```

[Senate Hearing 109-287]
[From the U.S. Government Publishing Office]

                                                        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

                                 _____

                     U.S. GOVERNMENT PRINTING OFFICE
                             WASHINGTON: 2006        
26-240 PDF

For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                 PETE V. DOMENICI, New Mexico, Chairman
LARRY E. CRAIG, Idaho                JEFF BINGAMAN, New Mexico
CRAIG THOMAS, Wyoming                DANIEL K. AKAKA, Hawaii
LAMAR ALEXANDER, Tennessee           BYRON L. DORGAN, North Dakota
LISA MURKOWSKI, Alaska               RON WYDEN, Oregon
RICHARD M. BURR, North Carolina,     TIM JOHNSON, South Dakota
MEL MARTINEZ, Florida                MARY L. LANDRIEU, Louisiana
JAMES M. TALENT, Missouri            DIANNE FEINSTEIN, California
CONRAD BURNS, Montana                MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia               JON S. CORZINE, New Jersey
GORDON SMITH, Oregon                 KEN SALAZAR, Colorado
JIM BUNNING, Kentucky

                       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

                            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

 
                          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.
    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 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. 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.
    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 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:]
           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.*
---------------------------------------------------------------------------
    * The Outlook has been retained in committee files.
---------------------------------------------------------------------------
    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 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.
    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 
Low-Income 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.
    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:]
  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 long-term 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 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.

    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. 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 gas-fired 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 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.
---------------------------------------------------------------------------
    * The map has been retained in committee files.
---------------------------------------------------------------------------
    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 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 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.
    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 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 weather. 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.
    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 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.
---------------------------------------------------------------------------
    \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 Energy-Efficient 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).
---------------------------------------------------------------------------
    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 low-income 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.
---------------------------------------------------------------------------
    \2\ The Growing Need to Help Low-Income Energy Consumers: 
Government, Charitable, and Utility Programs, American Gas Association 
Energy Analysis, EA 2005-3, (September 14, 2005)
---------------------------------------------------------------------------
    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. 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 long-term 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
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. 
Representatives 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 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 because 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; 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 fund key elements of the Energy Policy 
Act of 2005, which is generally the thrust of the letter from the state 
groups.
---------------------------------------------------------------------------
    * The letter has been retained in committee files.
---------------------------------------------------------------------------
    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-in-time'' 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 agricultural 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);
          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 because 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 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 consumption--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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
                              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, energy-
saving 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\
---------------------------------------------------------------------------
    \3\ Attached are NEFI's Energy Conservation Recommendations for 
Consumers, which have been retained in committee files.
---------------------------------------------------------------------------
    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 low-income 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

    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.
    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.
    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 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 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 multi-emissions 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.
    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 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.
    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.
    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 low-income 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.
    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.
    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 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?
    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 short-term 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 
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.
    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 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 multi-missions 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.
    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?
    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 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 
country 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.
    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?
    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 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 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.
    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?
    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?
    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.
    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. 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.]
                               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 combined-cycle 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 electricity 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-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. 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 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 
gas-fired 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 gas-fired 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 supply, 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 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 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 steam-electric 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 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. 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/spcl_rpts/2005/wntr_assess/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.

                              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 increase 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.
                                 ______
                                 
             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 publicly-owned 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 
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:
---------------------------------------------------------------------------
    * All attachments have been retained in committee files.

          ``APPA members in RTO regions that attempt to procure power 
        under long-term 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.''

    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, bid-based 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%, non-utility 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 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 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 investor-owned 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 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, output 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.
    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.

                                


```