI also offers a brochure, ‘‘More Than 100 Ways to Improve Your Electric 

Bill,’’ to help residential customers control their electric bills. 

Consumers support the industry’s energy-efficiency efforts. Two out of three 

Americans now say they are hearing more about the need to use energy efficiently 

and to conserve energy. The vast majority of Americans (80 percent) also say they 

are taking extra steps to conserve electricity in their homes. 

Coalitions Expand the Industry’s Effectiveness 

EEI and its member company utilities are involved in a variety of energy-saving 

coalitions at the national, state, and regional level. For example, EEI currently is 

working with DOE, the Alliance to Save Energy, and a coalition of manufacturers, 

trade groups and consumer groups to implement an energy efficiency and conservation public information and outreach campaign. 

The campaign will educate consumers to use energy wisely by providing tools to 

help them control costs, teach consumers about available energy efficiency tax incentives for homes and appliances, and increase consumer awareness that wise energy 

use is good for the country. This campaign will run through the heating season and 

likely will become part of a long-term public-private effort to change public opinion 

about the value of energy efficient behavior. 

However, this campaign is severely underfunded. In order to be effective, much 

more money is needed. Changing consumer behavior requires a long-term, sustained 

effort. EPAct 2005 authorizes $90 million per year for five years for public education. However, even with private matching funds, including a major contribution 

from EEI, the program will have only about $2 million to spend this winter. 

The electricity industry supports many coalitions focused on energy use. Descriptions of many of the major coalitions appear at the end of this testimony (Appendix 

1). 

EEI’s website [www.eei.org/wiseuse] includes: specific tips on how consumers can 

‘‘take charge of their home heating bills’’ through simple, money-saving steps; brief 

descriptions of the many available individual utility-based conservation and efficiency programs; and information on the hundreds of low-income assistance programs available through our member companies. 

NATURAL GAS

Supply and Demand for Natural Gas-Fired Electricity Generation 

The reality is that the U.S. market for natural gas is a regional market, in contrast to the global oil market. We draw our natural gas supplies almost exclusively 

from a North American resource base, supplemented with some liquefied natural 

gas imports from foreign sources. 

Our supplies from that resource base are currently constrained by two factors: declining production from existing open fields and a public policy decision to place off 

limit for development substantial areas within the U.S. that have natural gas reserves. This resource constraint is exacerbated further by a geographic concentration in the location of our developed gas reserves and related infrastructure. The 

resulting supply shortfall, potential for disruption, and related high prices are a 

drag on the economy and are incompatible with the growing, job-producing economy 

that Americans have come to expect. 

EEI and its member companies have testified in the past that Congress needs to 

take steps to increase supply from every available resource that can be recovered 

consistent with environmental protections. This includes onshore and offshore domestic development, the construction of the infrastructure needed to deliver that 

product to market and access to foreign sources of international liquefied natural 

gas resources. EEI continues to support this position. The Minerals Management 

Service conservatively projects undiscovered and technically recoverable natural gas 

reserves of 128 trillion cubic feet (TCF) in Alaska and 284 TCF offshore. In comparison, the United States currently consumes 22 TCF per year. 

We encourage Congress and the Administration to take the necessary steps to obtain oil and gas production from the unleased portions of Leasehold 181 in the Gulf 

of Mexico and extend the drilling season for selected onshore areas. We applaud the 

beginning of serious discussions of how to address domestic development issues, and 

we believe there can be a solution that addresses the concerns of the coastal states 

and the needs of our national economy. 

‘‘Efficient Dispatch’’ Proposals 

Concern about high natural gas prices has brought about renewed interest in legislative proposals to require the ‘‘efficient dispatch’’ of electric generating plants. 

14

While the goal sounds laudable, these proposals raise serious practical and policy 

concerns about consumer electricity prices and operation of the electricity system. 

Advocates of efficient dispatch are seeking to require greater use of non-utility 

gas-fired generation, which they claim will reduce overall consumption of natural 

gas because these plants tend to be newer and burn gas more efficiently. Both the 

Power Plant and Industrial Fuel Use of 1978 and the Public Utility Regulatory Policies Act (PURPA) were attempts to dictate fuel choices and energy purchases to utilities. Both bills adversely distorted electricity markets, which impacted consumers. 

This is a major reason why EEI opposes federally mandated ‘‘efficient dispatch’’ proposals. Raising consumers’ electricity bills is not a solution to higher natural gas 

prices. 

‘‘Efficient’’ dispatch is not the same as ‘‘economic’’ dispatch. In fact, efficient dispatch can often result in uneconomic dispatch that leads to higher electricity prices 

for consumers. The most efficient gas-fired generating plants do not necessarily provide the lowest-cost power to consumers. Different types of gas-fired plants have different operating features that are important in determining when they are used. 

These include thermal efficiency, short-term fuel costs, fixed capital costs, emission 

rates, plant location and interconnection with the grid, and start-up times, among 

others. It is not possible to decide which plant is the best to operate by looking only 

at thermal efficiency, and it is often the case that the goals of dispatching plants 

with the greatest level of thermal efficiency and dispatching the lowest-cost available power to consumers are incompatible. 

For example, utilities use their less efficient single-cycle gas turbine, gas-fired 

power plants at times of peak demand because these single-cycle plants have the 

ability to start up very quickly, are operationally very flexible and are used for reliability purposes. In addition, older steam turbine plants are generally fully depreciated. Also, their fuel is often supplied under stable, long-term contracts that serve 

to mitigate the price volatility found in the natural gas spot markets. Under such 

circumstances, from a consumer perspective, these plants are the best choice to run 

and have the lowest cost, despite having lower thermal efficiencies than other gasfired plants that may be available. 

Decisions about which plants to run also can affect congestion on the transmission 

system. Running a more efficient plant in one part of the grid instead of a less efficient plant elsewhere on the grid can increase transmission congestion and create 

a situation where some consumers on the ‘‘downstream’’ side of the congestion point 

actually pay more. 

Nationally, utilities routinely operate their generation units in a manner that benefits electricity customers, in an effort to dispatch the lowest cost unit available to 

serve the next increment of load, recognizing any generation or transmission operational constraints. 

In addition to dispatching their own generation units on an economic dispatch 

basis, utilities, on a daily basis, seek out alternative non-utility generation sources 

from which to purchase energy that is available at a lower cost than their own generation. This routine inclusion of non-utility generation in their economic dispatch 

process enables utilities to provide energy to their customers at an even lower cost 

than if they relied exclusively on their own generation portfolio. 

Many regions of the country are served by regional transmission organizations 

(RTOs) or independent transmission organizations (ISOs), which have Federal Energy Regulatory Commission (FERC)-approved dispatch procedures in place that are 

designed to optimize the use of the mix of energy resources available in each respective region. The RTOs and ISOs dispatch generating facilities according to comprehensive dispatch plans that balance a number of important factors, including efficiency, lowest-cost available power, reliability, fuel diversity, environmental goals 

and transmission constraints. 

The dispatch systems used by utilities that are not in RTOs or ISOs are subject 

to regulatory oversight by state regulatory commissions. State commissions ensure 

that short-term costs are minimized, subject to operational, contractual and environmental constraints, and that other objectives are met, such as maintaining reliability, long-term rate stability, fuel diversity, promotion of renewable resources and 

other important criteria. 

Congress should not disturb generation dispatch plans already in place, whether 

they are plans administered by RTOs or ISOs, or utility plans subject to state regulatory oversight. 

During consideration of EPAct 2005, an ‘‘efficient dispatch’’ amendment was offered in the Senate Energy and Natural Resources Committee, where it was defeated by a 17-5 vote. EPAct 2005 requires two federal studies of economic dispatch, 

one to be conducted by DOE and the other by FERC-state joint boards. Congress 

15

* The map has been retained in committee files. 

should refrain from moving forward with more dispatch legislation until it receives 

the results of these studies and any policy recommendations they might propose. 

FUEL DIVERSITY

The Importance of Fuel Diversity 

Low-cost, reliable electricity results, in part, from our ability to utilize a variety 

of readily available energy resources—coal, nuclear energy, natural gas, hydropower, and emerging renewable energy resources, such as wind, biomass and solar. 

Fuel diversity is key to affordable and reliable electricity. This Committee recognized this important fact in crafting EPAct 2005, which includes many provisions 

that will promote long-term fuel diversity. A diverse fuel mix helps protect consumers, our economy and our national security from contingencies such as fuel 

shortages or disruptions, price fluctuations and changes in regulatory practices. A 

diverse fuel mix takes advantage of regional differences in fuel availability that 

have evolved over many decades. 

Coal and electricity are inextricably linked to the economic health of the nation. 

Coal is the fuel for more than half of our country’s electric generation, and electric 

generation drives economic growth. Electric demand, coal-fired generation and GDP 

growth are all projected to grow at a steady pace to 2025 and beyond. 

While coal fuels slightly more than 50 percent of the generation produced in the 

U.S., it fuels upwards of 80 percent of the electric generation in many specific 

states. These coal-fueled plants help to keep the price of electricity stable and affordable for consumers and businesses. The map* at the end of our testimony shows 

how different regions of the country rely on different fuel mixes to generate electricity. Interestingly, roughly 40 percent of coal used for power generation in 2004 

came from the Powder River Basin region in Wyoming. 

Coal will continue to play a key role in electric generation due to its reliability, 

affordability and fuel source security. New baseload generation is projected to come 

from coal and nuclear energy in 2025 and beyond. Between 2004 and 2025, EIA 

projects that 87 gigawatts (GW) of new coal-fired generation will be built. 

EEI member companies are already planning for substantial investment in new, 

large, baseload coal and nuclear generating plants to respond efficiently to growth 

demands, environmental requirements, and the expected limited availability and 

relatively high cost of natural gas. Public databases indicate that there are currently at least 38 large-scale (500 megawatts (MW) or more) coal projects totaling 

30,197 MW being planned. Twenty-two projects (or 18,247 MW) have been announced, while 16 projects (or 11,950 MW) are undergoing feasibility studies. They 

all have scheduled online dates between 2006 and 2013. 

EEI believes that many more such projects are under study but have not yet been 

announced. These new plants promise to be much cleaner than the ones in today’s 

coal-fired fleet, and they will provide opportunities for new advanced clean coal technologies such as super-critical pulverized coal and integrated gasification combined 

cycle plants. Some of these projects may present above-market costs initially, but 

costs will come down and risks will diminish as new plants are built and improved 

designs become standardized. 

Nuclear energy uprates are estimated to account for an additional 3.5 GW of electric generation. However, EEI does not agree with EIA’s projection that no new nuclear plants will become operational between 2003 and 2025, as several consortia 

are working on new plants. Nuclear energy is critical to meeting our country’s growing demand for new baseload generation and is a top-rated option now available for 

reducing greenhouse gas emissions. 

Natural gas plants, which provide baseload generation in some regions, will continue to be well-suited for peaking. Generation from non-hydroelectric renewables—

particularly wind energy—is expected to increase as these technologies become more 

economically competitive and as reliability and transmission issues are addressed. 

Renewables are a growing part of many utilities’ generation portfolio, and EEI supports measures to promote their expansion through tax credits and increased funding for research and development, as well as renewable programs in the states. 

However, because of their intermittent nature and the concomitant need for backup 

generation, renewable resources such as wind and solar energy will be limited in 

their ability to displace coal plants, nuclear energy and hydroelectric plants in baseload generation. 

And, while no new hydroelectric generation is expected, the challenge will be to 

maintain the nation’s hydropower resource through relicensing. In short, it is important to recognize that different regions of the country rely on different fuel mixes 

16

for their electric generation. Secure and diverse electric generation sources are critical to the economy and national security. 

The Need for Environmental Certainty 

Due in part to the complexity, cost and uncertainty of existing clean air regulation, over 90 percent of new power plants built over the past decade have relied on 

natural gas to produce electricity. However, given the unpredictability of natural gas 

supply and price, federal clean air policy must not force increases in the use of natural gas for electric generation. Federal energy and clean air policy goals can be better met, and consumer price increases kept to a minimum, through properly crafted 

‘‘multi-emission’’ legislation, along the lines of Clear Skies. The regulatory certainty 

provided by multi-emission legislation would promote continued use of the nation’s 

abundant and low-cost coal resources, require continuing environmental progress, 

and alleviate pressure on the natural gas supply. 

The U.S. electric power sector has reduced air emissions substantially under existing programs. Since 1980, the industry has cut sulfur dioxide (SO2) and nitrogen 

oxide (NOX) emissions by over 40 percent, while increasing net generation from coal 

by nearly 70 percent. Multi-emissions legislation would require SO2 and NOX and 

mercury emissions to be reduced by an additional 70 percent. 

In addition, power plants could take new steps to increase their efficiency if EPA’s 

2003 NSR rule were codified. Increased efficiency at existing plants leads to lower 

fuel consumption, greater fuel availability to the market, and lower average fuel 

prices due to lower overall demand. Because the electric power industry’s emissions 

of SO2 and NOX are capped, and the regulations require state-of-the-art emission 

controls for all new plants, such improved NSR policy would not increase emissions. 

It also is important to exercise caution to assure that proposals for addressing climate change and greenhouse gas emissions do not increase the pressure to shift 

from coal to natural gas, thus exacerbating the current shortage and price volatility 

of natural gas. Rather, we need to emphasize the development and deployment of 

technologies that will reduce or avoid greenhouse gas emissions. Again, we commend the Committee for your attention to technology advancement in EPAct 2005 

and encourage continuing emphasis in this area. 

Challenges and Possibilities for Near-Term Reductions in Natural Gas Usage for 

Electricity Generation 

Electric power plants are subject to economic, engineering and environmental realities and constraints. For example, power plants built to use natural gas or oil 

cannot burn coal directly. Power plants with long-term fuel contracts may not be 

able to switch to another fuel or procure new supplies in a tight spot market. There 

are challenges to transporting enough coal or oil to some plants; in fact, there are 

cases now where utilities are burning natural gas because of the problems associated with transporting coal out of the Powder River Basin. Nuclear power plants 

are operating at high capacity factors. To increase output at our nation’s nuclear 

plants, companies could upgrade some existing facilities to improve efficiency and 

employ new instrumentation technologies. However, uprate applications and reviews 

are complex and require careful review and approval by the Nuclear Regulatory 

Commission. 

In addition, environmental permits can limit the specific types of coal and oil that 

can be consumed at individual plants. When power plants switch from natural gas 

to oil or use more coal, SO2 and NOX emissions increase, often substantially. Such 

emissions are regulated by the Clean Air Act, state law and local regulations. While 

in many. situations power plants could increase emissions by using more emission 

credits, doing so would come at a steep price (e.g., approaching $1,000 per ton of 

SO2 and $2,500 per ton for NOX). 

That said, there is limited promise that some existing coal-based plants could increase their electric production, or that retired or mothballed plants could be started 

up again. And, although oil prices have increased significantly, the price of oil has 

increased less than that of natural gas, so some natural, gas-based plants potentially could switch to using oil. 

These opportunities often tend to be plant specific and, where feasible, economics 

already are driving these actions to occur. However, regulatory flexibility can help 

to maximize the potential for alternatives to natural gas in the short-term, and our 

companies stand ready to work with regulatory and policymakers to pursue reasonable opportunities. 

CONCLUSION

Depending on the weather and what fuels they use, American consumers are facing significantly higher bills for heating and other energy uses this winter, due 

17

largely to tight supplies of oil and especially natural gas. Electric utilities across the 

country are actively engaged in programs and coalitions to promote conservation 

and to help customers use electricity more efficiently. They also support full funding 

of the federal LIHEAP program for low-income households. 

Natural gas will remain an important part of the electricity generation fuel mix 

for the foreseeable future, so Congress should take action to increase gas supplies, 

while resisting calls for a return to failed or misguided demand-side restrictions on 

natural gas-fired generation. Fuel diversity must remain a fundamental part of our 

national energy policy, including (but not limited to) environmental and transportation policies to promote the use of affordable domestic coal supplies for baseload 

generation; and to facilitate the development and use of hydropower and other renewables. 

APPENDIX 1

ENERGY EFFICIENCY AND CONSERVATION COALITIONS SUPPORTED BY

THE ELECTRIC UTILITY INDUSTRY

Examples of National Coalitions

• Alliance to Save Energy—Educates decision-makers, opinion leaders, and the 

public about the many benefits of energy efficiency. [www.ase.org] 

• DOE Motor Challenge—Increases the market penetration of energy-efficient 

electric motors, where 20 percent of all electricity is consumed. By 2010, the potential savings are over 100 billion kWh/year energy savings and $3 billion 

(U.S.) annual energy cost savings. [www.oit.doe.gov/bestpractices/motors] 

• EPA ENERGY STAR—Voluntary rating system to label appliances and products that are 10-25 percent more efficient than the federal standard. 

[www.energystar.gov] 

• International Utility Efficiency Partnerships—Expands the development of 

international, environmentally friendly, energy-development projects. 

[www.ji.org] 

• Geothermal Heat Pump Consortium—Reduces home heating and cooling energy 

use through the expanded use of geoexchange heat pumps. Homeowners enjoy 

utility bills from 25 to 50 percent lower than with conventional systems. [www. 

geo exchange. org] 

• Peak Load Management Alliance—Promotes the concepts and technologies of 

reducing demand for electricity during peak periods in response to pricing signals in the marketplace. [www.peaklma.com] 

• Utility Hybrid Truck Working Group—Establishes the user requirements and 

performance specifications for a cleaner and more efficient hybrid utility ‘‘bucket’’ truck. H-TUF’s goal is to meet 2010 emissions standards while improving 

fuel economy up to 50 percent and with it, a 50-percent reduction in greenhouse 

gas emissions. [www.weststart.org] 

Examples of State and Regional Coalitions

• The Midwest Energy Efficiency Alliance (MEEA)—Advances energy efficiency in 

the Midwest to support sustainable economic development and environmental 

preservation. [www.mwalliance.org] 

• New England Energy Efficiency Partnership (NEEP)—Promotes energy efficiency in homes, buildings and industry in the Northeast United States. 

[www.neep.org] 

• New York State Energy Research and Development Authority (NYSERDA)—

Administers the New York Energy $martSM program during the transition to 

a more competitive electricity market. Some 2,700 projects in 40 programs are 

funded by a charge on the electricity transmitted and distributed by the state’s 

shareholder-owned utilities. [www.nyserda.org] 

• Northwest Energy Efficiency Alliance (NEEA, or NWEEA)—By 2010, the Alliance and related utility efforts are expected to save the region over 500 

megawatts. Reduction in carbon dioxide emission from the energy savings is estimated at over 2 million tons. [www.nwalliance.org] 

• Southwest Energy Efficiency Project (SWEEP)—Collaborates with utilities, 

state agencies, environmental groups, universities, and other energy efficiency 

specialists on conserving electricity [www.swenergy.org]

The CHAIRMAN. Thank you very much. 

18

Mr. Larry Downes, chairman of the American Gas Association. 

Thank you very much, Mr. Downes, for coming. We are glad you 

are here today. 

STATEMENT OF LAURENCE M. DOWNES, CHAIRMAN, 

AMERICAN GAS ASSOCIATION 

Mr. DOWNES. Thank you, Senator. I appreciate the opportunity. 

As you said, I am here in my role as chairman of the American Gas 

Association. We represent 195 local distribution companies that 

provide service to more than 50 million customers throughout the 

United States. 

I am also chairman and chief executive officer of New Jersey 

Natural Gas Company. We are a local distribution company. 

I am here today to share some thoughts with you on what is perhaps the most pressing issue facing our Nation today, and that is 

ensuring reasonably priced natural gas for our customers. 

Today we are witnessing firsthand the impact of higher natural 

gas prices, the vulnerability of our energy security, and the need 

for increased natural gas supplies. The effects of growing demand 

without adequate supply and other strategies are raising the cost 

of heating our homes and have driven U.S. manufacturing jobs 

overseas. The combination of warm weather during the summer, 

which increased electricity demand, and the catastrophes of hurricanes Rita and Katrina will lead to unprecedented costs to our customers this winter. 

Now, as the face to the customer, which we as local distribution 

companies are, we are doing everything that we can to help our 

customers. I think the first thing I need to point out to the committee is what we really are is lifeline service providers. We are 

really in the business of providing quality of life to our customers, 

and it is our mandate to serve our customers safely and reliably 

no matter what that takes. We have never failed in that regard, 

and we can tell you that we do not expect any supply shortfalls for 

our firm customers for American households this year. 

However, if it is an unusually cold winter, which is certainly beyond the control of all of us here today, some of our industrial and 

commercial customers that have chosen to receive a discount to 

allow their service to be interrupted may see temporary interruptions. However, I can assure you on behalf of our membership that 

we will do our part to keep Americans warm this winter, just as 

we have always done. 

Now, to serve our customers, we build a supply portfolio that is 

based upon natural gas placed in storage and supply contracts that 

have varying terms and prices. One important note I would like to 

make to the committee here today is that our members, natural 

gas utilities, and our customers do not benefit in any way from 

higher prices. We make our money based upon the delivery, not the 

production, of natural gas, and those prices that we charge for delivery are regulated by the various States that we serve. 

Our companies are also working to help our customers help 

themselves. First of all, customers can avail themselves of levelized 

billing plans to smooth out their prices through the year. They can 

help weatherize their homes and implement other energy efficiency 

and conservation measures. We have increased our efforts to reach 

19

out to our customers to communicate exactly what is going on in 

the industry so that we can help them further. 

Now, the Energy Policy Act enacted earlier this year was an important first step in addressing the Nation’s energy challenges. 

What we need now is additional urgent action to reduce the economic burden of record-high energy cost to our customers. I think 

first and foremost what we need to do is to help those who are 

most in need. LIHEAP funding, as Mr. Kuhn mentioned, should be 

increased to the $5.1 billion appropriated level, and we believe that 

we need an emergency appropriation of an additional $1 billion. 

But that said, in addition to an increased emphasis on efficiency 

and conservation, natural gas supplies must be increased. AGA 

supports policies that would increase the supply of natural gas in 

environmentally responsible ways. Among our many recommendations, we have urged Congress to open restricted offshore areas for 

the production of natural gas while giving States the choice as to 

whether to participate in those programs. 

Second, we believe that providing adequate funding and staffing 

to expedite the issuance of permits and facilitate access for natural 

gas exploration and production is very important. 

Congress should also accelerate all Federal energy efficiency 

rulemakings and make sure that we are promoting fuel diversity 

for new electric generation facilities. 

Finally—and this is an initiative I think that we can all participate in—we need to increase the amount of customer education and 

outreach programs. 

In summary, I can assure you that we will provide safe and reliable service to keep our customers warm this winter. We obviously 

have a challenge in dealing with the impact of higher prices on our 

customers. I think the hurricanes showed the vulnerabilities that 

we have and the need for appropriate government policies which 

include not only increasing natural gas supply and production, but 

also locating LNG import terminals outside of the gulf coast. But 

I think when we look at these entire issues, what we really need 

is a multi-faceted approach that will meet our growing demand for 

energy in the most environmentally responsible way. These are 

policies that have to be enacted now that will put us in the best 

position to help our customers. 

Again, on behalf of our membership, we will do everything we 

can to help you, just as we have always done. Thank you very 

much. 

[The prepared statement of Mr. Downes follows:]

PREPARED STATEMENT OF LAURENCE M. DOWNES, CHAIRMAN,

AMERICAN GAS ASSOCIATION

EXECUTIVE SUMMARY

The American Gas Association (AGA) represents the nation’s local gas utilities. 

AGA member companies acquire gas supply for, and distribute it to, their residential and commercial customers. Energy is the lifeblood of our economy and natural 

gas supplies about one-fourth of this country’s energy. Natural gas also is America’s 

most popular home-heating fuel, heating 52 percent of America’s homes. 

By law the local gas utility cannot make a profit on the cost of natural gas, it 

is required to pass through to customers what it pays for the natural gas commodity—without any mark-up. The Department of Energy’s Energy Information Administration has projected that natural gas households will see their winter fuel 

bills rise from about 30 percent to about 67 percent, depending on the winter weathVerDate 0ct 09 2002 08:36 Mar 02, 2006 Jkt 109287 PO 26240 Frm 00023 Fmt 6633 Sfmt 6621 P:\DOCS\26240.TXT SENERGY2 PsN: PAULM
20

er. Clearly, the natural gas prices that are projected for this winter in the wake of 

Hurricanes Katrina and Rita will be a tremendous burden to our customers. 

Our role as a lifeline business infuses the natural gas utility with a mandate to 

serve our customers safely and reliably—we do not fail in this regard. We build a 

supply portfolio that rests on a foundation of natural gas placed in storage during 

the summer months, well in advance of winter cold, when the prices generally are 

lower. To this we add a portfolio of natural gas supply contracts with varying terms 

and prices, and we are, as a whole, increasingly hedging our supply portfolio to promote some degree of price stability. 

Natural gas distribution utilities also help our customers help themselves. To this 

end, customer education is critical. Customers can avail themselves of levelized billing plans and seek help to weatherize their homes and implement other energy efficiency measures. For those who must decide between paying their heating bills or 

paying their medical bills, the Low Income Home Energy Assistance Program 

(LIHEAP) has been designed. Funds must be accessed and accessible. Congress 

must do its part to see that the fully authorized level for LIHEAP of $5.1 billion 

is funded. Emergency appropriations of an additional $1 billion are also needed. 

All of these tools will help this winter. But we cannot as a nation forever mask 

increasing natural gas prices with demand measures targeted at the home heating 

consumer alone. We must begin to take steps to diversify fuels for electricity generation. And we must take action to increase natural gas supply. Without these measures, the upward spiral will continue, and we will, winter after winter, face the 

same scenario—where one fall hurricane, or one winter cold snap can tilt the supply/demand balance against the consumer. 

TESTIMONY

Thank you for the opportunity to testify before this committee again. My name 

is Larry Downes, and I am Chairman and CEO of New Jersey Resources, which operates a natural gas utility in New Jersey that provides service to more than 

455,000 customers. I am also the chairman of the American Gas Association (AGA), 

which represents 195 local energy utility companies that deliver natural gas to more 

than 56 million homes, businesses and industries throughout the United States. 

Energy is the lifeblood of our economy and natural gas supplies about one-fourth 

of this country’s energy. Natural gas also is America’s most popular home-heating 

fuel, heating 52% of America’s homes. As the purveyor of this home-heating fuel, 

natural gas utilities are a lifeline business—it is a responsibility we take seriously 

and, as you will see, it guides our actions. 

Given the recent run up in natural gas prices in the wake of the warmer than 

normal summer and the Katrina and Rita hurricanes, this winter natural gas customers will likely face significantly higher energy bills. Local natural gas utilities 

as a whole have been consumed by planning for the winter heating season and seeking means to ease the burden that high gas prices will place on our customers. 

Accordingly, our focus as a national organization is to pursue policies that will 

help mitigate the high cost of natural gas for our customers this winter and, longer 

term, increase supply. It is shocking to think that the $13 prices projected in the 

American Gas Foundation, ‘‘Natural Gas Outlook to 2020,’’ published in February 

of this year, have already been exceeded for short periods. That study concluded 

that if public policy makers and industry decision makers did not immediately address critical issues that will have a significant impact on the availability and price 

of natural gas, such as diversifying our electric generating mix and increasing access to domestic supplies, then prices could go as high as $13 by 2020. No one imagined that a mere 7 months later those prices would already be a reality. These higher natural gas prices will lead to much higher bills for consumers. 

Higher bills are bad for customers, bad for the economy and bad for the natural 

gas utilities that the American Gas Association represents. More than 63 million 

Americans rely upon natural gas to heat their homes—unexpectedly high prices are 

a serious drain on their pocketbooks. High prices also put our industrial sector at 

a distinct competitive disadvantage, cause plant closings and idle workers. 

Most observers quickly understand why higher prices are bad for customers and 

the economy but are not aware why they are bad for natural gas distribution utilities. By law, natural gas utilities are not allowed to mark-up the price of natural 

gas and must sell the gas to consumers at exactly the same price they pay for it. 

Natural gas distribution utilities make their money by delivering natural to our customers. Higher natural gas prices mean that our customers will purchase less natural gas. So natural gas utilities want what their customers—lower natural gas 

prices and reliable natural gas supply. 

21

1 Impacts of Energy Efficiency and Renewable Energy on Natural Gas Markets: Updated and 

Expanded Analysis, R. Neal Elliott and Anna Monis Shipley, American Council for an EnergyEfficient Economy, Report No. E052 (April 2005) http://aceee.org/pubs/e052full.pdf (adoption 

of a portfolio of energy efficiency measures could reduce natural gas prices by 25 percent in the 

first year). 

Last week the Department of Energy’s Energy Information Administration (EIA) 

issued its Short-Term Energy Outlook and Winter Fuels Outlook (October 12, 2005). 

The American Gas Association does not issue its own natural gas price projections, 

so in my testimony I will be discussing the EIA projected prices. As has been widely 

reported, EIA projects that the average natural gas household’s winter fuel expenditures will be 47.6 percent. Don’t let the decimal point fool you. If history is any 

guide, this EIA predicted percentage surely will change next month both to the right 

and the left of the decimal point. It is important to remember, as EIA carefully 

notes, that the EIA projections are based on modeling results that depend on assumptions regarding some critical variables. A significant assumption is that there 

will be a ‘‘medium recovery’’ of energy operations in the Gulf of Mexico. In other 

words, EIA does not assume either a best-case or worst-case scenario in projecting 

the recovery of natural gas production, gas processing and pipeline facilities in the 

Gulf. Another significant assumption is that the winter weather will be normal. A 

‘‘normal’’ winter means weather somewhat colder than most parts of the US have 

seen in recent years. What if we do not have a normal winter? EIA projects that 

a ten percent warmer than normal winter would cause average residential natural 

gas prices to rise 29.8 percent, while a ten percent colder than normal winter would 

lead to a 67.3 percent price increase. This is quite a price range without considering 

best-case or worst-case Gulf of Mexico recovery scenarios. So that is what we are 

facing nationally—significantly higher natural gas prices in the best of cases and 

extraordinarily higher prices in the worst of cases. 

What are natural gas distribution utilities doing to help their customers this winter? Natural gas utilities are doing what we always do—that which is necessary to 

serve our customers reliably this winter. That means that we are pursuing purchasing strategies that, while tried and true, have also evolved over the past five 

years with ever-rising natural gas prices. It is a building block process that begins 

months ahead of the winter heating season as utilities begin purchasing natural gas 

during the summer months and putting it into underground storage. Usually summer and early fall natural gas prices are lower than winter prices and purchasing 

storage gas in the summer and early fall provides a natural hedge. 

On top of the foundation block of storage, natural gas utilities layer other supply 

and transportation services. Companies build and manage a portfolio of supply, storage and transportation services, which may include a diverse set of contractual arrangements to meet anticipated peak-day and peak-month gas requirements. 

Layered on top of that is an increasing use of financial tools to hedge natural gas 

costs and promote some degree of price stability. Financial hedging tools may include options, fixed-price contracts, swaps, and futures. These hedging tools are 

helpful in reducing price volatility, and while natural gas distribution utilities have 

grown increasingly savvy in their use of these tools over the past few years, they 

still do not always guarantee a lower natural gas price, nor are they designed to, 

quite frankly. Lower prices and price stability can sometimes be competing objectives. 

Natural gas distribution utilities also must help our customers help themselves. 

To this end, customer education is critical for a number of reasons. First, customers 

need to be aware of higher natural gas prices to have an opportunity to take action 

today to reduce this winter’s bills. That is why the American Gas Association and 

individual natural gas distribution utilities are working to communicate to customers regarding the anticipated higher winter bills and to offer consumers some 

tools to protect themselves. 

One important tool is the use of budget or levelized bill plans that allow utility 

customers to spread out their natural gas bills so that they pay about the same 

amount each month year round. Enrollees in fixed bill programs are charged the 

same total bill each month for 11 months, regardless of weather extremes and unpredictable commodity prices. Usually there is an adjustment during the twelfth 

month to reflect differences in actual versus projected costs. 

Another important tool is assisting customers to take steps to increase their 

homes’ energy efficiency and better conserve energy. Energy efficiency and conservation can do much to reduce individual energy consumption and lower customer bills. 

Indeed, one recent study indicated that aggressive energy efficiency measures could 

reduce natural gas prices by up to 25 percent.1 While analysts may quarrel with 

22

2The Growing Need to Help Low-Income Energy Consumers: Government, Charitable, and 

Utility Programs, American Gas Association Energy Analysis, EA 2005-3, (September 14, 2005) 

the likely impact of an increased application of energy efficiency measures on natural gas prices, we know that appropriate customer energy efficiency measures can 

benefit customers and these benefits will be more immediate in today’s high-priced 

environment. 

The American Gas Association thanks this committee for its work in encouraging 

greater consumer energy efficiency and AGA and its members will continue to encourage improved customer energy efficiency and conservation to help reduce the 

sting of higher natural gas prices. 

Another significant utility effort to help customers struggling to pay high natural 

gas bills is found in utility programs that provide low-income customer assistance. 

Each year utility programs and rate structures provide about $1.7 billion in low-income customer assistance.2 These programs are designed to augment the federal 

government’s Low Income Home Energy Assistance Program (LIHEAP), which in recent years has been funded at around $2 billion per year. Much of the utility lowincome assistance comes in the form of rate assistance, which may involve reduced 

rates for low-income households, waivers of fees, and arrearage forgiveness. Other 

utility programs include energy efficiency and weatherization programs that help reduce customer natural gas consumption. 

What we seek from all of these approaches is to flatten out the highest peak of 

natural gas prices and somewhat dampen the impact on customers of high and volatile natural gas prices. In the long term, however, these tools cannot forever mask 

the impact of higher natural gas prices on our customers. Other actions are necessary. They were necessary five years ago, they were necessary last year, and, even 

with enactment of the Energy Policy Act, they remain necessary today. 

Accordingly, AGA recommends the following multifaceted actions be taken to address both ends of the delivery chain—supply and demand. First and foremost, LIHEAP funding should be increased to the full $5.1 billion appropriated level and an additional emergency appropriation of $1 billion should 

be made. Without an increase in funding, the purchasing power of LIHEAP could 

be reduced by up to 50% this winter. The expected rise in home energy costs hits 

low-and fixed-income individuals particularly hard. The National Energy Assistance 

Directors’ Association (NEADA) just released its second annual survey of the effect 

of rising energy costs on poor families. Among the study’s findings: 32 percent of 

families in the survey sacrificed medical care; 24 percent failed to make a rent or 

mortgage payment; 20 percent went without food for at least a day; and 44 percent 

said that they skipped paying or paid less than their full home energy bill in the 

past year. Furthermore, the number of households receiving LIHEAP assistance has 

increased from about 4.2 million in FY 2002 to more than 5 million this year, the 

highest level in a decade. LIHEAP applications are expected to increase significantly 

this winter. The nation should help customers who will be hit hardest by energy 

price increases for home heating and cooling. 

Natural gas supplies must be increased. AGA supports policies that would increase the supply of natural gas in environmentally responsible ways. Demand responses can only go so far toward the goal of lower natural gas prices. And while 

a demand response will help us through this winter, long-term Increasing supplies 

of natural gas must occur if we are to reduce customers’ bills meaningfully. Accordingly, Congress should support appropriate incentives and legislative changes that 

would increase the production of natural gas. These priorities have not changed 

since I testified before this Committee in January of this year, so let me briefly reiterate a few of the most important access issues:

• Opening restricted off-shore areas for the environmentally responsible production of natural gas; 

• Providing adequate funding and staff for the federal offices principally involved 

in the issuance of permits for natural gas and production; 

• Further expanding and expediting procedures for producers to access lands and 

production areas; and 

• Taking steps to increase the U.S. capacity to receive liquid natural gas (LNG) 

shipments.

Energy efficiency programs should be supported that encourage the most efficient 

utilization of all energy forms through the matching of each energy task with the 

most appropriate fuel (e.g., running computers with electricity and heating homes 

and businesses with natural gas). Additionally, incentives should be incorporated for 

more efficient energy use through tax credits for the purchase of energy efficient appliances and the construction of energy-efficient homes and commercial buildings. 

23

Congress should further accelerate the effective date of energy efficiency tax incentives in the Energy Policy Act and fund energy awareness programs at the Department of Energy. 

Diversity should be the goal for fuels for new electricity generation facilities. In recent years, due to its lesser impact on the environment, natural gas has been the 

dominant fuel for new electricity generation. Electricity generation remains the fastest growing sector of natural gas demand. This increase in demand has occurred 

while production has remained stable, driving prices higher. AGA supports the direct use of natural gas and encourages electricity generators to seek greater fuel diversity, such as clean coal, nuclear, alternative and renewable fuels. AGA urges 

Congress to provide incentives for and reduce regulatory barriers to electricity generation facilities that use clean coal, nuclear energy and alternative and renewable 

fuels. 

Consumer education should be the goal not just of natural gas distribution utilities 

but of all policy makers. We in the utility sector will continue our efforts to educate 

our customers—we urge Congress to also educate our customers, their constituents, 

so that every avenue to the customer is blanketed with information that will ease 

the potential cost burden that will be imposed this winter by natural gas bills. 

CONCLUSION

For the past five years the natural gas distribution utility and our customers have 

been operating in challenging times—this winter will be no exception. While natural 

gas customers can do their part by embracing energy efficiency solutions, policy 

makers in Washington must do their part to balance supply and demand. 

PREPARED STATEMENT OF AMERICAN GAS ASSOCIATION

FEDERAL ENERGY PRIORITIES OF NATURAL GAS UTILITIES

The Energy Policy Act of 2005 was a good first step in meeting the nation’s longterm energy needs. However, the federal government has not adequately addressed 

the need for more and diverse energy supplies, or more relief for those most at risk. 

Urgent action is needed now to reduce the economic burden of record-high energy 

costs on consumers. The federal government should take action to:

• Increase the funding for the Low Income Home Energy Assistance Program 

(LIHEAP) 

• Increase natural gas supply for consumers 

• Diversify the portfolio of fuels for electricity generation 

• Support energy efficiency programs

Increase The Funding for Low Income Energy Assistance Program (LIHEAP) 

The nation should help customers who are hit hardest by the recent dramatic energy price increases for home heating and cooling by increasing the appropriation 

for LIHEAP. AGA urges Congress to:

• Increase the annual LIHEAP appropriation to $5.1 billion 

• Appropriate $1 billion for emergency assistance 

Increase Natural Gas Supply 

AGA supports policies that would increase the supply of natural gas in environmentally responsible ways because additional supplies typically mean energy lower 

bills for consumers. AGA urges Congress to:

• Open restricted off-shore areas for the environmentally responsible production 

of natural gas, including in the eastern Gulf of Mexico and on the outer continental shelf (OCS) 

• Provide adequate funding and staffing for the federal offices principally involved 

in the issuance of permits for natural gas exploration and production 

• Reform the National Environmental Protection Act (NEPA) process so that it 

works to protect the environment and allows for responsible natural gas production 

• Adopt streamlined and expedited procedures for producers to access lands and 

ensure that year-round production can occur in the intermountain west 

• Take steps to increase the U.S. capacity to receive liquefied natural gas (LNG) 

shipments 

• Codify into law Executive Order 13211 and a Federal Office of Energy Project 

Coordination 

24

Diversify The Fuel Portfolio for Electricity Generation Facilities 

Natural gas is now the predominant choice as a primary fuel for new electricity 

generation. Electricity generation has been the fastest growing sector of natural gas 

demand. This increase in demand has not been matched by production increases, 

driving prices higher for all consumers. AGA supports the direct use of natural gas 

and encourages electricity generators to seek greater fuel diversity. AGA urges Congress to:

• Provide incentives for, and reduce regulatory barriers to, electricity generation 

facilities that use clean coal, nuclear energy, and alternative and renewable 

fuels, and dual-fuel capability 

Support Energy Efficiency Programs 

AGA supports policies that encourage the most efficient utilization of all energy 

forms through the matching of each energy task with the most appropriate fuel (e.g. 

running computers with electricity and heating homes and businesses with natural 

gas). AGA urges Congress to:

• Accelerate the effective date of the energy efficiency tax incentives in the Energy Policy Act • Fund energy awareness effort by DOE

The CHAIRMAN. Thank you very much, Mr. Downes. 

Mr. Peter Smith, chairman of the National Association of State 

Energy Officials from Alexandria, Virginia. Thank you for joining 

us. 

STATEMENT OF PETER R. SMITH, CHAIRMAN, NATIONAL 

ASSOCIATION OF STATE ENERGY OFFICIALS 

Mr. SMITH. Thank you, Mr. Chairman. It is a pleasure to be here 

today. Mr. Bingaman, members of the committee. Thank you for 

the opportunity to testify on the critical energy situation we are 

facing this winter. My name is Peter Smith and I am chairman of 

the National Association of State Energy Officials, NASEO, which 

represents the energy offices within the States, territories, and the 

District of Columbia. NASEO members serve as energy policy advisors to our respective Governors and implement a variety of energy 

programs targeted to all sectors of the economy. We are also responsible for dealing with energy emergency responses. 

I am also president of the New York State Energy Research and 

Development Authority, NYSERDA, and I have worked on energy 

issues for the State of New York for almost 30 years. 

Guy Caruso has done a great job describing the difficult situation 

we are facing. We believe that high prices will continue for an extended period of time, well beyond this winter. 

At the State level, as soon as the scope of the problem associated 

with hurricane Katrina became apparent, NASEO convened all the 

State energy offices by conference call to share situation reports 

and response procedures. What we found over the years is that it 

is critical to coordinate our responses so that adjoining States do 

not take dramatically different actions than their neighbors thereby exacerbating the situation. 

In addition to conference calls, which occurred on a daily basis 

in the immediate aftermath of Katrina, we shared model energy 

emergency declarations, executive orders, public service announcements, emergency response plans, and accelerated energy conservation measures. We then arranged for regional conference calls that 

have continued on an as-needed basis. 

We have had good cooperation from the Department of Energy’s 

Office of Electricity Delivery and Energy Reliability. RepresentaVerDate 0ct 09 2002 08:36 Mar 02, 2006 Jkt 109287 PO 26240 Frm 00028 Fmt 6633 Sfmt 6602 P:\DOCS\26240.TXT SENERGY2 PsN: PAULM
25

tives from that office, headed by Kevin Kolevar, have worked closely with the States. 

The States also initiated price-gouging investigations on a coordinated basis with cooperation between multiple State agencies and 

our States’ attorney generals. 

States have also initiated public information campaigns to reduce 

usage and take certain steps that can help, such as: one, using the 

most efficient family car; taking advantage of State and utility programs to implement energy efficiency measures; increasing car 

pooling, van pooling, telecommuting; encouraging homeowners to 

add insulation, caulk, weather strip, replace furnace filters, and car 

tune-ups; also lowering thermostats and insulating water heaters; 

and installing programmable thermostats. In New York State, we 

have directed people to our getenergysmart.org Web site, and we 

are encouraging the use of Energy Star products and appliances. 

Most States have call-in numbers and Web sites for consumers. My 

written testimony includes our efforts in New York, and we can 

supply specific examples from all the other States at your request. 

In New York, as in many States, we have updated our energy 

emergency response plans to coordinate State and local energy 

agency actions. 

On September 15, 2005, NASEO joined with the other State associations to write both the President and the congressional leaders 

urging additional Federal funds for a set of programs that provide 

a near-term opportunity to reduce peak energy uses immediately. 

I will not repeat the contents of the letter here. I am attaching it 

to my testimony. We urge this committee to support efforts to fund 

key elements of the Energy Policy Act of 2005, which is generally 

the thrust of the letter from the State groups. 

We also support the efforts that Chairman Domenici has taken 

to encourage DOE interest in a number of programs. Chairman 

Domenici wrote to Energy Secretary Bodman in September asking 

whether the Department could release funding quickly if funds 

were provided by Congress for certain key programs. These programs include: the State Energy Program; the Weatherization Assistance Program; and sections 126 and 140 of the Energy Policy 

Act of 2005, which provides for pilot energy efficiency measures for 

low-income communities and States. NASEO believes that if sections 126 and 140 were funded and targeted to the far Gulf Coast 

States—Alabama, Louisiana, Mississippi, and Texas—that were severely impacted by the hurricanes Katrina and Rita, that reconstruction could proceed in an energy efficient manner. Last week 

Governors Barbour, Blanco and Riley sent a letter to Senator 

Domenici requesting funding for section 126 and section 140. 

Senator Bingaman has taken a similar approach in a series of 

letters to the congressional leadership and the President recommending a number of creative measures, many of which were included in the Energy Policy Act of 2005. On a bipartisan basis, 35 

Senators wrote to Chairman Domenici and Ranking Member Reid 

of the Energy and Water Development Appropriations Subcommittee urging immediate expansion of funding to the authorized levels for the State Energy Program, for the Low-Income 

Weatherization Program, and the energy efficiency public education 

initiative. A number of Senators on this committee endorsed this 

26

effort. A similar letter was delivered to the House Energy and 

Water Subcommittee. 

If the State Energy Program was funded at the authorized level 

of $100 million, the States could implement a dramatically expanded program to reduce energy consumption for residential consumers, schools, hospitals, businesses, and the agricultural sector. 

For every Federal dollar invested in the program, over $7 is saved 

in energy costs. 

If the Weatherization Assistance Program was funded at the authorized level of $500 million, approximately 230,000 homes could 

be weatherized in the coming year. Every home that is weatherized 

reduces energy usage by approximately 25 percent. 

We support additional LIHEAP funds of approximately $3.1 billion to bring funding for fiscal year 2006 to the authorized level of 

$5.1 billion. 

The CHAIRMAN. What was that one, sir? 

Mr. SMITH. We would increase LIHEAP to $5.1 billion from $3.1 

billion in emergency funds. 

As noted previously, with increasing heating costs of several hundred dollars per household, this level of funding would only keep 

pace with the increases for the same 15 percent of the targeted 

population. This is not, in fact, a program expansion. 

Thank you very much for the opportunity. I look forward to your 

questions. 

[The prepared statement of Mr. Smith follows:]

PREPARED STATEMENT OF PETER R. SMITH, CHAIRMAN, NATIONAL ASSOCIATION OF

STATE ENERGY OFFICIALS, AND PRESIDENT, NEW YORK STATE ENERGY RESEARCH

AND DEVELOPMENT AUTHORITY

Good morning. My name is Peter R. Smith. Chairman Domenici and Ranking 

Member Bingaman, thank you for the opportunity to testify today on the critical energy situation we are facing this winter. We believe high prices will continue for 

an extended period of time, well beyond this winter. I am Chairman of the National 

Association of State Energy Officials (NASEO), which represents the energy offices 

within the states, territories and District of Columbia. NASEO members serve as 

energy policy advisors to our respective Governors and implement a variety of energy programs targeted to all sectors of the economy. We are also responsible for 

dealing with energy emergency responses. I am also President of the New York 

State Energy Research and Development Authority (NYSERDA). I have worked on 

energy issues for New York State for almost thirty years. 

Last week, NASEO hosted the Winter Fuels Outlook sponsored by DOE’s Energy 

Information Administration and Office of Electricity Delivery and Energy Reliability. We have conducted this Winter Fuels Outlook for many years, but this year 

the media and public attention was striking, largely due to the significant increases 

in a broad range of energy prices. Both the Chairman and Ranking Member of this 

Committee have spent many years trying to get the public’s attention to focus on 

important energy problems. These energy problems have not been created overnight 

and they will not be solved overnight. 

Today I will discuss the winter fuels outlook, the impact of these high prices, what 

we are doing about it at the state level and what can be done about it at the federal 

level. 

HIGH PRICES AND CONSUMER IMPACTS

Guy Caruso has done a good job describing the difficult situation we are facing, 

including the almost 50% increase in natural gas prices (approximately 70% in the 

Midwest), increases of approximately one-third for heating oil (mostly impacting the 

northeast and mid-Atlantic regions), increases of approximately 30% for propane 

(impacting rural areas throughout the nation) and lesser increases of 5% in electricity costs. Even this smaller increase in direct electricity costs is misleading beVerDate 0ct 09 2002 08:36 Mar 02, 2006 Jkt 109287 PO 26240 Frm 00030 Fmt 6633 Sfmt 6621 P:\DOCS\26240.TXT SENERGY2 PsN: PAULM
27

cause of significant price spikes in states and for individual utility companies where 

natural gas prices set the marginal cost of electricity. 

I will not repeat Guy Caruso’s statement, but I want to illuminate some critical 

facts. First of all, this winter’s projected price increases are on top of significant 

price increases last winter. This means that lower-income Americans, including 

those who are elderly and disabled, will be at far greater risk. It is well known that 

the poor pay a far greater percentage of their income for energy costs than do more 

affluent Americans. Further, many households in the middle income category will 

be significantly affected as well. In addition, for those households that both heat and 

drive, the double whammy of high heating fuel costs and high gasoline costs, is a 

huge burden. 

A number of the state energy offices also operate the Low-Income Home Energy 

Assistance Programs (LIHEAP). In those states, where the energy offices do not actually operate the program, we work very closely with the LIHEAP offices in our 

respective states. With the FY’05 federal funding of approximately $2 billion, 15.6% 

of eligible households (federal eligibility is 60% of median income) were served, 

which equates to approximately 5 million families. The average benefit was approximately $313. States supplement these funds with state public benefit funds, in addition to other resources provided through private or utility networks. With winter energy prices escalating at hundreds of dollars per household we expect an enormous 

number of people to face stark choices as they choose between heating and eating, 

or other necessities. I want to stress that this is not simply a cold weather state 

problem. Next summer, with high prices expected to continue, the costs of air conditioning will likely increase dramatically, with similar impacts on low and middle income Americans. In addition, rural America is facing a crisis with escalating propane prices. 

Another key issue is the concern regarding instability in energy prices. Clearly, 

prices have not only escalated but have been extremely volatile. A number of factors 

have contributed to the volatility, but ‘‘just-in-time’’ inventories have a role to play. 

Again, while many upper income Americans select budget billing plans, where they 

pay an equal amount each month, individuals that live paycheck-to-paycheck generally do not participate in these plans. 

STATE ACTIONS

At the state level, as soon as the scope of the problem associated with Hurricane 

Katrina became apparent, NASEO convened all the state energy offices by conference call to share situation reports and response procedures. What we have found 

over the years is that it is critical to coordinate our responses so that adjoining 

states do not take dramatically different actions than their neighbors, thereby exacerbating the situation. In addition to conference calls, which occurred on a daily 

basis in the immediate aftermath of Katrina, we shared model energy emergency 

declarations, executive orders, public service announcements, emergency response 

plans and accelerated energy conservation measures, etc. We then arranged for regional conference calls. These calls have continued on an as-needed basis. We have 

had good cooperation from DOE’s Office of Electricity Delivery and Energy Reliability. Representatives from that office, headed by Kevin Kolevar, have worked 

closely with the states. 

Approximately one-half of the states are involved in the State Heating Oil and 

Propane Program (SHOPP), which involves real-time surveys of prices and supplies 

for heating oil and propane during the winter months. In this activity, we have 

worked closely with EIA. 

The states also initiated ‘‘price gouging’’ investigations on a coordinated basis with 

cooperation between multiple state agencies and the state attorneys general. We applaud efforts to expand the Federal Trade Commission’s investigatory efforts in this 

regard, as well as penalty provisions. Obviously, in a largely decontrolled energy 

market ‘‘price gouging’’ is harder to define. Each state has different consumer fraud 

statutes, but cooperation is expanding. As in any business, individual dealers may 

attempt to take advantage of a difficult situation, especially where panic buying is 

occurring. This is an area where we have encouraged the public to remain calm but 

to also report unusual prices. In the area of consumer fraud, our offices, in conjunction with the state attorneys general and consumer protection offices, are closely 

tracking any efforts by individual dealers to break fuel contracts. In some instances, 

even when supplies are available, some companies will attempt to claim ‘‘force 

majeure’’ in order to take advantage of higher prices. At this point, we have not 

identified a trend. This appears to be individual bad actors. 

States have also initiated public information campaigns to reduce usage and take 

certain steps that can help, such as: 1) utilizing the most fuel-efficient family car; 

28

* The letter has been retained in committee files. 

2) taking advantage of state and utility programs to implement energy efficiency 

measures; 3) increasing carpooling, vanpooling and telecommuting; 4) encouraging 

homeowners to add insulation, caulk, weather strip, replace furnace filters, and car 

tune-ups, etc.; 5) lowering the thermostat and insulating water heaters; and 6) installing programmable thermostats. In New York, we have directed people to our 

www.getenergysmart.org web site and we are encouraging the use of Energy Star 

products and appliances. Most states have call-in numbers and web sites for consumers. 

Again, New York has taken steps similar to other states. We have instituted a 

‘‘Have an Energy Smart Winter’’ public outreach campaign that is multi-agency and 

multi-media, with the express purpose of making consumers aware of what they can 

do immediately to reduce their energy bills this winter. The campaign provides both 

energy savings tips and gives consumers information about other assistance programs that can help with their winter heating costs. Our grass roots public relations 

program is underway with spokespersons from agencies and authorities throughout 

the State doing radio and television talk shows, as well as providing opinion pieces 

to newspapers across the State. Governor Pataki has also proposed the following additional actions:

1) Home Heating Tax Credit for the elderly—State would offer a refundable 

personal income tax credit of 25% of home heating expenses when those expenses exceed 7.5% of income. Residents 65 or older with incomes up to $75,000 

would be eligible and the tax credit maximum would be $500. 

2) Home Energy Assistance for the elderly and low-income—The State will 

provide additional funds of up to $25 million, and will encourage expanded federal LIHEAP emergency funds. 

3) Small Business and Farm Energy Assistance—Small businesses and farmers would be provided a refundable credit equal to 25% of heating costs (up to 

$3,000), if their energy costs exceed 10% (small business) or 5% (farms) of their 

overall operating costs. 

4) Tax Credit for Home Heating Systems—A personal income tax credit, up 

to $500, would be offered to homeowners for 50% of the costs related to the upgrade or renovation of a residential home heating system. 

5) Sales Tax Free Week for Energy Star—In order to encourage home energy 

conservation, two sales tax free weeks would be offered for the purchase of Energy Star appliances, weather stripping, caulk or insulation (this is similar to 

the effort undertaken in Georgia).

In New York, as in many other states, we have updated our energy emergency 

response plans to coordinate state and local agency actions. The state energy offices 

and the state utility commissions have expanded cooperative activities. For example, 

in New York, customers who hold interruptible gas contracts must have either alternative supplies, such as distillate fuel, in place or in designated storage or must 

have contractual rights to alternative supplies. This will hopefully avoid more significant market dislocations. A number of states have initiated innovative actions 

in this regard. 

As part of our state energy emergency plans, depending on the energy situation 

this winter, the state energy offices we will be prepared to institute other measures. 

These actions include possible implementation of ‘‘set-aside’’ programs, where available supplies are targeted to high priority uses, such as police, fire and hospital 

services. NASEO’s Energy Data and Security Committee, chaired by Jeff Pillon of 

Michigan, has prepared Energy Emergency Response Guidelines, for use by the 

states. These are proving quite helpful, especially to those energy officials who have 

not been through a few crises. 

FEDERAL ACTIONS

On September 15, 2005, NASEO joined with the National Association of Regulatory Utility Commissioners (NARUC), the National Energy Assistance Directors 

Association (NEADA—state officials in charge of the LIHEAP program) and the National Association for State Community Service Programs (NASCSP—state officials 

in charge of the Low-Income Weatherization Assistance Program), to write both the 

President and the congressional leadership urging additional federal funds for a set 

of programs that would provide a near-term opportunity to reduce peak energy 

usage immediately. I will not repeat the contents of that letter in its entirety, but 

I am attaching it to my testimony.* We urge this Committee to support efforts to 

29

fund key elements of the Energy Policy Act of 2005, which is generally the thrust 

of the letter from the state groups. 

We urge continuing support for the efforts of the Energy Information Administration and the Office of Electricity Delivery and Energy Reliability at DOE. These offices have been critical during this emergency. We will continue our close cooperation with these two DOE offices through our Energy Emergency Assurance Coordinators (EEAC) list, to monitor markets on a state, regional and national level, and 

to accelerate our efforts to reduce the vulnerability of critical infrastructure. In our 

opinion, these offices have not received sufficient funds, especially with the limited 

involvement of the Department of Homeland Security in energy emergency response. 

NASEO supports the specific federal actions that have been taken thus far: 1) releasing oil from the Strategic Petroleum Reserve; 2) temporarily waiving environmental requirements for gasoline types; 3) waiver of the Jones Act to permit domestic transfers of petroleum products on non-U.S. flagged tankers; 4) waiver of driver 

hour limitations to permit tanker truck drivers to deliver needed supplies; and 5) 

coordinated release of oil from IEA participating countries. We believe that we 

should also examine the role of expanded strategic inventories of natural gas and 

other products. Proposals, such as the one to expand the Northeast Heating Oil Reserve, is a good start, but may not be sufficient. Opportunities for expanded natural 

gas storage should be developed and consideration should be given to primary and 

secondary distillate storage. When this issue was raised over a decade ago it appeared that it might simply raise prices, but with increasing volatility and ‘‘just-intime’’ inventories, we should address this issue together. NASEO is also concerned 

about diversity of supplies and refining capacity. We should examine opportunities 

for expansion and development of new refineries, not only including traditional refineries but also bio-refineries and alternative fuel supplies. Distributed generation 

utilizing alternative fuel supplies should be an element of this examination. 

NASEO is pleased that Energy Secretary Bodman has joined with Kateri Callahan and the Alliance to Save Energy to promote a more aggressive public information campaign. We support funding for that program. Twelve NASEO members, led 

by the Colorado Energy Office and its former Director, Rick Grice, worked with the 

Ad Council to develop this public information campaign over a year ago. DOE also 

joined the states in providing funding. 

As noted previously, public information efforts are critical and can lead to reductions in energy use. During the California electricity crisis in 2001, a far-reaching 

public information campaign, led by the California Energy Commission (the state 

energy office in California), produced a dramatic reduction in energy use at peak 

periods. We support significantly expanded funding for the Energy Star efforts at 

both EPA and DOE. Again, this will make a difference. 

We also support the efforts that Chairman Domenici has taken to encourage DOE 

interest in a number of programs. Chairman Domenici wrote to Energy Secretary 

Bodman in September asking whether the Department could release funding quickly if funds were provided by Congress for certain key programs. These programs include: 1) the State Energy Program (SEP); 2) the Weatherization Assistance Program; and 3) Sections 126 and 140 of the Energy Policy Act of 2005, which provides 

for pilot energy efficiency measures for low-income communities and states. NASEO 

believes that if Sections 126 and 140 were funded and targeted to the four Gulf 

Coast states (Alabama, Louisiana, Mississippi and Texas) severely impacted by both 

Hurricanes Katrina and Rita, that reconstruction could proceed in an energy efficient manner. Last week Governors Barbour, Blanco and Riley sent a joint letter 

to Chairman Domenici requesting funding for Sections 126 and 140. 

Senator Bingaman has taken a similar approach in a series of letters to the congressional leadership and the President recommending a number of creative measures, many of which were included in the Energy Policy Act of 2005. On a bipartisan 

basis, 35 Senators wrote to Chairman Domenici and Ranking Member Reid of the 

Energy and Water Development Appropriations Subcommittee, urging an immediate 

expansion of funding to authorized levels for the State Energy Program ($100 million) (Energy Policy Act of 2005—Section 123), the Low-Income Weatherization Assistance Program ($500 million) (Energy Policy Act of 2005—Section 122) and an energy efficiency public education initiative ($90 million) (Energy Policy Act of 2005—

Sections 131 (Energy Star) and 134). A number of Senators on this Committee endorsed this effort. A similar letter was delivered to the House Energy and Water 

Subcommittee. 

If the State Energy Program was funded at the authorized level of $100 million, 

the states could implement a dramatically expanded program to reduce energy consumption for residential consumers, schools, hospitals, businesses and the agriculVerDate 0ct 09 2002 08:36 Mar 02, 2006 Jkt 109287 PO 26240 Frm 00033 Fmt 6633 Sfmt 6621 P:\DOCS\26240.TXT SENERGY2 PsN: PAULM
30

tural sector. For every federal dollar invested in the program, over $7 is saved in 

direct energy costs. 

If the Weatherization Assistance Program was funded at the authorized level of 

$500 million, approximately 230,000 homes could be weatherized in the coming 

year. Every home that is weatherized reduces its energy usage by approximately 

25%. In a time of increased energy costs those reductions are significantly more valuable, and are long-lived. These investments will continue to help consumers meet 

their energy needs for years to come. 

Similar letters signed by even more Senators and House members endorsed additional funding for LIHEAP. We support additional emergency LIHEAP funds of approximately $3.1 billion, to bring funding for FY’06 to the authorized level of $5.1 

billion. As noted previously, with increases in heating costs of several hundred dollars per household, this level of funding would only keep pace with the increases 

for the same 15% of the targeted population. This is not, in fact, a program expansion. With the level of prices expected, even where there are winter shut-off moratoriums in effect, we can predict significant numbers of shut-offs in the coming 

months through next spring. In the case of heating oil and propane users, where 

there is no comparable shut-off moratorium, we should expect significant hardship. 

While attempting not to be inflammatory; without additional resources people are 

in jeopardy of freezing to death this winter. 

Congress should also accelerate the relevant tax credits contained in the Energy 

Policy Act of 2005 to October 1, 2005, from the present date of January 1, 2006. 

While the IRS has not completed its guidance documents, if Congress accelerated 

these credits then consumers could make use of them immediately. Section 1333 of 

the Energy Policy Act provides homeowners a credit of up to $500 for installing energy efficient improvements to their homes, such as insulation, windows and HVAC 

equipment. Section 1332 of the Bill would provide credits of $1000—$2000 to builders and manufacturers of energy-efficient homes. New construction should set the 

pace for reduced energy usage. The energy efficient commercial buildings deduction 

(Section 1331) and the credit for residential energy efficient property (Section 1335) 

could also be accelerated to great positive effect. In light of our excessive reliance 

on oil-based fuel in the transportation sector, we also support expansion of the credit for hybrid vehicles. 

In addition, separate letters have been sent by a variety of groups to the Administration and congressional leaders encouraging acceleration of the tax credits (Sections 1332 and 1333), full funding of the public information initiative and support 

for the State Energy Program, the Weatherization Assistance Program, the state energy efficiency pilot program (Section 140 of the Energy Policy Act) and the Appliance Rebate Program (Section 124 of the Energy Policy Act). Signatories of these 

letters include both the American Gas Association and the Edison Electric Institute, 

who are with me on the panel today, as well as the American Chemistry Council, 

NASEO and others. 

Funding of Section 9006 of the 2002 Farm Bill, is the only short-term measure 

that could be implemented which is not included in the Energy Policy Act of 2005. 

FY’05 funding was $23 million. If funding could be dramatically expanded it could 

help reduce costs for farmers and rural small businesses immediately. 

In summary form, the proposed federal emergency funding request for FY’06 is 

a follows:

1) LIHEAP—$5.1 billion ($3.1 billion in emergency funds above FY’05 funding 

levels); 

2) State Energy Program—$100 million ($56 million above FY’05 funding levels); 

3) Weatherization—$500 million ($273 million above FY’05 funding levels); 

4) Energy Efficient Appliance Rebate Program—$50 million (new program); 

5) Energy Star Program—$105 million ($95 million for EPA, which is $45 million over FY’06 appropriated funding and $10 million for DOE, which is $5.5 

million over FY’05 funding levels); 

6) Energy Efficient Public Information Initiative—$90 million (new program); 

7) State Building Energy Efficiency Codes—$34 million ($29.5 million above 

FY’05 funding levels); 

8) Heating, Ventilation and Air Conditioning maintenance program—$5 million (new program); 

9) Energy Efficiency Pilot Program for the Gulf Coast states—$5 million (new 

program—targeted to Alabama, Louisiana, Mississippi and Texas); 

10) Low-Income Community Energy Efficiency Pilot Program for the Gulf 

Coast states—$20 million (new program—targeted to New Orleans, Gulfport, 

Biloxi, Mobile, Port Arthur and Beaumont); 

31

11) Energy Efficient Public Buildings Program—$30 million (new program); 

12) State Technologies Advancement Collaborative—$20 million ($13.5 million 

above FY’05 funding level); and 

13) Section 9006 of the 2002 Farm Bill—$46 million ($23 million above FY’05 

funding levels).

As stated previously, this would simply fund the key elements of the Energy Policy Act of 2005 (other than item 13 above), which would have an immediate and 

positive impact. 

In order for these programs to provide this relief, the funds must be distributed 

within two weeks of appropriation, and no later than mid-November. DOE’s history 

in releasing funds, at least for Weatherization and the State Energy Program, is 

that if funding is appropriated in October, the states don’t receive it until June of 

the following year. This is unacceptable. DOE procurement processes must be accelerated. 

We are also deeply concerned with the impact of high prices on domestic manufacturing and jobs in this sector, such as the chemical industry. The Nation should expand funding for industrial energy efficiency. NASEO supports Secretary Bodman’s 

announcement to work with the 200 largest industrial facilities on energy use. Unfortunately, funding for the industrial energy efficiency program has been cut from 

over $140 million a few years ago to the FY’06 Budget proposal of $58 million. This 

effort is inconsistent and counter-productive. 

One additional matter is of serious concern, and should be noted. This is not the 

time to eliminate the six regional offices operated by the Department of Energy. As 

we are attempting to deal with an energy emergency, we should not be eliminating 

the Department’s outreach arm to the states, businesses and others. 

CONCLUSION

We have attempted to address both the short-term impacts and both state and 

federal responses. Immediate congressional action is imperative. We deeply appreciate the opportunity to testify and thank you for your long-term interest in a balanced national energy policy. 

I am prepared to answer any questions that you might have.

The CHAIRMAN. Thank you very much. 

Mr. Jack Sullivan, executive vice president and CEO of the New 

England Fuel Institute. 

STATEMENT OF JACK SULLIVAN, EXECUTIVE VICE PRESIDENT 

AND CEO, NEW ENGLAND FUEL INSTITUTE, WATERTOWN, MA 

Mr. SULLIVAN. Good morning, Mr. Chairman, and thank you, 

Senator Bingaman. 

New England Fuel Institute is a 50-year-old oil heat trade association of small businesses, to say the least, oftentimes second, 

third generation, and in some cases third and fourth generation 

businesses. But today I am here to represent the heating oil industry in the 22 States that actually support heating oil. 

Before I get on with my testimony, I just want to compliment 

this august body in the passage of the Energy Policy Act of 2005. 

One of the items that was passed in that policy act was the reauthorization of the National Oil Heat Research Alliance, NOHRA, 

very important. And what that has done is to give this industry an 

opportunity that allows these independent businesses to start to 

look at different things that can improve the quality of life for consumers. And we have done so. 

Over the period of the last 2 years’ time and continuing on in the 

future, we are looking at things such as improving the quality of 

our fuel, upgrading the types of equipment that we offer to consumers, higher efficiency standards for equipment, and on top of 

that, technical training and education. We have over 9,900 certified 

technicians that service reliability and performance. So it is beVerDate 0ct 09 2002 08:36 Mar 02, 2006 Jkt 109287 PO 26240 Frm 00035 Fmt 6633 Sfmt 6602 P:\DOCS\26240.TXT SENERGY2 PsN: PAULM
32

cause of you, because of your judiciousness that this process is in 

place, and consumers are going to benefit. 

Today I want to provide the heating oil industry’s outlook from 

the perspective of a small retailer serving homeowners. 

Supply and price increases. For the past year, the prices of crude 

oil and correspondingly refined petroleum products, including home 

heating oil, have been rising. Moreover, with the onset of hurricane 

Katrina and Rita, the Nation faces a worse situation. The production of refined petroleum products is well below normal. 

Fortunately, home heating oil stocks were at reasonably good levels before the hurricanes. Today inventories on the east coast, the 

area of greatest consumption, are at approximately 38.3 million 

barrels. This volume is about 24 percent greater than the 30.9 million barrels held 1 year ago, and it is 21 percent greater than the 

average inventories of 31.6 million barrels held from 2002 through 

2004. Storage facilities are generally filled, and the mild weather 

to date has resulted in a very limited draw-down on this product. 

We do not foresee any product shortages. Consumers will be well 

served. However, anticipated slightly colder-than-normal weather 

and the continuing impact of the hurricanes on energy production 

will, of course, affect this price. 

Impacts on consumers. Heating oil prices are predicted to increase as much as one-third over a year ago. Such an increase will 

adversely affect all consumers. To minimize this impact, the heating oil industry works aggressively to inform consumers of ways in 

which they can conserve energy. 

However, in many instances, consumers simply lower their thermostats, close off portions of their homes, and live essentially in 

the family room and kitchen. Further, consumers often have no 

choice but to pay their heating bills more slowly than in prior 

years. 

Low-income families. In contrast, higher heating bills will have 

a far more significant impact on low-income families. These consumers are already living at a very basic level and have nothing 

to cut back. Particularly in the Northeast and the Midwest, low-income individuals often must choose among essentials: heat, food, or 

medicine. These families will be put at great risk this winter. 

Home heating oil dealers. High heating oil prices also will have 

a devastating effect on the small businesses that supply fuel to 

homeowners. We estimate that dealers will need approximately 

three times the credit lines that they needed last year to purchase 

the same amount of fuel. Without substantially increasing their 

lines of credit, dealers will not be able to meet their customers’ demands. In the past, traditional lending institutions have been unwilling to make additional loans to dealers because they cannot 

demonstrate a steady stream of revenue to repay the loan rapidly. 

To address this problem, many dealers will have to take second 

mortgages on their homes or borrow from family and friends. This 

is the real world, gentlemen. These dealers are facing anywhere between 50 to 70 percent increases in their credit lines or the needs 

for credit lines. It is not uncommon for consumers to take the necessary time to pay their bills, but retail fuel oil dealers themselves 

have to pay their bills within 10 days to their supplier and many 

33

of them are on electronic funds transfer that pay it between 3 and 

5. You can see the strain. It is enormous. 

Recommendations. Increase funding for the Low-Income Home 

Energy Assistance Program, LIHEAP. Each of my counterparts 

here at the table fully understands the implications and the necessary needs for this particular issue. However, the regular appropriation of $2 billion per year is terribly inadequate for this heating 

season. We recommend that Congress substantially increase the 

appropriation closer to the $5.1 billion authorized in the energy act 

enacted this August, and include at least $1.3 billion of emergency 

funding in a supplemental appropriation. 

Two, include in the final Commerce, Justice, and Science Appropriations bill for fiscal year 2006 a measure from the Senate 

version of the bill to provide small business disaster loans to heating oil dealers. In the alternative, because the credit crunch we 

have discussed is largely due to escalated prices resulting from the 

hurricanes, Congress could include these SBA disaster loans in a 

supplemental appropriation. 

Conclusion. The heating oil industry recognizes there is no magic 

bullet to deal with these problems, but increasing LIHEAP funding 

and providing SBA disaster loans for small dealers will go a long 

way to alleviate the pain. 

Thank you very much, and I would be happy to answer any of 

your questions. 

[The prepared statement of Mr. Sullivan follows:]

PREPARED STATEMENT OF JACK SULLIVAN, EXECUTIVE VICE PRESIDENT AND CEO, 

NEW ENGLAND FUEL INSTITUTE, WATERTOWN, MA 

Good morning. I am Jack Sullivan, Executive Vice President and CEO of the New 

England Fuel Institute (‘‘NEFI’’). NEFI is an association of more than 1,000 companies that market home heating oil to consumers throughout the six New England 

states. Most of the member companies are small businesses, family-owned—third or 

fourth generation. I am here today representing the heating oil industry, operating 

in 22 states, and to provide our outlook for the winter—not simply a recitation of 

heating oil stocks held in inventory, projected demand and prices, but the view from 

the small retailer serving homeowners. 

In the winter, consumers do not focus particularly on gasoline prices at the pump. 

They are concerned about heating their homes and the amount of their paychecks 

that must be allocated for this essential commodity. The heating oil dealer interacts 

directly with homeowners and understands their problems. Dealers respond at 2:00 

a.m. to a call from a homeowner to repair equipment or make a special delivery on 

a weekend when a consumer needs it. The industry takes pride in making sure that 

no one goes without heat. 

I. SUPPLY AND PRICE INCREASES

We feel certain that this winter is going to be very difficult for consumers. For 

the past year, the prices of crude oil and correspondingly refined petroleum products, including home heating oil, have been rising. Market conditions seem to justify 

crude at more than $50 per barrel, and the U.S. refinery capacity is limited. The 

U.S., for that matter, the world, has little or no back-up capacity or product inventories to draw on. 

Moreover, with the onset of Hurricanes Katrina and Rita, the nation faces a worse 

situation. Crude oil production in the Gulf has been shut in and several refineries 

are closed while others are not yet operating at full capacity. At its peak, more than 

4 million barrels of refining capacity were idle. Today, more than 2 million remain 

out of commission. Thus, the production of refined petroleum products is well below 

normal. All this is occurring as the heating season begins. 

Fortunately, home heating oil stocks were at reasonably good levels before the 

hurricanes. Today, inventories on the East Coast—the area of greatest consumpVerDate 0ct 09 2002 08:36 Mar 02, 2006 Jkt 109287 PO 26240 Frm 00037 Fmt 6633 Sfmt 6621 P:\DOCS\26240.TXT SENERGY2 PsN: PAULM
34

1 ‘‘U.S. Distillate Fuel Oil Update—October 13, 2005,’’ American Petroleum Institute Statistics; most recent data from the week ended October 7, 2005. 2 Ibid.

3 Attached are NEFI’s Energy Conservation Recommendations for Consumers, which have 

been retained in committee files. 

tion—are at approximately 38.3 million barrels.1 This volume is about 24% greater 

than the 30.9 million barrels held a year ago, and 21% greater than the average 

inventories of 31.6 million barrels held from 2002 through 2004.2 Storage facilities 

are generally filled, and the mild weather to date has resulted in a very limited 

draw on this product. We do not foresee any product shortages. Consumers will be 

served. However, anticipated slightly colder-than-normal weather and the continuing impact of the hurricanes on energy production will, of course, affect the 

price. 

II. IMPACTS

A. Consumers 

Heating oil prices are predicted to increase as much as one-third over a year ago. 

Such an increase will adversely affect all consumers. To minimize this impact, the 

heating oil industry works aggressively to inform consumers of ways in which they 

can conserve energy. The industry provides consumers with detailed recommendations, including improvements to insulation, sealing sources of heat leakage, energysaving practices, low-cost improvements to efficiency of existing heating systems, 

and the upgrading of heating oil equipment. Such measures can result in significant 

savings, from 5% to 30%, on a homeowner’s heating bill.3

However, in many instances, consumers simply lower their thermostats, close off 

portions of their homes and live essentially in the family room and kitchen. They 

forego discretionary spending—they eat out less, stay home instead of going to a 

movie, and limit their shopping to the basics. While not life-threatening, these circumstances are uncomfortable and difficult. Moreover, consumers often have no 

choice but to pay their heating bills more slowly than in prior years. 

B. Low-Income Families 

In contrast, higher heating bills will have a far more significant impact on lowincome families. These consumers are already living at a very basic level and have 

nothing to cut back. Particularly in the Northeast and Midwest, low-income individuals often must choose among essentials—heat, food or medicine. These families will 

be put at great risk this winter. 

C. Home Heating Oil Dealers 

High heating oil prices also will have a devastating effect on the small businesses 

that supply the fuel to homeowners. We estimate that dealers will need approximately 3 times the credit they needed last year to purchase the same amount of 

fuel. Without this substantial increase in their lines of credit, dealers will not be 

able to meet their customers’ demand. In the past, traditional lending institutions 

have been unwilling to make additional loans to dealers because they cannot demonstrate a steady stream of revenue to repay the loan rapidly. We anticipate that 

these same circumstances will occur this winter. 

To address this problem, many dealers will have to take second mortgages on 

their homes or borrow from family and friends. The heating oil industry is very resilient. Despite this fact, we are concerned that some dealers will experience a great 

deal of difficulty this winter. 

III. RECOMMENDATIONS

We understand that this Committee and the Congress have the same concerns as 

the heating oil industry. No one wants consumers and small businesses to suffer. 

Therefore, we recommend that Congress adopt two measures that will address some 

of the problems likely to occur this winter:

1. Increase funding for the Low-Income Home Energy Assistance Program 

(‘‘LIHEAP’’). This program, through state grants, benefits the most vulnerable of our 

society. However, the regular appropriation of about $2 billion per year is terribly 

inadequate for the 2005-2006 heating season. We recommend that——

(a) Congress substantially increase the appropriation to a number closer to 

the $5.1 billion authorized in the Comprehensive Energy Policy Act of 2005 enacted this August; and/or 

(b) Include at least $1.3 billion of emergency funding for LIHEAP in a supplemental appropriation; and

35

2. Include in the final Commerce, Justice, Science Appropriations Bill for Fiscal 

Year 2006, a measure from the Senate version of the bill, to provide small business 

disaster loans to heating oil dealers. Such loans from the Federal Government will 

enable small dealers to obtain the capital they need to stay in business and remain 

viable. These loans are temporary ‘‘bridge loans’’ that provide just enough money 

for the dealer to maintain operations while waiting for consumers to pay their bills. 

In the alternative, because the ‘‘credit crunch’’ that we discussed is largely due 

to escalated prices resulting from the hurricanes, Congress could include these SBA 

disaster loans in a supplemental appropriation. 

IV. CONCLUSION

Home heating oil retailers will make every effort this winter, as they have in the 

past, to meet consumer requirements. However, this year the odds of problems occurring are much greater than in prior years. The heating oil industry recognizes 

that there is no magic bullet to deal with those problems, but increasing LIHEAP 

funding and providing SBA disaster loans for small dealers will go a long way to 

alleviate the pain. 

Thank you. I would be happy to answer any questions the Committee may have.

The CHAIRMAN. Well, Mr. Sullivan, even though your comments 

were not so pleasing, we are very glad you came and shared it with 

us. 

Mr. SULLIVAN. Thank you, Mr. Chairman. 

The CHAIRMAN. And I am also glad that you can smile when you 

are saying it. Not bad. 

Mr. SULLIVAN. Thank you, Mr. Chairman. 

The CHAIRMAN. Now, we are going to go with questions. There 

are a lot of members interested here today, so we are going to try 

to move ahead quickly. I have two or three, and then I am going 

to quickly go to you, Senator Bingaman. 

Mr. Caruso, what would happen to the price of gasoline if a strategic gasoline reserve were created? How much gasoline would be 

required for such a reserve to support 30 days of consumption, and 

what would the effect be on prices if the reserve mandated 2 million gallons a day of storage? Would this have any serious effect 

on the inventory practices? I raise this because some have been 

talking about it, and I do not think we have heard any expert tell 

us about it. 

Mr. CARUSO. Well, of course, it is unclear exactly what the impact a strategic gasoline reserve would have. But to put some numbers on the table, 30 days of gasoline consumption in this country 

is about 27 million barrels. For every 10 million barrels of gasoline 

that you would have to purchase, it would be about a $1 billion expenditure. So it would be quite an expensive program. 

Second, of course, it would depend on the pace at which you filled 

it. To use the SPR as an example, it took a number of years, of 

course, to build the storage capacity in the Strategic Petroleum Reserve, which was utilizing crude oil. 

So, again, it would be rather expensive and it would take time. 

Of course, the storage itself of gasoline would most likely be in 

steel tanks. Our best estimate for gasoline storage above ground 

would be about $20 per barrel of storage capacity initially. So you 

would have to add that to the cost of the purchase and the time. 

Third, there would be some impact on the market, depending on 

when the program was started and the pace at which it achieved 

that. 

So those are some of the thoughts that I would share on just the 

facts of the situation. 

36

The CHAIRMAN. I know you are not a policymaker, but I have not 

heard you saying anything about this being a good idea or something we should do, all things being considered. Would you answer 

that question, or do you think that is out of your domain? 

Mr. CARUSO. I think that would be more usefully answered by 

one of the policy-level witnesses perhaps at future hearings. 

Certainly I would say this. It is certainly worthy of studying if 

this issue were to be contemplated by this committee or others 

within Congress. It definitely would merit a study. 

The CHAIRMAN. Before you could do it, it ought to be studied. Is 

that what you are saying? 

Mr. CARUSO. Exactly. 

The CHAIRMAN. How about natural gas? We have heard about 

the idea of setting up some kind of natural gas reserve. You spoke 

of the reserve that is the one we have now. Is there another natural gas reserve that is being spoken of where we would put more 

natural gas in different kinds of reserves, or what is being spoken 

of in that regard, do you know? 

Mr. CARUSO. Well, the industry itself, particularly local distribution companies and other gas companies, do have working gas in 

storage, which is a critical element in meeting winter natural gas 

demand. As I mentioned, we are going into this winter with about 

3.1 trillion cubic feet in working gas in storage. So the industry 

itself does a very good job of having working gas to meet peak demands. On a typical peak month in January and February, about 

one-third of the gas in this country comes out of that working gas 

in storage. So it is critically important. 

So I think, again, if a strategic natural gas reserve were to be 

contemplated, I would again think it would merit a study because 

of not only the expenses, which ultimately would be borne by consumers, but also the practical aspects of it as well. 

The CHAIRMAN. Mr. Smith, you said that you had submitted a 

long list—and I have it in front of me—led by LIHEAP. 

Mr. SMITH. Yes, sir. 

The CHAIRMAN. I just was going to ask you, have you and your 

association put some numbers to this? If all of them were done, 

what would it do? 

Mr. SMITH. Yes, sir. We put all of the things together. The first 

thing that we would stress would be that energy efficiency is the 

most cost effective resource we have to address the situation we are 

facing right now. 

The increase in LIHEAP funding is a band aid. It is something 

to allow low-income consumers right now to address the heating 

bills they are going to see this winter. What we find is that for 

every dollar we invest in the States, we get a $7 return in investment. We think that is a very, very good investment. 

The CHAIRMAN. I heard that. I am asking not about the LIHEAP, 

but the rest of the programs here. Have you attached a conservation number to them? 

Mr. SMITH. Senator, we are working on that right now. We can 

make that available to the committee and to you. 

The CHAIRMAN. Could you put them line by line while you are 

at it? 

Mr. SMITH. Yes, sir, absolutely. 

37

The CHAIRMAN. Thank you very much. 

Senator Bingaman. 

Senator BINGAMAN. Thank you very much. 

I wanted to ask about the subject of conservation tariffs. As I understand the way that utility rates are structured in most States, 

in most utilities, gas utility rates discourage utilities from promoting energy efficiency and helping their customers to use less 

natural gas; that the revenue of the utility increases, the more natural gas is used. 

I also understand that there are some exceptions to that. One exception is in the State of Oregon. Northwest Natural, which is the 

gas utility serving Portland, and the Oregon Public Utility Commission, in 2002, did a 3-year pilot program under which they imposed a conservation tariff that would break the link between the 

energy utility’s sales and its profitability so that there would be a 

financial incentive for the utility to go ahead and encourage conservation by its customers. 

If I understand this correctly, it seems a no-brainer that every 

public utility commission in the country ought to be implementing 

conservation tariffs immediately so that this additional incentive is 

there for the utilities under their jurisdiction to encourage conservation. Am I missing something? Mr. Downes, maybe you are 

the right witness. Maybe Mr. Smith would like to respond. 

Mr. DOWNES. Senator, the way you have generally described the 

way our rate structure works is correct. We basically are throughput-based right now. 

Now, having said that, and as you heard me describe our business as being a lifeline service provider, we still do quite a bit in 

the area of efficiency. 

You described correctly what has happened with Northwest Natural. I think that the industry would tell you that that particular 

tariff structure has worked very well, and what you are seeing 

right now is that local distribution companies throughout the 

United States are filing for these decoupling tariffs because, as you 

suggest, if there is a separation of throughout from our rates, the 

way we actually recover our costs, that does create an even greater 

incentive for our companies, as far as focusing on efficiency and 

conservation. 

As I said, as you look throughout the United States right now—

and there are different forms of the conservation tariff—you see 

that our companies are being more aggressive in doing that. And 

I expect that you will see, because of the situation that we face 

right now, increasing receptivity on the part of local utility commissions. 

Senator BINGAMAN. Mr. Smith, is there a reason why the group 

that you represent is not out there beating the drums in favor of 

these conservation tariffs? It seems to me to be a very good thing 

to be doing. 

Mr. SMITH. Mr. Bingaman, we are in policy rather than a regulatory aspect of the National Association of Regulatory Utility Commissions, NARUC. We work very closely with NARUC and we are 

looking at these options in order to decouple ratepayer and shareholder interests so that we get more efficiency involved in this. 

Each individual State has to make their own decisions on their 

38

each individual regulatory structure. I think if you go across the 

United States, you will find that from the west coast to the east 

coast, commissions are looking at this, and we are, in fact, working 

with them to make these more palatable and make these so that 

they balance shareholder and ratepayer equity. 

Senator BINGAMAN. Well, let me just say that I think the public 

utility commission there in Oregon adopted this in 2002, and I 

guess the rest of the country has been looking at it ever since. At 

some point, they ought to get busy and do it if industry and the 

regulators and the customers all say it makes sense. It aligns the 

incentives of the utility with the incentives of their customers, as 

I understand it. 

Let me ask about one other issue, and that is roughly described 

as this efficient dispatch. I do not know whose chart this is we 

have up here. Is that yours, Mr. Caruso? 

Mr. CARUSO. No, sir. 

Senator BINGAMAN. Whose is that? Oh, it is our chart. Well, it 

is a very good chart. 

[Laughter.] 

Senator BINGAMAN. Generating capacity brought on line by fuel 

type. If you look at the red bars on the right, that leads me to believe that in the last 10 years, something north of 95 percent of the 

generating capacity brought on line has been gas-generated. Is that 

the way you read it, Mr. Caruso? 

Mr. CARUSO. About 98 percent. 

Senator BINGAMAN. 98 percent. 

Mr. Kuhn, you talked about how we should not get in the business of dictating the choice of fuels, and I understand that point 

of view. I guess what occurs to me, though, is if we do all these 

things, open area 181, do all these other things to try to get more 

gas—my understanding is 23 percent of our gas today is used to 

generate electricity. If this trend that is reflected on this chart continues, the more gas we bring on line, the more that goes into generating electricity. I wonder if that is the most efficient use of the 

incremental natural gas we have. So that is one part of the efficient dispatch issue. 

But the other part is even if a utility is going to use natural gas 

to generate 23 percent of the power that they provide, do we not 

have some interest in seeing to it that they use the most efficient 

plants available to generate that power where possible? I understand there has to be some balancing within the system, but it 

seems to me we have a lot of new, efficient plants which are combined cycle plants, efficient combustion turbine plants that are not 

being utilized while older, inefficient plants are being utilized. 

Maybe, Mr. Kuhn, you could respond to that. 

Mr. KUHN. Senator, you asked two very, very important questions, and they are very different questions. The first relates to the 

chart up here that shows that the majority of plants built over the 

last decade have been natural gas, not the majority, but as Mr. Caruso indicated, 98 percent. 

The energy bill certainly tried to address our issue by addressing 

the question of fuel diversity which we feel very strongly about. 

Fuel diversity is the strength of the electricity system, and to the 

39

extent that we can make use of all fuels, that is going to be the 

absolute best situation for us. 

You recognized the importance of clean coal technology so we can 

burn clean coal environmentally and use our 300-plus year supply 

of coal. That is going to be extremely important. 

It recognized the importance of a new generation of nuclear 

power plants. We recently had a meeting with CEOs all over the 

world from Europe, Japan, and North America. Every one of them 

said that the only way we are going to meet energy and environmental goals in the future is with more new nuclear power plants. 

The bill addressed hydro relicensing, which is extremely important so we can keep our hydro capacity. 

It addressed renewable technologies and the expansion of renewable technologies. 

All of these provisions are going to be extremely important so 

that in the future we do not build such an incredibly high percentage of power plants with natural gas because it cannot continue in 

that regard. 

Similarly, I think it is extremely important for us to get environmental regulations right so that they do not encourage movement 

from coal to natural gas. We are very strong proponents of a multiemissions legislation that would allow us to address environmental 

concerns in a way that would allow us to achieve some 70 percent 

reductions in emissions at the same time in the most economic way 

to our consumers and not encourage switching to natural gas. So 

I think all of these policies are extremely important. 

With respect to the second part of your question on the efficient 

dispatch of natural gas, we do have very serious concerns that that 

could cause an increase in electricity prices to consumers, as well 

as interfere with the efficient operation of our electric system. In 

the past, Congress did dictate fuel supply and purchase choices 

twice before with respect to PURPA and the Fuel Use Act and 

years later had to rescind them. 

Let me make sure you understand that efficient dispatch does 

not equate to economic dispatch, and economic dispatch does not 

equate to efficient dispatch. Often the most efficient power plants 

are not the most economic power plants. 

When regional transmission organizations or States or utilities 

dispatch power plants, they take into account a number of different 

factors. They take into account the lowest cost to the consumer as 

probably the primary thing they are thinking about, but in addition 

to that, they take into account efficiency. They take into account 

fuel diversity. They take into account environmental constraints 

and they take into account transmission considerations. And all of 

those things, not just one, are a very, very important part of the 

equation in the dispatch of power plants because if you take out 

any one and demand that one be considered at the expense of the 

others, it will seriously disrupt the system. 

As you know, different gas plants are built to operate in different 

capacities. For example, a peaking unit. A utility might want to 

dispatch a less efficient but more economic peaking unit to meet reliability concerns, and so they could have a very fast startup situation. Similarly, a large gas generating plant might have a situation 

where it has lower fuel supply contracts. 

40

So I think all of these considerations are important and I think 

it is important that Congress not get into the business of interfering with the regional transmission organizations and the States 

on generation dispatch because it may have unintended consequences for consumers and for the operation of the system. 

Senator BINGAMAN. Thank you very much. 

Mr. Chairman, if I could just ask Guy on this same line. Do we 

have a figure as to how much natural gas could be saved if we were 

using our most efficient natural gas plants rather than our least 

efficient? 

Mr. CARUSO. We have asked, as part of our questionnaire to electric power utilities, for them to indicate the efficiency aspect of it. 

Now, this differs a bit from Tom’s answer. We did not ask them 

about the economics of it, just the efficiency. If you assume that the 

most efficient combined cycle turbine units were utilized, we think 

we could probably use about 20 to 30 billion cubic feet less this 

winter than not using—in other words, using the old steam turbines. 

Senator BINGAMAN. Thank you. 

The CHAIRMAN. Senator Alexander. 

Senator ALEXANDER. Thank you, Mr. Chairman. 

I would like to follow up Senator Bingaman’s question. What we 

are facing here—we have all heard it many times—is this. When 

we were debating the energy bill and before that, when Senator 

Johnson and I first introduced the Natural Gas Price Reduction 

Act, we were lamenting the fact that gas prices were $5 or $6 in 

an economy that was geared to $2 or $3, and today they are $13 

or $14. 

As Chairman Domenici, Mr. Bingaman, and others have pointed 

out, with just the chemical industry with 900,000 jobs, blue collar 

jobs in this country, heading overseas because of that, that is of 

paramount concern. And we all are aware of the gasoline price 

problems. But the price of natural gas is an even bigger problem 

for homeowners, as we are talking about today, for blue collar 

workers, and for farmers. So it seems to me we should be taking 

extraordinary steps today, in addition to what we did in July with 

the energy bill, to try to make a difference today. 

Now, as I listen and study and hear, the only things that I see 

that could make a big difference are conservation, turning the thermostat down, which would make a big difference, Lease 181 which, 

as the chairman has said, I believe the President has the authority 

to draw that line today. And if he were to do that, that would not 

lower the price of natural gas today, but it would tend to stabilize 

that because it would be a signal that there would be more supply 

later. 

A third is the provisions we have already adopted for liquified 

natural gas terminal plants. If we knew there were three or four 

more plants about to go up, that would be another stabilizing signal. 

One other thing that would be both a stabilizing signal and a reduction in prices would be the more efficient dispatch of natural 

gas. 

Now, Mr. Kuhn, I have heard what you said. I understand there 

are some problems, but the legislation which we introduced last 

41

year did not say that Congress would make all these decisions. It 

simply would have the States evaluate whether we could do a better job more efficiently dispatching natural gas. The information I 

have is that a new natural gas plant—we saw how many of them 

are being built—will use half the amount of natural gas than an 

old one uses. And we have got these new ones all over the place 

now, which means we have got a lot of old ones too. The Entergy 

Corporation was up here last week. They have done a Herculean, 

really an admirable job in Louisiana responding, and they are asking us to help them rebuild and to deal with those problems. 

Should we not be looking for ways to encourage the States to 

make a more efficient use of natural gas? Over the past decade, our 

natural gas demand has grown by 7 trillion cubic feet. That does 

not mean much to anybody, but if you put it in effect, it is estimated that the efficient dispatch of natural gas could result in a 

savings of 10 percent of that growth over the last 10 years. 

Mr. Downes, let me ask you. I noticed in your recommendations 

that no one seems to mention the more efficient dispatch of natural 

gas. Common sense would tell us that if we have got a whole bunch 

of old plants sitting around and they use twice as much gas as new 

plants, that even though there are other factors to consider like 

economic dispatch, environmental, other issues, that we could do a 

better job of that. 

Mr. Smith, I would like to ask you after Mr. Downes. Is New 

York not already doing a better job of the more efficient dispatch 

of natural gas than, say, Louisiana? 

Mr. Downes, what would your comment be? 

Mr. DOWNES. Senator, earlier this year, as we were in this really 

escalating price environment and before the hurricanes, back in, I 

would say, the April-May timeframe, our membership understood 

what the impact of growing demand for natural gas for electric 

generation was doing. We came forth with a very specific plan and 

comment as to how that can be handled. 

First of all, we said that the highest and best use of natural gas 

is the direct use of natural gas. Use it for heating homes. Use it 

for supporting our businesses. 

Senator ALEXANDER. That is a different issue. 

Mr. DOWNES. Yes, but I think it is all——

Senator ALEXANDER. Yes, I know, but I want to talk about if all 

of these old gas plants, which use twice as much natural gas as the 

new gas plants, why should we not, in an emergency when we have 

hundreds of thousands of good jobs going overseas, insist that 

States do something about it? We do not have to do it here, but 

why should we not insist that you do something about it? 

Mr. DOWNES. That was the second point I was going to get to. 

We got to the issue of fuel diversity and making sure part of that 

is efficiency, making sure that for every mcf of natural gas that we 

are using, that that is being used in the most efficient way. You 

made the point about how much natural gas was used for electric 

generation and what potentially could have been saved. Quite honestly, the support I think that we received from our colleagues on 

the electric side has been good. But you are absolutely right. We 

are in a position right now where efficiency has to drive the process 

because natural gas is a premium fuel right now. 

42

The other point that you make—and I just want to follow up on 

it—is conservation this winter, absolutely important in the short 

term. But this is not a tradeoff between conservation and the need 

for more production or the need for more LNG, as you point out. 

This is a long-term strategy here where we are going to need really 

everything we can, not only in terms of new supplies and conservation and efficiency, but we think that natural gas can be a bridge 

to that future. Efficiency is going to be a critical part of that, and 

I think quite frankly, unfortunately, it has taken prices at these 

levels to really increase the awareness of the importance of what 

you are suggesting on the efficiency side. 

Senator ALEXANDER. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much. 

Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. 

I was interested. My friend from Tennessee talked about the extraordinary measures that ought to be taken and the like. I still 

want Congress to go out and pick the low-hanging fruit. Mr. Caruso, my figures are that if Congress increased CAFE standards by 

just 2 miles a gallon—just 2 miles a gallon—that would more than 

exceed peak ANWR production of 1 million barrels a day. Could 

you tell me if you think those figures are correct? That is our information. 

Mr. CARUSO. I would have to double-check on that, but it does 

not sound unreasonable. 2 miles per gallon. I think the average 

automobile in this country is achieving about 25. So it is about 10 

percent. 

[The following information was received from Mr. Caruso:]

An increase in CAFE standards would not bring about a short-term reduction of 

motor-fuel use. The rulemaking process takes a certain amount of time. The industry must receive a reasonable lead time to implement changes to their product plans 

(an additional 2-5 year period). However, the longest delay occurs because of slow 

capital-stock turnover. Only a fraction of the total vehicle fleet is affected by improvements in a single model year. It therefore takes about 20 years to realize the 

full impact of a CAFE change. ANWR development also takes time. The EIA estimates that under the mean USGS resource scenario, the ANWR region, including 

the state offshore area and native lands, would begin to produce about 40 thousand 

barrels per day 9 years following a decision to open the area to exploration and development. In this scenario, production would peak at about 875 thousand barrels 

per day 20 years after the decision to open the area. Production would be lower in 

a low-resource scenario and higher in a high-resource scenario—the actual level of 

resources will only become known over time if exploration and development are allowed. 

A 2 miles-per-gallon (mpg) increase in the CAFE standard for light trucks, a category that includes pickups, sport utility vehicles, and minivans, is projected to reduce motor fuel use by 40 thousand barrels per day 3 years after it takes effect, 

with the impact growing to 200 thousand barrels per day 12 years after implementation. An increase of 2 mpg in the CAFE standard for cars, which would require 

new legislation, is expected to have little if any impact on motor fuel consumption, 

since fuel economy is likely to exceed the current standards by that amount given 

the outlook for gasoline prices.

Senator WYDEN. I would just say to colleagues I hope we can get 

back at this. Nobody is talking about 20 miles or anything like 

that, but to not take a baby step. I asked for 1 mile a gallon in 

the conference committee. I said let us just raise mileage standards 

1 mile a gallon, just 1 mile, and you would have thought western 

civilization was going to end. Senator Wyden is going to put all 

these people out of work. I hope we can come back to that. 

43

I would like you to furnish that for the record, Mr. Caruso, because I think there are some baby steps that can be taken here. 

Mr. Smith, a question with respect to what we could do to help 

people this winter. I am concerned that the Federal Government is 

not using its purchasing power out in the marketplace to get a better deal for programs like the Low-Income Home Energy Assistance 

Program. Contracts between the natural gas suppliers and private 

companies allow these businesses to purchase cheaper natural gas 

when they buy in bulk. The Federal Government is the largest consumer of energy in the United States. Why should the Federal Government not go out and bargain, on behalf of low-income people 

and taxpayers, for programs like the Low-Income Home Energy Assistance Program? 

As far as I can tell, the Federal Government buying energy for 

low-income people this winter is like a guy going to Costco and 

buying toilet paper one roll at a time. Nobody would shop that way, 

but the Federal Government will not be a smart shopper, and I 

think they ought to do it this winter. What do you think? 

Mr. SMITH. Senator, I believe that is a good idea. States such as 

New York and States in New England have programs that use the 

purchasing power that we have for the Low-Income Home Energy 

Assistance Program to go to the marketplace. For example, in New 

York we spend $60 million a year on heating oil for our low-income 

consumers. In the past, we usually buy at the worst part of the 

year, in the wintertime when the prices are highest. This year we 

have worked with our heating oil distributors in New York State 

to, say, give us a break for the first truckload of oil that goes to 

a home heating oil dealer and we will guarantee you a certain percentage over your marginal price of oil. And what we promise you 

is that if you do that, we will promptly pay you because we hear 

the oil dealers saying that we need to wait for when we get paid 

by government. So the States are taking those efforts across the 

Nation because we have the purchasing power of using our dollars 

in our States to make a difference. I think it would be wise for the 

Federal Government to look at that program as well and to make 

those kinds of efforts in the Federal Government. 

Senator WYDEN. So you support the idea. Any idea of what kind 

of savings that the Federal Government could make? Everything 

that I hear is we are going to run way, way short of funds for lowincome folks this winter, and this would be a chance to do something quickly to make better use of those dollars. Any idea of what 

kind of savings? 

Mr. SMITH. Mr. Wyden, I cannot speak to the Federal Government, but I know in New York State last year we had a pilot program and we saved consumers 12 percent on their home heating 

oil costs for low-income consumers, which is significant if you are 

a low-income consumer and you are living paycheck to paycheck. 

Senator WYDEN. Well, the chairman and the ranking minority 

member have gone, which is the story of my life I guess. But the 

chance to save, colleagues, upwards of 10 percent by making sure 

the Federal Government is a smart shopper for low-income people 

just strikes me again as low-hanging fruit. It is one thing to talk 

about complicated, difficult kinds of things. This is something we 

can do. We can do it this winter. 

44

One last question, if I could, for you, Mr. Caruso. Yesterday the 

price of crude went up by $1 a barrel just as a result of the threat 

of tropical storm Wilma. Now, NOAA, the atmospheric agency, expects that tropical storm Wilma could intensify into a hurricane 

and enter the gulf region. What are your projections at this point? 

I realize that this is a difficult science to prosecute, but what are 

your judgments about what would happen to energy costs if there 

was another storm in the gulf at this point? 

Mr. CARUSO. Well, as you correctly point out, we have not actually analyzed the impact of Wilma, but clearly because we are almost fully utilized now in terms of crude productive capacity on a 

world basis—still 10 percent of our refinery capacity is down—

there would have to be a substantial spike in prices if there was 

a further disruption. I think what we have learned in this experience and in previous experiences is that because of the very low 

elasticity of supply and demand, it takes very high prices to rebalance the market when it is as tight as it is today. So I would say 

a significant price increase if, indeed, there were a further significant disruption. 

Senator WYDEN. One last question for EIA. As I understand it, 

the estimates of winter fuel costs are based on a household metric, 

which includes multi-family units. And I also understand if the estimates were revised to reflect a homeowner basis instead, the estimated increase in fuel costs would be much, much higher. Some 

analysts have suggested it could be as high as a $600 increase 

versus the $350 increase that you indicated for natural gas. So 

what I am concerned about is that the Government is low-balling 

the estimates here and we could be talking about almost double the 

estimate. 

Would you like to comment on this? 

Mr. CARUSO. Just to say that that is accurate, that our household 

metric includes both single family and multiple family housing. I 

spoke with Mr. Sullivan before the hearing and asked him, in 

terms of New England, what is the average single household user, 

and it is about 800 gallons per winter, and our metric is about 700 

gallons. So the numbers you cited sound higher than I would estimate, but I do not really have those in front of me right now. 

[The following information was received from Mr. Caruso:]

For the upcoming winter, the November 2005 Short-Term Energy Outlook (STEO) 

projects that on average, all households (includes both single family households and 

households in multi-unit buildings) can expect to pay an additional $221 or 28.1 percent more for heating costs this winter compared to last winter. For those households that use natural gas as their primary heating fuel, expenditures for natural 

gas use (including heating and other uses) are expected to increase by $306 or 41.2 

percent. 

Single family households that use natural gas as their primary heating fuel can 

be expected to pay $99 more for natural gas this winter than the average for all 

households that use natural gas as their primary heating fuel (due to their larger 

average housing unit size).

Senator WYDEN. My time is up, but why do you not get back to 

me on that? I would like to get that clear. 

Mr. CARUSO. I will. 

Senator WYDEN. Thank you, Mr. Chairman. 

Senator THOMAS [presiding]. Thank you. 

I guess it is my turn next here. 

45

Mr. Caruso, you mentioned, in terms of the hurricane recovery 

and so on, that now there is normal storage. What do you mean 

by normal storage? 

Mr. CARUSO. Based on a 5-year average of where natural gas in 

storage, as we prepare for the winter, has been over the last 5 

years. We are now right about in the middle or to the upper end 

of that band. 

Senator THOMAS. I understand that all of you here today are not 

producers, that you are distributors and other kinds of things. But 

if we do not have a difficulty in reduced storage, why do you see 

this big talk about price increases and all this concern about it? 

How do you justify that, Mr. Caruso? 

Mr. CARUSO. Well, the main pressure on natural gas prices has 

been the lack of ability to meet demand on a regular basis. We are 

not finding enough natural gas to meet——

Senator THOMAS. Have we ever had a shortage? Has anybody not 

been able to go with their services? 

Mr. CARUSO. Well, we have had spot shortages in the past. 

Senator THOMAS. Where? 

Mr. CARUSO. In the Northeast during times of severe winters. 

Senator THOMAS. We had them before. The price was not as high. 

I guess I am a little concerned as to the justification. If we are in 

the marketplace and we have storage, we have production, why is 

the price doubled or tripled? 

Mr. CARUSO. It is exactly what you pointed out. It is the supply/

demand fundamentals which are driving it. 

Senator THOMAS. But you have already said there is storage. You 

said we are going to have normal storage this winter. No one here 

has said we are going to have a shortage. 

Mr. CARUSO. That is correct. We have enough gas in working gas 

in storage to assure the local distribution companies——

Senator THOMAS. I guess you begin to wonder whether this is a 

speculative kind of a stock market kind of a fluctuation or whether 

it really has to do with production. 

Of course, we are not going to be able to do much about this winter except consumption. Is that not true? 

Mr. CARUSO. That is the most likely short-term response, yes, sir. 

Senator THOMAS. Yes, the really short-term response. 

I am a little interested, as you talked, Mr. Kuhn, about LNG and 

increasing that. Our policy that we are talking about in energy is 

to reduce our dependence on foreign production. So why then do we 

push for more foreign production in gas? 

Mr. KUHN. Well, Senator, I think that is a very good question. 

Utilities all over the world right now are turning more toward natural gas, and I believe that when we have additional LNG sites, 

that certainly is going to be helpful to us in terms of increasing the 

supply, but it is certainly not going to be any guarantee that we 

are going to have lower natural gas prices. 

Senator THOMAS. If we are looking for less dependence on the 

world supply and the world supply is growing, it looks like we 

ought to be looking at ways, even though they may not be immediate. And you are looking at very technical changes in the costs. 

After all, coal is our largest supply of fossil fuel and the generators 

have not used coal at all. Now, I know there is a number of reasons 

46

for that. Part of it is transmission. Gas generators, the small ones 

closer to the market, are easier to build with gas. But should we 

not be making some longer-term changes so that we can use domestic fuels? 

Mr. KUHN. Senator, I fully agree with you. That is just the point 

that we made in our testimony, that we need to return to building 

some baseload power plants, namely coal and nuclear power plants, 

to use our 300-year supply of coal. I think that is going to be extremely important. It certainly would alleviate the natural gas 

problem. 

Senator THOMAS. We do not seem to have any difficulty in producing coal. Has there been a transportation problem for you to get 

it from, say, the West? 

Mr. KUHN. In the past year, there has been a transportation 

problem. About 40 percent of our coal comes from the Powder River 

basin. There have been accidents out there that have caused damage to the tracks. That has caused a situation where coal supplies 

and deliveries have been impeded in some situations. Utilities have 

had to draw down their stockpiles of coal for the wintertime. 

That, I think, leads you again to the fundamental principles that 

we probably ought to increase alternative routes out of the Powder 

River basin. The Minnesota and Dakota and Eastern Railroad has 

a proposal for an alternative line. 

Senator THOMAS. Even though we have immediate problems, we 

ought to be looking at a longer-term policy. 

One more short question. Mr. Smith, you indicated a study in 

price gouging results. What was the result of your study? 

Mr. SMITH. In New York State, we have elicited the Consumer 

Protection Board and our State attorney general to have an energy 

hotline, as well as an investigation. Right now we have on the 

order of 300 instances of purported price gouging that are being investigated by the attorney general. That investigation is ongoing. 

What we are doing is if it appears prices are out of line, we are 

directing consumers to call the attorney general or call the Consumer Protection Board and we are going to investigate. 

Senator THOMAS. The consumers are pretty much dependent on 

the price that you all set in the State. When we really look at the 

base price, is there any reason—it just sometimes makes me think 

that there is more speculation going on here in the price of energy 

than there is a real market thing. I do not suppose you look at 

that. 

Mr. SMITH. We have not, sir. 

Senator THOMAS. Okay. I have taken my time. Thank you, Mr. 

Chairman. 

The CHAIRMAN [presiding]. I think, Senator Salazar, you are 

next. 

Senator SALAZAR. Thank you very much, Senator Domenici and 

Senator Bingaman, and thank you for holding this hearing. 

I have a question for Guy Caruso. If we were to move up the incentives that we created for energy efficiency in the bill that this 

committee put together, could we have an immediate impact on 

what is happening this year with respect to the high fuel prices 

that we are dealing with? 

47

I have spoken very positively about the bipartisan work of this 

committee and the Senate on the energy bill. I think one of the 

most important cornerstones of that bill is the fact that we embrace 

conservation. When I look at the conference report where we have 

the residential and business credits for energy-efficient equipment 

and materials relating to heating, windows, furnaces, hot water 

heaters and the like, it seems to me that that was a very important 

part of this energy bill. I think it was Chairman Domenici who 

said, if we had done that maybe 4 or 5 years ago, we might be in 

better shape today. 

If we were to move up the time line for the implementation of 

those efficiency programs to make it effective upon a bill that 

might be passed by the Congress and signed by the President, say, 

by November 1 or December 1, could we see an impact with respect 

to prices for this next year alone? 

Mr. CARUSO. I would have to look at that in much more detail, 

but my recollection is that most of those energy efficiency provisions do require a longer lead time than this winter. So I think it 

would probably take a bit longer for them to actually have an impact on a short-term supply or demand. But clearly moving them 

up would improve our situation, but probably not dramatically in 

terms of this winter. Most of them have 3- to 5-year lead times. 

Senator SALAZAR. Let me ask you this question as a follow-up. 

It seems to me as a homeowner that when I started looking, as 

most Americans are, at the cost of gas and heating oil for this next 

winter, having to pay 36 percent more, that maybe this is an opportunity for me, as well as many Americans, to put in a new furnace before the height of winter. So maybe it is just targeted at a 

furnace or maybe windows. But I think it would create an incentive 

for people to bring in these much more efficient furnaces and perhaps windows than we had 30-40 years ago. I do not know what 

the average is in the United States of America today, but I would 

bet you that most furnaces in homes have been there for 20 to 30 

years. The industry, I think, with the new more efficient producing, 

could have a major impact on that. 

So I am just trying to figure out what the short-term action is. 

Most of what we did in our energy bill is long-term, but is there 

something that we could do to incentivize homeowners for shortterm action and conservation by maybe adding new concepts on the 

energy bill? 

Mr. CARUSO. Well, I think there are. The energy efficiency technology is there. If we took the best available and we are able to 

utilize it more effectively, I think the opportunity is there. So I 

think you are absolutely right, that if we could provide those incentives, the technology is there and particularly in the residential 

and commercial sectors where the tendency is for consumers not to 

take advantage of some of the efficient technologies because they 

do not understand or do not have sufficient information to understand that the return on that investment could be utilized in a relatively short period of time. So I do think the opportunity is there. 

With respect to your specifics, I would require more detail to look 

at it. 

Senator SALAZAR. Let me ask another question related to the 

Federal Government and the Federal Government’s use of energy 

48

whether that is in fuel for vehicles or heating our buildings. We 

have heard the President make statements to the Nation about the 

importance of energy conservation for this year, and it seems to me 

that what the President is calling for is immediate action that we 

take as a Nation with respect to conservation. If there were a requirement that we would impose on our own Federal Government 

to reduce the consumption of energy by, say, 2 percent, would we 

see an impact at all in terms of fuel prices for this next year if we 

were to make that kind of requirement effective immediately? 

Mr. CARUSO. Well, I think the President has ordered that all 

Federal agencies do reduce their use of energy. And there is this 

Federal Energy Management Program, so-called FEMP, which is in 

place. So I do think it could have an impact. For the actual price 

impact, I would need to provide specifics for the record, but it can 

have an impact. But the Federal Government is not a large consumer relative to the whole country, but it would have an impact. 

[The following information was received from Mr. Caruso:]

What is the difference between the Federal Government cutting its energy use 1 

percent, 10 percent, or 20 percent? 

In fiscal year 2004, the Federal government’s primary energy consumption was 

about 1.6 quadrillion British thermal units (Btu) of energy, of which almost 1.2 

quadrillion Btu were used by the Defense Department. About 0.7 quadrillion Btu 

were used for military fuel. 

The total Federal primary energy consumption of 1.6 quadrillion Btu is minor 

compared to an annual U.S. primary energy consumption figure of 99.7 quadrillion 

Btu. Therefore, saving 1, 10 or 20 percent of Federal energy use would have little 

impact on U.S. aggregate energy consumption. For example, if total Federal energy 

use were reduced by 20 percent, aggregate U.S. primary energy consumption would 

decline by 0.3 percent, and would have a negligible short-term impact on energy 

markets. 

Federal adoption of energy efficient technologies and practices can, however, serve 

to demonstrate approaches that can be usefully applied in other parts of the economy, while also using Federal funds wisely.

Senator SALAZAR. If I may, Mr. Chairman, just one more question on that. In terms of the cutback with respect to fuel supply 

usage by the Federal Government, is there a significant difference 

between, say, a 1 percent reduction in energy over a 10 percent, 

over a 20 percent? When does it become meaningful enough that 

it starts having an impact on the market, or is the Federal Government such a small player in all this that it does not really matter? 

Mr. CARUSO. Well, as I mentioned, the specific numbers I certainly could provide for the record. But clearly, when you start getting into numbers like 10 or more percent, even though relative to 

the whole country it is not huge, it can make a difference. So I 

think every component of our energy economy can contribute to 

this. Most importantly, of course, the calls for conservation that the 

chairman has mentioned even today and that the President has 

mentioned and that Secretary Bodman is initiating in the energy 

efficiency programs all can make a huge difference. 

Senator SALAZAR. Thank you, Mr. Caruso. Just as a follow-up request, to repeat I think what the chairman asked. It would be useful for us as a committee to have all these conservation measures 

that people are talking about as a short-term thing that we can do 

that also would have a quantification of what that means relative 

to energy savings. Would it have an impact with respect to the fuel 

prices that we are expecting for this coming winter? 

The CHAIRMAN. Thank you very much, Senator. 

49

Senator Burns. 

Senator BURNS. Thank you very much, Mr. Chairman. 

Building on the conversation with Senator Salazar and Mr. Caruso, I would say this administration should turn it up as far as 

conservation. There should be Presidential leadership here. Nobody 

has a better bullhorn than the President does as far as taking some 

steps, reminding people about conservation. 

By the way, we will be having a hearing on the 25th with regard 

to procedures and the process of opening up new leases on public 

lands as far as natural gas is concerned. We know we have tremendous reserves in natural gas in this country and particularly in the 

West. It is accessible and the infrastructure is there to get it on 

line as fast as any other place that we could think about right now. 

We are going to be listening on that, and that is at 9 o’clock on 

the 25th. 

When we look at these numbers right here, they are pretty staggering. 

Also, this committee did Fuels for Schools with the Forest Service. We have conversions now going on in our schools of burning 

slash and using what comes off of our forest that cannot be used 

for anything else being given now to the schools in areas where 

they are next to a national forest. That has been fairly successful. 

We see it happening every day in sawmills, and, of course, even 

with the Forest Service and what is left on the ground after a logging operation or whatever is there. And that is saving thousands 

and thousands of dollars for fuels in schools. 

But I also note by looking at the chart—and, Mr. Kuhn, you can 

bring us up to date on this, if you would—we do not see any real 

push. We put a lot of money in clean coal technology. We know 

that we can burn coal cleaner now than we have ever burned it before, but yet there is no real push to put coal back in the mix. 

Maybe our policy has not been one that would drive things to coal. 

Our policy took us to natural gas. That was a policy set by this 

Government. We need a policy now that takes us into the most efficient part and the low-cost part of producing electricity. Would you 

agree with that? 

Mr. KUHN. I do agree, Senator, and I think that, once again, the 

Energy Policy Act of 2005 helps us to get there. But people are becoming more interested in coal I think, obviously, because of the 

higher natural gas prices. There are some 28 coal plants now that 

are being planned, another 22 plants are being planned, another 16 

that are under consideration. Some of them are IGCC plants. That 

would be the integrated gasification combined cycle plants that 

would be extremely clean coal plants. I think that the future for 

coal has to be a major part of our planning for the future. It represents more than 50 percent of our current generation and it is 

absolutely key and critical to the major supply of coal that we have 

in this country. 

Senator BURNS. Also, I see nowhere in the plans where we are 

looking—and I just met with the Bureau of Reclamation just a second ago. They are now looking for more hydro. We do not know 

what is out there as far as hydro is concerned and how it interfaces 

with irrigation and everything else. We may have some possibilities 

50

there. Would you agree that maybe we should be looking in that 

direction too? 

Mr. KUHN. I think you have to be looking in all directions, Senator. To the extent that we can take particularly existing hydro facilities and find out whether or not it is possible to increase their 

capacity, I think that would be the most promising situation. 

Senator BURNS. Now, Mr. Caruso, whenever you say we store 

and we put in salt domes natural gas, what is our shrinkage on 

recovery? 

Mr. CARUSO. It is quite low, Senator. I do not have the specific, 

but it is certainly less than 1 percent. 

Senator BURNS. Would that be about the same as the crude that 

we store in salt domes also? 

Mr. CARUSO. We have very little shrinkage in the crude salt 

domes in the SPR. It is extremely low, the actual loss in the storage facilities in the salt domes. 

Senator BURNS. You think it is down to around 1 percent. 

Mr. CARUSO. It is less than that. 

Senator BURNS. Less than that. 

Mr. CARUSO. Less than that, yes, sir. 

Senator BURNS. I did not know what our shrinkage was when we 

recovered it and started to use it. 

Now, I would ask anybody that wants to tackle this one. How do 

we change that energy bill to make you more efficient and to improve it for the consumers? 

I want to congratulate New York. I do not congratulate New 

York every day, you know. 

[Laughter.] 

Senator BURNS. This is a high point of my career, and I will 

probably lose my image here. But I want to congratulate New York 

because I think they have got a handle on conservation and have 

taken the right steps and have reacted. 

What can we change in that bill to make it better for consumers 

and still keep some profitability and energy production and make 

sure that investment happens and we continue to produce? Does 

anybody want to tackle that? Mr. Kuhn, do you want to start off? 

Mr. KUHN. One of the most important things here for us in the 

future is the long-term outlook with respect to environmental 

issues, and that is why we feel so very strongly about the multimissions legislation that would give us a certainty to plan for the 

70 percent reductions in emissions that we plan to achieve over the 

next 15 years. Understand that we have already reduced emissions 

by 40 percent in this country while we have more than doubled the 

use of electricity. We plan on doing a lot more, but the multi-missions legislation would give us a great deal of certainty in the future and would be the best economic cost for the consumer and it 

would be a great assist to us in terms of utilizing the coal that you 

just mentioned. 

Senator BURNS. Mr. Downes. 

Mr. DOWNES. Senator, I think the point that I was trying to 

make earlier is that I would love to be here today to tell you we 

just have to do these one or two things and that will take care of 

everything. Unfortunately, that is not the reality. 

Senator BURNS. We could at least tinker a little. 

51

Mr. DOWNES. We have made great progress on conservation. I 

would say to you that is something that we should do whether 

prices are high or low because it is good for efficiency, it is good 

for the economy, and it is good for the environment. But the reality 

is we have got to make progress on production and supply. Those 

are tough issues and we all realize that, but we have got to make 

progress on that if we are really going to tackle this in the long 

term. But having said that, that has got to be part of an overall 

strategy that looks at not only increasing the supply side, but also 

focuses on increasing the efficient use of natural gas. 

Senator BURNS. Mr. Smith. 

Mr. SMITH. Mr. Burns, first of all, thank you very much. I will 

be sure that Governor Pataki understands and receives your congratulations on the work that we are doing in New York. 

I think from our perspective, from the State’s perspective, there 

is an opportunity here, and I think the opportunity is we have authorized in the energy bill a lot of programs that will make a lot 

of sense to consumers. I think there is an opportunity to put appropriations behind those authorizations. 

The first thing is in New York, what we are trying to do is we 

are spending $1 million right now in a public information campaign 

to educate consumers on what they can do this winter. They can 

take advantage of the programs that we offer through NYSERDA, 

through our public utility commission, to save energy because we 

think we have to arm consumers with information. That is the first 

thing, is making consumers aware. 

The second thing the Federal Government can do is make the 

money available to the States. The States are the best place. They 

are on the front line of making sure that things happen because 

we deal with our industries. We deal with our schools. We deal 

with our hospitals. We deal with our consumers one to one, face to 

face to make sure that they make cost effective energy efficiency 

investments that pay back better than passbook savings, better 

than the stock market. 

Senator BURNS. Well, when you start talking about money from 

the Federal Government and the States, the States have some responsibility also in this. Working together, maybe we can come up 

with an awareness program that would probably pay off. 

Thank you, Mr. Chairman. I appreciate that. 

The CHAIRMAN. Thank you for waiting and being so patient, Senator. I am sorry that it takes so long. 

We are going to move now to Senator Dorgan. The same to you, 

Senator. Thanks for your patience. 

Senator DORGAN. Mr. Chairman, thank you. 

I am going to ask most of my questions of Mr. Caruso, but let 

me say that I think the witnesses have all provided some important and useful information today and I thank all of them for being 

here. 

Mr. Caruso, the first 3 pages of your EIA talking points or, I 

guess, the publication really deal with hurricane Katrina. And I do 

not disagree at all that that caused some pretty substantial disruption. But the price of oil and the price of natural gas and the price 

of gasoline the day before Katrina hit or the month before Katrina 

hit all were at very substantial levels. Was that not the case? 

52

Mr. CARUSO. That is correct. We had a very tight oil and natural 

gas market this summer. 

Senator DORGAN. And tight market means what? It means that 

there is greater demand than there is supply, or does it mean higher price? 

Mr. CARUSO. Yes. The crude oil spare capacity in the world was 

already down below 2 million barrels a day in August before 

Katrina hit. 

Senator DORGAN. So the price of a barrel of oil was roughly in 

the mid-60’s before Katrina hit. 

Mr. CARUSO. That is correct. 

Senator DORGAN. And mcf of natural gas was——

Mr. CARUSO. About $10. 

Senator DORGAN. $9-$10 an mcf. 

Mr. CARUSO. Yes, on the spot market. 

Senator DORGAN. The price of a gallon of gasoline was? 

Mr. CARUSO. $2.61. 

Senator DORGAN. The reason I mention this, Mr. Chairman, is 

there is this notion somehow that Katrina has caused all this price 

issue. It has not. This price issue was occurring well before Katrina 

formed as a hurricane. 

I want to ask a little about the subject that was explored by my 

colleague from Wyoming. You indicated that as we go into this winter, natural gas storage is about average, not below average, about 

average. Is that correct? 

Mr. CARUSO. That is correct. 

Senator DORGAN. If natural gas storage is at about average levels 

and in the EIA submission for this month, you say that demand 

for natural gas is expected to fall by 1.2 percent, I do not understand the construct of how a market system works in which you 

have average storage and projected less demand in the year and 

therefore record prices. Can you describe how that works? 

Mr. CARUSO. Sure. I think one of the reasons storage is average 

or close to average is that the local distribution companies and 

other gas companies have been buying gas over the summer in 

order to get to this point and they are willing to pay a price premium to ensure that their customers have enough gas. So that has 

been part of this upward pressure on price in order to get the storage to where we are. 

The other part is that during the summer we had a warmer than 

normal July and August putting increasing demand for air conditioning and electric power, and the peak units which supply that 

incremental demand, as was shown in the chart by the committee, 

has been these gas peaking units. But they are putting pressure on 

gas demand in the summertime. 

Senator DORGAN. But are you not projecting a 1.2 percent decrease in natural gas use this year in America? 

Mr. CARUSO. That is correct. And what has happened since the 

summer are two things. One, the price elasticity of demand for gas 

is low, but it is not zero, and particularly industrial consumers of 

natural gas have reduced their utilization of natural gas. And second, the infrastructure that was devastated by both Katrina and 

Rita have had a direct impact both in the refineries which utilize 

natural gas in some instances, in petrochemical plants. All, of 

53

course, are now demanding less. So there is going to be a direct impact on demand and there is going to be a price impact and there 

will be an income effect as well. 

Senator DORGAN. Mr. Caruso, the last time you appeared before 

our committee, we had a chance to talk a little about free markets. 

I made the point that the market for, particularly, oil—let me talk 

about oil just for a moment—is made by having, first and foremost, 

the OPEC country oil ministers sitting around a table somewhere 

in a room that we are probably unaware of making decisions about 

production, supply, and price. And second, the major integrated oil 

companies are much bigger as a result of block buster mergers in 

recent years, having greater muscle in the marketplace. And third, 

by a futures market that has now become much more than a market that provides simply for liquidity, but in fact has become a 

speculative bazaar. In the framework of these three events, we still 

talk about the free market. In fact, in my judgment, there is not 

much of a free market here. But that deals with a whole range of 

issues, oil, gas prices, natural gas prices. 

You talk about on average the average homeowner in this coun- try will see a cost increase of about $350 to heat their home this 

winter. Of course, you probably would expect me to say that we do 

not live on average in this country. We live, for example, in Minot, 

North Dakota, or perhaps Alaska. We have different climates, different amounts of consumption of home heating fuel and natural 

gas to heat our homes. What do you expect will happen in the 

Northern Great Plains? You say $350 on average. What should we 

expect in the Northern Great Plains with respect to price increases 

for natural gas inasmuch as a substantial portion of our people 

heat their homes with natural gas? 

Mr. CARUSO. We do have a regional breakdown of our model, but 

it is not on a State-by-State basis but it is a regional basis. For 

your region, we are expecting a larger increase, as you might imagine, because of the increased number of heating degree days in that 

climate, plus the price increase I have already mentioned. So we 

are looking at, for that region, about a 61 percent increase over last 

year’s heating bill. In some instances, it would substantially exceed 

that $350 national average that you have mentioned. So you are 

absolutely correct. It varies considerably by region, by the type of 

home you live in, the square footage, as well as your insulation and 

other technical factors. 

Senator DORGAN. Well, we are pretty well insulated in the Northern Great Plains. We are not insulated against 61 percent price increases or 61 percent cost increases, I should say. 

Let me just finally say I think all of you have talked about the 

dislocations this is going to cause. This is not going to go away. The 

reason I mentioned the Katrina references on the first three pages, 

I think, yes, there is a set of issues here that deal with Katrina 

and ought to make us aware of our responsibilities to deal with the 

next emergency of that type or, rather, disaster of that type. But 

I think energy pricing is now changing and may be changing in a 

permanent way, in a way that in my judgment is going to enrich 

some and impoverish others in this country. I think we, as a matter of public policy, have to take a good, hard look at what all this 

means. 

54

I mentioned at the other hearing where you appeared—just to 

give you an idea of where we are headed here. You say we use 84 

million barrels a year, generally on the planet here. We use a quarter of that in this country. China, 1.4 billion people roughly, has 

20 million cars on the road. They expect in the next 15 years to 

increase that by 100 million automobiles. Plug that new demand 

against 84 million barrels and the expected increase and where the 

increase in production might come from, and then ask yourself 

what the price of a barrel of oil will be in the future, and who is 

going to benefit, whose treasuries will be full, even as people are 

pained when they go to the gas pumps or when they try to buy natural gas to heat their homes. I think there are some real serious 

problems here, very serious problems. We are just beginning to 

scratch the surface. I think it begs for action by the Congress. I will 

talk more about the specifics later. 

Let me again thank all of you for being here and presenting testimony today. 

Mr. Chairman, thank you. 

The CHAIRMAN. Thank you, Senator. 

Senator Allen. 

Senator ALLEN. Thank you, Mr. Chairman, for once again holding a very important hearing which is so vital for jobs in this country, competitiveness, as well as our national security. 

I do want to associate myself with the comments of Senator Dorgan. This Katrina and Rita disaster has caused a spike, but these 

were conditions precedent before Katrina hit. There are many 

things that we need to do, and I think these hearings you have 

held, Mr. Chairman, are helping us coalesce behind ideas that can 

work short-term as well as long-term. I think action does need to 

be taken. The passage of the energy bill I think was finally, after 

many years of delays and obstruction and so forth, very positive. 

Senator Burns and I have a measure. It has to do with gasoline. 

I know we are focused on natural gas here and electricity. But 

there are 100 different fuel blends. We ought to harmonize them. 

It will help with our limited refinery capacity, just as you saw a 

big increase in the number of permittings of natural gas, electricity 

generation, you have seen virtually no new refineries in this country. And so if you harmonize them to a few blends, it will help refinery capacity, reduce costs, and it will help in the pipelines. 

We also need to be looking at new technologies, conservation 

ideas, biofuels. What Senator Dorgan was talking about with India 

and China, no question. It even makes economic sense, great economic sense, for these biofuels for the future, as well as coal for 

different types of fuels. 

Efficiencies and conservation, absolutely essential. Good incentives. 

One thing I want to add to the mix is telecommuting. With the 

broad band and the Internet, there is no reason why people have 

to all the time—and there is about 60 percent of the jobs in this 

country that are conducive to telecommuting, which reduces the 

number of gallons being purchased, reduces air pollution, and also 

gives people a better quality of life. That is an efficiency that I am 

going to be proposing there as well. 

The CHAIRMAN. What is that, Senator? 

55

Senator ALLEN. Well, it would be a tax credit for telecommuting, say, $500 or some amount, because they are going to have to set 

up that office with the computers and supplies. If they do that, 

whoever pays for it, whether it is the individual or the employer——

The CHAIRMAN. Instead of commuting, they telecommute. 

Senator ALLEN. Telecommute, and they have to do it at least 1 

day a week. Really just reducing the congestion by a few percentage points every day is good for air quality. It also reduces congestion, and it has been something that has been proven out. You see 

it on Fridays around here. There is less congestion on Friday because there are fewer people here. Telecommuting can have that 

impact just, say, in the D.C. area every day while also saving fuel. 

Now, we did not get into electricity other than how much is used 

for electricity. Natural gas production needs to be increased. We 

need electricity, though, as a national policy incented toward clean 

coal, since we are the Saudi Arabia of the world in coal, and advanced nuclear rather than using natural gas for baseload. I can 

understand why it is done for peak power. 23 percent was apparently the evidence here of natural gas for electricity. What percentage is used for baseload electricity? Do any of you all have an answer to that? 

Mr. KUHN. Well, that is a hard number to clarify, Senator, and 

we can get you the exact number. But most of the power plants 

that have been built over the last decade that you saw in that 

chart were fairly large combined cycle plants that, in many case, 

do serve the baseload. 

Senator ALLEN. All right. Here is what people have to do. People 

are sitting here building a new house. What should I use for heat 

or for a heat pump? I would generally say use electricity these days 

rather than natural gas. However, if you look at this—and this is 

in Mr. Caruso’s outstanding testimony and evidence—you break 

the country down by regions, and the South Atlantic which is 

where Virginia is, the Mason Dixon Line south to Florida, we use 

for our electricity 25 percent nuclear, 52 percent coal, 13 percent 

gas. Then you take New England, though, it is 47 percent gas, 14 

percent coal, which is low, 27 percent nuclear, and then another 9 

percent oil. So you have 47 percent of the electricity generated in 

New England is from oil and natural gas. In certain regions of the 

country, by their decisions, however they were made, to generate 

electricity by oil or natural gas, as opposed to coal and nuclear, 

their electricity costs are undoubtedly going to have to go up this 

winter, even if they were relying on electricity as opposed to natural gas for heating their homes. 

So my concern is, as a country, while we are concerned about individuals—we heard from Mr. Liveris with Dow Chemical—and 

this has to do with jobs, manufacturing jobs in everything from 

plastics to masonry products to chemicals to fertilizers to tires. So 

many of these jobs are going overseas. It looks very dismal for 

those jobs to stay here where they can get more affordable and 

more reliable natural gas. 

Mr. Downes, what will you all be able to do? I know your No. 

1 concern is consumers in their homes, but these jobs matter a lot 

to this country. What can you do, as best you can, to answer these 

56

concerns in manufacturing jobs because ultimately people who 

have homes do need jobs as well? 

Mr. DOWNES. No question. I think, Senator, that goes back to the 

point that I made earlier, that there is no single answer here because the reality is that energy demand is going to continue to 

grow and we are going to need as much new sources of supply and 

energy strategies to deal with that. 

As I said, I would love to be able to say to the panel here today 

just do this one thing and it will be taken care of, but when we 

are talking about manufacturing and the impact that it has had—

certainly Dow Chemical can give us all the statistics in the world, 

which we have all heard, and the devastating impact and the hundreds of thousands of jobs that have been lost already—we have to 

address the supply and production issue. There is just no way 

around that. 

Again, as I said earlier, I will be the first one to tell you that 

even though I am not in the production business, I recognize that 

those issues are challenging and that there are many different 

stakeholders in the process. But until we take that issue on to increase supply and combine that with the other steps that we are 

taking in terms of conservation, efficiency, what you are talking 

about in terms of investment in technology, we are going to have 

a problem. 

What I would suggest to you is as we look longer term and we 

look at, hopefully, our energy mix changing and look at things like 

biofuels and renewables, that we could view natural gas as a bridge 

to get us there. But we cannot do that with prices where they are 

right now, and the way that we have to address that is through 

this combination of initiatives in the short term, whether they be 

supply, production-based, efficiency, and conservation. 

Senator ALLEN. Thank you. 

Mr. Kuhn, you mentioned how many power plants were coal. Do 

you see any new nuclear power plants on the horizon? I have 

talked to some companies. Do you have an aggregate number since 

we passed this measure for advanced nuclear plants? 

Mr. KUHN. Senator, I believe that there are some very, very serious consortia right now considering building new nuclear power 

plants. This is one area where I disagree with the projection that 

Mr. Caruso has and the Energy Information Administration data 

that talks about that no new additional nuclear plants would be 

there before 2025. We do believe that because of the legislation you 

passed and because of the increase in interest and necessity for nuclear power plants in the future, that there will be several new nuclear power plants ordered in the next several years. 

Senator ALLEN. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. Now, Senator Murkowski, first I want to say I 

commend you for all the work you do on this committee, and I 

know tomorrow might be your exciting day with ANWR. 

Senator MURKOWSKI. Hopefully it will be a good and positive 

day, Mr. Chairman. 

The CHAIRMAN. That is what I say. I will be here and smiling, 

if I can, if I have got the numbers right. 

But I think we should set the record here. Now, there is going 

to be a vote called at 10 after, but that gives us 15 minutes. You 

57

proceed. I will ask some questions and if you want a second round, 

we will come to you. 

Senator Allen, you are finished for the day? 

Senator ALLEN. Yes, I am. 

The CHAIRMAN. I want to thank you also. To stay around, Senators, means that we are getting something done. Most of the time 

Senators do not wait on these hearings, but these are important 

and I very much appreciate your genuine interest. 

Senator Murkowski. 

Senator MURKOWSKI. Thank you, Mr. Chairman, and I too want 

to thank you for continuing to highlight this issue. We are not just 

having one quick hearing and saying we are done with the discussion. I think the American public deserves more and I appreciate 

the time from the very distinguished panel here this afternoon. 

I also want to comment on Senator Dorgan’s comments and those 

made by Senator Allen. I am so concerned, I am so troubled with 

the direction that this country is taking when it comes to natural 

gas. We know what the picture is in this country with our reliance 

on foreign sources of oil. We talk about the numbers and we argue 

whether it is 57 percent or 58 percent or close to 60 percent, but 

the fact of the matter is this puts this Nation in a very vulnerable 

spot. And we are going in that direction with our natural gas as 

well. 

I am looking through the analysis here, the Short-Term Energy 

Outlook, and discussing the U.S. natural gas markets where the 

impact that the domestic supply here has without much real discussion about China, about India, about the development in terms 

of these countries as a consuming nation where we just simply 

have not had them factored into the energy equation in the past 

and how that is going to affect us. And can we accurately predict 

the pressures that we are going to see from these developing countries out there? It troubles me a great deal as we compete. 

We are trying to do our part up north. I appreciate the chairman 

mentioning ANWR. As you know, we are still trying to get a natural gas pipeline authorized and move forward, but there is a lot 

of uncertainty. There are a lot of unknowns out here. 

Mr. Caruso, just a very quick parochial question to you. I was 

just up in the State this past week, and the No. 1 question and 

concern in every community I went to was, what is the price of 

home heating fuel going to be? Some of our villages are paying 

about $6 a gallon right now. It is tough, and they are panicking 

in anticipation of what they are going to be paying. Villages are already saying we are going to have to shut down the doors. We are 

not going to be able to operate. And when it is as cold up there as 

it is, we do not know what to do. 

I know that when you do your analysis, it is basically the Western market. Do you isolate out the Alaskan market at all? Is there 

anything that I can tell my Alaskan constituency? 

Mr. CARUSO. You are correct. We do it on a regional basis. So 

Alaska is included in the Western region, so it is not isolated. But 

we do collect data on the prices of fuels on a monthly basis, but 

we do not project by State. 

Senator MURKOWSKI. I think our numbers would just throw your 

averages out anyway. 

58

Mr. CARUSO. It sounds like it. Our average heating oil forecast 

price for the winter is $2.54, so it is much lower than you are mentioning. 

Senator MURKOWSKI. Yes. The figure that I have given you is, 

again, for very remote villages, very small villages, but it is the reality that they are operating in. 

Mr. CARUSO. And we do rate them by population, so that also has 

an impact. 

Senator MURKOWSKI. Let me ask you one more question. In your 

testimony and your comments today, I think we are all expecting 

that most of the shut-in oil and gas production down in the gulf 

is going to be back in the very short term here. If we do not get 

most of that back, for one reason or another—say it is Wilma. Who 

knows what can happen down there? But if we do not get most of 

that production back by January, what does that do to your price 

forecasts? 

Mr. CARUSO. Our assumption is that the full recovery will not 

occur until the end of the first quarter of 2006. So we do have built 

in a relatively modest recovery. We do continue to expect shut-in 

capacity through the end of this year and into next year. So it 

would not change the projections that much, but if you had a further disruption, because the world is operating so close to full capacity, clearly we would have another price increase. 

Senator MURKOWSKI. And let me ask for your comments on 

China, on India, as major consumers in the natural gas market 

worldwide. I guess I am asking you to stand behind your numbers, 

but do you feel that the numbers we are using can accurately predict or predict with a level of accuracy what we can anticipate on 

the world market out there? 

Mr. CARUSO. Well, I think there is a particularly wide range of 

uncertainty when it comes to demand in countries like China and 

India, mainly because it can be influenced so much by the actual 

pace of economic growth. 

The reason China has had such a strong impact on oil markets 

in the last 2 years is they have been experiencing double-digit GDP 

expansion. Any country that large, as mentioned, over a billion people, growing that fast just outstrips most models’ capabilities of accurately predicting. And so I would say those are probably the most 

uncertain components of the longer-term outlook for oil and, to a 

lesser extent, natural gas because China is only a very small consumer of natural gas, although it will grow, as you point out, particularly from LNG and will be competing for that LNG, if our outlook is close to being accurate. So I would agree with your supposition that the growth in developing countries, particularly those in 

Asia, can make a huge difference in the outlook for both oil and 

natural gas in the longer term. 

Senator MURKOWSKI. Mr. Smith, I have got just one quick question for you. I appreciated your kind of laundry list in your testimony as to the various conservation items, I guess, that we can do. 

Recognizing that we have got some very legitimate funding and fiscal constraints that we are faced with, is this list prioritized in any 

way? Where would you start? What would your top, say, three to 

five be out of your dozen? 

59

Mr. SMITH. My top three, Senator, would be, first of all, LIHEAP. 

We have to address the low-income consumers right off, those least 

able to afford the coming heating season. 

The second I will address is weatherization assistance. We have 

to make some long-term savings to consumers. 

And most importantly, a sustained energy program whereby the 

States are on the front line, and if we can make funding available 

to State energy offices that deal directly with customers, can provide them with technical assistance, can provide them with the opportunities to understand how they use energy and the opportunities that they have to undertake measures to improve the way they 

use energy. 

So I think my top three would be LIHEAP, weatherization assistance, and State energy program. If I had a fourth, it would be putting money into public awareness and public campaigns so that 

consumers understand that they have options. I think the best 

thing we have to do is to educate consumers that there are things 

they do. There are low-cost/no-cost things they can do, caulking, 

weather stripping, having your furnace or boiler tuned up by a professional, changing your filters, having a programmable thermostat. There are things consumers can do today to help them address their concerns for this coming winter season. And I think it 

is a partnership with the States, a partnership with the Federal 

Government, and I think, working together, we can make a difference and we can help people perhaps not alleviate that price increase, but help them perhaps address that price increase. 

Senator MURKOWSKI. It is not only a partnership there, but I 

know that the gas utilities in my State put a little stuffer in your 

monthly utility statement saying this is how you can save energy. 

If everybody is doing that—and maybe we as consumers should be 

reading it, but I think that there is an effort from Federal, State, 

and local, as well as the private in education. 

Mr. SMITH. I did not mean to leave my colleagues out. We work 

very closely with the natural gas utilities, electric utilities across 

the Nation. They are great colleagues, as well as our oil dealers 

and distributors. We work very closely with all of those. 

Senator MURKOWSKI [presiding]. Thank you. 

Senator Salazar. 

Senator SALAZAR. Thank you, Senator Murkowski. 

Let me ask a question for Mr. Downes. One of the things that 

I think most of us on this committee who serve in the Senate hear 

a lot as we travel around our home States and meet with our constituents is there is price gouging that has been going on at incredible levels. The facts are that we have oil and gas companies that 

are making record profits. The concern is, why are you not doing 

something about it? Why are you not calling the oil and gas companies into the White House, Mr. President, and telling those oil and 

gas companies to stop price gouging? 

I know that the utilities that you represent essentially are regulated, so you essentially just pass on the costs from the producer. 

What is your sense of whether or not there is price gouging that 

has occurred in the context of the prelude to Katrina and Rita and 

then also in the aftermath? 

60

Mr. DOWNES. Well, remember—and let us go back into, say, the late spring when natural gas was in the $6 to $6.50 range. I think 

we were all familiar with the reasons as to how we got to that 

level. We came to the summer and we saw weather that was 16 

percent warmer than normal, which led to a 25 percent increase in 

natural gas demand. That is the leg that took us from $6.50 up to 

the roughly $9-$10 range that Mr. Caruso mentioned. 

Then along comes Katrina. 9 bcf, 15 percent of our total daily 

supply is taken out. That recovers to about 3 bcf and now I think 

is in the 6 to 7 bcf range. 

I think the point that has been made here today by a number 

of the Senators is what we have is a situation where we cannot lose 

focus, that there are issues here to begin with. 

Quite frankly, Senator, it is impossible for me to speculate on 

whether there has been price gouging or not in that short period 

of time. What I do know, though, is that going into this situation, 

what we did have was a very, very tight balance between the productive capacity for natural gas and the actual demand. What that 

means——

Senator SALAZAR. Mr. Downes, excuse me. Let me just say, in the 

interest of time—I know we have a vote—I just want to again commend the chairman for holding this hearing on fuel prices, and I 

hope that in the days ahead we might look at passing an emergency fuel conservation act of 2005 because I think this is the only 

way in which we are going to deal with the short-term issue. But 

thank you for holding the hearing. 

The CHAIRMAN [presiding]. Thank you very much. 

I understand Senator Murkowski is finished, and we have a vote. 

And I have some New Mexico customers over here. They do not 

charge, so they are really free. 

But I want to say, Mr. Sullivan, I have a concern. You have an 

established policy in your home heating oil reserve where there is 

a triggering mechanism, but your reserve only has 10 days of supply. The trigger would probably go in currently. I really think you 

ought to look at it. I am not your policymaker, but boy, we should 

not eat all that up in times like this. This is not really the kind 

of thing that I would have thought would be a crisis, but you defined it with numbers, as I understand it. 

Mr. SULLIVAN. I do not disagree with you, Senator. 

The CHAIRMAN. Okay, fine. 

Now, let me just do one other thing that is very, very worrisome 

to me. Mr. Caruso, we have been working on the premise that we 

are going to absolutely need LNG in the next 25 years, if you look 

at the makeup of what we are going to need, and yet, from what 

I understand, there is not an increase in the importing of LNG. It 

has actually stalled out and going down in the United States. Is 

that correct? 

Mr. CARUSO. I think the first 6 months’ data is pretty flat for 

year-on-year change. That is correct. 

The CHAIRMAN. So it is below our capacity level. 

Mr. CARUSO. Yes. It is about one-half of capacity right now. 

The CHAIRMAN. So we are out saying we need more, but the 

truth of the matter is, we have not used what we have got. I am 

not saying we do not need more. We absolutely do. 

61

But I am wondering now, are we not getting in the same position 

that those who are eating up our crude oil supply like China are 

out there buying up LNG because it is much more economic to 

them than fuel oil. What do you see as to that? Is there going to 

be enough LNG? Are we going to get some of it, or are we whistling 

Dixie? 

Mr. CARUSO. One of the problems right now is the supply is not 

available. There is no world market for LNG. You cannot go out 

and buy a spot cargo except under exceptional circumstances because Asia, Europe, and others are basically demanding it all. So 

it is going to take time, and those producers are bringing on stream 

new capacity, but that is going to take at least 2 to 3 years before 

we see it. 

The CHAIRMAN. It seems to me—and I am not in this field, and 

I know every time we have something that is simple, there is another thing. But it seems to me that the United States, whatever 

that means, business-wise, country-wise, ought to be getting into 

that market and making some commitments to buy it so that they 

will expedite their production at their liquefication facilities. 

Are there enough liquefication facilities to meet demand? 

Mr. CARUSO. There are enough new gasification facilities—capacity in this country right now. But, indeed, we will need, on a global 

basis, significant expansion of capacity, and that is happening in 

places like Qatar. 

The CHAIRMAN. Qatar came in before we passed our bill, and of 

course, they are talking about a gigantic investment. They have a 

huge supply. But they are getting a lot of pressure to sell elsewhere. Europe is starting to use LNG. Spain is a great demand, 

right, from what we know now? 

Mr. CARUSO. Yes, Spain and other European consumers are 

using significant amounts. 

The CHAIRMAN. I wish I had enough time, but I do not. You 

know, the American people and certainly constituents in my State 

meet me and their principal question and how they greet me is 

they grab my hand and say, Senator, why do you not reduce the 

price of crude oil? Or Senator, why do you not reduce the price of 

natural gas? Of course, we have to go through a long scenario. So 

I do not wait for the question anymore. I have a speech that I start 

off with the question and try to answer it. 

Mr. Caruso, I would like you in writing—you are answering that 

question instead of me. Why can we not just go out and stop the 

price increase of crude oil, but conversely, why does it go up? And 

the same with natural gas. Could you do that? 

Mr. CARUSO. I would be happy to do that, Senator. 

[The following information was received from Mr. Caruso:]

Natural gas prices change as a result of the market forces of supply and demand—an increase or decrease in either may cause prices to increase or to decrease. 

Both consumers and producers face significant constraints in changing the amount 

of gas consumed or produced in the short run when markets are tight. This leads 

to disproportionately large price swings in response to changing market conditions. 

There are a number of factors that recently have contributed to high natural gas 

prices. Supply disruptions owing to the recent hurricane activity in the Gulf of Mexico contributed to an already tight market resulting from factors such as stagnant 

production and high demand. Despite a 16 percent increase in natural gas well completions, natural gas production in 2005 is forecast in the November EIA Short 

Term Energy Outlook to be about 3 percent lower than the 2004 production level. 

62

While primarily due to the impact of the recent hurricanes, the limited response in 

natural gas production to recent increases in drilling activity suggests the limited 

availability of high-yield conventional sources of natural gas. In an unregulated environment, producers invest in exploration to identify reserves that are economically 

producible. When the price is higher, this means relatively greater investment for 

exploration and production is warranted. Producers are increasingly exploring and 

producing from lower-yield non-conventional sources such as coal-bed methane and 

shale. 

At the same time, the demand for natural gas this year has remained strong 

owing to the continued strong performance of the economy and warmer-than-normal 

summer temperatures across the country during the summer of 2005. Higher temperatures increased air conditioning demand, adding to the natural gas used by 

electric power generators. High oil prices are another factor contributing to the high 

natural gas prices, as some large-volume customers can switch between fuels depending on their prices, putting an upward pressure on natural gas prices when the 

petroleum and petroleum products prices are at high levels. 

Higher natural gas prices allow the market to clear, balancing the quantity of natural gas demanded by consumers with that supplied by producers. Historically, efforts to control natural gas prices have had unintended adverse consequences, because a binding constraint on prices prevents the natural gas market from clearing. 

One illustration of the impact of price controls in the natural gas market can be 

seen in the aftermath of the United States Supreme Court decision in Phillips Petroleum Co. v. Wisconsin, 347 US. 672. With this decision, the Federal Power Commission (FPC), the predecessor to the Federal Energy Regulatory Commission (FERC), 

was given authority to regulate prices at which producers sold natural gas to interstate gas pipeline companies for resale. Previously, the FPC regulated the prices at 

which interstate pipeline companies sold gas but not the wellhead price at which 

they purchased it from producers. The impact of the regulation of wellhead prices 

for gas sold in interstate commerce following the Supreme Court’s decision in Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, which did not provide sufficient incentives to explore or develop new fields, was pervasive and far-reaching, ultimately 

culminating in the natural gas shortages of the 1970’s. 

To relieve gas shortages, Congress enacted the Natural Gas Policy Act of 1978 

(NGPA), which granted FERC authority over intrastate as well as interstate natural 

gas production. The NGPA established price ceilings for wellhead first sales of gas 

that varied with the applicable gas category and gradually increased over time. The 

increased wellhead prices encouraged producers to seek and develop new sources of 

natural gas supply. However, the price controls under the NGPA themselves led to 

market imbalances that became problematic by the late 1980’s. With complete decontrol of wellhead prices in 1993, as required by the Natural Gas Wellhead Decontrol Act of 1989, the natural gas spot market and transportation markets steadily 

expanded.

The CHAIRMAN. It is much like you have an audience, instead of 

me, and you are telling them that. Would you do that for the 

record? 

Mr. CARUSO. I will, Senator. 

The CHAIRMAN. It can be long. If it is long, summarize it. It 

would be better if you would not have it so long. 

Any other questions that Senators have, they have 10 days to 

ask them. 

I appreciate your coming. Be safe. We will see you soon. 

[Whereupon, at 12:20 p.m., the hearing was adjourned.] 

(63)

APPENDIXES 

APPENDIX I 

Responses to Additional Questions 

EDISON ELECTRIC INSTITUTE, 

Washington, DC, November 2, 2005. 

Hon. PETE V. DOMENICI, 

Chairman, Committee on Energy and Natural Resources, U.S. Senate, Washington, 

DC. 

DEAR MR. CHAIRMAN: Thank you again for the opportunity to testify before the 

Energy and Natural Resources Committee on the winter fuel outlook. Enclosed are 

responses to the questions that the Committee submitted to me. 

EEI’s member companies share your concerns about high energy prices, particularly for natural gas this winter. Our member companies are committed to doing 

everything they can to use the diverse range of fuel sources available to produce 

electricity as cost-effectively as possible and to help our consumers manage their energy use wisely. 

I want to reiterate our strong opposition, though, to any congressional effort to 

dictate fuel choices and energy purchases to electric utilities, such as federally mandating ‘‘efficient dispatch.’’ Even if EIA’s assumption that efficient dispatch could 

save 20 to 30 billion cubic feet (bcf) of natural gas is accurate, those possible savings 

amount to less than one-half of a day’s worth of natural gas consumption in the U.S. 

during the heating months. However, we are deeply concerned that a federal ‘‘efficient dispatch’’ mandate would actually increase the electric industry’s use of natural gas and have the perverse effect of encouraging the construction of even more 

gas-fired generating facilities for baseload demand, at the expense of coal-based, nuclear and hydroelectric generating facilities. 

Proponents of ‘‘efficient dispatch’’ advocate replacing utilities’ use of single-cycle, 

gas-fired generating facilities with combined-cycle gas-fired power plants. However, 

these facilities have very different operating characteristics, so that combined-cycle 

plants are not necessarily viable substitutes for single-cycle plants. For example, 

these single-cycle plants have the ability to go to full power production in about 30 

minutes and are operationally very flexible so they can run for only a few hours if 

needed. By contrast, combined-cycle plants are designed to cover the baseload or intermediate needs of the electric load curve. And, it can take as long as a day to 

bring combined-cycle plants to full power. Because of these characteristics, a utility 

that needed power for only a few hours may be forced to back off other types of generation in order to accommodate the requirements of a longer-running combinedcycle power plant, thereby utilizing gas-fired generation for a longer period of time 

than necessary. 

Perhaps more importantly, a federally mandated dispatch preference for more efficient gas-fired power plants could perversely distort generation markets, making it 

more attractive to developers to build more gas-fired power plants as baseload and 

intermediate facilities. Developers would have an incentive to build new gas-fired 

power plants, even near ones that are only a few years old, if the new plant would 

be even slightly more efficient. A dispatch preference for more gas-fired power 

plants to serve as baseload and intermediate facilities will discourage investment 

in a more diverse generation portfolio, including future coal-based, nuclear and hydroelectric generating facilities. 

Finally, as we noted in our testimony, the most efficient gas-fired generating facilities do not necessarily provide the lowest cost power to consumers. In fact, efficient dispatch can often result in uneconomic dispatch that leads to higher elecVerDate 0ct 09 2002 08:36 Mar 02, 2006 Jkt 109287 PO 26240 Frm 00067 Fmt 6601 Sfmt 6621 P:\DOCS\26240.TXT SENERGY2 PsN: PAULM
64

tricity prices for consumers. We do not believe that higher electricity prices are the 

answer to the natural gas situation. 

Thank you again for the opportunity to testify before the Committee. We look forward to continuing to work with you on our nation’s energy policy. 

Sincerely, 

THOMAS R. KUHN, 

President. 

[Enclosure.] 

RESPONSE OF EEI TO QUESTION FROM SENATOR TALENT

Question 1. Mr. Kuhn, you note that 90% of the new power plants built in the 

last decade were natural gas-fired units. Had there been greater regulatory certainty with respect to emissions of pollutants over that period, what percentage of 

the new power plants would have been fueled by coal instead of natural gas? 

Shouldn’t we be using this coal gasification technology to make use of this existing 

investment? What is preventing that from happening? 

Answer. While it is not possible to estimate what percentage of new power plants 

over the past decade would have been built to use coal instead of natural gas, we 

believe more coal-based generation would have been built if there had been greater 

regulatory certainty regarding emissions of sulfur dioxide (SO2), nitrogen oxides 

(NOX) and mercury. It is clear that the multiple challenges for new coal plants were 

evident from the mid-1990s. 

For example, there is a long history of overlapping regulations and regulatory uncertainty for coal plants. EPA initiated its Clean Air Power Initiative discussion in 

1996, even though Phase 1 of the acid rain program had only started for SO2 in 

1995 and was only starting for NOX in 1996. EPA finalized its decisions to update 

its ozone and particulate matter National Ambient Air Quality Standards in 1997 

and the NOX SIP Call in 1998, both of which were litigated. In 1997 EPA kicked 

off its coal-based plant enforcement initiative, which led to numerous notices of violation and eventually lawsuits, some of which are still playing out. In 2000, EPA 

concluded that mercury regulation was warranted. 

EPA’s recent Clean Air Interstate Rule (CAIR), Clean Air Mercury Rule (CAMR), 

and Clean Air Visibility Rule—plus two rulemakings on new source review (NSR)—

have provided a limited measure of regulatory certainty. However, even that certainty is eroded because all these rules are being litigated. The only way to end this 

cycle of uncertainty is for Congress to pass properly crafted ‘‘multi-emission’’ legislation, along the lines of the Clear Skies bill. The regulatory certainty provided by 

sensible multi-emission legislation would promote continued use of the nation’s 

abundant and low-cost coal resources, require continuing environmental progress, 

and alleviate pressure on the natural gas supply. 

The U.S. electric power sector has reduced air emissions substantially under existing programs. Since 1980, the industry has cut sulfur dioxide (SO2) and nitrogen 

oxide (NOX) emissions by over 40 percent, while increasing net generation from coal 

by nearly 70 percent. Multi-emissions legislation would require SO2 and NOX and 

mercury emissions to be reduced by an additional 70 percent. 

In addition, coal-based power plants could take new steps to increase their efficiency if EPA’s 2003 NSR rule were codified. Increased efficiency at existing plants 

leads to lower fuel consumption, greater fuel availability to the market, and lower 

average fuel prices due to lower overall demand. Because the electric power industry’s emissions of SO2 and NOX are capped, and the regulations require state-of-theart emission controls for all new plants, such improved NSR policy would not increase emissions. 

It also is important to exercise caution to assure that proposals for addressing climate change and greenhouse gas emissions do not increase the pressure to shift 

from coal to natural gas. Rather, we need to emphasize the development and deployment of technologies that will reduce or avoid greenhouse gas emissions while still 

maintaining plant efficiency. Again, we commend the Committee for its attention to 

technology advancement in EPAct 2005 and encourage continuing emphasis in this 

area. 

Regarding future new coal technologies, EEI member companies are already planning for substantial investment in new, baseload coal (and nuclear) generating 

plants to respond efficiently to increasing electricity demand, environmental requirements, and the relatively high cost of natural gas. Among the technological improvements that are most important to pursue are: 1) super-critical pulverized coal 

and 2) integrated gasification combined cycle (IGCC). Furthermore, work is underway, in programs such as FutureGen, to develop and commercialize technologies 

65

that are expected to achieve ultralow/net-zero emissions from new coal-based generating plants. 

These new plants promise to be much cleaner than the ones in today’s coal-based 

fleet. The environmental advantages of advanced clean coal technologies, such as 

super-critical pulverized coal, integrated gasification combined cycle and FutureGen, 

are clear, and costs will come down and financial risks will diminish as new plants 

are built and improved designs become standardized. Achieving continual improvement in the environmental performance of our coal-based generating fleet will require that the nation pursue an aggressive and sustained technology development 

program. This will require billions of dollars in new investments shared by the public and private sector. 

With regard to financial and tax mechanisms necessary to bring technological improvements such as combustion-based advanced pulverized coal and gasification to 

market, EEI supports tax credits, enhanced accelerated depreciation and loan guarantees. These incentives would encourage deployment of IGCC technology and other 

advanced coal-based generation technology by addressing cost and other issues that 

have inhibited deployment of these technologies. EPAct 2005 provides some of those 

incentives, but they must be fully funded in order to accomplish our energy and environmental objectives. 

RESPONSE OF EEI TO QUESTION FROM SENATOR BINGAMAN

Question 1. Emergency planning/Natural gas generation—Last week, the New 

England-ISO reported that the loss of Gulf of Mexico natural gas production will 

likely lead to the chronic shortages this winter in New England and would disproportionately affect electricity generators in the region (Platts-Hurricane Fact 

Sheet, 10/13/05) At a meeting on natural gas infrastructure issues, FERC staff 

warned that the Northeast gas markets are at a greater risk for supply disruptions 

and high prices because the area is served by fewer pipelines and uses natural gas 

for both heating and electricity. At that meeting a gas utility executive said he was 

surprised that many large generators had not taken firm transportation of a transmission pipeline. (Energy Daily 10/13/05) What are electric generators, natural gas 

utilities and regulators in New England doing to guarantee reliable electricity and 

natural gas supply this winter? Are other regions in the country at risk for supply 

disruptions? 

Answer. Electric generators and the New England Independent System Operator 

(NEISO) are engaged in ongoing discussions about the winter heating season and 

how to meet customer needs as economically and efficiently as possible, both 

through regional generation as well as imports from neighboring regions. Some, 

though not all, natural gas power generators in New England have transportation 

contracts for firm service. The region is also examining the availability and potential 

of burning both Fuel Oil Number 2 and Fuel Oil Number 6 in other natural gasfired units. Those options may be limited because of the higher emissions generated 

by the combustion of oil and the need for different permits under the Clean Air Act. 

In addition, the necessary tanks in which to store oil are not available to every gasfired generator. 

New England faces potential energy difficulties this winter because both the natural gas distribution system and the electric systems peak simultaneously, which 

happens in only two other regions of the country: Florida and the Pacific Northwest. 

In neither of these regions does natural gas play as important a role as it does in 

New England, because those two regions have greater diversity in their generation 

of electricity. In most other parts of the country, the role of natural gas is more limited as a peaking resource. 

NATIONAL ASSOCIATION OF STATE ENERGY OFFICIALS, 

Alexandria, VA, November 4, 2005. 

Hon. JEFF BINGAMAN, 

Ranking Member, Committee on Energy and Natural Resources, U.S. Senate, Washington, DC. 

DEAR SENATOR BINGAMAN: With respect to your question regarding emergency 

planning and natural gas generation, the state energy directors remain very concerned about supply issues in the northeast as well as potential supply and price 

issues throughout the country. 

In my own State of New York, the Department of Public Service staff has met 

with the local distribution companies and generators, as well as the State Department of Environmental Conservation (DEC) to assess the gas supply situation in 

New York City. Generators indicated that they expect to have an adequate gas supVerDate 0ct 09 2002 08:36 Mar 02, 2006 Jkt 109287 PO 26240 Frm 00069 Fmt 6601 Sfmt 6621 P:\DOCS\26240.TXT SENERGY2 PsN: PAULM
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ply, however, natural gas prices will remain high. The New York State Energy Research and Development Authority (NYSERDA), the Department of Public Service 

and the DEC will continue to monitor the situation. 

Again, in New York, we have substantial generation resources from coal, nuclear 

and hydroelectric power. The New York Independent System Operator (NYISO) implements reliability-based demand response programs which can help alleviate 

shortages of electric supplies. This has certainly been more common in the summer 

months, but programs are in place for the winter. In addition, the NYISO is working 

closely with the New England Independent System Operator (NEISO) and PJM to 

better coordinate natural gas and electric issues through the Northeast ISO/RTO 

Natural Gas and Electricity Interdependency Coordination Committee. The Committee has contracted with Levitan Associates to perform an extensive analysis of 

fuel supply risks and expects the results to be available in the near future. 

In New York City most generating units can bum either natural gas or residual 

oil. NYSERDA is tracking the availability of residual oil on a daily basis. In Massachusetts officials are considering permitting generators to bum up to 50% more oil 

in order to avoid problems with natural gas supply. NYSERDA also participates in 

a program with over twenty states and the Energy Information Administration 

(EIA), known as the State Heating Oil and Propane Program (SHOPP), which 

tracks price and availability of these commodities. 

Throughout New York and New England, the state public utility commissions and 

state energy offices have worked with the utilities to encourage gas storage. Substantial amounts of winter natural gas needs are covered by storage. We encourage 

the Committee to work with the states in examining the advisability of expanded 

strategic storage opportunities for natural gas, as well as an expansion of the Northeast Heating Oil Reserve. 

The New York Public Service Commission has had a program in place to require 

interruptible natural gas customers to have alternative supplies in storage or under 

contract. This program has been helpful in past winters though we do expect a 

strain this winter. We are carefully monitoring the situation. 

In addition, the states have generally all implemented expanded outreach and 

education programs to encourage consumers to reduce consumption and take steps 

to weatherize their homes, as well as a variety of other measures. In New York we 

have established a statewide ‘‘Have and Energy Smart Winter’’ campaign. We are 

focusing on peak load reduction in the winter in the same way that our successful 

summer Energy Smart campaign has been a model. 

As I discussed at the hearing on October 18th, the states have taken significant 

actions to reduce demand by promoting energy efficiency and increasing public education efforts. As evidenced by the public’s response to new programs initiated by 

the California Energy Commission in the wake of the 2001 energy crisis, substantial 

reductions in usage can be achieved by a concerted effort to combine rebates and 

other incentives with public education. We have previously provided those studies 

to your staff. 

As also noted in my testimony, funding and implementing a number of provisions 

in the Energy Policy Act of 2005 could help a great deal, both in the short-term and 

long-term. The September 15, 2005, letter sent by NASEO, as well as NARUC, 

NASCSP and NEADA, explains in great detail short-term actions that the federal 

government could take to help the situation. Both you and Chairman Domenici have 

communicated with the Administration in support of some of these initiatives, especially on the appropriations front. Secretary Bodman’s announcement this week that 

the Administration’s plan will be forthcoming in several weeks raises concerns in 

our mind in terms of timing. 

Thank you for your question and your leadership. We hope we have been responsive. We stand ready to work with the Committee in addressing our serious energy 

problems. 

Sincerely, 

PETER R. SMITH, 

Chairman. 

RESPONSE OF ROB IDE, STATE ENERGY DIRECTOR, STATE OF VERMONT, TO

QUESTION FROM SENATOR BINGAMAN

Question 1. Emergency planning/Natural gas generation—Last week, the New 

England-ISO reported that the loss of Gulf of Mexico natural gas production will 

likely lead to the chronic shortages this winter in New England and would disproportionately affect electricity generators in the region (Platts-Hurricane Fact 

Sheet, 10/13/05) At a meeting on natural gas infrastructure issues, FERC staff 

67

warned that the Northeast gas markets are at a greater risk for supply disruptions 

and high prices because the area is served by fewer pipelines and uses natural gas 

for both heating and electricity. At that meeting a gas utility executive said he was 

surprised that many large generators had not taken firm transportation of a transmission pipeline. (Energy Daily 10/13/05) What are electric generators, natural gas 

utilities and regulators in New England doing to guarantee reliable electricity and 

natural gas supply this winter? Are other regions in the country at risk for supply 

disruptions? 

Answer. Vermont’s situation is unique to New England. We are susceptible to ISO 

New England electrical pricing on the margins. 

Our flow of natural gas for heating, and industrial uses is through Vermont Gas 

System. The product is produced in Canada, delivered over the only distribution 

pipeline from Canada into the Northwest corner of our state. Because of our Canadian connection we are mostly separated from the effects of the storms in the Gulf 

Coast states. 

DEPARTMENT OF ENERGY, 

CONGRESSIONAL AND INTERGOVERNMENTAL AFFAIRS, 

Washington, DC, December 12, 2005. 

Hon. PETE V. DOMENICI, 

Chairman, Committee on Energy and Natural Resources, U.S. Senate, Washington, 

DC. 

DEAR MR. CHAIRMAN: On October 18, 2005, Guy Caruso, Administrator, Energy 

Information Administration, testified regarding our national capacity for producing 

innovation in energy technologies and the importance of this innovation to our global economic competitiveness. 

Enclosed are answers to six questions that were submitted by Senators Talent 

and Bingaman to complete the hearing record. 

If we can be of further assistance, please have your staff contact our Congressional Hearing Coordinator, Lillian Owen, at (202) 586-2031. 

Sincerely, 

JILL L. SIGAL, 

Assistant Secretary. 

[Enclosures.] 

QUESTION FROM SENATOR TALENT

Question 1. Mr. Caruso, I know that this hearing was primarily designed to look 

at supply and price issues for this coming winter. But, can you tell me how the natural gas supply and price forecast might change over the next 3 to 5, or even 10, 

years if we were to provide the coal industry with certainty regarding emissions, 

say along the lines of the Clear Skies proposal? Under this scenario, we’d be producing electricity through clean coal gasification technology as well as diesel and 

other transportation fuels using the most abundant energy resource this nation has. 

Answer. Emission control policies that offer some degree of regulatory certainty, 

such as that called for under Clear Skies, make more capital intensive strategies 

for meeting multipollutant emissions reduction requirements more economic. Furthermore, where there are co-benefits—reducing one pollutant contributes to reducing the others—a multipollutant approach should lower the overall costs of the program. However, our May 2004 analysis of the Clear Skies proposal found that power 

companies would reduce their emissions by adding emissions control equipment to 

existing generators. Fuel switching from coal to natural gas was projected to play 

a relatively small role in their compliance strategies. For example, we found that 

projected natural gas consumption was 1 percent higher in 2025 as a result of the 

Clear Skies proposal. As a result, we would not expect legislation along the lines 

of Clear Skies to have a large impact on natural gas markets. 

QUESTIONS FROM SENATOR BINGAMAN

Question 1. We have heard from Mr. Kuhn and others that for the most part gas 

plants are dispatched in the most cost effective or efficient manner, given transmission constraints and the need to provide power to support the transmission system. Do you have information that could help us understand how many plants that 

are older and less efficient are in areas where they must be run in order to provide 

reliability for the transmission system? How many could be displaced today without 

reconfiguring the transmission system? How many could be displaced with only 

minor modifications to the transmission system? (Note: the questions have been 

68

combined and, in some cases, rephrased pursuant to EIA discussion with the Senator’s staff.) 

Answer. As noted in the answer to another question, significant amounts of 

steam-electric generating capacity were used during the past winter even though, 

in aggregate, there are enough underutilized combined cycle plants available to replace this generation using significantly less gas. However, operational factors can 

limit the potential for displacement of steam-electric plants. The two most important 

factors are transmission system capacity constraints and the related issue of units 

which have ‘‘reliability must run’’ (RMR) status. The operation of RMR units is 

mandatory at times to maintain the reliability of the transmission grid and to protect against the possibility of blackouts. However, EIA does not collect information 

that identifies RMR plants. We are therefore unable to provide specific information 

about which gas-fired steam plants can be displaced to save natural gas without impacting the reliability of the transmission system. 

Question 2. Some witnesses at last week’s hearing suggested that requiring consideration of the efficiency of natural gas plants in the systems for determining 

which power plants are dispatched to serve customers’ loads would provide enormous savings in the use of natural gas for the generation of electricity. Do you have 

information as to how many older, less efficient steam generation plants with high 

heat rates are currently in use? How many of those plants could be displaced by 

newer, more efficient combustion turbines or combined cycle plants? If these newer, 

more efficient plants were dispatched, how much natural gas could be saved? Over 

the long term, how much effect could these savings have on the price of natural gas? 

(Note: the original 4 separate questions were combined into one, pursuant to EIA 

discussion with the Senator’s staff.) 

Answer. During the recent winter period December 2004 through March 2005, 

EIA estimates that about 244 steam-electric plants using natural gas as a fuel were 

in operation (see attached list). All of these plants are less efficient than newer combined-cycle plants. The efficiency of power plants is typically measured by the ‘‘heat 

rate,’’ which is the quantity of fuel (expressed in British thermal units, or Btu) needed to produce one kilowatt-hour of electricity. Steam-electric gas plants will typically 

have heat rates in the range of 10,000 to 15,000 Btu per kilowatt-hour (Btu per 

Kwh) while a modem combined-cycle plant will have a heat rate in the range of 

about 7,000 to 8,000 Btu per Kwh. 

The 244 gas-fired steam-electric plants generated about 20 billion Kwh of electricity during the period December 2004 through March 2005, and consumed about 

225 billion cubic feet (bcf) of natural gas. In theory, there are enough underutilized 

combined-cycle plants to replace all of this generation. Replacing all of the steamelectric generation with more efficient combined-cycle generation would have saved 

on the order of 70 bcf of natural gas over this four-month period, although this 

amount could have been higher or lower depending on weather conditions. 

In practice, not all of the steam-electric generation could be replaced by electricity 

from underutilized combined-cycle plants. This is because of operational factors that 

limit the potential for displacement of steam-electric plants. The two most important 

factors are transmission system capacity constraints, which limit the ability of grid 

operators to move power across systems, and the related issue of units which have 

‘‘reliability must-run’’ (RMR) status. The operation of these RMR units is mandatory 

at times to maintain the security of the transmission grid and to protect against 

the possibility of blackouts. However, EIA does not have the information needed to 

determine which specific steam-electric plants cannot be displaced due to transmission limits and reliability requirements. 

More than half of steam-electric generation using natural gas occurs in regions 

with competitive wholesale markets. Where competitive wholesale markets exist, 

there are strong profit incentives (made stronger by high natural gas prices) to displace generation from old, much less efficient, gas-fired STs in regions with capacity 

surplus. However, in states where traditional regulation still hold sway, utilities 

may choose to operate their old gas-fired STs no matter how high gas prices get, 

since fuel costs can be passed through in regulated rates. This may be true even 

if power from CCTs could be bought at a lower cost and used to meet customer 

loads. 

Assuming that 20 to 30 bcf, roughly one-third to one-half of the gas burned in 

steam-electric plants, could be saved in future winters, the impact on the price of 

natural gas would likely be modest. This is because such a reduction in natural gas 

would represent a very small portion of total gas demand during the winter. For 

example, during the period December 2004 through March 2005, residential gas demand was 3,047 bcf and total gas demand from all consuming sectors was 9,408 bcf. 

Question 8. Canadian Oil and Gas imports—The Canadian Association of Petroleum Producers said this week that Canadian energy companies may be able to 

69

boost their natural gas output by up to 200 million cubic feet per day in a relatively 

short time frame and that this gas could provide some relief to US markets this 

winter. Is this a realistic scenario? Is there adequate pipeline capacity from Canada 

to the US to provide additional gas to meet winter peak demand? Which regions 

of the US could receive Canadian gas? Would this additional supply have any impact on spot prices under the EIA forecast? 

Answer. A review of natural gas capacity data and monthly flow data by region 

indicates that, on average, there is sufficient cross-border capacity to handle an incremental 200 million cubic feet per day (MMcVd). However, given variation in capacity utilization rates, specific pipeline segments may not be available. Additionally, already contracted flows may not allow for additional volumes on peak days. 

However, temporary parking of the incremental supplies either in storage or as line 

packing should allow for average flow equal to the incremental volume to be delivered across the border. Under these conditions, capacity is available to all regions 

of the United States. 

An increment of this magnitude by itself likely would not impact prices greatly. 

Additional supply of 200 million cubic feet per day on a sustained basis translates 

into 6 billion cubic feet per month, less than the continuing daily loss of production 

in the Federal Gulf Mexico and Louisiana as of October 28. 

Question 9. Liquefied Natural Gas imports—The curious decline in LNG imports 

to the US in a very high price environment was briefly discussed at the hearing. 

(October 17, 2005 Wall Street Journal article reports that LNG imports have been 

about 3% of US supply, but that LNG imports fell by 27% in August 2005 versus 

August 2004.) Please provide your analysis of the current LNG import situation and 

the potential to increase our imports of LNG in the short term for the winter heating season. Over the long term, will the EIA forecast for LNG imports and the need 

for regasification capacity in the US change as a result of higher natural gas prices? 

Answer. There are several reasons why August 2005 imports of LNG were so low. 

Prior to the price run-up caused in part by Hurricanes Katrina and Rita, global 

price competition, particularly from Spain, had limited spot shipments to the United 

States. In addition, outages at LNG production facilities overseas reduced available 

supply to the U.S. There was a temporary suspension of LNG production in Nigeria 

as a result of pipeline fire and in August there was maintenance at the Atlantic 

LNG plant in Trinidad and Tobago which currently provides over 70 percent of LNG 

imports to the U.S. 

LNG supplies should increase for the heating season as production at the Atlantic 

LNG plant in Trinidad has been restored. Moreover, productive capacity at this 

plant is expected to be further expanded before the end of the year. In addition, two 

liquefaction projects in Egypt have recently started production. 

Over the long term, projected LNG imports are expected to increase in response 

to higher domestic natural gas prices, all else being equal. However, higher world 

oil prices are expected to increase the demand for LNG and stranded gas in the 

world (e.g., for gas-to-liquids applications), therefore increasing the price necessary 

to attract LNG shipments to the United States. 

Question 10. Emergency planning/Natural gas generation—Last week, the New 

England-ISO reported that the loss of Gulf of Mexico natural gas production will 

likely lead to the chronic shortages this winter in New England and would disproportionately affect electricity generators in the region (Platts-Hurricane Fact 

Sheet, 10/31/05). At a meeting on natural gas infrastructure issues, FERC staff 

warned that the Northeast gas markets are at a greater risk for supply disruptions 

and high prices because the area is served by fewer pipelines and uses natural gas 

for both heating and electricity. At that meeting a gas utility executive said he was 

surprised that many large generators had not taken firm transportation of a transmission pipeline. (Energy Daily 10/13/05) What are electric generators, natural gas 

utilities and regulators in New England doing to guarantee reliable electricity and 

natural gas supply this winter? Are other regions in the country at risk for supply 

disruptions? 

Answer. With respect to emergency planning and preparations for the upcoming 

heating season, the Department of Energy has actively engaged State and industry 

groups. The Department of Energy’s Office of Electricity Delivery and Energy Reliability (OE) works very closely with States and State associations such as National 

Association of Regulatory Utility Commissioners, (NARUC), National Association of 

State Energy Officials (NASEO), National Governors Association (NGA), and National Conference of State Legislators (NCSL) and has sponsored a number of 

projects to aid states in dealing with energy emergencies. Recently, NASEO and 

NARUC released the State Energy Assurance Guidelines, which are designed for 

State use to prepare their energy emergency preparedness plans. NARUC has also 

conducted an assessment of State’s Natural Gas Curtailment plans and authorities. 

70

From this, NARUC and DOE are working with States to examine the effectiveness 

of the curtailment plans should individual states needs to implement them. In addition, DOE has established the Energy Emergency Assurance Coordinators (EEAC) 

system, a communications protocol, to coordinate information among states should 

a supply disruption or energy emergency occur. 

Many organizations are involved in monitoring and tracking fuel supplies across 

the country. With respect to the New England region, the New England Governors 

Conference holds weekly conference calls with DOE, States, Coast Guard, and industry officials to assess the winter fuels situation. Participants are apprised of current heating fuels inventories, prices, as well as logistical problems impacting specific states or the region. States share and coordinate information which is invaluable to the effort to remain informed and to respond to a supply disruption. In addition, various states in the New England region have held winter fuels meetings with 

state officials as well as natural gas and petroleum industry representatives to assess supply conditions for the upcoming winter. Other regions of the country, such 

as the Midwest, have conducted similar activities. 

Industry and industry associations have prepared reports and conducted analyses 

to assess the natural gas impacts from the recent Gulf Coast hurricanes. As noted, 

the New England ISO recently released a report entitled ‘‘ISO New England Assesses Hurricane Impact on Region’s Electricity Supply.’’ The report highlights that 

the New England area can expect high fuel costs, particularly for natural gas and 

oil, to continue from November through March if Gulf of Mexico supplies remain uncertain. The report can be found at: http://www.iso-ne.com/pubs/spcllrpts/2005/

wntrlassess/index.html. In response to possible natural gas supply problems, the 

New England ISO plans to conduct an energy exercise with federal and state agencies, and industry at the end of November to address the necessary actions in the 

event of a supply disruption. 

DOE has also sponsored a study to analyze natural gas disruptions across the 

country. The results of this study, while considered official use only, will be shared 

with key State and utility regulators, particularly in the Northeast, to better understand natural gas disruptions and supply issues and how State regulators can use 

the information to address energy reliability and security in their area. 

Finally, the Interstate Natural Gas Association of American (INGAA) has conducted an assessment of the impact of the recent hurricanes on the US natural gas 

markets for the upcoming winter. The report highlights various scenarios based 

upon different weather inputs. Given the different scenarios, results reinforce the 

concern that areas east of the Mississippi, in particular the Northeast, are likely 

to experience curtailments of natural gas should Gulf Coast systems continue to experience recovery delays. 

(71)

APPENDIX II 

Additional Material Submitted for the Record 

STATEMENT OF HON. JIM DOYLE, GOVERNOR, STATE OF WISCONSIN

Mr. Chairman, Senator Bingaman, and members of the Committee, I appreciate 

the opportunity to submit this written testimony on the subject of today’s committee 

hearing, ‘‘Winter Fuels Outlook.’’

As you know, energy prices in this country have recently reached dramatic and 

dangerous heights. Today the price of foreign oil is near record levels, and gasoline 

costs have spiked to over $3.00 per gallon. High gas prices drive up transportation 

costs and harm virtually every sector of our economy, from aviation to trucking to 

tourism. The spike in energy prices has depressed consumers’ spending power and 

led to a twenty-five year high in inflation rates. 

The hit to the pocket-books of average Americans will be exacerbated as we move 

into the winter months, when families are expected to face huge increases in home 

heating costs. Industry experts forecast that bills for natural gas, the most popular 

home heating fuel, will rise by $611 this winter—more than the total amount of aid 

that most low-income families receive through the Low Income Home Energy Assistance Program (LIHEAP). In the Midwest, where 75 percent of households heat their 

homes with natural gas, citizens are bracing to pay nearly 61 percent more in home 

heating costs this year, according to the U.S. Energy Information Administration. 

Moreover, high home heating costs disproportionately affect the neediest Americans. According to the National Energy Assistance Directors’ Association’s (NEADA) 

second annual survey, 82 percent of LIHEAP recipients reported an annual income 

of less than $20,000. For these Americans, high heating costs means sacrificing 

other basic needs: 20 percent of households kept their homes at unsafe temperature 

levels, 20 percent went without food for at least one day, and 32 percent were unable to afford proper medical care, between 2003 and 2005. It is unacceptable to 

force Americans to choose between basic needs. As a consequence, our nation’s governors are taking steps to protect consumers from artificially high energy prices and 

the resulting economic ripple effects. 

In late September, 28 governors sent a letter to the Senate urging it to pass emergency legislation to help mitigate this extra cost on the neediest Americans. At the 

time, we said, ‘‘The high cost of home heating fuel is one of the most pressing issues 

facing families today, and it demands a national response.’’ That is true now more 

than ever. While we are gratified by the federal government’s release of $1.3 billion 

in federal funds to help low-income families pay their heating bills this winter, 

LIHEAP funding levels have not changed since 1982. 

Governors are also implementing innovative energy-savings ideas in our states. 

For example, in my home state of Wisconsin, we have implemented the Energy Help 

Initiative. We know it is important to not only help our most vulnerable citizens 

pay their heating bills, but also to make sure Wisconsin is taking the necessary 

steps to increase energy conservation and efficiency in our homes and businesses. 

The Energy Help Initiative, launched on October 1, would more than double the 

state’s commitment to low-income heating assistance—providing an additional $16 

million for the state’s program to assist with heating bills. With this funding, Wisconsin is more than doubling its commitment to energy assistance for low-income 

families, and the federal government should do the same. 

Led by Wisconsin, eight Midwest states have joined an agreement to reduce natural gas consumption by one percent a year for five years. Not only will this lower 

bills for consumers, but, according to a recent study from the American Council for 

an Energy-Efficient Economy, it will also reduce the cost of natural gas by as much 

as 13 percent nationally after five years. 

The Energy Help Initiative encourages homeowners to have an energy audit to 

identify ways to make their homes more efficient and reduce their utility bills and 

energy demand. The Focus on Energy program, one part of the initiative, will inVerDate 0ct 09 2002 08:36 Mar 02, 2006 Jkt 109287 PO 26240 Frm 00075 Fmt 6601 Sfmt 6621 P:\DOCS\26240.TXT SENERGY2 PsN: PAULM
72

crease the rebate they offer on energy audits to $100, and will continue to offer a 

$150 rebate on energy-efficient furnaces. Last year, homeowners who had an audit 

and implemented the most cost-effective measures saved an average of $450 on their 

utility bills in the first year. 

Energy costs affect economic development as well. I asked the state’s Public Service Commission and my Department of Administration to identify and report back 

in 30 days any natural gas efficiency projects that are stalled because of regulatory 

red tape or other hurdles. We will do everything within our power to expedite the 

process and, in time, conserve enough natural gas to heat thousands of homes, save 

businesses millions of dollars, and keep good, high-paying jobs in Wisconsin. 

My fellow Democratic governors have also put forth innovative ideas for dealing 

with high energy costs:

• Pennsylvania Governor Ed Rendell announced a comprehensive Stay Warm PA 

program to make sure Pennsylvania’s most vulnerable citizens are warm and 

protected as cold weather approaches. With increased state funding and increased support from energy companies and utilities, an additional $30 million 

will be available this winter for low-income energy assistance. Additionally, 

Governor Rendell will meet with CEOs of the state’s major utilities in the next 

two weeks and will challenge them to meet their required participation rates 

under the Consumer Assistance Program. Governor Rendell believes, like me, 

that large energy companies need to ‘‘step up to the plate’’ to help needy citizens 

cover their heating expenses. 

Several Pennsylvania utilities have responded to the governor’s call. The Stay 

Warm PA program has brought together organizations like the United Way, 

Red Cross, Salvation Army, AFL-CIO, the Pennsylvania Council of Churches as 

well as Jewish and Muslim organizations to weatherize homes. And in a unique 

agreement with the Commonwealth, the home improvement store Lowe’s will 

conduct weekly weatherization workshops at their sixty Commonwealth stores, 

at senior centers, and other locations. This Fortune 50 company is providing 

plastic sheeting, caulking, door guards and other weatherization materials at no 

cost to volunteer groups helping to winterize homes of seniors and needy families. 

• New Mexico Governor Bill Richardson called a special session of the state legislature to provide immediate relief for high home heating and gas costs. As a 

result of the rebate legislation supported by the governor, every New Mexican 

taxpayer will be mailed a rebate check within the next few weeks averaging 

$125. Home Heating Assistance legislation will speed relief from high heating 

costs to 60,000 lower income and elderly New Mexicans. The bill provides $23 

million in home heating relief and addresses long term heating costs by repairing and insulating homes to be more cold-weather proof It also provides funding 

to supplement public safety fuel costs, and assistance for public schools for gas 

and heating costs. 

• In Maine, Governor John Baldacci has launched Operation Keep ME Warm, a 

public private partnership using volunteer teams to winterize the homes of 

Maine’s most vulnerable senior citizens. He is also leading an effort to bring 

Northeastern governors together to collectively address energy conservation. 

• Illinois Governor Rod Blagojevich successfully urged Illinois’ major utility companies to waive reconnection fees and suspend deposit requirements for customers receiving benefits through LIHEAP. As a result, one large utility company has already agreed to waive deposits for LIHEAP customers living in 

buildings heated entirely by electricity.

This is just a small sample of what governors are doing to protect Americans from 

artificially high energy prices and start down the path of energy independence. Recent events have revealed what should have been obvious long ago—that our nation 

stands at a crossroads on energy issues and that we must act now to plan for our 

future. As you deliberate on this important issue, I encourage you to involve governors. Across the country, governors have demonstrated leadership and resolve in 

helping our nation address this pressing energy problem. I think I speak for all of 

us when I say that we are ready, able, and willing to partner with you and share 

our experiences. 

Again, I thank you for the opportunity to present this testimony. I look forward 

to working with you to find innovative energy policies that protect our economy as 

well as our energy supply. 

73

STATEMENT OF JOY DITTO, LEGISLATIVE DIRECTOR,

AMERICAN PUBLIC POWER ASSOCIATION

The American Public Power Association (APPA) is pleased to submit the following 

statement for the record to the Committee in relation to its hearing on the winter 

fuels outlook for 2005-2006 that was held on Tuesday, October 18, 2005. APPA represents the interests of more than 2,000 publicly-owned electric utility systems 

across the country, serving approximately 43 million citizens. APPA member utilities include state public power agencies and municipal electric utilities that serve 

some of the nation’s largest cities. However, the vast majority of these publiclyowned electric utilities serve small and medium-sized communities in 49 states, all 

but Hawaii. In fact, 75 percent of our members are located in cities with populations 

of 10,000 people or less. Further, most publicly owned utilities depend on wholesale 

power purchases to meet all or some of the retail loads for the communities they 

serve. 

APPA concurs with Chairman Domenici that this year’s enactment of the Energy 

Policy Act of 2005 (EPAct 2005) provides the regulatory certainty for electric utilities and other stakeholders that is essential for an industry that requires long-term 

planning and as much predictability as possible. Although the electric utility industry continues to face significant challenges—including volatile natural gas prices 

that will be discussed below—EPAct 2005 has satisfactorily addressed many of the 

complex issues that have arisen since passage of the Energy Policy Act of 1992. 

Therefore, APPA strongly discourages the Committee from taking any additional action on electricity restructuring or regulation matters in the context of hurricane relief or in response to high natural gas prices. 

THE ELECTRIC UTILITY INDUSTRY AND NATURAL GAS

A diverse portfolio of fuel options is vitally important to the electric utility industry in order to maintain a reliable supply of affordable electricity to consumers 

throughout the nation. Natural gas remains an extremely important fuel for the 

electric utility industry, and must remain an option in the future in order to maintain portfolio diversity. However, natural gas prices have increased steadily over the 

last several years, and the supply disruption triggered by the hurricanes has accelerated the climb in prices. APPA defers to the natural gas industry for their analysis of ways to bring supply and demand back into a more normal balance after the 

devastation created by the hurricanes. 

However, over and above the disruption caused by the hurricanes, supply of natural gas has not kept up with demand. APPA believes that demand side management is a central component to increasing the supply (thereby decreasing the price) 

of natural gas. Over the last 25 years, much of the problem with sufficient supply 

can be linked to a lack of coordination between the nation’s environmental and energy policies. As Clean Air Act regulations have become more stringent in relation 

to the use of coal as a source for electric generation, an increasing number of electric 

utilities have turned to natural gas-fired power plants. Although that trend may be 

changing as clean coal technologies become commercially viable, there is still a need 

to harmonize efforts to overcome the current natural gas crisis with common sense 

environmental policy. Regulatory timelines must be used to allow for the research 

and development of new generating technologies that expand the nation’s fuel diversity in an environmentally sensitive manner. New regulations and legislation must 

avoid regimes that result in an additional increase in fuel switching from coal to 

natural gas in order to prevent a further decrease in natural gas supply. 

Unfortunately, all recent combustion related regulations in the Clean Air Act have 

worked to drive the industry away from the use of coal and have forced the industry 

to depend very heavily on natural gas as the most frequently used fuel choice for 

new electricity generating stations. Natural gas is favored because its emissions contain a significantly lower level of SO2 and mercury emissions. Even though natural 

gas combustion can increase the level of NOX in a community, many manufacturers 

and utilities have been forced to increase the use of natural gas in the electricity 

industry since the mid 1980s. Because regulatory regimes have failed to allow for 

proper planning time, the electricity industry has made a business decision to move 

to natural gas in many cases which has exacerbated the gas supply problems, instead of seeking new technologies, such as coal gasification, to address environmental challenges. 

While there are some legitimate combustion energy uses for gas (where the manufacturer or utility virtually sits atop a gas pipeline or is co-mingled with a refinery), 

this regulatory push for natural gas over coal and oil will continue to put pressure 

on natural gas supplies. Also the Clean Air Act’s ‘‘anti-backsliding’’ provisions make 

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* All attachments have been retained in committee files.

it hard for a manufacturer or utility to return to coal or oil once the transition to 

gas has been made. 

It will be very important for regulators and legislators alike to meet the challenges of keeping energy supply needs and environmental requirements in sync with 

one another. The development of new clean coal technologies, encouraged under 

EPAct 2005, will go a long way toward helping the electric industry decrease its dependence on natural gas as a fuel for electric power in an environmentally sound 

manner. 

CONCERNS WITH MANDATING ECONOMIC OR EFFICIENT DISPATCH

As is mentioned above, APPA does not support new efforts to address broad electricity industry provisions. During the hearing, a few members of the Committee expressed particular interest in the issue of ‘‘economic’’ or ‘‘efficient’’ dispatch, with the 

implication that legislation should be enacted to direct the most efficient natural gas 

plants to be deployed in a given market before less efficient natural gas plants. 

While this is a seemingly simple proposal, like most issues in the electric utility industry, deciding when and why a given generating plant is deployed is a complex 

decision, with efficiency and cost being only two of the variables affecting the decision. Other variables include available transmission, environmental constraints, and 

maintenance schedules. 

Also, the term ‘‘economic’’ or ‘‘efficient’’ dispatch has been used loosely and is subject to varying interpretations. Section 1234 of the Energy Policy Act of 2005 mandates a Department of Energy study on economic dispatch, the outcome of which 

we believe should be analyzed before any additional legislation on this issue is even 

considered. In Section 1234, the definition of economic dispatch is quite generic, and 

hence subject to varying interpretations—an issue that is being evaluated at DOE 

as part of the study process. The definition refers to the operation of generation facilities ‘‘at the lowest cost.’’ But it is not clear whether the word ‘‘cost’’ means the 

cost of production of each unit dispatched (in other words, what is referred to in 

the industry as a ‘‘cost-based dispatch’’) or a dispatch regime under which each generation unit is bid by its operator into a centralized market at a price that the 

owner sets at its discretion (subject only to any applicable market rules), which is 

generally known as a ‘‘bid-based dispatch.’’

The former type of dispatch was a central feature of a number of regional power 

pools that the electric utility industry operated prior to restructuring, with utilities 

bidding in their generation at cost, resulting in savings from such joint operations 

that were shared among the members, often under a ‘‘split the savings’’ convention. 

The latter type of dispatch is now in use in a number of organized markets run by 

Regional Transmission Organizations (RTOs) and Independent Systems Operators 

(ISOs), including ISO New England, the PJM Interconnection, the New York ISO 

and the Midwest ISO. These ISOs run day-ahead and real-time markets using a security-constrained, bid-based economic dispatch and a single-clearing price mechanism. Under the single-clearing price convention, all generators bidding into the 

market for a particular time interval are paid the price necessary to clear the market in that time interval, even if the bid an individual generator made was much 

lower than that clearing price. This has resulted in higher prices for generation of 

all kinds in ISO/RTO regions, not just natural gas. This phenomenon, known as 

‘‘dark spread’’ in the industry, has resulted in windfall profits for merchant generators of coal and nuclear in these bid-based markets. 

APPA members have also discovered that the high clearing prices set in ISO-run 

day-ahead and real-time markets (which are often set based on the high fuel cost 

of natural gas-fired generation units) are having a ‘‘ripple effect’’ on longer-term bilateral markets. At APPA’s June 2005 National Conference in Anaheim, California, 

the membership passed Resolution 05-18, entitled ‘‘Unjust and Unreasonable Prices 

for Long Term Bilateral Power Supplies’’ (copy enclosed as Attachment 1*). That 

resolution notes that: 

‘‘APPA members in RTO regions that attempt to procure power under longterm bilateral arrangements now find that generators are often willing to enter 

into such agreements only on terms that reflect the (higher) ‘‘market clearing 

prices’’ they can obtain in RTO-run spot markets, even when their own (lower) 

cost structures bear little relationship to spot market clearing prices. 

Because such APPA members rely on bilateral power supply contracts to 

avoid the even higher risk and price volatility of spot markets, this perverse 

pricing ‘‘feedback loop’’ has caused steep retail rate increases in some public 

power communities.’’

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As is implied above, even a ‘‘pure’’ cost-based economic dispatch of generation 

across a region can raise difficult questions. For example, some generation resources, such as storage-limited hydroelectric resources or environmentally limited 

fossil fuel plants, incur opportunity costs if they are required to run at a time not 

of their own choosing. These costs can be quite difficult to value. Operators must 

also account for regulatory and contractual limitations on unit operations, level of 

fuel inventories, transmission constraints, low load stability risk, ramp requirements, weather conditions, and other factors. 

But these pricing and operational issues with cost-based dispatch are dwarfed by 

the problems APPA members are experiencing with ISO-run, bid-based, single-clearing price markets. APPA understands the economic theory underpinning this market model, and its attraction to policy makers. But for this model to work, the bids 

of generators must reflect the true marginal cost of producing the last unit of electric power. For many reasons, including substantial transmission constraints, unanticipated increases in natural gas prices that have weakened new generation entrants heavily dependent on that fuel, convoluted market rules and associated exceptions, generation market power, and concomitant economic withholding, the actual results in bid-based markets have diverged markedly from the theory of how 

a competitive market should work, to the detriment of retail electric consumers. 

For these reasons, APPA does not support the further extension of ISO-run, bidbased single-clearing price markets to regions of the country that do not now have 

them, and we are concerned that a federal mandate on efficient or economic dispatch with the definitional context of ‘‘cost’’ being a bid-based market could move 

non-RTO regions toward RTOs. As is explained above, even cost-based dispatch has 

its challenges, and we think that those challenges are best met at the local and regional levels so that variables like environmental regulations, transmission constraints, etc., can be taken into consideration. Further explanation of APPA’s general position on RTOs may be found in APPA’s December 2004 policy paper, ‘‘Restructuring at the Crossroads: FERC Electric Policy Reconsidered,’’ which is enclosed as Attachment 2. 

COAL-FIRED GENERATION

During the hearing, Senators Burns and Thomas both expressed concerns that the 

vast majority of new electricity generation built in the last 10 years in this country 

has been natural gas-fired generation. Although the trends delineated above provide 

the answer as to why natural gas has been an attractive investment to utilities in 

the last decade or so, we agree with their concerns with these trends and believe 

that coal-fired generation is and must continue to be a vital and viable part of our 

electric generation mix. Coal is abundant domestically, is inexpensive relative to 

other fossil-fuel sources like natural gas, and is an increasingly clean fuel source 

due to the technological innovations achieved in recent years, like integrated gasification combined cycle (IGCC), that minimize emissions of air pollutants. 

According to Energy Information Administration (EIA) data, coal currently accounts for approximately 50% of the electric generation produced in the United 

States, far exceeding the proportion of other primary fuels like natural gas, nuclear, 

hydropower, oil, and non-hydro renewable energy. By the year 2025, it is predicted 

that this high percentage will remain relatively unchanged. Also according to EIA 

data, the public power sector provides approximately 16.6% of all kilowatt-hour 

sales to ultimate consumers in the nation. Public power systems own 9.8% of the 

generating capacity compared to the investor owned utilities (IOUs) at 40.9%, nonutility generators at 37.9%, and the rural electric cooperatives at 4.1%. Although 

public power systems have less coal capacity and more natural gas and hydropower 

capacity in their mix than other utility sectors, coal is still a crucial part of their 

generation mix, accounting for 30.1% of nameplate capacity. Furthermore, given the 

price volatility of natural gas, and the uncertainty and high costs we have experienced in ISO/RTO markets in particular, many public power systems are interested 

in building more of their own generation close to their load. This has resulted in 

a heightened interest in siting new coal-fired generation in the last couple of years, 

despite the regulatory constraints and expenses imposed by the Clean Air Act. Several public power communities are in the advanced stages of proposing coal-fired 

generation projects, and we are likely to see continued interest in this area by our 

members. 

Another issue that was mentioned cursorily in the hearing last week was the 

issue of coal transportation. Coal must be transported from the mine to the generator via rail, and from the generator to the end-use customer via high voltage electric transmission lines. Increased reliance on coal requires greater attention to both 

of these areas. To that end, APPA supports legislation that encourages structural 

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and policy changes to promote competitive transportation alternatives for rail customers and improvements in the rail customer protection mechanisms that are implemented by the Surface Transportation Board (STB). This issue has become increasingly acute in the last two years for ‘‘captive rail’’ customers that are served 

by only one railroad. As long-term contracts for coal shipping have come up for renewal, public power systems, along with many other captive rail stakeholders, have 

faced exorbitant rate increases from the railroads. They have had little or no ability 

to negotiate these rates and as a practical matter, little relief is available from the 

STB. These disproportionate costs for rail shipping in some areas of the country are 

driving the cost of coal-fired electric generation up unnecessarily at a time when the 

last thing the industry and the economy needs is more high fuel costs. 

Regarding electricity transmission, the industry badly needs new transmission infrastructure, and public power represents an untapped resource for the development 

of such new facilities. Public power systems are willing and able to invest in transmission facilities provided they receive the concomitant long-term firm transmission 

rights. APPA is anxious to encourage joint ownership of new transmission facilities 

by all load-serving entities in a region, be they public or private—in fact, two public 

power systems in the Gulf States have sent the enclosed (Attachment 3) letter to 

Entergy proposing to aid in the rebuilding of Entergy facilities destroyed by recent 

hurricanes through joint financing and ownership. A white paper on this subject is 

also enclosed (Attachment 4). 

LAFAYETTE CONSOLIDATED GOVERNMENT, 

LAFAYETTE UTILITIES SYSTEM, 

Lafayette, LA, October 6, 2005. 

Mr. J. WAYNE LEONARD, 

Chief Executive Officer, Entergy Corporation, Clinton, MS. 

DEAR MR. LEONARD: The recent devastation wrought by hurricanes Katrina and 

Rita throughout much of Louisiana, Mississippi and Texas has destroyed much of 

the electric system owned by investor owned utilities. municipal systems and electric cooperatives. The costs to repair these systems, while still largely undetermined, 

may well be in the billions of dollars. 

It has occurred to us that this may also he a time of unique opportunity .for the 

power consumers of this region. The Entergy transmission grid is a vital component 

of not only Entergy’s system but of ours as well. We are therefore vitally interested 

in seeing transmission system rebuilt that will better serve all electric consumers, 

stronger and more reliable than before. And we think this is a time when a new 

approach could redistribute costs in a tray that could reduce the need to seek support. from the nations taxpayers to share in the cost of reconstruction. 

The changes in our industry have led to much debate concerning the rights of 

transmission dependent utilities such as ours. We agree that those who expect some 

certainty from the transmission system should be willing to invest in that system, 

although we do not think that the so-called participant funding approach will work. 

As we work to restore the grid we have the opportunity to resolve a number of divisive issues and share the burden of improving the transmission system together. 

We write on behalf of a number of transmission dependent utilities who would 

be willing to invest our own funds to help rebuild Entergy’s transmission system 

to the point where it is capable of serving all consumers better, including investment in needed facilities not necessarily affected by the storms in order to free up 

Entergy’s capital for restoration. We believe such an investment would ease 

Entergy’s search for funds to repair its system and result in an improved system 

overall. 

We would be interested in seeking solutions that would allow our organizations 

to build and own segments of the grid that would improve the system and cost share 

with Entergy where it makes sense. We would he willing to contract with Entergy 

to manage and maintain these segments. or participate in an RTO if Entergy should 

choose to join one. We think that Section 30.9 of your transmission OATT, or in 

some cases, a like provision in an existing grandfathered contract, offers a good way 

for our costs to be recovered, and it appears that this method of ownership and operation would be cheaper for all of your transmission customers than if Entergy were 

to be forced to own and finance all of the facilities that are required. We understand 

that when you were at Cinergy, you had a Joint Transmission System arrangement 

with IMPA and Wabash Valley, which we understand worked well, and which might 

serve as at least a partial model. 

If you are at all interested in this approach, please let us know. We recognize that 

time is of the essence in getting the system rebuilt, but we see this as a unique 

77

opportunity to build a stronger and less expensive system that better serves all electric customers in the region. Together we can turn this disaster into a positive for 

all concerned. 

Sincerely, 

TERRY HUVAL, Director, Lafayette Utilities System, 

ROBERT D. PRIEST, General Manager, Clarksdale Public 

Utilities. 

STATEMENT OF AMERICAN PUBLIC POWER ASSOCIATION

JOINT OWNERSHIP OF TRANSMISSION

Joint ownership of transmission facilities is a structural solution that can address 

many of the access-related issues that Regional Transmission Organizations 

(‘‘RTOs’’) were intended to address. Proportional ownership by those load-serving entities providing service in the region is an effective means to mitigate the transmission market power of utilities seeking market-based rate authority from the Federal Energy Regulatory Commission (‘‘FERC’’). If the responsibility for building and 

owning the transmission grid is spread more broadly among entities serving loads 

in a region, then joint transmission planning will be facilitated, simply because 

there are more participants at the planning table. If network customers of a dominant regional transmission provider are encouraged to buy in to their load ratio 

share of the transmission system, transmission usage and ownership will be more 

closely aligned, and the frictions between transmission-dependent utilities and 

transmission owners can be reduced. 

Public power utilities have participated in jointly-owned transmission arrangements for many years. One model of joint ownership that has worked for public 

power is investment in a transmission-only company. A second model is ownership 

in a shared system. 

INVESTMENT IN A TRANSMISSION-ONLY COMPANY

There are two transmission-only companies that are partially owned by public 

power utilities. These are the American Transmission Company and the Vermont 

Electric Power Company. 

American Transmission Company 

American Transmission Co. LLC (‘‘ATC’’) was organized in 2000 and assumed 

ownership and operation of transmission assets on Jan. 1, 2001. Four investorowned utilities—Wisconsin Electric Power Company, Madison Gas & Electric Co., 

Wisconsin Public Service Corp. and Wisconsin Power & Light Co.—transferred their 

transmission assets to ATC at net book value. In return, the utilities received 50 

percent of the assets’ value in cash and the remainder as ownership interests in 

ATC. The fifth founding member, Wisconsin Public Power Inc. (‘‘WPPI’’), a public 

power utility that owned no transmission, purchased a 5.7 percent ownership interest in ATC for $17 million. The percentage amount was based on WPPI’s proportionate share of electric load in Wisconsin, and the purchase price was based on the 

net book value of the transmission facilities transferred to ATC by the other owners. 

WPPI is a municipal joint action agency that provides full requirements power and 

energy and other services to its 39 member cities and towns in Wisconsin. 

Currently, ATC has 28 members who have contributed some combination of transmission assets or cash to the system. These members include the Upper Peninsula 

Public Power Agency, which was created to facilitate the participation of seven 

Michigan municipal utilities in ATC, as well as four electric cooperatives in Wisconsin and Michigan. 

ATC owns approximately $1 billion in transmission assets, including 8,900 circuit 

miles of transmission lines and 450 substations. The company is governed by a 

Board of Directors, which includes four independent directors and a director representing each of the five founding members. The company raises capital by selling 

bonds and by equity contributions from its members. Its bonds are rated by all three 

major credit rating agencies: currently ATC’s long-term debt is rated ‘‘A’’ by both 

Fitch and Standard & Poor’s, and ‘‘A1’’ by Moody’s. 

ATC was created in response to the Reliability 2000 legislation signed into law 

in October 1999 as part of Wisconsin’s 1999 budget bill. The legislation represented 

a compromise: it raised the cap on investor-owned utility investments in non-regulated businesses to 25 percent of utility assets, if the utility voluntarily transferred 

78

its transmission assets to a separate transmission-only company that would in turn 

improve system planning, construct needed transmission facilities, and ensure a 

more reliable system. The legislation addressed regulatory jurisdiction over the new 

company, to be structured as a utility subject to state jurisdiction for issues including certification of transmission projects but ceding rate jurisdiction to FERC. 

A June 2000 filing with the Wisconsin Department of Financial Institutions established ATC as a limited liability company. This structure was selected in part to 

facilitate the participation of a diverse mix of utility owners. Next, ATC filed with 

FERC for approval of its Open Access Transmission Tariff (OATT); the tariff created 

a single-zone transmission rate, phased-in over a 5-year period. 

In August 2000, ATC and the five member companies filed with the Wisconsin 

Public Service Commission for certification of ATC as a transmission company and 

for approval to transfer transmission assets with a book value of more than $545 

million from the member companies to ATC. ATC filed for and received necessary 

approvals from FERC, as well as state regulators in Wisconsin, Michigan and Illinois, in time to meet the January 1, 2001 launch date. 

ATC is a member of the Midwest Independent Transmission System Operator 

(MISO), transferring operational control of its transmission facilities to MISO in December 2001. ATC transmission customers began taking transmission service under 

the MISO OATT in February 2002. 

Each year ATC conducts a transmission system assessment, including public 

input in system-wide meetings, which results in recommendations for system upgrades and expansion. In its most recent 10-year transmission expansion plan, ATC 

projects new investment of up to $2.8 billion. Since operations began in 2001, ATC 

has invested over $500 million in transmission infrastructure. 

Vermont Electric Power Company 

ATC was created just a few years ago, but the idea of a jointly owned transmission-only company is not new. Vermont’s investor-owned utilities established 

Vermont Electric Power Company (VELCO) in 1956 to develop an integrated transmission system in the state. The Burlington municipal utility became a shareholder 

in the 1960s through conditions placed on nuclear plant licenses to address situations inconsistent with the antitrust laws. However it wasn’t until the late 1970s 

that agreement was reached to allow all of Vermont’s municipal and cooperative 

utilities to acquire shares in VELCO; the agreement forestalled a legislative proposal directing the State of Vermont to take over VELCO. 

Vermont’s 15 municipal and two cooperative utilities have increased their shares 

in VELCO over time, finally achieving a load ratio ownership share in 2001. Today, 

municipal utilities have two seats on the VELCO Board, and cooperative utilities 

have one. 

When VELCO needs new equity for its capital program, each shareholder is allowed to invest a proportionate amount based on its load ratio. Shares are owned 

by the individual municipal utilities, and many obtain financing from Vermont Public Power Supply Authority, the joint action agency in the state. 

OWNERSHIP IN A SHARED TRANSMISSION SYSTEM

In shared or joint transmission systems, two or more load-serving utilities combine their transmission facilities into a single system. Examples of public power participation in shared transmission systems are found in Indiana, Georgia, Minnesota, 

and the upper Midwest region. 

Indiana 

Cinergy Corp., Wabash Valley Power Association (‘‘WVPA’’), and Indiana Municipal Power Agency (‘‘IMPA’’) own a Joint Transmission System (‘‘JTS’’), an integrated transmission system covering two-thirds of Indiana, part of Ohio and a small 

part of Kentucky. IMPA, a joint action agency that now serves the power supply 

needs of 40 Indiana Municipal utilities, acquired its interest in the JTS in 1985 

through the purchase of transmission facilities from Public Service Company of Indiana (‘‘PSI’’). (PSI has since been acquired by Cinergy.) WVPA has had a similar arrangement with PSI since 1983. 

IMPA’s participation in transmission ownership and the establishment of the JTS 

followed several years of negotiations between the parties. At the time, PSI was constructing the Marble Hill nuclear plant and had severe financial problems. PSI was 

looking for co-investors in Marble Hill and invited IMPA to participate. IMPA declined, and countered with the suggestion of investing in PSI’s transmission assets. 

In November 1985 IMPA executed ownership and licensing agreements with 

WVPA and PSI. These agreements provide that each utility owns specific lines and 

substations in the system, but has all rights, as tenants in common, to the use, outVerDate 0ct 09 2002 08:36 Mar 02, 2006 Jkt 109287 PO 26240 Frm 00082 Fmt 6601 Sfmt 6621 P:\DOCS\26240.TXT SENERGY2 PsN: PAULM
79

put and capacity of the entire JTS. IMPA issued $31.6 million in revenue bonds to 

purchase about seven percent of PSI’s transmission assets. If a joint owner’s use of 

the system is more than its investment share, the utility makes payments to one 

or both of the other owners. This arrangement—owning specific assets, but operating as if the entire system were jointly owned—was used rather than a partnership arrangement, because IMPA is a political subdivision of Indiana, and state law 

prohibits it from entering into partnership agreements with private entities. IMPA 

also signed an operating agreement with PSI, providing for IMPA to pay PSI (now 

Cinergy) a monthly fee for the operation and maintenance of the IMPA assets. 

Cinergy, WVPA and IMPA jointly plan for JTS system upgrades and expansions. 

The planning group uses forecasts of total load growth to determine where the need 

for new transmission is greatest. The planners assign ownership of specific capacity 

additions among the three utilities in proportion to each utility’s percent of total 

load, and each utility then provides the investment money for its assigned portion. 

The goal is to keep each utility’s investment in proportion to its use of the system. 

IMPA currently owns 4.6 percent of the JTS. 

The JTS is directly connected with eight other electric utilities in or adjacent to 

Indiana, and is under the operational control of MISO. MISO treats the JTS as a 

single entity, and pays Cinergy revenues collected for the use of the system. 

Cinergy, in turn, pays WVPA and IMPA their portion of the revenue. 

The other three jointly-owned systems described below have very similar arrangements to the Cinergy/WVPA/IMPA JTS model. Brief descriptions are provided for 

each of the three. 

Georgia 

Georgia’s Integrated Transmission System (‘‘ITS’’) is jointly owned by four Georgia 

electric utilities: Georgia Power Co., a subsidiary of Southern Company; Georgia 

Transmission Corp., an affiliate of Oglethorpe Power Corp., which is a generation 

and transmission cooperative; MEAG Power, a municipal joint action agency; and 

Dalton Utilities, a municipally-owned utility. A 1975 Georgia statute authorized the 

creation of MEAG Power, and in 1976 the agency began purchasing transmission 

assets and ownership interests in generating facilities from Georgia Power to serve 

the needs of its 49 municipal utility members. 

Georgia Power has separate, two-party agreements with each of the other three 

joint owners, and also has supplemental agreements regarding operations and maintenance of the transmission system. Each utility owns individual transmission assets, but may use all transmission facilities in the system, regardless of ownership, 

to serve its customers. 

Georgia Power operates the transmission network, and each utility is responsible 

for the operation and maintenance costs of the lines it owns. Through a joint planning process each owner maintains an investment in transmission that is in parity 

with the investments of the other joint owners. The parity formula is generally determined each year based on each system’s five-year rolling average peak demand. 

MEAG Power currently owns more transmission than its parity amount, and so receives parity payments from Georgia Power. 

Minnesota 

In the 1980s utilities in Minnesota signed a series of agreements for sharing of 

transmission systems (‘‘STS agreements’’) that generally provide for investment in 

transmission assets in proportion to each utility’s load and use of the shared system. 

By the end of 1983, Southern Minnesota Municipal Power Agency (‘‘SMMPA’’), for 

example, had signed STS agreements with two investor-owned utilities (Interstate 

Power and Northern States Power) and with two cooperative utilities (Dairyland 

Power Cooperative and United Power Association). 

SMMPA’s transmission assets are generally operated and maintained by the 

agency’s partners in the STS agreements. The agreements with the investor-owned 

utilities (‘‘IOUs’’) were terminated and converted to network transmission service as 

part of the two IOUs’ merger activities. However, the IOUs continue to operate 

SMMPA’s transmission in their service areas, and SMMPA receives a credit reflecting its investment in each system. SMMPA’s joint ownership arrangements with the 

cooperative systems remain in effect. 

Upper Midwest Region (Missouri River Energy Services) 

Otter Tail Power (‘‘OTP’’), an investor-owned utility that serves customers in Minnesota, North Dakota and South Dakota, has separate transmission system agreements with Great River Energy (‘‘GRE’’), a cooperative in Minnesota, and with Missouri River Energy Services (‘‘MRES’’), a joint action agency serving public power 

utilities in Iowa, Minnesota, North Dakota and South Dakota. 

80

The OTP/MRES integrated transmission system began in 1986 when MRES, then 

known as Missouri Basin Municipal Power Agency, purchased (via its financing 

agent, Western Minnesota Municipal Power Agency) eleven percent of OTP’s transmission system. Otter Tail Power is responsible for the operation and maintenance 

of the transmission system, and the two utilities jointly plan for system expansions 

and upgrades. 

Under the OTP/MRES agreement, each utility owns specific transmission assets, 

generally in proportion to its share of load in the system’s service area, and each 

utility has use rights on the system. The OTP/GRE agreement works in a similar 

way. The two integrated systems partially overlap one another, and the effect of the 

two agreements is that each of the three utilities has the right to use the overlapping portions of the integrated transmission systems as if they were its own.

Æ