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96–091 PDF 2004

EASING PAIN AT THE GASOLINE PUMP: FINDING

SOLUTIONS FOR WESTERN WOES

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY POLICY, NATURAL

RESOURCES AND REGULATORY AFFAIRS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

MAY 28, 2004

Serial No. 108–203

Printed for the use of the Committee on Government Reform

(

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

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

NATHAN DEAL, Georgia

CANDICE S. MILLER, Michigan

TIM MURPHY, Pennsylvania

MICHAEL R. TURNER, Ohio

JOHN R. CARTER, Texas

MARSHA BLACKBURN, Tennessee

PATRICK J. TIBERI, Ohio

KATHERINE HARRIS, Florida

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. ‘‘DUTCH’’ RUPPERSBERGER, Maryland

ELEANOR HOLMES NORTON, District of

Columbia

JIM COOPER, Tennessee

——— ———

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director/Communications Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON ENERGY POLICY, NATURAL RESOURCES AND REGULATORY

AFFAIRS

DOUG OSE, California, Chairman

EDWARD L. SCHROCK, Virginia

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

CHRIS CANNON, Utah

NATHAN DEAL, Georgia

CANDICE S. MILLER, Michigan

PATRICK J. TIBERI, Ohio

JOHN F. TIERNEY, Massachusetts

TOM LANTOS, California

PAUL E. KANJORSKI, Pennsylvania

DENNIS J. KUCINICH, Ohio

CHRIS VAN HOLLEN, Maryland

JIM COOPER, Tennessee

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

BARBARA F. KAHLOW, Staff Director

MELANIE TORY, Professional Staff Member

LAUREN JACOBS, Clerk

KRISTA BOYD, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on May 28, 2004 ............................................................................... 1

Statement of:

Burdette, Richard, energy advisor to Governor Kenny Guinn, State of

Nevada; William Keese, chairman, California Energy Commission; and

Lynette Evans, policy advisor regulatory affairs, Office of Governor

Janet Napolitano, State of Arizona ............................................................. 28

Sparano, Joseph, president, Western States Petroleum Association; Sean

Comey, media relations representative, AAA of northern California,

Nevada and Utah; David Hackett, president, Stillwater Associates; and

Tyson Slocum, research director, Public Citizen’s Energy Program ......... 68

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

Berkley, Hon. Shelley, a Representative in Congress from the State of

Nevada, prepared statement of .................................................................... 133

Burdette, Richard, energy advisor to Governor Kenny Guinn, State of

Nevada, prepared statement of .................................................................... 31

Comey, Sean, media relations representative, AAA of northern California,

Nevada and Utah, prepared statement of .................................................. 80

Evans, Lynette, policy advisor regulatory affairs, Office of Governor Janet

Napolitano, State of Arizona, prepared statement of ................................ 50

Gibbons, Hon. Jim, a Representative in Congress from the State of Nevada, prepared statement of ........................................................................ 130

Hackett, David, president, Stillwater Associates, prepared statement of ... 88

Keese, William, chairman, California Energy Commission, prepared statement of ........................................................................................................... 39

Ose, Hon. Doug, a Representative in Congress from the State of California, prepared statement of ........................................................................... 18

Slocum, Tyson, research director, Public Citizen’s Energy Program, prepared statement of ........................................................................................ 96

Sparano, Joseph, president, Western States Petroleum Association, prepared statement of ........................................................................................ 72

Tierney, Hon. John F., a Representative in Congress from the State

of Massachusetts, letter dated May 25, 2004 ............................................. 7

(1)

EASING PAIN AT THE GASOLINE PUMP:

FINDING SOLUTIONS FOR WESTERN WOES

FRIDAY, MAY 28, 2004

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON ENERGY POLICY, NATURAL

RESOURCES AND REGULATORY AFFAIRS, COMMITTEE ON GOVERNMENT REFORM, Henderson, NV.

The subcommittee met, pursuant to notice, at 10 a.m., in Henderson Convention Center and Visitor’s Bureau, 200 South Water

Street, Henderson, NV, Hon. Doug Ose (chairman of the subcommittee) presiding.

Present: Representatives Ose, Schrock, and Tierney.

Also present: Representatives Porter and Gibbons.

Staff present: Barbara F. Kahlow, staff director; Melanie Tory,

professional staff member; Megan Taormino, press secretary;

Lauren Jacobs, clerk; and Krista Boyd, minority counsel.

Mr. OSE. Good morning. I want to welcome everybody to today’s

hearing of the Subcommittee on Energy Policy, Natural Resources

and Regulatory Affairs. I ask consent to allow Congressman Gibbons and Congressman Porter to join us. Hearing no objection, so

ordered. I would like to turn to our host, Congressman Porter.

Mr. PORTER. Thank you, Mr. Chairman. Good morning and welcome to Henderson, NV. We appreciate the committee being here

and your staff, and on behalf of the whole Las Vegas community

we appreciate this bipartisan approach to a very serious challenge

that we’re facing in Las Vegas and regionally in California, Arizona.

I hope you all have an opportunity to enjoy our community of

Henderson, Las Vegas. It is a great place and one of the fastest

growing communities in the country. 5,000 to 7,000 people a month

are moving into our community and with that comes numerous

challenges. We’re very, very proud of what we have as a community so please enjoy your stay; and, to the staff, we appreciate you

being with us from Washington, and we look forward to a very productive meeting this morning with solutions to help families in Nevada.

Thank you very much.

Mr. OSE. Thank you, Congressman Porter. Here is the way this

works. We’re going to have two panels of witnesses today. First will

be folks associated with the State or local governments. Second will

be private citizens and the organizations they represent. There is

no open testimony here. People who are testifying have been invited. They have written statements. We’ll be submitting those

2

statements to the record. There are copies of those statements outside the door if you care to follow along.

The way these hearings proceed is that each of us up here will

make an opening statement. Statements are limited to 5 minutes

in turn. We alternate between Republicans and Democrats. I do

want to compliment my friend John Tierney from Massachusetts

for traveling this far. I know it’s not easy, but it is appreciated.

Now, there will not be questions from the audience during the

course of this hearing. That’s not the way congressional hearings

proceed. These are invited witnesses and they will be the ones that

we direct our inquiry to. With that we will proceed.

Mr. Gibbons, you are our co-host here. I’ll turn to you next.

Mr. GIBBONS. Mr. Chairman, I want to thank you and this committee for allowing me, a nonmember of this committee, the generous opportunity to appear and be a panel member with you and I

do thank you and Mr. Tierney for that courtesy. I also want to

thank my colleague Jon Porter for spearheading this effort to bring

attention to a national level problem, high price of gasoline as it

affects not just Nevada but every American over this holiday and

preceding days.

As we all know, the price of gasoline in Nevada alone has risen

60 cents since January of this year and it’s anticipated that it will

rise and continue to steadily increase over the next several months.

This has brought a great deal of concern to many Nevadans because we are a tourist industry based State. In order to have our

economy flourish we need to be able to bring tourists to Nevada.

One of our principal means by which tourist arrive in Nevada,

of course, is by the vehicle and we are beginning the Memorial

weekend, a period of time when Las Vegas and Nevada alone flourishes with tourism in an effort to seek an entertainment value for

their time over the weekend.

So Nevada, like California, is suffering from high gas prices, and

I want to say there are several causes of that high gasoline cost,

one of which of course is the fact that OPEC does control a great

deal of the supply and has actually a hostage holding effort and effect on the price of gasoline.

I know that in the 108th Congress I and our colleagues have

made a strong effort to pass an energy policy to give the United

States an opportunity to create meaningful efforts to regulate and

control the price of fuel that affects each and every one of our lives.

We need to have that bill passed both through the Senate. There

are disagreements among individuals, disagreements among bodies,

disagreements among parties with regard to the passage of the energy bill, but nonetheless, the energy bill is the basis by which a

sound policy for energy problems in this country must be addressed.

We’re hoping today that by this hearing we can allow more dialog to be brought forward that will allow for us to understand the

energy problem, and to understand why the fuel costs in this Nation are rising dramatically, and we hope that through the testimony that is also going to be presented here today that we’ll find

solutions to those problems. Whether those solutions are government, regulatory, restricted permitting, needs to expand our own

domestic production of oil and gasoline for this country’s energy

3

problem, a need to back away from our dependence upon foreign

supplies of oil and gas which in fact do change the market conditions dramatically, and we also need to look at, in my view, a broad

effort alternative energy solution to our dependence on fossil fuels

in this country.

Mr. Chairman, I’m looking forward to the testimony of the witnesses that will appear before you today and again I want to thank

the committee for holding this hearing in Nevada, holding it here

in Henderson. I want to thank Mr. Porter one more time and I

want to thank the audience for being here and the people who are

going to be testifying before you today. Again, it’s a real honor and

privilege for me to be here on your committee. Thank you, Mr.

Chairman.

Mr. OSE. Thank you. Gentlemen, I would like to ask your consent

to enter into the record the statement of Congresswoman Shelley

Berkley regarding this hearing. Shelley is actually engaged in activities related to another of her committees, International Relations, and is not able to join us today, but we will put this statement in the record.

I would now like to recognize my friend from Massachusetts, Mr.

Tierney, for purpose of opening statement.

Mr. TIERNEY. Thank you, Mr. Chairman, thank you, Mr. Porter,

for hosting this out here and the people of Henderson, NV, for their

courtesies. I enjoy being out here, and I want to thank you, Mr.

Chairman, for having another in a series of hearings on the important issue of energy and the cost of energy. We’ve done it at several

locations, one in my district up in Massachusetts and seems to be

an issue that periodically raises its head as we’ll see in some of the

testimony.

I don’t think I need to repeat what might also be mentioned by

others here but obviously between January of this year and May

the U.S. average gasoline price has increased 50 cents or more. It’s

been most dramatic in the West, I believe, but in Massachusetts

you should know our current price is $2.06 a gallon. That’s about

57 cents higher than it was last year at this time. Families are

going to spend about $375 on average more for gas this year than

they did last year and about an average of $540 more per year

than they did in 2002, eating up just about all of any tax break

they may have gotten over the last several years. This affects the

family car but also truckers, shippers, and many small businesses,

all who are suffering from these skyrocketing prices.

Comments from the industry and from the Bush administration

run the gamut, run from somewhat plausible contributing reasons

all the way to flat-out excuses. Mostly, as studies like that done by

the Consumer Federation of America and Consumers Union earlier

this year show, the explanation for the high and volatile price of

gasoline offered by the industry and the Bush administration is so

oversimplified and incomplete that it must be considered at best

misleading. At worst, it’s wrong because it points to policies that

do not address important underlying causes of the problem and,

therefore, will not provide a solution.

First, let me say there may well be merit to the issue raised by

Mr. Ose and others from his delegation. California has been a pioneer in environmental policy and generally they have found the

4

price to be higher but acceptable. In California refiners truly can,

if they can truly produce gasoline that is cleaner or as clean an alternative as that comprised of 2 percent ethanol by weight, then

the EPA should act on the State’s request for relief. We’ve had

other hearings on that and I think we’ll talk about that again

today.

With that said, eliminating the small gasoline markets that result from efforts to tailor gasoline to microenvironments of individual cities will not increase refinery capacity, nor improve stockpile

policy to ensure lower, less volatile prices if the same handful of

companies dominate the regional markets. Markets should be expanded by creating more uniform product requirements. These

should not result in a relaxation of clean air requirements.

Blaming tight refinery markets on the Clean Air Act requirements to reformulate gasoline ignores the fact that in the mid1990’s the industry adopted a business strategy of mergers and acquisitions to increase profits that was intended to tighten refinery

markets and reduce competition at the pump.

Blaming high gasoline prices on high crude oil price also ignores

the fact that over the past few years the domestic refining market

and marketing sectors have imposed larger increases on consumers

at the pump than crude price increases would warrant. In other

words, while they pass on the cost of higher crude prices, they don’t

stop there. They jack the prices up higher still, padding their profits.

Claiming that the antitrust laws have not been violated in recent

price spikes ignores the fact that forces of supply and demand are

weak in the energy markets and that local gasoline markets have

become sufficiently concentrated to allow unilateral actions by oil

companies to push prices up faster and keep them up longer than

would normally be warranted in a vigorously competitive market.

What price increases are not caused by cost increases are the result of profit increases, a sign of the exercise of market power and

the market failure. Net operating income for the domestic downstream industry, refining and marketing side of the business, have

tripled from 1997 to 1999 to 2001. While profits were down in

2002, due to the serious economic downturn and the post September 11, 2001 travel slowdown, they have skyrocketed since.

In 2000, the petroleum industry reported a return on equity of

25 percent, more than twice the historic average for the industry

and about 50 percent more than what other large corporations

earned. 2003 was the equivalent of another year of record profits.

So far, the first quarter of 2004 has also been incredibly profitable,

especially in the downstream operations.

A good part of the reason for these spikes in price come from

mergers and acquisitions. This wave of mergers and acquisitions in

2003 saw 52.2 percent of the U.S. oil refinery industry controlled

by just five companies, that compared to 341⁄2 percent in 1993. 781⁄2

percent was controlled by the top 10 companies in 2003 as compared to 55.6 percent in 1993.

Companies have let supplies become tight in their area and they

have kept the stocks low. There is too few competitors to counter

this strategy. Companies can simply push prices up when demand

increases with no fear the competitors will keep their prices down

5

to steal customers. Individual companies don’t feel compelled to

quickly increase supplies with imports because their control of refining and distribution ensures that competitors won’t be able to

deliver supplies to the market in their area. Operating at very high

levels of capacity places strains on the physical infrastructure and

renders it susceptible to accidents.

Let me make one point, Mr. Chairman, refineries have been

closed by business, not by government. In the 1980’s the policies

of support for smaller refineries ended. That accounted for the loss

of over 100 refineries from 1980 to 1983. Since then scores of others have been shut down. In 1990 alone 50 or more refineries were

closed. Since 1995 more than 20 have been shut. The number of operating refineries have been reduced 13 percent since just 1995.

Refineries get larger but they get smaller in number and they’re

owned by fewer and fewer entities. Over the period of 1980 to 2000

the number of firms engaged in refining in the United States has

declined by two-thirds.

Let me make another point. Blaming the decline of capacity relative to demand on the Clean Air Act does not stand close scrutiny.

Consolidation of the industry is a business decision that began long

before the changes in the Clean Air Act amendments of 1990 and

continued after the adjustment to changes in gasoline formulation.

Moreover, stock levels are down. Number of days of demand for

gasoline that is held in storage has gone from 4 to 5 days down to

just 1 or 2 days. Any stock levels are no accident. They are a result

of business decisions.

In the face of all this industry activity, the Bush administration

stands idle, merely watching as prices on regular Americans rise

and profits on the President, Vice President Cheney’s cronies skyrocket. The President continues to divert oil for the Strategic U.S.

Petroleum reserve, even though it’s at an all-time high, 660 million

barrels. This purchases 170,000 barrels per day. According to

Valero Energy Corp. CEO William Greehey, if the President

stopped purchasing for the oil reserve it would signal to the commodity traders that the White House is serious about oil prices and

the prices would fall fast.

The President’s administration sanctions refinery mergers.

They’ve approved 33 oil refinery takeovers worth $191⁄2 billion and

haven’t even tried to block one.

The President continues to fail to jawbone OPEC or the Saudis

into increasing supplies despite the fact that there is a 2000 campaign promise to do just that and criticized President Clinton for

not doing that. We can only hope the administration is not waiting

for a politically opportune time to take action as was asserted in

Bob Woodward’s book Plan of Attack, in essence that the Saudis

would act to lower prices closer to election time.

Finally, the President’s energy bill does nothing to address overconcentration or conservation. It does nothing that would lower

prices much. Instead, it gives billions of dollars of taxpayers’

money, large oil companies in the form of subsidies and tax breaks

with no real conservation requirements.

The administration’s own analysis concludes that the legislation’s

incentives to reduce our reliance on foreign sources of oil will have

only negligible success. In fact the administration’s own analysis

6

indicates it will reduce net imports only 1.2 percent between now

and 2025. It’s hard to think that’s worth billions of dollars in taxpayer money in subsidies and tax breaks.

The Department of Interior concluded only 15 percent of the oil

in the 104 million acres of Federal land between Montana and New

Mexico is currently unavailable due to wilderness designation and

other environmental restrictions. So we can, therefore, conclude

that the vast majority of oil reserves on Federal land are easily accessible for drilling. Environmental laws do not need to be weakened in order for America’s needs to be supplied.

Mr. Chairman, I’ve joined a number of colleagues in writing the

President seeking action, and I’d like with unanimous consent to

submit a copy of that letter.

Mr. OSE. No objection.

[The information referred to follows:]

7

8

9

10

11

12

Mr. TIERNEY. Here are some of the things we believe we should

do. We should require the oil companies to expand storage capacity,

require them to hold significant amounts in that storage, and reserve the right to order the companies to release the stored gas to

address supply and demand fluctuations.

We should block mergers that make it easy for oil companies to

manipulate gasoline supplies and take steps, such as forcing asset

sales, to remedy the current highly concentrated market: Discontinue filling the strategic petroleum reserve while the prices are

so high; consider building crude and product reserves that can be

used as economic stockpiles to dampen price increases. We did that

recently in the Northeast and it worked quite well. We should consider doing it in other areas.

Reduce oil consumption by implementing strong fuel economy

standards. Substantially improving CAFE standards over a 10 year

period to reduce the oil used by a third in 2020 and save consumers

$16 billion at the gas pump. We should re-regulate energy trading

exchanges that were exploited by Enron and continue to be abused

by other energy traders.

We should have the Federal Trade Commission study the reasons

why the market forced the closure of over 50 predominantly small

and independent refiners in the past 10 years and assess how to

bring fair competition back to refinery market and thus expand

competition.

Mr. Chairman, it’s strategies such as these, not the administration’s billions of dollars in giveaways to its cronies in faulty legislation, not the industries crying wolf over environmental regulations

when in fact it’s the industries’ decision to cause less competition

and decreased supply and capacity that result in the higher prices.

That’s what we need and hopefully there will be other suggestions.

Thank you.

Mr. OSE. Thank you for his comments. We’re now going to our

host for purpose of an opening statement. Congressman Porter.

Mr. PORTER. Again, thank you, Mr. Chairman. I appreciate you

being here today. I’m looking across the room and wondering how

many were around when we were paying about 20 cents a gallon

for gas. I think there are a couple here. I can remember filling my

1968 Volkswagen. I think it cost me about $3 or something to fill

the tank. That gives my age. I’m a ripe old age of 49. I remember

the early seventies, 1973, 1974 with the oil embargo. I do not wish

for that to ever happen again to the United States of America although I would love to have 20 cents or 25 cents a gallon. The Nevada economy, Las Vegas, Henderson specificly, is tourist dependent. How do tourists get here? They either come by car or by air;

almost 50/50. Close to 40 million visitors a year come into Nevada

economy. Add to that the fact that we’re growing at 6,000 to 7,000

people a month. Although we may have a State of a little over 2

million people, with an additional 40 million in tourist, we are

very, very dependent upon the cost of fuel. Not only for our economic future, to make sure that tourists can visit Nevada at a reasonable cost, but for our residents, moms and dads and families

that are trying to get to work.

Nevada is truly a part of a regional economy. What happens in

California directly impacts Nevada. What happens in Arizona diVerDate 11-MAY-2000 17:03 Oct 18, 2004 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 D:\DOCS\96091.TXT HGOVREF1 PsN: HGOVREF1
13

rectly impacts Nevada. Our sister States, although much larger,

have a huge influence over our economic future, whether it be visitors or whether it be the cost of fuel.

There are a number of issues that have come forward in light of

the increased prices in Nevada and in the region in the past few

months and I’ve asked staff to come up with a few key areas that

appear to have caused a major increase in our fuel. One, of course

I mentioned that we’re a part of the whole region, but with gas

tightening the markets around the world, the U.S. growth in gasoline supply is not keeping pace with the growth in demand.

One of the serious challenges is truly supply and demand. Over

the last 20 years many refineries have closed. I think there are different opinions and we’ll probably hear many opinions as to why,

but the fact is they’ve closed. And, no refineries have been built

since 1976. However, demand for gasoline has remained strong and

continues to increase at about 2 percent a year. The result is an

ever-increasing imbalance between supply and demand.

It’s my understanding that the current refineries are operating

at about 95 to 96 percent of their capacity. There is ample crude

oil available but we don’t have the refineries to process that for

whatever reason. I’m sure we’re going to hear about it this morning.

The ethanol mandate in California. From January to March, refineries in California transition from winter-grade gasoline to harder to produce summer-grade gasoline. This year, because of overlapping Federal and State regulations, California refineries were

required to begin blending their gasoline with ethanol. There are

lots of opinions on ethanol as to how it impacts the environment,

but the fact remains that they began blending this year.

As a result of the blending properties of ethanol, California gasoline productions ability was decreased by almost 10 percent, causing upward pressure on gasoline prices in California, Nevada, and

in the Southwest. Because Nevada receives almost all of our gasoline from California, these changes also exert upward pressure on

Nevada’s gasoline prices.

The cost of crude oil, you know, as I talked about my 1968 Volkswagen in the early seventies and the oil embargo, at that time

about 30 percent of our resources in this country were dependent

upon foreign oil. Now, in 2004, we’re more dependent than ever, at

almost 63 percent on foreign oil. Now, let’s use a little common

sense. Sixty-three percent dependency on other countries and their

economies and their political problems and their challenges can

and do hold us hostage.

The cost of a barrel of crude oil has increased from about $25 to

an all-time high of $41.85. This is due to a strong demand in the

United States and China. China is importing all it can find. They

don’t care about the grade. We do as we should be very cautious

and be careful with the crude that we bring into the States. They

don’t care.

Production cuts by the Organization of Petroleum Exporting

Countries [OPEC], political instability in Iraq and Venezuela. As a

rule of thumb a dollar increase in the cost of a barrel of crude oil

translates into about 21⁄2 cent increase at the gas pump. Those are

some of the key areas that I think specific to Nevada. Also, we

14

have a challenge here with storage in Nevada. We have limited

storage space, which is another challenge as I’ve heard from the

wholesalers and suppliers here in the great State of Nevada.

What can be done to address some of these prices in the shortterm? Because today we’re here to talk about some short-term fixes

but really some long-term solutions as the morning unfolds. But

what are some of the things we can do in the short-term?

Well, there are a few things that we can take, that consumers

can take to decrease the amount of their hard-earned money that

goes to the cost of gasoline, things that we have taken for granted.

One, we certainly can combine some of our trips to the grocery

store, but in reality simply checking inflation in tires would help

immensely right now, here and today. Now, this isn’t a big government suggestion. This is just some common sense approach. Of

course carpooling, and I applaud the Regional Transportation Commission here in Nevada for working on the monorail, an additional

resource that’s being proposed here in the Henderson corridor. All

of these things are actually in the works today, and I consider some

short-term solutions. Long-term I believe is why we’re here today

also and probably most important.

Some possible solutions that will be addressed today include expanding and enhancing the petroleum infrastructure, including additional refineries and being able to expedite regulations. I want to

make it clear, when I talk about expediting approval process, it’s

not about changing or weakening or making our environmental

regulations more lax. We must preserve and protect the environment and that’s the priority. But we all know how government can

be. It can be very slow, inefficient. We need to elevate the priority

of oil production as we have energy in the Southwest over the last

24 months.

The fuel challenge we’re having today is almost parallel to the

electricity problem we’re having in the Southwest. The difference

is when it comes to fuels, we can’t bring in fuel from the Northwest, from Oregon or Idaho, or from other States, because there are

over 60 different fuels being used in different communities. Now,

in fairness, they follow the proper regulations that have been proposed. I applaud Christine Robinson here, the Air Quality Control

Board of Clark County. As you know, I helped reorganize that

agency just last year. But, each community has different options.

One of the possible solutions, as we’re looking at the supply side

solution, is to make sure that we look at some of these regulations

in a regional basis. So, we may not need 60 different boutique fuels

across the Southwest or the West. We can combine and still meet

the important stringent requirements of the Clean Air Act.

Increasing imports of finished gasoline, that’s another option. I’m

not suggesting necessarily that we do that, but we can purchase

additional gasoline that’s already been refined from other countries. And fuel blending, of course the number of boutiques as I

mentioned and the blending of components, but No. 4 which is really important to Nevada is finding a way to have additional gasoline

storage and capacity right here in southern Nevada.

The demand side is critical. Improving vehicle fuel economy, encouraging the use of alternative fuels, hybrid vehicles, providing in

15

public incentives for public transportation and carpooling. These

are some of the solutions that I think will be mentioned today.

In conclusion, Mr. Chairman, during the hearing we’re going to

investigate why consumers are paying so much at the pump. More

importantly we’ll discuss potential short- and long-term solutions

to address the rise in gasoline prices. By the end of the day only

clean renewable energy sources can meet our growing energy needs

while protecting the economy, freeing us from foreign suppliers and

maintaining our commitment to the environment. Thank you, Mr.

Chairman.

Mr. OSE. Thank you, Congressman Porter. I want to add my

compliments to the others. I don’t know whether your people here

in Clark County or Henderson know exactly the type of Member

you are, but the reason we’re here today is to get you off my back.

That’s why we’re here. Jon Porter has dogged me to death about

the importance of this issue to this area and I thank the gentleman

for being persistent in that regard.

Mr. PORTER. Thank you.

Mr. OSE. I want to ask unanimous consent, actually I think this

is normal, unanimous consent that Mr. Gibbons’ written statement

be entered into the record; without objection, so ordered.

I want to recognize the vice chairman of the subcommittee from

Virginia, gentleman, who is recognized, Mr. Schrock.

Mr. SCHROCK. Thank you, Mr. Chairman. Thank you for holding

this very timely and important hearing. I also want to thank our

Nevada colleagues, Congressman Porter, Congressman Gibbons, for

having us in their wonderful State and I was amused, Jon, when

you said you were bemoaning the fact that you were at the ripe old

age of 49. I would kill to be 49 again. So don’t feel so bad. There

is a lot of life ahead of you.

I wasn’t going to come here today because I live in Virginia; it

was a long haul. I didn’t get here until last night, and I have to

speak at a commencement ceremony at 9 a.m. tomorrow at home.

But like the chairman, Jon Porter said you will be here because

this is such an important issue, and it really is. As I left home, we

were well into our $2 range as well, and I never thought we’d see

that in Virginia. I can assure you that’s why I’m here because Jon

said for me to be here, and, consequently I am.

We all know why we’re here. That’s because gas prices have

reached record highs and Americans want to know the answers to

two very important questions: How did we get to this point and

what do we do about it now?

To answer the first question of how we got to this point, the answer is that America has gone too long without a national energy

policy and we have all been forced to adopt a fly by-the-seat-ofyour-pants approach. Though Congress and the administration

have tried over the last few years, we have not been able to agree

on a plan that sets the course in the right direction with regards

to an energy plan. This lack of policy have forced Americans to be

beholden to foreign producers, to their oil supply, and we have been

held hostage by the decisions of OPEC so that our loss is their

gain.

In May 2001, the administration came out with a policy statement outlining their plan for tackling America’s energy needs. The

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bulk of these initiatives required congressional action, which has

not yet taken place 3 years later. It is clear that some have chosen

to make this stalemate and the resulting energy crisis a political

issue rather than seeking out real solutions.

The House passed an energy bill conference report last year. The

Senate has yet to pass that legislation. The House has done its

part in establishing a national policy, but like any other issue,

we’re waiting for the Senate to take issues.

So where do we go from here? Well, I think that passing the current energy bill would be a giant step in the right direction and

while not including all the policies that will get gas prices and

other energy sources on track, it will put in place a number of

measures to boost production, curb consumption, and encourage the

use of alternative fuel. Once we get the energy conference report

out of the way, we can move on to the more difficult issues of boosting domestic production by drilling in Alaska and increasing the refinery capacity right here in America.

We’re here today to hear from our witnesses and to get their

input from where we are heading and how we can point this ship

in the right direction. I was in the Navy for 24 years. I understand

how important it is to have a ship aimed in the right direction. The

same is true with this energy policy. I thank my colleagues again

for hosting us in their fine State and I look forward to hearing from

our witnesses this morning. Thank you, Mr. Chairman.

Mr. OSE. Thank you, gentleman. First of all I want to say how

much fun I had a year and a half ago when I brought my family

through this part of the country on a Christmas vacation. We actually went right down Lake Mead Boulevard and on over to Hoover

Dam. We were inspected just like everybody else. Doing their job.

My family did spend the evening here, and we had a great time.

This is a great part of the country and my kids and I and my wife

thank you for the opportunity to come here.

As we were driving out here today, I was watching the gasoline

stations on the corners trying to keep track of the different pricing.

It was clear that the pricing here is no different perhaps than it

is in California. Everybody is above $2.25 for regular. It’s as high

as $2.43 for premium. I think we’re all somewhat unsettled by

that.

The purpose of this hearing is to try and examine the root causes

of that. Why is it that we’re in this situation where we find few

alternatives and the only near term or immediate thing we can do

is pay through the nose for fuel?

Now, Congressman Tierney and I have been on the road for 4

years looking at this, different areas, different times of the year,

and while we may differ in terms of a number of things, some of

the things we have found I think we consistently understand. No.

1, we have an imbalance between supply on one hand and demand

on the other. We have growth in demand that is exceeding growth

in capacity to refine. So the differences, the imbalance, are growing, not shrinking.

As Congressman Porter said, we’re impacted by events in Venezuela, Iraq, and Indonesia, and by growth in the economy in

China where demand for oil has gone through the roof. In effect,

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we find ourselves in a marketplace where we’re having to bid

against people who previously could not afford to bid against us.

There are a any number of ways to address this. We can talk

about CAFE standards, which are the fuel efficiency standards. We

can talk about increased production domestically. We can talk

about increased ability to import. We can talk about alternative

means of propulsion, whether they be carbon based or otherwise for

our vehicles. But whatever, whatever you want to do, the reality

is that 97 percent of the means of propelling our vehicles remains

based on petroleum. That’s a fact. Cannot get around that. It’s not

going to change by tomorrow. In order to increase supply, there are estimates as high as $20

billion being needed to upgrade facilities that refine petroleum into

fuel, whether it be diesel or regular or premium or what have you.

Now, others have spoken about the winter to summer changeover

in fuel and I’m sure a number of our witnesses will testify about

that today so I’m not going to touch on that.

Over in California there is a refinery that’s being closed. Shell

Oil is closing its Bakersfield refinery. Stated reasons appear to be

they can’t get enough heavy fuel oil out of the Kern County supply

source to efficiently supply the Bakersfield refinery. I want to explore that today. I want to ask the people who are experts in this

field whether that’s the case.

Frankly, if Shell is going to close their refinery, why don’t they

put a price on it and sell it? Now, it’s my understanding that there

have been 21 inquiries made as to the status of that refinery, its

condition, what the price is, but there has been no final closure on

that. I would hope to have some of our witnesses speak to that

today.

[The prepared statement of Hon. Doug Ose follows:]

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Mr. OSE. I do want to just go through and introduce our witnesses here. We’re going to have two panels of witnesses. Our first

panel is comprised of the following individuals: Richard Burdette,

who is the energy adviser to Governor Guinn here in the State of

Nevada, William Keese, who is the chairman of the California Energy Commission, and who has testified in front of this subcommittee regularly, and Lynette Evans, who is the policy advisor on regulatory affairs for Governor Napolitano in the State of Arizona.

Our second panel, four individuals, is comprised of Joe Sparano,

president of Western States Petroleum Association; Sean Comey,

media relations representative of AAA of Northern California, Nevada, Utah, an organization I used to be on the board of directors

for; Mr. David Hackett, president of Stillwater Associates; and,

Tyson Slocum, research director for Public Citizen’s Energy Program.

Again, we’re taking testimony from these invited witnesses who

have statements for the record which will be entered into the

record which we have copies of outside that door back there for

anybody who wants to follow along as they summarize. With that

I would ask the first panel, Mr. Burdette, Mr. Keese, Ms. Evans

to come forward and join us up here.

Standard practice in our subcommittee as well as full Committee

on Government Reform is to swear our witnesses in. If you all will

please rise.

[Witnesses sworn.]

Mr. OSE. Let the record show the witnesses answered in the affirmative. The first witness on the first panel is Mr. Dick Burdette,

who is the energy advisor to Governor Kenny Guinn here in the

State of Nevada. He is also the director of the Nevada State Office

of Energy. Sir, welcome to our subcommittee hearing. You’re recognized for 5 minutes.

STATEMENTS OF RICHARD BURDETTE, ENERGY ADVISOR TO

GOVERNOR KENNY GUINN, STATE OF NEVADA; WILLIAM

KEESE, CHAIRMAN, CALIFORNIA ENERGY COMMISSION; AND

LYNETTE EVANS, POLICY ADVISOR REGULATORY AFFAIRS,

OFFICE OF GOVERNOR JANET NAPOLITANO, STATE OF ARIZONA

Mr. BURDETTE. Thank you, Mr. Chairman and members. Let me

add, Governor Guinn welcomes you and thanks you for offering us

the opportunity to talk a little bit about our views and the continuing challenge of gasoline prices in Nevada, California and Arizona.

We are linked pretty closely together. Nevada is greatly dependent on the availability and price of gasoline, diesel fuel, and jet

fuel, and as the prices of those fossil fuels rise it directly affects

our employment, our tax base, and, of course, nearly every one of

our citizens.

It is going to take a little bit of an academic tack here because

I think the problem is academic. Much has been said about the

preference for using the free market to allocate products to consumers. This, of course, is what markets do. When this is done efficiently, we call them competitive or free. When markets are not

free, goods and services are not allocated efficiently and economic

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rents, that’s a term that is less inflammatory than excess profits,

economic rents are collected usually by suppliers.

The truth is that there are virtually no free markets or competitive markets in the classical sense. To an economist the word implies a series of standard assumptions such as the market allows

easy price discovery. The price discovery during the Western energy crisis 3 years ago, electricity, was exceedingly difficult because

as FERC determined some market participants manipulated the

electricity market and extracted substantial rents that nearly

bankrupted Nevada’s electric utilities and the State of California.

Nevertheless, we still refer to those markets as free or for those

who like to hedge their bets as governed by free market principles.

Unfortunately, there exist a crucial defect in the gasoline market

that is even more fundamental. In a reasonably free gasoline market, when supply shortages occur, prices increase until they are

high enough to allocate available gasoline to its most efficient use.

Generally this means that some refiners will collect rents, ordinarily a bad thing. But in a free market these rents are used to

provide the capital needed to expand, to build new refineries, and

to attract new capital. Those who fail to make those kind of investments would lose market share and profitability. Most importantly

when that happens consumers benefit.

We can spend a lot of time pointing fingers at who created the

market that we have now, but in my opinion we in the West have

allowed ourselves to drift or perhaps be nudged into a situation

that is economically unsound. We don’t want the government to ration gasoline but we are increasingly aware that the rents collected, principally by refiners, are not being used to serve the public interest as they would be in a free market.

The international crude market is not a free market either. It’s

characterized by institutional collusion of OPEC. The consequence

is higher crude prices now exceeding $40 a barrel. If we had known

that crude prices would remain high, the domestic supply of crude

would increase substantially. After all, there is a whole lot more

$40 a barrel oil than there is $23 a barrel oil. Unfortunately we

don’t know that. And, the ability of OPEC to drop prices is very

effective in minimizing competition from renewable energy development, hydrogen technology and other methods we would take here

in the United States.

Crude prices, however, are like the tidal forces beneath waves.

The waves are the price spikes generally caused by conditions

unique to our Western market and are similar to State taxes and

gasoline environmental attributes that affect the price level but

generally, not always but generally do not affect price spikes. Price

spikes are caused by excess demand, when demand exceeds supply.

But because refiners are operated so close to full capacity it is

sometimes possible, not possible for them to make enough product

for peak demand.

Supply interruptions cause—also result in price spikes and unwarranted collection of rents. Unplanned maintenance of refineries

is an especially troublesome type of interruption. It is very difficult

to ascertain whether the occurrence or duration of an unplanned

maintenance outage was the result of a legitimate problem or withholding capacity. The situation is uncomfortably close to the elecVerDate 11-MAY-2000 17:03 Oct 18, 2004 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 D:\DOCS\96091.TXT HGOVREF1 PsN: HGOVREF1
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tricity crisis of 2000 and 2001. But, in this market it may not even

be illegal to withhold capacity. Governor Guinn and Senator Reid

had just such concern in mind when they jointly asked the FTC for

a systematic method of overseeing the western petroleum market.

With regard to solution, the most direct solution for our refined

products supply problem is to build more refineries. While it may

still be possible, this is very unlikely and improving the short-term

refining capacity has been largely a matter of relying on imports.

There is one potential mid-term solution which is not fully developed: ethanol and biodiesel, not generally available.

With regard to demand-side problems, demand-side options, the

easiest thing to do is to get people to live closer to their job, to have

cars with higher mileage, or to offer public transportation. But, in

any event, changing behavior is a long-term process. That would be

helped most by what we want the least, high gasoline prices.

[The prepared statement of Mr. Burdette follows:]

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Mr. OSE. I thank the gentleman. Our next witness, chairman of

the California Energy Commission, has been before us in the past,

testified on any number of things, and is a welcome guest here. Mr.

Keese, you’re recognized for 5 minutes to summarize your testimony.

Mr. KEESE. Thank you, Mr. Chairman, members of the committee. I was noticing that we have an AAA chart over here on the

wall. I believe our last hearing was at the last peak we had. The

good news, I guess, it looks like says $2.40 is as high as it will go.

That’s as high as their chart goes.

I’m going to briefly summarize what has happened on our price

increases, what the impacts have been, and the measures that

California is looking at. Crude actually does contribute to the price,

as we heard when the barrel goes up $1, the price of gas goes up

21⁄2 cents. That’s a cost factor that the refineries have. It’s OPEC

but California relies on Kern and California relies on Alaska. The

oil isn’t quite as good but our price goes up commensurate. They’ve

gone up 25 percent since January 1st and our prices have gone up

pretty much the same as we’ve heard from the members of the

committee.

We had a particular problem this spring because with the turnaround from using MTBE to switching to ethanol, coinciding with

the turnaround that refiners take to move from winter-grade to

summer-grade gasoline, 9 I believe of our 13 refineries decided to

have major outages. They put away inventories to cover their needs

during that time. So we went in to the turnaround time with historically high inventories. Well, a number of the refineries that

weren’t going to go out went out at that time. A number of the refineries that were going to come back on in 2 or 3 weeks didn’t

come back in 2 or 3 weeks. We went through historically low level

of inventories which started our price spike.

We do import product and we import the ingredients for gasoline.

Unfortunately, our capacity to import liquid products has been

going down as our ports have been shutting down their tankage.

We had tankers that couldn’t get into port and had to divert to

other ports. Our price reached $2.27 last week. We may hear higher from

AAA. It’s a little higher. We see a leveling out about this time. The

diesel situation was actually worse and coincided with the time for

spring planning which is a heavy demand time. As you know, up

in the Sacramento area we had a rupture of the Kinder Morgan

pipeline. That and a rumor that the Energy Commission was on

the verge of declaring an energy emergency, which we can do drove

prices up another nickel or dime. We were not. We were in the investigative stage, not about to declare an emergency. Diesel got to

$2.34.

We are an island, somewhat, but we are affected by conditions

in other regions. We routinely import from out of the country, out

of the State, but they have to give a fuel that will meet our specifications. We compete with imports for these other areas. Most of

their markets are closer than California. We have to pay a premium to get it shipped to us. That adds money.

I’d like to say just one thing about ethanol. We did add ethanol.

We like the flexibility of not having to add ethanol. Ethanol does

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not contribute to the price, however. Ethanol ingredients today are

cheaper than gasoline ingredients. So, we do not expect if there is

a major change in Washington and they give us the waiver, we do

not expect to see California refiners leaving ethanol. It’s the cheapest ingredient. We would like to see them have an alternative to

import alkylates. If they can import alkylates that will probably

keep the price of ethanol down and the price of gasoline down.

Price is up 65 cents. I think I’ll just stop right there. We do supply virtually all of Nevada’s fuel. We supply most of Arizona’s fuel

and we supply much of Oregon’s fuel.

The alternatives available to us are to restrain prices, increase

refinery capacity. We’re not going to build a new one. We need to

change the rules so we can expand the ones we have.

Increase imports. We have to change the rules in the ports, let

more product get in. Perhaps we have to pipe it from the coast inland to store it, but we have to counteract this idea that the ports

want to move to container cargos for some liquid cargos and we

have to reduce demand. We’ve asked for the waiver. We certainly

hope that rumored discussions taking place back in Washington

will culminate in getting the waiver. The flexibility, as I say, of a

refiner to either use ethanol or not is what will bring down the

price.

We need to have permission to study about the problems in the

ports. We’re going to have workshops in the next month on that

issue and we hope to solve that problem.

I’m going to defer discussion of the Shell refinery to others who

would like to talk about that. I guess our other hope is that the

Federal Government will look at CAFE standards. CAFE standards

can help, and we’d like to see fuel cell light-duty vehicles incentive

as another strategy. Thank you.

[The prepared statement of Mr. Keese follows:]

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Mr. OSE. I thank the gentleman. Our third witness on the first

panel is Ms. Lynette Evans. She is a policy advisor for regulatory

affairs to Governor Napolitano in Arizona. Ma’am, welcome. It’s a

pleasure to have you here. We do have your statement, and we’ve

read it. We recognize you for 5 minutes to summarize.

Ms. EVANS. Chairman, members of the subcommittee, thank you

for inviting me here today to testify about the impact of high gas

prices on the State of Arizona. I just wanted you to recognize that

also present with me today is the assistant attorney general,

Emma Lehner, representing the Arizona Attorney General’s Office,

and they submitted written testimony for the subcommittee.

Needless to say, this is a timely topic. In fact, since March when

our office was initially asked to testify until early this week, the

average price throughout the Nation has risen more than 18 percent and it seems we set new records every day. Usually Arizona

prices tend to be among the highest in the country. Our retail

prices typically track the ups and downs of the California market

minus 10 to 20 cents. This pattern is largely due to our State’s dependence on California refineries.

Arizona has no refineries, no shipping ports, and as a result we

import all of our gasoline and are dependent on two pipelines to

supply almost all of our fuel. Approximately 60 percent of the fuel

consumed in Maricopa County comes from California and remaining 40 percent from Texas and New Mexico. The Phoenix area

alone consumes 65 percent, roughly 109,000 barrels of the State’s

average daily gasoline supply.

Our relative isolation from the primary supply sources became

painfully clear last summer when the east pipeline ruptured and

seriously disrupted the gasoline distribution system in Phoenix for

several weeks. At the peak of the disruption, we estimate that

more than half of all the gasoline stations in Maricopa County were

forced to close and ran dry. At the same time, pump prices rose approximately 60 percent.

Now, at the beginning of this year the average price for a gallon

of gas in Arizona was $1.53. By early this week, it had increased

a total of 40 percent to $2.15 a gallon and I think it’s even up more

today. Even recognizing seasonal variations, the price is still 47

cents more than the same point last year.

Now, at the same time there has been lots of media coverage

about the increased profits enjoyed by the oil industry. The Oil

Price Information Service data indicates that refinery margins are

currently above 35 cents a gallon, which is significantly above the

2000 through 2003 average of 15 cents per gallon.

Now, interestingly, despite these high prices, driving behavior

does not change much. According to a recent survey conducted by

AAA, record numbers of drivers are expected to hit the road for

this weekend and hotel occupancy rates in Arizona are expected to

be higher than average.

Instead, consumers do appear to be responding in other ways.

Last week CNN reported that SUV sales have slipped 22 to 33 percent over the last quarter. While this is definitely encouraging to

hear that consumers may be adjusting their behavior, it’s difficult

to predict whether this apparent move toward fuel conservation

will last.

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There are some industry concerns that our State has. According

to Bloomberg News there have been 33 mergers in U.S. oil industry, I think that was mentioned earlier, during the last 4 years

alone. Unlike other markets the petroleum industry offers the

greatest benefit to consumers when they have options. I am concerned that the continuing consolidation of the industry is decreasing choice and depressing competition. We need to take a more

careful and holistic look at mergers as they’re being proposed and

better analyze how they will impact the overall market.

In the short-term, the Governor in February wrote to President

Bush requesting an investigation of the high prices. Nine of the

Governors later joined the request and sent a second letter to

President Bush. Unfortunately, the administration has declined to

undertake such an investigation. Needless to say, we are disappointed by this decision, and Governor Napolitano along with 10

other Governors have written the President to urge reconsideration

and several State attorney generals have made similar pleas. There

is no reason why the Federal Government should not begin an immediate inquiry into why prices and profits have risen simultaneously at the expense of American consumers.

Long-term, we need to reevaluate our overall energy policy. In

Arizona, there has been some discussion about the possibility of a

new in-State refinery. I’ll say that our office is certainly receptive

to exploring opportunities that would increase the fuel supply for

Arizona and our regional sister States.

In order to successfully address this issue we need to look beyond

today, even the next year, and do some real long-term planning.

That means increasing CAFE standards, promoting the manufacture and purchase of fuel-efficient hybrid vehicles, and exploring

nonconventional fuel sources.

Hybrid vehicles are proving to be popular with buyers despite the

limited production of these cars to date. Continuing existing Federal tax incentives for these kinds of vehicles will encourage drivers

to purchase more hybrids. I also recommend we reexamine current

tax laws that offer tax deductions for the purchase of fuel inefficient vehicles like Hummers.

Without long-term solutions we may end up like policymakers

nearly 30 years ago who were faced with supply shortages during

the 1970’s. That fuel crisis was followed by lots of talk of reducing

our dependence on foreign oil and fossil fuels, but ultimately very

little has changed. Fossil fuels are a finite resource that we should

be weaning ourselves from. We must be proactive now or our future

gasoline crises will be even more devastating to consumers and our

economy. Thank you.

[The prepared statement of Ms. Evans follows:]

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Mr. OSE. Thank you, Ms. Evans. Now what happens next is we

go through a round of questions for our witnesses. Typically, the

questioning proceeds in 5 minute increments. We’ll just go one,

one, one, one, one. The panelists are asked to keep their answers

brief, again, to respect the Member’s 5 minutes. We can always followup in writing with clarification and the like.

We’re going to recognize our host for the first round of questions.

Congressman Porter, I recognize you for 5 minutes.

Mr. PORTER. Thank you. I’m going to come to the home team

here for a second.

Mr. SCHROCK. Smart move.

Mr. PORTER. This past December, seems to me it was somewhere

around Christmas, in our big sister State of California there was

a challenge in that there were floods that caused the pipeline to

break, our single pipeline into southern Nevada for fuel. I know

that there is a certain finite amount of storage in Nevada to help

allow for emergencies in the line. My question would be should we

be looking at additional pipelines into Nevada also?

Mr. BURDETTE. Mr. Porter, absolutely. We have three pipelines

into Nevada from California. There are actually two. There are two

right together in the south and one up north. Actually, the pipe

didn’t break in December, but it shut down because they had to fix

the overlayment.

But, the point is very well taken. Obviously, capacity is helpful,

storage capacity is helpful to the distributor, both the distributor

market, wholesale market and retail market. Yes, we should have

more pipelines and yes, it would be nice to have one from a different source than California. Take some of the pressure off them

and give us some reliability.

Mr. PORTER. Can you cover for us briefly and followup at some

point what steps the Governor is taking in Nevada today to help

with the fuel crisis? Are there some things that we need to know

as Members of Congress to put into our findings?

Mr. BURDETTE. Well, I think, to be frank, there are limited options available to the Governor. I think the primary initiative is we

want to make sure that no matter how flooded the market is, that

there is some oversight at the Federal level, some access to books

and records or some effort to deal with the principal problem.

The principal problem is the investment of the excess profits that

are earned, I’m sorry, rents that are earned are not plowed back

into something that benefits people, benefits our consumers and

California’s consumers and Arizona’s consumers, and an effort that

would somehow try to deal with that constructively we would be

very enthusiastic about supporting.

We are interested in much of the research that my colleague to

my left and the CEC is doing. CEC does very fine work and is very

helpful not only to California but it’s helpful to us as well. We have

begun to try to work more closely, and I think that’s important for

us. We can learn a lot from California and not always from mistakes either.

Mr. PORTER. We know someday they’re going to fall off into the

ocean so we want to be prepared, right, when California drops into

the ocean. I ask those questions to make sure we’re not duplicating

some of our efforts and make sure we can coordinate.

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The storage situation has come up in our research from Washington but also from those suppliers here in southern Nevada. Any

thoughts on the storage and things that we can do to help with

that?

Mr. BURDETTE. There are private forces that have increased the

amount of storage, particularly after the problem we had with

pumping power during the energy crisis. There were approximately

120,000 barrels of storage capacity increased in the Las Vegas

area, largely for regular gasoline and commercial diesel, plus, and

I don’t have the number for the airport, but we did increase airport

jet fuel capacity storage as well.

I think private forces are working reasonably well there but we

are short. We would certainly be supportive and helpful if we can

in that regard.

Mr. PORTER. One additional question, Mr. Chairman? Mr. Keese,

from a regional perspective, California, Nevada, with the boutique

fuels, I understand the Clean Air Act and believe that those steps

should be followed. Is there some things that we can do more regionally to make sure that there is additional fuels available between the two States?

Mr. KEESE. Actually, yes. I was interested to hear the line of

your questioning because over the last 2 or 3 years in California

we looked at three alternatives that the legislature asked us specifically to look at. New refinery capacity perhaps, perhaps State

owned, storage capacity, and a pipeline from Houston.

New refinery, probably impossible. We are going to be working

very actively on allowing more expedited permitting process on current refineries.

Storage is a major problem because the fuels are fungible. You

have to keep moving them through. Yes, some enhancement but it

does add to the cost of the product. We wind up thinking that we’d

like to see the pipeline from Houston and if the pipeline from

Houston even only goes to Phoenix and Las Vegas and meets your

needs, it frees up plenty of supply in California. So, the pipeline

is a very viable thought. We would love to talk to you about the

pipeline.

Mr. PORTER. Thank you. Thank you Mr. Chairman.

Mr. OSE. Gentleman from Massachusetts.

Mr. TIERNEY. Mr. Burdette, you were talking during your testimony about outages. I understand it’s so concentrated refineries

now, so few being around and the stress under which they’re working that we’re liable to have more accidents, really working at capacity for a good deal of time. I suppose outages are somewhat a

necessary part of the business during particular times.

At some point, when we start to see the number of unplanned

outages happen with the frequency that we’ve been witnessing,

particularly this past year and others, should we be concerned

about probably having some sort of investigation as to whether any

of these are planned outages as opposed to accidental or coincidental outages.

Mr. BURDETTE. Congressman, I guess a couple of things about

that. First off, it isn’t surprising equipment as complicated and as

old as the equipment to see unplanned forced outages we call them

in the electric business, forced outages, unplanned outages, but I’m

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not, I’m not an expert on refineries. I don’t have credentials that

could comment technically about what you said.

As an economist, I look at it though and I am very worried about

whether these unplanned outages are as unplanned as perhaps

they may have been described. The problem I think is that it’s not

illegal for them to be withheld.

Mr. TIERNEY. I would agree. I would agree. The other part of

your testimony, these rents as you like to call them, you’re much

nicer than I am I guess, these excess profits, most industries in a

free market would reinvest some of that money into capital needs

of their business. You would want to fix your refineries or make

storage capacity, whatever. That’s not happening in this industry,

is it.

Mr. BURDETTE. That’s correct, it’s not. Not in the refineries that

serve our State. I’m not sure about elsewhere but it’s not happening here.

Mr. TIERNEY. Mr. Keese, you indicated that you don’t think there

will be any refineries in California. Would you explain to me why

that’s the case? You think society won’t allow it or the industries

won’t invest the money or what is it?

Mr. KEESE. Correct.

Mr. TIERNEY. Both of those.

Mr. KEESE. Society won’t allow it and, therefore, it becomes easier to do it in New Zealand or Australia or someplace else. There

is investment taking place a broad.

Mr. TIERNEY. So, not in my backyard.

Mr. KEESE. Not in my backyard.

Mr. TIERNEY. How many refineries have been closed in California

during the last 5 years.

Mr. KEESE. I’m going to guess one.

Mr. TIERNEY. In the last 10 years.

Mr. KEESE. Probably two or three small ones and then we have

Shell, looks like it’s going to go down. That’s of great concern to us,

and I guess where I come from I can understand shutting down a

7-year-old essentially refinery that was three small refineries on

different pieces of property combined. I can understand the economics of it. What I want to see is that 6 percent of California’s

diesel and 2 percent of California’s gasoline that came out of that

is replaced. I’d like to see a commitment to do that.

Mr. TIERNEY. From the industry.

Mr. KEESE. Yes.

Mr. TIERNEY. I’m a little concerned. I do think we need to

streamline the whole process, permitting process. I know most of

these refineries have been expanded. A lot of them have been expanded. We have fewer refineries but they’re larger and controlled

by fewer and fewer people on this and it gets to be an issue there.

The other way to go about it, of course, Ms. Evans, is to do more

conservation in the CAFE standards out there. What is your State

doing about the standards and conservation?

Ms. EVANS. Actually Arizona is one of the leading States when

it comes to purchase of the State vehicles that are alternative fuel

regarding the vehicles. The only problem with that is apparently

one of the big national producers, Chevy, is going to be not producing the Cavalier which is one of the common vehicles we use, but

57

we’ve been very proactive in making sure the State buys those type

of vehicles and less dependent on gasoline.

Mr. TIERNEY. I was just sharing with the chairman that we’ve

had people that talk about increasing the fuel efficiency standards

generally get jumped on both by the industry and by labor unions

because everybody has worked together, decided this is a bad thing.

In fact, I was hoping they would join together and ask us help retooling facilities and keep the industry going, keep the jobs going

and move in that direction so we can make the kind of vehicles we

would.

It makes a lot more sense to me than giving out subsidies to everybody, doesn’t make a lot of sense to me to look at the President’s

energy bill who moves away from conservation, away from alternatives, loads it up on fossil fuel industries and subsidies that don’t

do much for anybody. In the long-run, we have to look at that industry perhaps not making fuel-efficient cars, let them retool. Got

other countries do it. Perhaps we ought to look in that direction.

Thank you.

Mr. OSE. Thank you. Gentleman from Nevada, Mr. Gibbons.

Mr. GIBBONS. Thank you very much, Mr. Chairman, Ms. Evans

and gentlemen. Thank you very much for your testimony today. It’s

been very helpful. Mr. Burdette, maybe I’m going to ask you a

question that you know or do not know. If you don’t, that’s fine.

Would you for us, for me individually, break down the cost of a

gallon of gasoline for us. Tell us what the various percentages are

that are related to taxes, production, refinery, transportation, etc.,

and then tell us the second part of that question, which ones can

we control? Which ones can we affect that are under our control

that will make a difference in the price of gasoline today?

Mr. BURDETTE. Thank you, Mr. Gibbons. First of all, we’re only

talking about 25 percent that we can directly affect because roughly half or a little bit more is the price of crude. That obviously goes

up and down as the price of crude goes up and down. About a quarter or more, maybe 30 percent, is taxes.

In Nevada we have fairly high taxes and the—I believe there is

good reason for that. We are a pretty partially populated State. We

have long roads and we have in places where we do have lots of

people, a lot of growth, a lot of capital required. So taxes and cost

of crude are the overwhelming majority of the cost we deal with.

They’re not always the cause of the spikes that we see.

The cause of the spikes that we’re seeing, in my opinion, is in

that last 25 percent where we’re talking about the cost of refining

and the cost of distributing, storing it, piping it and finally making

it available at retail. We have some ability to control that but this

is a free market. Particularly the distribution and the retail side

of that market there is a fair amount of competition in our State

and that folks have different places to go.

So there is probably not a great deal that can be done to effect

the price there which is why I focused mostly, at least my comments, on refining and the fact that the market seems to absolutely

forget those, the rents that are collected there that should be helping us that aren’t.

Mr. GIBBONS. Let me ask a followup question if I may. Perhaps

either Mr. Keese or Ms. Evans would like to add to this. If we cap

58

those rents or production profits that you’re speaking of, what

would be the short-term and indeed the long-term effect of such an

action.

Mr. BURDETTE. Frankly, Mr. Gibbons, I’m not sure how the Governor would answer that so I’m going to answer it for myself. I

really don’t believe that caps are a good idea. They may sound

great and may work just fine for 6 months or a year, but eventually they get you in trouble because they skew investment also.

Because our markets aren’t perfect, we try to gain from our markets those things that a free market would give us. So, what I believe we need is a method of perhaps even working with refiners,

working with the other States to find a way to use those profits,

and it would be hard to define but use those profits in a constructive way that would help relieve the supply shortage. Perhaps to

purchase the diesel that is going to hurt Nevada, by the way, just

as badly as California when and if Bakersfield shuts down.

Mr. PORTER. Mr. Chairman, if I can yield time.

Mr. OSE. Gentleman from Nevada would yield.

Mr. GIBBONS. I’ll yield.

Mr. OSE. Stop the clock for a minute.

Mr. PORTER. Thank you. I appreciate that. I could possibly help

with the question of the cost of fuel on the taxes. We’re the fifth

highest in the country. Federal tax of course is 18.4 cents per gallon. Second highest. Sorry. State taxes are 18 cents. County and

sales tax is 14.4 which equals about 15.8 cents per gallon.

Now, let’s define a little step further. I applaud local governments. In the early 1990’s in southern Nevada they put forth a petition, initiative petition that was voted on by the people of Nevada, to help fund our streets and highways. So, this is an example

of how Nevada has been paying its own share and its fair share

if not more than its fair share. But part of the reason that we are

some of the highest is because of local initiative petitions that were

exerted by the community to help fund our streets and highways.

I want to enter that for the record.

Mr. OSE. Senior member of Nevada delegation.

Mr. GIBBONS. Thank you, Mr. Chairman. I appreciate Mr. Porter’s clarification on that issue as well. It was a very important

point to have been made. I don’t know if I gave Mr. Keese or Ms.

Evans an opportunity to answer the final question about the controlling of profits, capping of those profits. Your philosophy, your

ideas, should it be done?

Because it seems to me that part of the issues, part of the concerns are in fact the mergers of companies; therefore, the ability of

these companies to make larger profits which seems to be economic

stimulus of American economy to begin with. But what’s your individual thoughts on capping those? Should we do it in fact?

Mr. KEESE. I’ll answer specifically. I think it would be extremely

difficult. I also have electricity under my purview. Let me make a

quick distinction here. If you have three or four generating plants

and you shut one down, we saw that you can drive the price up

and profit. If you have an oil refinery, you have contracted, committed to supply everything that comes out of that refinery. If you

have an inadvertent shutdown, you go next-door to your neighbor

59

and you pay that economic rent to them to buy the product at a

higher price to meet what your commitment was. You lose.

Mr. GIBBONS. So it’s not——

Mr. KEESE. Unforced outage at a refinery is a loss. Now, if Chevron has to go to Shell and pay an extra 30 cents a gallon to buy

it because that’s what Shell wants, is that an excess profit? And

then, when Chevron does the same thing to Shell when Shell goes

out and Chevron says, well, I want 40 cents. There is winners and

there is losers is what I would say. It seems to me it would be very

difficult to try to figure out. You get taxed when you win. You get

a credit when you lose.

Mr. GIBBONS. Mr. Chairman, I know my time is up.

Mr. OSE. Ms. Evans, I think Mr. Tierney and I are interested in

Ms. Evans’ answer.

Ms. EVANS. Absolutely. I have the same caveat that Mr. Burdette

had is that haven’t had a direct conversation with the Governor

about this particular issue, but I think from our perspective we

would like to see a little more transparency to understand exactly

what’s going on in marketplace to ensure we don’t have market

manipulation going on, that we don’t have refineries that are purposely making decisions to shut down to increase their profits. So

at this time, I’d hate to speak to whether or not we would need a

cap that is a little more down the road. Transparency first.

Mr. TIERNEY. Yield the floor.

Mr. OSE. Certainly.

Mr. TIERNEY. Mr. Keese, are you telling me you don’t think that

industry raises its prices to recoup that loss at some point down

the chain.

Mr. KEESE. Oh, I think throughout many different segments, production, refining, distribution, it does, and I don’t want to be misunderstood. You see those spikes over there, we want them down.

We don’t want those spikes.

Mr. TIERNEY. I want to make sure I was clear with your answer.

They may temporarily have to go somewhere else and use those

rents to replace them, but in the long run they can charge more

for the product they do generate.

Mr. KEESE. Certainly try to recoup it.

Mr. TIERNEY. Thank you.

Mr. OSE. Gentleman from Virginia.

Mr. SCHROCK. Thank you, Mr. Chairman. Ms. Evans, for whatever it’s worth if you can’t get Chevys, Ford in 90 days will be coming out with the new Escape.

Ms. EVANS. I’ve heard it.

Mr. SCHROCK. It’s going to be a hybrid. My wife drives a current

Escape. My son is No. 4 on the list of 20,000 to get the new Escape

and I’m dying to see what it’s going to look like. It’s good that

they’re doing that. It’s going to be interesting to see when that happens.

We’re talking about these rents and such and I understand that.

The refineries are just saying they’re playing by the rules that Congress set up for them. There is an FTC report from 2001. Long

time ago. It said the commission found no evidence of conduct by

the refiners. Are we the problem? Is Congress the problem? Could

we fix this? Don’t be politically correct. Tell us what you think.

60

Mr. BURDETTE. I’m sorry, are you addressing the question to me.

Mr. SCHROCK. All three of you. If we’re the problem we need to

know it because everything emanates from there that causes some

of these problems. If we have to change the way the game is played

then so be it.

Mr. BURDETTE. I personally don’t believe that Congress is the

problem, although, by the way——

Mr. SCHROCK. I was hoping you would say we were. We could fix

it.

Mr. BURDETTE. The new Ford hybrid won’t count. It’s not an alternative fuel vehicle. Now that’s controlled by the feds, not by the

government.

Mr. SCHROCK. What do you mean ‘‘won’t count.’’

Mr. BURDETTE. We can’t use Prius or Ford, the new Ford because

it doesn’t comply with the Clean Air Act. We’re a clean cities initiative, which requires alternative fuel. The definition of alternative

fuel doesn’t include savings of fossil fuel. But that’s——

Mr. SCHROCK. But that’s our fault, right.

Mr. BURDETTE. Well, I think it’s EPA.

Mr. SCHROCK. That is our fault, yes or no.

Mr. BURDETTE. Yes, sir, it’s a Federal problem.

Mr. SCHROCK. Good. If we’re truly interested in getting people

into hybrid cars we need to change the rules of the game so they

can get in them.

Mr. BURDETTE. To get the States more involved, sure, that would

help out.

Mr. KEESE. You could fix that. Arizona buys alternative fuels,

natural gas vehicles. They can’t buy hybrid because they get 40 or

50 or 60 because it doesn’t meet the requirement. You can change

that. That’s yours to change.

Mr. SCHROCK. OK.

Mr. BURDETTE. The broader issue is one that we fell into, I think.

1950, by the way, I remember driving in the 1950’s.

Mr. SCHROCK. Good. I’m glad there is somebody here besides me

that remembers that.

Mr. BURDETTE. Maybe Bill, too. We rely almost as an article of

faith on the free market to deal with many of our markets, all of

them, and true, we should and did in this market but this market

has changed. This is not the same market that existed in 1950’s,

and the same level of faith and its ability to drive the kinds of results, the kinds of outcomes are very different, and so the Congress

in 1950 faced a very different problem than the Congress of 2004.

Again, the aim is to get results that mirror what a free market

would give us.

Mr. SCHROCK. In Nevada, for instance, would Nevada be prepared to build their own refinery? I’m probably going to get asked

that in Virginia. Everybody says not my backyard, but if we don’t

do it in our backyard then we’re going to have to depend on foreign

oil companies to provide it. We’re going to continue to have these

problems. Could you or would you build one in Nevada, Arizona as

well?

Mr. BURDETTE. We have one refinery that is underutilized in

Tonopah. We are much more fragile than Virginia but, yes, we’d

have to go through the permitting process.

61

Mr. OSE. If I understand the issue on the Tonopah refinery is the

throughput to the refinery does not allow the refinery to actually

meet its total capacity; is that correct?

Mr. BURDETTE. That’s correct. It’s also a problem with the crude

itself.

Mr. OSE. It’s a little broader than just will you build a refinery.

It also relates to the infrastructure that feeds the refinery.

Mr. BURDETTE. Absolutely. Yes, sir. Yes, Mr. Chairman.

Ms. EVANS. If I could speak to that point, too. I think the economics and in some other panels have mentioned is not necessarily

there to afford a new refinery in United States. It’s much less expensive generally for someone to go out of the country and build

a refinery than have one here brand new in the United States.

Mr. SCHROCK. How do we solve that?

Ms. EVANS. Well, I think——

Mr. SCHROCK. Tell me why you think it’s cheaper out there than

it is here.

Ms. EVANS. Well, a small portion of that, and I can’t say exactly

how much, probably does go to some of the permitting and those

areas that do add some cost. There is labor costs that are obviously

less expensive outside the United States. On the cost of importing

could be offset through increased price in the United States and

we’ve been willing to pay those prices so far.

Mr. SCHROCK. Really no answer to it, is there.

Ms. EVANS. I think short-term it is a challenge. We’re looking at

very high prices that we’re seeing this summer. Again, to think

more long-term, to look at our overall demand and supply, reducing

that demand, making ourselves more efficient, energy efficiency,

and conservation I think will get us a long way, not all the way

but a long way toward reducing our dependence.

Mr. SCHROCK. One of the ways is using hybrid cars but the Federal Government won’t allow the local jurisdiction to use it. There

is something wrong here somewhere.

Ms. EVANS. Absolutely.

Mr. SCHROCK. We’re talking out both sides of our mouth when

we say that. We up here have to get that fixed for people like you

at home.

Ms. EVANS. Absolutely. If I could speak to I realize it’s not a

large percent of the market but the fact that they have a Federal

tax incentive that indirectly creates an incentive for a purchase of

a Hummer is not the kind of policy that we want to be encouraging.

Mr. SCHROCK. I agree. Thanks, Mr. Chairman.

Mr. OSE. Mr. Keese, I was unclear about your testimony. Was it

the Commission or the State of California that was advocating for

a new pipeline from Texas, Houston?

Mr. KEESE. The legislature asked us to study the three alternatives. We essentially came to the conclusion that the first two

aren’t feasible. The pipeline is feasible. As the Energy Commission,

yes, we would like to encourage the expansion of that pipeline but

it isn’t the California part that’s the problem. It’s other States.

Mr. OSE. Has the State of Texas said they’re willing to expand

the pipeline.

62

Mr. KEESE. Mr. Hackett probably knows quite a bit about this

who is on the next panel. There is a segment of the pipeline that

is having difficulty getting permitted to operate at a higher capacity as I understand it.

Mr. OSE. In what State.

Mr. KEESE. We’ll ask Mr. Hackett.

Mr. OSE. Do you know if any inquiry has been made to the State

of New Mexico that they would be willing to permit a larger pipeline.

Mr. KEESE. I don’t know if it’s been a direct request. I know our

people have been in contact with the other States.

Mr. OSE. Do you know anything about that?

Ms. EVANS. I can speak quickly. The pipeline we’re discussing is

the Long Horn pipeline. It comes out of west Texas. The problem

that we have in Arizona is that pipeline although would expand the

capacity would stop in Arizona at the Kinder Morgan pipeline

which currently has an 8 to 12-inch pipeline. It would get

bottlenecked basically in El Paso because there is no additional expansion on the pipeline. Although it would introduce Gulf Coast

product, it wouldn’t necessarily increase the amount of product

that comes in in total.

Mr. OSE. Would you support expanding the Kinder Morgan pipeline?

Ms. EVANS. Absolutely. I think I told you that seriously has to

be considered. I have concerns that the estimation by Kinder Morgan about the growth of the State are a little low and they aren’t

anticipating the kind of growth that we should be experiencing and

the expansion that we need.

Mr. OSE. Do you speak for the Governor on that issue.

Ms. EVANS. I believe so I do.

Mr. OSE. In terms of being willing to support expansion of

Kinder Morgan pipeline?

Ms. EVANS. I believe I do, yes.

Mr. OSE. What about Governor Guinn, would he have any objection to the expansion of the Kinder Morgan pipeline.

Mr. BURDETTE. I haven’t had direct conversation. I would be very

surprised if he would not, that he would not support an expansion

of that pipeline from Arizona to Nevada.

Mr. OSE. You would be very surprised if he would not support

it?

Mr. BURDETTE. Support it.

Mr. OSE. Let’s put that in a positive. You would expect him to

support it?

Mr. BURDETTE. I would expect him to support it, yes, sir.

Mr. OSE. When we talk about these pipelines that is jurisdictional in many respects to FERC and we actually do have a bite

of that apple and I’m just trying to make sure geography of which

this pipeline would pass that we’re not going to have some unintended impediment places in the way.

Mr. BURDETTE. It would pass almost entirely through Arizona.

Mr. OSE. I understand that. Also, take a stem from there and

head it north to Vegas.

Mr. BURDETTE. Yes, sir.

63

Ms. EVANS. Certainly we want to have consideration for where

the pipeline is, what the expansion is, proximity to homes and all

those other factors. In general, with the right situation I would be

surprised if we would not support its passage.

Mr. OSE. At the existing right-of-way today at the Kinder Morgan pipeline seems to be that the pipeline is 8 or 12 inches.

Ms. EVANS. It varies between 8 and 12 inches.

Mr. OSE. Seems to me if we move 1 foot over to the side we’d

have room for another 8 or 12-inch pipeline.

Ms. EVANS. Right. Well, the concern obviously in Arizona is when

we experienced a rupture—if I could give you a little more detail.

The rupture that we had actually spewed gasoline over homes that

were under construction. No one was in the area. We didn’t have

any deaths or injuries. Obviously people in the community are concerned about the safety and reliability of these lines.

Mr. OSE. What’s the spacing between lines that the State of Arizona would require?

Ms. EVANS. Well, we have not nailed down a specific number. I

think right now we’re at the stage where we feel like there should

be adequate disclosure to the people that live near there so at least

they know what they are purchasing and what risks might be associated with that but we haven’t determined specific distance between a pipeline and the neighborhood.

Mr. OSE. We do have an existing pipeline through this neighborhood.

Ms. EVANS. That’s right.

Mr. OSE. It did have a rupture?

Ms. EVANS. It did have a rupture.

Mr. OSE. Did it cause price spikes?

Ms. EVANS. Yes, absolutely.

Mr. OSE. If I understand correctly from Mr. Keese’s testimony,

that the creation of additional 8 or 12-inch buried pipeline bringing

refined product or otherwise from Texas would allow fuel that is

currently coming from California to both Nevada and Arizona to

then stay in California. Is my logic correct?

Mr. KEESE. Yes.

Mr. BURDETTE. Yes.

Mr. KEESE. It would offer both those States options to get it

where it’s cheaper. Get it from California if it’s cheaper, get it from

Houston if it’s cheaper.

Mr. OSE. The nature of the crude that comes from Texas westerly

on the existing pipeline, is that the same type of crude that’s currently usable in the refineries in——

Mr. KEESE. Product. We’re talking about product, gasoline, diesel, aviation gas.

Mr. OSE. My time has expired. The gentleman from Massachusetts.

Mr. TIERNEY. My reaction was a reaction to something Mr.

Shrock said. I think the Federal role can be significant. One, the

Federal Trade Commission can certainly look at mergers. I understand that people aren’t alleging that there has been an antitrust

violation, but I want to read to you a couple reports. One is the

March 2001 report from the FTC. It said the completed FTC investigation uncovered no evidence of collusion or any other antitrust

64

violation. In fact, the varying responses of industry participants to

the gasoline price spike suggest that the firms were engaged in individual, not coordinated conduct. Prices rose both because of factors beyond the industry’s immediate control and because of conscious but independent choices by industry participants, each industry participant acted unilaterally and followed individual profit

and acquisition strategies.

One firm increased its summer-grade gasoline production substantially, as a result had excess supplies of RFG available and had

additional capacity to produce more RFG at the time of the price

spike.

This firm did sell off some inventory RFG, but it limited its response because selling extra supply would have pushed down prices

and thereby reduced the profitability of the existing RFG sales.

I think what you’re talking about there is no current law against

that except that as I read and as the FTC’s own merger considerations, rules and regulations allow for they can still decide that

this consolidation of the market is too extreme. It may not amount

to a monopoly of the antitrust law but would be too extreme.

An executive of a company made clear that he would rather sell

less gasoline and earn a higher margin on each gallon sold than

sell more gasoline and earn a lower margin. So, on that theory a

RAND study which came out in 2003 made pretty much the same

point. The central tactic is to allow markets to become tight by relying on existing plant and equipment to the greatest possible extent, even if that ultimately meant curtailing output of certain refined product, again not investing the profits that are made on

that.

Talking about having some storage capacity. We did that with

the Northeast oil during the winter season and it worked out pretty well. We Ought to perhaps think about having more of those

storage capacities around, ability to have that when the fluctuations are coming in. Things like that I think that the government

can do, some minor regulations on that.

Otherwise, I’m not sure that this industry is ever going to reinvest the resources it needs into its capital, do what it has to do to

get the NIMBY, not-in-my-backyard attitude resolved. This industry may decide that profit going up is a happier day for them. It’s

not a totally free market. There has to be some modicum of regulation when we let them make the same—reasonable that somehow

serve the public good. The length of a filing as necessary to our

human existence as these fuel products have become and I think

that may be appropriate for us to make sure we do some modicum

of regulation. Thanks, Mr. Chairman.

Mr. OSE. Mr. Gibbons.

Mr. GIBBONS. Mr. Chairman, I, first of all, want to thank our

witnesses on this panel for being here today.

Mr. OSE. We’re not done with them yet.

Mr. GIBBONS. This is my one last opportunity to ask a question

before I got shut off. I wanted to thank them.

Mr. SCHROCK. Just like the oil.

Mr. GIBBONS. Before they shut it off. I guess my concern is, Mr.

Burdette, I want to direct my final question to you, if we look at

the price of gasoline as I asked earlier, the percentage you indiVerDate 11-MAY-2000 17:03 Oct 18, 2004 Jkt 000000 PO 00000 Frm 00068 Fmt 6633 Sfmt 6633 D:\DOCS\96091.TXT HGOVREF1 PsN: HGOVREF1
65

cated was 50 percent of that price is due to taxes and crude oil.

Was that——

Mr. BURDETTE. Seventy-five percent. Fifty percent for crude.

Mr. GIBBONS. That makes it even more difficult. When I look at

the price of crude oil going up from $30 to $40 per barrel, that’s

a $10 barrel increase times the 2, 21⁄2 cent gallon cost per gas, that

would make it a 25 cents increase in per gallon cost. So, the overall

crude oil which seems to be the villain here is only a small part

if it’s 75 percent of the increase in the cost of gasoline.

Mr. BURDETTE. Mr. Gibbons, one of the things that we haven’t

talked about at all is speculation in how that affects the market.

I know this is a very controversial subject, but speculation exists.

It exists because we don’t know what the Saudis will do 3 months

from now. We don’t know what’s going to happen in Iraq. We don’t

know what’s going to happen to political instability in Venezuela.

But, there are people who are willing to take that risk and they

will buy it and there is a risk premium, whether there is no market

that says here is the risk premium for petroleum, but there are

risk premiums in petroleum and those risk premiums are paid and

they are a significant part of—and I wasn’t careful about does that

belong with the crude price or is that in the extra 25 percent, but

the point is right now risk premiums are very high because of the

instability and because of the new demand from China and because

of—well, many reasons. Risk premiums are an important part of

the situation today.

Mr. GIBBONS. Well, I agree with Mr. Tierney about the fact that

we need to start looking at our production capability, building new

refineries. We have all 30 year infrastructure legacy refineries that

are going to be growing in their need for repairs and maintenance

as they get older, as any large or aging system would. I think it

behooves us, including California, to start looking at the ability to

supply the demands within our region and our areas.

The NIMBY issue which is something that is troubling a lot of

us out here, well, it troubles everybody across America, has to be

resolved politically. It is something that all of us are responsible for

addressing. I think that’s probably one of the biggest solutions to

cause, being able to generate a given supply or a constant supply

to meet a growing demand or increase in demand as we have in

this country. Again, thank you, Mr. Chairman for indulging me in

my questions.

Mr. OSE. The gentleman from Virginia.

Mr. SCHROCK. I don’t have anything further.

Mr. OSE. I want to go back to something Mr. Burdette said. Refinery at Tonopah, roughly 5,000 barrels per day production capacity.

Mr. BURDETTE. I don’t know, Mr. Chairman.

Mr. OSE. Are there any plans to expand its capacity?

Mr. BURDETTE. Not that I’m aware of. I don’t expect so. It uses

crude from a railroad valley in central and eastern Nevada. It is

crude that is not, not particularly suited for transportation fuels.

Mr. OSE. The information I have is as of 2002, it indicates the

State has crude oil production of 2,000 barrels per day.

Mr. BURDETTE. That’s about right. We make about a million and

a half a year is top production. It’s a little bit more than that.

66

Mr. OSE. You have a refinery in Tonopah that’s processing 5,000

or can process up to 5,000 barrels per day.

Mr. BURDETTE. I don’t know that number, Mr. Chairman.

Mr. OSE. What I’m trying to get at is the infrastructure that delivers the crude to the refinery, there is a difference here of 3,000

barrels per day and it’s coming from somewhere. Where is it coming from?

Mr. BURDETTE. The crude that’s cracked in Tonopah is shipped

out of State to finish its refining process. It’s refined——

Mr. OSE. It’s cracked in Tonopah.

Mr. BURDETTE. In fact not completely. It’s just an initial step in

Tonopah. I’m going to have to learn more about exactly what happens in Tonopah and will be happy to supply you with additional

details.

Mr. OSE. As I scratch around for solutions to the problems here

in Nevada that will help us in California, it seems to me that with

the refinery already in operation in Tonopah, that I think your testimony a little while ago was had unused capacity because of

throughput constraints. With one already established it would

seem to me we could move forward with or maybe you guys more

accurately could go forward with a permit application to either expand the refining process from simply the first cut on the crack or

expand the capacity beyond the 5,000 barrels a day that would go

to some degree toward addressing deficit here in the State.

Mr. BURDETTE. Our problem is that we don’t have crude that is

suitable for making transportation fuels.

Mr. OSE. Very heavy.

Mr. BURDETTE. A lot of wax.

Mr. OSE. Maybe we need to figure out how to get you a pipeline

that brings you crude.

Mr. BURDETTE. The economics, if the economics are there we

have communities like Tonopah that are anxious for economic development. There is not to say that there aren’t people who won’t

be concerned about it.

Mr. OSE. Now, as it relates to the petroleum infrastructure—I

know that Congressman Shrock has a plane to catch. Don’t feel

badly he has to leave. As it relates to Arizona, California, Nevada,

each of you probably have a better understanding of the infrastructure within the State. Are each of your States looking at ways to

expand the infrastructure, for instance, to allow a greater amount

of throughput or to permit larger refineries from capacity standpoint? Start with Arizona.

Ms. EVANS. I am aware, and I mentioned in my testimony, that

there is a discussion about a refinery in Yuma which is in the western part of the State. I’m not sure exactly where they are in the

process. Again, I think they submitted written testimony. To the

extent again that we can meet our air quality standards and end

up the community is receptive we would certainly be open again to

increasing the supply to the State and the region.

Mr. OSE. Is the State advocating for the development of a refinery somewhere in Arizona.

Ms. EVANS. I don’t think advocating would be the appropriate

term for us at this stage. We are watching, we’re monitoring, we’re

interested, but not necessarily advocating at this point.

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Mr. OSE. What about in California?

Mr. KEESE. As I mentioned, we have identified the problems in

the ports for import and in the refineries for expansion. We use to

see refiners capacity creep about 2 percent a year. It’s now under

half percent. That’s not enough. There is an active proposal in California, the legislature and in the administration, to look at a

streamlined licensing process for expansion of refineries without

changing any environmental laws.

Mr. OSE. How about in Nevada?

Mr. BURDETTE. In Nevada we are actively pursuing both ethanol

and biodiesel production. We currently produce about 3 million gallons of biodiesel down south. We’re opening new biodiesel facilities

up north. They are marginal fuels at best, marginal addition.

We are concerned about the economics of ethanol. The fact is we

have some renewable resources that we can use to provide energy

for a refinery for ethanol that would help the cost but we still have

to deal with the fundamental cost of shipping unit trains of grains

into the State, processing it, and selling the byproducts and making that productive, and we haven’t got somebody who is quite

ready to that, frankly.

Mr. OSE. Flip this question around. Instead of looking at it from

the State’s perspective about what the State can or should be

doing, within your respective States what recommendations would

you make to the Federal Government about how to help the States

with their infrastructure? Mr. Keese.

Mr. KEESE. I would think that probably would get around to the

port situation which is the ability to bring in the product that Arizona and Nevada will need to. It will probably have to come

through California. There well may be something that the Federal

Government can do there. We’re in the analytical stage right now.

I don’t have the——

Mr. OSE. Mr. Burdette.

Mr. BURDETTE. Pipelines are clearly important part of our infrastructure. We should acknowledge that California’s air quality is

affected by the amount of fuel they make for Nevada. We’re grateful for that, but the truth is we need additional pipelines. Additional pipeline infrastructure and storage infrastructure would be

helpful for us. Not sure we need a great deal of Federal help on

that but certainly on the pipeline we would. That’s a FERC jurisdiction.

Mr. OSE. Ms. Evans.

Ms. EVANS. I would reiterate that in any dynamic activity, it

might be changing since, but one issue we looked at in the State

of Arizona is our west pipeline and east pipeline. East pipeline was

older, west line was a little bit newer and the tariff was higher in

the west line so we were wondering and concerned that might be

creating some kind of disincentive perhaps on the part of the company to expand that pipeline. That was one issue that we were

looking at and would have some FERC obviously.

Mr. OSE. Mr. Tierney.

Mr. TIERNEY. Thank you very much. The witnesses are great.

Mr. Keese, if you had the port situation resolved is that going to

increase the transportation costs of getting that material inland.

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Mr. KEESE. We have to solve that, the tankage also but I don’t

think it would—gives you options. The option we’re talking about

on the pipeline is that there is excess refining capacity in Houston

today. So, the pipe would be full.

Mr. TIERNEY. Thank you very much all of you.

Mr. OSE. I want to thank this panel for their participation. We

have questions that may have occurred to any of the Members up

here that we will forward to you in writing. We appreciate timely

response. Generally once you’ve got them, you will have 10 days to

2 weeks to respond. We’ll be in touch. We appreciate you guys participating. We’ll take a 5 minute recess.

[Recess.]

Mr. OSE. Welcome back. I am pleased to welcome our second

panel of witnesses. We are joined on the second panel by Mr. Joseph Sparano, president of Western States Petroleum Association;

Mr. Sean Comey, media relations representative for AAA of northern California, Nevada, Utah; Mr. David Hackett, president of

Stillwater Associates; and Mr. Tyson Slocum, research director for

Public Citizen’s Energy Program.

Gentlemen, you saw on the first panel we swore everybody in.

We do that for everybody. We’re not picking on you. If you’d all

rise, raise your right hands.

[Witnesses sworn.]

Mr. OSE. Let the record show that the witnesses answered in the

affirmative. As you saw in the first panel, what we do is we ask

our witnesses to summarize in 5 minutes the essence of their testimony. We have received your written statements and they have

been entered into the record. I’m sure that Mr. Tierney and I have

both read them. To the extent that you can briefly summarize we’d

appreciate it so we can get right to the questions.

Mr. Sparano, you’re recognized for 5 minutes.

STATEMENTS OF JOSEPH SPARANO, PRESIDENT, WESTERN

STATES PETROLEUM ASSOCIATION; SEAN COMEY, MEDIA

RELATIONS REPRESENTATIVE, AAA OF NORTHERN CALIFORNIA, NEVADA AND UTAH; DAVID HACKETT, PRESIDENT,

STILLWATER ASSOCIATES; AND TYSON SLOCUM, RESEARCH

DIRECTOR, PUBLIC CITIZEN’S ENERGY PROGRAM

Mr. SPARANO. Thank you, Congressman, other members of the

committee. Appreciate the opportunity to testify today. The Western States Petroleum Association is a trade association that represents companies that explore for, produce, refine, transport and

market petroleum products in six western States: California, Nevada, Arizona, Oregon, Washington and Hawaii. I’ve worked in the

petroleum industry for 35 years and have held positions including

CEO and chairman and president of regional businesses.

We’ve been engaged with State policymakers exploring how to

address many of the petroleum supply-side and demand-side issues

that were raised in your staff report. My testimony will focus primarily on gasoline price issues and, as importantly, ways to improve the current situation.

To put current gasoline prices in perspective, I used Bureau of

Labor Statistics data covering 20 years to compare the real growth

in gas prices to other products and services we use every day. What

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I found is that gasoline prices have risen far less at 19 percent

than most everything else we use in our lives including food, clothing, housing, health care, electricity and college tuition which is up

about 400 percent during the same period.

Gasoline prices in the West are a function not only of local and

regional market conditions but also worldwide petroleum market

conditions. According to the Energy Information Administration

[EIA], nearly one-half the price of a gallon of gasoline is a result

of crude cost.

Crude prices have risen dramatically over the past several months to almost $42 a barrel. They are currently settled near

record highs. According to the EIA, and other experts, crude costs

have increased due to surging worldwide demand and tightening of

supplies by OPEC.

Another reason gasoline cost more in the West is the fact that

gasoline taxes are generally higher here; about 52 cents per gallon

in both Nevada and California. As was mentioned earlier, higher

margins, several folks mentioned higher margins, they do not equal

profits. Margins do not equal profits.

In addition to those comments, demand for gasoline on the west

coast and cities like Phoenix and Las Vegas has grown at a significant rate. In California, demand has grown at two to four times the

rate of in-State production capacity increases. This growing imbalance between supply and demand growth is due in part to regulatory barriers to expanding refineries and other infrastructure.

This means there is an increasing reliance on importation of blending stocks and finished products, subsequently higher marginal

costs to supply the western marketplace. This puts a lot of pressure

on an already inadequate infrastructure.

Whether it’s in the area of refining capacity, pipeline capacity,

port handling and storage equipment, marketing facilities or terminals, removal of permitting constraints and barriers to infrastructure projects are needed to improve capacity and reliability.

Throughput limits on refinery equipment and ports, repetitive

environmental compliance reviews and continuous permit delays

when our industry wants to add refining capacity or more retail

units all need immediate attention. These barriers stop or slow

down construction of new petroleum facilities and upgrades to existing equipment that together would allow petroleum companies to

more effectively and efficiently produce, transport and sell more

gasoline in the West or to import fuels from other areas. Of course,

as with any industry, projects must also meet shareholders’ and

boards of directors’ economic criteria in order for any implementation to proceed.

Well, given that, what can be done? Here are some specific observations and suggestions. Most of my remarks will focus on California State policies. This is because many of the refineries, other

forms of petroleum infrastructure that are located in California

provide fuel products to Nevada, Arizona and other parts of the

west.

The first area of improvement is to avoid counterproductive policies. For example, California State government has been sending

less than positive signals to the business community in general and

to our industry in particular that it does not want companies to inVerDate 11-MAY-2000 17:03 Oct 18, 2004 Jkt 000000 PO 00000 Frm 00073 Fmt 6633 Sfmt 6633 D:\DOCS\96091.TXT HGOVREF1 PsN: HGOVREF1
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vest in new facilities and to add new jobs. High operating and administrative costs and the challenges of complying with cost-ineffective environmental regulations have made it difficult for investments, companies and jobs to stay in the State.

In addition, our industry must constantly fight back legislative

proposals that would dramatically increase the cost of doing business.

Permit reviews need to be streamlined. Permit streamlining and

establishing policies to ensure timely processing of permits by State

agencies, local air districts and regional water boards are critical

components of improving business competitiveness. California Energy Commission’s Integrated Energy Policy Report contains some

specific recommendations for permit system streamlining.

Another of the critical areas affecting permitting is the Federal

New Source Review. New Source Review reforms adopted by the

Federal Government but negated by the California legislature in

2003 do promote permitting and construction of critical energy

projects without increasing emissions or negatively impacting the

environment or local communities.

Another effort that will help the situation will be to create consolidated permitting for energy projects. We strongly urge development of consolidated State-level permitting agency whose intervention could be requested by project proponents when duplicative or

counterproductive regulatory requirements endanger a project.

To succeed in this effort we must eliminate overlapping and conflicting regulations. Unnecessary regulatory processes that add cost

without adding value environmentally should be eliminated. This

can be done without sacrificing environmental standards or diminishing local control over land use decisions that affect community

values. One agency could manage the permitting of many energy

facilities.

In fact, California Energy Commission has just launched an

Order Instituting Investigation focusing on examining the causes of

petroleum intrafracture development constraints. WSPA is participating in this process.

Obtaining a waiver of the Federal minimum oxygenate mandate

would also be very helpful. WSPA has long supported California in

its effort to exempt the State from the Federal EPA’s requirement

that gasoline include an oxygenate. Since the removal of MTBE

from California’s gasoline formula, the only viable oxygenate additive is ethanol. Being forced to use ethanol entails additional costs,

limits refiner flexibility and may even reduce production capacity.

California’s air quality agencies agree that our industry can continue to produce the cleanest gasoline on the planet without the addition of ethanol. A waiver would provide the flexibility for California refineries to produce and marketers to sell cleanest fuel available as efficiently and cost effectively as possible. What we would

like is to be able to use ethanol when it is economically attractive

and when market conditions support that choice.

Private and public sector research into alternative fuel is also important. Our industry is working closely with California legislators

to produce a bill that would help us move forward and level the

playing field for new refinery and other infrastructure projects.

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Let me finish up here, just a couple of points to make, in California there were 33 refineries in 1985. Now there are 13. We haven’t

built one since 1969. Thirty-five years without a new refinery in

the State. Despite that, petroleum industry in the last 20 years has

met the challenge of reliably supplying our customers with all

types of products despite continually growing demand and increased regulatory hurdles. I believe we can continue doing this but

we really need a concerted and cooperative effort with all the parties that are involved here today. Thank you.

[The prepared statement of Mr. Sparano follows:]

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Mr. OSE. Thank the gentleman for his testimony. Mr. Comey,

AAA of northern California, Nevada and Utah. Welcome, sir. We’ve

had your statement in writing, we appreciate its submittal. Please

summarize in 5 minutes.

Mr. COMEY. Thanks. Let me start by saying that we’re probably going to have to amend that chart because $2.40 may not be the

top of where we go this summer. My apologies about that.

AAA began tracking gas prices in the mid-1970’s as a service to

our members and to the public. Our survey tracks 60,000 gas stations nationwide every day and the results are released to the public and media.

The price of gasoline, like few other consumer goods, seems to

strike a raw nerve among consumers. No other consumer product’s

price is displayed so prominently in public places.

When it comes to buying gasoline, many feel they have few practical alternatives. The majority of driving is not a matter of discretion. People need to drive to get to and from work, take their children to school, go shopping, and for many there are really no other

realistic or convenient alternatives.

For people who use a lot of fuel, like families forced to commute

a long distance from their homes to their jobs in order to find affordable housing, a hike in gas prices can have a significant impact

on the family budget. It can mean the difference between being

able to balance their checking account at the end of the month and

going deeper into debt. Or gas prices can influence their other

spending decisions, forcing consumers to cut back on other purchases so they have enough money to fill their gas tanks.

Unlike many consumer products, the cost of gasoline is subject

to dramatic fluctuations. After reviewing the data available on gas

prices over the last 3 years some patterns are apparent. Prices tend

to increase in March and April. The seasonal increase in gas prices

is generally attributed to the refineries switching their production

over to summer-blend fuel. Supplies tend to decrease at that time

as refineries use up their winter blend of gasoline before switching

over to the summer blend.

This year that trend began early with significant increases in

February which is normally a period of the year when we expect

to see relatively stable prices. During the summer we often see

prices increase around the 4th of July weekend which is typically

one of the biggest holidays during the year in terms of automobile

travel. Prices also tend to rise in late August, early September

around Labor Day weekend, another holiday with large numbers of

driving vacations. This typically marks the end of the season characterized by high fuel consumption.

In general, prices in the summertime tend to be higher than winter, largely due to higher demand. Generally prices tend to move

up or down by less than 10 cents per month. California and Nevada, however, are susceptible to dramatic price swings when experiencing supply or distribution problems or when crude oil prices

change significantly.

Since 2000, here in Nevada, there have been 21 months where

the price of a gallon of regular unleaded gasoline has changed by

10 cents or more. For purposes of comparison nationwide, the average price has changed by 10 cents or more only 14 times during

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the same period of time. So, Nevada consumers have seen far more

price volatility than residents of many other States.

Statewide average price per gallon in Nevada is usually among

the highest in the Nation. Typically only Hawaii and California

residents pay more. Right now Nevada drivers are paying about 25

cents more than the national average, 2003 was a particularly volatile year. Prices hit record highs throughout Nevada and California

in late March. At that time the statewide average in Nevada was

$1.97 per gallon, an increase of 29 cents per gallon from the previous month. Although that would look like kind of a bargain

today. Again, analysts at the time largely attributed the situation

to the rise in the price of crude oil. Crude oil hit nearly $40 per

barrel in February of that year during the buildup to the war in

Iraq. It was back down to about $28 a barrel by mid-April and consumer gas prices also declined between April and May as a result.

In 2004 gas prices have risen significantly since the beginning of

the year. Between January and May, the Statewide average price

for a gallon of regular unleaded in Nevada increased by 58 cents

a gallon, a jump of nearly 35 percent. Again, the high cost of crude

oil seems to be the main cause of the price hike.

What can we do about the problem? Any meaningful change

would team to have to address both supply and demand. On the

supply-side of the ledger AAA of northern California, Nevada and

Utah would support plans to increase domestic production, reserves

and fuel distribution in order to increase the certainty that consumers will have a reliable source of transportation energy as long

as these steps could be undertaken in an environmentally responsible manner. Likewise, we would also back a reduction in dependency of oil imports, again, in an environmentally responsible manner.

In terms of reducing demand we believe it is important to promote transportation energy efficiency and continue research in this

area in order to provide a wide variety of fuel-efficient technologies.

A wider range of options, including hybrid vehicles, would give consumers more choices when it comes to vehicle purchasing and use.

We also support the elimination of the oxygenate requirement for

fuel that was discussed before. We believe we can meet the requirements set by the Clean Air Act without being forced to use ethanol.

Cleaner emissions could be achieved by requiring tougher performance standard rather than by insisting on a particular ingredient.

To summarize, the pattern that we’ve seen emerging over the

last few years, prices rise, consumers complain, politicians investigate, then prices go back down again, we shift the focus of our

attention to other issues, and then after a period of time the cycle

repeats.

As George Santayana once wrote, ‘‘Those who cannot learn from

history are doomed to repeat it.’’ In some respects history may

serve as our guide in attempting to understand and ultimately

solve this problem.

At the onset of the oil embargo in the 1970’s, many Americans

drove a car powered by gas-guzzling V8 engine. By the end of the

decade the Honda Accord, much more fuel efficient vehicle, was one

of the most popular cars in the country. It wasn’t because people

just wanted a more fuel-efficient car. It was a car they actually

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wanted to buy. Technology really rose to meet the challenge of the

times and perhaps it may do so again. But, based on the pattern

we’ve seen over the last couple years it may take a more sustained

period of unpleasantness such as what happened three decades ago

in order to precipitate some of those changes.

Unfortunately, there is no quick-fix to this situation. If there was

an easy answer I suspect we would have found it a long time ago.

At AAA of northern California, Nevada and Utah we believe that

today’s high gas prices underscore the need to keep exploring alternative fuels, step up conservation efforts, and implement a national

energy policy that will meet our transportation needs without sacrificing the environment. Thank you.

[The prepared statement of Mr. Comey follows:]

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Mr. OSE. Thank the gentleman. The next witness, president of

Stillwater Associates, David Hackett. Sir, welcome. I appreciate

your participation.

Mr. HACKETT. Thank you, Mr. Chairman. Good afternoon, ladies

and gentlemen. I’ve been invited here today to address the issues

around high gasoline prices and to specifically address the effects

that government regulations, Federal, State, local, have had on the

cost of gasoline. I will also make recommendations on steps that

government can take to improve gasoline supply and, therefore, reduce gasoline price rises and price volatility.

Stillwater Associates has been retained by a number of government agencies to study high gasoline prices. California Energy

Commission we conducted studies that included creation of a strategic fuel reserve, MTBE phaseout and petroleum marine infrastructure. Our studies for the State of Hawaii have included gasoline price controls and ethanol production. Last year, Stillwater Associates provided assistance to the Department of Energy’s Energy

Information Administration’s studies, which were requested by this

committee, on California gasoline prices and the forecast for gasoline supply in New York and Connecticut.

Clearly the most significant impact that government regulations

have had in recent times on gasoline prices has been the oxygen

mandate and then the subsequent MTBE ban. Starting in 2002, we

warned that an MTBE ban would result in a reduction of gasoline

supply to the region and higher prices for consumers. The additional gasoline supply needed to meet demand would have to be imported by tanker from distant refineries.

Recently, Stillwater Associates calculated that the MTBE ban in

California, coupled with the mandate to blend with ethanol, is costing consumers in the Pacific southwest, and that’s California, Arizona, Nevada, more than $2 billion per year.

In many respects today’s high gasoline prices and diesel prices

are the result of government policy, or lack of policy. This afternoon I’ll make five specific recommendations for policymakers.

These recommendations are: one, eliminate oxygenate mandate;

two, cancel Unocal’s patents on gasoline; three, improve local permitting processes so that necessary infrastructure can be constructed in a timely manner; four, rationalize the number of grades

of gasoline that are required around the country; and, five, improve

oil company reporting to appropriate government agencies.

Relative to the elimination of the oxygen mandate, in 1998 refinery economics modeler MathPro, Inc., estimated the cost for local

refiners to produce California cleaner burning gasoline without ethanol would be reduced by about 2 cents per gallon or $300 million

per year. Today Stillwater Associates believes that elimination of

the oxygen mandate will make it easier for offshore refiners to

make CARB gasoline because they will not have to reject cleanburning butane and pentane from their gasoline blends.

As to the patent issue, Unocal was granted patents in the mid1990’s for cleaner burning gasoline, including gasoline that qualifies under California’s strict specifications. These patents have held

up under legal challenge, but they are being reviewed on other

grounds.

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We estimate that they pad the cost to consumers $150 million a

year.

Through our work for the California Energy Commission, we

came to realize that it is difficult, expensive, and time consuming

for companies to make infrastructure improvements in order to improve the manufacture and importation of oil products into this

market. I’ve listed a couple examples here. The telling one though

is with the Port of Los Angeles Mr. Keese mentioned earlier. This

was a quote from the local paper. There is a company that wants

to build an oil terminal on their property in the port. When asked

about the issue, an official is quoted as saying, ‘‘We don’t need the

addition of any more facilities of this nature whatsoever.’’

Then of course over the years individual States have decided to

mandate changes in gasoline composition sold in their jurisdictions

to help achieve air pollution reduction goals. Many of these programs have had success from an air quality perspective but at unnecessarily high cost to gasoline consumers.

Then we’ve got representation here on reporting. Government

agencies don’t collect, analyze, or publish the proper data in a timely fashion to help participants in the marketplace understand the

supply and demand issues. Of course on the other side you can

argue that industry makes reports to all sorts of government agencies, and so all that, that whole recording process needs to be sorted out and it comes back to the transparency that Arizona spoke

about a few minutes ago, trying to understand what’s going on.

We’ve got a demand side suggestion. Experts say if motorists

properly inflated their tires, they could save 6 percent on gas mileage. Assume everyone did that and reduced their gasoline demand

by merely 2 percent. That would save about 180,000 barrels a day

of gasoline, the equivalent production of a new refinery or the delivery of 18 tanker loads of gasoline imports every month.

It is Stillwater Associates’ conclusion that the root cause of high

gasoline prices in this region are government regulations, including

the California ban on MTBE and the continuation of the oxygenate

mandate which have reduced gasoline supply. Government policies

limiting gasoline supply expansion are adding to the problem.

[The prepared statement of Mr. Hackett follows:]

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Mr. OSE. I thank the gentleman for his testimony. Our final witness on the second panel is Mr. Tyson Slocum. He is the Research

Director for Public Citizen’s Energy Group. Sir, we’ve received your

testimony, welcome your participation. I Recognize you for 5 minutes to summarize.

Mr. SLOCUM. Mr. Chairman, thank you for having me here today.

Two months ago I released a report called Mergers, Manipulation

and Mirages: How Oil Companies Keep Gasoline Prices High, and

Why the Energy Bill Doesn’t Help. And among other conclusions

that I reached in the course of my research I found that recent

mergers, for example, those between Exxon and Mobil, Chevron

and Texaco, and Conoco and Phillips, among others have resulted

in dangerous levels of concentration in the domestic oil industry,

particularly in the refining sector.

My research documented that in just one decade as a direct result of mergers, largest five oil refiners went from owning one-third

of capacity to over one-half, and the largest 10 refiners went from

owning 55 percent of refinery capacity to nearly 80 percent. It is

not just Public Citizen’s reaching these conclusions. Just yesterday

the U.S. General Accounting Office released this report, ‘‘Effects of

Mergers and Market Concentration in the U.S. Petroleum Industry.’’ Among the conclusions that this Federal agency reached was

GAO’s economic analyses indicate that mergers and increased market concentration generally led to higher wholesale gasoline prices

in the United States.

Prior to that, in March 2001, the U.S. Federal Trade Commission, which is the agency that is supposed to be enforcing antitrust

laws, found that oil companies, because of their large market

share, were able to unilaterally intentionally withhold gasoline

supplies from the marketplace for the sole purpose of engaging in

what they called profit maximization strategies, what I would call

price gouging.

Now, while the Federal Trade Commission found those practices

were perfectly legal, now I’m not an attorney but I do know right

from wrong and I think it is wrong, Mr. Chairman, that oil companies are intentionally price gouging consumers in the United States

today and I think that Congress has many tools at its disposal to

help address this crisis.

Unfortunately, none of those tools are included in the energy bill

which has been championed by many in Congress and by the current administration. That’s because the current energy bill has zero

chapters or portions of it that address industry consolidation. In

fact, the energy bill as crafted by Congress would make matters

worse by repealing the Public Utility Holding Company Act which

is one of the Federal Government’s most effective structural regulations over the energy industry, and if the energy bill became law,

companies like ExxonMobil freed from PUHCA’s restrictions would

be able to acquire electric utilities, natural gas utilities, and other

electric assets that are currently regulated by PUHCA.

If we are experiencing damaging levels of concentration within

the domestic refining sector, just imagine what would happen if

PUHCA was repealed and the same companies with a stranglehold

over gasoline markets were allowed to engage in that kind of behavior in our electricity and natural gas markets as well.

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The solutions that Public Citizen’s advocates that are unfortunately not included in the energy bill would be to mandate minimum storage requirements. One of the key problems that I found

and Federal investigations have found is that financial incentives

exist in today’s uncompetitive gasoline markets for companies to

restrict capacity. The FTC clearly found that the inelasticity of

some of these reformulated blend requirements in certain markets

make it very easy for these companies to unilaterally withhold gasoline.

If an entity is unilaterally withholding, that is clear evidence of

uncompetitive market. A solution would be to have mandated storage requirements that the government could also order its release

and that would take away the financial incentive of these companies to engage in these manipulative behaviors.

Another option would be to launch a serious multi-agency investigation of these anticompetitive practices and possibly a comprehensive review of recent mergers that have been approved and

whether or not those recent mergers have indeed resulted in these

anticompetitive practices.

There are other solutions as well. We could implement fuel-economy standards that would reduce our demand. The United States

uses 25 percent of the world’s oil and we can also improve our

management of the Strategic Petroleum Reserve by ceasing filling

it. We’re already at 92 percent capacity. Thank you very much, Mr.

Chairman.

[The prepared statement of Mr. Slocum follows:]

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Mr. OSE. Thank you for joining us today. We appreciate your testimony. Gentleman from Nevada.

Mr. PORTER. Thank you, Mr. Chairman. I guess I have a couple

questions but first, Mr. Slocum.

Mr. SLOCUM. Yes.

Mr. PORTER. Regarding investigations, who else should be doing

the investigations? You may have said it. I was trying to read your

testimony as you were speaking, but is there some other steps we

should be taking in that.

Mr. SLOCUM. I did not mention specific agencies. I think that getting all of the various antitrust entities such as the Department of

Justice involved in this review of specific mergers, and in my written testimony that I’ve submitted to you, sir, I go through some of

the problems where the Federal Trade Commission did not place

adequate conditions on the approval of mergers. They allowed these

companies, for example, when you merge fully vertically integrated

entities like ExxonMobil or Chevron and Texaco to merge they

were allowed to retain much of their downstream assets, and that

as also concluded by the General Accounting Office they have found

that has directly led to overconcentration of this industry which is

leading to anticompetitive practices.

Mr. PORTER. Thank you. Regarding travel to Las Vegas, I guess

this is an AAA question, you know this weekend begins one of the

most popular weekends and moving into the season of tour and

travel. At what point do you think the gas prices are going to keep

people home?

Mr. COMEY. Right now they are not detering people from traveling. We’re actually predicting a more robust travel season this year

than we’ve seen since 2001. Despite the high gas prices, people are

still traveling in large numbers. How long that will continue is uncertain. Our survey suggests that some people are adjusting their

travel plans, taking shorter vacations closer to home. It doesn’t

seem to be adversely affecting tourist-dependent economies at this

point.

The problem seems to be that these periods of unpleasantness

with regards to high gas prices don’t last long enough to really

have a significant impact in terms of changing people’s behavior.

They kind of soldier on, they grumble at the gas pump, they go

anyway. Whether or not that continues into the future is very uncertain. With global demand, particularly from China increasing,

we may not have seen the end to these high prices.

The short answer is we don’t exactly know when it will start undercutting economies like it does in Las Vegas. At the present time

it does not.

Mr. PORTER. Do you track also the airline industry impact or I

know you’re an automobile association.

Mr. COMEY. I read press accounts and that sort of thing, but we

don’t do any independent research in regard to the airline industry.

The airline industry seems to be reluctant to pass along the added

fuel costs for competitive reasons, but people seem to be traveling

by air in larger numbers than they have in the last couple years.

Mr. PORTER. For the balance of the panel, what I’m asked every

day is what we can do today. I know we touched upon some things

with the automobile efficiency, getting it repaired, serviced, tires,

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6, 7 percent savings I think, Mr. Hackett, you mentioned that.

Some other things people can do today to help with the problem.

I know we’re looking at some long-term solutions but what about

some quick short-term fixes. Any suggestions?

Mr. COMEY. One of the main things, the suggestions that you referenced with regard to keeping your car in proper operating order,

not accelerating rapidly, driving the speed limit, those are things

that people might have heard. I try to focus on things that maybe

they haven’t heard of.

One of the biggest waste is buying higher octane fuel than you

need. Fewer than 10 percent of the cars on the road actually require high octane fuel and consumers purchase between mid-grade

and premium fuel up to 30 percent, that represents up to 30 percent of fuel purchases. It’s less now with high prices. It’s down to

around 20 percent. But, if your car’s manufacturer and the owner’s

manual does not specifically require you to use high octane fuel

then you shouldn’t buy it because you’re just wasting your money.

People often will buy premium or mid-grade fuel in belief they

can enhance engine performance, increase the life span of their vehicle. It’s just not the case. You’re not getting any value for your

money if you’re overbuying on premium fuel.

Tire pressure inflation I think is something that can have a big

impact. For every pound of pressure that your tires are underinflated you can lose up to 2 percent of your fuel economy. A lot

of people judge whether or not their tires are properly inflated

based on looking at them. You can easily be off by 5 pounds and

your tires would still work just fine, so that could be 10 percent of

your gas mileage right there. People who are reluctant to use tire

pressure gauge are probably also reluctant to change their own oil.

So an easy way to get it checked is to make sure they do that when

they change the oil. It is supposed to be part of the service. Sometimes they neglect to do it.

Also taking stuff out of your trunk. A lot of us use our trunks

as mobile storage facilities. While it doesn’t have a huge impact on

gas mileage it does add up over time. Could be up to an extra tank

during the course of a year. If a tank of gas costs $40, $50, do you

really want to buy an extra one? Those would be the suggestions

that we’ve been giving to consumers as some way they can combat

this.

Also we encourage consumers to shop aggressively for lowest

price on gasoline. Many of us may have chosen a gas station at one

time because it had the lowest price but because prices fluctuate

so much the cheapest station today could be the most expensive

next week.

So, what AAA encourages people to do is just pay attention to

the posted prices of gasoline as they’re driving throughout their

normal routine. That way they know what a fair price is once they

have to fill up. It doesn’t make sense to drive all the way across

town to save a couple pennies on gas, although I have talked to

consumers who are so bent out of shape about this issue that they

will do that. It does pay to find a station that offers the best value

and is equally convenient to the one you normally shop at.

I have told people who want to go the extra step further that if

they politely discuss this with the station owner by saying, look,

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your prices are out of line and I normally shop here but I’m going

to go to your competition, I’ll keep my eye on your price if you

lower it, I’ll be back, this is also a way for the consumers to use

their dollars to send a message.

Mr. PORTER. Mr. Sparano, unless you have a——

Mr. SPARANO. I think Mr. Comey’s comments are well taken. I

think it’s important for people to know that in the United States

there are 160,000 service stations. In Nevada there are 1,008 as of

last look. California has about 9,500. People do have a choice. It’s

a very competitive industry.

In California, according to the Lundberg survey, 10 percent of

those 9,500 stations are owned and operated, that is with salaried

employees, by the major corporations, some of which were mentioned earlier. The other 90 percent are either owned or leased by

independent business people who are involved in making a living,

and recently we saw an e-mail that floated around challenging

folks to boycott stations. That just hurts the independent owner.

I think people can exercise their choice. They shouldn’t drive too

far as was suggested. They should do all the things that represent

efficiency. But, this problem didn’t start last week or last year or

in 1999. It started 30 plus years ago when we stopped building refineries. We stopped building infrastructure.

The U.S. production of crude went from 10 million barrels a day

to 51⁄2 million barrels a day. The use of products in this country

is now 201⁄2 million barrels a day. We import as you mentioned earlier, Congressman, almost 63 percent. Twelve and a half million

barrels a day. Ten of crude, two and a half of product comes from

somebody else’s refineries and production fields.

Those issues are important for us to focus on and they’ll require

longer term fixes. I think the AAA representative hit it right on the

head when he talked about the kind of things that folks can do day

in and day out.

Mr. PORTER. Mr. Hackett.

Mr. HACKETT. I can’t add to the list.

Mr. PORTER. Mr. Slocum.

Mr. SLOCUM. I would respectfully challenge the contention that

inadequate refinery capacity has been built. It’s true that no new

refineries have been built in a little while but we’ve got internal

company documents that were turned up by a Senator from Oregon, Senator Ron Wyden, in a recent report that discusses explicit

strategies by large refiners to muscle smaller independents out of

the market.

For example, Castle Energy owned and operated a refinery just

outside of Los Angeles called the Powerine refinery and it shut

down in 1995 and at the time the CEO told the San Francisco Examiner that, ‘‘operating as a small independent refinery in California has been very difficult because of the competition and poor refining economics.’’

Now, at the same time, Senator Ron Wyden had in his possession

an internal communication from the Mobil Corp., which is now part

of ExxonMobil which states, ‘‘if Powerine restarts and gets the

small refiner exemption, I believe the CARB market,’’ which is the

California—the cleaner burning California Air Resources Board

gasoline blend, ‘‘I believe the CARB market premium will be imVerDate 11-MAY-2000 17:03 Oct 18, 2004 Jkt 000000 PO 00000 Frm 00111 Fmt 6633 Sfmt 6633 D:\DOCS\96091.TXT HGOVREF1 PsN: HGOVREF1
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pacted. Could be as much as 2 to 3 cents per gallon. The restart

of Powerine, which results in 20,000 to 25,000 barrels per day of

gasoline supply, could effectively set the CARB premium a couple

of cents per gallon lower. Needless to say, we would all like to see

Powerine stay down. Full court press is warranted in this one.’’

That is an indication to me of some fairly aggressive tactics by

larger companies using their dominance of the market to muscle

smaller independents to intentionally restrict supplies so that they

and not the market determine how much gasoline is available to

consumers.

Mr. PORTER. I’ve got one more question.

Mr. OSE. Yield for one moment?

Mr. PORTER. Yes.

Mr. OSE. Because we have the person who actually ran the

Powerine. Do you care to add to this.

Mr. SPARANO. Congressman, thank you. That has been

misreported. I was chairman, CEO of Pacific Refining Co., an

equally small independent refiner that was shut down in 1995. I

can assure you after 35 years in this business that’s not the way

it operates. This country has lost 1.8 million barrels a day of refining capacity, not 10,000 barrels, not 180,000 which is a good size

refinery. 1.8 million barrels a day since the mid-1980’s.

I don’t know where the report came from. I do know the FTC,

the EIA, the CEC, the attorney general of the State of California

on repeated occasions have examined the kind of allegations that

are being made by the Citizen’s group and have found no wrongdoing, not just no wrongdoing, nothing illegal, no collusion, no market manipulation.

So, as a head of a refining operation I will share with you that

Pacific Refining in 1995 shut down because it spent 5 years and

millions of dollars trying to get permits just to make CARB gasoline, not to expand, not to grow bigger, not to put someone else out

of business; to make the gasoline that the State required.

We had tremendous amounts of resistance, influence by government officials to not proceed with our project despite the lack of belief that we would ever accomplish our task we did in fact get the

permits and the partners who happened at the time to be a Texas

corporation and a foreign national oil company, Peoples Republic of

China specifically, they decided they weren’t having much fun in

this industry and they closed down the plant. I had to personally

layoff 220 people.

I did examine as part of a team the Powerine refinery because

one of our thoughts was if we could combine with Powerine we

might be able to keep our plant open and keep all those people in

business in both plants. It wasn’t a very good operation. It didn’t

have the tools to be competitive. That’s the fact.

Mr. OSE. I thank the gentleman for yielding.

Mr. PORTER. Thank you. Close to home, again, Bakersfield, what

will happen, once it’s shut down, to Nevada?

Mr. SPARANO. Shell has made a decision to shut down that refinery. They indicated that they are in a position where valley heavy

crudes have been produced for probably 100 plus years. They don’t

have access to the kind of heavy crudes that make that refinery

economic. It’s been reported that it made money in the last 4 of 6

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years. People have tossed around internal documents. The refinery

made, according to Shell, $14 million in a 6 year period. That’s not

exactly what I would call excess profits.

The plant is older. It requires upgrades. It is a very difficult environment. Shell has indicated they will supply all of their contract

customers with both gasoline and diesel. Where they get it is not

certain. What happens in the marketplace I cannot predict whether

others step in to fill the void or not.

The closure of that refinery which produces 2 percent of the gasoline for the State of California and 6 percent of the diesel may or

may not have an impact. It’s too early to tell. I’m sure that others

will have the opportunity to fill the capacity when it leaves the

marketplace.

Mr. PORTER. Thank you.

Mr. OSE. Thank you. The gentleman from Massachusetts.

Mr. TIERNEY. Thank you very much.

Mr. Sparano, I do think you’ll agree these are business decisions,

not building refineries. Government didn’t decide to stop having refineries built.

Mr. SPARANO. I disagree.

Mr. TIERNEY. Can you point me to something that said the government came out and said we’re not going to——

Mr. SPARANO. No, sir. It’s not that——

Mr. TIERNEY. You want to tell me how it’s all the regulations and

all that, right.

Mr. SPARANO. No. If you were to build a new refinery today in

the State of California, and you built a small one, 100,000

barrels——

Mr. TIERNEY. Let’s talk about keeping the ones open that were

open.

Mr. SPARANO. I’d like to answer your question.

Mr. TIERNEY. First of all—in fact, I’ve been through these hearings before. I’ve had other members from organizations like yours

that tell us how it’s the environmental regulations that is shutting

them down. In fact, I sat through one hearing, we haven’t built a

new refinery, got a new permit for new refinery since God knows

when. Only to find out from the administrator for the EPA said

they haven’t asked for any.

The fact, if you’re not seeking any, you’re not likely to get them.

If you want to expand as you indicated was your thing and you did

get your permit and then there is a business decision made to shut

it down anyway, that’s not the government.

From 1995 to 2002, 97 percent of the more than 920,000 barrels

of oil per day of capacity that have been shut down were owned by

smaller independent refiners. They either decided to shut down or

they were squeezed out of the market, one or the other. I can assure you that you can’t come up with an instance where the government ordered them to shut down.

Mr. SPARANO. I think we’re almost playing with the chicken and

the egg here. Who produced the regulations? It is the response or

lack of the ability——

Mr. TIERNEY. You believe the regulations made them shut down.

Mr. SPARANO. If you run a refinery, as I have done in my career

on more than one occasion, you face a myriad of costs. They’re in

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the millions of dollars. Those costs in large part are constituted by

regulatory requirements of some sort. For example, in

California——

Mr. TIERNEY. Some of the cost is.

Mr. SPARANO. I said in some respects they’re made up of environmental costs. In California, between 1990 and 1995, refiners spent

$5 billion. Someone said earlier that the industry doesn’t reinvest

its profits. $5 billion in a 5 year period, another billion to make

clean diesel. Not to make extra product. To make clean diesel.

Regulations exist on the local level, on the county level, on the

local air and water district level, on the State level and on the Federal level and they are multilayered. They are duplicative. They

are very expensive to meet. You’re correct, many of the refiners

that shut down in the period you described, Congressman Tierney,

were as a result of people not having the money to reinvest. That’s

a business decision.

Mr. TIERNEY. You say it’s not having money. The profit in this

industry has been phenomenal since 1997, 1998, 1999, 2001. It

dipped a little in 2002 and then it went back up again. It’s incredibly profitable again now. So the question is how much money is

enough for these people to make a business decision to shut it

down. If your profits are 50 percent higher than they were the year

before, you decide it’s not enough, you shut it down, it’s not the

government or its regulations shutting it down.

Now, let me just ask Mr. Hackett for a second. You talked about

filling your tires. Mr. Comey, you talked about taking things out

of your trunk. The fact is about 180,000 barrels a day that are

being saved if people fill their tires. Right now the President continues to buy about 107,000 barrels a day for the reserves. If he

just stopped buying that for the time being because the price is up

so high, what impact would that have on the market? Would it

send a message to people that the White House is serious about the

supply? Would it have an impact.

Mr. HACKETT. As near as we can tell. Major impact would be the

signal it would send. Volume is not very big on an overall basis.

So that physically might not have a lot of impact on the market

but it certainly does send a signal.

Mr. TIERNEY. Now, when we talk about the price at the pump

is there any ability to defend that unbranded is going to be less expensive than branded supplies? Does anybody know that?

Mr. COMEY. Independent stations tend to be more competitive

when there is a lot of supply because they buy on what’s called the

spot market meaning the stations that are affiliated with a large

corporation get under contract the gasoline first and that price

might be higher than the market price would set when supplies are

good. When supplies are down, independent stations tend to be less

competitive because they may be paying more on the spot market

and the contracted stations that are part of the big chains may

have actually a better deal.

It just goes to show you that shopping around is important. The

independent station that had good value last year when you decided that was your gas station might be more expensive. So, it

varies depending on what the supply situation is.

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Mr. TIERNEY. Would independent refineries be more inclined to

sell to the nonbranded?

Mr. COMEY. I’m not sure if I can answer that question.

Mr. SPARANO. Any independent refiners, some of those are independent refiners in that they are not associated with the bigger

companies that have been mentioned but they have retail operations of their own. Both independent refiners and major refiners

have segments of their production that may be sold to the independent gasoline stations.

I think there is an important point that I would like to share

with you about concentration of stations. Another factor about

where you might find the cheapest gas and whether it’s an independent station flying independent flag or independently-owned

station flying someone’s brand or branded station, if you have 25

service stations in a 5 square mile area you’re going to have a heck

of a lot of competition. They’re all going to be vying for the same

motorists, having to meet the same amount of volumetric demand.

If you have four or five stations in that same 5 square mile area

they won’t be nearly as competitive.

California is a wonderful example of that. Again, according to

Lundberg, in Los Angeles there are almost 2,000 stations. In San

Diego there are 700 and in San Francisco there is 130. That makes

a big difference in terms of local pricing practices and the availability of affordable product to the local consumers.

Mr. TIERNEY. Same would be true with refineries, if you have

fewer of those then the prices will also be expected to be impacted

by that.

Mr. SPARANO. Prices are governed by local markets. Prices are an

issue of supply and demand. I can’t argue with the fact that we are

barely meeting the demand requirements but that’s because supply

is increased, as Mr. Keese said earlier, at half a percent a year and

demand is currently growing this year 5 percent more than the

same period last year. That’s a function of people’s driving habits,

where they drive, how much they drive and what they drive.

Mr. TIERNEY. You’re not going to tell me the lack of refinery capacity has no impact on this.

Mr. SPARANO. I’m saying the lack of the ability of the refiners to

construct more capacity and the restraints caused by the permit

system, other local constraints and just the sheer cost of building

all have influence.

Mr. TIERNEY. Just so I get it on the record because I read to you

the RAND report, Public Citizen’s report talked about General Accounting Office report; we’ve talked about consumer reports, had

testimony of Mr. Wyden’s committee on this. Are you saying to me,

sir, that the only reason that these places shut down, those refineries which have been extraordinary number shut down not because

of business decision but it’s all because of government regulation?

Mr. SPARANO. No, I didn’t say that, nor am I saying that.

Mr. TIERNEY. You would agree with me to some degree it’s a

business decision to shut these down?

Mr. SPARANO. I guess I would take it a step further. It’s always

a business decision. It’s what causes the business decision to occur

that’s what’s important.

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Mr. TIERNEY. We lost 100 or more refineries from 1980 to 1983.

Over 50 from 1990 on, over 20 since 1995. We lost two-thirds of the

firms engaged in refinery business in the United States from 1980

to 2000. You think the primary culprit here is regulation?

Mr. SPARANO. I think the overwhelming number of regulations

and the cost to meet those regulations, to buy land, to keep land,

to pay taxes on land all have had influence over this. There were

301 refineries in the mid-eighties. There are 149 now. I closed one

of them down personally so I feel this perhaps more than——

Mr. TIERNEY. I think you do. Step outside that one experience for

a moment. This happened about the same time all the consolidations was happening in the market. Companies are gobbling each

other up. We’re ending up now with five companies essentially

owning half of the capacity around here. You don’t think there is

any possibility these companies deciding this is a good thing to decrease, especially when we have all these internal memos coming

from people telling us they have strategies to decrease the amount

so they can increase their prices.

Mr. SPARANO. I’d like to make a couple of observations. First and

foremost, there have been 29 investigations in the last 20 years

that have said there is nothing illegal going on. Including not just

the FTC that is responsible for making determinations but the attorneys general for the States.

Mr. TIERNEY. That’s a nicety. I agree with you none of those reports have found there is collusion or other antitrust violations.

What I’m saying to you is the high concentrations right now is you

don’t have to be a monopoly. You don’t have to be violating antitrust to be able to have such a concentration in your particular region, whatever, that you can decide what you’re going to do without

being in fear of a competitor coming in and doing something else.

Again, I go right back to the finding that the FTC made. In addition to finding that there was no antitrust violation, it specifically

found that the choices by industry participants, each industry participant acted unilaterally and followed individual profit-maximization strategies, that’s essentially what it did. The firm did sell off

some of its RFG. Didn’t sell the rest, want to buy when the price

is up. Executive of the company made clear that he would rather

sell less gasoline and earn a higher margin on each gallon sold

than sell more gasoline and earn a lower margin. That may not be

illegal but as a matter of public policy I’m not sure it’s good for this

country’s energy needs and the things people need.

I’m not trying to argue that your firm is out there breaking the

law. I may be making the argument they are making business decisions for their shareholders which they believe is their obligation

to do and that as public policy we may not have been doing what

we can do to make sure that enough of the supply got out to where

it had to be, the prices were in the range of where it should be and

they had the kind of capacity on hand that is necessary. If companies are going to make those legal but tough decisions on that

basis, going to shut down refineries and do things like that, maybe

we ought to take a tough stand on this end.

Mr. SPARANO. Two important points, if I may respond, which I

think there was a question in there somewhere.

Mr. TIERNEY. There wasn’t.

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Mr. SPARANO. OK. Industry, there has been a lot of talk about

companies combining. Companies have combined over the last 10,

15 years for survival. We’ve gotten an industry that factually, according to Business Week, last 5 years makes a nickel on the dollar. I’m not in the habit of investing for a nickel on the dollar.

Mr. TIERNEY. Which industry are you talking about?

Mr. SPARANO. The petroleum industry. According to Business

Week, the last 5 years, 5.2 percent, oil industry 5.3 percent. Business Week score card published quarterly. In the first quarter of

2004 petroleum industry made 6.9 percent, coal industry average

71⁄2 percent. Business Week score card. I have it here.

Mr. TIERNEY. I’ve got what Business Week said about the profit.

You can go where you want to go on that. I think the profit margins here, profits down 2002 but afterwards they went up. 2000 petroleum industry reported return on equity of 25 percent. That’s a

nickel? Twenty-five percent. That was twice the historic average for

the industry which ain’t so bad and was about 50 percent more

than that of other large corporations.

Mr. SPARANO. Which year are you talking about, sir.

Mr. TIERNEY. Talking about 2000, 2002, 2003, 2004.

Mr. SPARANO. There is a point here. It’s over a long period of

time. This is not a one quarter or 1 year of the ultimate history

of this business, the return on capital employed on refining is

about a nickel.

Mr. TIERNEY. It ain’t a nickel now.

Mr. SPARANO. It’s better at the moment, grant that, but it has

been over the long haul not a particularly profitable business.

That’s why companies have gotten together. That’s why many companies have left the business. There are no people lining up that

I know of at California’s borders to build new plants.

Mr. TIERNEY. How would anybody break into a marketplace

where five companies own over half of the capacity on that?

Mr. SPARANO. It’s a great market.

Mr. TIERNEY. We can go back and forth on this. I find it hard

pressed you want to be on the record saying that they’re making

50 percent more than other corporations, large corporations and

they’re making twice the historic average for their own industry,

that there is some sort of impoverished industry.

Mr. SPARANO. No. 1, I didn’t say that. No. 2, what I did say, the

industry made 6.9 percent profit margin in the first quarter of

2004. That’s not 50 percent. It’s not 25 percent.

Mr. TIERNEY. Disagree. Go ahead.

Mr. OSE. I thank the gentleman.

Mr. Slocum, what I get from your written statement a concern

about the level of profits that the refining industry is making. As

a percentage of sales what should the industry be making?

Mr. SLOCUM. That’s a good question. And I think that——

Mr. OSE. Let me add, I’m sorry, I mischaracterized the question.

From your perspective what advice would you give to us if we were

to mandate what the return on sales should be?

Mr. SLOCUM. Well, I don’t think that I advocate the government

setting a return on sales. The primary tool that I was recommending to the committee, Mr. Chairman, was some sort of mandatory

minimum storage requirements that the government could also

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order its release during periods of tight supply and rising crisis and

that would act as a deterrent against what we are now experiencing as a financial incentive by the industry to keep supplies tight.

I would not advocate that the government be in the business of

telling a company how much profit it should or should not be making, nor am I saying that companies do not deserve to make a profit. Profit is what it is.

I think that there are tools that the government should develop

to recognize that we have uncompetitive markets, and again it isn’t

just Public Citizen reaching these conclusions. It’s economists with

the Federal Government and others who have examined the industry and seen that these mergers are having negative impact and

that it is the government’s duty to take some affirmative steps to

protect consumers and protect the economy.

Mr. OSE. As it relates to the storage issue, at what point in your

thinking would the government direct the holding company, whatever company that held the petroleum product, at what point

would the government order the release of that product?

Mr. SLOCUM. When some sort of either the Department of Energy

or some sort of regional committee made up of Governors or other

energy officials within regions or specific States could make a recommendation to the Federal Government to release those reserves

because some sort of formal assessment and conclusion had been

reached that supplies were too tight and, therefore, necessitate

some sort of release of storage.

I clearly have not developed an enormous amount of detail on

this. I think talking to other individuals who are familiar with the

industry that it is one tool that may be successful in reducing

prices and reducing some of the volatility that we’re currently now

experiencing.

Mr. OSE. I was curious of the details. Clearly you’ve got more

thought to put into that?

Mr. SLOCUM. Yes, sir.

Mr. OSE. We may give you a question to that effect.

Mr. SLOCUM. I would be happy to answer that, Mr. Chairman.

Mr. OSE. Mr. Sparano, I want to talk to you. It’s my understanding California consumption right now is around 151⁄2 to 16 billion

gallons of gas per year.

Mr. SPARANO. That’s correct, according to the Energy Commission.

Mr. OSE. Nevada, it’s about a billion gallons of gas per year. Arizona it’s about 21⁄2 billion gallons of gas per year. Do you have any

information about what the refining capacity in the three States is?

Mr. SPARANO. Refining capacity in Arizona is zero for all intents

and purposes. With all due respect to the Tonopah refinery, the capacity in Nevada is close to zero. In California, California refiners

produce about 45 million gallons per day. If you put it in a refining

term it’s 1.1 million barrels per day of capacity of gasoline production. I think that’s what you were asking, Mr. Chairman.

Mr. OSE. 1.1 million?

Mr. SPARANO. Barrels per day of gasoline produced by California

refineries. That gasoline serves California consumers, about 60 to

70 percent of Arizona.

Mr. OSE. So 400 million barrels per year? 365 times 1.1?

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Mr. SPARANO. Times 42 you get 16 billion gallons.

Mr. OSE. California is imbalanced. As a percent is there a 1 percent play, is there 5 percent play?

Mr. SPARANO. If I may describe the way the western region

works because I think it’s important to not just identify this as a

California issue even though the bulk of the——

Mr. OSE. I live in California. That’s why I’m interested.

Mr. SPARANO. Me, too. California produces and transports for

sale about 60 percent of Arizona’s gasoline, about 100 percent certainly of southern Nevada’s gasoline, about 100 percent comes from

California pipelines, and then we actually send about 30 to 35 percent of Oregon’s gasoline requirements.

Now, when you add those up you say, well, if you use 45 million

a day and you make 45 million a day and send a bunch out, it’s

backfilled. Washington refineries can make the California quality

gasoline. We have the most stringent specifications in the world.

We do get some product from there.

There is some product that is imported—I think the last numbers I saw, about 100,000 barrels a day of imports into California

from either a United States or foreign source. So there is a balance

you can draw around the five State area: Washington, Oregon,

California, Arizona and Nevada. Roughly in balance every day.

I think in response to your question, there is not much of a buffer. I believe Chairman Keese touched on that earlier. Earlier this

year there were a number of refineries that were undertaking

planned maintenance and some of them did not startup on schedule and at the same period there were others that had some unplanned outages and as a result there were 9 or 13 experiencing

some kind of problem. Set a very difficult situation in place whereby the supply in the region and nationally has been well behind

last year’s supply in terms of inventory gasoline.

Mr. OSE. The reason I ask the question is from an operational

standpoint, one of the things we discovered in our examination of

electricity was that historical standards within the industry were

that you had a 71⁄2 percent spending reserve and another 71⁄2 percent standby in the event something went down. What is the historical tradition in the refining business? Is it to always run right

at maximum?

Mr. SPARANO. No. Refiners in the 1980’s were running in the 70

percent capacity range and because of the number of plants that

have shut down that capacity utilization now is year to date about

91 percent nationwide. In California, I think Chairman Keese can

support this, plants have run at about 95 percent of capacity.

That’s essentially full because when you do that calculation it

doesn’t take into account the days that plants must be down every

3 or 4 years to do plant maintenance because the equipment

doesn’t run infinitely. It requires very costly and long-planned

maintenance. Sometimes up to 2 or 3 years of planning go into creating maintenance planning. We’re operating pretty much at full

capacity and there is not a great deal, if any, spare capacity.

Mr. OSE. You’re saying there is no margin of error?

Mr. SPARANO. There is very little margin for error.

Mr. OSE. It would seem like with no margin for error it just highlights the urgency with which we need to deal with this issue. Now,

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let’s say we do the deal with inflation. Was it you that had inflation of tires.

Mr. HACKETT. (Nodded.)

Mr. OSE. That adds 180,000 barrels.

Mr. HACKETT. Nationwide.

Mr. OSE. Per day? Per year?

Mr. HACKETT. 180,000 barrels——

Mr. SPARANO. If every driver——

Mr. OSE. It would save 180,000 barrels.

Mr. HACKETT. Right.

Mr. OSE. Now, somebody mentioned CAFE standards. Let’s say

we take CAFE standards and we raise them from the current average 26 or 27 to 30?

Mr. HACKETT. How long do you assume it could take to turn it

over——

Mr. OSE. If I’m the buyer of the vehicle it’s like 14 years. You

tell me.

Mr. HACKETT. Seven to 10 years.

Mr. OSE. Seven to 10 years to turn the fleet over?

Mr. HACKETT. Yes.

Mr. SPARANO. Mr. Chairman, one of the things that have happened as CAFE standards have improved vehicle mileage efficiency

enormously since the early 1980’s and into the 1990’s, the vehicle

miles driven and the demand for the product has gone up commensurately. So, despite the fact that CAFE standards have created an

improvement in vehicle efficiency, more miles are driven, more gasoline is consumed. So I’m not sure that’s an absolute method to get

at reducing demand and bringing thing back into balance. I’m not

negative on it at all. Please don’t misunderstand me.

Mr. OSE. One of the things that Mr. Tierney and I and others

in Congress struggle with, we have a range of choices. We can do

a whole of bunch of X, a little of Y and some of Z or whatever. But

I can tell you, the statistical data is very clear that as we seek to

raise CAFE standards we’re going to take weight out of vehicles

and that’s going to compromise the structural integrity of those vehicles.

We are making a tradeoff in terms of an increase in number of

highway fatalities. Currently we’re maybe at 50,000 a year nationwide. How many more do we want? How many more can we stomach?

Conversely, the tradeoffs that we make on the permitting side,

I mean, if the argument is that if refining is such a profitable business, why aren’t people lined up to do it because Lord knows

money is cheap right now. Why aren’t they lined up to do it? Why

aren’t they coming to the State, local, Federal permitting agencies

and submitting their applications?

Mr. HACKETT. Some of the answer to that is the time that it

takes to make the change. From my perspective—I’ll agree with

Mr. Sparano. For a long time refining was not a very good business

to be in. Frankly, what happened is the government regulations

that have constrained the supply have in fact put money in the refiners pockets.

Mr. OSE. Actually, I think Mr. Tierney is correct. The government regulations have been a conscious decision on the part of the

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people of the United States that they want something and they’ve

asked their elected official to pass statute and the agencies have

adopted regulation to implement statute, and it may be that statute led to regulation that said New Source Reviews required or

that we’re going to reduce the particulate matter that comes out of

the end of your tailpipe or what have you. That is a conscious decision. What I’m trying to highlight here is that we have made a series of conscious decisions that have had consequences.

Mr. HACKETT. Thank you, Mr. Chairman. From my perspective

one of the consequences is that it’s made refining profitable.

Mr. OSE. At $2.50 a gallon or whatever it is.

Mr. HACKETT. Well, probably less than that. In our analysis it’s

really sort of the last few years that these things have been profitable. A good place to go look at that is as Mr. Tierney indicated

check the facts, look at the stock prices of the independent refiners,

the Senecas, Valeros, the Desarros and the like. You can see how

their stock prices have gone up dramatically, nearly doubled in

some cases over the last perhaps 18 months or so. So you can see

Wall Street talks ill of refiners. Lately they’ve caught on and they

see that these independent refiners are making money. That’s

probably a good place to go to validate how much money they’re

making.

But, from my perspective what happened is the regulation—everybody in this room is for clean air and clean water and fair prices

for gasoline. Nobody will dispute that. But in order to get those

clean air and clean water regulations, that’s wound up reducing the

amount of gasoline that refiners in the United States can make

and that’s a fact. So then——

Mr. TIERNEY. Excuse me.

Mr. HACKETT. Yes, sir.

Mr. TIERNEY. Don’t say that’s a fact. It’s an opinion. Cause and

relation is your opinion. I’m going to point out once again when you

blame the decline of capacity to those regulations you do away with

the fact that this began, these decisions to close these things down

began long before the Clean Air Act Amendments ever took effect

and they continued long after.

Mr. HACKETT. Let me explain my opinion on a shutdown of refineries. There were 300 of them. Now there are 148. Most of that 150

or so that shut down, most of those went in the 1980’s and those

were primarily bonus. They were the result of government’s support for refiners. Government essentially paid those guys to be in

business. Once President Reagan de-controlled oil, they made a

business decision to close down because they were losing money.

Most of them went because of that.

So then we talk about mergers. When did the merger start?

Merger started in mid-1990’s. I want to say—let’s pick 1996 because I can’t quite remember. Mr. Sparano’s refinery and the

Powerine refinery both shut down in 1995. I think most of these

refinery shutdowns have been primarily business decisions, but I

can’t find a cause and relationship between mergers and refinery

shutdowns. I think there are other factors there.

Mr. TIERNEY. RAND found it, General Accounting Office found it,

several other people found it.

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Mr. HACKETT. I read the RAND report and I didn’t reach that

conclusion.

Mr. TIERNEY. RAND did.

Mr. HACKETT. That mergers shut down refineries?

Mr. TIERNEY. That had a lot to do with it, yeah. I read it into

the record earlier twice.

Mr. OSE. You were fidgeting there. I’m the chairman of fidgeting.

I watch for that.

Mr. SLOCUM. I can’t remember if there was something specific I

wanted to say or not.

Mr. OSE. If it comes to you, share it with us.

Mr. TIERNEY. I want to finish up with Mr. Hackett. I’ll read you

again from the 2003 RAND study. ‘‘Indeed, many RAND discussants openly questioned the once-universal imperative of a refinery

not going short, that is not having enough product to meet market

demand. Rather than investing in and operating refineries to ensure that markets are fully supplied all the time, refiners suggested that they were focusing first on ensuring that their branded

retailers are adequately supplied by curtailing sales to wholesale

markets if needed. Central tactic is to allow markets to become

tight by relying on existing plant and equipment to the greatest

possible extent, even if that ultimately meant curtailing output of

certain refined product.’’ So, basically, they were trying to curtail

the output of the refined product.

Mr. HACKETT. I understand your point. I’m not disagreeing with

that.

Mr. TIERNEY. The elimination of spare capacity generates upward pressure on prices at the pump, on and on from there.

Last thing, I think the Energy Information Agency, if that’s—it’s

report in the first quarter of this year, ‘‘Twenty-four major energy

companies reported overall net income of $13.9 billion on revenues

of $198.3 billion during the first quarter of 2004. The level of net

income for a quarter one of 2004 was significantly higher than in

the first quarter of 2003, rising 18 percent.’’

Mr. SPARANO. That’s 6 percent.

Mr. TIERNEY. Overall, the petroleum line of business registered

an 8 percent increase in net income between first quarter of 2003

and first quarter of 2004, as the 3 percent increase in oil and gas

production net income was augmented by a 30 percent increase in

refining/marketing net income. Moreover, all lines of business fared

better in first quarter of 2004 relative to first quarter of 2003.

Downstream petroleum operations in the United States majors

rose from $2.9 billion first quarter of 2003 to $3.8 billion the first

quarter of 2004. Higher U.S. gross refining margins contributed to

a 41 percent increase in U.S. refining/marketing earnings from $1.8

billion in first quarter of 2003 to $2.6 billion in first quarter of

2004. Higher refining margins, despite higher fuel costs, is one of

the basic reasons they cited as to why the earnings were higher.

Mr. OSE. Would you like to submit that for the record?

Mr. TIERNEY. Sure.

Mr. OSE. April 2004?

Mr. TIERNEY. January to March 2004.

Mr. OSE. Actually have the April 2004 report, EIA.

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Mr. SPARANO. Mr. Tierney, in response to your comment to Mr.

Hackett about refineries closing down due to mergers. I think just

to clarify that point, one of the things that has occurred to a great

extent when mergers have taken place is that refineries, the FTC

has chosen to force the merging parties to divest in more and more

refineries and that has in fact built the independent refiner asset

base.

So I might characterize it more as a shift in the assets as opposed to the mergers themselves being merging of partners being

forced to shut down facilities. They’ve shifted hands.

Mr. TIERNEY. One big company to another big company in the instances you talked about most recently, right?

Mr. SPARANO. From a major to an independent. Exxon Benicia

refinery was sold to an independent first. The Shell refinery in

Martinez is now run by an independent.

Mr. TIERNEY. They weren’t asked to divest. In both those instances they gave up one refinery and then they passed it over to

somebody else.

Mr. SPARANO. My point is not to argue how much. I just wanted

to clarify that it’s really not shutdowns. It’s a shifting of ownership

of those refineries. They’re not shutting down. They’re continuing

to run.

Mr. TIERNEY. Everybody has testified here that there has been

a significant number of shutdowns.

Mr. SPARANO. Not because of mergers. That’s the point I’m trying

to make. The mergers have resulted in the FTC and certain attorney generals forcing mergers to divest at one or more plants, or in

the case of where there is petroleum, in ours they divested on production on the north slope.

Mr. TIERNEY. Once companies have merged and they close down

facilities who is to say what the business reason was there. What

we’re saying is once they merged it was a better business decision

for them, you know, to have less capacity than it was to not. That’s

what the internal memo says.

Mr. OSE. Are we all in agreement that we have less production

today than we had previously?

Mr. HACKETT. No.

Mr. OSE. OK. Why not?

Mr. HACKETT. Because we can find this in the stuff we did for

the California Energy Commission. If you look at gasoline production in California has been roughly constant.

Mr. OSE. Two million barrels per day?

Mr. HACKETT. Gasoline production are around 1.1 million barrels

per day. It has grown slightly. That’s the refinery people talk

about. Fundamentally as the smaller refiners were shutting down,

the bigger refiners were spending the money to make the upgrades

that they needed in order to make CARB gasoline.

I can think of two shutdowns in California. One was post de-control of oil where uneconomic ones shut down because they couldn’t

make money without government support. The next was in the

early to mid-1990’s, that required like Pacific Powerine, Fletcher,

Golden West, et al., shutdown because they couldn’t raise the capital to make investments in order to make the new flavor of cleanburning gasoline. I can’t think of one that, maybe it has, I can’t

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think of a refinery that has been shut down post-merger in the mid

1995 timeframe.

Having said all that I really don’t care about that. My particular

interest is coming up with more gasoline for consumers in the Pacific southwest region. Shuffling around who is running refineries

only makes a difference in my view of the margin especially when

we’re short gasoline.

The issue here is how do you get more gasoline into this market.

Do you expand the refineries? Do you expand the port handling facilities? What are those things that will make a physical difference

and get 1 more gallon in here to help get the price down.

Mr. OSE. Is it your testimony that for whatever reason closures

of refineries that have been discussed, that the production from

those refineries has been replaced and we still have a constant, albeit slightly increasing level of supply in California?

Mr. HACKETT. Yes. Now, having said that, demand has grown

faster than refinery production so that’s why we’re here today.

Mr. OSE. All right. I want to recognize Congressman Porter. I

know he has a 2 p.m. meeting with a bunch of folks that he intends

on attending, so as the host I thought I would give you another

round here.

Mr. PORTER. Thank you, Mr. Chairman. What percentage of the

gas retailers are independent in Nevada, approximately?

Mr. SPARANO. I don’t know that number for Nevada. I’m not familiar with that at all.

Mr. PORTER. What would they be in California, ballpark?

Mr. SPARANO. California, about 90 percent of the stations are either owned or leased or franchised by independent owners. Now,

saying that, they may be owned by a major and leased from the

major and fly the brand but 10 percent, solid figure is that in California 10 percent of the 9,500 service stations are both owned and

physically operated, staffed and salaried by major companies. The

other 90 are a mix of lessee dealers, true independents.

I think I have the independent figure if you bear with me for a

second. I believe I do have that for California, the exact independent figure according to Lundberg. It’s about 30 percent I believe

that are in the categories of job or distributor, non-major salary,

non-major lessee and non-major opening dealers. They are all the

ones that would simply have the ability to go buy their own supply

and to sell it under their own brand, a flavor of that.

Mr. PORTER. If we were to talk about franchises, independent 90

some percent?

Mr. SPARANO. Yes.

Mr. PORTER. Had a question with status and numbers. That was

in your testimony earlier?

Mr. HACKETT. Yes, it was.

Mr. PORTER. How best for us to streamline that process and who

should be doing that?

Mr. HACKETT. Someone has to sit down and study the issue because as a practical matter it’s all over the place. All kinds of government agencies using all kinds of computer systems.

The first step is to—is put a little—put some resources in to understanding exactly how big this problem is and what the likely soVerDate 11-MAY-2000 17:03 Oct 18, 2004 Jkt 000000 PO 00000 Frm 00124 Fmt 6633 Sfmt 6633 D:\DOCS\96091.TXT HGOVREF1 PsN: HGOVREF1
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lutions are. This is the kind of computer system problem I think

that companies solve all the time.

Mr. PORTER. Just want some consistency?

Mr. HACKETT. Sort of the issue here is it’s very hard to know—

what you really like to know is what’s going on in the market. How

much is really getting imported? How much is being moved from

the Gulf Coast? I’ll give you an example. The Corps of Engineers

keeps track of port movement. Every time a boat goes in and out

of a port it generates a piece of paper, electronic thing, and it goes

to New Orleans.

New Orleans accumulates these reports. It’s part of the water

boring statistics group. I’m not complaining about it, but it takes

them a year to turn around the data. So if I want to know how

much gasoline if I’m helping Chairman Keese understand supply

and demand in California and some of that is gasoline coming from

the Gulf Coast, the best data I’ve got is a year old because it takes

water boring data center a year to turn it around. That’s an example.

Mr. OSE. Mr. Tierney.

Mr. TIERNEY. In a report for the Consumer Federation of America Consumers Union talk about with oil companies merging and

eliminating redundant capacity, that’s their assumption that you

don’t agree with it, should not be surprised to find capacity is not

kept up. Refining capacity has not expanded to keep up with

growth and demand. Documents from the mid-1990’s indicate that

industry officials and corporate officers were concerned about how

to reduce capacity, and obviously because as you mentioned you

don’t think the industry was profitable, and they made—these are

direct quotes from some of the corporate documents on that.

‘‘If the United States petroleum industry doesn’t reduce its refining capacity, it will never see any substantial increase in refinery

profits.’’ That from a Chevron Corp. document written in November

1995. A Texaco official, in a March 1996 memorandum, said ‘‘refinery overcapacity was the most critical factor facing the industry

and was responsible for very poor refining financial results.’’

Some could argue that the companies merged and some of the capacity disappeared, whatever, because to have all that capacity out

there made it less profitable. If that’s the case I think one of the

questions for us is what’s going to increase that capacity and

what’s going to give those companies incentive to do that.

We’re all agreed that the regulations, I think we all agree we

want to have clean air to breathe and the environmental regulations ought not be disturbed. As I’ve said before, these things are

going on long before the Clean Air Act got in. That’s not really a

viable argument. What are the incentives going to be? What is the

taxpayer going to get in return?

Mr. SLOCUM. I think that there was an interesting example that,

Mr. Chairman, you made earlier when talking about reserve capacities and you were comparing the fairly significant reserve requirements in electricity markets and you were discussing how it seems

in oil and gas markets it’s not that big.

It’s interesting to note the history of electricity markets, which

is actually my primary focus at Public Citizen is a heavily regulated industry up until fairly recently and the State Public Utility

122

Commission in California mandated that utilities have those reserve requirements for good reason, and now FERC is trying to do

it through standard market design, trying to have regional markets

where they will require participants selling market-based power to

have certain minimum reserve requirements because they recognize that market power abuses occur when you do not have that

kind of excess capacity. We’ve seen as the California energy crisis

introduced to us that even with excess capacity you can have all

sorts of manipulations if your market is not adequately supervised.

So, I think the question at hand here is how do we increase capacity. Well, the market by itself is not going to produce excess capacity. There are such significant barriers to entry, especially with

these wave of mergers that have occurred that it’s going to take

some sort of government intervention in the marketplace to make

it a more competitive market because competitive markets will

flourish but it seems as though right now the elements are not

there for successful competition and so—yes.

Mr. HACKETT. Let me tell you a story. The Kinder Morgan pipeline not only provides fuel up here to Las Vegas, but they also, and

to Phoenix and Tucson, but they also have a large import terminal

in the port of Los Angeles in the city of Carson. For at least 2 years

Kinder Morgan has been trying to get permits to build two more

gasoline storage tanks in their Carson storage tank terminal facility. If you’ve been to Carson, Carson is well refineries and storage

tanks and the like.

They’ve been working on the permits for 2 years. The reason that

they’ve been working on the, to build these tanks is they got an oil

company who is not a California oil company, a trading company,

an arbitrageur, to put up the money. They guaranteed that they’ll

rent the tanks over a long enough period of time for Kinder Morgan to be able to get their investment back.

In preparation for this meeting, talking with chairman of the

staff, I got told that Kinder Morgan’s permitting process has been

derailed, 2 years into it, been derailed, going to be another 6, 9

months before they get the permits and they can start building the

tanks which takes 6 months or so. In this particular little story

here, what I observe is that here are companies willing to spend

money to make the infrastructure improvements that they think

will provide them with an adequate return and they’re not allowed

to.

Mr. OSE. You’re saying the investor is going to park oil in those

tanks waiting for the peaks and then put it into the market?

Mr. HACKETT. That’s the kind of business that this particular

business is in.

Mr. OSE. They are trying to get permits to build storage——

Mr. TIERNEY. That’s the NIMBY issue. It’s communities holding

it up, right.

Mr. HACKETT. When we did our work with California Energy

Commission, what we concluded was that a lot of the holdup is not

inside the beltway or in Sacramento. It’s the folks in the local planning communities who are making the decisions and holding these

activities up.

Mr. TIERNEY. You don’t have any equivalent, is what you’re saying, if FERC when it wants to put a gas pipeline in somewhere can

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actually do a taking and go through and there is very little local

community can do about it but there is no equivalent what we’re

talking about here as far as for storage refinery or anything like

that?

Mr. HACKETT. I think that is what Mr. Sparano and Chairman

Keese is talking about.

Mr. TIERNEY. Is the industry prepared for some sort of a tradeoff,

some incentive to increase capacity in return for limited regulation

of either profit, excess profits, plow back in mandatorily back into

this thing or some regulation that requires storage as Mr. Slocum

talks about and consequently being able to direct that storage out

when fluctuations are in place?

Mr. HACKETT. Let me address that. First is price controls. We

looked at price controls for Hawaii and that doesn’t work. Never

have worked. They generally lead to higher prices of oil prices. Depending on the market, they can lead to shortages. We saw that

in the 1970’s. Mr. Porter left but I remember waiting in gas lines.

That was prior to price controls. Price controls are a bad idea.

Second thing, fuel reserves. We thought about this a lot. In general they’re bad ideas. They agreed to let us look at areas to supply. This is the stuff we’ve been talking about. Permitting and oxygenate mandate, etc.

But given that we took the legislature’s money to do a report we

figured one out, and so it turns out Energy Commission decided not

to put any more resources into that particular idea but I think

there is some interest—we did some interesting thinking about

that.

But the fundamental issue here is that if the industry is not preparing enough inventory, somehow or other it’s because they can’t.

You quoted days of supply going down. I think that’s probably

right. I think that’s more the fact that inventories are not necessarily going down but demand is going up. And so, the denominator is getting bigger than the numerator. Get some effect there because they’re not building facilities.

Mr. OSE. Are you saying the numerator is fixed but the denominator is getting larger?

Mr. HACKETT. That’s right. I have to look at the numbers to

make sure we’re talking apples to apples.

Mr. SPARANO. I think I mentioned earlier and I hope I got it

across, the amount—the demand increases are running at about

four times the amount of production capacity increases and that

does certainly have an influence on how much inventory you can

hope to keep in place while it’s being sucked away by demand.

Dave raises a good point.

Back to one of your earlier points on what’s responsible. It’s very

difficult for an industry that goes through years of permitting that

gets stifled. You called it NIMBYism but NIMBYism uses the regulatory structure to fight projects in the neighborhood. I mean,

that’s the connection. I think you’ve got an industry that has run

a pretty low return business, 5 cents on the dollar, and the reason

people refine, gentlemen, is that you can’t burn crude.

It is a very simple, and I don’t mean to be glib, it’s a very simple

fact that in order to take that precious supply of hydrocarbon resource and turn it into something we can put in our cars and airVerDate 11-MAY-2000 17:03 Oct 18, 2004 Jkt 000000 PO 00000 Frm 00127 Fmt 6633 Sfmt 6633 D:\DOCS\96091.TXT HGOVREF1 PsN: HGOVREF1
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planes and diesel trucks and locomotives, a huge amount of capital

investment, time and effort and risk, capital risk, physical risk

goes into making those products that we all use. And, it’s not been

a great return business, and there are people as David just described who are trying to fight their way into it and are not being

allowed.

Mr. TIERNEY. So if, if people in the local level would allow these

places in you’re telling me that you think companies would go out

and build more refineries?

Mr. HACKETT. I know of several examples. Of refineries? I’m

sorry. My head is in tanks and pipelines and docks.

Mr. SPARANO. It’s an important question. It’s one that we both

know no one can provide a guaranty because at the end of the day

if you’re going to spend $2 billion to build a new one you better

have good economics and certainty for your shareholders that you’ll

be able to build the project in the timeframe.

Mr. TIERNEY. Set aside the regulatory issues on that, NIMBYism,

whatever you want to say, we’re talking about a demand that you

tell me keeps going up, that it’s not going to go down any time

soon, and enough profit so this would be a reasonable investment

for you to think they would make. So, my question is given those

circumstances would you expect that the industry would go out

there and do that or do you think they would keep what they have

now?

Mr. SPARANO. I would say the environment is a lot better than

it’s been in the history of the planet. I don’t think you can just ignore the fact that you can’t just pick the quarter you like where

you made money in refining but you didn’t make money in production. These companies all have multi-national portfolios of assets.

That whole balance is what has to be looked at.

Whether or not a company would take advantage of a refining

opportunity in California, I don’t know. I’m not privy to their economics. The dynamics of the marketplace appear to be improving

such that becomes a better idea but there is no one who can guarantee that would happen.

Mr. TIERNEY. What if we prohibited the vertical integration?

What if we didn’t let refinery producers refine?

Mr. SPARANO. I think you probably break the model of the guy

I admired, Adam Smith. I don’t think that’s how our country

works.

Mr. TIERNEY. It’s worked that way in the past, regulation on

that. Maybe that’s one way to look at it as long as they’re integrated in that sense, we have a problem. Maybe if you set up the

refining as a separate industry then there is——

Mr. HACKETT. As a student of the industry I think we’ve seen a

lot of that. We’ve seen the rise of—what you’ve seen is the vertically integrated majors, the Shells, Exxons, et al., have sold off refining. Some of it is due to the FTC to sell off, if you couldn’t merge

you had to sell off refineries, and some of it is because there have

been companies, Valero, you talked about Greehey, I think you

quoted him, who built a big company on nothing but refinery.

They’ve got about that much marketing and they have no crude oil

whatsoever.

125

I think you can look to the marketplace and see in fact that kind

of thing has already happened and so you don’t have vertically integrated mergers in refining today as you did let’s say 10 years

ago.

Mr. TIERNEY. Four of the five companies are vertically integrated.

Mr. HACKETT. That’s right. The other half aren’t.

Mr. TIERNEY. But they’ve got over half the market.

Mr. HACKETT. How much competition is enough.

Mr. TIERNEY. Four of the top five companies are vertically integrated and they’ve got over half the market.

Mr. HACKETT. The nonvertically has the other half.

Mr. SLOCUM. The arguments that are made today about placing

some of the blame on environmental regulations to me sound unfortunately very familiar. I worked extensively on trying to expose

certain elements of the California energy crisis, and during the

height of the crisis it was often said that environmental restrictions

were the leading contributor to the power shortages.

Well, on April 8th of this year John Ashcroft held a press conference in Washington, DC announcing the criminal indictment of

Reliant Energy, Houston-based company. In the remarks he made

he mentioned how Reliant intentionally shut down four of its power

plants. I understand I’m talking about power plants which are different from the oil industry obviously but there are some similarities in the economics. And, how Reliant intentionally shut down

four power plants and publicly sent out press releases and their PR

people, John Ashcroft said this on April 8th, and blamed environmental laws for the shut down of those power plants when actually

it was the company’s own economic strategies that led to the intentional shutdown of those plants.

So, I understand it’s a little different but for me from looking at

the industry, from reading other academic and economic surveys of

the industry, I see where there are numerous economic incentives

to mandate as tight margins as possible because they are going to

make far more money, and I’m just afraid that we’re going to have

deja vu here where we are going to blame environmental regulations. We already did that before and we turned out to be wrong.

I’m just afraid of placing all the blame on environmental regulations.

Sure, I think that there is some credibility to re-examine some

of these reformulated blend requirements. We’ve got an enormous

number of blends, possibly streamlining them should definitely be

on the table but not without a very tough critique of the way that

the oil industry conducts business today. It’s been well documented

that they do indeed engage in anticompetitive behavior and I don’t

think it’s fair to place the blame solely on excessive permits or

other sensible public health laws.

Mr. SPARANO. May I respond? That was a direct shot I believe

at the industry. There are a couple of very simple things. We lost

sight of something this morning. The cost of crude and the tax

structure in this country create a very enormous segment of costs

that is related to water refiner I guess to start with and what is

transported in the market and I don’t think we should lose sight

of that, but that’s not the real issue.

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Mr. TIERNEY. Those are constants. The taxes remain constant.

Set that aside. Talking about the crude.

Mr. SPARANO. Crude does move up and down and it’s been more

and more controlled in the last several years I’ve been in this business by increasingly smaller group of people I think that have a

pretty dominant cartel position.

Mr. TIERNEY. Before you go, except over the last few years as

crude prices go up the profit margins have also gone up more so

than the crude so what we’ve seen has been that the company has

not only taken the rise for the crude but taken the excess on top

of that and that’s pretty well documented.

Mr. SPARANO. I do not want to start us going around and around

again on that. I’ll stick to my original point if I might.

Mr. OSE. I’ve got a couple questions about solutions.

Mr. SPARANO. You have the gavel, sir.

Mr. OSE. Do you have a mortgage on your house?

Mr. SPARANO. I have a mortgage on my house and I live in an

apartment. So I’m double blessed.

Mr. OSE. Mr. Comey, do you have a mortgage?

Mr. COMEY. Yes.

Mr. OSE. Do you have a mortgage?

Mr. HACKETT. Yes.

Mr. SLOCUM. No, sir. I’m a fairly young man.

Mr. OSE. I just wanted to touch on something. You suggested a

cause of the electric crisis we had in California. The mortgage is

a promise to pay some amount of money in the future. With all due

respect to your conclusions as it relates to electric crisis which you

brought up——

Mr. SLOCUM. Yes, sir.

Mr. OSE [continuing]. The sole cause and accelerant of that

whole thing was an absolute refusal by the PUC to give the right

to contract for future delivery of power at reasonable prices and

traceable to one single individual, the rental. It followed PUC’s refusal to do that?

Mr. SLOCUM. If I leave the doors to my apartment unlocked, does

that give anyone the right to come in and take everything.

Mr. OSE. If the PUC removes the carpet and the paintings and

the beds and the dining room table and everything else, you’re not

going to have much of a place to live and that’s exactly what happened.

Mr. SLOCUM. The criminal convictions against several energy

traders——

Mr. OSE. All followed from the PUC’s refusal to give safe provisions for forward contracting of power purchases. It started in August 2001 when the PUC absolutely uniformly said we’re not going

to do it.

I want to go back to my question. I couldn’t pass that one up,

having paid that price. I want to get your collective opinions. We

have in this country different air quality regions. Each of those air

quality regions has a different fuel that they’ve adopted to comply

with the Clean Air Act.

One of the things that just baffles me is, as I count, there are

abouit 60 different boutique fuels, which means this refinery over

here produces one kind, that refinery produces another and this

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one produces a third, and the product from each of these refineries

goes to a different air market. Have I got it right so far.

Mr. HACKETT. Well, that’s the simplified version.

Mr. OSE. We’re going to keep it simple until you expand on it.

Now, this refinery goes down, it can no longer provide fuel to the

air market that it otherwise is servicing and these other refineries

can’t either because they’re all designed to provide fuel to different

air markets.

What would be the impact of the Federal Government saying,

OK, we’re going to reduce 60 to 3 or 4 as a safe harbor, we’re going

to say if you cook these 3 or 4 fuels so that the exhaust coming

out of people’s tailpipes meet our air quality requirement, you’re

fine. What would be the result of that? Would we have more fuel

or more fungible fuel? Would we have any abatement in price.

Mr. HACKETT. From our perspective, vulcanization of fuel is inefficient in normal times. If a refinery, for example, and I know

something about this because we’re currently——

Mr. TIERNEY. Can we all agree it’s inefficient? Just go on from

there.

Mr. HACKETT. Where it really gets to be a problem though is

when there is some kind of supply constraint. Refinery goes down,

pipeline breaks, something else happens and so that market can’t

be resupplied with its fuel and then you get the price spikes. You

saw them in Chicago, saw them in Phoenix last summer and there

are other examples. So it’s the harmonization of fuels is going to

be probably one step in reducing those price spikes because of

regional——

Mr. OSE. Do you agree with that as a former producer.

Mr. SPARANO. As a person who represents the industry, I think

one thing you have to take into consideration is that a lot of members of the industry, not just refiners but marketers and transporters have set up their systems and spent billions of dollars. It’s $100

billion since 1990 for the whole industry for all varieties of investments. They’ve got investments built around this 18 boutique fuel

map. So, there may be some complications there.

I’m guessing that there are some States like California that will

insist if there are fewer boutique fuels that one and the most

prominent one, that would be California’s CARB fuel because it is

in fact the cleanest one. So, that’s an issue.

I want to get to one thing that you all can do. You asked about

what are solutions. There is this I think very counterproductive

Federal minimum oxygenate mandate that I think you can in fact

influence the EPA to grant the waivers that are requested by California and New York. I think that would go a long way toward beginning to create greater flexibility on the part of refiners, greater

fungibility in the system.

You can’t put ethanol in at a plant. You have to build tanks at

a terminal in order to put it in because it has some characteristics

that make it unacceptable to transport. So, I think that’s one of the

big things you can do. You can also think about whether or not

there is some relief EPA might grant on a plant basis for the SIPs.

If I work as I’ve done——

Mr. OSE. You need to tell me what SIPs are.

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Mr. SPARANO. I’m sorry. The State Implementation Plan. Each

State has an air quality State implementation plan where they

sign up for air quality improvements that they’re going to make

over a series of years.

While working with the Energy Commission, we really are working hard with coming up with permit streamlining and other ways

to make the system work better. We’re trying to work with the air

districts. In California you have local ones throughout the State, to

help them come up with ways to not only get emissions out of the

air but fund them.

They went up often against the SIP and whether or not the emissions they take credit for are creditable against the SIP. It’s something to look at, see whether or not there is a greater risk of emission reductions that might be credible again the SIP. That might

promote more activity within a number of States that would both

reduce emissions and allow proponents of projects to get them moving and to have a certainty of cooperation from those air districts

because they all know that they all are going to get credit for that

approval.

Mr. OSE. Are the processes that you’re referring to that might be

put into new construction significantly more efficient than those

that might exist in the field today otherwise?

Mr. SPARANO. I think with every year the efficiency of refinery

operation improves. The technology is so much better. The biggest

piece of that is advanced computer control. So, yes, I think new

projects will almost always be more efficient than old. The processes haven’t changed that much. Catalytic cracking was invented

in 1941 or earlier. It’s the heart of every refinery, but it is those

technological advances and controls that I think you will see year

after year better and better.

Mr. OSE. Mr. Slocum.

Mr. SLOCUM. Yes, Mr. Chairman. Like I said a few moments ago,

I do support revisiting all of these various reformulated blend and

boutique fuel requirements, and I would potentially support a

streamlining of that. There is no question that those multiple requirements make it far easier for the majors to manipulate the

market as the FTC has found. That said, even streamlining those

environmental regulations is not going to alter the fundamental

disfunction that clearly are present in the domestic industry, particularly the refining industry.

The GAO is very clear it does not place the blame on boutique

fuels. It places the blame on higher gasoline prices, on mergers and

consolidation. And so, if we are going to examine a streamlining of

these boutique fuels it should be done at the same time as an investigation and other attempts to obtain competitive domestic energy markets.

Mr. SPARANO. Before we put too much faith in the GAO report

I would like to observe something I read in the paper today

through the industry Internet.

Mr. TIERNEY. You put more faith in the paper.

Mr. SPARANO. I don’t believe I said that. I said I read that.

Mr. OSE. Got it on the record as saying that?

Mr. SPARANO. The FTC has said in response to the report, which

is 527 pages—I haven’t read the whole thing. My little Blackberry

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wouldn’t accept it. FTC said the report, the GAO report is flawed,

quote.

So there needs to be I think some examination before we run off

too quickly and say that’s the answer to all of our prayers.

Mr. OSE. We have a little time on our hands to do that. Mr.

Hackett, Mr. Comey, anything you want to add?

Mr. HACKETT. I think that, Mr. Tierney, you observed and Mr.

Slocum’s bad behavior—apparent bad behavior on (inaudible)

talked about how they would act, try to shut down competitive refiner or to withhold supplies from the market and that clearly happens, no question about that.

I think that these issues come back to things that government

needs to do which is pay attention to this stuff but ensure there

is adequate supply so that these guys got to compete. They don’t

get to a point where they can actually withhold stuff in the market

because if they do the competitors will take their heads off.

Mr. OSE. That’s Governor Wall right there.

Mr. TIERNEY. That’s the issue though. How are we going to do

that?

Mr. HACKETT. I do it from the supply side. Government works

hard to ensure adequate supply. Government doesn’t get in the

way of Kinder Morgan and their customers spending money to import gasoline in California.

Mr. OSE. Well, there is a caveat though to that. We had testimony earlier about that pipeline that went through that neighborhood where we had a disruption in the pipeline and we lost the

neighborhood. Government does have a duty for safety. I don’t

think you’re suggesting any compromise of that?

Mr. HACKETT. No compromise to safety whatsoever. The issue

here is the process of getting this stuff done.

Mr. OSE. All right.

Mr. TIERNEY. Thank you, Mr. Chairman.

Mr. OSE. Thank you for coming all this way.

Mr. TIERNEY. Thank you, witnesses.

Mr. OSE. I appreciate your testimony. If we do have additional

questions, we’ll send to you in writing. And we will appreciate a

timely response. Again, our thanks to our host here at the convention center. Sorry he had to leave. It’s been great being here. We’re

adjourned.

[Whereupon the proceedings concluded.]

[The prepared statements of Hon. Jim Gibbons and Hon. Shelley

Berkley, and additional information submitted for the hearing

record follow:]

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