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27–031 PDF 2006

S. Hrg. 109–398

VOLATILITY IN THE NATURAL GAS MARKET:

THE IMPACT OF HIGH NATURAL GAS PRICES

ON AMERICAN CONSUMERS

HEARING

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

FEBRUARY 13, 2006

FIELD HEARING IN ST. PAUL, MINNESOTA

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs

(

(II)

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

SUSAN M. COLLINS, Maine, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

JOSEPH I. LIEBERMAN, Connecticut 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL D. BOPP, Staff Director and Chief Counsel 

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Chief Counsel 

TRINA D. TYRER, Chief Clerk 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

NORM COLEMAN, Minnesota, Chairman 

TED STEVENS, Alaska 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

RAYMOND V. SHEPHERD, III, Staff Director and Chief Counsel 

LELAND B. ERICKSON, Counsel 

JAY JENNINGS, Senior Investigator 

ELISE J. BEAN, Minority Staff Director and Chief Counsel 

MARY D. ROBERTSON, Chief Clerk 

(III)

C O N T E N T S 

Opening statements: Page 

Senator Coleman .............................................................................................. 1

WITNESSES 

MONDAY, FEBRUARY 13, 2006

Lucille Olson, St. Paul, Minnesota ......................................................................... 6

Deidre Jackson, St. Paul, Minnesota ..................................................................... 7

LaRaye Osborne, Vice President, Environment, Health and Safety, Cargill, 

Incorporated .......................................................................................................... 8

Kathleen O’Brien, Vice President for University Services, University of Minnesota .................................................................................................................... 11

LeRoy Koppendrayer, Chairman, Minnesota Public Utilities Commission ........ 18

Edward A. Garvey, Deputy Commissioner for Energy and Telecommunications, Minnesota Department of Commerce ................................................... 20

James Wells, Managing Director, Energy Team, Government Accountability 

Office ..................................................................................................................... 29

Susan J. Court, Director, Office of Market Oversight and Investigations, 

Federal Energy Regulatory Commission, accompanied by Stephen J. Harvey, Deputy Director, Office of Market Oversight and Investigations, FERC 31

ALPHABETICAL LIST OF WITNESSES

Court, Susan J.: 

Testimony .......................................................................................................... 31

Prepared statement .......................................................................................... 116

Garvey, Edward A. 

Testimony .......................................................................................................... 20

Prepared statement with attachments ........................................................... 68

Jackson, Deidre: 

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 44

Koppendrayer, LeRoy: 

Testimony .......................................................................................................... 18

Prepared statement with attachments ........................................................... 51

O’Brien, Kathleen: 

Testimony .......................................................................................................... 11

Prepared statement .......................................................................................... 48

Olson, Lucille: 

Testimony .......................................................................................................... 6

Prepared statement .......................................................................................... 43

Osborne, LaRaye: 

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 45

Wells, James: 

Testimony .......................................................................................................... 29

Prepared statement .......................................................................................... 90

EXHIBITS 

1. Natural Gas Costs Around The World ............................................................ 123

2. Henry Hub Spot Price Volatility—Natural Gas Prices Have Been Increasing Since 2002 ................................................................................................... 124

3. Production Has Not Responded Strongly to Increased Drilling .................... 125

Page

IV

4. Energy Market Oversight and Enforcement: Accomplishments and Proposal For Enhanced Penalty Authority, prepared by the Staff of the Federal Energy Regulatory Commission, Department of Energy, March 2005 . 126

5. Statement for the Record of Lori Cooper, St. Paul, Minnesota .................... 155

6. Statement for the Record of The Honorable Nora Brownell, Commissioner, Federal Energy Regulatory Commission, Department of Energy .... 156

7. Statement for the Record of Joseph A. Carrabba, President and Chief 

Operating Officer, Cleveland-Cliffs, Inc .......................................................... 160

8. Letter from Edward A. Garvey, Deputy Commissioner, Minnesota Department of Commerce, to the Permanent Subcommittee on Investigations, 

regarding spot market purchasing practices of Minnesota’s regulated natural gas utilities ................................................................................................ 164

(1)

VOLATILITY IN THE NATURAL GAS MARKET: 

THE IMPACT OF HIGH NATURAL GAS 

PRICES ON AMERICAN CONSUMERS 

MONDAY, FEBRUARY 13, 2006

U.S. SENATE,

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,

COMMITTEE ON HOMELAND SECURITY AND

GOVERNMENTAL AFFAIRS. 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 8:30 a.m., at the 

James J. Hill Reference Library, 80 West 4th Street, St. Paul, Minnesota, Hon. Norm Coleman, Chairman of the Subcommittee, presiding. 

Present: Senator Coleman. 

Staff Present: Leland Erickson, Counsel, Andy Burmeister, Luke 

Friedrich, Bill Huepenbecker, Carl Kuhl, Shain Bestick, David 

Bowell, Tom Steward, Gary Wertish (Senator Dayton). 

OPENING STATEMENT OF SENATOR COLEMAN 

Senator COLEMAN. This hearing of the Permanent Subcommittee 

on Investigations is called to order. I’m going to welcome everybody 

here. Mother Nature has provided a nice setting for us today, it’s 

cold outside, and we had a relatively mild winter, but we can’t escape it forever and we’re seeing it a little bit today and we’ll see 

it later in the week. 

Let me note that Senator Dayton had intended to be here, in fact 

I spoke to him last week, he was very much looking forward to 

being part of this conversation. I believe he got stuck in DC, never 

made it back, there was a big snowstorm there, so we’ll have this 

hearing today without him. I know his staff member, Gary 

Wertish, is around. Gary, thank you, and please let Senator Dayton 

know I appreciate the opportunity to work with him and we will 

follow up with what comes out of this hearing. 

Let me thank everybody, by the way, for attending today’s hearing. We’ve all seen the news reports about spiking prices of natural 

gas over the last few months. These spiking prices have put businesses in jeopardy and burdened families with significantly higher 

heating bills. The tragedy is that many of the folks who are suffering most in our community are the most vulnerable, and today 

hopefully we’ll put a human face on the impact of high energy 

costs. 

Take the story, for instance, of Lori Cooper, who cannot be with 

us today. She’s a working professional, wife and mother of a 21-

2

1 Exhibit No. 5 appears in the Appendix on page 155. 

month-old baby. We were supposed to have the hearing on Friday 

but because of scheduling conflicts in Washington, we were stuck 

in Washington on Friday, we had to reschedule and she couldn’t 

make it today, but she told us her story. She lives in St. Paul, 

struggling to make ends meet. Things got even worse when Mrs. 

Cooper’s husband lost his job and was diagnosed with cancer, had 

to scrape by on her salary alone. Even though they received an energy assistance grant from the government, paying off the heating 

expenses has became a great difficulty. For instance, paying last 

year’s winter heating bills took months and months and, according 

to Mrs. Cooper, ‘‘it took us all summer to pay it off.’’ Finally they 

got caught up on last year’s energy bill but then they got hit by 

this year’s heating bill, which was significantly higher, 37 percent 

higher. And for the Cooper family, a 37 percent hike is a huge 

problem and it clearly put them in serious financial jeopardy.1

Unfortunately, stories like the Cooper family are all too common. 

Again, while Mrs. Cooper could not attend this hearing and detailed her story in written testimony, two other Minnesotans will 

join us today to share their stories about how price hikes in natural 

gas have real consequences on our citizens. 

Deidre Jackson is a single mother, a working professional, a college student, I think she does it all, and has three wonderful kids. 

Her heating bill was increased over 100 percent this December 

versus last December. 

Lucille Olson—Ms. Olson, thank you for being with us. She is a 

senior trying to live with the high cost of health insurance and prescription drugs and paying a heating bill that represents 30 percent of her monthly income. When we were chatting a little while 

ago she said, this is not just about seniors, I think she was referencing Mrs. Jackson and others, saying this is about everybody, 

we’re all impacted by this. 

One of my hopes is to take the testimony of folks like Ms. Jackson and Ms. Olson and bring that back to Washington so my colleagues understand the personal effect and put a human face on 

this issue. 

Since November I’ve asked the Permanent Subcommittee on Investigations, which I Chair, to examine price manipulation in the 

natural gas market. For decades the price of natural gas ranged 

from $2.30 to $2.50 per million BTUs, British thermal units. Since 

2000, prices of natural gas have generally fluctuated between $2 

and $10 per million BTU. Energy market projections estimate 

record high natural gas prices this winter. We’re seeing a bit of 

that. In December the NYMEX, which regulates natural gas as a 

commodity, trading, natural gas futures closed above $14 per million BTU. Later on I’ll have a chart on which you can see the 

steady rise in the price, the cost of natural gas. 

As prices have increased in recent years we have all heard stories and allegations of price manipulation. We’ve heard concern 

that suppliers are withholding gas supplies from the market. To be 

fair, it is clear that the natural gas supply has been limited by 

other circumstances. For instance, Hurricanes Rita and Katrina 

caused more than a dozen natural gas processing plants to go offVerDate 0ct 09 2002 14:04 Jun 15, 2006 Jkt 027031 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 C:\DOCS\27031.TXT SAFFAIRS PsN: PAT
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line and damaged gas pipelines. This is particularly significant because about 20 percent of all the natural gas produced in the 

United States comes from the Gulf of Mexico. At the same time, 

oil industry profits have nearly tripled over the 3 years to $87 billion last year. In the first 9 months of 2005, the five largest oil 

companies made $84 billion in profits. Just last week Exxon Mobile 

Corp. reported that its 2005 earnings totaled $36 billion, which is 

the largest annual profit ever for a U.S. company, according to the 

Washington Post. The company’s annual profit was up 43 percent 

from the year before. So we’re seeing rising prices, we’re seeing 

record profits by oil, the oil industry, and I have concern, I know 

that folks are concerned about paying double what they were paying last year in heating bills. 

As part of my concerns for market manipulation, I sent Chairman letters to five of the top producers of natural gas asking for 

information regarding their operations, profits, and capital expenditures to increase domestic supply. In addition, the Subcommittee 

has had multiple briefings with representatives from each of these 

companies. At this point it’s important to note that some of the 

market factors that have contributed to high and volatile natural 

gas prices in recent years, we see them, we see the increase in demand combined with declining supply, and this contributes to rising natural gas prices. 

Second, the Nation’s ability to increase imports has been limited, 

which has also contributed to high gas prices, and we’ll talk about 

that later in the hearing today. Market manipulation may also be 

contributing to this problem. As a result of my concern on that 

issue, I’ve asked the Subcommittee to look into it. I’ve also asked 

the GAO to examine market manipulation, and their results should 

be available in the spring, so we’re not going to get to the bottom 

of this today, the issue is still out there. It is of concern, and we 

continue to be involved in reviewing the impact of market manipulation. 

Bottom line is, given the impact that higher prices are having on 

Minnesotans and businesses, I will continue to look at this issue. 

I think the key is to do what we can to ensure that natural gas 

prices are fair and appropriate. 

Mrs. Cooper’s story and the stories we will hear from Mrs. Jackson and Mrs. Olson show that increased costs take a toll on the 

American families, businesses and the economy at large. In Minnesota, natural gas is used to heat most homes and, therefore, rising costs have directly affected most families. The Department of 

Energy found that for 1999, 2000 and 2004, residential heating 

prices rose an astounding 73 percent. Prices should skyrocket even 

further, according to Department of Energy forecasts, which projected that residential households are expected to pay 41 percent 

more on average for natural gas this winter. CenterPoint Energy, 

the largest provider of natural gas in Minnesota, said that last 

year’s average customer spent $720 to heat their homes during the 

months of November through March. This year officials at 

CenterPoint indicated that the same customer could spend $1,070 

by the time that winter is over. A quick calculation on my part is 

it’s almost a 50 percent, 40-something percent increase. Again 

we’ve so far benefited from a mild winter, but Minnesota winter is 

4

subject to change about every 10 minutes, and we’re seeing that 

this week. 

I am concerned when families have to spend more money on the 

heating bill and thus have to choose between paying for heat, medicine, food, clothing, and the problem is not limited to families. Natural gas prices paid by Minnesota’s manufacturers have increased 

nearly 150 percent since 1999. It’s a serious drag on our economy 

and hamstrings our businesses trying to compete with countries 

where energy costs are far less. In fact, the United States pays significantly higher prices for natural gas than anywhere else in the 

world. Even countries that produce no natural gas, like Japan, 

have lower natural gas prices than the United States of America. 

In response to concerns about the effect of high energy costs, I 

continue to be a supporter of the Low Income Home Energy Assistance Program, otherwise known as LIHEAP. This program helps 

families struggling to pay their heating bills. Most recently I cosponsored a motion in November to include $2.92 billion in additional funding for LIHEAP. Unfortunately this increase, this effort 

did not lead to an increase in funding. As a result, I worked with 

Senators Snow and Collins and demanded a firm commitment from 

the Senate leadership to provide $2 billion in additional funding for 

LIHEAP, but we’re actually working on finalizing that right now. 

We had a bill last week that would have added a billion dollars up 

front, and we actually tried to what we call hotline that bill; in 

other words, we’ve got a bill, it’s been approved by leadership, 

we’ve moved 2007 money to 2006 so we have the money this year, 

and we worry about the extra billion for next year but we get the 

money right away, and I think—I have to turn to staff—but it’s 

about $30 million for increases just for Minnesota, so it’s a significant increase, but we need it. It’s not really—it’s making sure that 

we can make ends meet. 

In light of the home energy crisis that families face, a couple 

other things we can do. I’m coauthor of the Home Energy Savings 

Incentive Act of 2005. This is really providing legislation which 

provides tax breaks for homeowners making energy upgrades. Upgrades may include simple items such as using energy efficient 

light bulbs and weather stripping, or more substantial items such 

as purchasing an energy efficient furnace or windows. Residents 

can receive up to $5,000 in tax credits that will immediate reduce 

heating bills resulting from energy efficient upgrades. I will tell 

you I went through my house and changed all the light bulbs. My 

wife is not sure that we get the same amount of light, but I think 

we do, and it’s certainly more efficient. These efficiency upgrades 

are just one part of the solution to our Nation’s problem. 

Another part of the solution is a necessary commitment to conservation and use of alternative fuels. And I’m proud to represent 

Minnesota, a State that really leads the Nation in renewable fuels 

like ethanol, biodiesel, wind, energy derived from livestock waste. 

Minnesota’s work in renewable fuels makes good sense because 

those homegrown, clean-burning fuels provide cleaner air and 

water, promote greater energy independence, lower our fuel costs 

and foster economic development through jobs. The production and 

use of renewable fuels will always be a top priority of mine, but 

it’s really a top priority of Minnesota, it’s what we’re good at. And 

5

the good news is the President mentioned the need for renewable 

fuels in the State of the Union, and my colleagues in Washington 

get it. Now we’ll be doing some hearings in the next couple weeks, 

Senator Domenici, Chairman of the Energy Committee—I just 

spoke with him last week—is going to be doing hearings on renewables, and so we’re going beyond the energy bill. We’re going to 

have, I think, a whole new phase of opportunities for renewables. 

This morning we’re going to focus on the recent price increases 

of natural gas and the effect they have on American consumers. As 

I mentioned earlier, we’ll have the pleasure of hearing from two 

Minnesotans, Deidre Jackson and Lucille Olson, who will describe 

the effects of high prices on their lives. I look forward to hearing 

their experiences and I want to thank them for attending. 

In addition, I look forward to hearing from Cargill, headquartered right here in Minnesota, to understand how high natural gas 

prices affect their business. Similarly the University of Minnesota 

is going to discuss how the University is dealing with high energy 

costs and what effects prices have on the school’s educational mission. 

The bottom line is that we either pay as consumers directly or 

indirectly. We pay directly for our bill; we’ll pay indirectly for the 

significant increases companies like Cargill have and that it impacts us, or the University of Minnesota. I presume there are 

choices being made between heating a classroom and what you do 

with tuition or other things, and you’ve got to heat the classroom, 

and as a result we get hit one way or another. 

I look forward to hearing from the Minnesota Department of 

Commerce and the Minnesota Public Utilities Commission with respect to any recent trends that are affecting residents during this 

winter heating season, as well as any recommendations that each 

agency may have. 

Last, I’m eager to hear from the Federal Energy Regulatory 

Commission with respect to the factors that are driving up today’s 

prices, their oversight in monitoring natural gas prices and what 

the Commission is doing to ensure that prices are just and reasonable. 

And, finally, the Government Accountability Office is going to 

talk about their analysis of the factors affecting prices, including 

whether price manipulation is contributing to higher prices, as well 

as what additional steps we can take to ensure that prices are determined in a competitive and informed marketplace. 

I look forward to hearing from all our panelists this morning. I 

know that we will learn a great deal today. I should note, one other 

item, this hearing, as I said before, was originally scheduled on Friday. Because of the Senate’s schedule, it votes, Senate had votes 

that day, we continued it to today, so I do appreciate everyone for 

their flexibility in adjusting their schedules to be available today. 

I would like to now welcome our first panel of witnesses to today’s hearing. We will hear this morning from Lucille Olson and 

Deidre Jackson, both residents of St. Paul. Additionally we will 

hear from LaRaye Osborne, the Vice President of Cargill based 

here in Minneapolis, as well as Kathleen O’Brien, Vice President 

of the University Services at the University of Minnesota. I appreciate your attendance at today’s hearing and look forward to hearVerDate 0ct 09 2002 14:04 Jun 15, 2006 Jkt 027031 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 C:\DOCS\27031.TXT SAFFAIRS PsN: PAT
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1The prepared statement of Ms. Cooper appears as Exhibit 5 in the Appendix on page 155. 

2The prepared statement of Mr. Carrabba appears as Exhibit 7 in the Appendix on page 160. 

3The prepared statement of Ms. Olson appears in the Appendix on page 43. 

ing about the impact higher natural gas prices is having on families and businesses. 

I would like to note that for the record we had anticipated additional witnesses on this panel but again, because of the rescheduling from last Friday, two of our witnesses were unable to rearrange their schedule. I’m sorry they were not able to make it this 

morning but I would like to include their statements in the record. 

I’m including the statement of Lori Cooper, resident of St. Paul,1

and Joseph Carrabba, the President and Chief Operating Officer 

for Cleveland-Cliffs of Cleveland, Ohio.2

Before we begin, pursuant to Rule 6, all witnesses before the 

Subcommittee are required to be sworn in. At this time I would ask 

you to please stand and raise your right hand. Do you swear the 

testimony you’re about to give before this Subcommittee is the 

truth, the whole truth, and nothing but the truth, so help you, 

God? 

(Witnesses respond to oath affirmatively.) 

Senator COLEMAN. Ms. Olson, we’ll kind of go from this order. 

We’ll start with you and then we’ll go to Ms. Jackson, Ms. Osborne 

and then finish with Ms. O’Brien. 

After we’ve heard all the testimony, I anticipate that I will have 

questions for the panel, and your full testimony will be entered into 

the record. I would like you to limit your oral testimony, if you can, 

to 5 minutes. I don’t know if we have a clock here, but someone 

is going to have to keep track of time. My staff will give me the 

high sign, and that’s what this big gavel is for, so we’ll start with 

Ms. Olson. 

TESTIMONY OF LUCILLE OLSON3

Ms. OLSON. Good morning, Senator Coleman. My name is Lucille 

Olson. At 75 years of age I am like many seniors who are widowed 

and trying to live on fixed income with high costs for health insurance and prescription drugs. My expenses for the most basic needs 

are rising far faster than my income, and my heating costs are no 

exception. 

I married my husband, Ken, in 1959. We purchased our home 

the following year. I have lived there ever since. Our home was 

built in the early 1920s. Kenny was a Teamster with Murphy 

Motor Freight Lines, and I worked for White Manufacturing when 

we married. After our daughter was born I decided to quit my job 

and care for my family. Several years ago the copper water pipes 

in our home started leaking and we were told they needed to be 

replaced. Ken and I took out a $50,000 home equity loan and used 

the money to replace our water pipes and remodel our home. After 

that Ken went blind from macular degeneration, and I cared for 

him. Following a series of other health-related problems Ken 

passed away last October. When Ken died, I lost his pension and 

social security income, which had been $1,772 per month. I am now 

trying to live on my social security, which is $1,022 a month. 

I have a number of prescriptions that my doctor has prescribed 

for several health problems I have. If I had no insurance, my preVerDate 0ct 09 2002 14:04 Jun 15, 2006 Jkt 027031 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\DOCS\27031.TXT SAFFAIRS PsN: PAT
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1The prepared statement of Ms. Jackson appears in the Appendix on page 44. 

scriptions would cost me $877 a month. My health insurance under 

Medicare is $104 per month, and I am required to make copays on 

my prescriptions, which range from $6 to $25. My total copays can 

run as high as $101 per month, so before I even buy food, make 

a mortgage payment and my home equity loan, or pay my heating 

bill, I have already spent about 20 percent of my monthly income 

on my health needs. Last December my heating bill for the month was $274, and in December it was $366. That is a 34 percent increase and represents over 30 percent of my monthly income. The $366 bill does 

not include what I would have to pay if I were not receiving energy 

assistance through Low Income Home Energy Assistance Program. 

Things have gotten so bad for me financially that I am getting 

a reverse mortgage on my home so I can pay my bills. I would prefer to leave my home to my daughter but there is not any option 

for me. If you have any questions, I would be pleased to answer 

them. 

Senator COLEMAN. Ms. Olson, thank you. Thank you for your 

courage coming today. 

Ms. OLSON. Thank you. 

Senator COLEMAN. It’s very important and it will have an impact. 

Ms. OLSON. Thank you very much. 

Senator COLEMAN. Ms. Jackson. 

TESTIMONY OF DEIDRE JACKSON1

Ms. JACKSON. Good morning, Senator Coleman, my name is 

Deidre Jackson. I’m a single mother and a working professional 

and also a college student. Each is really a full-time profession and 

I am trying to juggle all three. I am like so many other single 

mothers who struggle to raise their children, work and attend 

school. I am sure you know raising children properly is very expensive, and I am no exception in that I want the best that I can provide for my children. I have three children, ages 14, 8 and 6. I work 

full-time for the Minnesota Department of Human Services as a 

health care claims specialist. In my position I’m responsible for 

processing health care claims for the medical assistance program. 

I also attend the Metropolitan State University where I’m studying 

business administration. 

I bought my home on the east side of St. Paul in February 1998. 

It is an older home which was built in 1910. In the fall of 1999 the 

Lead Program came and replaced windows in my home, and also 

in the fall of 1999 the Weatherization Program came and did some 

weatherization to my home, which included insulation and weather 

stripping and some other things they added to the windows and the 

other areas of my home that were losing heat. Even with the improvements to my home’s insulation, my heating bill keeps going 

up. In December 2004 my heating bill was $309. This December it 

was $649. My bill has increased over 100 percent in spite of the 

energy efficient improvements that I have made to my home. 

I am already receiving energy assistance through the energy assistance program, and my bill would be much higher without the 

assistance. My December bill does not include over $2,000 that I 

8

1The prepared statement of Ms. Osborne appears in the Appendix on page 45. 

owe Xcel Energy for past heating bills. I expect that I will have to 

use most of my income tax refund to pay my heating bill. I would 

like to do other things with my income tax refund, like pay for my 

children’s education where they attend school and continue my 

education, which this is having an impact on because I’m deciding 

if I should continue on in college or if I should get a second job and 

pay for the costs of keeping my home up, which is mostly the heating bill. Other than replacing my furnace, I do not know what more 

I can do to try and save money on my heating bill. I have asked 

EnergyCents to come and do another energy audit of my home, 

which is scheduled for February 22, I believe. 

These increasing gas prices are really putting a squeeze on my 

family, and I would like any help that you can provide to help us 

with this at this time. Thank you, Mr. Coleman. 

Senator COLEMAN. Thank you, Ms. Jackson, and, Ms. Olson, 

thanks for putting a very personal face on the real impacts of the 

choices that a mom has to make and the impact it has on families. 

It’s important and very helpful to me and, hopefully, to my colleagues. 

Ms. Osborne. 

TESTIMONY OF LaRAYE OSBORNE,1 VICE PRESIDENT, ENVIRONMENT, HEALTH AND SAFETY, CARGILL, INCORPORATED 

Ms. OSBORNE. Chairman Coleman, my name is LaRaye Osborne, 

and I’m the Vice President of Environment, Health and Safety for 

Cargill, and we are headquartered in Wayzata, Minnesota. Cargill 

is an international provider of food, agricultural and risk management products and services. 

We appreciate the opportunity to offer our thoughts on natural 

gas prices and the impact they’ve had on Cargill’s operations, and 

we appreciate the diversity of the panel that you have before us. 

Thank you. 

My testimony will focus on three areas: First, our energy requirements; second, our efforts to conserve energy and reduce our reliance on natural gas; and, third, suggestions for additional lines of 

inquiry that the Subcommittee might want to proceed with. 

First, allow me to give a picture of Cargill’s energy consumption. 

We consume about 65 million MMBTUs of natural gas globally, approximately 50 percent of which is consumed in our U.S. operations. Of the nearly 60 countries in which we operate, North 

America is the highest cost gas region in the world, with current 

prices hovering around $8.50 per MMBTU. 

For this fiscal year, Cargill budgeted more than $1 billion for energy purchases necessary to run our global operations. Unfortunately, skyrocketing natural gas prices have negatively affected our 

performance against that budget. In the United States we’ve seen 

a 38 percent increase in natural gas costs for the first 6 months 

of this fiscal year compared to the first 6 months of the last fiscal 

year, and that amounts to approximately $32 million in additional 

costs for natural gas for our U.S. operations. 

Increased natural gas costs have ripple effects throughout our 

energy portfolio however. Natural gas is used to generate elecVerDate 0ct 09 2002 14:04 Jun 15, 2006 Jkt 027031 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 C:\DOCS\27031.TXT SAFFAIRS PsN: PAT
9

tricity. In fact, the last 15 moderate-to-large-sized electrical power 

plants built in the United States are gas-fired generators. Consequently, at least in part as a result of increased natural gas 

costs, our global energy electrical use costs have increased 15 percent for the first 6 months of the fiscal year compared to last year. 

As more and more natural gas is burned for electricity production 

we believe that gas prices will continue to increase for all consumers and that electricity prices will follow suit. 

Now let me describe our strategy for addressing these costs. 

First, we set very aggressive energy conservation goals for the company. In 2000 we set a goal to improve our energy efficiency by 10 

percent by the end of our fiscal year 2005. We achieved that goal 

and we’ve set a new goal to improve energy efficiency by yet another 10 percent by 2010. To support these goals, $100 million, in 

addition to usual business unit capital allocations, was made available for energy projects last fiscal year, and that money was spent 

very quickly. Achieving these goals is also supported by quarterly 

reporting of performance against goals and the sharing of best 

practices across our global operations. In fact, as we faced unprecedented increases in energy costs early this winter season, our 

chairman and CEO communicated directly with all U.S. based employees about the need and opportunity for energy conservation at 

work, but also what they could do to assist in managing their energy prices at home. 

The second aspect of our strategy relates to the use of renewables. Currently 6 percent of our energy needs come from renewable resources, or roughly twice industry average. We established 

a goal of increasing that percentage to 10 percent by the end of 

year 2010. In the United States we have several examples of renewable energy resources being substituted for natural gas use. 

Each of our beef processing plants has placed covers over wastewater treatment lagoons. These covers capture naturally occurring 

methane. This methane is then conditioned and used in the processing plant boilers, displacing 21 percent of the aggregate natural 

gas demand for these locations. In addition, several of our oilseeds 

processing locations have implemented similar projects, but they 

capture methane from the landfills in the communities in which 

they operate, methane that would otherwise escape into the atmosphere or be burned in flaring systems that have no energy benefit. 

Finally, at our operating locations we have developed and permitted the capacity to switch from natural gas to biobased energy 

sources like soybean oil or the animal fats that we produce. The 

ability to optimize our energy dollars by switching to animal fat 

and oils during these periods of peak natural gas pricing saved 

Cargill more than $1 million in this fiscal year alone, and we’re 

only about 7 months into that fiscal year. 

The third aspect of our strategy relates to committing significant 

resources to switch fuels to those that are in more abundant supply 

and at lower cost and to cogeneration. I’ll provide two examples. 

Our wet corn milling plant in Blair, Nebraska represents the 

largest single corporate capital investment in that State. Cargill 

has invested more than a billion dollars in the plant over the last 

13 years and employs more than 460 individuals. The plant produces high fructose corn syrup, ethanol, animal feed and biobased 

10

plastics from the corn grown by local farmers. Corn wet milling requires thermal energy to break down the corn supplied by the 

farmers into its component parts. Our existing boiler operates on 

natural gas. As those costs continue to rise, the competitiveness of 

this plant is threatened. Consequently, we recently decided to convert from gas to coal as the primary fuel. The new boiler will utilize the latest emissions control technology and provide us with an 

affordable and safe source of thermal energy for the long term. 

We also work hard to maximize cogeneration through the use of 

combined heat and power systems. These systems at industrial and 

commercial locations give the most bang for our energy buck, generating both steam and power from the same fuel. On a global 

basis we cogenerate 7 percent of our total electrical demand, and 

in some locations we export power back to the grid. While these 

systems are a proven technology, a majority of such systems operate outside of the United States, and for Cargill, cogeneration applications are some of our greatest opportunities to improve energy 

efficiency, reduce the environmental impact of our energy use and 

enrich our communities. 

I’ll finish my testimony by responding to the Subcommittee’s request for Cargill’s perspectives on addressing the high cost of natural gas, and I’ll touch on the supply side issue first. 

As the Permanent Subcommittee is aware, there are many opportunities under discussion for increasing gas supply, including the 

development of additional terminals and distribution infrastructure 

for imported liquefied natural gas and expanded exploration and 

drilling for natural gas along the Outer Continental Shelf. Each 

possibility that has been subject to public discussion has pros and 

cons, and Cargill is focusing on managing its own energy demands 

optimally and is not taking a position on these difficult issues of 

public policy. We trust that Congress, which has the broadest national perspective, will appropriately balance all of the issues and 

interests in determining how to address supply issues. 

We do, however, encourage Congress to consider means for facilitating use of renewable fuels and cogeneration. The flexibility to 

use renewable fuels as an alternative gas during peak price periods 

usually requires changes to air emission permits. These permits 

are usually issued by individual State or regional authorities under 

the umbrella of the Federal Clean Air Act. Our experience is that 

the technology for timely fuel switching exists and its positive impact on air emissions has been demonstrated. Consequently, we 

would encourage the Federal Government to partner with State 

and regional environmental authorities to streamline the process 

by which these flexible permit features are authorized. Cargill also 

believes that Congress has a role to play in encouraging greater 

use of cogeneration applications to improve the energy efficiency of 

the economy overall. Opportunities include creating incentives for 

public utilities and transmission system operators to purchase and 

introduce into the grid that excess electrical energy that’s generated by these investments. There’s also opportunity for accelerated depreciation for cogeneration equipment investments and for 

equipment converted from natural gas use to other energy alternatives. 

11

1The prepared statement of Ms. O’Brien appears in the Appendix on page 48. 

With that, Senator Coleman, I’ll close my remarks, and thank 

you once again for inviting us to this hearing. 

Senator COLEMAN. Thank you, Ms. Osborne, very helpful. 

Ms. O’Brien. 

TESTIMONY OF KATHLEEN O’BRIEN,1 VICE PRESIDENT FOR 

UNIVERSITY SERVICES, UNIVERSITY OF MINNESOTA 

Ms. O’BRIEN. Thank you, Senator Coleman. Good morning and 

thank you for the opportunity to be present today. I’m Kathleen 

O’Brien, Vice President for University Services at the University of 

Minnesota. I’m responsible for the nonacademic campus operations, 

including utilities, on the Twin Cities campus and four campuses 

and research centers of the University across the State. 

To give you some context, the University of Minnesota has more 

than 800 buildings, encompassing 28.5 million square feet, more 

than downtown Minneapolis and St. Paul combined. The Univesity 

of Minnesota is large, old and complex, with every type of building 

from classrooms and offices to athletic venues, research labs, clinics, animal barns and greenhouses. 

The University manages its utility operations to maximize our 

performance on these three principles; reliability, environmental 

stewardship, risk and cost control. I would like to briefly address 

how the University is working on each of these principles and then 

respond more specifically to the challenges the University faces 

with the volatility of natural gas prices. 

Reliability. We are a 365 24/7 operation. We are responsible to 

make sure the daily teaching continues to our student enrollment 

of over 60,000, that critical and central research of over $500 million annually is protected and secured, and the life critical care at 

the University-Fairview Hospital and Clinics is maintained. In 

short, we cannot fail. To this point we have made significant utility 

infrastructure investments, are updating our utility master plan, 

and are at work with our energy provider partners to secure and 

maintain reliable service. 

With regard to environmental stewardship, the University 

achieves environmental stewardship through energy conservation, 

efficiency in production, and the use of alternative energy sources. 

The University has conducted ongoing energy conservation programs for many decades. These efforts have ranged from installing 

high-efficiency fluorescent lighting systems, such as you did in your 

home, to a campus-wide conservation program aimed at changing 

behavior patterns, to the installation of direct digital controls that 

allow equipment to be controlled from a central campus site. The 

University has made significant investments to utilize more efficient boilers that have reduced the amount of fuel we need in order 

to heat the campus. In tandem with our energy conservation efforts, since 1994 the University has been able to reduce the number of BTUs per gross square foot required to heat the campus by 

over 20 percent. The University is working very hard to utilize alternative energy sources to meet utility needs. In the late 1990s, 

when the University renovated its major steam plant in southeast 

Minneapolis, it installed a Circulating Fluidized Bed boiler that is 

12

capable of burning multiple fuel types. After 4 years of work, this 

spring we anticipate approval of a major permit amendment that 

will allow us to burn oat hulls, the residual from Cheerios, a 

biofuel that is currently priced substantially lower than current 

natural gas prices. 

Last spring the University of Minnesota-Morris campus completed a wind turbine that is now producing wind energy. This turbine is reducing the cost to the campus for electricity overall and 

the amount of fossil fuel-based energy. Also at our Morris campus 

an initiative is underway to establish a biomass gasification system 

that will focus on using corn stoves as the primary fuel source to 

provide up to 75 percent of the heating and cooling loads for the 

campus from alternative energy. It is intended to reduce the use 

of natural gas and fuel oil as the campus energy source. 

As a University system, we have an overall utility budget of $150 

million. On the Twin Cities campus for heat and electricity alone 

we are budgeting nearly $90 million to purchase and deliver these 

utilities for our next fiscal year. The Twin Cities campus generates 

its own steam heat through two plants for close to 22 million 

square feet of building space. Annual steam production is enough 

to heat and cool 55,000 average homes, or the equivalent of the city 

of St. Cloud. 

Your concerns regarding natural gas prices are especially important to the Twin Cities campus, as it is currently required by permit to produce 70 percent of its steam plant BTUs through the 

burning of natural gas. Therefore, we have been significantly impacted by both the overall increased costs for natural gas and the 

great volatility in the markets. As recently as June 2003, the University purchased natural gas for $3.12 per million BTUs. Contrast 

this with projections this winter that went as high as $15 dollars 

per million BTUs. 

For the current fiscal year, the Twin Cities plant has spent $12.3 

million to purchase natural gas. Because of the great volatility in 

pricing, it was difficult to project our actual final costs. For a point 

of reference, if the Twin Cities campus needed to pay $1 more per 

million BTU for all of its natural gas usage for a complete year, 

it would cost an additional $2 million. Because of the efforts by the 

University to conserve energy and buy smarter, we have limited 

our expected cost increase next fiscal year to $4 million, roughly a 

1 percent increase in tuition. 

How are we buying smarter? The University has developed a 

team to monitor the energy market and to contract for natural gas 

purchases in the future in order to lower our expected costs and to 

increase price certainty for our planning and budgeting purposes. 

I’ve spoken this morning about the University’s operations and 

management of our principles; reliability, environmental stewardship and cost controls. The University also has an extensive research initiative sponsored by President Bruininks on renewable 

energy and the environment, and you might want to hear from 

those researchers at sometime in the future. 

Thank you for your interest in this critical issue and its impact 

on our State, its university and our communities. 

Senator COLEMAN. Thank you very much, Ms. O’Brien. 

13

1 Exhibit No. 2 appears in the Appendix on page 124. 

To the entire panel, by the way, from the personal touch to 

Cargill, I think we almost got a primer on various forms of energy 

and energy opportunities, and listening to you, Ms. O’Brien, I think 

we’re also hearing about the future. 

If we look at Exhibit 2,1 the chart that talks about Henry Hub 

spot price volatility, really reflects probably what you talked about. 

Going back, if you look from 1995, look at around 2000, you’re looking at around $2 per million BTUs cost of natural gas, and what 

you see, and there are a couple of spikes, one of them is Katrina—

I think you can see that—and a couple of other spikes. But what 

you notice is even with the spikes in coming down, even coming 

down it’s still rising, so it’s not settling to where it was. It spikes 

up, then drops a little lower, spikes up, then drops down a little 

lower than before it spikes up, and the concern clearly is, and we’re 

going to hear others talk about rising demand without rising capacity, rising production, and so we can anticipate that. And so to me 

it’s very heartening just to listen to some of the things that are 

going on in terms of renewables. 

Out of curiosity, you talked about the Morris campus producing 

wind energy, I think a 1.65 MW turbine, is a large turbine. One 

of the concerns that I have about wind energy is its capacity, can 

it really make an impact. Can you give me a sense of what wind 

energy does at the Morris campus, how helpful that is? 

Ms. O’BRIEN. The wind turbine at the Morris campus provides 

about 60 percent of the electricity needed on the Morris campus 

today, so it has had a very significant impact on that campus. 

Senator COLEMAN. And I think sometimes we underestimate the 

impacts of that. That’s a good object lesson to say that in this facility the impact is significant. I would also note, Ms. O’Brien, as we 

look to the future, as we look to the call from Cargill and others 

to be looking at renewables—and Congress will be doing that, my 

colleagues get it—but the University of Minnesota has a unique 

role to play with, because of where we are with renewables in this 

State, and I would anticipate that the governor has talked about 

centers of excellence in terms of dealing with Ford and some of the 

auto industries looking at renewables, and I take it that the University would be ready, willing, and able to play a major role in 

that? 

Ms. O’BRIEN. Absolutely. 

Senator COLEMAN. Ms. Osborne, as I said before, on various 

forms of energy and energy opportunities, Cargill is almost a primer. You talked about methane and getting energy out of ethanol, 

you talked about gas to coal, cogeneration, biofuels, etc. It’s interesting, I had a chance to visit a dairy operation, Haubenschild operation up in Princeton, Minnesota, and they capture methane gas 

and use it to produce energy and that’s one little operation, but I 

take it you’re looking at that. 

Ms. OSBORNE. We’ve done it at all of our beef processing plants. 

In addition, we’re trying to roll that opportunity out to people in 

our value chain, our customers, who provide products to our locations globally. It’s simple technology. 

14

1 Exhibit No. 1 appears in the Appendix on page 123. 

Senator COLEMAN. What about the cost efficiency, one of the 

challenges with renewables is in order to use wind production you 

need the tax credits to really make it economically viable. I’m wondering, as the cost of oil goes to $50, $60, and $70 a barrel, does 

that have an impact on the cost efficiency of some of these alternative fuels you’re looking at? 

Ms. OSBORNE. Sure it does. I talked about our ability to switch 

fuels to, from natural gas to soybean oil when natural gas prices 

spike up, and in making the decision to make those switches we 

do look at the economics of the two fuel sources. In a lot of the renewable work that we’re doing we have some advantage because 

the renewable feed stock hitchhikes into our plants with the stuff 

that we actually process. So we have a soybean or, excuse me, a 

sunflower plant in the Ukraine, for example, we’re burning the 

hulls while we’re processing the seeds. So we have a bit of an economic advantage in that sense, we don’t have to transport the stuff 

in. We don’t have to buy it. 

Senator COLEMAN. One of the things that I’ve seen in my travels 

around the State looking at ethanol operations, we’re seeing in 

southern Minnesota, I think in Albert Lea and some other areas, 

you have ethanol operations and then you have some of the byproduct of that now used to convert to energy, which again in the past 

may not have been cost efficient. But if we could, actually one of 

the other charts, if you could put Exhibit 11 up there—that’s what 

I’m looking for—you also mentioned about the cost in the United 

States, I think you said the North American market, the costs are 

the highest in the world. One of the things that we find—and this 

may not be your expertise—that I find frustrating is in this chart 

we have costs being $13, almost $14 per BTUs for natural gas in 

the United States, and places like Japan, which don’t have any 

natural gas production, significantly less than half of that. Do you 

have any—and I’m not an economist—but as you look at the cost 

of natural gas in the world, can you give me kind of Cargill’s overview of what you see impacting that? 

Ms. OSBORNE. I wish I could, I’m not an economist either. I’m a 

lawyer who manages environment, health, and safety, so I really 

am not competent in the financial issue. 

Senator COLEMAN. I’m not going to push you, we’ll have some 

others to talk a little bit about that. I’m going to come back perhaps to both Ms. Osborne and Ms. O’Brien—but, first, Ms. Jackson. 

Ms. Olson, as I said, thanks for being here. I really think it’s important. 

Ms. Olson, as I listened to you talk, I’ve got one of those homes 

that was built in the early 1920s, great old homes, but they cost 

to heat. 

Ms. OLSON. Yes. 

Senator COLEMAN. So I listened just to your personal story and 

I know that’s a challenge. As I listened to what you talked, you 

talked about 20 percent of costs for health, 30 percent heat, so 

you’re talking about 50 percent of your income is gone before you 

deal with food or anything else? 

Ms. OLSON. Yes, it is. 

15

Senator COLEMAN. You’ve got 50 percent of your income going to 

keeping warm and taking care of your health? 

Ms. OLSON. That’s right. I try to keep the thermostat down but 

I just can’t, I can’t take the cold. So I try to keep it down as much 

as I can, so I try to save, but it doesn’t seem that it makes any 

difference. 

Senator COLEMAN. And, Ms. Jackson, you talked about some 

choices that you may have to make, which I find, I know it must 

be difficult. You’re a student, you want to advance in the future, 

and now you’re talking about whether you’re going to have to give 

that up in order to just take care of your family. Both of you take 

advantage of the LIHEAP Program, is that correct? Low Income 

Heating Assistance Program? 

Ms. OLSON. Yes. 

Ms. JACKSON. Yes. 

Senator COLEMAN. Could you tell me how you became aware of 

that, how you accessed that program? 

Ms. OLSON. Are you talking to me? 

Senator COLEMAN. Both—either of you. Ms. Olson first, then Ms. 

Jackson. Because I would like others who may not, who are in the 

same position, I would like to get some information to them about 

how they can, there’s help available, and I just want to figure out 

how you knew there was help available, and how you connected 

with that help. 

Ms. OLSON. Well, I tried several times, several years ago to try 

to get some help, because it was large then, but it never was as 

large as it is now. And my husband then at the time, or both of 

us, our income was $2,100 a month and—but my health care for 

myself was $609 a month, because I do take a lot of prescription 

drugs prescribed by my doctor. But they didn’t take that into consideration. They had their guidelines and they didn’t take into consideration that my husband was getting $775 a month pension 

from Central States, he was a truck driver. So you take $775, that 

was our total premium for U–Care. We were living on approximately $1,300, and it was very hard. Then I got some help from 

Catherine, and I talked to her and I talked to a reporter. 

Senator COLEMAN. Catherine being? 

Ms. OLSON. I don’t know what Catherine’s last name is. 

Senator COLEMAN. Working with what group? 

Ms. OLSON. Oh, through Energy——

Senator COLEMAN. OK. 

Ms. OLSON [continuing]. Resource. And so then they sent me out 

an application this year and when I took it in there, and because 

I didn’t know—my husband was in the hospital then and I was still 

getting his $775 plus his social security, but my income was $400, 

my social security was $433 a month, and I didn’t really know 

what to do. I called up to see if I could get some help, and they 

said I had too many assets. And to me, I don’t know where the assets come, but I did have a policy on my husband, a life insurance 

policy, and when he passed away that was an asset. I had a few 

thousand dollars left of that. But I did take my forms down, had 

them filled out, and they helped me a lot, and then I had people 

that I talked to, and I don’t know what I would do without the help 

of Energy Resource, because what the bills are now, I couldn’t afVerDate 0ct 09 2002 14:04 Jun 15, 2006 Jkt 027031 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 C:\DOCS\27031.TXT SAFFAIRS PsN: PAT
16

ford it. I would have to give up something. But I did get on it, and 

I was hoping that more people, elderly people, they don’t know that 

there’s help out there. Most of the time they’re turned down at 

first, but a squeaking door gets attention. 

Senator COLEMAN. You’ve got to stay at it. Ms. Jackson, who did 

you connect with to get some help? 

Ms. JACKSON. I’m from Minnesota, so I’m very aware of the help 

that Minnesota offers. So I knew where to go, I knew that there 

was an energy assistance program for people that needed assistance. I just knew, but it’s very informal. They’re on the Internet, 

I know the energy assistance is, and they also sent me an application this year because I was an applicant last year. 

Senator COLEMAN. I’m trying to get—is it Catherine Fair? 

Ms. JACKSON. Yes. 

Senator COLEMAN. That’s what I wanted to make sure, it’s Catherine. Ramsey Action, Ramsey Community Action Program is for 

those—I just wanted to make sure this is RAP. When I was mayor 

I worked with these folks a lot and they’re very good. My point 

being is that there are programs out there. 

Ms. JACKSON. Yes. 

Senator COLEMAN. Ramsey County, through the county themself, 

or the Ramsey County Action Program, and they were the ones 

who helped you kind of work through the process, figure out to get 

what you’re entitled to, and I take it you found that help to be positive? 

Ms. OLSON. Wonderful. 

Senator COLEMAN. Ms. Jackson. 

Ms. JACKSON. Yes. Ms. Fair from the RAP program, she also has 

called Xcel Energy for myself to explain to them my situation so 

that they would not cut me off. She did this around the end of September because the Cold Weather Rule was not in effect at that 

time. So she has been very helpful. 

Senator COLEMAN. Catherine, by the way I see her in the audience. Catherine, you’re with Ramsey County Action Program? So if 

folks have questions afterwards, they can talk to her. 

As I understand the community action program, they administer 

the LIHEAP program throughout the State. So we get the Federal 

money, we get it to the State, but then it’s administered at the 

local level. Thank you. 

If I can just come back to Ms. O’Brien and Ms. Osborne, just a 

little bit about where we go in the future with renewables and 

what some of the opportunities are. Ms. Osborne, you talked about 

a concern about a permitting process. Could you amplify that a little bit? 

Ms. OSBORNE. Yes, I can. Several years ago when natural gas 

prices started to spike we decided it made some sense to look at 

some of our locations that produce soybean oil or produce animal 

tallow as a byproduct to see if those were suitable substitutes for 

natural gas burning, and we worked with local authorities to determine permitting requirements. We completed the necessary air 

emission tests, and we were able to get permits to introduce those 

fuels on a flexible basis when the economics of natural gas dictated 

it. Perhaps we were lucky in that the States that we were working 

with at the time were ready for that kind of innovative thinking, 

17

but we’re not seeing that occurring consistently across the Nation, 

and we think that this is an opportunity for the Federal Government to take some initiative and examine the Federal Clean Air 

Act and introduce more flexible measures that will encourage State 

and regional authorities to step up and be courageous on these 

sorts of opportunities. 

Senator COLEMAN. And what I’m hearing you saying is if we can 

do those things to prevent less barriers to moving into renewables 

it would be helpful. 

Ms. OSBORNE. Yes, very much. 

Senator COLEMAN. Ms. O’Brien, I know you’re not a scientist, but 

could you talk a little bit about where you see us going with renewables, what type of things that the U is looking at? Where is the 

cutting edge of technology and what can Minnesota add to it? 

Ms. O’BRIEN. Senator Coleman, I would like to start out by reinforcing the point that Ms. Osborne just made. It took us 3 years 

to secure the permit we expect in the next month for oat hulls. 

Right now the PCA will grant a permit for wood and allow us to 

burn many different kinds of wood, but for biofuels, we need to 

seek a permit for an individual type of biofuel. That’s a lengthy 

process, and one that makes us less competitive in the marketplace 

in other States or other nations in terms of the use of biofuels, so 

I believe that this is a point that is a very germane point to address. 

Senator COLEMAN. I appreciate that, and I appreciate your reiterating that, and particularly the way you phrase it, a lengthy permitting process making us less competitive. It’s not just educational institutions, but for businesses, and for America itself, so 

I appreciate that point and I will certainly—I am very sensitive to 

it. Please continue. 

Ms. O’BRIEN. With regard to, and I’ll just speak briefly to the 

President’s initiative on renewable energy and the environment. In 

the College of Biological Sciences, the Institute of Technology, scientists are working together with the private sector to really determine what fuel sources, biofuel sources we have in Minnesota and 

how we might utilize them, whether it’s wind or biofuels in western 

Minnesota and how we might actually transport those to the large 

population centers. And as Ms. Osborne said, she wasn’t a lawyer 

(sic), I’m not a scientist, so I won’t go any further than that. I’m 

a historian. 

Senator COLEMAN. Well, folks, historians in 20 years will look 

back on the cutting edge. I just think there’s great opportunity. I’ve 

worked with the U, I worked with President Bruininks on these 

issues, and Minnesota is in a unique place. I think now we have 

the largest number of farmer-owned ethanol coops in the nation. 

We’re on the cutting edge of soybean biodiesel technology, we’re on 

the cutting edge now of coal gasification, one of the first States 

looking at the creation of a new coal gasification operation in 

northern Minnesota, which will cut down on emissions and generate greater energy out of a resource which we have in this Nation, I think a 250-year supply. Wind energy, I think we pride ourself of being the Saudi Arabia of wind in southwest Minnesota. So 

I think there’s great opportunity, and I know the U is really posiVerDate 0ct 09 2002 14:04 Jun 15, 2006 Jkt 027031 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 C:\DOCS\27031.TXT SAFFAIRS PsN: PAT
18

1The prepared statement of Mr. Koppendrayer with attachments appears in the Appendix on 

page 51. 

tioned to help us take advantage of that, and I simply want to express my thanks to you for that. 

This panel has been very helpful. Again for the personal stories 

I want to say thanks. For others out there, if you’re listening, check 

out the Community Action Programs, in Ramsey County it’s 

Ramsey Action. I think there are 38 such programs like that 

around the State, they’re very important. And to all the panelists 

I want to say thank you. 

With that we will now have our second panel. It’s my pleasure 

to welcome Leroy Koppendrayer, Chairman of the Minnesota Public Utilities Commission, and Edward Garvey, Deputy Commissioner of Energy and Telecommunications, Minnesota Department 

of Commerce. 

Gentlemen, I appreciate your attendance at today’s hearing and 

look forward to hearing your testimony, and particularly interested 

to hear about any recent trends or issues that may negatively affect Minnesotans during this winter’s heating season. I would also 

like to explore your recommendations and solutions you may have 

with respect to the energy crisis and the administration of the 

LIHEAP program. 

As you’re aware, witnesses before this Subcommittee are required to be sworn. I would ask you to please stand and raise your 

right hand. Do you swear the testimony you’re about to give before 

this Subcommittee is the truth, the whole truth, and nothing but 

the truth, so help you, God? 

(Witnesses respond to oath affirmatively.) 

Senator COLEMAN. Thank you, gentlemen. Mr. Koppendrayer, 

we’ll have you go first, followed by Mr. Garvey. After the testimony 

we’ll turn to questions. Your written testimony will be presented 

into the record in its entirety. I would like you to limit your oral 

testimony to 5 minutes, and with that you may begin. 

TESTIMONY OF LeROY KOPPENDRAYER,1 CHAIRMAN, 

MINNESOTA PUBLIC UTILITIES COMMISSION 

Mr. KOPPENDRAYER. Thank you, Senator Coleman. On behalf of 

the other four Public Utilities Commissioners, also on their behalf, 

I want to thank you for holding this hearing. And we, as the commission, put together, as you’ve said, a statement that’s in the 

record. I’ll go through and just pick some highlights from that to 

probably discuss orally and stimulate some questions, if you have 

those, perhaps. 

One of the issues that has already been talked about, the use of 

natural gas for electric energy, is one of the main concerns that 

concerns us as a commission, and I know that it also concerns commissioners across the country because it’s being talked about at regional and national meetings such as NARUC. 

I’ve noted that natural gas will soon pass nuclear energy as a 

base load energy. I personally think that’s regrettable to see natural gas as a, which is used for all the other uses that we’ve just 

heard stated in the previous panel, to be—surpass nuclear energy 

as a base load. And I appreciate, Senator Coleman, your efforts in 

19

the Senate to help us resolve the nuclear waste issue so that form 

of energy can go forward. We appreciate that. 

The Public Utilities Commission, one of the primary tools that 

we use for ensuring all natural gas rate payers are paying a fair 

price is an annual review of local distribution companies, gas purchasing practices known as the Annual Automatic Adjustment 

process, and in that we require a monthly summary of the rate 

mechanism used to recover fuel costs, a reconciliation of monthly 

rate mechanisms with the actual cost of gas purchased, a report on 

fuel procurement policies, including a summary of actions taken to 

minimize costs, and an annual auditor’s report and an annual estimate of future fuel costs. Included in that, the purchasing practices 

of the fuel companies which we audit, are the tools that they have 

is the spot market, buying on the spot market, withdrawal of gas 

put into storage during the summer, index price supplies and fixed 

price markets. 

We also have in the recent years encouraged hedging. Of course, 

hedging is trying to bet against the weather and the market and 

do a better job than buying all fixed costs or spot price gas. While 

we encourage companies to do that, and that can levelize some of 

those peaks that you show on that graph, and mitigate some of the 

peak prices to the consumer, it also—hedging has a cost. If you bet 

wrong and you have a warm January, you’re going to see that 

there’s cost to the hedging. And on the Commission we’ve been cognizant of that and want to allow companies to pass those costs 

through as well; otherwise, you can’t have the good side and not 

pay some price for when it doesn’t go your way. 

Another important tool that the Commission uses to protect the 

consumer is the Minnesota’s Cold Weather Rule. The Cold Weather 

Rule is what you were alluding to earlier, and that is no one can 

be disconnected between October 15 and April 15. If a customer is 

subject to disconnect, the utility must provide the customer with a 

Cold Weather Rule packet explaining protections available and the 

sources of financial weatherization assistance. If the utility and the 

consumer reach a mutual agreement on a payment plan, the process is over; if not, the utility customer can appeal to the Public 

Utilities Commission, and during the appeal the customer is provided heat until a decision is made. All household income requirements are based on total household income and all persons residing 

in the household, excluding amounts received from energy assistance. The total household income must be less than 50 percent of 

the State median income. 

And you asked earlier about who informs people. One of the 

things that the Public Utilities Commission requires is that utilities are required to send the Cold Weather Rule applications to 

each residential customer at the onset of the heating season, which 

would be in late summer, early fall. They’re required to put in their 

billing a flyer telling folks about the Cold Weather Rule. And you 

alluded in your questions to CenterPoint Energy being one of the 

largest providers of heating fuel. CenterPoint Energy, as you are 

aware, we had, last winter, over a thousand customers that were 

not reconnected as of December 15. CenterPoint Energy has since 

revised their system of notifying customers. It has this past fall 

and this winter, we believe, according to the reports that we’ve gotVerDate 0ct 09 2002 14:04 Jun 15, 2006 Jkt 027031 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 C:\DOCS\27031.TXT SAFFAIRS PsN: PAT
20

1The prepared statement of Mr. Garvey with attachments appears in the Appendix on page 

68. 

ten and the lack of complaints that we’ve gotten, has done a far 

better job in notifying customers what their rights are under the 

Cold Weather Rule. 

Part of the problem that we became aware of was that customers 

obviously are responsible for their heating bill, but they were not 

responsible to pay their entire heating bill before they were reconnected. What they were responsible for was to be, enter into a payment plan with the utility, and that payment plan, it’s important 

to note, also in Minnesota, that payment plan cannot exceed 10 

percent of their income. So even if there’s an amount owed in arrears, when they enter into a payment plan for this coming heating 

season, and the heating season that we’re in, that payment plan 

doesn’t exceed 10 percent of their income. 

We also, in the Public Utilities Commission, encourage conservation, which is handled through Mr. Garvey’s, Commissioner Garvey’s department, and we have entered into agreements with all of 

the companies on distributed generation connection, so that if 

they’re using other types of generation, biofuels, wind, etc., we have 

agreements with the companies as to how those people using alternative renewable fuels would be treated in their interconnection 

policy, how the metering will be handled, and we just finished the 

last hearing this week, as a matter of fact, on the last company to 

enter into an agreement for distributed generation, so we encourage conservation and renewable energy use. 

I would note that if you get the handout that we put together, 

Minnesota is first in its commitment to new wind. Minnesota is 

first in its biggest commitment to new biomass. We have the 

strongest commitment to renewables outside of electric restructuring, and Minnesota ranks first. We were second in renewable, 

in the renewable markets. We have the second largest wind farm 

in the United States, and the most renewables as a share of total 

electric sales were third only to Massachusetts and Connecticut, 

and with that I’ll conclude my comments. 

Senator COLEMAN. Thank you, Mr. Koppendrayer. Mr. Garvey. 

TESTIMONY OF EDWARD A. GARVEY,1 DEPUTY COMMISSIONER 

FOR ENERGY AND TELECOMMUNICATIONS, MINNESOTA DEPARTMENT OF COMMERCE 

Mr. GARVEY. Mr. Chairman, Members of the Subcommittee, I appreciate the opportunity to discuss with you the issues surrounding 

the recent volatility and historic highs in natural gas prices and 

their effects on Minnesota consumers. I want to extend my sincere 

thanks on behalf of Governor Pawlenty and Commissioner Wilson 

to you, Senator Coleman, for your aggressive and continuing leadership in these kinds of issues, especially securing additional 

LIHEAP funding. That kind of funding is very important to Minnesota. It provides direct help to those who are adversely affected 

by the high heating costs that we are confronted with today. 

The Department of Commerce serves four primary roles that are 

of interest to the Subcommittee today. First, we’re the State’s chief 

policy developer and advocate. We provide also regulatory oversight 

21

and staffing for the Public Utilities Commission, we are the State’s 

energy office, which implements the Weatherization Program, and 

we are the administrator of the LIHEAP program. 

Walking very quickly through some of those issues, Mr. Chairman. The Department of Commerce closely monitors natural gas 

prices and supply because of its roll as an advocate for all natural 

gas consumers and the broad public interest in matters before the 

Public Utilities Commission. After the devastating events of Hurricanes Katrina and Rita, many consumers were aptly concerned 

with how much natural gas would cost them and if there would be 

enough gas available to get through the winter. In November 2005, 

Minnesota customers were paying an average of $12.02 per Mcf. 

Based on this increase in price, the Department projected that the 

average heating bills would be 70 percent higher than last winter. 

Luckily Mother Nature has been kind to us this winter. Last 

month was the warmest January since 1846 in the Twin Cities and 

the warmest on record for International Falls and Duluth. As a result of the lower demand and the recovering delivery capacity in 

Louisiana, February natural gas prices in Minnesota are on average $9.38 per Mcf, or $3 less. Based on price predictions last fall, 

this appears to be very good news for Minnesota consumers. However, it is important to keep in mind that the heating season is not 

over, as you’ve already noticed, and as this week’s weather will indicate. Even with mild weather to date and $9.38 gas, average 

heating bills in January are still expected to be 30 percent higher 

than they were last year. 

Responding to the historically high natural gas prices, last November Governor Pawlenty announced his Heating Security Initiative aimed as assisting customers most impacted by the high natural gas prices. There are three components to this initiative. First 

was to expand the Cold Weather Rule in order to basically assure 

that no low income customer would be shut off this winter by their 

utility. Six major utilities in this State have joined in this agreement. 

The second portion of the initiative was to provide greater heating financial assistance to those in need. Governor Pawlenty has 

infused the LIHEAP program with $13 million of State funds. This 

is the largest contribution of State money to the program in our 

history. That additional funding will allow the Department of Commerce to serve an additional 26,789 households. In addition, because of the higher energy costs, the Department of Commerce has 

increased the average assistance amount households receive by 25 

percent over last winter, so that, on average, each household receives at least $500. That’s above an average of $400 last year. 

The third component rounding out the Governor’s Heating Security Initiative is lowering utility bills through energy conservation. 

Through the State’s Energy Conservation Improvement Program—

CIP, as we refer it to—the Department of Commerce has approved 

natural gas utility proposals to spend an additional $2.1 million 

this year on energy conservation on top of the $14 million that they 

are already expending. This, of course, is an effort that I think you, 

Senator Coleman, pays a lot of attention to, to your credit, through 

your Home Energy Savings Incentive Act of 2005. 

22

The fourth component, of course, of the Governor’s Heating Security Initiative is to lead by example, and through an executive 

order he has ordered a 10 percent reduction of energy consumption 

at the State’s buildings. 

The Department of Commerce reviews the regulated natural gas 

utilities’ charges to assure that they charge their customers the 

same price that the utilities pay to gas producers for the gas that 

they buy. Utilities only make profit on the cost of operating their 

business. Normally these business operations costs account for approximately 10 percent of a customer’s bill, which means the natural gas cost is 90 percent of that bill. Since the price of natural 

gas itself is such a large portion of the customer’s bill, we, working 

with the Public Utilities Commission, are constantly reviewing natural gas prices charged to Minnesota consumers by the State-regulated natural gas utilities. 

The Department’s analysis is geared towards ensuring that the 

utility is charging reasonable prices to its consumers. If the Department finds an exception, it provides its analysis to the Public 

Utilities Commission and recommends that the Commission uses 

statutory authority, as Chairman Koppendrayer has already indicated, to prevent unreasonable or imprudent costs from being 

charged to customers. 

Let me turn very quickly to the administration of the LIHEAP 

program and Weatherization. To date, total State and Federal 

LIHEAP funds available in Minnesota equal $101 million. These 

funds are used to direct heating assistance, additional funds in crisis situations, and furnace repair or replacement for low income 

households. With this funding, it is projected that the Department 

will serve 145,800 Minnesota households with primary heating assistance. That’s significantly up from last year when we served 

117,689 households. 

The Weatherization Program provides assistance and informs, as 

you’ve already heard from Deidre Jackson, the ability of a household to come in and provide energy conservation steps. Last year 

the total budget of that program, including State and Federal 

funds, was $14 million, with $13 million of it spent directly for 

homes, and we were able to provide assistance to 4,000 homes that 

were weatherized at an average cost of slightly over $3,000. 

To conclude, Mr. Chairman, high natural gas prices appear to be 

here to stay, at least for the foreseeable future. We at the Department of Commerce, working with the Public Utilities Commission, 

and with you and with the natural gas utilities, are diligent in 

using the tools at their disposal to provide consumers with reasonable priced natural gas service. Congress has already taken some 

steps on this issue with the passage of the Federal Energy Policy 

Act of 2005. Also the President’s recent State of the Union address 

called for further energy efficiency and innovation. We applaud 

these actions and are ready to help achieve our common goals. 

Let me make a couple recommendations that I have before I conclude. First and foremost, the importance of a hearing like this and 

the showing of Federal vigilance and congressional vigilance and 

the Subcommittee’s vigilance and, most importantly, your vigilance, 

Mr. Chairman, to protect consumers from market manipulation is 

very important. It is a national issue, gas prices are set at a naVerDate 0ct 09 2002 14:04 Jun 15, 2006 Jkt 027031 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 C:\DOCS\27031.TXT SAFFAIRS PsN: PAT
23

tional level, and without your oversight we at the States level are 

handcuffed. 

Assuring adequate LIHEAP funding, you have been aggressively 

working with that. We are very pleased to be helping you do that, 

and very proud of your work on that. 

Third, promoting aggressive energy conservation acts, you’ve already taken a leadership role in that area. I think continuing that 

and working with your colleagues in any way that you can to increase those efforts is important. 

And I think the fourth component, and you’ve already heard testimony on that, is promoting the development and use of renewable 

energies, particularly ethanol and biodiesel, and perhaps some of 

those fuel switching options that you’ve heard is very important because natural gas is priced shadowing petroleum and a fuel switching for petroleum. 

So, Mr. Chairman, those are the final thoughts that I have. I 

hope I did that in the time to allow you enough time for questions. 

Senator COLEMAN. Thank you very much, Mr. Garvey. 

Mr. Garvey, looking at the data that you’ve provided us, if you’re 

looking from the year 2000 through 2005, in 2000 there were 

110,000 households served by LIHEAP, 2004–05, 117,000. All of a 

sudden this year it’s 145,000. That’s one of the largest increases in 

quite a while. Do you have any explanation for why there is such 

a significant increase in the number of households needing 

LIHEAP this year? 

Mr. GARVEY. Mr. Chairman, the number of households who are 

eligible for the Low Income Heating Assistance Program roughly 

stays approximately the same at about 400,000 households. The 

reason those numbers, as you’ve indicated, move is our ability to 

provide assistance to them, which is directly related to the amount 

of funding available. The reason we are able to fund and provide 

assistance this year more than we’ve done in past years is because 

of the funding that you’ve been able to secure to fund the LIHEAP 

program, as well as the infusion of Governor Pawlenty’s $13 million. 

Senator COLEMAN. So the needs are out there, it’s really just a 

question of whether the dollars can match the needs? 

Mr. GARVEY. Correct. 

Senator COLEMAN. Mr. Koppendrayer, I think good news by the 

way, you mentioned earlier in your testimony, you talked about 

using natural gas for electricity, natural gas surpassing nuclear in 

terms of providing for energy. I believe this year for the first time, 

as of a couple weeks ago there were at least five new permits nationally that have been applied for for nuclear, and I think that 

number may even have doubled by now, so I think one of the 

things that you’re seeing is, and we saw, certainly the last couple 

years, operations, including Excel right in St. Paul, going from coal 

to natural gas, but what I think the good news is—and that was 

all done since environmental reasons certainly hit at the center of 

that—but I think a lot of that was done before we saw these huge 

spikes in prices, but the good news is is that there are, for the first 

time, I believe, a number of new nuclear operations. We still have 

the waste issue which is out there, but in addition to that there’s 

24

also some folks looking at some new technology down the road that 

will limit that. Can you comment at all on that issue? 

Mr. KOPPENDRAYER. Well, I think the short answer is we know 

what to do with the waste, we know where to put the waste, we 

just have to get the votes eventually to get the job done. The new 

nuclear technology, of course, it includes recycling the fuels that we 

have. It should not be considered a waste and put in a geological 

repository and then blown up and left there. It’s a resource. And 

finally now we are starting to recognize that’s a resource. And in 

the recycling processes that are being worked on now, the actinides 

are going to be left with the uranium so that you don’t get a pure 

plutonium, weapons-grade plutonium. So the proliferation of nuclear weapons is not a concern under the new process. And under 

the new process the hundred-million-year half life could be brought 

down to 500 years, and of course it needs a whole lot less storage 

space for the waste that’s left over. 

Senator COLEMAN. I know we’re looking a little bit into the future here, but that future is very real. Even my colleagues get it. 

Can you give an estimate about how far down the road? Are we 

talking 20 years, 30 years, or 15 years before we can move to a situation where, in fact, that what is seen now as waste really becomes a recyclable material that could produce more energy? 

Mr. KOPPENDRAYER. The latest that I’ve seen in the trade journals and meetings I’ve been at is it’s 15 years that we’re looking 

at, probably 15 years. 

Senator COLEMAN. And having a 16-year-old daughter, that 16 

years is——

Mr. KOPPENDRAYER. Went quick. 

Senator COLEMAN. A blink of the eye, I can tell you. 

Mr. KOPPENDRAYER. But in other technology that we shouldn’t 

fail to mention that you’ve been a huge part of in Minnesota that’s 

coming, and the Public Utilities Commission approved $10 million 

towards the IGCC, the integrated combined cycle coal gasification. 

You know that coal is the largest energy resource that the United 

States has, and the key will be to using it in an environmental 

friendly way as we can, and that is the huge next step that we’re 

going to be taking. 

Senator COLEMAN. What’s interesting about that is that a few 

years when we forwarded the Minnesota project and we had a loan 

guarantee in the energy bill, I think that was the only coal gasification of the next generation. I believe in last year’s energy bill 

there were at least five coal gasification projects nationwide and 

even more, so there are a number of folks seeing what we’ve seen, 

but the good news is that I believe we’ve been out in front in Minnesota on that technology and are moving forward. 

Let me ask you another question about spot markets. You talked 

about buying in the spot market. Isn’t that one of the problems 

that we’re facing, that consumers face, that when folks buy on the 

spot market they’re subject to these spikes in prices? 

Mr. KOPPENDRAYER. Sure it is, but there’s a phrase that I like 

to use. When you’re trying to contract for enough gas and you’re 

trying to hit the market right, and you’re trying to do that based 

on the weather, you use what we’ve come to call random variables. 

You take all of these variables, you pick from them and choose 

25

from them, and then you try to forecast next year what’s the 

weather going to be, and based on that weather forecast how much 

fuel am I going to need, and a forecast, well, you and I have both 

watched weather forecasts. They’re better every year but never perfect, and you can never anticipate a year ahead, 6 months ahead, 

3 months ahead where that next spike is going to be in cold weather, and that’s what hits us really hard when you don’t have enough 

on fixed contract and you have to buy on the spot market. 

Senator COLEMAN. But most of Minnesota’s natural gas is bought 

on the spot market, is that correct? It’s not? 

Mr. KOPPENDRAYER. No, not most of it. Most of it is through contracts. 

Senator COLEMAN. OK. 

Mr. KOPPENDRAYER. And spot market is kept as minimal as possible. But if you overcontract you’re going to end up with gas purchases that you don’t need and you’re going to pay the price for 

that. 

Senator COLEMAN. Mr. Garvey, what do you say to Minnesotans 

who say that the folks out there are ripping us off, the cold weather and prices are being gouged, they’re going through the roof, how 

do you respond to that? 

Mr. GARVEY. Mr. Chairman, thank you for that question. The 

Minnesota utilities pass through to retail customers the wholesale 

price that they pay. We at the Department of Commerce make sure 

that they do that, that they don’t make a penny more on the retail 

cost than their wholesale charge. Working with the Public Utilities 

Commission, we’re very confident that is exactly how that works. 

The question then becomes the fairness and appropriateness of 

that wholesale market price, and that’s where Subcommittee hearings like this and your vigilance and examination of the wholesale 

marketplace is so important. We look at it. While we don’t see manipulation from our perspective, we have a very narrow State perspective. We don’t see the national marketplace. What I now can 

say to that person, because of Subcommittee hearings like this and 

because of examinations that are going on by Members of Congress 

and our Federal agencies, that they will make sure that those 

kinds of things are not happening. 

Senator COLEMAN. And we’ll hear, right after you, FERC and the 

GAO will talk a little bit about that. One of the things you mentioned in your testimony, you talked about natural gas prices kind 

of shadow some of the oil prices, and this whole discussion of renewables says that if we can lessen dependence on oil, Middle East 

oil, oil generally, that will have a beneficial impact, even though 

natural gas is mostly domestically produced. You see, though, the 

headlines scream out about gas companies making huge, huge, 

huge profits, and some of that profit, I presume, is generated from 

things that happen in local gas stations right here in our community. Could you respond, kind of shifting a little away from natural 

gas to just the overall cost of the gas, has the Department looked 

at the issue of price gouging when it comes to other energy products, gasoline particularly? 

Mr. GARVEY. Mr. Chairman, thank you for that question. The 

three energy sources: (1) Electricity, the Department of Commerce 

and the Public Utilities Commission has extensive regulatory reVerDate 0ct 09 2002 14:04 Jun 15, 2006 Jkt 027031 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 C:\DOCS\27031.TXT SAFFAIRS PsN: PAT
26

view and authority over. (2) Natural gas energy providers we have 

extensive regulatory review over. We have little authority over the 

wholesale market of natural gas. (3) When you move to petroleum, 

we have no regulatory oversight of either the retail or the wholesale marketplace. Having said that, the retail and the wholesale 

marketplace for petroleum is aggressively examined by our States’ 

attorney generals and those folks. 

And, the other thing you need to know, sir, in Minnesota we always have, as a rule, some of the cheapest gasoline prices in the 

country. I mean you drive around today, it’s $2.07. And the reason 

for that is that we have a very competitive retail marketplace. We 

get most of our petroleum from Canada, we have several very important local refiners, we have low gas taxes, and we have ethanol 

and biodiesel mandates. When you put those components together, 

gasoline is still expensive, but it’s relatively cheaper here than it 

is across the country. 

Senator COLEMAN. We talked about—let me shift gears a little 

bit—dealing with the Cold Weather Rule. There was an action, and 

you made some references, Mr. Koppendrayer, I think it was 

CenterPoint Energy. I believe that there was a concern about willful and repeated violations of the Cold Weather Rule. Is it your testimony today that those concerns have been taken care of? 

Mr. KOPPENDRAYER. Mr. Chairman, as I mentioned, that was 

last winter, and the complaints this winter are at a bear minimum. 

Senator COLEMAN. Can you tell us what happened and why it 

happened? 

Mr. KOPPENDRAYER. Well, that’s as varied as the people that 

were affected, and there were a lot of people affected, as to what 

they were told and what they weren’t told. As I mentioned earlier, 

everybody gets a flyer and everybody gets the rules as to what 

apply to them. The difference comes in when they call the company, for example, and say, I can’t pay my bill and I want to be 

reconnected, what transponds between, as far as an oral conversation, and for the most part what came to the surface was the main 

part of the problem was that the company’s representatives were 

telling the consumer that you have to pay, you are responsible for 

your full bill, and that was true, they were responsible for the entire bill. However, what didn’t immediately follow, or was not 

picked up by the consumer, is in a payment plan you don’t have 

to pay more than 10 percent of your income, so here is a payment 

plan, and that wasn’t clearly explained to the consumers and there 

was a lot of confusion and a lot of people weren’t hooked up because they thought they had to pay their entire bill before they 

could enter into that agreement, which wasn’t true. 

And I understand that the Attorney General’s Office, who pursued this, and to enforce the rules that we have, entered into a settlement with CenterPoint Energy for last year’s issues. But I have 

to say again, that hasn’t been repeated this year. And the other 

companies, we’ve all learned from that and we’ve clarified the rules 

and we’ve clarified when it’s supposed to be sent, and other companies have learned from that. We’ve clarified it for all the companies. 

Senator COLEMAN. To both gentlemen—what’s the single biggest 

complaint that Commerce gets, Mr. Garvey, and what the PUC 

27

gets from consumers regarding energy and energy costs? What are 

folks worried about right now? 

Mr. KOPPENDRAYER. I got an e-mail from a former school superintendent just the other day and what he said was, look, in 2000 

I paid this, in 2001 I paid this, and now in 2005 I’m 90 percent 

higher than in 2000. And it’s not, the consumer out there doesn’t 

understand, or hasn’t had the opportunity to completely be informed of what Commissioner Garvey just said, the companies here 

are passing, the distribution company is passing through the 

wholesale cost of gas and not profiting from that cost of gas, they’re 

only profiting from the distribution end of it. That’s not understood. 

As a matter of fact, I’ve never seen before this morning a map 

like that. I’m going to get a copy of that, if I might, and ask a lot 

of questions about why the United States is $13 and Japan is $5, 

and Japan doesn’t have natural gas and we do. 

Senator COLEMAN. That’s a question that a lot of my colleagues 

asked and the next panel will touch on it, I hope. Mr. Garvey, what 

about you, what are people complaining about? 

Mr. GARVEY. Mr. Chairman, the biggest complaints sort of fall 

under the general rubric of the cost of their bills. And if I may, Mr. 

Chairman, even though much of the winter season is behind us—

Punxsutawney Phil saw his shadow, so we’re supposed to still have 

6 to 8 more weeks. More LIHEAP funding will allow for us to provide greater assistance to a larger number of families. Even the assistance that we can give, even the increase of $500, is still significantly less than 50 percent of their total bill. We would be allowed 

to not only serve more families but raise that amount. We would 

be able to provide additional assistance to those homes, those 

homeowners whose furnace blows out and has a crisis. We could 

provide greater weatherization. 

I want to just make sure we enforce what I think you already 

know. Just because we’re into mid-February, don’t let folks say we 

don’t need to and let this issue go by, because it’s still very important. And just because spring is around the corner, those bills will 

still be due. You’ve heard testimony that they roll through the 

summer into next fall. 

Senator COLEMAN. And I can assure you that we will be moving 

very aggressively. And winter is not over. We’re seeing that this 

week, we’ll see it next week, and coming from Minnesota, winter 

may not be over in March, going into April. I think even when we 

talk about mild winters, people forget that it’s, so if it’s a mild winter, instead of being minus 10, it’s 15 or 20 degrees. Well, you’ve 

still got to get another 45 degrees of heat into your house at prices 

that are a 100 percent higher than they were 5 years ago, double 

what they were a year ago, 40 percent, whatever it is. For folks on 

fixed and limited income, that’s a big jump. I mean that’s a big 

hurdle to overcome. So I think even when we talk mild winter, we 

forget the impact here. You’ve still got to get up to 60 or 65 degrees 

or you’re not going to be healthy. So I am very hopeful that when 

we get back we’ll at least fill some of the needs for this year, and 

there should be hopefully another billion dollars that we’ll be getting through the Committee. 

I want to thank you for your testimony, and please tell that to 

the Governor, too. Mr. Garvey, you laid out, in a way it’s a pretty 

28

1 Exhibit No. 6 appears in the Appendix on page 156. 

simple but pretty basic formula; you’ve got to do oversight, you’ve 

got to provide funding for LIHEAP. We forget conservation. For 

folks who are listening, conservation, conversation, conservation. 

Whether you’re Cargill or U of M or a single mom, there are things 

we can do in conservation, or State offices. It makes a difference. 

And then renewables, which the good news is that we will have another energy bill, and my colleagues are getting that renewable is 

going be a big part of it. 

I tout the story of Brazil, fifth largest country in the world, half 

the population of Latin America. At the end of 2005, I think they 

were not dependent on any foreign oil. Sixty percent of the new 

cars in Brazil run on flex fuel engines, they can run on 100 percent 

ethanol or gasoline, and the technology—is it expensive? The largest car manufacturer in Brazil this year I think is General Motors. 

So it’s technology we have that can go a long way, so I think we’re 

moving forward in the right direction. 

I appreciate your testimony. Mr. Koppendrayer. 

Mr. KOPPENDRAYER. If I might, Commissioner Brownell from 

FERC was here on Friday and left her testimony with me and then 

I gave it to your aide. I don’t know if there is somebody from FERC 

here this morning, but her testimony is here. 

Senator COLEMAN. I appreciate that, and we’re going to—clearly, 

FERC, for those who are listening, they play a role in the wholesale level, and so they have to do their job, their role is absolutely 

critical, and so we’ll hear a little bit of that today. I think it’s important for folks who are local to understand here that the companies are really, they’re passing through, they make a certain set 

profit but they’re not making massive windfall profits that, I think, 

are people looking at their own bills and they see these huge profits and they wonder, am I getting ripped off and what are we doing 

about it. We’ll talk a little bit about the wholesale prices with the 

next panel. 

Gentlemen, thank you very much for your testimony. 

I would like to welcome our final witnesses to today’s hearings: 

James Wells, Managing Director of the Energy Team of the Government Accountability Office in Washington, DC, and Susan J. 

Court, the Director of the Office of Market Oversight Investigations 

at the Federal Energy Regulatory Commission, FERC, who will be 

accompanied by Steven J. Harvey, the Deputy Director of FERC’s 

Office of Market Oversight and Investigations. So again we are 

thrilled to have you here. 

As Commissioner Koppendrayer noted, we anticipated having 

FERC Commissioner Nora Mead Brownell testify, but because of 

the last minute rescheduling of the hearing Ms. Brownell was unable to arrange her schedule. I’m sorry that she won’t be with us 

but we’ll include her full testimony in the record as Exhibit No. 6.1

But certainly, representatives from FERC are here. I appreciate 

your presence. I look forward to looking at this issue of monitoring 

any evidence of price manipulation as well as explore some longterm solutions to the energy crisis. 

As you’ve seen, witnesses before this Subcommittee, pursuant to 

Rule 6, have to be sworn. I would ask you to please stand and raise 

29

1The prepared statement of Mr. Wells appears in the Appendix on page 90. 

2The chart referred appears in the Appendix on page 98. 

your right hand. Do you swear the testimony you’re about to give 

before this Subcommittee is the truth, the whole truth, and nothing 

but the truth, so help you, God. 

(Witnesses respond to oath affirmatively.) 

Senator COLEMAN. Mr. Wells, we’ll have you go first followed by 

Ms. Court. Then after we have the testimony we’ll open it up to 

questions, and your written testimony will be presented into the 

record in its entirety, so if we can stay within the 5-minute rule, 

that would be very helpful. 

TESTIMONY OF JAMES WELLS,1 MANAGING DIRECTOR, 

ENERGY TEAM, GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. WELLS. Thank you, Senator Coleman. We are pleased to be 

here today to discuss natural gas prices. Accompanying me today 

is my colleague, Jon Ludwigson, he’s our GAO energy expert, and 

hopefully he’ll take all of the hard questions for me. 

As you know, in early December 2005 wholesale gas prices 

topped $15, more than double the prices seen last summer, and 

seven times the prices common throughout the 1990s. I want to 

refer to the chart.2 You see 20 years worth of natural gas prices. 

Look at it in terms of the first decade, 10 years, the most recent 

10 years, and then we’re going to talk, when we get to our conclusions, about what the next 10 years is going to look like. 

For the 2006 winter heating season, the residential household 

heating with natural gas will pay at least $260, 35 percent more 

on average this winter than last winter. Mr. Chairman, consumers 

in your Midwest here are expected to witness even greater increases, paying 41 percent more than last winter. You have the distinction of being the one part of the country, the highest part in 

the entire Nation. 

You’ve asked GAO to discuss three questions: Why natural gas 

prices are so high, the impact on the consumers, and what is the 

Federal Government’s role. 

Demand has clearly expanded faster than supply. Since 1999 

wholesale gas prices have clearly trended steadily upward, as you 

referred to earlier. They bounce up, they rocket up in price and 

float back down like a feather, but they’re still higher than where 

they started. You can see the peaks in late 2005 here, there’s two 

twin peaks there as two hurricanes smashed into the Gulf Coast 

where we have major gas production facilities. 90 percent of that 

production that you see there in the Gulf Coast was taken off-line. 

Mr. Chairman, it’s still not totally recovered, and daily production 

levels will still not be back to normal before the hurricane until 

sometime this summer, so we today are still feeling the impact of 

the two hurricanes. 

On the supply side, our U.S. gas industry has been producing at 

near capacity, and our ability to increase imports has reached its 

limit currently, given available infrastructure. There’s no more 

magic bullet to bring more gas in because we don’t have anywhere 

to bring it in. Tight supplies have set the stage for extreme price 

spikes. Clearly I will tell you today that everyone will say the easy 

30

answer is it’s all about supply and demand, but clearly there are 

many other factors that you’ve heard about today that will continue 

to affect wholesale prices such as market manipulation. 

Although you gave us an investigation charge and we’re continuing with that, we have not found any market manipulation to 

date. We continue to look at the futures trading in natural gas and 

for signs of market manipulation, and we plan to report to you and 

your Subcommittee the results of that work later this summer. 

For the individual consumer sitting behind me here in this room, 

how much their gas bill will rise today will depend on large measure on how much of their supply is purchased, as you’ve heard, 

from the wholesale spot markets. By buying in the spot market 

when prices are rising, it clearly is expensive. Some of the largest 

natural gas utilities in at least three States expect to buy at least 

70 percent of their gas this winter at spot market prices. Mr. 

Chairman, we’ll continue our investigation, but we understand that 

Minnesota does buy a tremendous amount on the spot market. The 

utility clearly has and will continue to pass these prices on to their 

customers. 

For others, gas utilities and consumers that use a process call 

hedging, that’s buying gas at fixed prices in long-term contracts, or 

storing the gas that they purchased when prices are relatively low 

to be used during times when prices are high, may this winter be 

able to see their price rise at a little less degree than if they were 

buying on the spot market. While hedging may not guarantee the 

lowest price, it clearly does allow consumers to have greater price 

stability. Our preliminary work shows that natural gas utilities in 

more than half of the States have hedged at least 50 percent of 

their supplies for this winter. Mr. Chairman, we did analyze the 

market back in 2002, and our results at that time indicated that 

the marketplace was hedging about 20 percent across the country, 

so the trend is upwards. 

I think you have to ask questions of the public utilities that are 

administering their programs how conservative they’ve been and 

whether they’re using some of the newer, sophisticated techniques 

to help ensure that the consumers have the best price advantage 

of natural gas. 

As we’ve clearly heard today, unfortunately the impact of these 

high gas prices have clearly meant hardships. The lower income 

residents may not be able to absorb the price increases, and they 

are clearly having difficulty paying their bills, as we’ve heard 

today. Mr. Chairman, I hope we get a chance to have questions 

talking about LIHEAP where we can talk more about it because I 

think it is an extremely important program. 

Industrial consumers, like Cargill Company that you’ve heard 

today, the chemical, the fertilizer manufacturers, are not able to 

compete with foreign companies that have access to gas at lower 

prices, a dollar and 60 cents out of Trinidad, and therefore may reduce operations or close U.S. plants. We are clearly moving some 

of our industry and jobs overseas. 

I want to turn a minute to the Federal Government’s role. Clearly two Federal agencies, Susan here on my right from FERC, and 

Commodities Futures Trading Corporation, they do play key roles 

31

in trying to keep the level playing field with competitive prices in 

an informed marketplace. 

FERC is responsible for ensuring that prices are determined 

competitively at the wholesale level. We need to hold FERC accountable, and clearly they’ve been doing a lot of aggressive things 

that they have not necessarily done in the past. One example, one 

company agreed to pay a settlement of over $1.6 billion in California relating to some of the heating season in 2002. Clearly the 

industry is being put on notice that they can’t perform badly in the 

marketplace that has the impact that we saw in California in 2002. 

Similarly, the CFTC is responsible for ensuring that fraud, manipulation and abusive practices do not occur. They have prosecuted 46 energy companies or individuals and have assessed penalties over $300 million. They’re not alone. There is still the Securities Exchange Commission, the Federal Trade Commission, the Department of Justice, these are all the Federal regulatory agencies 

that are supposed to be looking out for wrongdoings, and I think 

hearings like this are another example where we can hold these 

Federal regulatory agencies responsible. 

Mr. Chairman, I’m going to stop here and just say there’s no 

doubt that we can’t live without natural gas. In the near term 

there may be relatively little that folks can do to avoid the pain, 

although there are things that they can do, and I do hope to address some of those in the questions. 

The stage is set for the future price spikes. We haven’t changed 

the fundamentals of the marketplace; future price spikes will continue, people will still have trouble affording natural gas tomorrow 

and in the future. The key industries may be lost, along with jobs 

they bring, particularly here in Minnesota relating to some of the 

fertilizer industries. Meeting the future demand for this energy 

source, changing this less-than-desirable scenario will be a challenge for the consumers, for the utilities, and the U.S. Congress. 

Holding this hearing is another step in keeping informed and seeking the best possible solutions. Mr. Chairman, I thank you and welcome your questions. 

Senator COLEMAN. Thank you for your testimony, Mr. Wells. Ms. 

Court. 

TESTIMONY OF SUSAN J. COURT DIRECTOR, OFFICE OF MARKET OVERSIGHT AND INVESTIGATIONS, FEDERAL ENERGY 

REGULATORY COMMISSION 

Ms. COURT. Good morning, Mr. Chairman. My name is Susan 

Court, and I am the Director of the Office of Market Oversight and 

Enforcement Investigations at the Federal Energy Regulatory Commission. I am accompanied this morning by my deputy, Steven 

Harvey. We appear today as Commission staff witnesses speaking 

with the approval of the Chairman of the Commission. The views 

we express are our own and not necessarily those of the Commission or any individual commissioner. 

We thank you very much for this invitation to discuss the natural gas market and recent price trends. The Commission takes 

very seriously the high natural gas prices, and I hope that we will 

be able to answer your questions regarding what has driven current prices and what the Commission is doing to monitor them to 

32

ensure that they are not the result of manipulation or the abuse 

of market power. My written testimony covers the six issues that 

were identified in your letter of invitation, so I’m just going to 

highlight some points at this time. 

First, you asked what factors have contributed to high and volatile natural gas prices in recent years. There are three factors in 

particular. First, the balance between supply and demand for natural gas in North America has been tightening throughout the decade. Production has slightly increased or even declined while the 

economy has increased demand. The gas bubble prevalent in the 

late 1980s and early 1990s started to shrink at the end of the last 

century. 

Second, the summer of 2005 was abnormally hot, the hottest on 

record according to the National Climatic Data Center. With the 

addition of natural gas-fired generation to the electric system over 

the past decade, increased electric demand drove increases in natural gas demand. Generation from natural gas, for example, increased by 20 percent for June and July of last year compared to 

the year before. Third, the price of oil rose 21 percent from $9.40 an MMBTU in early April to over $11.40 just before the hurricane struck. Although the relationship between oil products and gas prices differs 

across the country depending on how easily fuels can be switched, 

oil and gas prices have been loosely related for many years. As a 

result, increasing oil prices last summer put upward pressure on 

gas prices above and beyond the effects of the increased electric demand. 

You’ve also asked what effect the hurricanes have had. As you 

and other witnesses have pointed out, the hurricanes had and still 

have significant effects on the entire natural gas industry in the 

Gulf Coast, which accounts for about 20 percent of the United 

States supply. Overall, about 10 Bcf of production from the Gulf of 

Mexico and Louisiana was shut in, representing almost one-fifth of 

the U.S. average daily production. That number is fortunately now 

down to about 2.5 Bcf. Since the hurricanes, prices have risen and 

fallen based on weather. Given the strains on U.S. domestic natural gas supplies represented by the hurricanes, as others have 

pointed out, including yourself, Senator, we have been very fortunate to have experienced a milder-than-normal winter. Nonetheless, the longer term tightness between supply and demand exacerbated by increased electric demand is likely to reassert itself with 

more normal weather. As a result, current futures prices for natural gas suggest that prices are likely to rise from current levels 

into the summer, though they are likely to remain below the crisis 

levels seen after the hurricanes. 

Next you asked what is FERC doing to respond to high natural 

gas prices, especially with respect to its enforcement responsibilities. As an initial matter, as you may know, and I need to point 

out here, the commission has very limited jurisdiction over gas as 

a commodity, over wholesale sales of natural gas, due to the Natural Gas Decontrol Act of 1989. 

That said, starting in the fall of last year we have encouraged 

conservation, as did other Federal and State agencies. For our part 

we made a concerted effort to distribute information on the State 

33

1 Exhibit No. 1 appears in the Appendix on page 123. 

of the natural gas market. We have, for example, on our web page 

a feature called ‘‘Gas Basics,’’ and we brought copies of the latest 

edition with us. We did this to help consumers understand what is 

happening so that they can make informed decisions. 

More to the point, the Commission is committed to assuring that 

the high natural gas prices caused by the loss of supply from Hurricanes Katrina and Rita do not go higher still because of market 

manipulation. We have done this in several ways. The Commission 

actively monitors natural gas markets to determine whether price 

movements are the result of market manipulation or market fundamentals. Our market oversight and enforcement staff is continually reviewing market activity for any possible manipulation that 

might also affect prices. In close coordination with enforcement 

staff, market oversight staff performs a detailed review of natural 

gas prices and market activity on a daily basis with the intent of 

identifying areas of possible manipulation. If we identify price 

anomalies that are not explained by market fundamentals, my office is authorized by the Commission, to begin an investigation. 

Furthermore, to assist our monitoring effort, the Commission has 

entered into a Memorandum of Understanding with the CFC to assure the smooth flow of information between the two agencies. The 

Commission also acted quickly to exercise the new anti-manipulation authorities in the Energy Policy Act. On January 19, the Commission issued rules to prevent market manipulation by any entity, 

not just companies traditionally subject to Commission jurisdiction, 

with respect to jurisdictional natural gas and electric sales and 

transportation. The new rules, in conjunction with the new civil 

penalty authority in the Energy Policy Act, will provide a strong 

deterrent to market manipulation. Under our new civil penalty authority, the Commission can impose a penalty up to $1 million per 

day for a violation of the Commission’s anti-manipulation rules. 

You’ve also asked finally whether or not there is any extra authority we would need. The Commission at this time has not articulated any additional authorities that we need. We have many 

new responsibilities under EPAct of 2005, but we would surely welcome the opportunity to be asked again once we have a better understanding of how our new responsibilities are playing out. Thank 

you very much. 

Senator COLEMAN. Thank you very much, Ms. Court. Some of my 

colleagues question whether we’re doing enough to vigorously monitor market manipulation. Your testimony today is that you’re involved in a continuous review of market manipulation and that it 

is quite vigorous; is that a fair representation of what you’ve just 

stated? 

Ms. COURT. Yes, sir, it is. 

Senator COLEMAN. Let me back up. First, that chart over there,1

we’re looking at cost of natural gas in the United States; natural 

gas being something that we have domestic production, and you 

have places like Japan that don’t have domestic production and it’s 

less than half, Trinidad a dollar sixty. Can someone explain that 

chart to me? Why is there a wide gap, why does the United States 

have the highest natural gas prices in the world? 

34

Ms. COURT. I would like to just note to start with, the chart is dated October 26, and the United States is listed at $13.90. Of 

course, that was right at the time of the hurricane. Currently 

they’re running between $8 and $9, so I think that’s probably a 

fairer statement of natural gas prices vis-a-vis the world natural 

gas prices, because of the date of this particular chart. That said—

and I’ll let others comment on this as well as perhaps the situation 

with Japan. Japan, of course, relies on LNG as it doesn’t have any 

domestic production. It is my understanding that Japan has their 

LNG committed under long-term contracts so that they were able 

to lock in a price at an earlier time. 

A couple weeks ago, Senator, I was able to participate in a conference in Paris sponsored by the International Energy Agency and 

the International Gas Union. The concern for all of the nations represented, and there were at least 30 nations represented at that 

conference, was the higher natural gas prices. Those countries were 

especially concerned because so much of their natural gas comes 

from countries like Russia, gas from other countries where there’s 

production but where the production is owned by the governments 

themselves. So I think it is a fair statement, Senator, that every 

country is concerned, industrialized countries in particular, about 

higher natural gas prices. 

We are now in a global market for natural gas, there’s no question about it. Currently 84 percent of our natural gas consumption 

comes from domestic supplies, but we anticipate that is going to 

change in the near future. As a consequence, the Commission, with 

the support of Congress, with EPAct, has now some very important 

responsibilities and authority to ensure that we can site LNG terminals throughout our country in order to take advantage of supplies from other countries as our domestic supplies decrease. And 

we’ve stated in our testimony, for example, some of the steps that 

FERC has taken, again with some support of EPAct and Congress, 

with respect to LNG supplies. 

We lost, by the way, several LNG shipments this winter to Europe. Spain will pay whatever price they need to pay in order to 

get the gas coming in to Spain. Likewise, in the UK, there is an 

LNG facility downstream from London at the Grain Island, and the 

UK also took LNG shipments away from the United States this 

past winter because they were willing to pay a price higher than 

Henry Hub. Basically it’s Henry Hub plus a dollar that they were 

willing to pay to get those LNG. Now I think that things are probably going to balance out more as we get more LNG facilities in 

the United States and the liquefaction facilities elsewhere in the 

world improve. Right now the ratio is a little bit off. There is fewer 

liquefaction facilities than there are gasification facilities, and as 

that balances out I think the United States is going to be fairly 

well-poised to be able to receive LNG shipments. 

Senator COLEMAN. And I understand Japan, by the way, but I’m 

now looking at a place like China that has an insatiable appetite 

for energy, and still the price is lower. Ms. Court, perhaps you 

could give a primer to folks in the—I studied this stuff a little bit, 

and it’s still hard for me to kind of understand the layout, why, 

even if it’s $8 to $10, still double, a hundred percent, a hundred 

and fifty percent, some other areas that have, again I use China 

35

now as an example. Can you give me a one, two, three? Mr. Wells, 

do you want to weigh in as to why in this country prices are still 

so high? 

The other observation is this: Natural gas, though it may be a 

global market—petroleum is a global market. We’re impacted by 

what happens with Middle East oil, Venezuelan oil, etc. Natural 

gas is still principally domestic. I mean we have, as you say, 85 

percent, and I’m going to touch upon the LNG, because I think Mr. 

Wells made the comment about supply, ‘‘we can’t bring it in,’’ I 

want to talk about that. But can you give me one more shot, one 

more time to explain to the folks sitting back there who aren’t experts in this and don’t work for FERC, why prices in the United 

States are significantly higher, U.S. and Canada, than just about 

anywhere else in the world? 

Mr. HARVEY. Senator, if I could give it a shot——

Senator COLEMAN. Mr. Harvey. 

Mr. HARVEY [continuing]. I would be glad to. Part of it is what 

we’ve seen is not just high prices this last winter in the United 

States, but a lot of volatility in prices. That’s not surprising. We’ve 

seen a lot of volatility in weather after the hurricanes took out a 

great deal of productive capacity. We had abnormally warm Novembers and Januaries. And these prices have come down significantly from the levels that are on this particular map at this point, 

and actually in the last week or two, down into the mid $7 range 

at Henry Hub. That’s likely, and that is, in fact, likely to be characteristic of natural gas markets in the United States at this point, 

given the dependencies and the relative tightness of supply and demand. 

These different markets behave in different ways, and as Ms. 

Court pointed out, during the course of the winter, the winter was 

extremely cold in northern Europe, and as a result prices went 

very high in northern Europe. Now the markets don’t function exactly the same way that ours do necessarily, and so these prices 

for, in effect, spot gas, function a little bit differently. The spot 

market dominates the United States, and we talked about that a 

little bit, and the volatility that exposes our customers to. Spot 

markets don’t dominate in many of these countries. They are 

longer-term contracts. Many of these contracts were written up in 

times that we can see in this graph that were earlier in that process. 

So, for example, the United Kingdom has a much larger, and 

really all of Europe has a much larger, long-term relationship. 

Much of their LNG then is also purchased by large State companies who tend to buy based on oil prices as opposed to any particular spot market within their country. We buy only based on the 

spot market in our country for spot purchases. As a consequence, 

January was the lowest LNG delivery month in the United States 

since, I believe, April 2003, and that’s fine. We’ve got plenty of gas 

right now because of the warm January. It was a reasonable economic response. 

As I look at a couple of other places, though, within the last 

month we know, or a month and a half, I guess, we know that the 

relationship of Russian supplies of natural gas heading into Europe 

have changed and, in fact, the Ukrainian gas price became a very 

36

material international political issue when the Russians began to 

change that price based on contractual issues between those countries that I won’t pretend to understand, but that price has come 

up significantly and is likely to come up significantly again, mainly 

based again on oil prices, which tend to be the benchmark there. 

Many of the other countries referred to there are producing 

areas, Trinidad. Trinidad, in fact, was the source of much of the 

LNG that was delivered in January in the United States. Many of 

the Middle Eastern countries. China is interesting, it’s a strongly 

emerging economy, many, many energy demands, but China, unlike the United States, has focused very strongly on their growth 

in electricity on coal, and this begins to raise various climate 

issues, given the aggressive coal plans that they have, and not a 

lot of clarity about exactly what environmental controls will be 

there. 

So I don’t know if that helps, but it gives you a sense that these 

are very different markets in very different positions across the 

world. Having said that, obviously it’s important for us to figure 

out how to get the most cost-effective energy we can to remain competitive. 

Senator COLEMAN. One of the comments Ms. Court made that’s 

been referenced here a number of times is the relationship between 

oil and gas, and that as prices rise in one there’s somewhat of a 

mirror. What I’m trying to understand there is the kind of market 

forces to me seem so different between oil and gas, again one being 

clearly international, the other not. Where oil prices are skyrocketing for a range of reasons and we see this mirroring, is there 

a potential there for market manipulation and how do you oversee 

that? How do you stop that from happening? 

Mr. HARVEY. What we’ve seen historically is sort of a loose relationship with oil, and it differs again locationally, as was in Ms. 

Court’s testimony. The one thing, for example in New York, where 

we have a lot of oil product prices, we can see it fairly clearly. The 

lower grade of oil tends to be a floor on prices for natural gas delivered into New York. And at this point actually today, when we 

have extraordinarily high levels of natural gas storage inventories 

in place today, the spot price is still in a $7 to $8 kind of range 

mainly, I think, because of that oil price, because of oil prices now 

in the low $60s after some drops last week. 

The amount of fuel switching capability differs radically across 

the country. In New York there actually is a fair amount of fuel 

switching capability in some heating applications and in some electric generation applications. It’s still not very large, and we are entering again, in the very short term, a period where we’re going to 

have and where we do have a lot of gas compared to the demand. 

January was an extraordinary month in terms of history, where it 

looked more like an April than it looked like a January typically, 

and it has put us in a very different position in terms of supply 

and demand balances. But that price has not moved down through 

the oil level yet. It’s not completely clear. We don’t have great statistics on how much fuel switching capability is there, but one of 

the things we will be watching is, to the extent gas inventories remain high or get higher, at some point that relationship needs to 

break, because it just doesn’t make sense. There’s just not enough 

37

oil demand to kind of keep it from there, and that’s one of the 

kinds of things that we do look for and we look at in our daily oversight activities within the Commission is when those relationships 

seem to need to change, they need to change. 

Now because of the activity of different participants in the market, it’s not just immediate supply and demand; it’s people’s worries about the future, it’s their considerations of other things that 

get folded in there. So there isn’t an exact time or place. But, 

again, it’s the kind of thing that you can look for that trend, you 

can kind of examine that. If things don’t happen the way we would 

expect them at some point we can begin to investigate in more detail. That is an example of one of those cases where we are watching for that. 

Senator COLEMAN. I am one of those who have difficulty understanding the relationship between oil, it just doesn’t seem to be 

that logical, and the concern I have, and I know Mr. Wells said it’s 

something the GAO is continuing to look at. We talked about market manipulation and gas as a commodity. At what point where do 

you draw the line between the legitimate impact of people’s fears 

versus using those fears to gouge, price gouge? That’s the average 

citizen, that’s what they look at. They say we’ve had a hurricane—

gas is, using gasoline, all of a sudden it’s $5 a gallon in Georgia. 

At what point, when is fear a legitimate factor and when is fear 

used as a market manipulation, price-gouging factor? Where is the 

line drawn and how do you, who identifies that? Who deals with 

that? Ms. Court. 

Ms. COURT. Well, Senator, as far as natural gas is concerned, it 

is the responsibility of the FERC to monitor the market drivers to 

see whether or not, in fact, particular high prices are understandable from market basics, or whether or not they might be reflecting 

some type of manipulation or behavior on the part of market participants. And so with respect to natural gas prices, that is our responsibility, that is FERC’s responsibility. 

Of course, oil prices are deregulated, have been since 1981, and 

so there are other Federal agencies that may be looking at that, or 

State agencies, perhaps under antitrust laws, for example. The 

U.S. Department of Justice and the FTC are charged with that 

type of responsibility. And then in natural gas futures, as you mentioned, Mr. Wells mentioned, the CFC is responsible for that. So 

there are a lot of watch dogs out there, both at the Federal level, 

including, of course, the U.S. Department of Justice Antitrust Division, and also on the State level, to watch for that type of bad behavior in the marketplace. 

Senator COLEMAN. Mr. Wells, thank you for your response—but 

you made the comment about tight supply and ‘‘we can’t bring it 

in.’’ Can you talk about why we can’t and what recommendations 

you have to change that? 

Mr. WELLS. OK. We currently are operating with approximately 

four port facilities that have the capability to handle the LNG 

tanker imports of which we are bringing in, 3 percent of our usage 

right now is LNG. These facilities are basically operating in excess 

of 90 percent capacity. I know there’s a permitting process, an application process underway. The record is showing at least 14 applications for the future in terms of development, but these faciliVerDate 0ct 09 2002 14:04 Jun 15, 2006 Jkt 027031 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 C:\DOCS\27031.TXT SAFFAIRS PsN: PAT
38

ties are not built yet. There’s a lot of NIMBY activity in terms of 

not in my backyard. There’s concern about the safety of LNG that 

needs to be factually assessed and make determinations, but right 

now, even when we talk about proposals to bring natural gas out 

of the North Slope, we’re talking about issues, even if we brought 

it here, where would it go. Infrastructure needs are a high priority 

that needs to be assessed in terms of its capability to bring it on 

line fairly quickly. This stuff doesn’t come on line in less than a 

year, so the verdict is still out. 

I do want to mention just quickly, there is clearly a fear premium that exists in the oil marketplace. I think if you look at the 

last 10 years of natural gas, the price volatility that exists lends 

itself to believe that there’s no reason to think there’s not a fear 

premium that exists in the marketplace in natural gas. I think 

clearly the Federal Government in the last five or 6 years is just 

now beginning to realize that they need to gear up to look at market oversight and monitoring, and we hope that the regulatory 

agencies are putting the necessary resources in place to determine 

whether or not the marketplace is operating fairly. 

Unfortunately as an auditor, as an investigator, the verdict is 

still out because we haven’t seen any results yet. I know there’s restrictions in terms of discussion about what is ongoing, but until 

some of this information becomes public, we don’t know for sure yet 

whether, in fact, we do have due diligence in watching the marketplace. 

Senator COLEMAN. Let me just follow up. You mentioned the gas 

reserves in the North Slope. There was an article in the New York 

Times recently that talked about that. I think there are some lawsuits going on, competing proposals, one building a pipeline from 

the North Slope to Alberta to Chicago, another is to expand current 

LNG facilities, and my staff has looked into that, we’ve talked to 

the oil company folks. Has GAO at all looked at this issue? 

Mr. WELLS. Senator Coleman, we work for the Congress, we have 

not been asked to look at this. We know there is an antitrust lawsuit that has been filed. So we don’t have anything to report on the 

status of that. 

Senator COLEMAN. You mentioned, you touched upon, and you 

said maybe we can pursue the question about what can folks do to 

limit the pain. Can you respond to that? Can you provide some advise, some direction? 

Mr. WELLS. Absolutely. I want to touch a minute on the consumers and the utilities and even the Federal Government. The 

consumer can do things, like we’ve heard today. They have consumer choice in many States where they can actually seek a different supplier of natural gas. In a competitive marketplace they 

can look for a supplier that’s doing a better job of delivering gas 

at a lower price. Individual consumers can work with the utilities 

on budget plans to spread out their payments as opposed to getting 

the big spikes in the winter. Clearly, take action, lower thermostats. There are things that, I know Ms. Jackson mentioned it 

today, she is one of the smart consumers that asked for an energy 

audit. Surprisingly, many consumers don’t even realize that for 

free they can have someone come into their home and assist them 

in identifying where they can identify the most advantageous exVerDate 0ct 09 2002 14:04 Jun 15, 2006 Jkt 027031 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 C:\DOCS\27031.TXT SAFFAIRS PsN: PAT
39

penditure of a resource to save energy. Clearly education in terms 

of LIHEAP. You touched on it. How did these people, how did the 

consumers even realize that they were eligible. There’s a lot of 

things that can be done for the consumer once they become informed, and I think the Federal Government also has the responsibility to keep the consumers informed about what’s out there. 

I think to the utilities GAO would say we need to look at their 

storage practices, maybe their storage policy. They need to look at 

the fixed price contract buying that they’re doing, derivatives, 

hedging, how do you manage risk. There’s a lot of sophistication in 

today’s marketplace. Unfortunately, we see a lot of utilities and 

State commissions that haven’t necessarily come up to speed on 

some of the sophistication techniques that may exist in the marketplace to assist the consumers, so we would encourage them to work 

on that. 

Even at the Federal Government level, clearly we need to make 

some decisions and we need to take action. It’s been said many 

times, but we need to diversify. We’ve talked a little bit about fuel 

switching, it’s beginning to occur. We’ve heard even some of the 

electric generation from natural gas, using natural gas and switching over to coal in the future. We need to diversify. Unfortunately, 

we need it all. We need to modernize, technology, R&D. I think we 

need a better partnership between the Federal Government and 

the utilities and the States and the industry. We need to get everybody in the room and start talking about solutions. Leadership, and 

I think that’s where the Federal Government can provide some 

leadership to send the right signals so that we can move forward 

into the 21st Century and meet our energy demands. 

Senator COLEMAN. That’s very helpful, Mr. Wells, thank you. 

Ms. Court, can I turn to you and from your vantage point—you’re 

dealing with the wholesale, the big picture stuff. 

Ms. COURT. Right. 

Senator COLEMAN. Where else do you think we have to go to give 

consumers a better sense of confidence that their concerns about 

market manipulation are being addressed? 

Ms. COURT. Well, I think that it will, it behooves us to keep them 

informed, to make sure that as we go through the investigations 

and, of course, as Mr. Wells indicated, an ongoing investigation by 

its very nature has to be kept nonpublic, but I think it helps the 

consumer to know that the people that they are counting on, the 

Federal Government, and also the State government, are on top of 

the matter, and that we should publicize the results of these investigations on a regular basis. We have done that, by the way, Senator. 

Last March, for example, the FERC submitted a report to Congress even before we had our EPAct authority which has expanded 

our authority so much where we listed all the various investigations and the results of those investigations and the nature of those 

investigations, and the dollar penalties or disgorgement of profits 

that we were able to get on behalf of the consumers. So I think 

that will help. I think that that will be an assistance to the consumer and to the customers, natural gas customers. 

Senator COLEMAN. That’s very helpful. I would hope that, one, 

you continue to remain committed to vigorous oversight, it’s critiVerDate 0ct 09 2002 14:04 Jun 15, 2006 Jkt 027031 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 C:\DOCS\27031.TXT SAFFAIRS PsN: PAT
40

cally important, and I would like for the purposes of this record for 

you to submit to us any documentation or other things you have 

that will help us get out the message that this is what’s being done 

and this is how we’re doing it. 

Ms. COURT. We would be more than happy to do that, Senator. 

Senator COLEMAN. That would be very helpful. I want to thank 

everyone for their participation. I’m going to keep the record open 

for 7 days, there may be some follow-up, additional questions. I 

hope this has been helpful from the personal perspective of how individuals are affected. We didn’t get into details, Mr. Wells, you 

talked about fertilizer. But, for an agriculture-focused State, this is 

important to Minnesota. The cost of the fertilizer has gone through 

the roof and it has a direct impact on farmers’ abilities to take care 

of themselves and families, and some of the competitive challenges 

of losing those operations, so there are a lot of questions that are 

still out there, but we need vigorous oversight. We’re going to continue to work with GAO and waiting for, I think, the discussion 

about market manipulation and trading futures and things like 

that, which will come out in two thousand and——

Mr. WELLS. Early this summer. 

Senator COLEMAN. Oh, this summer. 

Mr. WELLS. And also I want to say that I’m actually flying to 

Japan next week, we’re doing some work related to terrorist activity and security of LNG, and that will be high on my list to ask 

questions about how they can sell gas at——

Senator COLEMAN. Let me ask you one last question before we 

finish. We did make changes this year in the energy bill that dealt 

with the ‘‘not in my backyard’’ with respect to LNG. Have you had 

a chance to look at those, Mr. Wells? Are they sufficient or are 

there additional things we need to do? 

Mr. LUDWIGSON. My understanding is that those provisions are 

still being phased in the FERC oversight of the licensing process. 

Ms. COURT. Actually, Senator, the tools that Congress gave us in 

EPAct I think will go a long way. We’re pretty confident that 

they’re going to help us a lot. For example, the EPAct made FERC 

the lead agency for all of the Federal authorizations that are required. You’ve also given us exclusive jurisdiction, for example, 

over LNG. That was a major issue, for example, with some of the 

coastal States and, in fact, one large lawsuit was dropped right 

after EPAct was enacted. So I think we’ve pretty much put everything in place. We have rules now implementing every one of the 

EPAct responsibilities that Congress gave us to facilitate the siting 

of LNG facilities, and also some of those provisions go to our infrastructure generally, not just with LNG, but with our interstate 

grid. 

One of the things with respect to the interstate grid, one of the 

advantages that we have vis-a-vis other countries is that we have 

the most sophisticated interstate natural gas grid in the world, and 

so that even though other countries right now may have a lower 

wellhead price, or they may even be able to get some LNG shipments, one of the advantages that we have is that once the gas gets 

to our country, we do have a grid that will be able to disperse it 

throughout the country. 

41

Senator COLEMAN. Well, let’s make sure we keep that grid safe. 

I want to thank you all. The hearing will be kept open for 7 days. 

With that, this hearing is now adjourned. 

(Whereupon, at 10:48 a.m., the Subcommittee was adjourned.) 

(43)

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