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26–995PDF 2005

NATURAL GAS AND HEATING OIL FOR

AMERICAN HOMES

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

NOVEMBER 2, 2005

Serial No. 109–58

Printed for the use of the Committee on Energy and Commerce

(

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

COMMITTEE ON ENERGY AND COMMERCE

JOE BARTON, Texas, Chairman 

RALPH M. HALL, Texas 

MICHAEL BILIRAKIS, Florida 

Vice Chairman 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

PAUL E. GILLMOR, Ohio 

NATHAN DEAL, Georgia 

ED WHITFIELD, Kentucky 

CHARLIE NORWOOD, Georgia 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

JOHN B. SHADEGG, Arizona 

CHARLES W. ‘‘CHIP’’ PICKERING, 

Mississippi, Vice Chairman 

VITO FOSSELLA, New York 

ROY BLUNT, Missouri 

STEVE BUYER, Indiana 

GEORGE RADANOVICH, California 

CHARLES F. BASS, New Hampshire 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

MIKE FERGUSON, New Jersey 

MIKE ROGERS, Michigan 

C.L. ‘‘BUTCH’’ OTTER, Idaho 

SUE MYRICK, North Carolina 

JOHN SULLIVAN, Oklahoma 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

JOHN D. DINGELL, Michigan 

Ranking Member 

HENRY A. WAXMAN, California 

EDWARD J. MARKEY, Massachusetts 

RICK BOUCHER, Virginia 

EDOLPHUS TOWNS, New York 

FRANK PALLONE, Jr., New Jersey 

SHERROD BROWN, Ohio 

BART GORDON, Tennessee 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

ELIOT L. ENGEL, New York 

ALBERT R. WYNN, Maryland 

GENE GREEN, Texas 

TED STRICKLAND, Ohio 

DIANA DEGETTE, Colorado 

LOIS CAPPS, California 

MIKE DOYLE, Pennsylvania 

TOM ALLEN, Maine 

JIM DAVIS, Florida 

JAN SCHAKOWSKY, Illinois 

HILDA L. SOLIS, California 

CHARLES A. GONZALEZ, Texas 

JAY INSLEE, Washington 

TAMMY BALDWIN, Wisconsin 

MIKE ROSS, Arkansas 

BUD ALBRIGHT, Staff Director 

DAVID CAVICKE, Deputy Staff Director and General Counsel 

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

SUBCOMMITTEE ON ENERGY AND AIR QUALITY

RALPH M. HALL, Texas, Chairman 

MICHAEL BILIRAKIS, Florida 

ED WHITFIELD, Kentucky 

CHARLIE NORWOOD, Georgia 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

JOHN B. SHADEGG, Arizona 

CHARLES W. ‘‘CHIP’’ PICKERING, 

Mississippi 

VITO FOSSELLA, New York 

GEORGE RADANOVICH, California 

MARY BONO, California 

GREG WALDEN, Oregon 

MIKE ROGERS, Michigan 

C.L. ‘‘BUTCH’’ OTTER, Idaho 

JOHN SULLIVAN, Oklahoma 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

JOE BARTON, Texas, 

(Ex Officio) 

RICK BOUCHER, Virginia 

(Ranking Member) 

MIKE ROSS, Arkansas 

HENRY A. WAXMAN, California 

EDWARD J. MARKEY, Massachusetts 

ELIOT L. ENGEL, New York 

ALBERT R. WYNN, Maryland 

GENE GREEN, Texas 

TED STRICKLAND, Ohio 

LOIS CAPPS, California 

MIKE DOYLE, Pennsylvania 

TOM ALLEN, Maine 

JIM DAVIS, Florida 

HILDA L. SOLIS, California 

CHARLES A. GONZALEZ, Texas 

JOHN D. DINGELL, Michigan, 

(Ex Officio) 

(II) 

C O N T E N T S 

Page

Testimony of: 

Castelli, Brian, Executive Vice President and COO, Alliance to Save 

Energy ............................................................................................................ 133

Davidson, Charles D., Chairman, President and CEO, Noble Energy, 

Inc .................................................................................................................. 112

Ewing, Stephen E., Vice Chairman, DTE Energy, Incoming Chairman, 

American Gas Association ............................................................................ 72

Horvath, R. Skip, President, Natural Gas Supply Association .................... 116

Jeffery, Hon. Reuben, III, Chairman, Commodity Futures Trading Commission ........................................................................................................... 27

Kelliher, Hon. Joseph T., Chairman, Federal Energy Regulatory Commission ................................................................................................................. 21

Maddox, Mark R., Principal Deputy Assistant Secretary, Office of Fossil 

Energy, Department of Energy .................................................................... 35

Manoogian, Mary Ann, Director, New Hampshire Office of Energy and 

Planning ......................................................................................................... 77

Mason, Donald R., Commissioner, Public Utilities Commission of Ohio ..... 40

Slaughter, Bob, President, National Petrochemical and Refiners Association ................................................................................................................. 120

Stibolt, Robert D., Senior Vice President, Strategy, Portfolio, and Risk 

Management, Suez Energy North America, Inc ......................................... 68

Tucker, Dorothy Elizabeth ............................................................................... 97

Wright, Phillip D., Senior Vice President, Gas Pipeline, Williams Pipeline 

Company, on behalf of Interstate Natural Gas Association of America ... 125

(III) 

(1)

NATURAL GAS AND HEATING OIL FOR 

AMERICAN HOMES 

WEDNESDAY, NOVEMBER 2, 2005

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON ENERGY AND COMMERCE, 

SUBCOMMITTEE ON ENERGY AND AIR QUALITY, 

Washington, DC. 

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

2123 of the Rayburn House Office Building, Hon. John Shimkus 

presiding. 

Members present: Representatives Shimkus, Wilson, Shadegg, 

Radanovich, Rogers, Burgess, Barton (ex officio), Boucher, Waxman, Markey, Engel, Wynn, Green, Allen, and Solis. 

Also present: Representative Bass. 

Staff present: Mark Menezes, chief counsel for energy and the 

environment; Maryam Sabbaghian, majority counsel; Elizabeth 

Stack, policy coordinator; Peter Kielty, clerk; Sue Sheridan, minority senior counsel; and Bruce Harris, minority professional staff. 

Mr. SHIMKUS. If we can get the doors closed in the back, we will 

get this hearing to begin. Thank you for coming. I am sitting in for 

Chairman Hall, who is going to be returning this afternoon, so I 

am glad to have this opportunity. 

I would like to start with my opening statement. Please let me 

start by submitting a letter regarding our Nation’s current energy 

supply situation in the record on behalf on Noble Energy. 

Mr. SHIMKUS. Noble has been very active in Illinois over the last 

several years, accounting for as much as 15 percent of the drilling 

activity in the State over the last 3 years. I believe their current 

production is more than 3,000 barrels per day, making them the 

largest producer in the State of Illinois. Much of their production 

takes place in Wayne, White Clay, Richland, and Jasper Counties 

in my southern Illinois district. 

Many of you who have been here have heard me talk numerous 

times about the diversity of Illinois’s energy resources, and we forget that we still are an oil-producing region. We have all seen the 

reports with the speculation of significant increase in dollars spent 

by American families this winter for natural gas and heating oil. 

In the Midwest, we are expecting to see a 61-percent increase in 

the costs this winter. One statistic recently showed that, overall, 56 

percent of American families with incomes of $50,000 or less, which 

totals about 63 million families, will spend 20 percent of their 

pretax income on energy in 2005. There are ways to bring these 

burdensome consumer costs down by increasing supply and creVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
2

ating more competition, we can lower the cost to the American families. 

Congress has recently acted upon legislation that creates an atmosphere to make this possible. Specifically, in July of this year, 

we passed the Energy Policy Act of 2005, which recognized the 

need for fuel supply increases to make energy more affordable. This 

country has a 250-year supply of coal located in every region of the 

country, and industrial coal gasification technology exists now that 

would combust coal into a gas to produce electricity. The Energy 

Policy Act gives us an opportunity to utilize this technology, which 

is called integrated gasification combined cycle, IGCC, creating an 

alternative to natural gas for electricity production, and creating 

more competition in the gas market to bring the price down for 

consumers. 

The Energy Policy Act also recognizes nuclear power as a clean 

and efficient means of generating electricity. By generating, to create an atmosphere where this type of power generation looks attractive to investors. Also included in that same bill were provisions to help increase our domestic natural gas supply by streamlining burdensome permitting and process issues, giving regulatory 

certainty along with tax and royalty incentives and greater access 

and liquefied natural gas. 

These are all logical steps increasing supply and lowering costs. 

In addition to making natural gas pipeline infrastructure a safer 

investment, so that the product can be transported in an efficient 

manner. Just last week, we passed a budget reconciliation bill out 

of this committee that increases Low Income Heating Energy Assistance Program, commonly known as LIHEAP, by $1 billion, to 

make sure that the very young and the elderly do not go cold this 

winter. 

Finally, H.R. 3893, the GAS Act, gives us an opportunity to expand and build new refineries by implementing several incentives 

to bring outside investors into the crude oil refining business, creating more supply and competition to bring the price of gas at the 

pump down. And also, one provision of the bill, which I know my 

colleague is very excited about, is coal to liquid definition as a refinery. 

I look forward to hearing from our panelists today to get an idea 

of how and what Congress has done this far, and what we can do 

to make energy costs more affordable, along with what we can do 

in the future. And with that, I will yield to the ranking member, 

my friend Mr. Boucher. 

Mr. BOUCHER. Well, thank you very much, Mr. Chairman, for 

convening this timely hearing, and thank you also for those 

thoughtful opening remarks. You will find portions of mine to be 

remarkably similar to the themes you have addressed. 

Across our Nation, gasoline prices at the pump have been declining from post-hurricane highs, as hurricane-damaged production 

and refining facilities have come back into operation. But a major 

energy concern is on the immediate horizon, as cold weather arrives, and as Americans turn on their furnaces. Due to the 

unhealthy reliance by electric utilities on natural gas to fuel electricity generation, our Nation has become highly vulnerable to any 

disruption in natural gas production or distribution, and the hurriVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
3

cane-related disruptions will drive natural gas costs for home heating to truly stressful levels during the course of this winter. 

More than one half of all Americans heat their homes with natural gas, and under current estimates, the cost to the homeowner 

who heats with natural gas will, on average, be 48-percent higher 

this winter than the winter before. And last year’s cost to the 

homeowner was significantly higher than the year before that. 

Those who heat with oil will experience an increase of 32 percent 

this year, while the cost of heating with electricity will increase 

somewhat more modestly. 

Over the longer term, one obvious strategy to address the 

unsustainable price of natural gas is to encourage electric utilities 

to rely more on coal and less on natural gas for electricity generation. As the chairman mentioned in his remarks, with the advent 

of technologies such as integrated gasification combined cycle, the 

utility industry is now showing renewed interests in coal and new 

orders are, for the first time in a long time, being placed for coalfired facilities. 

EPACT 2005, which this committee originated and which the 

President in August signed into law, contains incentives that were 

originated on the House side to encourage more reliance on coal 

and less reliance on natural gas for electricity generation. Those incentives will help, and I think the renewed interest we have seen 

from some electric utilities in employing technologies, such as integrated gasification combined cycle, have been driven to some extent 

by the presence of those incentives. Going forward, this committee 

and the Congress in general should seize every opportunity to further encourage this shift from natural gas to coal on the part of 

electric utilities. 

For home heating oil, the concept of a strategic refinery reserve 

similar to the strategic petroleum reserve, is also an appealing 

long-term strategy. It can easily be established, and it would provide the same shock absorber benefits for refined products that the 

strategic petroleum reserve provides so effectively with respect to 

crude oil. 

In the near term, a major new infusion of Federal dollars into 

the Low Income Home Energy Assistance Program is essential for 

all low-income homeowners and renters. People are going to be in 

genuine need this winter. The Congress has an obligation to address their plight and fund LIHEAP adequately to assure that people are not put to the choice of having heat, of having food, or of 

having medicine. 

I look forward to the comments by our witnesses this afternoon 

on the strategies that I have suggested in these remarks, and on 

other strategies that they may want to suggest, whether they are 

short term, intermediate term, or longer term in nature, in order 

to address the very real problems our Nation now confronts with 

respect to home heating prices. 

Mr. Chairman, I thank you very much, and I look forward to the 

witnesses’ testimony. 

Mr. SHIMKUS. Thank you. Now, the Chair recognizes the chairman of the full committee, Chairman Barton, for an opening statement. 

Chairman BARTON. Thank you, Mr. Chairman. 

4

I would like to begin today by welcoming our witnesses, thanking 

them for their time today, especially Chairman Joe Kelliher, who 

is the Chairman of the FERC. I have known Chairman Kelliher for 

a number of years, and at one point in time, he even had to say 

yes, sir to me, because he worked for me, so I am glad to have him 

back where he can say now, no, sir, go jump in the lake, Mr. Barton. I am glad to have him here. 

I also want to welcome Chairman Jeffery from the Commodity 

Futures Trading Commission. We don’t often have your agency before this committee, and I am glad that you could find time to appear today. 

Two weeks ago, we heard from the EIA, the Energy Information 

Administration, about their projections for the outlook for winter 

fuels this coming winter. According to EIA, households that rely on 

natural gas and home heating oil are expected to spend approximately $350 per household more this winter for heating than they 

did last winter. 

Today, we are going to look specifically at home heating oil and 

natural gas, to get a better understanding of supply, availability, 

and price. And like we did with gasoline, we have invited representatives along the entire natural gas supply chain. We are 

going to hear from Federal and State regulators, producers, pipelines, local distribution companies, and of course, the consumer. 

Many of our witnesses are experts in their fields. I am anticipating 

that what they are going to tell us is that high prices are driven 

by a relatively low supply and lack of availability. Supply and demand, just as in Economics 101. 

It is with great concern that I view the list of energy projects 

that could help on the supply side, and find that they have been 

stalled or killed in the very areas of the country where the prices 

will probably be the highest. In the Northeast, for example, 51 percent of our households rely on natural gas for their heating, but 

projects that would have provided more natural gas to heat Northeastern homes have been stopped cold, no pun intended. 

For example, the Logan Township New Jersey Liquefied Natural 

Gas Terminal would provide warmth to about 5 million homes in 

the Northeast, but it is bogged down in a lawsuit. New Jersey actually wants this project, but Delaware doesn’t. While the terminal 

would be located in New Jersey, the pier would touch the Delaware 

River, and Delaware won’t allow development along that river. The 

Millennium Pipeline project would supply much needed natural gas 

to the people of New York City. The New York Algonquin natural 

gas trading prices are among the highest in the country because of 

supply bottlenecks. The project’s original application was filed with 

the FERC in 1997, 8 years ago. The project would have been finished and bringing natural gas to the city today, but local officials 

apparently have just said no. Back in the 1990’s, the pipeline was 

named Millennium, because it was intended to supply natural gas 

in the next century, which is now this century. Maybe it should be 

called Millennium, because that is how long, apparently, it is going 

to take to get it built. 

In the Northeast, 30 percent of the households use heating oil as 

their primary heating fuel. However, 50 percent of the Northeast 

distillates consumption, which is where home heating oil comes 

5

from, now comes from overseas, from countries like Venezuela, and 

yet, even as we face dramatic price increases at the beginning of 

what appears to be a cold winter, I am not aware of any refinery 

projects, new or expanded, in the Northeast. Why is that? You oppose a refinery in your back yard, but apparently, it is okay to let 

America-haters like the President of Venezuela gain more control 

over our supplies. 

Now, I am sure that some are going to be tempted to say well, 

Venezuela only hates our President, not our people. Well, I am not 

so sure about that. Put me down as skeptical. Investing faith in a 

snarling foreign country dictator seems unlikely to keep heating oil 

flowing into the U.S. at prices people can afford to pay even in our 

coldest, bluest States. 

The expected continuing high natural gas prices and home heating oil prices will be a hardship this winter for everyone. We know 

that. We know that there are many members on both sides of the 

aisle that want to do as much as we can, and we have a low income 

heating assistance program, called LIHEAP. This committee last 

week increased it by $1 billion, $1 billion real dollars that will be 

available if we get reconciliation done in the House and the Senate 

to help heat homes, not just in the Northeast, but all over our 

country this winter. That is an increase of 50 percent. It is not subject to appropriation, and it is direct help today. 

LIHEAP, however, is only a caulking for a loose window. If we 

want warmer homes and more affordable heating bills, we need 

more natural gas and more heating oil, which means we need more 

infrastructure and more projects. As the chairman of this committee, I stand committed to work with people on both sides of the 

aisle, with the other body, and with the President of the United 

States, and with officials like those that are here before us today, 

to come up with projects that are environmentally friendly, economically make sense, and can be built in a reasonable amount of 

time. 

I hope that this hearing today helps us begin that process, and 

that very soon, and again, in a bipartisan, bicameral basis, we can 

begin to move forward, so that we are not just talking about Band 

Aid approaches, we are talking about long term solutions that help 

our country and help our citizens, not just in the wintertime, but 

all the time. 

Thank you, Mr. Chairman. 

[The prepared statement of Hon. Joe Barton follows:]

PREPARED STATEMENT OF HON. JOE BARTON, CHAIRMAN, COMMITTEE ON ENERGY

AND COMMERCE

I would like to begin by welcoming our witnesses and thanking them for their 

time today. I would especially like to welcome Chairman Joe Kelliher, the Chairman 

of the Federal Energy Regulatory Commission. I have known Chairman Kelliher for 

many years from his work on this very Committee and I hold his views and perspectives in great regard. Joe, welcome back to the Energy and Commerce Committee, 

thank you for being here, and good luck with your Chairmanship. 

I would also like to specifically welcome Chairman Reuben Jeffrey from the Commodities Futures Trading Commission. I look forward to your testimony regarding 

natural gas and home heating oil futures trading. 

Two weeks ago, we heard from the Energy Information Administration regarding 

their winter fuel outlook. According to their projections, households that rely on natural gas and home heating oil are expected to spend approximately $350 more this 

winter in fuel expenditures. 

6

Today, we look specifically at home heating oil and natural gas to get a better 

understanding of supply availability and price. And like we did with gasoline, we 

have invited representatives along the entire natural gas supply chain. We will hear 

from federal and state regulators, producers, pipelines, local distribution companies 

and the ultimate consumers. 

Many of our witnesses are experts in their fields, and I’m anticipating that they 

will tell us that high prices in home heating oil and natural gas are driven by the 

relatively low supply. Supply and demand, just like in economics 101. So it’s with 

great concern that I review the list of energy projects stalled or killed in the very 

areas of the country where prices will be the highest. 

In the Northeast, 51% of the households rely on natural gas. But projects that 

would have provided more natural gas to heat Northeastern homes have been 

stopped cold. For example:

• The Logan Township, New Jersey LNG terminal would provide warmth to about 

five million American homes, but it is bogged down in a lawsuit. New Jersey 

wants the heat, but Delaware doesn’t want the project. While the terminal 

would be located in New Jersey, the pier would touch Delaware River waters 

and Delaware won’t allow development along the river. 

• The Millennium Pipeline Project would have supplied much needed natural gas 

directly to the people of New York City. The New York Algonquin natural gas 

trading hub prices are among the highest because of supply bottlenecks. The 

project’s original application was filed with the FERC in 1997. That’s 8 years 

ago. This project could have been finished and bringing heat to the city today, 

but local officials just said, ‘‘No.’’ Back in the 1990s, the pipeline was named 

′′Millennium′′ because it was intended to supply natural gas into the next century, which is now this century. Maybe it should be called ‘‘Millennium’’ because 

that’s how long it will take to build it. 

In the Northeast, 30% of households use heating oil as their primary heating fuel. 

However, 50% of the Northeast’s distillate consumption, which is where home heating oil comes from, now comes from other areas of the country or overseas, from 

countries like Venezuela. And yet even as we face dramatic price increases at the 

beginning of a cold winter, I am unaware of any refinery projects, new or expanded, 

on the Northeast’s drawing boards. Why is that? You oppose a refinery in your backyard, but apparently think it’s okay to let America-haters like the president of Venezuela gain more control over our supplies. 

Now, I’m sure that some will be tempted to say, ‘‘Well, Venezuela only hates our 

President, not our people. Why, they’ll never cut off Massachusetts.’’ 

Put me down as skeptical. Investing faith in a snarling foreign country seems unlikely to keep heating oil flowing into U.S. homes at prices people can afford, even 

in the blue states. 

The expected continuing high prices of natural gas and home heating oil will be 

a hardship this winter for everyone we know. I know there are many members on 

the other side of the aisle that will blame this hardship on Low Income Energy Assistance Program funding. First of all, as a direct help to those with low-incomes, 

last week this Committee increased the Low Income Energy Assistance Program by 

$1 billion dollars. That’s an increase of 50%, not subject to appropriations and it’s 

direct help today. LIHEAP, however, is only a caulking for a loose window. If we 

want warmer homes and affordable heating bills, we need more natural gas and 

more heating oil. 

I stand committed to more energy at prices working people can afford. I stand opposed to those who spend their energies killing the very projects that would help 

their own people. If you want your constituents to freeze in the dark, the way to 

do it is to kill energy projects here at home and rely on more heat from President 

Chavez.

Mr. SHIMKUS. The Chair thanks the chairman. And now, I recognize my colleague from Massachusetts, Mr. Markey, for 3 minutes. 

Mr. MARKEY. Thank you, Mr. Chairman. 

Mr. Chairman, we are holding today’s hearings less than a week 

after the full Energy and Commerce Committee voted to defeat an 

amendment sponsored by Representative Rush and Green and myself, which would have provided $3 billion for the low-income, heating-assistance program, which, in addition to the $2 billion in funding for the program that is contained in the appropriations bills, 

would have actually funded this heating program at the $5.1 billion 

7

authorization level that the committee voted for in the Energy Policy Act of 2005 that the President signed into law in August. 

I believe that the committee’s decision to reject additional funding for this program was fundamentally wrong. It is inconceivable 

to me that this Congress would give higher priority to protecting 

tax cuts for millionaires than to providing consumers with some 

help in addressing the home heating crisis that we will be facing 

in the Northeast and Midwest this winter. And we know that this 

crisis is coming. Just 3 weeks ago, the Department of Energy’s Energy Information Administration released its short-term energy 

outlook and winter fuels outlook. This report projected that home 

heating oil prices are likely to rise 31 percent this winter compared 

to prices paid last winter. That translates into an additional $378 

over this coming winter for seniors, for poor people, for everyone. 

In the event of a colder than normal winter, consumers could face 

an even worse situation. Home heating oil expenditures could rise 

$774 this winter, if we have a colder than normal winter, which 

many prognosticators are predicting. These expenditures are a lot 

higher than seniors have been forced to pay in past winters. 

But the crisis we are facing goes beyond just the question of how 

to help low income seniors that qualify for Federal programs. With 

price increases on the order of what we are going to be seeing, even 

seniors that consider themselves to be comfortably middle class will 

be facing difficult choices. Today, we will be hearing from Dorothy 

Elizabeth Tucker of Medford, Massachusetts, about the pressures 

she and other seniors in Massachusetts are facing this winter, as 

a result of high energy prices. And this is all about choices, moral 

choices: who needs help and who doesn’t need help? 

Mrs. Tucker and seniors like her are sitting around the kitchen 

right now trying to make tough decisions about whether to pay for 

more medicine or heat or for groceries. Our constituents all across 

the Northeast and Midwest are being squeezed in this way, as Conoco and Exxon Mobil and others report astronomical profits, so this 

is a moral choice. Should we, in fact, have tax breaks of $70 billion 

for mostly the millionaires in our country, or should we put more 

money into programs to help the seniors, to help the needy, pay for 

their home heating bills this winter. That is a moral choice, not a 

political choice, a moral choice, and I am afraid that this committee 

and this Republican Congress and this Republican President is failing this test. 

I yield back the balance. 

Mr. SHIMKUS. The gentleman yields back his time. The Chair 

recognizes the gentleman from Michigan, Mr. Rogers. 

Mr. ROGERS. Thank you, Mr. Chairman. My friend neglected to 

inform us that we had the single largest increase in LIHEAP funding ever, a 50-percent increase over last year’s funding. I am sure 

that is in the bottom of your notes there. 

I just wanted to, and I look forward to hear our panelists, but 

welcome Steve Ewing—he is on the second panel—who is not only 

a great leader and CEO and, certainly, someone who cares about 

his community. He is a great corporate citizen. He is involved in 

so many activities in southeast Michigan. Thank you for not only 

being a great leader of a great company, but taking of the time 

that you do to give so much back to our local community around 

8

Detroit, Michigan. I just wanted to thank you for that, and I look 

forward to hearing the statements of the panelists. 

And with that, Mr. Chairman, I will yield. 

Mr. SHIMKUS. The gentleman yields back. The Chair recognizes 

the gentleman from New York, Mr. Engel, for an opening statement. 

Mr. ENGEL. Thank you, Mr. Chairman, for holding this important hearing on natural gas and home heating oil prices. As we 

move toward the fall and winter, I am very concerned about the 

welfare of my constituents back home in New York, and of people 

all over the country. 

Two weeks ago, our subcommittee heard from the Energy Information Administration on their short term energy outlook and winter fuels outlook. Their findings were grim. Home heating oil prices 

are likely to rise by 31.5 percent this winter compared to last winter, and prices for households heating their homes with natural gas 

are expected to rise by 48 percent. In September, the NYMEX market prices for natural gas had moved from an average of 6.81 per 

decatherm in the winter of 2004-2005, to the current price of 14.64 

for the period between November 2005 and March 2006. It is expected that on average, people will pay a minimum of more than 

$350 each on heating costs this winter, money that is needed to be 

spent on food, electricity, gas, prescription drugs, you name it. 

Clearly, tradeoffs will have to be made on these basic necessities 

for living, but they shouldn’t have to be. 

I am terribly, like my colleagues, disturbed by the failure of the 

Administration and Republican leadership here in Congress to promote policies that will have significant impact on stabilizing energy 

prices, and protect consumers from price gouging. Just last week, 

as Mr. Markey pointed out, in the reconciliation bill, an amendment offered by Mr. Rush, Mr. Green, and Mr. Markey to increase 

LIHEAP funding to $5.1 billion, as authorized under the Energy 

Policy Act, which everyone on this committee initially voted for, 

was rejected on a party line vote, with all Democrats voting for it 

and all Republicans voting against it. 

As you know, most LIHEAP recipients have a family member living with them that is elderly, disabled, or a minor child. Simply 

put, in light of the colder than average temperatures expected this 

winter, current funding for the program is simply inadequate. The 

Administration has also declined, so far, to make releases from the 

Northeast Home Heating Oil Reserve, which would help address 

the soaring energy prices of those living in the Northeast, despite 

the sustained high prices reaching the trigger margin for using the 

reserve. I know my colleagues and I hope to hear back from them 

on when such a release will be made. 

So not only has the majority rejected granting low income constituents necessary help with their heating bills, but they won’t 

even offer them comprehensive protection from price gouging. The 

Democratic substitute to the GAS Act had a price gouging amendment that authorized the FTC to punish unscrupulous companies 

charging unfair prices for gasoline, heating oil, propane, and natural gas. By contrast, the majority bill was weaker, in that it failed 

to offer consumers any protections for natural gas and propane 

gouging. 

9

In the meantime, the oil companies are making out like bandits. 

Just a few days ago, Exxon Mobil announced that its third quarter 

net income jumped 75 percent to $9.92 billion. The Washington 

Post noted that this set an industry record, and that Exxon’s sales 

of $107.2 billion were the highest in any quarter, according to 

Standard & Poor’s. So the rich get richer and the poor get poorer, 

and the Administration and the Republican majority offers only tax 

breaks for the wealthy, not help for low and middle income people. 

Now, the chairman of the Finance Committee said yesterday that 

oil and gas companies reaping record profits from soaring prices—

I just need 10 more seconds, Mr. Chairman—should give 10 percent of those profits to supplement a Federal program to help the 

poor. I agree. While oil executives are jumping for joy over their 

third quarter profits, families across the country are worrying 

about how to make ends meet, and how to stay out of the cold. It 

is just wrong. We have to make companies accountable for their 

profits, and we must help our constituents in this very real time 

of need. 

And I yield back. Thank you. 

Mr. SHIMKUS. The gentleman’s time has expired. The Chair recognizes the gentleman from Texas, Mr. Burgess, for an opening 

statement. 

Mr. BURGESS. Thank you, Mr. Chairman. I appreciate the opportunity to deliver an opening statement, and I thank you and Chairman Barton for holding this important hearing today. 

I think this hearing today will do a good job of providing a good 

deal of information about the natural gas and home heating oil 

supply chains. Chairman Barton did something similar following 

Hurricane Katrina and Rita, to break down the supply chain for 

gasoline, and I found it extremely useful. 

As we discussed here last week during our hearing, the EIA expects home heating costs to soar next year, and people can expect 

to pay an additional $300 to $400 this winter for heating costs. 

This committee and this Congress have already taken steps to help 

address home heating needs for the future. When President Bush 

signed the Energy Policy Act of 2005 into law, it included several 

important provisions intended to boost supply and to hold down 

costs for consumers. It incentivized the domestic production of both 

ultra-deep wells in the Gulf of Mexico and onshore marginal wells. 

It streamlined permitting for natural gas projects on Federal lands, 

and it clarified the Federal Government’s role in siting liquefied 

natural gas facilities to reduce red tape. 

The Energy Policy Act also provided loan guarantees for the construction of the Alaska Gas Pipeline. In Alaska, the problem is not 

so much of having the gas, but transporting the existing gas in an 

economical way to the lower 48 states. That is why, in the Energy 

Bill, Congress provided loan guarantees for the construction of the 

natural gas pipeline when we passed Energy Bill II, just a few 

weeks ago, we sunsetted some of these provisions to spur companies to action. At least one company in my area of north Texas was 

listening, and just last week, the Challenger Capital Group in Dallas announced that it will take the lead in arranging financing for 

the Alaska Natural Gas Pipeline. The project is expected to cost beVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
10

tween $13 billion and $20 billion when it is finished in the year 

2012, and provide a significant amount of natural gas. 

We are in this situation, Mr. Chairman, because some members 

of this panel have consistently opposed measures that would increase both the supply of natural gas and oil. I frankly do not understand how members can be opposed to policies that will bring 

relief to their constituents from high heating costs. In north Texas, 

we are geologically blessed with the Barnett Shale that provides us 

with natural gas. In fact, an article in the Fort Worth Star-Telegram from last Sunday says that drilling companies are flooding 

into the area, putting up every rig they can find, because it is now 

economical to break the Barnett Shale and capture its gas. 

We have all the gas we need in Texas. In fact, we export it to 

our friends in the Northeast and the Midwest. North Texas is 

clearly playing its role in providing the country with safe and secure domestic energy. It is time for those who would stand in the 

way of increasing the energy supply to realize that it is partly their 

tactics that are causing the high heating costs that the EIA is predicting this winter for their constituents. 

I will yield back. 

[The article referred to follows:]

Posted on Sun, Oct. 30, 2005

PRICEY GAS HAS A SILVER LINING

By Mitchell Schnurman, Star-Telegram Staff Writer 

It’s natural to complain about high energy prices, especially after Exxon Mobil 

posted nearly $10 billion in quarterly profit last week. Even the top-ranking Republican senator called for public hearings on oil, while others urged a replay of the 

windfall-profits tax. 

Tarrant County should shudder at the thought. Companies are investing billions 

of dollars here to extract natural gas, and we don’t need government spoiling the 

party. 

Many people will say: ‘‘So what? Haven’t they made enough already?’’

Enough profits maybe, but not enough gas. And isn’t that what we should focus 

on—increasing the supply of these limited resources? 

It’s hard to imagine energy companies putting more money into finding oil and 

gas if we cut their profit motive. 

The Barnett Shale, the massive natural-gas field surrounding Fort Worth, has become an economic juggernaut, in large part because of higher gas prices. 

Four years ago, natural gas sold for $2.78 per thousand cubic feet; last year, it 

was $5.45. In October, the average price topped $14. 

Consumers across the country will be shocked by their winter heating bills, and 

there will be an outcry. 

But if we impose extra taxes or price controls, producers might never invest in 

the new technologies that make the Barnett Shale work. 

Companies are flooding into the area, putting up every rig they can find, because 

it’s now economical to break the Barnett Shale rock and capture its gas. 

‘‘At $13 [per thousand cubic feet], a lot of things are possible,’’ oilman Mike Patman told the Star-Telegram’s Dan Piller this month. 

Patman has leases on 75,000 acres in the Barnett Shale, and that helped him 

bring energy giant Shell Exploration to the game, as well as Boone Pickens. Shell 

and Pickens are big names, but they’re just the latest to tap into a gas field that 

runs under 10 counties, including Tarrant. 

How big is the local natural-gas play? 

Ross Perot Jr., whose company is drilling 19 wells in the Barnett Shale, says it’s 

the economic equivalent of three or four Dallas/Fort Worth Airports. 

About 125 rigs are working there today, which translates into more than 5,000 

jobs. After six years, the Barnett Shale is generating more gas than any other field 

in Texas. It’s likely to produce 400 million cubic feet of gas this year and roughly 

$4 billion in revenue. 

11

One local economist, Bernard Weinstein of the University of North Texas, says 

the local economic impact could approach $3 billion a year. 

Huge investments are being made in equipment and people; property-tax revenue 

is surging; many cities and families are earning royalties from gas leases; and 

Weinstein says the trickle-down effects are reaching home builders, landscapers, 

even sign-makers. 

That means we have a silver lining in the cloud of high energy prices. 

The Texas economy as a whole still gains more than it loses when prices rise, says 

the Dallas Fed. 

The upside is not as great as in the past, because the economy is more diverse, 

but the industry remains a force in the state. 

Of course, the positive effects are concentrated in limited locations, and the pain 

of high prices hits everyone. The Barnett Shale puts us in the select company. 

My colleague Piller has chronicled the growing activity in the Barnett Shale, comparing it to the great energy strikes that created past booms in Texas. 

Some examples: 

Since 2002, Devon Energy of Oklahoma City has drilled almost 2,000 wells in the 

Barnett Shale and may drill 1,000 more in the area. It’s the No. 1 player. 

XTO Energy jumped in last year and increased its bet with an acquisition. CEO 

Bob Simpson says the Fort Worth company plans to drill an average of 20 wells a 

month for the next six years. 

Quicksilver Resources expects to be getting 30 million cubic feet a day from its 

Barnett Shale wells by the end of 2005. It’s opened a pipeline to serve the sector 

and plans a natural-gas-processing plant near Granbury. 

EOG Resources of Houston has drilled 18 wells in Johnson County. Chesapeake 

Energy, which started drilling here last year, says it has 99 wells—and the potential 

for 500 to 750. 

Energy Transfer Partners of Dallas recently said it’s expanding its 264-mile pipeline from near Cleburne through East Texas and into Louisiana. The total cost is 

$535 million. The company is also adding a $32 million loop to handle extra gas 

from Johnson and Parker counties. 

As you’d expect, natural-gas production here is climbing. It’s up 19 percent in the 

first eight months of the year, while the statewide total declined. 

The Barnett Shale alone may not lead to lower natural-gas prices, because older 

fields in Texas now produce less, while utilities are using much more gas to make 

electricity. The supply of natural gas peaked three decades ago, while demand is 

growing, a recipe for soaring prices. 

The question is: What’s the best way to improve the situation—with government 

dictates or market adjustments? 

Stephen Brown, director of energy economics and microeconomic policy analysis 

at the Dallas Fed, points to the market’s response after Hurricane Katrina. 

Within two months, gasoline prices had nearly returned to pre-storm levels, despite some refineries still shut down today. 

Many factors contributed to the improvement, including gasoline supplies that 

were shipped from Europe to the United States. Higher prices made that a profitable proposition. 

‘‘Price controls or new taxes would prevent the market from self-correcting,’’ 

Brown says. 

In the 1980s, the Reagan administration effectively ended price controls on natural gas, which led to a boom in exploration and falling prices. 

‘‘The history of intervention is that it discourages development and slows the 

pace,’’ Brown says. 

Experts have predicted that we’d run out of oil many times in the past. 

But innovations keep leading to new supplies and making it economical to get 

them out of the ground. 

Deep underwater drilling and Canadian oil sands represent promising options, 

but only if prices are high enough to justify the risk. 

The Barnett Shale has emerged because higher prices and new technology make 

it attractive. 

That happens to be very good for the North Texas economy, but it’s also the fastest way to get more gas for everyone.

Mr. SHIMKUS. The gentleman’s time has expired. The Chair now 

recognizes the gentleman from Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman, and like my colleagues, 

I am glad you are holding this hearing on natural gas and heating 

12

oil for this winter, and I want to welcome both this panel and our 

future panel. 

Along with the war in Iraq, energy prices are the highest concern 

for my constituents. This Congress passed the Energy Bill that I 

supported, and to address our medium term and long-term energy 

future, and I remain confident that bipartisan bill will deliver. 

However, many of the important new provisions of that bill will not 

bring benefits this winter, because the energy infrastructure takes 

many billions of dollars and several years to expand. If we could 

build five new LNG plants between now and December 1, my 

Northern friends would rest a lot easier and a little warmer this 

winter. But these projects cannot be built that fast, and the fact 

that we will have cheaper gas in the future is little consolation for 

this winter. 

Since today is focused on the immediate crisis coming down the 

road, I will focus on two policies that I believe would help heat 

homes affordably this winter: full funding for LIHEAP and economic dispatch. Our committee last week, in a 16-hour markup, increased funding for LIHEAP $1 billion, which was great. The problem is now we hear that that reconciliation bill may not be passed 

by the full Congress until next year, so it will not help us at all 

this winter. Maybe we should have done it earlier in the original 

Energy Bill, but as many observers of this committee know, I have 

serious problems with the outdated and nonsensical current Tier I 

LIHEAP formula, and I would be interested to know what some of 

our witnesses think about this formula, and if they can defend it. 

However, since the formula gets fairer as the funding increases in 

the short term, we do have a solution where the rising tide lifts all 

boats. That is why I was disappointed that we, last week in the 

budget reconciliation, we only did $1 billion instead of the full $5 

billion that was authorized in the Energy Bill that passed in July 

for LIHEAP, which is really .002 percent of the Federal budget, 

would show that Congress is responding to high energy prices, 

which would have the most severe impacts on the needy. 

I hope that Congress will continue to consider increasing 

LIHEAP funding, such as the Katrina supplemental, and that Congress will put all funding in the base account, as opposed to the 

emergency account, that shortchanges warm weather States, and is 

controlled by the Office of Management of Budget. Over 15 years, 

we have had a trigger in our LIHEAP formula that $2 billion, after 

which funds are allocated more evenly nationwide. Unfortunately, 

we rarely, if ever, pass that trigger. This year, it looks like we certainly will, so it is extremely important that we do not use accounting tricks, like emergency accounts, to avoid the $2 billion trigger. 

If we do, I think we will see continuous warm-weather-State rebellions on LIHEAP funding. Northern members cannot expect us to 

sympathize with their constituents during the winter if we don’t 

get any sympathy for our constituents who have heart attacks, dehydration, heatstroke and exhaustion, and other health impacts 

from hot weather. If we want to put our differences aside for the 

2006 fiscal year, we must put all LIHEAP funding in the base account, not the emergency account. 

The second strategy we could use to save natural gas, and lower 

prices this winter, is economic dispatch. This is a complex elecVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6602 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
13

tricity policy issue which I withdrew my amendment during the 

Energy Bill, but I think the committee needs to start to pay attention to this issue. The Federal Energy Regulatory Commission has 

convened joint FERC-State boards to study economic dispatch in 

the various regions of the country. But the bottom line is it does 

not make economic sense to run inefficient power plants while our 

more efficient ones are idle. Competitive power markets bring competition for lower prices for consumers, and one big way is a more 

competitive price is to use your expensive natural gas more efficiently. Many areas of the country are already doing economic dispatch, since they are part of the independent system operators——

Mr. SHIMKUS. The gentleman’s time——

Mr. GREEN. And thank you, Mr. Chairman, and I will briefly say 

Texas and ERCOT use economic dispatch, and we have saved the 

country 15 billion cubic feet in just 4 years of natural gas. That is 

a 10-percent efficiency improvement in gas use, and I hope our 

committee will look at that. 

Thank you, Mr. Chairman. 

Mr. SHIMKUS. The gentleman’s time has expired. The Chair recognizes the gentleman from Arizona, Mr. Shadegg, for an opening 

statement. 

Mr. SHADEGG. I thank you, Mr. Chairman, and I thank you for 

holding this hearing. I think it is indeed important. 

I would like to associate myself with one of the remarks by colleague, Mr. Green of Texas, and that is my colleagues are deeply 

concerned about the price of energy today, and they want us to act 

on it, and they want us to look at the issue very carefully. But I 

also want to associate myself with my colleague from Texas’s remarks to my right who said, as I pointed in a hearing a week ago, 

it is time for those who have stood in the way, in the past, of increasing energy supplies, and those who stand in the way today of 

increasing energy supplies, to realize that it is their obstructionist 

tactics that are causing the high heating costs that are being predicted for this winter. I am deeply concerned about those costs, although I share Mr. Green’s concern about the high air conditioning 

costs that some people in the Southwestern part of the United 

States, where I live, confront, and the program does not deal, I 

think, in a fair fashion, with the problems they confront. 

I am deeply concerned about this issue. I would like to know if, 

indeed, there was price gouging, but I am saddened that we continue to go along the line of the rhetoric of well, the Republicans 

don’t care. This is just about tax cuts for the rich. What we really 

need is more programs, more programs, more programs, more programs, and more money from the government. Unfortunately, that 

money from the government has to come from somewhere. What 

we need to look at in this discussion is why is the price of natural 

gas so high, and what can we do about it. Let us talk about not 

just the effect that has on homes and home heating and home heating oil, for example, and the ability of people to keep their homes 

warm this winter. But let us talk about it in terms of the long term 

economy. We have got a serious problem confronting this Nation 

and confronting our economy. Natural gas in Canada is $9.25 per 

million BTU; Australia, it is $3.85; China, it is $4.85; Britain, it is 

$5.65; and in the United States, it is $14.67. We simply cannot reVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
14

main viable in a world economy where natural gas is that much 

more expensive here than it is anywhere else. 

You want to talk about tax cuts. John F. Kennedy is the one who 

cut tax rates, as a Democrat President, and who said that a rising 

tide lifts all ships. What he meant by that was that when you 

lower tax rates, and the economy improves, every American does 

better. We need to be looking at what policies will improve the 

lives of every single American, and I would suggest that having 

natural gas prices 3 or 4 or 5 times as high as they are anywhere 

else in the world is not going to help our economy. The Federal 

Government estimates that on the outer continental shelf, there 

are 406 trillion cubic feet of natural gas, and yet, this Congress has 

locked away 85 percent of that oil, making it impossible to reach, 

even with platforms that are completely out of sight, and even with 

the fact that a natural gas platform has never caused, so far as I 

know, any environmental damage. 

Sure, we should be doing something about LIHEAP, and we have done that. This year, we added $1 billion additional dollars to 

LIHEAP. That will take the program to its highest level ever, since 

the program was created in 1981. But more important than more 

government programs which take from some and give to others is 

the obligation we have to find out why gas prices are so high, and 

what we can do to make them lower, and I would suggest improving the competitiveness of American economies, improving our ability to build refineries and to explore in places like the outer continental shelf, hold much more for the American economy than decrying the lack of additional LIHEAP funding. 

Mr. SHIMKUS. The gentleman’s time has expired. The Chair recognizes the gentleman from California, Mr. Waxman, for an opening statement. 

Mr. WAXMAN. Today, we are going to examine the expected impact of the Administration’s energy policy on Americans trying to 

heat their homes this winter. 

Energy costs have been steadily increasing over the last 4 years, 

and for consumers, it is going to get worse before it gets better. 

Home heating costs are expected to go through the roof this winter. 

The Energy Information Administration projects that residential 

natural gas costs will skyrocket 61 percent in the Midwest. Home 

heating oil is expected to cost more than 30 percent more than last 

year. 

As we would expect, the big oil companies are reaping the benefits of these prices. I have a chart behind me. It shows the profits 

of the six biggest oil companies from 2002 through 2005. 

[Chart.] 

In 2004, Exxon Mobil earned more profits than any corporation 

in the history of the planet, totaling some $25 billion. Last week, 

we learned that in only three quarters so far this year, Exxon 

Mobil’s profits have already exceeded the 2004 record. They have 

gone up by 75 percent. This remarkable increase in profits is not 

unique among oil companies. Each of the big oil companies have 

enjoyed major increases in their profits, and this didn’t occur in a 

vacuum. 

Upon assuming the office, Vice President Cheney began meeting 

in secret with big oil companies to craft a national energy policy. 

15

The Vice President didn’t want any advice from consumers or environmental advocates. We still don’t know what the big energy companies requested in the secrecy of the White House, but the prices 

that consumers are paying today may be the best indication of 

what happened behind those closed doors. 

Upon the Vice President’s announcement of the policy, the President started putting it into place. According to Energy Secretary 

Bodman, 75 percent of the Administration’s energy policy was implemented during the President’s first term. By March 2005, he reported that 95 percent of the energy policy was implemented, before Congress even passed the Energy Policy Act of 2005. At every 

step of the way, as this program has been implemented, energy 

prices have been increasing. The Administration got the energy policy it wanted, and now, the American people are bearing the costs. 

We need to promote energy efficiency and renewables, and address the Nation’s dangerous dependence on oil. I hope that day 

will come soon, but it is ironic to hear the Republicans crying about 

obstructionists. They control the House. They control the Senate. 

They control the White House. If they wanted any bill to pass, if 

they had their own members lined up for it, it would pass. But the 

fact of the matter is, they couldn’t get the bill passed in the House 

without twisting arms of Republican members who had to hold 

their nose and vote for a very bad bill just a week or 2 ago, and 

in the Senate, they have got the same problems. It was a Republican that lined up with the Democrats to defeat that bill in the 

committee. 

They have got their policy. The American people are paying for 

it. Now, all we can do is hope government programs will keep people from going without heat in the winter. 

Mr. SHIMKUS. The gentleman’s time has expired. The Chair recognizes the gentleman from New Hampshire, Mr. Bass. 

Mr. BASS. No opening statement. 

Mr. SHIMKUS. No opening statement. Mr. Allen from Maine is 

recognized. 

Mr. ALLEN. Thank you, Mr. Chairman, and thank you to the 

many witnesses who are here today. This is another in a series of 

hearings in this subcommittee to explain that yes, fuel prices are 

high, and yes, they will continue to be high this winter. 

What else will be high this winter? Oil company profits. I won’t go into all the statistics. I mean Exxon-Mobil’s $10 billion is startling. It is twice the domestic product of Kuwait. But it is the case, 

it absolutely is the case that this——

Mr. SHIMKUS. Now to you, my friend, would the gentleman suspend? Your mic is still not on, and maybe, you can just move over 

until we figure out why. Everyone else is on. Now, try it. 

Mr. ALLEN. I did do that. My apologies. Mr. Chairman, if I can 

have a little time back, I have lost whatever dramatic effect I was 

striving for, so——

Mr. SHIMKUS. We will give you your minutes back. Go ahead. 

Mr. ALLEN. I did want to say that I believe it is hard to deny 

the link between the enormous gas company profits, oil industry 

profits, and then, what is happening to people back home. This is 

a rising tide that is sinking small business boats in Maine. Our 

loggers, our fishermen, our building owners and others. There are 

16

a few isolated examples of price gouging at the local level, but in 

Maine, we have enough pricing information to know that our oil 

dealers are not the problem. The problem is Exxon Mobil and companies like it, and those profits. 

There are two critical questions. Why are the prices so high, and 

what can we do about it? The answer to the first question is that 

the Administration, its allies in Congress, and its supporters in the 

oil industry have made little effort to reduce demand in order to 

create downward pressure on price. Just a few years ago, the Vice 

President famously said that conservation was a personal virtue, 

but not an energy policy. In March 9 of this year, Secretary 

Bodman said, and I quote: ‘‘During his second week in office, the 

President put together a taskforce to address America’s energy 

challenges. The taskforce sent back more than a hundred recommendations as part of a new national energy policy, and over 

the last 4 years, we have implemented 95 percent of those recommendations.’’ So essentially, the Administration got exactly what 

it wanted, and the result is a national crisis. The Energy Policy Act 

approved in July provided extensive subsidies and tax breaks to 

the oil and gas industry, and those simply cannot be defended. 

What we need to do in the short term—there are a multitude of 

things. I will mention LIHEAP. When you don’t talk about authorization levels, but you talk about actual funding levels, here is the 

truth. In fiscal year 1982, LIHEAP was funded at $1.87 billion. In 

fiscal year 2005, LIHEAP was funded at $1.88 billion, a $100 million increase. The purchasing power of that program has simply 

evaporated. 

Now, I have legislation I just want to mention briefly, H.R. 3944, 

the Small Business Fuel Cost Relief Act, to give small businesses 

a tax credit for the increase in price between diesel, gasoline, and 

heating oil and natural gas from Labor Day 2004 to Labor Day 

2005. Those are the people who need relief, not the people who got 

the tax relief in the Energy Policy Act that was signed by the 

President in July. We can do a whole lot better in this country, but 

not without changing course. 

Mr. Chairman, I thank you. 

Mr. SHIMKUS. The gentleman yields back his time. The Chair 

now recognizes the gentlewoman from California, Ms. Solis. 

Ms. SOLIS. Thank you, Mr. Chairman, and thank you, ranking 

member, and also the witnesses that are here today. I appreciate 

the fact that we are having a hearing on this very important issue, 

natural gas and heating oil for American homes. 

Mr. Chairman, the retail cost of heating oil is expected to increase another 32 percent this winter. The increase will not only 

impact the Northeastern part of the United States, but will impact 

thousands of homes across the country. In Northern California, Pacific Gas & Electric estimated heating bills for its customers to be 

at least 70-percent higher, and in Los Angeles, the Southern California Gas Company, my representative, expects gas bills that 

could rise above 50 percent. 

Working class Americans, in my opinion, can’t afford these increases. And the Department of Labor reported that the average 

weekly pay for production workers took its biggest fall in 10 years. 

These workers are earning almost 3-percent less than the cost of 

17

inflation, and facing a 50 to 70-percent increase in their heating 

bills. We should have looked at these issues long before President 

Bush decided to implement the GAS for America Security Act. 

On March 9, 2005, the Energy Secretary, Samuel Bodman, stated 

that the Department of Energy has implemented 95 percent of the 

Administration’s energy policy. If 95 percent of the Bush Administration’s energy policy is implemented, why are Americans, working class families, continuing to suffer? Companies like Exxon 

Mobil, who have generated $9.92 billion in a third quarter profit 

are better off than working class Americans. But how is America’s 

working class better today because of the Bush energy policy? 

Democrats had a plan to protect consumers. We supported a 

price gouging amendment that would have authorized the Federal 

Trade Commission to punish companies that price gouge customers 

for gasoline, heating oil, natural gas, and propane. But my colleagues across the aisle only supported a very weak version, price 

gouging language, which does not include natural gas. That doesn’t 

help California. 

So under the weak Republican price gouging language, 73 percent of California consumers depend on natural gas, including 20 

percent of families in Los Angeles County that fall below the poverty line, and they would have no protections, no legal recourse, no 

rights, and no relief. 

Adding insult to injuries, my colleagues last week moved to cut $10 billion from the Medicaid program, and refused to fully fund 

the LIHEAP program. So I find it ironic that after refusing to protect customers, consumers from price gouging after cutting aid to 

working families, and after refusing to fund the program to help 

the people who will be suffering the most this winter, we are here 

today talking about protecting consumers. The priorities of the 

Congress and this Administration are wrong. It is well, long overdue that we start really working on working class family issues, 

and that is to reduce the cost of high fuels in our country. 

Yield back the balance of my time. 

Mr. SHIMKUS. The gentlelady yields back. Does the gentleman 

from Maryland wish to make an opening statement? 

Mr. WYNN. Thank you, Mr. Chairman. I would like to thank you 

for calling this very important hearing on natural gas and home 

heating oil. 

On October 19, we met to discuss the Energy Information short 

term energy outlook and winter fuels outlook. The report illustrated the critical need for Congress and this Administration to act 

now, in order to protect our most vulnerable citizens from exorbitant energy prices this winter. As I stated at that time, and I have 

restated, increased funding for the Low Income Home Energy Assistance Program, LIHEAP, is essential. Home heating bills for the 

60 million U.S. households that use natural gas will increase by 

about 50 percent, translating to about a $350 increase in home 

heating over last year’s prices. 

In my Maryland district, 60 percent of residents use natural gas 

to heat their homes. They could face an increase in their heating 

bills from last year’s average of $750 to $1,100 this year. Heating 

bills for the 8.5 million U.S. homes that are using heating oil will 

increase about 32 percent, translating to a $378 increase in home 

18

heating expenses over the last year. For the almost 7 percent of my 

district’s residents that use home heating oil, including myself, this 

means last year’s average spending of about $1,200 could be as 

high as $1,600 this year. 

These increases in home heating energy costs disproportionately 

our low income, fixed income, and elderly citizens. Low income 

households spend a whopping 14 percent of their annual income on 

energy expenditures, compared to non-low income households, 

which spend only about 3.5 percent. In fact, two thirds of the families that utilize LIHEAP assistance have annual incomes of $8,000, 

forcing them to choose between heating their homes and putting 

food on the table. The National Energy Assistance Directors Association’s most recent survey on the impact of rising energy costs on 

poor families illustrates this case in point with troubling data: 32 

percent of the families interviewed said that they sacrificed medical 

care; 24 percent failed to make rent or mortgage payments; 20 percent went without food for at least a day; and 44 percent said they 

skipped paying or pay less than their full home energy bill in the 

last year. 

There is a great need for increased funding, and in fact, my State 

of Maryland is going to need almost $84 million in Federal fuel assistance, more than twice the amount anticipated, to help our low 

income residents heat their homes this winter. The Maryland Energy Assistance Program, which distributes LIHEAP funds locally, 

is expected to receive $32 million from the Federal Government. 

However, the program will need $51 million more to cover rising 

costs based on EIA’s home heating price projections this winter. 

Unfortunately, my colleagues on the other side of the aisle are 

not doing enough to address this troubling situation. We missed a 

critical opportunity last week to increase LIHEAP funding during 

the budget reconciliation markup. While I recognize that they made 

a significant effort in this regard, we still need to do more. LIHEAP 

is working with a limited budget of $2 billion, serving only 20 percent of those eligible for assistance. I urge my Republican colleagues to increase LIHEAP funding and provide true relief for our 

low income, fixed income, and elderly citizens. I look forward to 

hearing the panels today, and I hope that they will bring greater 

attention to this very pressing problem. 

Thank you. 

[The prepared statement of Hon. Albert R. Wynn follows:]

PREPARED STATEMENT OF HON. ALBERT R. WYNN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MARYLAND

Chairman Barton, thank you for holding this hearing on natural gas and home 

heating oil. On October 19th we met to discuss the Energy Information Administration’s (EIA) Short Term Energy Outlook and Winter Fuels Outlook. The report illustrated the critical need for Congress and the Administration to act now in order to 

protect our most vulnerable citizens from exorbitant energy prices this winter. As 

I have stated time and time again, increased funding for the Low Income Home Energy Assistance Program (LIHEAP) is essential. 

Home heating bills for the 60 million U.S. households that use natural gas will 

increase by about 50 percent, translating into a $350 increase in home heating over 

last year. In my Maryland district, 60 percent of residents use natural gas to heat 

their homes. They could face an increase in their heating bills from last year’s average of $750 to $1,100 this year. 

Heating bills for the eight-and-a-half million U.S. homes that use heating oil will 

increase by about 32 percent, translating into a $378 increase in home heating exVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
19

penses over last year. For the almost seven percent of my district’s residents that 

use home heating oil, including myself, this means that last year’s average spending 

on home heating of $1,200 could be as high as $1,600 this year. 

These increases in home heating energy costs disproportionately impact our low 

income, fixed-income and elderly citizens. Low-income households spend a whopping 

14 percent of their annual income on energy expenditures, compared to non-low-income households that only spend 3.5 percent. In fact, two-thirds of the families that 

utilize LIHEAP assistance have annual incomes of $8,000, forcing them to chose between heating their homes and putting food on the table. The National Energy Assistance Directors’ Association’s most recent survey on the impact of rising energy 

costs on poor families illustrates this case in point with troubling data: 32 percent 

of families in the survey sacrificed medical care; 24 percent failed to make a rent 

or mortgage payment; 20 percent went without food for at least a day; and 44 percent said they skipped paying or paid less than their full home energy bill in the 

past year. 

There is a great need for increased funding. In fact, my state of Maryland is going 

to need almost $84 million in federal fuel assistance, more than twice the amount 

anticipated, to help our low-income residents heat their homes this winter. The 

Maryland Energy Assistance Program, which distributes LIHEAP funds locally, is 

expected to receive $32.1 million from the federal government. However, the program will need $51.5 million more to cover rising costs based on the EIA’s home 

heating price projections for this winter. 

Unfortunately, my colleagues on the other side of the aisle are not doing enough 

to address this troubling situation. We missed a critical opportunity last week to 

increase LIHEAP funding during budget reconciliation markup. Now, we are currently in a position of begging the industry for handouts; we should be in a better 

position than this. Senator Grassley, the chairman of the Senate Finance Committee, suggested that companies contribute 10 percent of their third-quarter profits 

to LIHEAP. In the absence of a voluntary industry give back, we should give some 

consideration to the option of a windfall profits tax to fund the necessary support 

for LIHEAP. Given that there will be no new natural gas coming online for at least 

the next three years, the outlook is bleak for the next few winters. 

LIHEAP is working with a limited budget of $2 billion, serving only 20 percent 

of those eligible for assistance. I urge my Republican colleagues to increase LIHEAP 

funding and provide true relief for our low-income, fixed-income and elderly citizens. 

I look forward to the panels we have lined up for today.

Mr. SHIMKUS. The Chair thanks the gentleman. 

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. SHERROD BROWN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OHIO

Thank you, Mr. Chairman, for scheduling today’s hearing and for affording me an 

opportunity to submit this statement for the record. 

Gasoline prices spiked nationwide after Hurricane Katrina interrupted gas supplies. They’ve been on the evening news, on the front page of our newspapers—and 

high gasoline prices have been a key topic at every one of our town meetings. 

But tomorrow—or next week, or no later than a month from now when the winter 

heating bills start rolling in—what everyone will be talking about is natural gas 

prices. 

According to the Energy Information Administration (EIA), natural gas prices will 

average more than 50% higher this winter than last. And EIA tells us that residents 

of Ohio and other Midwestern states could see their natural gas bills jump more 

than 70%. 

You can talk to any energy economist out there and he or she will tell you that 

the energy bill we passed this year will do little or nothing to stabilize natural gas 

prices. 

We talked to Ken Costello, a Senior Institute Economist at Ohio State University’s National Regulatory Research Institute. And he confirmed that the only way 

we can really get at the problem in the near term is by addressing the demand side 

of the equation. 

But you do not have to be a PhD to know that, in a market economy, both supply 

and demand matter in setting the price. American motorists know that intuitively. 

When gasoline prices spiked after Katrina, motorists responded immediately. Demand for gas-guzzlers dropped, and demand for super-efficient hybrids increased. 

We ought to take a hint from our constituents and advance policies that manage 

the demand side of the natural gas price equation. 

20

We missed an opportunity during the Energy and Commerce Committee’s markup 

of the energy bill. One of the amendments we considered would have required electric power generators to increase their investment in renewable energy sources. 

This approach makes energy security sense, because a diverse fuel mix makes our 

electricity supply less vulnerable to interruptions in the delivery of any particular 

fuel. 

But more importantly for the present debate, investing in renewable energy 

makes sense as a way to stabilize and moderate natural gas prices. 

Electric power generation now accounts for 20-25% of America’s natural gas demand. And according to the EIA, demand from the electric power will be the fastestgrowing component of total natural gas demand during the next 20 years. 

Last year, the Union of Concerned Scientists used an EIA analysis tool to quantify the price benefits of renewables. UCS found that increasing the fraction of 

America’s electric power generated from renewable sources to 20% by 2020 would 

save consumers nearly $27 billion. 

And by the way, UCS also found that diversifying the fuel supply would also 

lower electric bills by more than $10 billion over the same timeframe. 

When it comes to natural gas, the energy bill was by no means a complete loss. 

Though I felt the liquefied natural gas siting provisions were insufficiently responsive to homeland security concerns, enhancing our access to LNG will eventually 

bolster supplies. 

And the conference bill’s emphasis on coal gasification and hydrogen fuel cell development offer promise as tools to reduce natural gas demand.But on natural gas, 

the energy bull was certainly a missed opportunity. 

This committee and the Congress embraced a renewable fuel standard for gasoline 

for good public policy reasons. We failed to adopt a renewable energy standard for 

electricity because we chose to ignore those same good public policy reasons. 

But it is not too late to make next winter better than this one. We ought to embrace demand-side solutions that could make a real difference for consumers. That 

means not only Investing in renewable sources for electric power generation. But 

considering a wide range of sensible demand-management tools, like:

• Cash rebates to help consumers—especially low- and moderate-income consumers—buy energy-efficient appliances; 

• Increasing our investment in the Energy Department’s Industrial Technologies 

program, which helps energy-intensive manufacturing businesses save energy 

and money; 

• Incentives for states and local governments to adopt energy-efficient building 

codes. 

We must also take a close look at the ability of federal regulators to fulfill their 

mandate to protect consumers from natural gas market manipulation. 

Companies like Dynegy and El Paso Energy manipulated California’s natural gas 

market during that state’s 2001 energy crisis. We should not be so naı ̈ve as to expect that the tight natural gas market that exists nationwide today will not attract 

the same unscrupulous element. 

If these corporate wrongdoers fool us once, shame on them. But if we allow them 

to fool us time after time, shame on us. 

This winter will be costly for American consumers in part because Congress failed 

to consider policy tools that might have blunted the effects of Hurricane Katrina on 

natural gas prices. 

This hearing should begin a new effort to ensure that we do more to protect consumers next winter. 

Thank you again for the opportunity to participate in today’s hearing.

PREPARED STATEMENT OF HON. GEORGE RADANOVICH, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Mr. Chairman, I would like to thank you for holding this important hearing today 

on Natural Gas and Heating Oil for American Homes. 

As we are all aware, the expected continuing high prices of natural gas and home 

heating oil will be a hardship on all of our constituents this winter. Residential 

space-heating expenditures are projected to increase for all fuel types compared to 

year-ago levels. On average, households heating with natural gas are expected to 

spend about 48% more in fuel expenditures and households heating primarily with 

heating oil can expect to pay on average 32% more this winter. 

Today’s hearing is important because it will provide our constituents with a complete understanding of the elements that determine the price they will pay for natural gas, specifically natural gas itself (the gas charge or gas commodity charge); 

21

long-haul pipeline transmission charges; and local distribution and storage charges. 

In addition, what effects hurricanes Katrina and Rita have had on supply and price 

along the full natural gas supply chain; As well as what is being done to bring the 

costs of natural gas down. 

The House passage of HR 3893, which I supported, is the first of many steps in 

the right direction. Increasing the number of refineries and relaxing environmental 

standards is only the beginning, we will continue to make every effort to do everything we can to allow our constituents to heat their homes at reasonable costs. 

Thank you I look forward to hearing from our witness.

Mr. SHIMKUS. Now, we are ready for our first panel. We welcome 

you. We have the Chairman of the Federal Energy Regulatory 

Commission, Mr. Kelliher, who was introduced earlier. We also 

have with us Mr. Jeffery, Reuben Jeffery III, who is the Chairman 

of the Commodity Futures Trading Commission; Mr. Mark Maddox, 

Principal Deputy Assistant Secretary, Office of Fossil Energy; and 

Mr. Donald Mason, Commissioner of Public Utilities Commission of 

Ohio. 

Welcome. All your statements are inserted in the record. We ask 

for around a 5 minute opening statement, and then, we will follow 

up with questions after the whole panel has testified. 

With that, Joe, would you like to begin? 

STATEMENTS OF HON. JOSEPH T. KELLIHER, CHAIRMAN, FEDERAL ENERGY REGULATORY COMMISSION; HON. REUBEN 

JEFFERY III, CHAIRMAN, COMMODITY FUTURES TRADING 

COMMISSION; MARK R. MADDOX, PRINCIPAL DEPUTY ASSISTANT SECRETARY, OFFICE OF FOSSIL ENERGY, DEPARTMENT OF ENERGY; DONALD R. MASON, COMMISSIONER, 

PUBLIC UTILITIES COMMISSION OF OHIO 

Mr. KELLIHER. Thank you, Mr. Shimkus. Good afternoon, Mr. 

Shimkus, Mr. Barton, Mr. Boucher, and members of the subcommittee. 

I thank you for the opportunity to address the challenges from 

high natural gas prices this coming winter, FERC’s role in the pricing of natural gas and home heating oil, and development of the 

U.S. energy infrastructure. It is good to be back at this subcommittee. 

As my formal statement details, the Commission has responsibilities in many areas of the energy sector, including regulation of 

interstate natural gas transportation rates and services, and crude 

oil and petroleum product pipelines. The Commission has limited 

jurisdiction over natural gas sales, and does not regulate home 

heating oil prices or natural gas wellhead prices. 

Hurricanes Katrina and Rita have caused the loss of a significant 

portion of our domestic oil and natural gas supply. Twenty percent 

of U.S. gas supply comes from the offshore Gulf, and most of this 

production has been shut in since the hurricanes. We will not be 

able to offset this loss of domestic gas production through higher 

imports from Canada, due to Canada’s flattening production and 

increasing demand, nor will liquefied natural gas imports be able 

to offset the loss of domestic production. Most LNG is locked up in 

long term contracts, and the U.S. market competes for short term 

supplies with Europe, and we have been losing this competition. 

Gas prices were already high before the hurricanes. Because of 

the loss of domestic production, gas prices will be higher this winVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
22

ter. The key variables on how high prices will rise are the rate of 

recovery of offshore gas production in the Gulf, the weather, and 

the effectiveness of conservation efforts. Effective conservation 

must start with consumer awareness and appreciation of the high 

level of gas prices. Normally, consumers receive a price signal after 

consumption, when they receive their monthly bill, and it is important they recognize it before consumption this winter. The effectiveness of State conservation programs will be critical in moderating 

natural gas prices this winter. 

The Commission has encouraged its counterparts at the State 

level to make a maximum effort to strengthen their conservation 

programs, and we met recently with State regulators from regions 

that will be most affected by high natural gas prices to discuss best 

practices in State programs. 

I particularly want to commend Secretary Bodman for his efforts 

to promote conservation this winter, and his leadership has been 

impressive. Now, clearly natural gas prices will be higher this winter, as a result of the loss of domestic production caused by the 

hurricanes. However, the Commission, FERC, is acting to assure 

prices do not go higher still because of market manipulation. The 

Commission actively monitors natural gas markets to determine 

whether price movements are the result of market manipulation or 

market fundamentals. To assist this effort, the Commission recently entered into a memorandum of understanding with the Commodity Futures Trading Commission to assure the smooth flow of 

information between the two agencies, and to improve our ability 

to identify market manipulation. Under the Energy Policy Act, the 

two agencies were directed to enter into an MOU within 6 months 

of enactment. We accomplished it in 2 months, in part, because the 

two agencies want to be in a position to better monitor gas markets 

this winter. 

Importantly, FERC is acting to exercise the new anti-manipulation authorities in the Energy Policy Act. The Commission recently 

issued proposed rules to prevent market manipulation with respect 

to jurisdictional natural gas and electricity sales and transportation. And we intend to issue final rules by the end of the year. 

The new rules, in conjunction with the new penalty authority in 

the Energy Policy Act, will provide a strong deterrent to market 

manipulation. 

Now, the Commission has limited jurisdiction over the price of 

natural gas paid by consumers. Through the natural gas——

Mr. SHIMKUS. You can suspend for a minute. We are just going 

into session now. 

Mr. KELLIHER. [continuing] through the Natural Gas Policy Act 

of 1978 and the Natural Gas Wellhead Decontrol Act of 1989, Congress deregulated most sales of natural gas. 

The Commission regulates the interstate transportation rates for 

natural gas and crude oil and petroleum products. This regulation 

involves the rate to be paid for the transportation component of the 

delivered product, rather than the commodity price. The regulated 

transportation rate is a very small portion of delivered cost. 

The Commission stands ready to act on emergency filings to authorize a more efficient use of our existing gas infrastructure. The 

Commission has already acted quickly to authorize exemptions and 

23

waivers for Discovery Gas Transmission and Stingray pipeline that 

allowed shut-in gas to flow to consumers. In both instances, the 

Commission issued orders the same day the emergency filings came 

in, and that is a testament to the professionalism and dedication 

of the Commission staff, and it shows that we know what is at 

stake this winter. 

Now, the Commission plays a critical role in strengthening the 

U.S. energy infrastructure. Since the year 2000, the Commission 

has certificated over 8,400 miles of gas pipelines. We have steadily 

improved our regulatory process, and the average length of a major 

pipeline proceeding at the Commission is now less than a year. The 

Commission’s Hackberry policy, which ceased economic regulation 

of LNG terminals, has resulted in a significant increase in proposals to construct LNG import facilities. In the last few years, the 

Commission has approved eight new LNG terminals, a new pipeline from the Bahamas, and expansions at two existing terminals 

that will more than quadruple our LNG import capability. 

Now, the Commission is also exploring opportunities to provide 

greater incentives to expand natural gas storage capacity through 

pricing reform. Since 1988, gas storage capacity has expanded only 

1.4 percent, while demand has increased 24 percent. Greater storage capacity may help mitigate gas price volatility. Pricing reform 

can promote storage capacity expansion at both existing and new 

facilities, although it will not bring relief this winter. 

Now, in closing, the Commission is working diligently within its 

authorities to prevent market manipulation and authorize the most 

efficient use of our existing gas infrastructure. We will closely monitor gas markets in the coming winter in conjunction with the 

CFTC, and take appropriate steps within our authorities to protect 

customers to the maximum extent possible. We are encouraging 

our State colleagues to promote effective conservation programs, 

and we will continue our efforts to promote a strong U.S. energy 

infrastructure. 

And with that, I will be happy to answer any questions you 

might have. 

[The prepared statement of Hon. Joseph T. Kelliher follows:]

PREPARED STATEMENT OF HON. JOSEPH T. KELLIHER, CHAIRMAN, FEDERAL ENERGY

REGULATORY COMMISSION

Mr. Chairman and Members of the Subcommittee: Good afternoon, Chairman Hall 

and members of the Committee. My name is Joseph T. Kelliher, and I am Chairman 

of the Federal Energy Regulatory Commission (FERC or Commission). I want to 

thank the Subcommittee for the opportunity to address expected high gas prices this 

coming winter, FERC’s role in the pricing of natural gas and home heating oil, and 

the development of energy infrastructure. 

The Commission has responsibilities in many areas of the energy sector. In the 

natural gas area, the Commission authorizes the construction of interstate natural 

gas pipelines and storage facilities, as well as import/export facilities including liquefied natural gas (LNG) import terminals, and it is responsible for the operation 

and safety of LNG facilities. It also regulates natural gas transportation rates and 

services in interstate commerce and has limited authority (discussed below) over 

sales in interstate commerce of natural gas for resale. In the area of electricity, the 

Commission regulates public utility sales for resale of electric energy in interstate 

commerce as well as wholesale and unbundled retail transmission rates and services 

in interstate commerce. It also has authority over certain corporate transactions involving public utilities. In addition, the Commission is responsible for non-federal 

hydroelectric licensing, administration, and safety. Finally, the Commission regulates the interstate transportation rates and services of crude oil and petroleum 

24

products pipelines. The Commission does not regulate home heating oil prices. With 

these general jurisdictional parameters in mind, let me begin by briefly reviewing 

the damage to energy infrastructure and domestic natural gas production in the 

Gulf of Mexico caused by Hurricanes Katrina and Rita, and then discuss steps the 

Commission is taking in response, including infrastructure issues. 

As of October 31, 2005, the Minerals Management Service (MMS) reported that 

two months after Hurricane Katrina, approximately 68 percent of the daily oil production and 54 percent of the daily natural gas production in the Gulf of Mexico 

remains shut-in. According to the Energy Information Administration (EIA), as of 

October 28, 2005, petroleum refinery shutdowns in the Gulf of Mexico totaled approximately 991,000 barrels per day. A number of natural gas processing plants in 

Louisiana and Texas, with capacities equal to or greater than 100 million cubic feet 

per day, are not active. Recent industry press reports indicated that 45 percent of 

oil and gas pipelines in the Gulf were operational; while 30 percent needed repairs 

and 25 percent were undamaged but could not be used due to onshore bottlenecks. 

The Association of Oil Pipelines reported that as of October 14, 2005, all onshore 

petroleum pipelines have resumed 100 percent normal operation capacity. However, 

some systems continued to experience reduced availability of products to transport. 

The hurricanes have caused the loss of a significant portion of our natural gas 

supply. It is much greater than the loss last year resulting from Hurricane Ivan, 

and the recovery of offshore production has been much slower. We will not be able 

to offset this loss of domestic gas production through higher imports from Canada 

due to Canada’s flattening production and increasing demand. Nor will LNG be able 

to offset the production loss. Most LNG is locked up in long-term commitments, 

while the U.S. market, at existing terminals, tends to trade in the short-term or 

spot market. The U.S. may be losing out on these short-term supplies due to European competition, where prices are expected to be close to our prices this winter, 

and shipping costs are lower due to shorter distances, thus keeping additional LNG 

supplies away from the U.S. in the short term. 

In testimony before both the House and the Senate, the Administrator of the EIA 

stated that domestic dry natural gas production in 2005 is expected to decline by 

3.0 percent, due in large part to the major disruptions to infrastructure in the Gulf 

of Mexico. Gas prices, prior to the hurricanes, were already high due to the strain 

of a hot summer and the anticipation of tight supplies. EIA estimates that the average consumer’s natural gas bill may be as much as 48 percent higher this winter 

than last, if there is an average winter. Natural gas prices will be higher this winter 

because of this loss of supply. Of course, other variables can affect winter gas prices, 

either negatively or positively. These factors include the timing of the recovery of 

offshore Gulf of Mexico production. The sooner the recovery occurs, the less upward 

pressure there will be on prices. Another factor, and the least controllable, is the 

weather. A mild winter can buy the industry time to repair or replace infrastructure 

and to get gas production back on line by reducing demand and dampening price 

levels. And, conversely, a colder than normal winter will drive up prices even higher. 

One more factor that is controllable is conservation. Effective conservation must 

start with consumer awareness and an appreciation of the high level of gas prices. 

Under most circumstances, the consumer receives a price signal after consumption, 

that is, when the bill from the gas utility is delivered. If the consumers understand 

ahead of time that gas prices will be high this winter, they are more likely to conserve. The effectiveness of state conservation programs will be critical in moderating 

natural gas prices this winter. The Commission has encouraged its counterparts at 

the state level to make a maximum effort to strengthen their conservation programs. Hedgingcan also reduce the exposure of consumers to price volatility. The 

Commission recently met with state regulators from regions that will be most affected by high natural gas prices to discuss best practices in state conservation and 

hedging programs. 

Natural gas prices will be higher this winter as a result of the loss of domestic 

production caused by Hurricanes Katrina and Rita. Just how much higher prices 

will go will be driven largely by these variables—rate of recovery of offshore production, weather and conservation. 

The Commission is acting to assure prices do not go higher still because of market 

manipulation. Even though the majority of sales of natural gas are not subject to 

the Commission’s jurisdiction, the Commission actively monitors natural gas markets to determine whether any price spikes are the result of market manipulation 

or the laws of supply and demand. To assist this effort, the Commission recently 

entered into a Memorandum of Understanding (MOU) with the Commodity Futures 

Trading Commission (CFTC) to assure the smooth flow of information between the 

two agencies. The MOU formalizes a close working relationship between the two 

25

agencies that has developed over the last five years. The MOU will improve the ability of the Commission to identify market manipulation. Under the Energy Policy Act 

of 2005, the two agencies were directed to enter into an MOU within six months 

of enactment. We accomplished this in two months, in part because we want to be 

in a position to better monitor gas markets this winter. 

Importantly, with respect to the new anti-manipulation authorities the Congress 

gave the Commission in the Energy Policy Act of 2005, the Commission recently 

issued a notice of proposed rulemaking to prevent market manipulation with respect 

to Commission-jurisdictional natural gas and electric services. The Commission 

issued rules two years ago to help prevent the manipulation of gas and electric markets, but the new proposed rule, in conjunction with the new Natural Gas Act civil 

penalty authority in EPAct 2005, will provide a strong deterrent to market manipulation. The proposed rule, following the new statutory language, would make it unlawful for any entity, directly or indirectly, in connection with the purchase or sale 

of natural gas or transportation service subject to Commission jurisdiction, to:

• Use or employ any device, scheme, or artifice to defraud; • Make material false statements or omit material facts; or • Engage in any act, practice, or course of business that operates or would operate 

as a fraud or deceit upon any person. 

As noted earlier, the Commission has limited jurisdiction over the price of natural 

gas. Through the Natural Gas Policy Act of 1978 and the Natural Gas Wellhead Decontrol Act of 1989, Congress deregulated most sales of natural gas, including imports from countries with which the United States has a free-trade agreement. The 

Commission’s jurisdiction over wholesale sales is limited to sales of gas in interstate 

commerce by interstate pipelines, intrastate pipelines, local distribution companies 

(LDCs) and the affiliates of those entities (including marketers) for resale, so long 

as they do not produce the gas they sell. The Commission’s regulation of such sales 

is through blanket certificates that were issued to entities that fall in these categories, authorizing them to make sales in interstate commerce (to anyone that is 

not a pipeline) for resale at negotiated rates. 

As I mentioned at the beginning of my testimony, the Commission does regulate 

the interstate transportation rates for natural gas as well as crude oil and petroleum products. This regulation involves the rate to be paid for the transportation 

component of the delivered product, not the price of the commodity. Regarding natural gas, of the total delivered charge of approximately $17.00 per thousand cubic 

feet estimated by EIA to the Mid-Atlantic this winter, the interstate transportation 

portion from the production area would be about one dollar, or about 6 percent. For 

petroleum products, the amount that transportation contributes is approximately 1 

percent of the total delivered cost. 

In addition to setting rates for transportation of natural gas and monitoring for 

market manipulation in the commodity markets, the Commission stands ready to 

act on emergency filings to authorize more efficient use of our existing gas infrastructure in the Gulf of Mexico. For instance, the Commission received an emergency filing from Discovery Gas Transmission on October 11 at 10:30 AM requesting 

an exemption and waivers that would expedite the transportation of up to 300 million cubic feet per day of offshore natural gas. This gas supply was shut in as a 

result of hurricane damage to a Dynegy Inc. processing plant in Venice, Louisiana. 

This authorization, which was approved by the end of the same day, allows Discovery to re-route gas flows from offshore production fields that previously went to 

the Venice Processing Plant. Without such an innovative request and a quick response by the Commission, this gas supply would continue to be unavailable to gas 

consumers. The Commission also received an emergency filing from Stingray Pipeline for a tariff waiver to allow shut-in gas to flow and approved it by the end of 

the same day it was filed. 

Since 2000, the Commission has recognized that there was a growing gap between 

the demand for natural gas and the gas supply of the North American continent. 

In this regard, the Commission has taken steps to reduce the processing time for 

its analysis and consideration of infrastructure projects, most notably through its 

pre-filing process, that actually commences Commission analysis prior to the filing 

of a formal application. This has resulted in major projects being approved and constructed to deliver gas from the Rockies region to markets in California and the 

Midwest. 

Since the beginning of 2000, the Commission has certificated over 8,400 miles of 

pipeline. Also, the Commission’s adoption of the ‘‘Hackberry Policy’’, which ceased 

economic (i.e., rate) regulation of LNG terminals, resulted in a significant increase 

in proposals to construct LNG terminals to received imported LNG. In the past few 

years, the Commission has approved eight new LNG terminals with 12 billion cubic 

feet per day of deliverability and expansions at two existing terminals that will inVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6621 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
26

crease deliverability by 1.3 billion cubic feet per day. The Commission has also approved 1.7 billion cubic feet per day of pipeline capacity that would transport Bahamian LNG to Florida. In total, FERC has approved 15.0 billion cubic feet per day 

of deliverability from LNG. Still, there are proposals pending at FERC for 16.7 billion cubic feet per day of deliverability at new and existing terminals. Also, there 

is another 0.5 billion cubic feet per day of pipeline capacity pending to transport Bahamian LNG. 

Our ability to provide the country with the necessary natural gas infrastructure 

has been greatly improved by Congress’ passage of the Energy Policy Act of 2005. 

Specifically, this legislation simplifies and streamlines the processes for considering 

natural gas infrastructure projects filed with the Commission. For this I would like 

to thank Congress and Chairman Barton, in particular, for his leadership in helping 

to guide this bill to passage. I note that almost immediately after passage of the 

Act, the Commission and the California Public Utilities Commission (CPUC) filed 

a joint petition to dismiss the litigation associated with the CPUC’s assertion that 

it should be the decisional agency for the siting of an LNG terminal in California. 

The Commission is exploring opportunities to provide greater incentives to expand 

natural gas storage through pricing reform. More natural gas storage capacity will 

increase the flexibility of the industry to manage available supplies and may help 

dampen peak prices. Since 1988, our total underground natural gas storage capacity 

has increased by only 1.4 percent, while total national natural gas consumption has 

increased by over 24 percent. Additional storage capacity will not bring price relief 

this winter but over the long term pricing reform can promote storage capacity expansion, at both existing and new facilities. Congress did supply additional tools to 

promote gas storage, by allowing gas storage to be priced at market-based rates 

even if the project sponsor cannot prove that it does not possess market power. It 

is now up to the Commission, in light of the new authority in EPAct 2005, to implement pricing reforms that expand storage capacity while protecting consumers. 

Even with this progress, there is a danger that we will not be able to meet our 

expected growing demand for natural gas in the near term. Existing natural gas 

production has been flattening—and this was before the effects of Hurricanes 

Katrina and Rita. Also, the newly approved LNG terminals that will fill the gap between domestic (and imported Canadian) production will not be available until 2008 

at the earliest. Further, new projects to extract gas from the Rocky Mountains and 

bring it to market are slated to begin in 2008. Given these potential shortages, there 

are still regional interests that make it difficult to site the needed infrastructure, 

especially in the Northeast, which is most dependent upon gas supplies from outside 

of its region. Inability to strengthen the energy infrastructure will likely result in 

higher prices and greater price volatility. 

In closing, the Commission is working diligently within its authorities to promote 

adequate and reliable infrastructure and to prevent market manipulation. We will 

closely monitor gas markets in the coming winter and take appropriate steps within 

our authorities to protect customers to the maximum extent possible. I would be 

happy to answer any questions that members of the subcommittee may have.

APPENDIX A 

The following is a list of major projects approved by the Commission, but not built 

due to various reasons.

Project Name Dispostion Comments 

Georgia Straits Crossing Pipeline 

CP01-176-000

Authorized 9/20/02 Canadians found a less expensive way to get the gas 

they needed. 

Islander East Pipeline Company 

CP01-384-000

Authorized 9/19/02 Held up due to negative Clean Water Act funding 

Algonquin Gas Transmission Company 

CP01-384-000

Independence Pipeline 

CP97-315

Authorized 7/12/00

Order vacated 

No market. Could not meet in-service date. 

ANR Pipeline Co. (Supply Link) 

CP97-319-000

Millenium Pipeline 

CP98-150

Authorized 9/19/02 Held up due to lack of CZMA consistency finding. 

Sponsors now reworking project to avoid Hudson 

River crossing. 

Red Lake Gas Storage Co 

CP02-420-000

Proceeding 

terminated 6/4/03

Terminated due to denial of market based rates. 

27

Project Name Dispostion Comments 

Greenbrier Pipeline Company 

CP02-396-000

Approved 4/9/03 Could not fulfill requirement to get 90 percent of firm 

contracts for the gas. 

Weaver’s Cove 

CP04-36-000

Approved 7/15/05 Congressional opposition to LNG terminal causing the 

expenditure of federal funds to maintain a bridge 

(that was scheduled to be torn down) that needs to 

be removed to allow access for LNG tankers. 

One of the many goals of the Energy Policy Act of 2005 was to strengthen the 

nation’s natural gas infrastructure. The provisions in the legislation could possibly 

result in more approved projects reaching fruition. Those provisions include making 

the FERC the lead agency in processing all applications filed under Sections 3 and 

7 of the Natural Gas Act. As lead agency, the FERC is tasked with setting a processing schedule by which all other permitting agencies with input into an infrastructure application must adhere. Further, the FERC is charged with establishing one 

federal record that is to be used in all appeals and rehearing of permitting actions. 

The Commission took a step towards implementing this provision in late September 

with a policy statement on the development of consolidated federal administrative 

records for judicial review of proceedings involving authorization of interstate natural gas pipelines and LNG facilities. Also, judicial appeals of FERC actions are to 

be heard in the federal appeals court where the proposed facility is located and, if 

any permitting agency does not comply with the FERC-established schedule, appeals can be made to the U.S. Court of Appeals for the District of Columbia. In addition, the FERC was named as the sole decisional agency regarding the siting and 

construction of LNG terminals and project sponsors of LNG terminals are now required to participate in the pre-filing program. Further, natural gas storage project 

sponsors can qualify for market-based rates even if they cannot prove that they do 

not have market power. These provisions, among other will serve to strengthen our 

natural gas infrastructure in a timely manner without compromising the environment.

Mr. SHIMKUS. Thank you. The Chair now recognizes the Honorable Reuben Jeffery III, Chairman of the Commodity Futures Trading Commission. You have 5 minutes, sir. 

STATEMENT OF HON. REUBEN JEFFERY III 

Mr. JEFFERY. Okay. Chairman Barton, Vice Chairman Shimkus, 

Ranking Member Boucher, members of the committee. I appreciate 

the opportunity to testify on behalf of the Commodity Futures 

Trading Commission concerning our oversight of energy futures 

markets. 

The CFTC has been paying particularly close attention to futures 

trading in energy commodities, both before and since the recent 

hurricanes, given the importance of energy prices to every American. Based upon our surveillance and market oversight to date, we 

believe that the heating oil and natural gas futures markets that 

we regulate have been accurately reflecting the underlying fundamentals of these markets. In my testimony today, I will try to 

describe how the CFTC works to ensure that energy futures markets are free from manipulation, and will also share some observations concerning the current state of the futures markets for natural gas and heating oil. 

Futures markets provide risk management tools that producers, 

distributors, commercial users of commodities such as natural gas 

and heating oil can use to protect themselves from unpredictable 

price changes. They also play a price discovery function, as participants in other markets look to futures markets for accurate information on supply, demand, and other factors. The CFTC’s mission, 

under the Commodity Exchange Act, the so-called CEA, is to ensure that commodity futures markets operate in an open and comVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
28

petitive way, free of manipulation or price distortions. Our focus is 

primarily on the regulated futures exchanges, such as with respect 

to energy, the New York Mercantile Exchange, known as NYMEX. 

The CFTC fulfills its obligation through a comprehensive program 

designed to identify and mitigate the potential for manipulation 

and other market abuses, and to ferret out and punish illegal behavior. 

On every trading day, CFTC staff closely monitor trading activities on the exchanges to detect unusual activity or price aberrations that may indicate actual or attempted manipulation. The cornerstone of the CFTC’s market surveillance, oversight of the markets, is their market surveillance program, as implemented 

through the Large Trader Reporting System. This requires traders 

to file confidentially with the CFTC daily reports concerning their 

positions in a particular contract. 

On the enforcement side, the CFTC’s Enforcement Division investigates and, as appropriate, prosecutes those who violate the 

Act, the CEA, through manipulation, false reporting, and trade 

practice abuses. Enforcement investigations are often conducted in 

cooperation with the Exchange and other regulators, such as 

FERC. In recent years, in the energy area alone, the CFTC has 

filed 32 enforcement actions against nearly 50 defendants, which 

have thus far resulted in civil penalties totaling approximately 

$300 million. 

Now, turning to the current state of the futures markets for 

heating oil and natural gas, recent experience has shown that even 

small disruptions in production, refining capacity, or transportation 

networks can significantly affect prices in the face of high demand 

for energy. Given the scale of the disruptions caused by the various 

hurricanes, prices for heating oil and natural gas, as we are all 

painfully aware, have risen significantly. It is precisely during 

times when the overall market environment is volatile that the risk 

management and price discovery functions of futures markets are 

needed most by commercial users of energy markets and energy 

products. 

Now, let me share some of our observations about the futures 

markets, specifically for heating oil and natural gas. First, with respect to a category of traders we hear about a lot, noncommercial 

traders, so-called speculators. This group, in the markets, has most 

recently held net short positions in both heating oil and natural 

gas futures markets. That is, they would benefit from falling, not 

rising, heating oil and natural gas futures prices. Second, a recent 

study by Commission economists of crude oil and natural gas, regarding the relationship between commercial and noncommercial 

users, so-called speculators and hedgers, is consistent with the 

view that speculators respond to price changes, that is, they are 

not the cause of price changes, per se. 

Third, high futures prices and price volatility for heating oil and 

natural gas since the hurricane are signals of market fundamentals, reflecting expectations of the market participants, both commercial and non-commercial, in a time of very tight demand/supply 

balances, combined with the impact of damage caused to the energy infrastructure by the hurricanes. In other words, futures 

29

prices, when futures markets are working properly, free of manipulation, reflect underlying fundamentals. 

Finally, the actual delivery experience in heating oil and natural 

gas futures contracts over the past 2 years has not displayed unusual patterns consistent with any market manipulative corners or 

squeezes. Now, in light of the costs and impacts that heating oil 

and natural gas prices have on all consumers, we are very conscious of our responsibility at the CFTC to ensure that futures 

markets are fair, competitive, and free of manipulation. To that 

end, we will continue to conduct active oversight and close surveillance of these markets to ensure that they continue to function 

properly. 

Thank you for having me here today and represent the Commission, and I look forward to your questions. 

[The prepared statement of Hon. Reuben Jeffery III follows:]

PREPARED STATEMENT OF HON. REUBEN JEFFERY III, CHAIRMAN, U.S. COMMODITY

FUTURES TRADING COMMISSION

Chairman Barton, Ranking Member Dingell, Chairman Hall, Ranking Member 

Boucher and Members of the Subcommittee: I appreciate the opportunity to testify 

on behalf of the Commodity Futures Trading Commission (CFTC) concerning the 

CFTC’s oversight of energy futures and options markets. I am pleased to testify 

alongside Chairman Joseph Kelliher of the Federal Energy Regulatory Commission 

and Assistant Secretary Mark Maddox of the Department of Energy. Each of our 

agencies has a distinct and important function in the markets for energy products 

and we, at the CFTC, are committed to continuing inter-agency cooperation and coordination in order to ensure an effective and efficient regulatory oversight regime. 

The CFTC has been paying particularly close attention to futures trading in energy commodities, both before and since the recent hurricanes, because of the importance of energy prices and supplies to the U.S. economy and to every U.S. citizen. 

Both the level and the volatility of prices will react to new information. If such reactions are based on accurately reported information about market fundamentals, 

such as short- or long-term changes in supply or demand, then the markets are performing their proper price discovery function. Based on our surveillance so far, we 

believe that heating oil and natural gas futures markets have been accurately reflecting the underlying fundamentals of these markets. 

In my testimony today, I will describe the CFTC’s oversight of the energy futures 

markets. I will also share my observations on the current state of the futures markets for natural gas and heating oil. 

A. THE COMMODITY FUTURES TRADING COMMISSION’S CORE MISSION

Futures markets play a critically important role in the U.S. economy. They provide risk management tools that producers, distributors, and commercial users of 

commodities (such as natural gas and heating oil) utilize to protect themselves from 

unpredictable price changes. The futures markets also play a price discovery role 

as participants in related cash and over-the-counter (OTC) markets look to futures 

markets to discover prices, which accurately reflect information on supply, demand, 

and other factors. Both functions would be harmed by manipulation of prices. 

The CFTC’s primary mission under the Commodity Exchange Act (the CEA) is to 

ensure that the commodity futures and options markets operate in an open and 

competitive manner, free of price distortions. The CFTC fulfills this obligation 

through a comprehensive, multi-faceted program that is designed to identify and 

mitigate the potential for manipulation and other market abuses, and to ferret out 

and punish illegal behavior. 

B. THE CFTC’S MARKET OVERSIGHT PROGRAM

To the extent possible, the CFTC attempts to proactively identify and mitigate the 

potential for price manipulation. When any new futures or options contract is listed 

for trading on a futures exchange, the CFTC staff reviews the terms and conditions 

of the contract to determine if it is readily susceptible to manipulation. For example, 

although most futures contracts are ultimately cash-settled (meaning participants 

offset their positions through the exchange by paying or receiving money rather 

than by making or taking delivery of the actual commodity), the CFTC carefully exVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6621 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
30

amines those contracts that permit physical delivery (as do key energy contracts on 

the New York Mercantile Exchange, or NYMEX) to ensure that the deliverable supply of the commodity is sufficient to facilitate orderly deliveries and liquidations at 

contract expiration dates, and to prevent any would-be manipulator from cornering 

or squeezing the market. 

Every trading day, CFTC staff closely monitors trading activities on the exchanges to detect unusual activity or price aberrations that may indicate actual or 

attempted manipulation. The cornerstone of the CFTC’s market surveillance program is the Large Trader Reporting System. The Large Trader Reporting System 

requires clearing members, futures commission merchants, and foreign brokers to 

file daily reports with the CFTC concerning their own and customer positions in a 

particular contract. This reporting requirement is triggered when a trader holds a 

position at or above specific reporting levels set by CFTC’s regulations. Through 

Large Trader Reports, the CFTC becomes aware of concentrated and coordinated positions that might be used by one or more traders to attempt manipulation. 

In addition to the daily Large Trader Reporters, the CFTC may issue a ‘‘special 

call’’ to a reportable trader or firm. Through these special calls, the CFTC can obtain additional, more detailed information on a participant’s trading and delivery activity, and on the trader’s positions and transactions in the underlying commodity. 

Market surveillance is not conducted exclusively by the CFTC. Each futures exchange is required under the CEA to affirmatively and effectively supervise trading, 

prices, and positions. The CFTC examines the exchanges to ensure that they have 

devoted appropriate resources and attention to fulfilling this important responsibility. The CFTC staff’s findings from these rule enforcement reviews are reported 

to the CFTC, and are publicly posted on the CFTC web site (www.cftc.gov). Furthermore, exchanges must impose position limits, where appropriate, to guard against 

manipulation. For example, NYMEX imposes spot month speculative limits on its 

energy futures contracts. 

When the CFTC’s surveillance staff identifies a potential problem situation, the 

CFTC engages in an escalating series of regulatory steps to work to correct the 

problem. Typically, the CFTC’s staff consults and coordinates its activities with exchange staff. CFTC staff contacts the largest long- and short-side traders to obtain 

information on, among other things, their delivery intentions and capability, and 

their price objectives in liquidating trades. The traders are advised of the CFTC’s 

concern regarding the orderly expiration of the futures contract, and reminded that 

they are expected to trade in a responsible manner. This ‘‘jawboning’’ activity by 

CFTC staff and the exchanges is usually quite effective in resolving most potential 

problems. However, when staff is not satisfied that it has been successful, a more 

formal warning will be issued to the trader in writing of the CFTC’s concern about 

the possibility of manipulation. 

Given the CFTC’s statutory role as an oversight regulator, and the exchanges’ 

statutory responsibility to monitor trading to prevent manipulation, the CFTC expects that the exchanges will take the lead in resolving problems in their markets, 

either informally or through emergency action. If an exchange fails to take actions 

that the CFTC deems necessary, the CFTC has broad emergency powers to direct 

the exchange to take such action as in the CFTC’s judgment is necessary to maintain or restore orderly trading in, or liquidation of, any futures contract. Such actions could include limiting trading to liquidating transactions, imposing or reducing 

limits on positions, requiring the liquidation of positions, extending a delivery period, or closing a market. Fortunately, most issues are resolved without the need 

for the CFTC’s emergency powers. The fact that the CFTC has had to take emergency action only four times in its history demonstrates its commitment not to intervene in markets unless all other efforts have been unsuccessful. 

C. THE CFTC’S ENFORCEMENT PROGRAM

The CFTC aggressively pursues any individual or entity that intentionally seeks 

to disrupt or undermine the integrity of markets for trading commodity futures and 

options contracts. The CFTC’s Division of Enforcement investigates and, as appropriate, prosecutes individuals and entities for violations of the CEA or CFTC regulations, including manipulation, false reporting, and trade practice abuses (e.g., wash 

sales and accommodation trading) involving trading on markets subject to CFTC 

oversight. The proposed sanctions sought in the CFTC’s enforcement actions serve 

the dual purposes of obtaining redress for the charged violations and acting as a 

deterrent for would-be violators by sending a clear message that improper conduct 

will not be tolerated. 

The CFTC’s Division of Enforcement may receive referrals from several sources: 

the CFTC’s own market surveillance staff; the Division’s interaction with compliVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6621 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
31

ance staff at the relevant exchange; market participants and complaints from members of the public; and other State, Federal, and international regulatory authorities. Upon determining that further inquiry concerning the referral is warranted, 

Enforcement staff immediately gathers information internally available within the 

CFTC and from the exchanges, and conducts relevant interviews. The CFTC may 

grant formal administrative subpoena authority, which enables its Division of enforcement to obtain documents (for example, audio recordings, e-mail and trade 

data), and testimony from third parties. 

The investigation may be conducted in cooperation with the applicable exchange 

and other regulators such as the Federal Energy Regulatory Commission (FERC). 

On October 12, 2005, the CFTC and FERC executed a Memorandum of Understanding, pursuant to provisions of the Energy Policy Act of 2005, to ensure that 

information requests to markets within the respective jurisdiction of each agency 

are properly coordinated to minimize duplicative information requests, and to address the confidential treatment of proprietary energy trading data. It will enable 

both the CFTC and FERC to work actively to assure the price integrity of the energy markets. 

If warranted at the conclusion of its investigation, the Division of Enforcement 

will recommend that the CFTC initiate a civil injunctive action in Federal district 

court or an administrative proceeding. The CFTC may obtain temporary statutory 

restraining orders and preliminary and permanent injunctions in Federal court to 

halt ongoing violations, as well as civil monetary penalties, appointment of a receiver, the freezing of assets, restitution to customers, and disgorgement of unlawfully acquired benefits. Administrative sanctions may include orders suspending, denying, revoking, or restricting registration; prohibiting trading; and imposing civil 

monetary penalties, cease and desist orders, and orders of restitution. 

The CFTC also may refer an enforcement matter to the Department of Justice. 

Criminal activity involving commodity-related instruments can result in prosecution 

for criminal violations of the CEA and for violations of federal criminal statutes, 

such as mail fraud or wire fraud. 

Not all investigations necessarily lead to the filing of a CFTC enforcement action. 

For example, in July 2003, the CFTC and FERC issued a joint statement of the results of investigations into a price spike in natural gas that occurred in late February 2003. The CFTC’s investigation focused on exchange-traded futures and options trading in natural gas, including obtaining and listening to numerous audiotapes of conversations between clerks on the NYMEX floor and the customers who 

were using the markets. The CFTC found nothing in its analysis to suggest any manipulative activity in the natural gas futures and options market at that time. 

Similarly, in August 2004, the CFTC issued a statement that it had completed 

its investigation of the sharp upward movement in prices in the natural gas market 

that occurred in late 2003. The investigation, which was conducted in full cooperation with FERC and enhanced by the cooperative effort of NYMEX, did not uncover 

evidence that any entity or individual engaged in activity that violated the CEA 

with respect to natural gas trading in late 2003. The CFTC’s investigation included 

the extensive review of documents and audio recordings produced by numerous companies and individuals in the natural gas markets, including physical and financial 

traders, industry analysts, and operators of natural gas storage facilities, as well as 

testimony and interviews of dozens of individuals. 

In recent years, the CFTC’s Enforcement program has conducted an extensive investigation of alleged abuses in energy-related markets. This investigation has focused on energy trading firms that allegedly have engaged in: 1) reporting false, 

misleading or knowingly inaccurate market information to natural gas reporting 

firms (including price and volume information) which affects or tends to affect the 

market price of natural gas, including futures prices as traded on NYMEX; and 2) 

manipulation or attempted manipulation which could affect prices of NYMEX natural gas futures contracts. The CFTC’s enforcement actions in the energy sector reflect an approach to market oversight that emphasizes tough enforcement actions 

against proven wrongdoers. As a result of its efforts in investigating wrongdoing in 

the energy markets, the CFTC has filed 32 enforcement actions charging 27 companies and 22 individuals. These enforcement actions, which are identified more fully 

in the Appendix, have thus far resulted in civil monetary penalties totaling nearly 

$300 million, among other sanctions. 

D. CURRENT STATE OF FUTURES MARKETS FOR HEATING OIL & NATURAL GAS

Having described the process the CFTC uses to ensure that futures markets are 

operating in an open and competitive manner, I will now describe what CFTC staff 

has recently observed in the futures markets for heating oil and natural gas. These 

32

1 A large percentage of the remaining long positions are held by traders whose positions are 

too small to meet the reporting size threshold for inclusion in the Commission’s Large Trader 

Report. The remaining long positions are held as part of so-called ‘‘spread’’ positions across contract months. A spread position is established by simultaneously taking a long position in one 

futures contract and taking a short position in a related contract. Although spread positions are 

generally regarded as speculative, the speculation is based on relative price differences between 

contracts. Spread strategies do not depend on, and are therefore unrelated to, the overall level 

or direction of the market. 

observations are directed at the following: 1) participation rates of non-commercial 

traders, the so-called ‘‘speculators’’; 2) current futures market prices for contracts 

with delivery dates during the upcoming winter heating season; 3) recent delivery 

experience; and 4) the relationship between crude oil futures prices and heating oil 

futures prices. 

1. Participation Rates of Non-Commercial Traders 

Data from the CFTC’s Large Trader Reporting System help answer questions 

about the role of non-commercial traders in futures markets for heating oil and natural gas. A weekly summary, called the Commitments of Traders (COT) Report, is 

based on information gathered through the Large Trader Reporting System. The 

CFTC publicly releases the COT Report every Friday afternoon via its web site 

(www.cftc.gov). 

A snapshot of positions in the futures markets for heating oil and natural gas, 

current as of October 25, 2005, shows that as a group, non-commercial traders—that 

is, those who are commonly labeled as speculators - have most recently held net 

short positions in both heating oil and natural gas futures markets. In other words, 

non-commercial traders have held positions that will gain in value if prices for heating oil or natural gas futures fall. In the heating oil futures market, non-commercial 

traders hold approximately 10 percent of the open long positions and 14 percent of 

the open short positions. These numbers reflect a net short position since the total 

number of long positions must equal the total number of short positions in the overall market. In the natural gas futures market, non-commercial traders hold approximately 12 percent of the open long positions and 15 percent of the open short positions. In other words, as of October 25, 2005, non-commercial traders would benefit 

from falling—not rising—heating oil and natural gas futures prices. 

Positions in both heating oil and natural gas futures are held predominately by 

commercial traders - that is, producers, refiners, and retailers, who are commonly 

known as hedgers. In the heating oil futures market, nearly 59 percent of outright 

long positions (i.e., positions that will gain value if prices rise) are held by commercial traders compared to 10 percent for non-commercial traders. In the natural gas 

futures market, approximately 44 percent of outright long positions are held by commercial traders compared to 12 percent for non-commercial traders.1

Managed money traders, including those called hedge funds, fall into the category 

of non-commercial traders because they do not have a commercial interest in the 

product upon which the futures contract is written. As a group, managed money 

traders represent a significant portion of the relatively small percentage of non-commercial positions in both heating oil and natural gas futures markets. On average, 

managed money traders make up approximately 61 percent of the non-commercial 

long positions and 92 percent of the non-commercial short positions in the natural 

gas futures markets. In the heating oil futures market, managed money traders 

make up 85 percent of the non-commercial long positions and 69 percent of the noncommercial short positions. 

Figures 1 and 2 provide a snapshot of participation by managed money traders 

in the November 2005 heating oil futures contract and the December 2005 natural 

gas futures contract traded at NYMEX. The net positions of managed money traders 

as a group are displayed by the vertical columns. These positions are reported, in 

thousands of contracts, for all futures and options combined (defined as ‘‘AFOC’’ in 

Figures 1 and 2). Each heating oil contract is written on 1,000 barrels (equivalent 

to 42,000 gallons) of heating oil. Each natural gas contract is written on 10,000 million British Thermal Units (mmBTU) of natural gas. The continuous line on each 

chart shows the end-of-day price for the nearby futures contract. Both charts show 

that managed money traders have most recently held net short positions in both 

markets, and they would benefit from falling—not rising—futures prices. The charts 

also show that while the positions of managed money traders and prices generally 

move together, there are several instances where prices move independently from 

the positions of managed money traders. A conclusion that can be drawn from this 

chart is that managed money traders, and speculators in general, do not have perfect foresight. 

33

The role of non-commercial traders in futures markets has been studied extensively, both by the CFTC’s economists and others. One lesson from these studies is 

that non-commercial traders are necessary in order for futures markets to facilitate 

the needs of hedgers. In order for hedgers to reduce the risk that they face in their 

day-to-day commercial activities, they need to trade with someone willing to accept 

the risk the hedger is trying to shed. Therefore, both hedgers and speculators are 

necessary for the futures markets to perform their vital role of transferring risk to 

those who are willing to accept it for a price. 

A recent study by the CFTC’s economists demonstrates the relationship between 

speculators and hedgers. The study shows that when a commercial trader sells, it 

will often be a managed money trader who takes the other side of the transaction; 

when a commercial trader buys, it will often be a managed money trader who is 

the seller. This observation is consistent with the notion that managed money traders respond to price changes; they are not the cause of price changes. 

2. A Snapshot of Current Futures Market Prices 

As I mentioned earlier, the futures markets serve an important price discovery 

function. As a general policy, the CFTC refrains from predicting prices. However, 

futures market prices can be viewed as reflecting the markets’ aggregate expectation of future spot market prices. Each table below displays current (as of 10/31/

2005) futures prices for contracts expiring during the upcoming winter heating season. These futures prices show, based on current information, that the futures markets expect spot market prices to remain close to current levels. These prices and 

expectations are revised continuously by the market as new information becomes 

available.

Heating Oil Futures Prices 

U.S. dollars and cents per gallon 

Delivery Date 

Futures Price

as of

10/31/2005

December 2005 ........................................................................................................................................................ 1.824 

January 2006 ............................................................................................................................................................ 1.870 

February 2006 .......................................................................................................................................................... 1.889 

March 2006 .............................................................................................................................................................. 1.871

Natural Gas Futures Prices 

U.S. dollars and cents per million British thermal units (mmBtu). 

Delivery Date 

Futures Price

as of

10/31/2005

December 2005 ........................................................................................................................................................ $12.14 

January 2006 ............................................................................................................................................................ $12.55 

February 2006 .......................................................................................................................................................... $12.56 

March 2006 .............................................................................................................................................................. $12.28

Here I should briefly mention what are, in our opinion, the primary causes of the 

recent high prices and price volatility for heating oil and natural gas. In recent 

years, demand for petroleum products and natural gas has risen faster than have 

supplies of these commodities. This has created very tight demand/supply balances 

in these markets. In economists’ jargon, both supply and demand for heating oil and 

natural gas are price inelastic in the short run. Therefore, changes in supply or demand can, in the short run, have disproportionately large effects on price. In addition, futures markets are by their nature anticipatory; they incorporate into prices 

a probabilistic estimate of possible future changes in supply and demand. For example, early summer weather forecasts of an unusually active hurricane season this 

year, and memories of the damage caused last year by Hurricane Ivan, had already 

caused the natural gas futures market to price-in some possible damage from summer hurricanes well before Hurricane Katrina hit the Gulf Coast. Of course, when 

Katrina did hit, it did substantially more damage to the energy infrastructure than 

the futures market had anticipated, and prices increased further. The impact of 

these storms has significantly changed the fundamentals of these markets. Hurricanes Katrina and Rita have caused cumulative losses of Gulf production of 74.7 

million barrels of crude oil (equivalent to about 5 days of crude inputs into U.S. reVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6621 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
34

fineries) and 381 billion cubic feet of natural gas (equivalent to about 7 days of U.S. 

consumption). Shut-ins of Gulf production of crude oil and natural gas remain at 

relatively high levels. In addition, outages of crude oil refineries and natural gas 

processing facilities continue to impact the markets. Nevertheless, heating oil and 

natural gas prices have recently fallen from their post-Katrina highs in response to 

declining crude oil prices and apparent declines in demand in response to high 

prices and generally mild weather. 

The direction of heating oil and natural gas prices this winter will be substantially determined by how quickly the energy infrastructure comes back on-line and 

by winter weather. Current heating oil and natural gas prices, while down a bit 

from their highs, are by historical standards at high levels. 

3. Recent Delivery Experience 

Figures 3 and 4 show deliveries for heating oil and natural gas futures contracts 

since the beginning of 2004. The vertical columns depict the number of contracts 

delivered. The number of contracts corresponds with numbers displayed on the lefthand axis of the figures. The continuous line, corresponding to the right-hand axis, 

shows the size of the deliveries as a percentage of the maximum number of open 

positions established for each contract month. For example, if the maximum number 

of open positions over a contract’s life was 100,000 contracts, and 4,000 positions 

were settled by delivery, the continuous line would represent 4 percent. The remaining open positions are settled by offset, that is, by taking an equal and opposite futures position that brings the trader’s net position to zero. 

Since futures contracts are primarily risk management contracts, positions are almost always settled by offset. Across all futures markets, less than one percent of 

open futures positions are settled by delivery. In physically settled futures contracts, 

such as heating oil and natural gas futures, close scrutiny of the delivery process 

is vitally important for preventing corners or squeezes. This process is watched 

closely by the CFTC surveillance staff and the exchanges. A trader holding a large 

long position into the delivery process can expect that his actions will be closely 

monitored. The CFTC surveillance staff looks at many sources of information in addition to actual deliveries. The actual delivery experience in heating oil and natural 

gas does not display any unusual patterns consistent with a corner or squeeze during this period. (Note: Each heating oil contract is written on 1,000 barrels (equivalent to 42,000 gallons) of heating oil. Each natural gas contract is written on 10,000 

million British Thermal Units (mmBTU) of natural gas.) 

4. The Relationship between Crude Oil Futures Prices and Heating Oil Futures 

Prices 

A common trading strategy is to simultaneously establish offsetting positions between crude oil futures contracts and futures contracts for the products refined from 

crude oil, such as heating oil traders commonly call this trading strategy the ‘‘crack 

spread,’’ referring to the cracking process of turning crude oil into refined products. 

The chart below displays the heating oil crack spread, using nearest-to-delivery futures contracts, over the past year. This chart shows that the value of the crack 

spread increased significantly following Hurricanes Katrina and Rita. In other 

words, prices for heating oil have moved much higher, on a percentage basis, than 

prices for crude oil. A conclusion that can be drawn from the behavior of the heating 

oil crack spread is that the increase in heating oil prices immediately following Hurricanes Katrina and Rita were driven primarily by disruptions to the refining process, and not as much from increases in the level of crude oil prices. In recent weeks, 

the heating oil crack spread has fallen, but still remains higher than the normally 

prevailing level. 

E. CONCLUSION

In U.S energy markets, recent experience has shown that even small disruptions 

in production, refining capacity, or transportation networks can significantly affect 

prices in the face of high demand for energy products. Therefore, given the scale 

of disruptions caused by Hurricanes Katrina and Rita, it is not surprising that current prices for heating oil and natural gas, as well as other energy products have 

risen significantly. It is precisely during times when the overall market environment 

is volatile that the risk-management and price-discovery features of futures markets 

are needed most by commercial users of energy products. All the evidence that we 

have seen is consistent with the notion that futures markets for heating oil and natural gas and other energy products have been properly performing their risk management and price discovery roles. The staff of the Commission will continue to conduct very close surveillance of these markets to ensure that they continue to function properly. Finally, improper conduct will not be tolerated, and the CFTC will 

35

continue to pursue aggressive enforcement actions against those who break the 

rules. 

This concludes my remarks. I look forward to your questions.

Mr. SHIMKUS. Thank you. Now, the Chair recognizes Mr. Mark 

Maddox, Principal Deputy Assistant Security of the Office of Fossil 

Energy. Thank you. 

STATEMENT OF MARK MADDOX 

Mr. MADDOX. Mr. Shimkus, members of the committee, subcommittee. I am pleased to be here today to discuss the supply and 

demand for heating oil this winter. I will also discuss the natural 

gas situation and its relationship to the heating oil market. 

America’s homes and businesses are heated predominantly by 

three fuels: heating oil, natural gas, and electricity, the last of 

which is used for heat pumps and resistance heating. Heating oil 

provides heat to only about 7 percent of the fuel consumed by residences on a national basis, but the demand is not uniformly distributed. The Northeast consumes about 73 percent of all the heating oil used in this country. 

Heating oil and natural gas each have economic and security of 

supply advantages. Heating oil supplying the Northeast comes 

from a number of sources. This diversity of supply has the obvious 

advantage of increased security. It would be rare for more than one 

source of supply to falter at the same time. The disadvantage is 

that most of these sources are distant from consumers, and they 

are subject to interruptions due to shipping problems. 

Unusual conditions can bring to light weaknesses in any system. 

In the late winter of 1999-2000, for example, the country suffered 

a severe cold spell. Just as demand was rising to record levels, domestic natural gas production slumped in the producing regions, 

harbors froze, North Atlantic storms kept ships at sea, and barges 

could not move. Heating oil availability became spotty. Dealers 

were rationing supplies and prices surged. 

In response to that incident, the State and Federal Governments 

have taken several actions to improve the security of supply. Coordination between the States and Federal Government has been 

improvement, and the State energy offices are in close contact with 

the Department of Energy. The Coast Guard has dedicated the necessary resources to assure that ports and rivers in the Northeast 

remain ice-free and open to ship and barge movements. We also 

created a 2 million barrel inventory of heating oil, called the Northeast Home Heating Oil Reserve, which is stored in New York Harbor, New Haven, Connecticut, and Providence, Rhode Island. Since 

2000, despite some severe winters, these measures have helped assure that the Northeast has not suffered from any shortages of 

heating fuel. 

The situation going into the winter of 2005 and 2006 will be different from what we have grown to expect. Crude oil prices have 

been rising, and this year, we realized the excess capacity had 

shrunk to a minimum level. In late August, Hurricane Katrina devastated the central Gulf Coast. A week later, Hurricane Rita did 

the same to the western Gulf Coast. The impact on the domestic 

oil industry was significant. At its worst point, virtually all of the 

production of oil and gas in the Gulf of Mexico was halted. 

36

The Administration responded immediately to the hurricanes by 

taking a number of crucial measures to minimize the impact of the 

storm on the Nation’s energy supply, and they are outlined in my 

submitted testimony. Today, the heating oil situation is less clear. 

While inventories of other products have been rising over the last 

several weeks, inventories of distillates have dropped, but are comparable to last year’s levels. However, the outlook is not bleak. The 

high prices occasioned by the hurricanes have caused refineries all 

over the world to put available capacity to work. Furthermore, 

based on our conversations with industry, we expect that distillates 

will continue to enter the U.S. from overseas. 

The other factor that makes the heating oil situation unclear is 

that our supplies of natural gas from the Gulf of Mexico were so 

thoroughly disrupted. However, we still project that we will meet 

or exceed the predicted 3.2-tcf goal. Whether that inventory will be 

adequate will depend on the rates of production from domestic 

fields going forward. 

Prices for natural gas are expected to remain high. According to 

the Energy Information Administration, Henry Hub natural gas 

prices are expected to average around $9.00 per thousand cubic 

feet, or mcf, in 2005, and $8.70 in 2006. 

The Administration has taken every action available to the government. The Strategic Petroleum Reserve sites are all operating 

and capable of drawing down and selling oil as quickly as may be 

required. The Northeast Home Heating Oil Reserve stands at its 

maximum authorized volume of 2 million barrels. To encourage reduced energy consumption, the Administration has launched an energy efficiency and conservation campaign, and is educating consumers on steps they can take to reduce their utility bills. 

I would like to conclude by saying that the Department of Energy 

stands ready to make the heating oil reserve available immediately 

in the event of a supply disruption. 

That concludes my prepared testimony. I will be happy to answer 

questions. 

[The prepared statement of Mark Maddox follows:]

PREPARED STATEMENT OF MARK MADDOX, PRINCIPAL DEPUTY ASSISTANT SECRETARY, 

OFFICE OF FOSSIL ENERGY, DEPARTMENT OF ENERGY

Mr. Chairman and members of the Subcommittee. I am pleased to be here today 

to discuss the Nation’s energy supply and especially the supply and demand for 

heating oil this winter. I will also discuss the natural gas situation and its relationship to the heating oil market. 

America’s homes and businesses are heated predominantly by three fuels, heating 

oil, natural gas and electricity, the last of which is used for heat pumps and resistance heating. Heating oil provides heat to only about 7 percent of the fuel consumed 

by residences on a national basis, but the demand is not uniformly distributed; the 

Northeast consumes the about 73 percent of all the heating oil used in the country. 

Heating oil and natural gas each have economic and security of supply advantages. Heating oil supplying the Northeast comes from a number of sources:

• Oil refined along the Gulf of Mexico is transported by water and by the Colonial 

Pipeline to the New York City gate; 

• Refiners in New Jersey, Pennsylvania and Delaware ship their production to the 

Northeast by pipeline and by water; 

• Imports mainly from Canada, the Caribbean, and Europe arrive by ship. 

This diversity of supply has the obvious advantage of increased security: It would 

be rare for more than one source of supply to falter at the same time. The disadvantage is that most of these sources are distant from consumers and they are subject 

to interruptions due to shipping problems. Historically, we have been concerned that 

37

severe winter weather could freeze ports and delay ship movements at exactly the 

time that demand would be surging. 

Unusual conditions can bring to light weaknesses in any system. In the late winter of 1999-2000, for example, the country suffered a severe cold spell. Just as demand was rising to record levels, domestic natural gas production slumped in the 

producing regions, harbors froze, North Atlantic storms kept ships at sea and barges 

could not move. Heating oil availability became spotty; dealers were rationing supplies and prices surged. 

In response to that incident, the state and Federal governments have taken several actions to improve the security of supply. Coordination between the states and 

the Federal government has been improved, and the state energy offices are in close 

contact with the Department of Energy. The Coast Guard has dedicated the necessary resources to assure that ports and rivers in the Northeast remain ice free 

and open to ship and barge movements. We also created a 2 million barrel inventory 

of heating oil called the Northeast Home Heating Oil Reserve, which is stored in 

New York Harbor, New Haven, Connecticut and Providence, Rhode Island. Since 

2000, despite some severe winters these measures have helped assure that the 

Northeast has not suffered from any shortages of heating fuel. 

The situation going into the winter of 2005-06 will be different from what we have 

grown to expect. Recent world economic growth caused a surge in oil demand that 

outstripped forecasts. Worldwide investment in oil exploration and production over 

the last ten years has been insufficient to maintain the wide margin of production 

capability above current demand that we have been used to. In addition, investment 

in refining has lagged demand growth, in large part because of the low returns on 

capital that beset the industry for many years. As a result, crude oil prices have 

been rising, and this year we realized that excess capacity had shrunk to a minimal 

level, and that Saudi Arabia and other member countries of the Organization of Petroleum Exporting Countries no longer had the ability to increase production and 

rapidly stabilize or reduce oil prices. During the summer of 2005, everyone realized 

that fuels for heating would be expensive this winter. However, inventories were 

building and we expected to go into the winter with the best inventory picture that 

we have had in years. 

Hurricane season changed that. In late August, Hurricane Katrina devastated the 

Central Gulf Coast. A week later Hurricane Rita did the same thing to the Western 

Gulf Coast. The impact on the domestic oil industry was significant. At its worst 

point, virtually all production of oil and gas from the Gulf of Mexico was halted. 

The Administration responded immediately to the hurricanes by taking a number 

of crucial measures to minimize the impact of the storm on the nation’s energy supply:

• The Department worked to get power to the interstate pipelines that were essential to ensuring adequate supplies of refined products to the southeast and east 

coast. • We authorized loans from the Strategic Petroleum Reserve to refiners in the Gulf 

region and the Midwest whose scheduled deliveries had been disrupted. • The President authorized the sale of oil from the Strategic Petroleum Reserve to 

help keep markets well supplied at a time when there were widespread fears 

of looming shortages. • We reached an agreement with the International Energy Agency for its members 

to release an additional 30 million barrels of crude oil and refined products to 

world markets. • The Environmental Protection Agency provided temporary waivers allowing the 

early use of winter blend gasoline. • The Department of Homeland Security rescinded legal restrictions on tanker 

transportation of fuel supplies. • The Department of the Interior’s Minerals Management Service immediately 

began to streamline processes for various permit approvals to resume production and expedited reviews of requests for temporary barging of oil until pipelines could be repaired. • The Treasury Department increased the flexibility available to fuel distributors to 

meet diesel fuel demand by waiving penalties for highway use of ‘‘dyed’’ diesel 

fuel normally restricted to off-highway use. 

• The Navy and Coast Guard worked to clear shipping channels in the Gulf and 

the Lower Mississippi River. 

• And we worked with European allies to provide extra cargo tankers, as well as 

refined product to help supply the American gasoline market. These steps had 

a positive effect and helped calm the markets. 

We do, however, want to note that additional facilities were shut-in due to Hurricane Wilma, resulting in an approximately four percent increase in shut-in producVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6621 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
38

tion. These facilities did not sustain any damage and therefore, are expected to come 

back on line in the next few days. Nevertheless, as of early this week, 223 production platforms and 6 drilling rigs were still evacuated—the equivalent of 27 percent 

and 4 percent, respectively, of all platforms and rigs. Approximately 100 platforms 

and rigs were destroyed by the storms. Shut in oil production still exceeds one million barrels of oil per day, or 68 percent of expected daily production from the Gulf. 

Similarly, shut in gas production from the Gulf is 5.6 billion cubic feet per day, 

equal to 54 percent of expected production. So far the country has foregone the production of 71 million barrels of oil and 360 billion cubic feet of gas during this time. 

On shore, the damage to refineries, gas processing plants, and power lines was 

equally serious. Over two million barrels of daily refining capacity was shut down. 

While onshore pipelines were not damaged, the lack of power meant drastically reduced operations. And when the pipelines came back into service there was not 

enough refined product to keep them operating at capacity. 

To a large extent the U.S. petroleum industry is making tremendous progress in 

recovering from the hurricanes, and it is a tribute to the workers in the Gulf region, 

many of whom have lost their homes and possessions, that they have done so much 

to restore electricity, pipelines, refineries and producing operations to service. At 

this time there are still four refineries with about one million barrels of capacity 

that have not returned to production, but two of these are expected to come back 

on line in November. 

The product pipeline problems that created shortages of gasoline along the East 

Coast have been corrected. While crude oil production in the Gulf of Mexico is still 

seriously hampered, imports are more than sufficient to meet demand, and inventories of crude oil are high and increasing. Furthermore, as refineries have come 

back on line and gasoline imports have continued at a high rate, gasoline is in 

ample supply. Inventories are rising and prices are declining from their peak. 

The heating oil situation is less clear. While inventories of other products have 

been rising over the last several weeks, inventories of distillates have dropped. To 

some degree that is because the U.S. economy is still strong and the demand for 

diesel fuel has not abated, and refineries as they have come back on line are emphasizing gasoline production. However, the outlook is not bleak. The high prices occasioned by the hurricanes have caused refineries all over the world to put all available capacity to work. Contrary to recent talk about the growth in demand for distillates in Europe, and many predictions that there will be no imports this winter, 

imports surged last week. Furthermore, based on our conversations with industry 

we expect that distillates will continue to enter into the U.S. from all over the 

world, but especially from Asia. 

As we actually go into winter, the demand for distillates will increase everywhere. 

However, that demand will be offset by the increase in domestic supply of distillates 

as refineries continue to come back on line. 

The other factor that makes the heating oil situation unclear is that our supplies 

of natural gas from the Gulf of Mexico were so thoroughly disrupted. Natural gas 

and distillates compete in many applications, and in the case of a disruption in supply for one product, a demand increase for the still available product can be nearly 

instantaneous. Prior to the hurricanes, industry observers believed that the target 

inventory level of 3.2 trillion cubic feet of natural gas entering the heating season 

would be achieved, and we still project that we will meet or exceed that goal, despite 

the disruption caused by the hurricanes. Whether that inventory will be adequate 

will depend on the rates of production from domestic fields, which in turn will be 

largely dependent upon the recovery of production and treatment facilities in the 

Gulf of Mexico and along the coast. It will also depend on the severity of the weather and the increased demand it could create. 

Prices for natural gas are expected to remain high. According to the Energy Information Administration’s October Short-Term Energy Outlook, under the baseline 

weather case, Henry Hub natural gas prices are expected to average around $9.00 

per thousand cubic feet, or mcf, in 2005 and around $8.70 per mcf in 2006. 

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

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

return to normal weather and a recovery in consumption by the industrial sector, 

which is projected to increase by about 6 percent over 2005 levels. Residential demand is projected to decline slightly from 2004 to 2005 mostly because of relatively 

weak heating-related demand during the first quarter, while industrial demand is 

estimated to decline by nearly 8 percent over the same period due to the much higher prices for natural gas as a fuel or feedstock. 

By 2006, both end-use sectors recover somewhat with residential demand estimated to increase 2.6 percent from 2005 levels and industrial demand increasing 

by 6 percent. The industrial rebound in 2006 is partly because of assumed reactivaVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6621 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
39

tion of damaged industrial plants in the Gulf of Mexico region but also reflects renewed fuel demand growth as domestic industrial plants adjust to higher prices. 

Power sector demand growth continues through the forecast period along with electricity demand growth. The pace is slower than the 5.7-percent rate projected for 

2005 because an unusually hot summer and high cooling demand boosted 2005 

growth significantly. 

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

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

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

162 billion cubic feet below 1 year ago but still 1.2 percent above the 5-year average. 

About 15 percent of our natural gas comes from Canada via pipeline. Otherwise, 

there is not much opportunity to import gas, and the possibility for a surge of Canadian gas this winter is diminished because the expanding Alberta oil sands industry 

is a very heavy consumer of natural gas. Liquefied natural gas is a valuable but 

still relatively minor element in our natural gas supply. While it is an integral and 

essential part of the market, especially in Boston, the spot market for that product 

is so small that we cannot count on it for measurable relief in the event of shortages 

due to weather. 

Faced with this situation, the Administration has taken every action available to 

the Government. First, the supply of crude oil appears to be ample, in part due to 

the decision by the President and the Department to use the Strategic Petroleum 

Reserve. Since the hurricanes we have loaned 10.8 million barrels of oil and sold 

11 million barrels. In addition, the sale of oil was coordinated with the other member countries of the International Energy Agency. The United States has been able 

to import so much refined product during the last month in large part because the 

release of those products from strategic storage in Europe and Asia created the necessary price differentials for traders to export the products to the United States. 

The Strategic Petroleum Reserve storage sites are all operating and capable of 

drawing down and selling oil as quickly as may be required. Further, we have made 

it clear to industry that if any individual company is having trouble finding feedstock for its refineries, we stand ready to make loans as necessary to assure the 

refineries operate at maximum capacity. We do not foresee shortages this winter 

due to shortages of crude oil. 

The only program directly affecting the availability of heating oil is the Northeast 

Home Heating Oil Reserve. The Reserve stands at its maximum authorized volume 

of 2 million barrels. The companies holding the oil for the Government are contractually bound to complete delivery of all the oil within 10 days of the Government 

contracting to sell the inventory. Our method for selling the heating oil is an internet-based interactive auction system, and we are ready to make the oil available, 

conduct an auction and award contracts within 48 hours of a declaration by the 

President of a severe petroleum supply interruption and subsequent authorization 

by the Secretary. 

Beyond these efforts, it is our belief that the markets are acting to make the best 

of what has been a severely disrupted fall season. Nevertheless, now that the Hurricane season is coming to a close, fears are diminishing and prices are receding. The 

wholesale price of heating oil peaked at about $2.20 per gallon early in October, and 

is down about $0.30 per gallon from that point. While low inventories for distillates 

present the possibility of volatility, and the price of natural gas, heating oil and distillates in general will be high throughout the winter, the awareness that high 

prices brings will cause people to use natural gas and oil more sparingly and to take 

what measures they can to reduce consumption. 

To encourage reduced energy consumption, the Administration has launched an 

energy efficiency and conservation campaign aimed at educating consumers on steps 

they can take to reduce their utility bills. Senior Department of Energy officials, led 

by Secretary Bodman, have been traveling the country to encourage consumer conservation efforts. We are also working with energy-intensive businesses and industries on ways to conserve. And the President has called on the Federal government 

to lead by example and conserve its own energy use. 

Additionally, the Department has published the Energy Saver$ booklet, an informative guide for your constituents with helpful tips on saving energy and money 

at home. Both the President and Secretary Bodman have encouraged Federal agencies and employees to use these reference guides in their daily activities. Many 

Members have requested copies for their constituents and an on-line version has 

been emailed to your offices. 

I would like to conclude by saying that the Department of Energy is in continual 

contact with state and local governments to monitor our heating fuel supplies, and 

40

that the Department stands ready to make the heating oil reserve available immediately in the event of a supply disruption. 

This concludes my prepared testimony and I will be happy to answer any questions you may have.

Mr. SHIMKUS. Thank you. Now, the Chair recognizes Commissioner Mason from the Public Utilities Commission of Ohio. Welcome. 

STATEMENT OF HON. DONALD L. MASON 

Mr. MASON. Thank you Chairman Barton, Chairman Shimkus, 

Ranking Member Boucher, members of the committee. I am 

pleased to be here to represent the united views of the National Association of Regulatory Utility Commissioners, but I would also like 

to represent views of the State of Ohio and the Public Utilities 

Commission. 

In the State of Ohio, we are concerned, as Congress is, with the 

energy prices on our consumers. Our State economy, regional economy, and national economy all are important to us, and we know 

the difficulties will be meeting with this coming winter heating season. I will touch particularly on issues relative to what State regulators can do this present winter heating season. 

For example, in Ohio, the Public Utilities Commission issued an 

order directing utilities to reconnect gas and electricity customers 

who have been disconnected from last year’s high energy prices. As 

long as those customers continue to make payments toward last 

year’s balances, they will not be disconnected. Our objective is to 

ensure that customers are not disconnected during the winter heating season. It is my understanding over 217,000 customers were 

disconnected last year, of which only 77,000 were on what we call 

the Percent of Income Plan program. 

Second, we strongly encourage consumers to take advantage of 

budget billing, so that their payments could be spread evenly over 

a 12 month period. However, this means utility commissions must 

work with local distribution companies on carrying the costs associated with the LDCs holding those balances. Now, in Ohio, additionally, we instituted a bad debt rider, whereby the uncollectibles accrued from the previous quarter are placed into a rider for purposes of spreading the uncollectible costs over the gas consumer 

customers who are paying their bills. 

Presently, the PUCO, the Public Utilities Commission of Ohio, is 

in discussions with one local gas company regarding abandoning 

the traditional regulatory structure, and implementing a demandside management program, in conjunction with a decoupling of 

rates from the throughput movement of natural gas. This would 

better enable the company, the PUCO, and the State’s Consumer’s 

Counsel to work together on reducing demand. The result is that 

the LDC would not make more money just because customers used 

more natural gas. 

Fifth, legislators in Ohio are presently preparing to introduce 

bills which would encourage timely review of proposals to explore 

for and develop mineral interests under our State’s properties. One 

proposal being considered is to create a board of review for such 

proposals. 

41

In Ohio, as in many other States, the natural gas distribution 

company is unbundled from the supplying of natural gas. As a result, marketers in the State of Ohio, at least, are providing natural 

gas to consumers sometimes on fixed price contracts. Therefore, 

those customers do not feel the effects of the $14 gas we are now 

seeing. 

The Public Utilities Commission of Ohio, in 2001, began to encourage the use of financial hedges by LDCs. The best example of 

success has resulted in a $3.00/mcf savings to customers in the 

Dayton area, by Vectren of Ohio. The benefits derived from hedging 

and long term fixed contracts are evident in the price of natural 

gas increases in the marketplace. In the case of Vectren of Ohio, 

the company has committed to a hedging program in which 75 percent of its winter volumes are known and locked in prior to November 1. VEDO, as they are known as, is able to lock in 75 percent 

of its winter volumes through a combination of hedged prices, locking in future prices in forward months, and contractual storage, 

where the gas is injected into storage during the non-winter 

months, typical from April through October, and then withdrawn 

during the winter months of November through March. VEDO has 

a near equal split of winter volumes between hedging and this contractual storage. 

There is also success story in a very small company, maybe 

15,000 customers, Pike, Eastern, and Southeastern Natural Gas 

Companies presented the Commission in 2001 a fully hedged program in which all volumes were known or locked in in advance of 

delivery. This allowed the companies to offer their customers fixed 

burner-tip commodity pricing. The companies utilized an asset 

manager who managed the companies’ pipeline entitlements, and 

secured fixed commodity pricing through the use of NYMEX strips 

and straddle provisions. Additionally, a holding company of a small 

rural LDC used fixed rate contracts, which benefited those customers by having a GCR under $10.00 an mcf through this last 

quarter. 

And finally, though not Ohio specific, the NARUC Committee on 

Gas, on which I serve as the Chairman, has adopted resolutions in 

past meetings encouraging utility commissions to work with local 

gas companies to encourage the proper hedging strategy for each. 

In addition, NARUC and the Interstate Oil and Gas Compact Commission, and that was chaired presently by Governor Freudenthal 

of Wyoming. The past Chairman is Governor Murkowski of Alaska, 

and the past Chairman before that was Governor Richardson of 

New Mexico. We have cooperated in creating a taskforce with the 

purpose of exploring whether long term contracts, as a supply 

strategy, would benefit consumers. After taking comments from interested parties, holding a workshop, and reviewing filed comments, the taskforce did issue a report which is attached to my testimony. The taskforce is recommending that public utility commissions work with the LDCs in understanding and implementing a 

proper contracting strategy for their respective needs. 

Mr. Chairman, members of the subcommittee, I thank you for 

your time, and look forward to any questions you may have. 

[The prepared statement of Hon. Donald L. Mason follows:]

42

PREPARED STATEMENT OF HON. DONALD L. MASON, COMMISSIONER, PUBLIC UTILI- TIES COMMISSION OF OHIO ON BEHALF OF THE NATIONAL ASSOCIATION OF REGU- LATORY UTILITY COMMISSIONERS

Good Afternoon Mr. Chairman and Members of the Subcommittee. 

I am Donald L. Mason, a commissioner at the Public Utilities Commission of Ohio 

(PUCO). I have served in that capacity since 1998. I also serve as the Chair of the 

Committee on Gas for the National Association of Regulatory Utility Commissioners 

(NARUC). As Chairman of the NARUC Committee that focuses directly on some of 

the issues that are the subject of today’s hearing, I am testifying today on behalf 

of that organization. In addition, my testimony reflects my own views and those of 

the PUCO. On behalf of NARUC and the PUCO, I very much appreciate the opportunity to appear before you this morning. The issues that you are addressing in this 

oversight hearing are very important to NARUC’s membership and the natural gas 

consumers in my State, and I am grateful to have this opportunity to present our 

views on the nation’s supply and demand for natural gas. 

NARUC is a quasi-governmental, non-profit organization founded in 1889. Its 

membership includes the State public utility commissions serving all States and territories. NARUC’s mission is to serve the public interest by improving the quality 

and effectiveness of public utility regulation. NARUC’s members regulate the retail 

rates and services of electric, gas, water, and telephone utilities. We are obligated 

under the laws of our respective States to ensure the establishment and maintenance of such utility services as may be required by the public convenience and necessity and to ensure that such services are provided under rates and subject to 

terms and conditions of service that are just, reasonable, and non-discriminatory. 

Today, I will cover a variety of areas ranging from encouraging additional domestic production, to increasing conservation efforts and personal finance. I will be covering some of these issues in a generic national overview and some of these issues 

will be addressed specifically from an Ohio perspective. 

NARUC believes that any Federal policy on natural gas will be sustainable only 

if that policy includes ‘‘the triad’’ of: conservation and efficiency; increasing supply; 

and diversification of energy sources. Any policy must include all three dimensions 

or the goal of energy security will not be met. In addition, any successful Federal 

policy must respect and preserve the States’ traditional roles in regulating distribution systems, planning, siting approval, reliability assurance, and consumer protection. 

INCREASING DOMESTIC NATURAL GAS SUPPLY

Natural gas is an important North American commodity, and the availability of 

abundant supplies of natural gas is a critical part of the energy security of the 

United States. The United States Congress, through enactment of the Natural Gas 

Policy Act of 1978, implemented phased-in decontrol of gas prices at the wellhead; 

and through the Natural Gas Wellhead Decontrol Act of 1989, eliminated wellhead 

price controls for sales of natural gas. The result was a decrease in natural gas 

prices that lasted many years. Recent increases in natural gas prices are, in part, 

a result of a substantial increase in demand for natural gas, especially in the electric generation and industrial sectors of the economy, coupled with a less than corresponding increase in supplies. This rise in natural gas prices is a cause for concern to all industry participants, including producers, suppliers, marketers, and especially consumers. 

Technological advances have improved the economics of natural gas exploration 

and production activities. New domestic natural gas production should improve supply reliability, and therefore, government policies that foster increased supplies of 

natural gas could benefit consumers by exerting downward pressure on natural gas 

prices. Substantial volumes of natural gas may lie beneath lands that are not available for exploration and production because of economic reasons or land-use policies 

and restrictions. 

NARUC believes that increasing domestic supplies of natural gas requires the coordination and cooperation of both State and Federal governments. NARUC has encouraged State Public Utility Commissions (PUCs) to support environmentally 

sound natural gas exploration and production activities and to communicate that 

support to their State legislators, executive branch officials, and U.S. Congressional 

delegations. NARUC supports the need for Federal legislation that institutes a comprehensive national energy policy that recognizes and encourages environmentally 

sound development and production of new domestic natural gas supplies where appropriate. 

The nation possesses large untapped deposits of both oil and natural gas in the 

State and Federal waters of the Atlantic and Pacific Oceans and Gulf of Mexico. If 

43

developed, these deposits could increase energy supplies and thereby both mitigate 

rising energy prices and reduce our nation’s dependence on foreign energy sources. 

Regulatory and tax barriers currently exist that inhibit offshore oil and natural gas 

exploration and production in the United States. NARUC recognizes the particular 

concerns of States affected by offshore drilling and NARUC encourages Federal policy makers to:

1. Consider removing existing moratoriums to oil and gas exploration and production in both State and Federal coastal waters off the coast of the States that 

agree to such removal, while also urging State and Federal policy makers to ensure that offshore oil and gas production practices are environmentally sound. 

2. Consider expanding State boundaries seaward from the current three miles and 

giving each State the right to control all resource development within their expanded boundary. 

3. Consider providing enhanced royalties to States that choose to allow new production off their shores, thereby providing a significant new revenue source for 

coastal States. 

4. Encourage domestic exploration and production of new natural gas supplies and 

expansion of natural gas transmission and delivery infrastructure in an environmentally sound manner at reasonable costs, but avoid an over-reliance on 

natural gas for new electric generation. 

LIQUEFIED NATURAL GAS (LNG)

Because of changes in the costs of producing gas from domestic resources, the 

United States and North America will turn increasingly to imported LNG to sustain 

gas markets. LNG offers access to an additional option for a source of supply as an 

alternative to increasingly more costly domestic production. Domestic growth in gas 

consumption is being driven, in part, by the use of gas for power generation. Without LNG, gas and electricity prices can be expected to increase. 

With over 40 LNG import facilities announced or proposed, there is great concern 

and debate about the effect of LNG on gas markets, public safety and the environment. State PUCs have a key role in this conversation and in the decision making 

on individual LNG facilities as well as on purchases of LNG by the Local Distribution Companies (LDC) they regulate. 

Both Federal and State governments have roles in approving the construction and 

operation of LNG facilities. Additionally, State and Local permitting are necessary 

for most proposed LNG projects. The ambiguities created by this overlap of authorities have contributed, in part, to LNG siting difficulties and controversies. There 

has not been a case to date where FERC has approved a project over Local and 

State objections—indeed, FERC’s pre-filing approach to LNG certification encourages the resolution of differences early in the process. 

Safety concerns have attracted the most attention in individual LNG siting controversies. The long record of safe operations by the LNG industry reflects purposeful decisions to implement conservative design standards and operational safety procedures. Recent technical disagreements about the adequacy of current regulations 

governing LNG safety center on three questions: whether the studies of LNG accidents to date adequately take into account terrorist capabilities; whether the models 

used to measure the effects of LNG accidents are adequate; and whether LNG facilities should be sited remotely. These issues are still under discussion and no final 

resolution has been reached. 

There are currently concerns about whether gas supplies from domestic production will be adequate to meet projected increases in demand for natural gas. In response many developers of LNG have proposed building regasification terminals in 

North America to help bridge the potential supply gap. In order for new LNG terminals to be expeditiously approved and in service, cooperation in the permitting process between Local, State and Federal authorities is essential. NARUC recognizes 

that LNG is an important future source of energy for the United States and encourages coordination among State agencies that oversee permitting for regasification, 

and between Local, State and Federal government agencies, in order to facilitate 

and streamline regasification terminal permitting. Additionally, NARUC encourages 

States to hold public hearings to educate consumers and stakeholders on the safety 

issues, costs, and benefits of LNG. 

The economics of the LNG trade are dominated by the large investment in capital 

equipment necessary to liquefy the gas, transport and re-gasify the LNG. As such, 

the industry is dominated by large international energy companies, state oil and gas 

companies, and trading houses. The web of contract commitments among these 

firms is designed to ensure security of both supply and markets and to cover large 

investments. A characteristic of the LNG contracts has been long-term contracts 

44

with take-or-pay provisions. This is not unlike the contracting practices that dominated the U.S. gas industry while it was under development. Trends underway in 

the LNG trade suggest a more flexible system and a growth of spot-type trading, 

yet long-term contracting will remain a backbone element of the industry. 

In September 2003, then Secretary of Energy Spencer Abraham announced the 

Department of Energy/NARUC Liquefied Natural Gas (LNG) Partnership as a 

means to assist in the education and outreach of critical energy decision-makers on 

the opportunities as well as the impediments related to the increased development 

of LNG Resources. The LNG Partnership sponsored two reports: an LNG white 

paper for State public utility commissioners and a model communication plan for 

State officials. The purpose of the white paper is to provide an overview of LNG policy issues facing State public utility commissions, State environmental officials and 

State legislators. The model communication plan is intended for State officials that 

have determined that building or expanding an LNG facility is in the best interest 

of the ratepayers. A critical goal of the communication plan includes encouraging 

better stakeholder involvement (and early resolution of stakeholder issues) in relation to LNG facility siting and operation. You may access both of these documents 

on the NARUC website at: http://www.naruc.org/displaycommon.cfm?an=1&sub

articlenbr=313

NATURAL GAS INFRASTRUCTURE

U.S. demand for natural gas is projected to increase by 50% or more during the 

next 20 years, including significant growth in the use of natural gas for electric 

power generation. The expected increase in demand for natural gas will necessitate 

construction of significant amounts of new distribution pipeline capacity, as well as 

investment in gas utility facilities, operational and maintenance changes, additional 

storage capacity and upgrading ability to serve changing load profiles. (Even before 

the terrorist attacks of September 11, 2001, the National Petroleum Council estimated that the natural gas distribution utilities will need to invest $100 billion to 

upgrade and expand their systems over the next two decades.) 

With regard to pipeline activity, NARUC is pleased that the 108th Congress 

began the process to efficiently transport Alaska North Slope gas to domestic markets by passing legislation to encourage construction of a pipeline. Such a pipeline 

can free stranded Alaska North Slope gas reserves by linking those reserves to the 

Lower 48 natural gas transportation and distribution grid. However, this is only a 

first step. 

To ensure that the nation’s gas distribution system is adequate in the future, 

NARUC supports Congressional legislation establishing an R&D funding program 

for gas distribution utilities to ensure essential research for distribution delivery 

systems in the amount of approximately $65 million per year. Additionally, NARUC 

has similar R&D funding concerns for other energy sectors. 

Annual funding would be collected through a legislatively designed, volumetric or 

per-therm equivalent charge designed to collect approximately $1 per year from residential customers, with a cap of approximately $250 per year for very-large-volume 

customers. Funds collected for this research would be directed by a governing body 

and would be focused on improving gas system reliability and integrity; enhanced 

health, safety and environment; and reduced operating and maintenance costs for 

local natural gas distribution companies. Funds would not be dedicated to end-use 

applications so that the research program’s efforts would be devoted entirely to enhancing distribution service operations as demand for those services continues to increase. 

NARUC believes that security of existing and new facilities is a vital component 

to improving and increasing the nation’s natural gas delivery infrastructure. Individual utility services do not function without support from other industry sectors 

and are therefore interdependent. Due to this interdependency, a disruption or outage in one utility sector can have a profound impact on other critical services, including information systems, healthcare, national defense, finance, shipping, and 

manufacturing. The vast majority of the Nation’s utilities and services are owned 

and operated by the private sector, and these businesses continue to develop, implement and update response and recovery plans for all critical service elements, including business continuity and contingency plans. Robust response and recovery 

plans must be applied to our Nation’s critical infrastructures so that each sector has 

a recovery plan that clearly defines sector responsibilities, articulates interdependencies and provides for communications with other critical sectors, as appropriate. 

NARUC strongly recommends that the States participate in private/public and 

cross-sector collaborative efforts that promote the Nation’s economic stability, national security and infrastructure integrity. Further ensuring the security and reliVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6621 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
45

ability of the Nation’s critical infrastructures is of the highest public interest due 

to the risk of terrorism, as well as other natural and technological hazards. NARUC 

has formed the Ad Hoc Committee on Critical Infrastructure to identify the appropriate role(s) of regulatory commissions with respect to the security of the Nation’s 

electric, natural gas, petroleum, water and telecommunications infrastructure. 

NARUC has strongly encouraged coordinated security efforts by Federal, State and 

Local authorities. 

NARUC recommends that State Commissions address the matter of how critical 

infrastructure or systems are being protected, how this protection is being financed 

and sensitive information is protected from disclosure. To accomplish this goal, 

NARUC member Commissions initiated a dialogue in 2004 with stakeholders to address these issues. NARUC urges the U.S. Department of Energy, the U.S. Department of Homeland Security, the Federal Energy Regulatory Commission, the Federal Communications Commission, Environmental Protection Agency and other key 

Federal agencies to support State actions by providing assistance and guidance in 

protection of critical infrastructure. 

DOE should establish a single point of contact, either an office or an individual, 

in the event of a disruption or emergency. NARUC recommends that DOE work 

with NARUC, the National Association of State Energy Officials (NASEO), other 

State level stakeholders, and industry to develop communication protocols where 

States would identify contacts in State government, by fuel type, and set up an internal State level communication mechanism which would be supported by DOE in 

order to assure that information is rapidly shared with key participants and to 

avoid misinterpretation of information. Existing, not new, industry/government information sharing efforts should provide the foundation for this exchange of information. NARUC urges assistance with regional coordination and exercises to avoid 

one State taking action contrary to actions taken by others and to ensure federal/

regional/State and industry coordination. 

NARUC encourages DOE to assist in developing State and regional models on 

critical infrastructure policies and practices that will focus on various approaches 

for meeting States’ needs on items such as information disclosure, cost recovery and 

prudence of investments, emergency natural gas allocations, and to assist with dissemination of this information to States. NARUC supports DOE-sponsorship of 

meetings to examine the outlook for energy supply for the summer and winter as 

an opportunity for States to meet with DOE and the industry to discuss the potential for supply disruptions and actions to mitigate the risk. 

Mr. Chairman, due to the effects of Katrina and Rita on the natural gas infrastructure, I have concerns that the national infrastructure will not be 100% reliable 

in serving all the natural gas needs this winter 24 hours a day 7 days a week as 

is necessary. I encourage the appropriate officials at the Federal and State levels 

of government to consider temporary environmental air quality waivers in selective 

States to encourage the use coal in lieu of natural gas for electricity generation. 

Such a move would allow more natural gas for home heating and reduce the price 

to residential consumers. 

Additionally, I believe that port authorities and federal officials should consider 

temporary measures to increase the delivery of LNG to coastal terminals. There are 

bottlenecks at the delivery level meant to provide additional measures of security 

and safety. I believe it would be prudent to inquire, investigate and possibly implement any measure that could deliver additional supplies of LNG. Of course, this 

should be done consistent with all the appropriate safeguards and security measures 

that the US Coast Guard and other agencies have instituted. 

EFFICIENCY, CONSERVATION AND DIVERSIFICATION

NARUC believes that increased use of alternative energy sources that minimize 

the environmental impacts of energy generation, delivery and use coupled with increases in efficiency can play a part in any effort to remedy the environmental challenges of increased gas supply. If we need less gas, we would be able to reduce the 

expansion of gas production, and likewise limit the associated environmental challenges. 

Conservation and efficiency must both be integral parts of any policy to improve 

the nation’s natural gas situation. NARUC does not believe that increasing domestic 

supply alone is a logical or sustainable solution for energy security. NARUC believes 

that State and Federal regulatory commissions should revisit, review and reconsider 

the level of support and incentives for existing gas and electric utility programs designed to promote and aggressively implement cost-effective conservation, energy efficiency, weatherization, and demand response in both gas and electricity markets. 

We recognize that the best approach towards promoting gas energy efficiency proVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6621 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
46

grams and electric energy efficiency programs for any single utility, State or region 

may likely depend on local issues, preferences and conditions. 

The National Petroleum Council (NPC), in its September 25, 2003, report on Balancing Natural Gas Policy—Fueling the Demands of a Growing Economy, also found 

that greater energy efficiency and conservation are vital near-term and long-term 

mechanisms for moderating price levels and reducing volatility and recommended 

all sectors of the economy work toward improving demand flexibility and efficiency. 

The NPC, in its report, identified key elements of the effort to maintain and continue improvements in the efficient use of electricity and natural gas, including (but 

not limited to):

1. Enhanced and expanded public education programs for energy conservation, efficiency, and weatherization, 

2. DOE identification of best practices utilized by States for low-income weatherization programs and encouragement of nation-wide adoption of these practices, 

3. A review and upgrade of the energy efficiency standards for buildings and appliances (to reflect current technology and relevant life-cycle cost analyses) to ensure these standards remain valid under potentially higher energy prices, 

4. Promotion of the use of high-efficiency consumer products including advanced 

building materials, Energy Star appliances, energy ‘‘smart’’ metering and information control devices, 

5. On-peak electricity conservation to minimize the use of gas-fired electric generating plants, and 

6. Clear natural gas and power price signals 

Further, the American Council for an Energy-Efficient Economy (ACEEE), the 

Natural Resources Defense Council (NRDC), and the American Gas Association 

(AGA) have adopted a Joint Statement noting that traditional rate structures often 

act as disincentives for natural gas utilities to aggressively encourage their customers to use less gas. Therefore, the NRDC, AGA, and the ACEEE have urged public utility commissions to align the interests of consumers, utility shareholders, and 

society as a whole by encouraging conservation. Among the mechanisms supported 

by these groups are the use of automatic rate true-ups to ensure that a utility’s opportunity to recover authorized fixed costs is not held hostage to fluctuations in retail gas sales. 

NARUC has encouraged State commissions and other policy makers to support 

the expansion of natural gas energy efficiency programs and electric energy efficiency programs, including those designed to promote consumer education, weatherization, and the use of high-efficiency appliances, where economic, and to address 

regulatory incentives to address inefficient use of gas and electricity. NARUC has 

also supported State and Federal policy makers efforts to: (i) review and upgrade 

the energy efficiency standards for buildings and appliances, where economic, and 

to ensure these standards remain valid under potentially higher energy prices, and 

(ii) promote the use of high-efficiency consumer products, where economic, including 

advanced building materials, Energy Star appliances, and energy ‘‘smart’’ metering 

and information control devices. 

NARUC has urged DOE to expeditiously promulgate and implement new national 

standards for commercial air conditioners, heat pumps, residential furnaces and 

boilers, and electric distribution transformers so as to achieve the greatest level of 

cost-effective energy savings. We have also encouraged DOE to establish an updated 

national standard for residential furnaces and boilers that takes into account both 

the equipment’s electricity use and its fossil fuel consumption, and to establish a 

voluntary standard more stringent than the national minimum standard that is designed to be cost-effective in cold climates and which cold-weather States could elect 

to implement in place of the national minimum. 

History has taught us the economic and environmental risk of over-reliance on a 

single source of fuel for new electric generating capacity. Since the early 1990s, new 

electric generating facilities have been predominately gas-fired. According to the Energy Information Administration, of the capacity added to the electric power grid in 

the United States between 2000 and 2004, over 90 percent was gas-fired, and over 

the next several years, most of the new electric generating facilities that will become 

operational also will be gas-fired. This has led many regions of the country to significantly increase their dependence on natural gas for electric generation. 

While natural gas-based generation technologies have made significant advances 

in efficiency and environmental performance, and are a necessary part of the overall 

generation mix, natural gas prices have continued to climb, relative to price levels 

in the 1990s, and are expected to continue to reflect a tight natural gas market over 

the next several years. Fuel diversity, therefore, is increasingly being advocated by 

industry stakeholders and policy makers as desirable for resource planning in the 

electric industry. 

47

The choice of fuel mix for electric generation, takes into account several factors, 

including long-term economic costs, environmental effects, power system reliability, 

and price volatility. However, market incentives alone would be unlikely to achieve 

the most reliable long-term fuel mix for electric generation. Evidence from various 

studies sponsored by both government and industry, including the September 2003 

National Petroleum Council study requested by the Secretary Abraham, has shown 

the decline in recent years of gas-fired generating facilities with dual-fuel capability. 

At the same time, these same studies have also shown the economic benefits of gasfired generating facilities with dual-fuel capability, including the dampening of both 

electricity prices and natural-gas demand during peak periods. 

These studies have identified the need to consider the use of alternative fuels in 

the electric generation industry, in order to provide for a balanced fuel mix. They 

have also identified the important role that State commissions can play in affecting 

the capabilities of new gas-fired generating facilities, when considering building 

with dual-fuel capability or considering the ability of existing gas-fired generating 

facilities, to switch to an alternate fuel where economic. NARUC encourages State 

commissions and other policy makers to support the concept of fuel diversity for 

electric generation. NARUC recognizes that the appropriate diversity of fuel sources 

for electric generation for any single utility or region likely depends on local issues, 

preferences and conditions. Additionally, NARUC urges Congress or the Administration to increase the efficiency for licensing and relicensing processes of hydroelectric 

and nuclear facilities, without compromising substantive environmental and safety 

standards. 

AN OHIO PERSPECTIVE

In my State of Ohio we are concerned, as is this Congress, about the effects of 

energy prices on our consumers, our State economy, our regional economy, and our 

national economy, and we have taken some actions that we hope will help the consumers of our State through this difficult time. 

In Ohio, the Public Utilities Commission issued an order directing utilities to reconnect gas and electricity customers who had been disconnected from last years 

high energy prices. As long as those customers continue to make payments toward 

the last years balances, they can not be disconnected. Our objective is to ensure that 

customers are not disconnected during the winter months. 

We strongly encourage our consumers to take advantage of budget billing so that 

payments are spread over 12 months. However, this means that our utility commission must work with Local Distribution Companies (LDCs) on carry costs associated 

with the LDC holding the balances. Additionally, we instituted a bad debt rider 

whereby the uncollectible accrued of the previous quarter are placed into a rider for 

purpose of spreading the uncollectible costs over all gas consumer customers. 

Presently, the PUCO is in discussions with one local gas company regarding abandoning the traditional regulatory structure and implementing a demand side management program in conjunction with a decoupling of rates from throughput movement of natural gas. This will better enable the company, the PUCO, and the 

State’s Consumer’s Counsel to work together on reducing customer demand. The result would be that the LDC would not make more money just because customers 

used more natural gas. 

Legislators in Ohio are preparing to introduce bills which would encourage the 

timely review of proposals to explore for and develop mineral interest on our under 

State properties. One proposal is considering creating a board to review such proposals. 

In Ohio, as in many other States, the national gas distribution is unbundled from 

the supplying of the natural gas. As a result, marketers in the State are providing 

natural gas to consumers, including fixed rate contracts. 

The Public Utilities Commission of Ohio began in 2001 to encourage the use of 

financial hedges by LDCs. The best example of success has resulted in a $3.00/mcf 

savings to customers in the Dayton area (Vectren of Ohio). The benefits derived 

from hedging and long term fixed contracts are evident as the price of natural gas 

increases in the market place. In the case of Vectren Energy Delivery of Ohio 

(VEDO), the Company has committed to a hedging program in which 75% of its winter volumes are known/locked in prior to November 1st. VEDO is able to locked in 

75% of its winter volumes through a combination of hedged prices (locking in future 

prices in forward months) and contractual storage, where the gas is injected into 

storage in the non-winter months (April to October) and then withdrawn during the 

winter months (November to March). VEDO has a near equal split of winter volumes between hedging and contractual storage. 

48

Pike, Eastern and Southeastern Natural Gas Companies (Companies) presented 

to the PUCO in 2001, a fully hedged program in which all volumes were known/

locked in advance of delivery, which allowed the Companies to offer to its customers 

fixed burner-tip commodity pricing. The Companies utilized an asset manager who 

managed the Companies pipeline entitlements and secured fixed commodity pricing 

through the use of NYMEX strips and straddle provisions. Additionally, a holding 

company of small rural LDCs used fixed rate contracts which benefited consumers 

by providing a gas costs recovery of under $10.00 a mcf. 

Though not Ohio specific, the NARUC Committee on Gas, on which I serve as 

Chair, has adopted resolutions at past meetings encouraging utility commissions to 

work with local gas companies to determine the proper hedging strategy for each. 

In addition, NARUC and the Interstate Oil and Gas Compact Commission (IOGCC) 

cooperated in creating a task force for the purpose of exploring whether long term 

contracts as a supply strategy would benefit consumers. After taking comments from 

interested parties, holding a workshop and reviewing filed comments, the task force 

issued a report which is attached to my testimony. The Task Force is encouraging 

PSC/PUCs to work with LDCs in understanding and implementing the proper contracting strategy for their respective needs. 

Finally, for your information and review, I have attached a joint letter, to which 

NARUC was a signatory, regarding energy emergency appropriations that was sent 

on September 15, 2005, in anticipation of high winter energy costs. 

Mr. Chairman, and members of the Subcommittee, thank you for your time and 

attention. I look forward to answering any questions you may have.

Mr. SHIMKUS. Now, the Chair would like to recognize the chairman of the full committee, Chairman Barton, for opening the round 

of questions. 

Chairman BARTON. Thank you, Mr. Chairman, and let me say 

you are doing an excellent job in Chairman Hall’s absence. Some 

of you may wonder why Chairman Hall is not here. His wife is ill, 

and he is having to attend to her, but she is doing better, and 

Ralph, Congressman Hall does expect to be back later this afternoon. I don’t know if you announced that or not. 

Mr. SHIMKUS. Not in totality. 

Chairman BARTON. Okay. 

My first question is to Chairman Kelliher. The LNG projects that 

the FERC has already permitted, I think you said, eight. Is that 

correct? 

Mr. KELLIHER. Yes. 

Chairman BARTON. How many of those do you expect to actually 

be completed? 

Mr. KELLIHER. I don’t know. I mean we have approved——

Chairman BARTON. Do you have——

Mr. KELLIHER. [continuing] in some cases, multiple sites, in fairly close to the same proximity. I would not expect all of them to 

be completed. 

Chairman BARTON. Do you think 50 percent will be completed? 

Or 20 percent? 

Mr. KELLIHER. I really don’t know. It will end up the market will 

decide how many of them can be financed and how many can acquire contracts for supply. 

Chairman BARTON. Well, let me try it another way. Let us assume they all were completed. 

Mr. KELLIHER. Right. 

Chairman BARTON. You said that it would quadruple——

Mr. KELLIHER. Yes. 

Chairman BARTON. [continuing] the capacity. What would that 

take the capacity to, in terms of billions or trillions of cubic feet 

per year——

49

Mr. KELLIHER. Okay. 

Chairman BARTON. [continuing] if they were to all be permitted, 

all be constructed and go into operation. 

Mr. KELLIHER. And I believe my number included the pipeline 

from the Bahamas, because there is a proposal to site LNG import 

terminals in the Bahamas, and then have a pipeline coming to 

Florida, so my estimate includes that, and also expansions at existing facilities. If you include the eight new facilities we have approved, the expansions, and the pipeline, current import capability 

is at four bcf a day. Those projects combined would increase that 

from 4 to 19. It would be an addition of 15. 

Chairman BARTON. 15 billion——

Mr. KELLIHER. Cubic feet. 

Chairman BARTON. [continuing] cubic feet a day. 

Mr. KELLIHER. Yes. 

Chairman BARTON. All right. Convert that to trillion cubic feet 

per year. 

Mr. KELLIHER. This is where I am not going to follow. Do you 

want to know what the ultimate amount of LNG might provide of 

U.S. gas supply? Or——

Chairman BARTON. Well, how much natural gas do we use a year 

in the United States? We use about 22 trillion cubic feet, or is it 

more than that? 

Mr. KELLIHER. I am consulting my staff. 

Mr. SHIMKUS. The Chairman is usually pretty close. 

Mr. KELLIHER. I don’t have any reason to dispute your figure, 

Mr. Chairman. 

Chairman BARTON. Okay. Well, let us say it is 20 trillion cubic 

feet. 

Mr. KELLIHER. Okay. 

Chairman BARTON. And let us say we get 20 billion cubic feet a 

day, 300 days times 20 is, I want to say, 6 trillion cubic feet a year. 

Actually, it is 360, but I am just kind of rounding it up, so if every 

LNG facility that is permitted were to actually be constructed, it 

would be a sizable increase in natural gas availability, and let us 

assume that my number is right. It is probably not right, but it is 

good enough for committee work. We would probably, if you increase the gas supply by about 30 percent, which I think that is 

what that is, yeah, I think that is exactly 30 percent, we would expect natural gas prices to come down considerably, wouldn’t we, as 

long as they increased larger than the demand? 

Mr. KELLIHER. Are you assuming demand is a constant, or now? 

Chairman BARTON. No, I am assuming demand is going up about 

3 percent a year. 

Mr. KELLIHER. You just get into other variables, what will the increase production from the Rockies in the U.S. be, will an Alaska 

gas pipeline be built? 

Chairman BARTON. No, I am not. 

Mr. KELLIHER. Oh. Now. Okay. 

Chairman BARTON. I am just assuming the only thing that we 

get is what you just testified that you have permitted. 

Mr. KELLIHER. That domestic production remains constant. 

Chairman BARTON. Yeah, it doesn’t go down. 

50

Mr. KELLIHER. It remains constant, and the Canadian imports 

remain constant, and the only delta is——

Chairman BARTON. That is right. That is right. 

Mr. KELLIHER. Projecting some reasonable increase in demand. 

Chairman BARTON. Right, 3 percent a year. 

Mr. KELLIHER. And the question is what, how much will——

Chairman BARTON. Where is our price going to go to? It is going 

to go down. If we have increased supply 30 percent and demand 

is only going up 3 percent a year——

Mr. KELLIHER. But it is a small base, LNG imports right now are 

3 percent of gas supply. 

Chairman BARTON. Well, but it is 6 trillion cubic feet, on the 20 

trillion cubic feet demand, that is going up 3 percent a year. 

Mr. KELLIHER. Right. 

Chairman BARTON. I am not trying to pin you down. All I want 

is an answer that if everything you have permitted——

Mr. KELLIHER. At some point——

Chairman BARTON. [continuing] gets built, natural gas prices will 

go down. 

Mr. KELLIHER. Sure. Also, there are other proposals. 

Chairman BARTON. I would say they are going to go down $5 or $6 an mcf, but that is just me. 

Mr. KELLIHER. There are other proposals as well that are pending on the Commission. These were just the ones that we have approved, but there is others pending. 

Chairman BARTON. Now, see, when he worked for me——

Mr. KELLIHER. At some point, LNG imports——

Chairman BARTON. [continuing] he couldn’t give me this runaround. Now he exercises his——

Mr. KELLIHER. I agree with you that at some point, LNG imports 

will start depressing prices. I don’t think we are at that point yet. 

Chairman BARTON. All right. Let me ask one final question, because I had a bunch for the other people, but my time is already 

gone. Are any of these projects that have been permitted actually 

under construction? 

Mr. KELLIHER. Yes, three of them are under construction right 

now. 

Chairman BARTON. And what is your estimated completion of 

those that are under construction? How many——

Mr. KELLIHER. 2008. 

Chairman BARTON. 2008. So we are in 2005. 

Mr. KELLIHER. Yes. 

Mr. KELLIHER. Yes. 

Chairman BARTON. So it takes, you said in your testimony—the 

average permitting time is about 1 year. Is that right? 

Mr. KELLIHER. That was for pipelines. For LNG projects, it is 

about 15 months, so it is close to a year. 

Chairman BARTON. Okay. So 15 months to permit it, and then 

3 years to build it? 

Mr. KELLIHER. Typically, 3 years to build. Yeah. 

Chairman BARTON. Okay. So no help is on the way for all these 

good things you are doing at FERC, really, for another 3 years. 

Mr. KELLIHER. Infrastructure tends to be long term in effect. 

Chairman BARTON. All right. 

51

Mr. KELLIHER. Yes. 

Chairman BARTON. Mr. Chairman, my time has expired. I am 

going to provide some questions that I would have asked the witnesses to answer as expeditiously as possible on underground storage, pipeline capacity constraints, localized as to where the bottlenecks are, and what, if anything, needs to be done legislatively to 

help de-bottleneck some of those. 

I thank the indulgence of the Chair to give me extra time. 

Mr. SHIMKUS. The Chair now recognizes the gentleman from Virginia. 

Mr. BOUCHER. Well, thank you very much, Mr. Chairman, and 

I want to say thank you to our witnesses for their excellent presentations here this afternoon. 

Mr. Chairman, before asking my questions, I ask unanimous consent that the opening statement of Mr. Brown from Ohio be made 

a part of the record. 

Mr. SHIMKUS. Without objection, so ordered. 

Mr. BOUCHER. Thank you, Mr. Chairman. 

Well, let me pick up on a subject that was mentioned during 

Chairman Barton’s questions, and that is, the natural gas pipeline 

from Alaska. This is a project that enjoys broad bipartisan support, 

and I think there is an acknowledged need to construct this. We 

placed in EPACT 2005 a Federal loan guarantee to assure the economic nature of this pipeline, and yet, I now am hearing that the 

pipeline is not moving forward. In fact, there was some debate in 

the recent refinery specific legislation we reported from this committee and that was passed on the floor, of sunsetting that loan 

guarantee, in the expectation that perhaps this pipeline would not 

be built. 

So would anyone care to give us a status report today of where 

this pipeline stands? Perhaps an indication of any problems that it 

is encountering, and some kind of projection of what we can anticipate? 

Mr. MASON. I can speak from the Commission’s point of view. 

Our role is to be ready to act when and if an application comes in 

the door, and we are ready to act, but we can’t compel an application. We monitor the status of the negotiations in Alaska, and we 

are hopeful, but you know, we are focusing our efforts on being prepared to act in the event there is an application, that we can act 

in a timely manner to——

Mr. BOUCHER. I am confident that you could, and that is obviously not in dispute here today. Based on your monitoring of the 

negotiations that are underway, can you report anything about the 

progress of those, and what is anticipated? Do we really think this 

project is going to move forward? 

Mr. MASON. I think it is inevitable that a pipeline will be built 

at some point. I think we do need that natural gas. The variable 

is when a deal is struck sufficient to support an application to the 

Commission. 

Mr. BOUCHER. Mr. Maddox, would you care to comment? 

Mr. MADDOX. Yeah. Currently, the negotiations are very intense, 

ongoing. There has been a lot of discussion over guarantees and 

what happens when and if the price of gas goes down. Complicating factors are several. One of them is the fact that this is the 

52

world’s most expensive construction project, which by definition, 

creates a lot of financial risks even to the healthiest of companies. 

Second is the history of relationship, I think, between the State 

and the parties, the producing parties, in trying to develop a level 

of trust. As you know, with any financial deal of this magnitude, 

there is always some questions, and the history between the two 

parties has not encouraged a lot of trust, and that trust has to be 

developed throughout these negotiations. 

My sense is, in talking to all the parties involved, is that everyone believes one, that they need to get this done, two that they are 

getting close, and that they will see a deal some time, or an agreement some time in the next several months. 

Mr. BOUCHER. Well, that is encouraging. Thank you very much 

for that report. In the time I have remaining, Mr. Mason, let me 

ask a couple of questions of you. For electricity consumers, who are 

concerned about higher than normal electricity prices generally 

this winter, as a consequence of buying their electricity from an 

electric utility that is gas-fired, one way that they could save 

money on their electricity bills is through the use of smart meters, 

and I noticed a reference to smart metering technology in your remarks. I strongly share the desire to see smart meters and demand-side pricing deployed across this country in every State, and 

in fact, authored a provision in EPACT 2005 that is designed to 

achieve that result. What we do is encourage the State PUCs to establish rulemakings, in fact, we require that that happen, to consider whether or not, within their State, a rule should be employed 

requiring electric utilities to offer time of use pricing, and in turn, 

deploy smart meters. 

A couple of questions for you. Do you have any sense of, at this 

early stage, after that bill has become law, of what States may be 

moving quickly in order to put these proceedings in place? They 

have a 2-year period within which to do it, but obviously, some will 

start sooner. So do you have any report for us on what is being 

done there? And do you have any recommendations for us as to 

what follow-on measures we might consider to encourage smart 

metering more broadly, more uniformly? 

Mr. Mason? 

Mr. MASON. Mr. Chairman and ranking members of the committee, thank you for that comment. And one of the reasons we 

filed comments is so we can give you a lot more information than 

we can in our remarks. 

I chair the Natural Gas Committee, and I deal with the electricity issues as they affect Ohio, and of course, in Ohio, we have 

deregulated generation. We thought we would be at a point by now 

where we would have smart metering taking place, because customers would be advantaged from it. We have yet to get to that 

place. But I do know there are at least three or our other States 

that are looking at smart metering. I think we are looking to take 

our lead from other Federal agencies at this time. We will be meeting in about two to 3 weeks from now, actually, in California, and 

that will be a subject matter we will be discussing. 

But on the issue of this decoupling that you are talking about, 

it really takes a change of mentality by regulators as they approach not just gas, but also electricity utilities, that you actually 

53

have to change the entire regulatory paradigm that we have been 

dealing with, you know, the old standard ROE, and the company 

makes money based on how much either electricity they push 

through the system or gas, and once we start moving more aggressively on those, then the smart metering actually makes sense for 

consumers. 

Mr. BOUCHER. Well, it strikes me that NARUC would be an appropriate forum for these conversations, and perhaps, for information about the new Federal statute, to be shared among all State 

utilities regulators. Do you know if there is any such plan on the 

part of NARUC at this point? 

Mr. MASON. I wouldn’t say a written plan, but we have had discussions on that, and we are moving in that direction. What I will 

do for you is we will provide additional information specifically as 

to which States are more aggressive in that, for you. 

Mr. BOUCHER. Well, let me just encourage you, finally, to bring 

the issue up at NARUC, and see if you can get NARUC involved 

in encouraging the States to implement this Federal requirement 

at the earliest possible time. Thank you, Mr. Mason. 

Mr. MASON. Thank you. 

Mr. BOUCHER. Thank you, gentlemen. 

Mr. SHIMKUS. Thank you. I now recognize myself for, I think, 5 

minutes. 

And thanks for your testimony. What I would like to talk about 

is that energy is really a fungible commodity. You really can’t talk 

about natural gas, and how the demand is based upon it, and not 

talking about electricity generation or fuels, and they all are interrelated. We know a couple things. We know the projection, especially by the Energy Information Agency, the projected demand for 

natural gas continues to go up, and I have a chart here, you can’t 

see it, but I mean, we are going to be, by 2020, into the over 8,000 

billion cubic feet is what is projected. 

Natural gas goes for home heating, as we are talking about 

today, but we have also used it for electricity generation over the 

past decade. We are using it for fueling vehicles. Also, it is a major 

product for manufacturing, and when we use the other types of 

charts that I always carry around with me, talking about how can 

the manufacturing sector stay competitive, when we are paying $14 

per whatever cubic feet, versus $0.95 in Russia, and what does that 

do with our farmers and the fertilizers. So this is a big debate, but 

it is tied to everything else. So because I have limited time, I am 

going to focus, first, I want to go to Mr. Maddox, and he is probably 

not surprised about these two questions: what is the Department 

of Energy doing on FutureGen, and what is it doing to incentivize 

Fischer-Tropsch coal-to-liquid technologies, which was part of the 

refinery bill that we just passed? Of course, FutureGen is a DOE 

initiative on electricity generation. 

Mr. MADDOX. Quickly, FutureGen is moving forward. The private 

sector alliance has been formed, and we are in negotiations, and 

hopefully, we will be concluding negotiations very soon, do the first 

tier of contracts, which will allow us to move out quickly on our 

NEPA work, and begin the siting process hopefully in early 2006. 

We have had numerous meetings now with foreign governments 

who have expressed interest in participating. As you will recall, 

54

part of the program requires or expects foreign financial support. 

We just last week had a Chinese coal generation company join the 

private alliance. We also have members from Australia, so on the 

private side, we are already getting extensive international interest. 

We have also seen some important policy things. Recently, the 

IPCC, which looks at technology in terms of Kyoto, made a very 

substantial statement in terms of viability of sequestration as possibly meeting 15 to 50 percent of the carbon reduction requirements to 2050. So we are seeing extensive interest internationally 

in FutureGen and the technology we are trying to lay forward. 

Mr. SHIMKUS. The rest is on Fischer-Tropsch coal-to-liquid stuff. 

Mr. MADDOX. We are moving out on that. We are looking at how 

to support the loan guarantee program that was part of EPACT. 

There are a number of loan programs throughout the Department 

of Energy, and we are trying to develop the expertise, and figure 

out the best way to implement those as expeditiously as possible. 

Mr. SHIMKUS. Thank you. Now, I would like to move quickly to 

Chairman Kelliher. And you mentioned the Bahama pipeline, 

which is one of the most enjoyable things I like to talk about. Why 

a pipeline from the Bahamas to Florida? 

Mr. KELLIHER. I think it recognized the difficulty of siting an import terminal on the Florida coast, on the Atlantic coast. 

Mr. SHIMKUS. And so when we have an LNG facility in the Bahamas, obviously, the construction jobs that built that refinery are 

being employed by Bahamans. 

Mr. KELLIHER. Bahamians. 

Mr. SHIMKUS. I am a Midwesterner. And the tax base, then, 

would go to Bahama. Again, the jobs in operating the LNG terminal would go to that location, and not to Floridians. I think it 

highlights the problem with our public policy. When we are excited 

about a pipeline to import natural gas to a terminal in the Bahamas, and then pipe it into Florida, because of the siting problems, 

and the other issue that I will try to end on, the other chart I like 

to always carry around is that Congress has placed over 85 percent 

of outer continental shelf off limits for exploration, and we are the 

only developed Nation in the world to cutoff access to our offshore 

energy reserves, and we are going to have people testifying from 

New England, and I think they would probably be surprised that 

off their cost, where we have some available resources, that they 

are off limits. So I would go back to Mr. Maddox, what is the Department of Energy doing to try to help the Interior Department 

open up some of these access areas? 

Mr. MADDOX. Well, from my own gas program, we work very extensively to help minimize the footprint of any oil and gas exploration activity. That is kind of the basis of our program. We work 

very directly with the Department of the Interior to identify technologies and methods to minimize that impact, develop rules that 

will expedite permitting. We give some grants to EPA to help them 

streamline their permitting process, in terms of travel money, in 

work with IOGCC, among others, to certify the protection of the 

programs. Obviously, in the Energy Bill, we supported the OCS inventory, among other provisions. 

55

Mr. SHIMKUS. Thank you, and my time has expired. I would like 

to turn now to my colleague from Massachusetts, Mr. Markey. 

Mr. MARKEY. Thank you, Mr. Chairman, very much. 

Mr. Kelliher, welcome back. 

Mr. KELLIHER. Thank you. 

Mr. MARKEY. What investigations do you currently have underway to ensure that today’s high prices are not at least in part the 

result of manipulative activities by gas companies, oil companies, 

or traders in the related commodities markets? 

Mr. KELLIHER. Well, we have an office at the Commission, Office 

of Market Oversight and Investigations, and they, on a daily basis, 

monitor gas markets. 

Mr. MARKEY. Do you have specific investigations underway right 

now of specific companies and specific activities? 

Mr. KELLIHER. We do not have a formal investigation right now. 

If OMOI identifies anomalous behavior, that is not explained by 

some kind of market fundamental, and they make a recommendation to the Commission to initiate an investigation. 

Mr. MARKEY. So you have not found any suspicious behavior in 

the market? 

Mr. KELLIHER. No. None. 

Mr. MARKEY. Mr. Jeffery, do you have any ongoing investigations? 

Mr. JEFFERY. We have investigations going back, that are ongoing, going back to issues that occurred——

Mr. MARKEY. Could you turn on the microphone, I am sorry. 

Mr. JEFFERY. Sorry about that. Excuse me. 

Mr. MARKEY. I am talking about the last 6 months. Do you have 

any——

Mr. JEFFERY. Yes. 

Mr. MARKEY. Do you have any new investigations that you have 

begun of——

Mr. JEFFERY. Related to——

Mr. MARKEY. [continuing] manipulative conduct, given the sky 

high prices that are being charged to consumers in the marketplace? 

Mr. JEFFERY. I would like to come back to you with, for the 

record, with the answer to that question, sir. Not to the best of my 

knowledge. What we are doing, and have done, and continue to do, 

is monitor, on as active and a real-time basis, the actual trading 

flows in the futures markets——

Mr. MARKEY. You don’t know of any——

Mr. JEFFERY. No, sir. 

Mr. MARKEY. You don’t have any new investigations of manipulative behavior. How about you, Mr. Maddox? Do you know at the 

Department of Energy of any new investigations in the last 6 

months, since these prices have skyrocketed, of new investigations 

of manipulative behavior in the oil or gas marketplace? 

Mr. MADDOX. The Department does not have any investigatory 

enforcement authority in this area. 

Mr. MARKEY. Okay. Thank you. Mr. Maddox, a few weeks ago, 

the price trigger for releasing oil from the Northeast Home Heating 

Oil Reserve was reached, and yet, the Administration, your AdminVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00059 Fmt 6633 Sfmt 6602 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
56

istration, failed to use the reserve to help provide price relief to 

New England and Northeast consumers. 

Why did the Bush Administration decide not to release that 

home heating oil, given the fact that the price trigger had been 

reached, where the government could have acted to help to keep 

prices down? 

Mr. MADDOX. The threshold you represent, the 60-percent 

threshold, is a threshold for triggering our looking at it, and monitoring it closely, and identify the reasons behind that threshold, 

but the Act requires there to be a shortage or disruption, and none 

existed at that time. We have made numerous calls. We talked repeatedly to State heating officials, to identify if there was truly a 

shortage of——

Mr. MARKEY. But doesn’t your mandate also allow you to make 

that determination based upon price considerations? 

Mr. MADDOX. It does. It also requires us to look, be prudent with 

these reserves. They are very limited. 

Mr. MARKEY. No, but why did you exclude that from your answer 

to me? Why did you give the other two reasons, but not price considerations? Do you consider that not to be as important? 

Mr. MADDOX. It is important, and it is a threshold, but it is not 

a sole decisionmaker. You asked specifically about the threshold, 

and why we didn’t respond as part of the threshold. It should be 

noted that the differential has declined, and that currently, that 

that threshold is not being reached, because it requires two consecutive increases. We have actually had two consecutive decreases 

in that threshold. 

Mr. MARKEY. But you could have given consumers help over that 

run-up period, that would have sent a signal to the marketplace 

that you were going to be serious, the government. In other words, 

my feeling is that the home heating oil consumer doesn’t feel that 

the Bush Administration is on their side. The ordinary consumer 

feels that the Bush Administration is on the side of the oil and gas 

companies, and they expect——

Mr. MADDOX. The Bush——

Mr. MARKEY. [continuing] the Bush Administration, when these 

prices are skyrocketing, to move in on the side of consumers, and 

yet, they stand on the sidelines——

Mr. MADDOX. No, the Bush Administration views that it is best 

for the consumers to make certain they have heating oil in January, if there is some sort of infrastructure disruption. This is a 

small reserve that can cover about 2 days worth of total supply for 

the Northeast, or a partial disruption for many 10 days, 200,000 

barrels. 

Mr. MARKEY. Do you believe that——

Mr. MADDOX. If we emptied that reserve now, we would have no 

ability to help consumers, indeed, in January——

Mr. MARKEY. Do you believe the size of the reserve should be increased, Mr. Maddox, so you have more capacity to be able to use, 

rather than having to wait until the middle of January? Would you 

prefer that we, for example, increased it from 2 million barrels to 

5 million barrels, so that you could use it in October or November? 

Mr. MADDOX. I am not prepared to say that at this point. One 

of the key parts of the market right now is that we are seeing a 

57

lot of supplies coming into the United States by ship, due to the 

differential with Europe. There is a shipping time, there is an ordering time, and if we create a situation where we can undercut 

the market, and European shipments are not sent to the United 

States——

Mr. MARKEY. No, but you do have——

Mr. MADDOX. [continuing] we will have significant issues, because we don’t have refining capacity to make our own heating 

oil——

Mr. MARKEY. You seem to indicate, Mr. Maddox, that you want 

to save the home heating oil that the government has stored, because there is not much of it, so we should save it until January, 

but the problem for home heating oil consumers all across the 

Northeast and Midwest, is that they have been whacked in October 

and November, and they are going to be whacked in December, and 

you seem to be saying, well, let me just, we already passed a bill 

through the House of Representatives, increasing the size of it from 

2 million to 5 million barrels, does the Administration have a view 

on that bill that has already passed the House? 

Mr. SHIMKUS. And we will let the Chairman, the gentleman answer his question, and this will be the last question. 

Mr. MADDOX. Quickly, the Administration has not taken, does 

not take positions until bills generally reach conference. There has 

been no Administration position. Second, that——

Mr. MARKEY. Can I say this? That is absolutely not true. The Administration has spoken on every single refinery issue, LNG issue, 

as a matter of fact, this is the only issue on which the Administration has not spoken. That is where you have to decide——

Mr. SHIMKUS. The Chairman, I——

Mr. MARKEY. And that is it. You have to——

Mr. SHIMKUS. I am being more than generous to the gentleman 

and my colleague from Massachusetts. 

Mr. MADDOX. If I could quickly reply to the other part. 

Mr. SHIMKUS. If Mr. Maddox would like to answer the question. 

Mr. MADDOX. Yeah. What I would like to point out, and here is 

the conundrum we are in. The Northeast gets a large amount of 

its heating oil imported. If we start releasing heating oil because 

of prices, especially early in the season, we will lose confidence for 

someone to say I want to ship oil, it takes 10 days to get to the 

United States, and we will lose our access to that market, because 

people won’t have confidence to import here, because by the time 

it lands, they could be looking at a loss. So we are running a very, 

very tight market, and one of these problems is because we had no 

ability to create heating oil in the United States. We don’t have the 

refinery capacity to make our heating oil. So we are——

Mr. MARKEY. But you could——

Mr. SHIMKUS. The gentleman’s time has——

Mr. MARKEY. [continuing] you could store oil. 

Mr. SHIMKUS. The gentleman’s time has expired. The Chair now 

recognizes—the gentleman will suspend. Very similar to what happened with the SPRo, prior to the hurricane, we had released the 

SPRo early because of price concerns, then when we really needed 

it, because of disruptions, a lot of it would have already been reVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00061 Fmt 6633 Sfmt 6602 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
58

leased. So it is a tough decision. Now, I would like to recognize the 

gentlewoman from New Mexico. 

Ms. WILSON. Thank you, Mr. Chairman. I have got a couple of 

things that I wanted to ask about, and I am not sure I am directing 

the right question to the right people. So I think this is a question 

for Mr. Maddox, but in 2003, Secretary Abraham came up and we 

had a copy of a letter that he sent to the State public utility commissions that talked about what can be done with respect to natural gas. And one of his recommendations was taking offline the 

most inefficient electricity generating plants first. And we had 

asked, I think, in H.R. 6, for a study to be done on this. Does the 

Administration still support, and is still pushing that approach, 

and what is the status of this study that was mandated under the 

Energy Bill? 

Mr. MADDOX. I am sorry. That is actually not part of my portfolio, and so I couldn’t really give you any hard answers, but I 

would be happy to get an answer for the record for you. 

Ms. WILSON. If you could, because I think when we look at the 

use of natural gas, and I am more and more concerned about our 

increasing reliance on natural gas for the generation of electricity, 

getting rid of the inefficient plants strikes me as something that we 

have to put on the table as a priority, because there is a significant 

difference in the efficiency of these plants, and when, you know, 

when you have one plant that uses 10,000 BTUs per kilowatt, to 

create a kilowatt of electricity, and another plant that uses 7,000 

BTUs to create a kilowatt of energy, that is a 30-percent difference 

in efficiency, and it will have a huge impact on the demand for natural gas, and I would like to see the Administration continue to 

push that matter. 

Mr. Kelliher, and this, again, I am not sure whether you are the 

right guy, but you may be. With respect to permitting for new 

plants, new electricity generation, what percentage of the plants 

out there on the drawing board are natural gas-fired? 

Mr. KELLIHER. I am not sure what the current projections are, 

and the siting of generation facilities is done at the State level, not 

at the Federal level, but there have been some references to the 

Administration’s national energy policy, and that was one of the 

issues the Administration was looking at when it developed the national energy policy. When it came in, the Clinton Administration 

had projections that 93 percent of all new generation added between the year 2000 and 2020 would be gas-fired. The Administration wanted to lower that number. It didn’t want to bet everything 

on one fuel, because it was concerned about volatility of gas supplies, and also, possibly, the adequacy of gas supplies. So the national energy policy was designed in part to increase other sources, 

other primary fuels used for electric generation, coal, nuclear, renewables. 

Ms. WILSON. Is that happening is what I am asking? 

Mr. KELLIHER. That, I don’t know. I know there has been, there 

is more interest now in fuel diversity, with the increase in gas 

prices. It is something the Administration was concerned about almost 5 years. 

59

Ms. WILSON. Mr. Mason, are you seeing it in Ohio, or do you 

have any plants on the drawing boards in Ohio that you are familiar, and are they looking at other than natural gas-fired? 

Mr. MASON. Mr. Chairman, Congresswoman. Chairman Kelliher 

is, I think, right on the point that State utility commissions do regulate. We have actually seen, at one point, in the later 1990’s, the 

generation from natural gas being permitted, though not constructed, and a couple that were constructed, not in use. We now 

have an application pending before us that the ranking mentioned, 

the IGCC, which is a gas-fired facility, is actually before the Ohio 

Public Utility Commission, so I cannot comment on that in particular. But we have also seen Synergy look at constructing one in 

Indiana, so to answer your question shortly, we are seeing the new 

electricity generation proposals coming at us, using clean coal technologies, rather than natural gas. The gas-fired technologies I saw 

proposed in Ohio, and in the Midwest, in the later 1990’s, were all 

based on $4 to $6 natural gas to be economic. Obviously, those 

prices are behind us by some great degree, so it does look like coal 

does have a future, and I might say my father is a retired United 

Mine Worker, whenever I see a coal application, I am somewhat excited by that. 

Ms. WILSON. Thank you. Thank you, Mr. Chairman. I appreciate 

it. 

Mr. SHIMKUS. I thank the gentlelady. The Chair recognizes the 

gentleman from Maryland, Mr. Wynn. 

Mr. WYNN. Mr. Chairman, I don’t know whether this should go 

to you, Mr. Kelliher, or you, Mr. Maddox, but earlier, our committee chairman was asking about the impact of new license, and 

I think you said that actually, 3 of 8 projects were under construction, best estimate that they would take about 3 years before we 

would see them online. And so my question is this. We have established about 3-percent annual growth, so we have got to say in the 

next 3 years, we will have a 9-percent increase in demand, growth 

in demand, 3 years out. 

Do you make projections on prices that would give guidance to 

Congress and the American public, as to what we could expect in 

terms of natural gas prices over the next 3 to 5 years, in light of 

these factors? 

Mr. KELLIHER. We don’t make projections. The Department of 

Energy’s Energy Information Administration makes some projections. We——

Mr. WYNN. So you are handing it off to Mr. Maddox. 

Mr. KELLIHER. I think that is correct. 

Mr. WYNN. Right. Okay. Mr. Maddox. 

Mr. MADDOX. Who will happily kick this can down the field. As 

Joe said, EIA does act as an independent agency. I don’t have their 

long term forecasts. I think most folks would say they were, probably will decline, but not dramatically. You know, I would guess, 

I would be happy to get you the EIA forecast for the record, but 

I know the next 2 years, we are looking at $8.70 in 2006, so——

Mr. WYNN. So pretty much consistent levels of pricing for the 

next couple of years. Beyond that, maybe a slight decrease, but are 

you projecting a decrease? 

Mr. MADDOX. Yeah, a moderation, yes. A decrease——

60

Mr. WYNN. About how much would you say you are going to 

project? 

Mr. MADDOX. I don’t have those numbers in front of me. I would 

guess they would probably be in that $8 range, give or take. I 

would be happy to, you know, give you a full answer for the record, 

and get the EIA projections. 

[The following was received for the record:]

The November 2005 Short Term Energy Outlook (STEO) projects that the lower48 average natural gas wellhead price in nominal dollars will be $7.62 per thousand 

cubic feet (Mcf) in 2005 and $7.86 per Mcf in 2006. Current longer-term projections 

will be available in December, when the Annual Energy Outlook 2006 is issued.

Mr. WYNN. Okay. I certainly would appreciate that. The other 

question, Mr. Kelliher, you were saying that one of the things you 

do is monitor State conservation programs. Have you identified 

best practices by State governments, in terms of conservation? 

Mr. KELLIHER. Well, yes. We had Commissioner Mason participate in the Commission meeting on October 12, looking at the gas 

infrastructure, the damage that the hurricanes caused to the existing infrastructure, and also, the need to develop infrastructure over 

the long term. And then, the Commission meeting——

Mr. WYNN. Well, I don’t want to cut in on you. I just want to 

know what the best practices are. 

Mr. KELLIHER. We heard from a number of States on the 20th 

at the Commission meeting. California has a huge conservation 

program, a $2 billion conservation program, that is just very impressive. 

Mr. WYNN. What does it do? How does it work? 

Mr. KELLIHER. I can’t say I am familiar with—we can supply 

that for the record, but we heard from New York, Massachusetts, 

Iowa, and California. 

Mr. WYNN. If you would submit for the record, and also, if you 

would submit to me the State best practices, I think that would be 

very helpful. 

Mr. KELLIHER. Okay. 

Mr. WYNN. Okay. Thank you. I relinquish the balance of my 

time, Mr. Chairman. 

Mr. SHIMKUS. The gentleman yields back, and the Chair thanks 

the gentleman. The Chair now recognizes the gentleman from 

Texas, Mr. Burgess. 

Mr. MARKEY. Mr. Chairman. Mr. Chairman. May I? Before you 

do it, I have the statement of Administration policy on the bill that 

Mr. Maddox said the Administration doesn’t state their policies on, 

that has now just passed the House, and I would like to have this 

inserted in the record, where Mr.——

Mr. SHIMKUS. Okay. If we could see it, and then, we will——

Mr. MARKEY. Okay. Sure. 

Mr. SHIMKUS. Why don’t you pass it down, and we will——

Mr. MARKEY. It is the statement of President Bush’s position. 

Mr. SHIMKUS. Well, if we could see it, and we will take a look 

at it. 

Mr. MARKEY. Okay. Sure. 

Mr. SHIMKUS. And we will make a ruling. The Chair recognizes 

the gentleman from Texas. 

Mr. BURGESS. And I thank the chairman. 

61

Chairman Kelliher, you mentioned that, and I apologize for being 

out of the room, so if I am asking anything that has already been 

covered, my apologies. But you mentioned that the Commission has 

jurisdiction over natural gas transmission rates, as well as petroleum pipeline products. You state that these costs are 6 percent of 

the delivered cost for natural gas, and 1 percent for the delivered 

cost of petroleum products. Can you tell us what accounts for that 

difference? 

Mr. KELLIHER. Why is it 6 percent in one instance, and one in 

the other? 

Mr. BURGESS. Why is it so much higher for natural gas? 

Mr. KELLIHER. Sure. The 6 percent is a rough rule of thumb. I 

think 1 percent is a little bit more accurate barometer of the typical transportation component of oil and petroleum products. The 

6-percent figure will vary, because the commodity price varies 

sharply, so it might be 6 percent on one gas pipeline; it might be 

10 percent on another. It really is, in large part, a factor of the 

commodity price volatility. 

Mr. BURGESS. Does storage factor in as being an issue in pricing, 

the cost of storage of natural gas? 

Mr. KELLIHER. In that 6-percent estimate? 

Mr. BURGESS. Yes. 

Mr. KELLIHER. No. To my knowledge, no. No. 

Mr. BURGESS. And what about the amount of storage capacity 

this year, as compared to last year? 

Mr. KELLIHER. Storage levels, right now, are actually above the 

5 year average. That is one of the few bright spots of the current 

picture, is that the amount of gas in storage was slightly above the 

5 year average before the hurricanes, and it still is slightly above 

the 5 year average. So we are in fair shape when it comes to storage. But I personally think that there is a need to explore pricing 

reforms to expand total storage capacity. 

Mr. BURGESS. Well, if that is the case, why were the prices higher before Katrina and Rita, and then even higher after the hurricanes hit, if we have more storage this year than last year? 

Mr. KELLIHER. Well, we saw some of that last year. Last year, 

we saw record levels of gas in storage. We saw very high levels of 

volatility. I mean, to me, that suggests that the total gas storage 

capacity is inadequate, and should be expanded. At least, that is 

one inference. 

Mr. BURGESS. The total storage capacity is inadequate, and 

should be expanded? 

Mr. KELLIHER. Yes. 

Mr. BURGESS. Okay. Thank you. With your Commission, what do 

you have at your disposal? What sort of stick do you have at your 

disposal to prevent people from taking advantage of price in markets when they are distressed? 

Mr. KELLIHER. First of all, we now have, for the first time, some 

strong enforcement tools, something the Commission has lacked for 

70 years. We asked Congress at the beginning of the year, for 

strong enforcement authority and penalty authority, something 

that other regulatory bodies, the CFTC has it, the SEC has it. We 

asked for comparable enforcement tools. For most violations of the 

Natural Gas Act, for example, we had no ability to impose a civil 

62

penalty, and civil penalty really is the basic enforcement tool available to en economic regulatory body. We had no civil penalty authority whatsoever. Now, we can impose a penalty of up to $1 million per day per 

violation. On October 20, we issued an enforcement policy statement to explain how we will seek to apply that penalty authority, 

and our approach is modeled on the SEC’s approach, and the 

CFTC’s approach, as well as Justice Department guidelines for 

prosecution of business organizations. So we have tried to study 

how other regulatory bodies and enforcement agencies use, exercise 

their penalty authority. But we do now have strong enforcement 

tools. 

Mr. BURGESS. Well, and I am grateful for that. How many companies, or how many cases do you have under review right now? 

Mr. KELLIHER. I don’t know how many we have under review 

right now. Some may be nonpublic investigations that I shouldn’t 

discuss. But we, even before this new grant of enforcement, we 

had, I think, a very impressive record on enforcement. We sent 

Congress a report in, I think March of this year, that detailed the 

Commission enforcement actions taken in recent years. Even 

though we didn’t have penalty authority, we have secured very impressive settlements. 

Mr. BURGESS. And what do those settlements look like for the 

last 6 months? Have they been even more impressive with the new 

tools that you have? 

Mr. KELLIHER. We have only had the new tools since August 8, 

and I think there have been, well, there have been a number of settlements that have been announced since then, but we decided, you 

know, to be fair, we decided that it wouldn’t be appropriate to impose civil penalties for violations that predated the enactment of 

the new law. 

Mr. BURGESS. At some point in the future, can this committee expect that you will keep us up to date on——

Mr. KELLIHER. Yes, sir. 

Mr. BURGESS. [continuing] on what these new tools have done for 

you, and——

Mr. KELLIHER. Yes. 

Mr. BURGESS. [continuing] and where we have forced compliance, 

where before, it might have been much more difficult to do so? 

Mr. KELLIHER. Yes. 

Mr. BURGESS. Thank you. 

Mr. KELLIHER. Thank you. 

Mr. BURGESS. Mr. Maddox, the current Administration is often 

criticized for drilling, wanting to drill anywhere and everywhere. In 

1999, the Clinton Administration issued 2,414 permits to lease in 

the Rocky Mountain States. In 2003, under the current Administration, that number was down to 1,479, in a time when supply is 

more important than ever. What is the Department doing to help 

the Department of the Interior in its effort to issue more leases? 

Mr. MADDOX. As I stated earlier, we are working very closely 

with them to clarify the environmental impacts of different technology, trying to identify best practices that can be employed and 

used to expedite that process, as well as developing new processes 

going forward. 

63

Mr. BURGESS. Thank you. Mr. Chairman, I am a little over. I will 

yield back. 

Mr. SHIMKUS. The gentleman yields back, and per our previous 

discussion, we will accept the statement in the record that Mr. 

Markey requested, since it has Chairman Barton’s co-signature, it 

made sense to do so. 

The Chair now recognizes the gentleman from Texas—and apologizes for not recognizing him earlier—for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman, and I want to thank my 

colleague from Texas, Congressman Burgess, for getting rid of the 

myth that the Clinton Administration was anti-energy, because 

some of us tried to work on that for many years, and I am glad 

they allowed the 2,000 plus permits, as compared to 1,400. 

I want to talk about economic dispatch. But before I get here, it 

seems like from your testimony, and a lot of the questions, is that 

right now, we are, you know, it is about $11 per million cubic feet, 

and if Congressman Wynn is correct that we have a 3-percent 

growth, you know, and it takes 3 years to get an LNG terminal, 

which is, again, not the panacea we wish it were, but it seems like 

we need to do everything. I mean, we need to drill more in the 

Rocky Mountains. We need OCS exploration and production, and 

the de-bottlenecking the chairman talked about, of course, the 

Alaska pipeline. I know in the refinery bill that the House passed, 

but it is not law now, there was some effort to encourage the companies to build that pipeline, but it seems like we need to do everything for gas supply, and that is what is frustrating. 

Let me ask you about, Chairman Kelliher, about the economic 

dispatch, and you know, we have such high prices, and I have a 

strong interest in economic dispatch, because we hear the problems 

up here from those States that don’t necessarily produce like Texas 

does. And therefore, I am pleased to hear that FERC is moving forward on that regional joint board that the States, to examine economic dispatch, as provided by our amendment that this committee 

accepted to the Energy Bill that passed this last July. 

There is an issue for, that maybe even a lot of our committee 

members and our staff don’t understand, that are familiar with, so 

could you lay out the basics of what economic dispatch is, and let 

us know what FERC and joint boards will be discussing on that 

issue. And on a separate issue, since again, it is a new law on the 

streamlined permitting process for LNG terminals, you have had 

all of 2 months now, what is happening with FERC on trying to 

permit new LNG terminals, to get them online? Again, 3 years may 

be the average, hopefully, we can shave a few months off that, not 

only for Mr. Markey’s constituents in Massachusetts, but for my 

constituents who use natural gas to cool our homes during the 

summer. 

Mr. KELLIHER. Well, first of all, on economic dispatch. Power 

plants have different costs. There are base-load plants and peaking 

plants, but base-load plants have varying costs, and normally, economic dispatch has been done for a long time. Typically, it has 

been done on a utility-by-utility basis. They dispatch the generation they own. They start with the lowest cost generation, and 

they, in a theoretical way, they start with the lowest cost generation, and add to it, each increment slightly more expensive than 

64

the last, until the point where they actually satisfy demand. They 

are dispatching enough generation that they can satisfy demand. 

That very simple model has gotten more complicated as independent power production has been added. Now, in some regions 

of the country, ERCOT, the organized markets in the Midwest and 

the Northeast, they dispatch, they have security constrained economic dispatch, where they will dispatch on a regional basis, not 

just on each individual utility system, but on a regional basis. In 

other parts of the country, they continue, they have economic dispatch, but on a system by system basis. 

That is what the Commission will look at at the joint board 

meetings. Texas, I will be chairing the southern joint board meeting in about 2 weeks, well, less than 2 weeks, and we will hear 

from ERCOT on how ERCOT does economic dispatch. 

And on LNG, since EPACT, I mean, one development since 

EPACT is the Commission, jointly with the California Public Utilities Commission, filed a motion to dismiss the litigation that inspired Congress to act to clarify the Commission’s legal exclusive 

jurisdiction over authorizing LNG import facilities. I am not aware. 

Have there been filings? Oh, we did. Yeah, one of our first actions 

in the Energy Policy Act was within 60 days—we have a deadlines 

under the Energy Policy Act, something like 15—and the first one 

was issuing a final rule on LNG pre-filing process, and we issued 

that on the sixtieth day, which is not easy to do under the Administrative Procedures Act. 

I am not aware. Have there been other LNG proposals filed? No 

new proposals have been filed. We expect there may be some filed 

soon, though. 

Mr. GREEN. Okay. In what brief seconds I have left, Secretary 

Abraham, in 2003, recommended economic dispatch to State PUC 

chairs as a way to reduce natural gas prices. Has the Administration made this recommendation again going into this winter, which 

would have even, will have even higher prices than we did 2 years 

ago? If not, is this a good idea for the Department of Energy to do 

that? 

Mr. MADDOX. As I noted earlier, this isn’t actually part of my 

portfolio, so I would take that question for the record, and respond 

in writing. 

Mr. GREEN. Okay. Thank you, Mr. Chairman, for the time. 

Mr. SHIMKUS. I thank the gentleman. Now, the Chair recognizes 

the gentleman from Maine, Mr. Allen. 

Mr. ALLEN. Thank you, Mr. Chairman. This is working, I gather. 

Mr. SHIMKUS. I will hit the mute button in a minute. 

Mr. ALLEN. Okay. When this light goes out, I will come back to 

you. First of all, Chairman Kelliher, I just had a question for you 

to begin with. I am sure you share my concern that as commodities 

supplies tighten, the potential for market manipulation increases. 

Can you give us any more detail about the market manipulation 

rules your Commission has proposed? Specifically, when will they 

be implemented, and will they be in place to prevent market manipulation on a real-time basis in the natural gas market this winter, if it occurs? 

Mr. KELLIHER. Sure. And first of all, let me start with, this is 

something that I personally urged Congress to do in a letter to Mr. 

65

Dingell last January. I thought that, given changes in the market, 

the Commission needed stronger enforcement tools. Something 

Senator Bingaman supported, Mr. Boucher supported, and it ended 

up getting into law. It was something I personally was committed 

to. So one of the first orders of business after the new law was enacted was to follow the path that Congress laid out for us. Congress 

told us to issue anti-manipulation rules modeled on the securities 

model, the model in securities law. We don’t, at FERC, naturally 

have great expertise on securities law. It is not something we deal 

with, so we started with the model Congress gave us, understood 

securities law, and issued a proposed rule modeled on the securities 

approach. And we issued those rules on October 20, I believe. We 

approved them October 20, and we fill finalize them by the end of 

the year. 

Mr. ALLEN. Okay. So they will be in effect. 

Mr. KELLIHER. Yes, sir. This winter. 

Mr. ALLEN. Before this winter. 

Mr. KELLIHER. Yes. 

Mr. ALLEN. Mr. Maddox. 

Mr. KELLIHER. Oh, I am sorry. And can I clarify one thing? 

Mr. ALLEN. Yes. 

Mr. KELLIHER. We also did have other market manipulation 

rules that go back 2 years, the market behavior rules the commission issued 2 years ago. Those have been challenged in court. They 

are still good rules. They haven’t been overturned by the court, but 

one reason we saw express prohibition of market manipulation was 

to guard against that legal threat, so there are market behavior 

rules in place until we finalize the new rules. 

Mr. ALLEN. Okay. And you feel the new rules have cleared up 

the legal problems with the old? 

Mr. KELLIHER. I think so. 

Mr. ALLEN. To the extent there were legal problems. 

Mr. KELLIHER. Yeah, I think it would be hard to challenge the 

essence——

Mr. ALLEN. Okay. 

Mr. KELLIHER. [continuing] of the new rules, given Congress’s action. 

Mr. ALLEN. Okay. Mr. Maddox a couple of questions for you. In 

the formulation of the Administration’s budget policy over the last 

5 years, was it ever conceived that a major hurricane could strike 

oil and gas producing regions in the Gulf of Mexico? I mean did you 

take that into account in the formulation of the Department’s budget? That risk. 

Mr. MADDOX. That planning would undoubtedly go over to DHS. 

I can tell you we have done extensive work on energy assurance. 

We have created an Office of Energy Assurance. We staffed it. So 

yes, the Department has addressed that issue, and moved forward, 

and in fact, our Department had played a major role in helping restore some of the energy, working with the industry, DHS, the Department of Transportation, Coast Guard, to clear channels, and 

get electricity back to critical infrastructure. So it was contemplated. A program was set up to address these issues, and it 

was very effective throughout this process. 

66

Mr. ALLEN. Okay. Coming back to the statement I made in my 

opening, I mentioned the fact that back in March, Secretary 

Bodman said that 95 percent of the Administration’s energy policy 

had been implemented. What do you believe was left out? What do 

you believe we should be doing now? The related question is do you 

agree at this point, it might have been wise to have a little more 

of a conservation component to the energy policy? It was, I think, 

Mr. Kelliher, who said in his remarks that we are counting on 

State conservation plans to help us through the winter. Wouldn’t 

it have been good to have a comprehensive, extensive Federal conservation plan in that energy policy? 

Mr. MADDOX. First, you know, the Administration’s policy during 

the Energy Bill was to support conservation and renewable energy 

efforts. I think we had $7.7 billion in spending and tax credits to 

support conservation. The Administration policy was not to support 

production credits. We felt like in the current price environment, 

that there was enough incentive to continue producing. Having said 

that, I would also note that, in October, Energy Awareness Month, 

the Secretary kicked off a campaign, our senior folks, the Secretary, Undersecretary, I think visited eleven cities. We have created a website, energysavers.gov, we have been out there talking 

about conservation for some time. We had this discussion, I think, 

in 2003. Secretary Abraham convened a group in July. So there has 

been extensive work on conservation. 

What we really have got to understand is that turning a ship 

this size takes time. It takes time to insulate homes. It takes local 

building code changes. We can educate it. We are getting very aggressive now in creating the Energy Saver codes. Some of this has 

been bogged down in courts for years. So we are very quickly moving out, and have been trying to move out in this front. It still does 

not ignore the fact, though, that we still do need additional production. The United States is the third largest oil producer in the 

world and declining. We are at 5.5 million barrels today. Projections have at 4.5 billion barrels in the not too distant future, unless 

we bring on ANWR, unless we bring on some of these other reserves. 

So it needs to be a combination. We are using energy much more 

efficiently than we did 10, 15 years ago. However, we have a huge 

hole in the residential area, which I think is a major problem going 

forward. Conservation from an industry perspective is pretty much 

a competitive necessity, and they are getting there. But we have 

a lot of work to do on the——

Mr. ALLEN. I see my time has expired, Mr. Maddox. I would just 

not belabor the point, but since 70 percent of all our oil goes into 

vehicles, it would have been nice, it seems to me, 4 years ago, to 

have done something serious about a policy, not just talking about 

a policy that would have driven down or improved the vehicle emissions, vehicle fuel efficiency as well. 

But I see my time has expired, and I argue with Mr. Shimkus 

about this now and then. So we won’t do it again today. Thank you. 

Mr. SHIMKUS. The chairman thanks my colleague. If the Chair 

can dismiss this panel, and thank them for their testimony, and 

call the second panel to their seats. 

67

Mr. MARKEY. Mr. Chairman, could I ask one question by unanimous consent? 

Mr. SHIMKUS. If the Chair would limit it, we have already been 

here 2 hours, we have got two more panels. If the gentleman can 

assure me that we can do this expeditiously, I would be happy to. 

Mr. MARKEY. No, I will. I just have——

Mr. SHIMKUS. Thank you. 

Mr. MARKEY. [continuing] one question for Mr. Maddox. 

Mr. SHIMKUS. I knew we wouldn’t get out of here. 

Mr. MARKEY. Well——

Mr. MADDOX. But first, may I acknowledge my error. 

Mr. MARKEY. Okay. No, I appreciate it, Mr. Maddox. So what I 

would like to do, Mr. Maddox, is just for you to clarify, because in 

the Administration’s letter to the committee on the bill, it says that 

they have concerns about certain provisions. I guess what I would 

like to know is first, do they have concerns about the bill having 

a provision which increases the reserve from 2 million to 5 million 

barrels? Is that one of the concerns? 

Mr. MADDOX. I don’t believe there is a fundamental concern over 

increasing the authorization to 5 million barrels. 

Mr. MARKEY. Okay. And second, it says there are Constitutional 

concerns about the Barton bill. What are the Constitutional concerns that the Administration has about the Barton bill? 

Mr. MADDOX. That I couldn’t address, but I would be happy to 

take it for the record. 

Mr. MARKEY. Okay. Thank you. 

Mr. SHIMKUS. And as with Chairman Barton, if there is additional questions that any member would like to address, they can 

submit those to, and we want to thank you for your time and your 

responses. 

And now, if we can get folks to expeditiously exercise their legs 

and move out of sight of the committee room, and have our second 

panel take their seats. 

I would like to get the second panel moving as expeditiously as 

possible. I will do some brief introductions, and then, we will go to 

opening statements. 

We have, in the second panel, and you can correct me if I butcher 

your last name. It is not intentional. Mr. Robert Stibolt. 

Mr. STIBOLT. Stibolt. 

Mr. SHIMKUS. Stibolt. Who is the Senior Vice President for SUEZ 

Energy North America. We also have with us Mr. Stephen Ewing, 

a Vice President of DTE Energy. Ms. Mary Ann——

Ms. MANOOGIAN. Manoogian. 

Mr. SHIMKUS. Manoogian. Director of the New Hampshire Office 

of Energy and Planning. And Ms. Dorothy Tucker, from Medford, 

Massachusetts. 

We welcome you. Your whole statements are submitted for the 

record. If you can summarize in 5 minutes, and we would like to 

start with Mr. Robert Stibolt. 

68

STATEMENTS OF ROBERT D. STIBOLT, SENIOR VICE PRESIDENT, STRATEGY, PORTFOLIO, AND RISK MANAGEMENT, 

SUEZ ENERGY NORTH AMERICA, INC.; STEPHEN E. EWING, 

VICE CHAIRMAN, DTE ENERGY, INCOMING CHAIRMAN, 

AMERICAN GAS ASSOCIATION; MARY ANN MANOOGIAN, DIRECTOR, NEW HAMPSHIRE OFFICE OF ENERGY AND PLANNING; AND DOROTHY ELIZABETH TUCKER 

Mr. STIBOLT. Thank you, Mr. Chairman. I appreciate the opportunity to be here today to discuss natural gas and home heating 

oil this year. 

As you know, I work for and represent SUEZ Energy North 

America, which through its LNG division, owns and operates the 

liquefied natural gas terminal in Everett, Massachusetts. My written statement is fairly thorough, and I ask that it be entered into 

the record. 

Mr. SHIMKUS. Without objection, so ordered. 

Mr. STIBOLT. Beyond the written statement, I thought I might 

discuss just three things very briefly. First, I want to note that the 

Everett terminal is important to the energy supply in New England. We provide about 20 percent of all the natural gas supplied 

to that region. On the coldest days, our estimates indicate that as 

much as 40 percent of the gas used in New England flowed through 

our terminal. 

We are justifiably proud of the role we play in keeping people 

warm and keeping the power on in New England. At the same 

time, we routinely take actions to keep the gas we sell economical 

to our customers. We typically sign long-term contracts with secure 

sources of supply. We then customarily hedge a significant percentage of the price risk carried within those contracts, which positions 

us to offer fixed price sales contracts to our customers, and positions our hedge counter parties to offer additional price hedging 

services. In short, we take prudent steps to keep prices in New 

England as modest as possible. We also, when possible, try to bring 

additional cargos into New England. Given the complicated logistics of bringing a ship into Everett, it would be difficult to do much 

this winter, but we are looking for those opportunities. 

Second, there is a lot of talk about bringing new supplies online. 

While we are proud of what we are doing right now, we are not 

just talking about what to do next. Right now, we are investing significantly in two major projects. The first is an offshore facility located about 12 miles off the coast of Massachusetts near Gloucester. This facility, which will consist essentially of a hookup to a 

nearby underwater pipeline will require a special set of tankers 

that can regasify the LNG right on the ship, and feed directly into 

the region’s pipeline system. When complete, this $1 billion project 

will give us the ability to supplement our cargos into Everett, increase the supply of natural gas being delivered into New England, 

and provide our customers with the most affordable natural gas in 

the region. 

The second is a similar project in Florida, which will bring LNG 

into Florida via pipeline, either from the Bahamas, or from an offshore regasification facility. Right now, we are actively working on 

both options. Third, I think we need to keep things in perspective. 

It is wrong to claim that LNG alone can meet all of our growing 

69

needs for natural gas. We view LNG as an important energy source 

in addition to other North American natural gas supplies, not as 

a replacement for them. 

Policymakers cannot and should not allow our very sensible and 

successful approach to LNG to obscure the fundamental reality 

that we need to better access and develop our Nation’s natural resource base. 

Thank you again for inviting me to discuss these issues with you, 

and I look forward to any questions you might have. 

[The prepared statement of Robert D. Stibolt follows:]

PREPARED STATEMENT OF ROBERT D. STIBOLT, SENIOR VICE PRESIDENT, STRATEGY, 

PORTFOLIO AND RISK MANAGEMENT, SUEZ ENERGY

Thank you, Mr. Chairman and members of the Committee for inviting me to 

present testimony regarding natural gas prices and, more specifically, the role of liquefied natural gas (LNG) in the larger marketplace. 

My testimony today will concentrate on five important points related to LNG. 

REGIONAL ENERGY SUPPLY

First, I think it is important to recognize that LNG can contribute substantially 

to a region’s energy supply. For instance our terminal in Everett, Massachusetts 

meets 15-20% of New England’s natural gas demand, and we are capable of meeting 

35-40% of the region’s demand on peak days. In addition we are supplying the fuel 

for a new 1,550 megawatt powerplant, which can generate enough electricity for approximately 1.5 million homes each year. If LNG resources were not available in 

New England, supplies would be far tighter and consumers would suffer. 

In short, wherever there is a facility LNG keeps downward pressure on prices by 

helping to diversify and increase a region’s energy supply. By competing openly and 

fairly with gas delivered via pipeline, LNG helps ensure that consumers get the best 

deal possible. 

There are two other important advantages of LNG. First, LNG helps us access 

the ample supplies of natural gas around the world. Estimates of the total world 

supply of natural gas hover around 6 quadrillion cubic feet, and more reserves of 

natural gas continue to be discovered. Much of this natural gas is stranded a long 

way from market, in countries that do not need large quantities of additional energy. For purposes of perspective, U.S. natural gas reserves were estimated by the 

Energy Information Administration (EIA) at 193 trillion cubic feet as of the end of 

2004. This represents only about 3% of the world total. Second, liquefying natural 

gas and shipping it is more economical than transporting it in pipelines for distances of more than about 700 miles offshore or more than 2200 miles onshore. 

Consequently, there are 113 active LNG facilities in the U.S., including marine 

terminals, storage facilities, and operations involved in niche markets. Worldwide 

there are 17 LNG export terminals, 40 LNG import terminals and 136 specially-designed LNG ships. 

NATURAL GAS SUPPLY

Second, even with our obvious enthusiasm for LNG, it is wrong and probably irresponsible to claim that LNG alone can meet all of our growing needs for natural 

gas. We view LNG as an important energy source in addition to other North American natural gas supplies, not as a substitute for them. 

In short, LNG needs to be thought of as complementary to our current resource 

base. This is a very important point. Policymakers cannot and should not allow our 

very sensible and successful approach to LNG to obscure the fundamental reality 

that we need to better access and develop our Nation’s natural resource base. 

We believe that the U.S. must increase its domestic production of natural gas. Recent legislative, regulatory and market trends have placed greater demands on our 

gas supply without taking commensurate steps to increase production. Congress 

needs to take steps to create a climate in which we can develop adequate supplies, 

produced in an environmentally protective manner. Access to new reserves is necessary not only to meet new demands, but simply to sustain current production levels. 

Currently, in the natural gas industry generally, many fields in the United States 

are getting more difficult to develop since most of the easy-to-access, highly producVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00073 Fmt 6633 Sfmt 6621 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
70

tive reserves already seem to be accounted for. In Canada, key fields are also maturing while the country is experiencing its own increase in natural gas demand. 

At the same time, natural gas demand is growing both overall in the U.S. and 

in our terminal’s home base in New England. There is a significant increase in new 

natural gas-fired electric power plants, which, although they use less fuel than 

older, less efficient gas and oil powerplants, still place demands on the resource 

base. In addition, there is steady growth in demand for natural gas from residential 

and commercial customers. 

More specifically, according to the Energy Information Administration (EIA), natural gas production in the U.S. is predicted to grow from 19.5 Tcf in 2001 to about 

26.4 Tcf in 2025. At the same time, total natural gas consumption is expected to 

increase to about 35 Tcf in 2025. It is not complicated math to see that demand is 

outstripping supply. 

We can talk for a long time about the reasons for higher prices, but when demand 

is increasing and supply is steady or dropping, it makes no difference whether you 

are buying and selling toast or helicopters or natural gas—prices are going to increase. 

As a result of these factors, many are concluding that LNG represents an important part of the long-term natural gas supply solution. 

We believe that because it provides unique flexibility, LNG will continue to grow 

as a resource for the United States. In our ongoing effort to diversify our supply 

of energy, LNG’s exceptional and exclusive ability to transport what was once 

stranded natural gas from various sources can only help. 

Additionally, as response to demand becomes more important, our ability to move 

natural gas to where it is needed, freed in part from the constraints of pipelines, 

will ensure that LNG is an increasingly important element in our Nation’s energy 

supply portfolio. Simply put, LNG offers greater trade flexibility than pipeline transport, allowing cargoes of natural gas to be delivered where the need is greatest and 

the commercial terms are most competitive. 

This trend can already be seen. As the Energy Information Administration has 

noted, LNG imports have increased by more than 30 times—from 18 Bcf in 1995 

to 540 Bcf in 2003. Factors ranging from additional sources of supply to lowered 

costs for liquefaction and shipping have contributed to the increase. Currently, anticipated expansions on LNG facilities are expected to raise the United States’ import volumes from 2 Bcf per day in 2005 to about 6 Bcf per day in 2010. 

PROJECTS

Let me move onto my third topic and address questions about the development 

of LNG as an important source of energy for the United States. As you know, the 

Energy Information Administration has indicated that LNG might supply as much 

as 20% of the natural gas consumed in the United States in the future. Additionally, 

there are dozens of proposed LNG terminals on the drawing board right now. While 

I think we can all agree that not all of those facilities will be built, and it is unlikely 

that LNG will supply 20% of this Nation’s natural gas anytime in the near future, 

it is safe to say that LNG can provide a growing fraction of the energy needed to 

power the world’s largest economy. 

We at Suez are confident in the future of LNG in this country. We are investing 

in two major projects to bring LNG into the U.S. We own and operate the terminal 

at Everett, and have some capability to deliver additional LNG supplies through 

both Cove Point and Lake Charles. A Suez subsidiary with direct access to LNG at 

the point of liquefaction is an important source of supplies delivered into Cove Point 

and Lake Charles. We are leaders in the worldwide LNG industry and are involved 

in the process from liquefaction through transportation right up to the point at 

which the gas is delivered into the pipeline. 

Our two major projects are designed to bring more LNG into the markets in New 

England and Florida. These markets have constrained access to natural gas, in part 

because pipeline capacity is not robust in those areas. These projects make sense 

for us as a business and for the consumers of New England and Florida, who continue to demand the benefits brought about by a plentiful, affordable supply of natural gas. 

The project in New England is an off-shore facility located about 12 miles off the 

coast of Massachusetts near Gloucester. This facility, which will consist essentially 

of a hookup to a nearby underwater pipeline, will require a special set of tankers 

that can regasify the LNG right on the ship and feed directly into the region’s pipeline system. When complete, this $1 billion project will give us the ability to supplement our cargoes into Everett, increase the supply of natural gas being delivered 

71

into New England, and provide our customers with the most affordable natural gas 

in the region. 

The project in Florida will bring LNG from the Bahamas via pipeline. Right now, 

we are working with the regulatory agencies to determine our best options. Unfortunately, sometimes the regulatory agencies are not as interested in moving energy 

projects along as we are. 

Let me offer our experience in Florida as an example. There, we have been working diligently to gain the appropriate regulatory authority to construct a pipeline 

between the Bahamas and Florida. Last April, FERC approved our EIS, the State 

gave its determination of consistency with respect to the coastal zone, and the local 

governments all approved the project. Unfortunately, the Corps of Engineers decided after all that to raise questions. The Corps representatives had participated 

in all the interagency meetings and discussions, but they waited until FERC had 

acted to raise their concerns, some of which included very fundamental elements of 

the process including potential pathways, tunneling, etc. Now, we find ourselves 

caught between a dramatic design change requested by the Corps of Engineers and 

the design that was approved by more than ten federal, state, and local agencies 

through the FERC multi-agency permitting process. 

As a coda to this section, I would simply point out that permitting and other 

delays complicate the supply picture. LNG is a global commodity. If we can’t move 

expeditiously to develop and secure supplies of it, other countries will. 

INTEGRATED MARKETS

My fourth point is that we need to better integrate natural gas markets. I have 

attached a chart to my testimony outlining how this can be thought about. For reasons both physical and financial, we are experiencing something of a balkanized 

marketplace for natural gas in the United States. Much of the natural gas from the 

Gulf of Mexico flows into the Northeast, which appears to be the gas market most 

stressed in the event of a cold winter. More abundant supplies of natural gas from 

the Western United States and Canada flow into the Chicago and other Midwest 

Hubs, but because of physical constraints and financial realities, does not flow further eastward into New England. 

This places us in a situation where New England is dependent on natural gas primarily from the Gulf, which, despite being a region rich in the resource, struggles 

to meet the demand. In this year, the hurricanes have greatly complicated the supply picture and placed New England in a position where supply, especially in February, may be problematic. 

We need to do everything we can to see that supplies scheduled for delivery to 

both the Gulf of Mexico and the Northeast US can in fact be delivered. 

SAFETY

Finally, let me address—and hopefully put to rest—the very important issues of 

safety and security. 

First off, I want to note that LNG is as safe, if not safer, to transport and store 

than most other fuels. It is not explosive, corrosive, carcinogenic, or toxic. It does 

not pollute land or water resources. It is not transported or stored under pressure. 

Like other fuels, LNG has risks associated with its improper handling; however, 

LNG has certain characteristics which minimize some of the dangers that may result from mishandling. For example, compared to other fuels, LNG is less likely to 

ignite in a well ventilated area. 

With respect to the transportation, LNG ships, with their double-hull construction, are among the best-built, most sophisticated, most robust in the world. According to shipping expert Lloyd’s Register, there has never been a recorded incident of 

collision, grounding, fire, explosion, or hull failure that has caused a breach to a 

cargo tank of an LNG ship. In fact, over the last 40 years there have been 33,000 

LNG carrier voyages, covering more than 60 million miles without major accidents 

or safety problems either in port or on the high seas. 

It is also important to note that in the extremely unlikely event that an LNG vessel were involved in an incident that ruptured a cargo tank, and the LNG vapor 

released met with an ignition source, the likely consequence would be a localized 

fire, and not an explosion as is often feared. 

With respect to the storage of LNG, there has never been a report of any off-site 

injury to persons or damage to property resulting from an incident at any of the 

LNG import terminals currently in operation worldwide, including our terminal in 

Everett. This is due to excellent equipment and facility design, excellent safety procedures employed in the industry, stringent design and safety codes governing deVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00075 Fmt 6633 Sfmt 6621 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
72

sign, construction, and operation of storage facilities, and a well-trained, highly experienced workforce. 

Finally, we live in a world of comparative risk. At Everett, we take about 80 shipments of LNG a year. Next door to us is a gasoline terminal that probably takes 

at least as many. Across the Nation there are thousands of such terminals and storage tank farms next to houses, schools, and businesses. I am not saying that because of this we need to pay less attention to the safety and security of LNG shipments. What I am saying is that we need to make sure that we are addressing real 

world risks in an appropriate and measured way. 

Thank you again, Mr. Chairman and Members of the Committee for inviting me 

to present our thoughts on possible approaches to help moderate natural gas prices 

and, more specifically, the role of liquefied natural gas in the larger marketplace. 

I look forward to answering any questions you might have and working with the 

Committee on these very important issues.

Mr. SHIMKUS. Thank you. Now, the Chair recognizes Mr. Ewing. 

Your statement is in the record, and your are recognized, sir. 

STATEMENT OF STEPHEN E. EWING 

Mr. EWING. Thank you, Chairman Shimkus, and thank you, 

Ranking Member Boucher, and members of the committee. 

I am here today in my role as Vice Chairman of the American 

Gas Association, which represents 195 utilities across the country 

that deliver natural gas to more than 63 million customers. I am 

also the Vice Chairman of DTE Energy, a combination electric and 

gas utility in Michigan. We serve 2.2 million electric customers, 

and 1.2 million natural gas customers. 

Before I begin my comments, I would like to offer my sincere 

thanks to the members of this committee for all the work that you 

did to successful pass the Energy Policy Act of 2005, for your support for $1 billion of increased funding for LIHEAP, and most recently, I would like to thank you for conducting these hearing, 

which serve as an important forum to further explore the impact 

of high gas prices, and to consider policy measures that could be 

enacted. 

As you already know, natural gas prices have reached unprecedented high levels, reaching a peak of $15.60 per thousand on October 5 of 2005. While prices have softened somewhat, they remain 

extremely sensitive to changes in weather, supply, and demand. 

Today, I would like to focus briefly on three things. First, the needs 

of low-income customers, who are the most vulnerable group to the 

impact of high prices. Second, the need for continued, effective communication measures that will do the following: warn customers 

about significantly higher heating bills this winter, and inform 

them of what actions they can take to reduce natural gas consumption, where to get help if they need it, and things they should not 

do, because they are unsafe. And third, the need for a long term 

solution, in the form of increased natural gas supplies. 

Returning quickly to the first point, the increase in gas prices 

has caused a corresponding decrease in the purchasing power of 

LIHEAP dollars. Based on current prices, it is a reduction of almost 50 percent. At the same time, the number of households receiving LIHEAP assistance, essentially 20 percent of those eligible, 

has increased from approximately 4.2 households in fiscal year 

2002 to more than 5 million households this year, the highest level 

in a decade. 

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The National Energy Assistance Directors’ Association study, 

that was referred to by Congressman Wynn earlier, released its 

second annual survey detailing the effects of high energy costs on 

poor families. These circumstances, noticed by the Congressman, 

create an immediate need that can only be addressed by an increase in LIHEAP funding. AGA is advocating that LIHEAP funding be increased to the full $5.1 billion that was incorporated in the 

Energy Policy Act of July 2005. 

To my second point, AGA and its member companies have embarked on extensive communication programs to our customers, 

warning them about higher heating bills this winter, and while this 

subject has been in the national media for some time, I believe it 

is only through repetition of the message that it becomes real for 

many people. And the message is simple: Prices are high; winter 

is coming; here are some things that you can do and some things 

you should avoid. The gist of the message? Act now. Don’t wait 

until the situation becomes critical. 

And while on the subject of communications, I think it is important to note that unlike the major energy companies who recently 

announced record quarterly earnings, natural gas utilities, like our 

customers, do not benefit from higher prices. We make our money 

on the delivery of the commodity, and those rates are regulated by 

each State. 

Last, and in the long term, the most important action is to increase the supply of natural gas. To that end, AGA advocates opening restricted offshore areas for the environmentally responsible 

production of natural gas; providing adequate funding and staff for 

the Federal offices principally involved in the issuance of permits 

for drilling and production of natural gas; further expanding and 

expediting procedures for producers to access lands and production 

areas; and finally, to take advantage of the provisions that have already been adopted through Congress, among them, taking steps to 

increase U.S. capacity to receive liquefied natural gas to our LNG 

shipments. It has been talked about already this afternoon. And 

also, to follow through on the construction of the Alaskan pipeline. 

Thank you very much for your attention, and again, thank you 

for the work that you have already done. 

[The prepared statement of Stephen E. Ewing follows:]

PREPARED STATEMENT OF STEPHEN E. EWING, PRESIDENT & CHIEF OPERATING

OFFICER, DTE ENERGY GAS ON BEHALF OF THE AMERICAN GAS ASSOCIATION

Thank you for the opportunity to testify before this Committee on behalf of the 

American Gas Association and the 56 million consumers served by its members. My 

name is Stephen Ewing, and I am President and Chief Operating Officer of DTE 

Energy Gas, a natural gas utility in Michigan that provides service to more than 

one million customers. I am also the Vice Chairman of the American Gas Association (AGA), which represents 195 local energy utility companies that deliver natural 

gas throughout the United States. 

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

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

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

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

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

Given the recent run up in natural gas prices in the wake of the warmer-thannormal summer and Hurricanes Katrina and Rita, this winter natural gas customers will likely face significantly higher energy bills. Local natural gas utilities 

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

74

Accordingly, AGA’s focus is to pursue policies that will mitigate the high cost of 

natural gas for America’s consumers this winter and that will, in the longer term, 

increase supply. It is distressing to consider that the $13 prices projected in the 

American Gas Foundation study, ‘‘Outlook to 2020,’’ published in February of this 

year, have already been exceeded over the last few weeks. That study concluded 

that if policy makers and industry decision makers did not immediately address 

critical issues that will have a significant impact on the availability and price of natural gas (such as diversifying electric generation mix and increasing access to domestic supplies) then prices could reach $13 by 2020. No one imagined that a mere 

seven months later those prices would become a reality. Today’s higher natural gas 

prices will, of necessity, lead to much higher bills for consumers. 

Higher bills are harmful to consumers, harmful to the economy, and harmful to 

the natural gas utilities that AGA represents. More than 63 million Americans rely 

upon natural gas to heat their homes. Unexpectedly high prices are a serious drain 

on their pocketbooks. High prices also put the nation’s industrial sector at a distinct 

competitive disadvantage, cause plant closings, and cause workers to lose their jobs. 

Most observers readily understand why higher prices are harmful for consumers 

and the economy, but they fail to apprehend that they are also harmful for natural 

gas utilities. By law and regulation, natural gas utilities in almost all circumstances 

are not permitted to mark-up the price of natural gas that they acquire for their 

consumers and must instead sell the gas to consumers at exactly the same price 

they pay for it. This process is overseen by state public service commissions and is 

subject to review and audit. Rather. natural gas utilities earn their income by delivering natural to their customers. Under the most basic principles of economics, today’s higher natural gas prices mean that customers will consume less natural gas. 

As a consequence, natural gas utilities will deliver less natural gas, thus diminishing the revenues paid to them for services performed for their customers. As a 

result, and contrary to the belief of so many, the interests of consumers and of natural gas utilities are aligned on this issue. Both want lower natural gas prices and 

reliable natural gas supply. 

Recently the Department of Energy’s Energy Information Administration (EIA) 

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

AGA does not issue its own natural gas price projections. As a result, I will be discussing in my testimony the prices projected by EIA. As has been widely reported, 

EIA projects that the average natural gas household’s winter fuel expenditures will 

increase by 47.6% over last year. 

It is important to remember, as EIA carefully notes, that the EIA projections are 

based on modeling results that depend on assumptions regarding several critical 

variables:

(1) A significant assumption is that there will be a ‘‘medium recovery’’ of energy operations in the Gulf of Mexico following Hurricanes Katrina and Rita. EIA assumes neither a best-case nor worst-case scenario in projecting the recovery of 

natural gas production, gas processing, and pipeline facilities in the Gulf. What 

if this assumption turns out to be off the mark? 

(2) Another significant assumption is that the winter weather will be normal. A 

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

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

projects that a ten-percent-warmer-than-normal winter would cause average 

residential natural gas prices to rise 29.8 percent, while a ten percent colder 

than normal winter would lead to a 67.3 percent price increase. This is quite 

a price range, entirely without regard to best-case or worst-case Gulf of Mexico 

recovery scenarios. 

AGA and its members are, on a national basis, facing significantly higher natural 

gas prices in the best of cases and extraordinarily higher prices in the worst of cases. 

What are natural gas distribution utilities doing to help their customers this winter? Natural gas utilities are doing what they always do—whatever they must to 

serve their customers reliably this winter. Gas utilities are pursuing purchasing 

strategies that, while tried and true, have also evolved over the past five years with 

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

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

the spring and summer months and putting it into underground storage. Usually 

summer and early fall natural gas prices are lower than winter prices, and purchasing storage gas in the summer and early fall provides a natural, physical hedge 

against higher prices in the winter. 

In addition to the basic building block of underground storage, natural gas utilities layer other supply and transportation services. Companies build and manage 

a portfolio of supply, storage, and transportation services, which may include a diVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00078 Fmt 6633 Sfmt 6621 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
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1 Impacts of Energy Efficiency and Renewable Energy on Natural Gas Markets: Updated and 

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

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

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

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

verse set of contractual arrangements to meet anticipated peak-day and peak-month 

gas requirements. 

Layered increasingly on top of that are financial tools to hedge natural gas costs 

and, hence, promote a greater degree of price stability. Financial hedging tools include options, fixed-price contracts, swaps, futures, as well as more exotic instruments. These tools help in reducing price volatility. Although natural gas distribution utilities have grown increasingly savvy in the use of these tools over the past 

few years, they still do not guarantee lower natural gas prices. They are, rather, 

designed to promote price stability. Lower prices and price stability can sometimes 

be competing objectives. 

Natural gas distribution utilities must also help their customers to help themselves. To this end, customer education is critical for a number of reasons: 

First, customers need to be aware of higher natural gas prices in order to have 

an opportunity to take action today to reduce this winter’s bills. That is why the 

American Gas Association and its member gas distribution utilities are working urgently to communicate to customers regarding the higher winter bills that they can 

anticipate and to offer consumers some tools for protecting themselves. 

One important tool is the use of budget (or levelized) billing plans that allow utility customers to spread out their natural gas bills so that they pay about the same 

amount each month year round. Consumers using these plans are charged the same 

total bill each month for 11 months, regardless of weather variations and regardless 

of unpredictable commodity prices. A reconciling adjustment is made during the 

twelfth month to reflect differences in actual versus projected costs and actual 

versus projected consumption. 

Another important tool is assisting customers to increase their homes’ energy efficiency and to conserve energy better. Energy efficiency and conservation can do 

much to reduce individual energy consumption and, therefore, lower customer bills. 

Indeed, one recent study indicated that aggressive energy efficiency and conservation measures could reduce natural gas prices by up to 25%.1 While analysts may 

quarrel with the likely impact of an increased application of energy efficiency measures on natural gas prices, AGA and its members know that appropriate customer 

energy-efficiency measures can benefit their customers. Moreover, these benefits will 

be almost immediate in today’s high-priced environment. In contrast, other measures to ameliorate the impact of natural gas prices require a considerably longer 

time frame. 

AGA would like to thank the Committee for its work in encouraging greater consumer energy efficiency. AGA and its member companies will continue to encourage 

improved customer energy efficiency and conservation to help reduce the sting of 

higher natural gas prices. 

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

gas bills is utility programs that provide low-income customer assistance. Each year 

utility programs and rate structures provide about $1.7 billion in low-income customer assistance.2 These programs are designed to augment the federal government’s Low Income Home Energy Assistance Program (LIHEAP), which in recent 

years has been funded at approximately $2 billion per year. Much of the utility lowincome assistance comes in the form of rate assistance, which may involve reduced 

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

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

What natural gas utilities seek to achieve from all of these approaches is to flatten out the highest peaks of natural gas prices and dampen somewhat the impact 

on customers of high and volatile natural gas prices. In neither the short run nor 

the long term, however, can these tools mask the impact of higher natural gas 

prices on consumers. Instead, other actions are necessary. They were necessary five 

years ago, they were necessary last year, and, even with the recent enactment of 

the Energy Policy Act of 2005, they remain necessary today. 

Accordingly, AGA recommends the following actions to address both ends of the 

delivery chain—supply and demand. 

First and foremost, LIHEAP funding should be increased to the fully authorized $5.1 billion level. We commend the committee for including an addiVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00079 Fmt 6633 Sfmt 6621 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
76

tional $1.0 billion for LIHEAP in its budget reconciliation package. This would bring 

total LIHEAP funding above $3.0 billion. Without an increase in funding, the ‘‘purchasing power’’ of LIHEAP will be reduced by up to 50 % this winter. The expected 

rise in home energy costs hits low- and fixed-income individuals particularly hard. 

The National Energy Assistance Directors’ Association (NEADA) just released its 

second annual survey of the effect of rising energy costs on poor families. Among 

the study’s findings: 32 percent of families in the survey sacrificed medical care; 24 

percent failed to make a rent or mortgage payment; 20 percent went without food 

for at least a day; and 44 percent said that they skipped paying or paid less than 

their full home energy bill in the past year. Furthermore, the number of households 

receiving LIHEAP assistance has increased from about 4.2 million in FY 2002 to 

more than 5 million this year, the highest level in a decade. LIHEAP applications 

are expected to increase significantly this winter. The nation should help customers 

who will be hardest hit by energy price increases for home heating and cooling. 

Natural gas supplies must be increased. AGA supports policies that would increase the supply of natural gas in environmentally responsible ways. Demand responses can only go so far toward the goal of lower natural gas prices. And while 

a demand response will help us through this winter, in the long-term supplies of 

natural gas must increase if we are to reduce customers’ bills meaningfully. Accordingly, Congress should support appropriate incentives and legislative changes that 

would increase the production of natural gas. These priorities have not changed over 

the last several years as AGA has testified before Congress. Nevertheless, I would 

like to briefly reiterate a few of the most important access issues:

• Opening restricted off-shore areas for the environmentally responsible production 

of natural gas; 

• Providing adequate funding and staff for the federal offices principally involved 

in the issuance of permits for natural gas and production; 

• Further expanding and expediting procedures for producers to access lands and 

production areas; and 

• Taking steps to increase the U.S. capacity to receive liquid natural gas (LNG) 

shipments. 

Energy efficiency programs should be supported that encourage the most 

efficient utilization of all energy forms through the matching of each energy task with the most appropriate fuel (e.g., running computers with electricity and heating homes and businesses with natural gas). Additionally, incentives 

should be incorporated for more efficient energy use through tax credits for the purchase of energy-efficient appliances and the construction of energy-efficient homes 

and commercial buildings. Congress should further accelerate the effective date of 

energy-efficiency tax incentives in the Energy Policy Act and fund energy awareness 

programs at the Department of Energy. 

Fuel diversity should be the goal for electric generation facilities. In recent years, as a result of its lesser impact on the environment, natural gas has been 

the dominant fuel for new electric generation facilities. Electric generation remains 

the fastest growing sector of natural gas demand. This increase in demand has occurred while production has remained stable, thus driving prices higher. AGA supports the direct use of natural gas and encourages electric generators to seek greater fuel diversity, such as clean coal, nuclear, alternative and renewable fuels. AGA 

urges Congress to provide incentives for, and to reduce regulatory barriers to, electric generation facilities that use clean coal, nuclear energy and alternative and renewable fuels. 

Consumer education should be the goal not just of natural gas distribution utilities but of all policy makers. AGA and its members will continue our 

efforts to educate our customers. But we also urge Congress to educate our customers—their constituents—so that every avenue to the customer is blanketed with 

information that will ease the potential cost burden that will be imposed this winter 

by natural gas bills. 

CONCLUSION

For the past five years AGA members and their customers have been operating 

in challenging times—this winter will be no exception. While natural gas customers 

can do their part by embracing energy efficiency solutions, policy makers in Washington must do their part to balance supply and demand.

Mr. SHIMKUS. Thank you. The Chair now recognizes Ms. 

Manoogian, and your statement is in the record. You are recognized for 5 minutes. 

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STATEMENT OF MARY ANN MANOOGIAN 

Ms. MANOOGIAN. Thank you, Mr. Chairman, and members of the 

committee. I am the Director of New Hampshire’s Office of Energy 

and Planning in New Hampshire, and I am honored to be here 

today on behalf of Governor Lynch to testify on the critical energy 

situation we are facing this winter. 

My office is also a member of the National Association of State 

Energy Officials and the National Energy Assistance Directors’ Association, and in the 8 years I have been with New Hampshire’s 

Energy Office, I have never witnessed such unprecedented increases in energy prices over a sustained period of time. Consequently, I have grave concerns about ensuring that our most vulnerable citizens, the elderly, people who are disabled, and working 

poor families, are safe and warm this winter. 

When we look at the EIA projections for this upcoming winter, 

which average to be anywhere between 30- to 50-percent increases 

for home energy, there is a critical point that I want to highlight 

for you all, and that is that the projected increases are on top of 

significant price increases last winter. Energy prices, including gasoline, have been on a steady increase the past 2 years. For example, in mid-October, New Hampshire residents were paying, on average, 33 percent more for heating oil than they were for the same 

time period in 2004, an 105-percent increase from 2003. For gasoline, New Hampshire citizens paid 34 percent more than in 2004, 

and 62 percent more than in 2003. Consumers have had no respite 

from rising energy costs in the past 2 years. 

This winter, with energy prices continuing to escalate, NEADA 

and NASEO members expect an enormous number of people having to face stark choices as they choose between heating and other 

necessities, such as food, medication, or the ability to pay their rent 

or mortgage. To put this in perspective, last heating season in New 

Hampshire, our community action agencies processed approximately 36,000 requests for heating assistance through the end of 

April. This year, our community action agencies have already processed over 20,000 applications. We are not even into the start of 

the winter season, and our State program has processed more than 

half the total applications taken last heating season. 

To compound the problem, at current fuel prices, the average benefit of $575 will buy a LIHEAP recipient less than a full tank 

of oil. And like many other States, we know that sufficient funding 

does not exist to serve all LIHEAP eligible households. The U.S. 

Census Bureau estimates that approximately 146,475 New Hampshire households are under 60 percent of the State median income, 

and therefore, in accordance with Federal regulations, eligible for 

LIHEAP. We know that sufficient funding doesn’t exist to serve all 

those households, but at this point, we don’t even have a final Federal appropriation to be able to determine how many households 

we can serve. And although New Hampshire operates a winter 

heating program, I want to stress that LIHEAP is not simply a cold 

weather State problem. Next summer, with high prices expected to 

continue, the cost of air conditioning will likely increase dramatically, with similar impacts on low and middle income Americans. 

In addition, rural America is facing a crisis with escalating propane prices. For many Americans who either pay heating or cooling 

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bills, the problem is further compounded by high gasoline prices. 

Again, I cannot underscore enough the need for LIHEAP assistance, and the fact that for those States operating heating programs, it is crucial to receive funds immediately. We need to assist 

our most vulnerable households, and discourage them from engaging in unsafe practices in an effort to stay warm. And according to 

our State’s Fire Marshal, New Hampshire is the only State in the 

country where the No. 1 cause of fire-related death is the result of 

improper use of heating systems. Governor Lynch and other public 

and private officials are doing all we can to ensure that this alarming statistic does not increase this winter season. Immediate 

LIHEAP funding will serve to prevent needless tragedies this winter season. 

And finally, I can’t underscore enough the importance and the 

value that energy efficiency and energy conservation can play in 

the long term and, also, in the immediate short term effect. My 

written testimony identifies various opportunities that the States 

are already taking advantage of to implement much more aggressive energy efficiency programs, in addition to public education programs, in regards to low cost, no cost measures that consumers can 

undertake. 

My written testimony also identifies other measures that the 

Congress can take, including implementing some of the recommendations in the Energy Policy Act of 2005, including full 

funding, as authorized for the LIHEAP program, full funding as 

authorized for the State energy programs, and full funding, as authorized for the low income weatherization programs, in addition to 

accelerating the rules and the start date for the tax credits to help 

both residential and business consumers. 

Again, I thank you for this opportunity, and would be happy to 

entertain questions. 

[The prepared statement of Mary Ann Manoogian follows:]

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Mr. SHIMKUS. Thank you very much. Now, the Chair recognizes 

Mrs. Tucker, from Medford, Massachusetts. Welcome, and your full 

statement is in the record, and you have, for you, as much time as 

you would like. 

Ms. TUCKER. Thank you. Good afternoon, Mr. Chairman. 

Mr. SHIMKUS. I think we need to make sure your microphone is 

on. There is a button underneath, on the base there. 

STATEMENT DOROTHY ELIZABETH TUCKER 

Ms. TUCKER. Good afternoon, Mr. Chairman and members of the 

subcommittee. Thank you for the opportunity to share my testimony with you this afternoon. It is an honor for me to be here. I 

want to thank Congressman Edward Markey for inviting me to this 

hearing, and I want to thank Mr. Dan O’Leary from Mystic Valley 

Elder Services in Malden, Massachusetts for coming to Washington 

with me today. 

My name is Dorothy Elizabeth Tucker, and my friends call me 

Dorothy Elizabeth. I am 83 years old, and I live in Medford, Massachusetts. I went to public schools and graduated from Boston University. The majority of my working life was with the Massachusetts Department of Mental Health and the Massachusetts Department of Mental Retardation until I retired at age 65. I am a divorced mother who has two wonderful children, and I live alone in 

my home in Medford. 

I want to share with you what it is like to be a senior citizen living on a fixed income as winter approaches, and my heating bills 

are going up. While I might not be considered low income from the 

government’s perspective, I still must make difficult choices when 

it comes to heating my home, taking my medicines, paying my 

property taxes, and living my life. For many of my friends and acquaintances, the choices are even more severe. And if the price of 

oil keeps going up, my choices will be severe, also. 

I am on a payment plan with my oil company. In October, my bill increased from $400 a month to, now, $580 a month. That is 

$180 per month more that I will be paying. I keep my heat low, 

but I know I have to keep it on so that my pipes don’t freeze. I 

have spent a lot of time figuring out where the warmest part of my 

house is, and it is a room on the second floor, because as you know, 

heat rises. When it gets colder, that is where I will spend all of my 

time. I have a sofa in that room, and I prepare my meals in the 

kitchen, bring them up to the second floor. My bedroom is a little 

colder, but that is okay. 

I have also been planning on changing the way I manage my 

medications. Right now, I have one pill I am supposed to take once 

a week. My plan is to take it three times a month instead. On Monday 1 week, Wednesday the next week, and Friday the next week. 

That way, I can stretch it out. 

A few years ago when my car broke down, I decided I couldn’t 

afford to fix it, and I would try to get along without it to save 

money. I still get around pretty well, so that it is working out pretty good. 

I have many friends who could use the local food pantry, but 

don’t, because they are embarrassed to need help, and sometimes, 

they do go and say it is for one of their children. More often, they 

98

use the senior meals program in town to stretch their food budget. 

While we struggle, we also want to maintain our independence and 

our dignity. 

I think things are going to be pretty tough this winter. I guess 

if I had one message for Congress from me and my friends, as you 

consider these issues, it is that I just think it is totally unfair for 

people who have worked so hard all their lives to receive so little 

at the end of their lives. We just can’t see why it is necessary for 

us to live this way. We know that people are making money off of 

us while we are struggling, and we don’t like it a bit. 

I do hope that my observations are helpful to all of you in Congress as you work on these important issues. I hope that you will 

be able to fund the fuel assistance program at a level that will 

allow us to heat our homes enough so that we will be able to safely 

live in them throughout this winter and in the years to come. 

Thank you again for inviting me to share my story. 

[The prepared statement of Dorothy Elizabeth Tucker follows:]

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Mr. SHIMKUS. Thank you, and we are all pleased to have you. We 

get a lot of important people here, but I think you got all of our 

attention with your testimony, and we appreciate you being here. 

Now, I would like to recognize myself for 5 minutes for a round 

of questions. I would like to start with Robert Stibolt. In your testimony, you talk about the balkanization of the natural gas markets, 

and this map depiction. When you talk about the balkanization, 

based upon the gasoline and the fuel market, which we know is 

disrupted. Is it disrupted the same way in the natural gas, and although I am from the Midwest, I am not sure if I would like to be 

shipping my natural gas east to, for them to take, you know, advantage of it. Can you talk me through that real quick? 

Mr. STIBOLT. Yeah, I think the testimony makes the observation 

that we have seen this division of the continent really into two 

markets, effectively. There is one that I would characterize as the 

Gulf of Mexico to Northeast Corridor, and then, there is the other 

Western U.S. portion, which includes Chicago and Midwest hubs. 

The current condition is, for example, in the forward markets, 

you see the Chicago city gate trading at $0.30 or $0.40 below 

Henry Hub in Louisiana, which is something we have never seen 

before. What it tells me is that we are relatively supply short in 

the Gulf of Mexico and the Northeast, relative to other parts of the 

country. So as you look at the Midwest, you have supplies coming 

from Canada, supplies coming from the Rockies and the mid-continent, which are relatively abundant and growing, but I think the 

real stress for the country is this Gulf of Mexico to Northeast Corridor, which tells me we need to not only get cargos into the Northeast, but into the Gulf of Mexico. 

Mr. SHIMKUS. Thank you, and Ms. Manoogian, as you know, last 

week we, in the reconciliation bill, increased LIHEAP an addition 

$1 billion. Did you support that addition to the LIHEAP fund? 

Ms. MANOOGIAN. Mr. Chairman, I would support additions, any 

additions to the LIHEAP fund that would just get it out the states 

as quickly as possible. 

Mr. SHIMKUS. Great. Thank you. To a total now of $3 billion. It 

was the largest increase in LIHEAP funding that we have done in 

the history of this country, and we hope that it is going to be helpful. 

Another question. It is always somewhat problematic, talking 

about my friends in the Northeast. Based upon your position as the 

Office of Energy and Planning, what is your state doing to increase 

their own ability for accessing natural gas supplies or other help 

in the supply equation of this debate? 

Ms. MANOOGIAN. In 2001, our State actually sited two additional 

natural gas facilities in New Hampshire that brought on approximately 1,200 megawatts of natural gas energy. In addition, 2 

years——

Mr. SHIMKUS. So that is like for electricity generation. 

Ms. MANOOGIAN. For its electricity generation, yes. 

Mr. SHIMKUS. Where is supply coming from? 

Ms. MANOOGIAN. I don’t remember right now, but I could supply 

that. 

103

Mr. SHIMKUS. It is all right. Very good. Anything additional? 

Have you been involved in supporting locating LNG facilities in the 

State of New Hampshire? 

Ms. MANOOGIAN. We haven’t been directly involved right now. I 

don’t know. To my knowledge, there is no interest in locating an 

LNG facility in New Hampshire. 

Mr. SHIMKUS. Has the State made any effort to find out why, and 

encourage the development of that? 

Ms. MANOOGIAN. We haven’t aggressively entertained as to why, 

but I do know that we continue to try and find ways to site generation into New Hampshire, be it through the, again, the two electric 

natural gas facilities for electricity, or in the conversion of one of 

our coal-fired burners to a wood-fired burner. 

Mr. SHIMKUS. I toured a refinery just on Monday, and 3 percent 

of the product of a petroleum refinery was natural gas. What about 

in the development of new refineries? Has your State been involved 

in encouraging refinery capacity? 

Ms. MANOOGIAN. For our State? 

Mr. SHIMKUS. Sure. 

Ms. MANOOGIAN. Refinery capacity? We import the oil from, primarily from New York Harbor and it then comes to us via Portland. New Hampshire is a small enough State that, at this point, 

there has been no interest that I have heard of refinery capacity 

within New Hampshire. 

Mr. SHIMKUS. The last question. If there was identified natural 

gas reserves off the coast of New Hampshire, would the State of 

New Hampshire be very supportive in pushing for access to those 

natural gas reserves? 

Ms. MANOOGIAN. At this point, I am not, you know, I am not in 

a position—I don’t know. I don’t have enough information, and 

I——

Mr. SHIMKUS. But you are from the Office of Energy and Planning, is that correct? 

Ms. MANOOGIAN. That is correct, but at least in terms of any interest in trying to generate any natural gas facilities off the State 

of New Hampshire, I would have to review the data and analysis 

to make sure that it was something that would be prudent both in 

the short term and also in the long term. 

Mr. SHIMKUS. Thank you, and I would like to now recognize the 

gentleman from Virginia, Mr. Boucher. 

Mr. BOUCHER. Well, thank you, Mr. Chairman, and I want to 

commend each of these witnesses for their testimony, and particularly, Mr. Ewing, Ms. Manoogian, and Mrs. Tucker for your very 

compelling testimony in support of full funding for the LIHEAP 

funding. 

Mr. Ewing, let me begin with you. I am very pleased to note that 

the gas industry is supportive of full funding for LIHEAP, and my 

first question to you is whether other segments within the energy 

industry generally, perhaps electric utilities, or the coal industry, 

or the nuclear industry, or the petroleum industry, are doing what 

you are so boldly doing, and calling for the full $5.1 billion for 

LIHEAP. Do you know if others are doing the same thing? 

104

Mr. EWING. No, sir. I don’t. Historically, the distribution end, 

which AGA represents, has been the most vocal in its support of 

LIHEAP. 

Mr. BOUCHER. Okay. The next question I have for you is this. 

You mentioned two ways in which the purchasing power for homeowners and home renters, with respect to heating costs, are diminishing this year. One of those comes from the fact that energy 

prices have gone up as much as they have, and they are anticipated to, and the other one is the fact that there are so many more 

people eligible for the Low Income Assistance Program now, as 

compared to a previous year. 

Could you relate those numbers to me once again? You mentioned the 2002 number of eligibility, and then, you mentioned a 

later number. Could you tell us what those numbers are? 

Mr. EWING. And this represents approximately 20 percent of 

those who are actually eligible, based on income guidelines. And 

the numbers I made reference to were 4.2 million households in 

2002 fiscal year, moving up to more than 5 million households this 

year. 

Mr. BOUCHER. Okay. Do you have a calculation as to how much, 

in percentage terms, the purchasing power for home heating has 

diminished this year, as compared to last year, based upon these 

two factors? 

Mr. EWING. It would be more than 50 percent. 

Mr. BOUCHER. A more than 50-percent reduction. 

Mr. EWING. Yes. 

Mr. BOUCHER. Do you know how much more than 50 percent? 

Mr. EWING. No, I don’t. 

Mr. BOUCHER. I mean, for someone who heats with gas, just the 

increase in price alone approaches 50 percent, because that expected price increase is 48 percent, so it would obviously be higher 

for someone who heats with gas. 

Mr. EWING. Yes, it would. The difficulty I have is that prices 

vary State by State, and the EIA, for example, has presented a 

range of increase ranging from 40 to 71 percent, depending on that 

part of the country. And as a consequence, clearly, it is more than 

50 percent, it would be greater in those areas where prices have 

gone up at least 40 percent, and certainly much more in those 

areas where prices are at the high end of that spectrum. 

Mr. BOUCHER. You are calling for Federal funding for the full authorization level for LIHEAP, which is $5.1 billion. Funding for last 

year was $2 billion, less than half of the full funding level. This 

committee, as part of a recent reconciliation package, had recommended a $1 billion add to that $2 billion, which would bring 

the level to $3 billion, but that doesn’t even approach the $5.1 billion authorization level, and you are calling for funding of that. 

Could you talk a little bit about why you think the higher number 

is necessary, and why the $3 billion number, assuming that is 

passed into law, is not adequate? 

Mr. EWING. Yes, sir. And there are two reasons in my mind. Both 

are economic. Both are quantitative. The first is if we were to increase LIHEAP funding from $2 billion to $3 billion, that simply 

offsets the increase in price, so it is a stay even situation, not an 

increase. So that is the first reason. 

105

The second is that there is a material increase in the number of 

households, those who actually qualify for LIHEAP assistance 

based on economic guidelines. Current guidelines are a family of 

four making less than $19,000. 

Mr. BOUCHER. Okay. Thank you very much, Mr. Ewing. Again, 

I want to commend the witnesses for illuminating us in such a 

thorough way this afternoon. Your testimony was compelling, and 

we appreciate it very much. 

Thank you, Mr. Chairman. I yield back. 

Mr. SHIMKUS. I thank the gentleman. The Chair recognizes my 

colleague from Texas, Mr. Burgess, for a round of questions. 

Mr. BURGESS. I thank the chairman. 

Mr. Stibolt, if I could ask you the price of natural gas generally 

tracks the price of crude oil. As the price of crude oil goes up, the 

price of natural goes up as well. But there are times, like the 

present time, when the price of natural gas per unit is actually 

markedly higher than crude oil. Can you give us any insight as to 

why that would be? 

Mr. STIBOLT. Well, I think what you are observing lately is the 

effects of the two hurricanes. The gas market is a more continental 

market than the oil market, so we had a very significant loss of gas 

production as a result of the hurricanes. I have seen estimates of 

700 billion cubic feet. Just to put that in perspective, that is more 

than three times the volume we deliver through the Everett terminal in 1 year. So you had a localized impact in the natural gas 

market. In the oil and oil products markets, we saw, and I think 

this was mentioned earlier, substantial imports coming from Europe, more adaptability in that system to a disruption than we 

have in natural gas, so it has created a spike. I think we see it now 

coming back closer to parity with crude oil. 

Mr. BURGESS. We have heard a lot of this committee, and I mean 

a lot in this committee, about the potential dangers associated with 

liquefied natural gas imports, and there are people in this committee who are pushing the idea that liquefied natural gas import 

terminals should be located in remote sites away from major population centers, in order to decrease that risk. Can you tell the committee from purely a business perspective if there are benefits to 

remote siting, and what the costs are associated with remote siting, 

and how difficult would it be to site a terminal in an unpopulated 

area, and does it affect capacity when you move offshore? 

Mr. STIBOLT. Well, there are a number of considerations I think 

you have raised there. The biggest challenge that I have seen is the 

infrastructure. Natural gas is a commodity that moves through 

pipelines. There is a constructed infrastructure today. One of the 

benefits, for example, coming into Boston is there is already that 

infrastructure in place, and we are helping to de-bottleneck constraints. When we do that, when you go to a remote location, there 

is often no infrastructure, so you can be talking about billions of 

dollars of pipeline investment, for example. And so I think that is 

one of the challenges. 

That being the case, I think there are opportunities, maybe some 

attractive offshore locations. We have filed an application for one, 

for example. We are looking at another possibility off of Florida, 

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where you could, in fact, tie into existing infrastructure, with a relatively remote terminal. 

Mr. BURGESS. How much at risk are these, if—I mean, Florida 

sometimes will have hurricanes. Does that impact your siting of 

these liquefied natural gas terminals? 

Mr. STIBOLT. Well, in fact, that may be one of the advantages of 

a floating terminal, is that the ships are portable. You could, in 

fact, move them out of harm’s way in the event of a severe storm. 

If you do have the terminal there, you want it to be on very solid 

grounded land, clearly, but you do have hurricane risk, yes. 

Mr. BURGESS. Very well. Mr. Ewing, one of the more alarming points that you brought up was that the $13 prices projected by the 

American Gas Foundation study outlook to 2020, published in February of this year, have already been exceeded over the last few 

weeks. That study concluded that if policymakers and industry decisionmakers do not immediately address critical issues, they will 

have a significant impact on the availability of natural gas prices, 

and natural gas prices could reach $13 by 2020. What are some of 

the other critical issues that you feel that policymakers have not 

addressed since we passed the Energy Policy Act of 2005, and what 

hurdles do you see preventing them from happening? 

Mr. EWING. The first is the one that I spoke to in relationship to LIHEAP funding. The Energy Bill provided for the $5.1 billion, 

and I think given circumstances as they exist today, we need to follow through on that commitment, and I think this committee has 

already taken a major step in that direction with the $1 billion increase that was proposed in the budget reconciliation process. 

The second is the third point in my remarks, and that has to do 

with stimulating activities that will create more domestic supply. 

Some of those were provisions that were incorporated in the Energy Bill or previous legislation, like the Alaskan gas pipelines, and 

like the siting for LNG, and given the authority to the FERC. But 

things like permitting and recognizing, as was discussed earlier 

this afternoon, that 85 percent of the productive region in the Gulf 

Coast is off limits. I think it makes sense to look at that reserve, 

and bring that gas to the market. 

So I think it tends to be restrictions on access, impediments to 

processing, and then, infrastructure approval. 

Mr. BURGESS. Do government dictates have a role in that? Do 

they have a place in that? 

Mr. EWING. Yes, they do. 

Mr. SHIMKUS. The gentleman’s time has expired. 

Mr. BURGESS. Mr. Chairman, I actually was going to ask a medical question of Mrs. Tucker. You are taking a medication you take 

once a week, and presumably, that is to help you with bone health. 

Is your Congressional representative going to help you with the 

new Medicare Modernization Act, where you will have availability 

of prescription medicines next year? 

I will yield back, Mr. Chairman. 

Mr. SHIMKUS. The gentleman yields back. Now, the Chair recognizes the gentleman from Massachusetts, Mr. Markey, for 5 minutes. 

Mr. MARKEY. I thank you. Mr. Chairman, we have two crises in 

New England this year. The first crisis is what are the Red Sox 

107

going to do now that Theo Epstein is leaving. And the second crisis 

is how are we going to handle these high prices for natural gas and 

for home heating oil? 

We keep talking, we keep hearing here discussions about putting 

LNG facilities in New Hampshire or Massachusetts. I don’t know 

that any company has proposed to put one in New Hampshire. I 

don’t know that Hampton Beach or Seabrook Beach or Rye Beach 

would be just the right location, especially since the Seabrook Nuclear Power Plant would be right there, that might really get complicated in the event of a real emergency. But you should also know 

that because of the Republican bill that was just passed and signed 

by the President, the State of New Hampshire now no longer has 

any say in where an LNG facility would go in New Hampshire. So 

the reason you don’t know the answer is that you are not going to 

be asked or thinking of an answer. So you should feel very comfortable under this new bill. It is out of the control of New Hampshire. It would be in the hands of FERC, exclusively. 

And Mr. Stibolt, you represent a French company, and this 

French company already has a huge facility in my Congressional 

district, an effort that is consistently referred to. And isn’t it ironic—well, I won’t ask you; although, the French do like irony—but 

I find it ironic that the French told us that invading Iraq would 

be a big mistake, and it could destabilize the oil and gas prices out 

of Iraq, and the Bush Administration went in because they thought 

that they could increase production, and now, the French, it turns 

out were right, and now, we are winding up with all the Republicans advocating that the French bring more natural gas into the 

United States at a very high price. 

So it is kind of an interesting kind of reverse takedown that the 

French have done on the United States that we are here listening 

to you testify that we need more French natural gas to be imported 

into the United States, and I congratulate you on your perspicacity, 

from a public policy perspective. 

I would say to you, Mrs. Tucker, that you gave eye-opening testimony, and you made the point that you have a Social Security 

check, and you have your retirement pension, that you are not considered poor, but that your home heating oil bill is skyrocketing. 

Ms. TUCKER. I will be poor shortly. 

Mr. MARKEY. You will be poor shortly. So where does the money 

come from? Where do you get the extra money for what could wind 

up, it sounds like to me, an extra $800 or $1,000 that you are going 

to have to pay for home heating oil this winter? Where are you 

going to get that money from? 

Ms. TUCKER. Nobody knows when I don’t eat, and a lot of people 

that have my income, we are proud, because we worked so hard. 

I remember working, and not taking my increases so I could save 

them for this time in my history. And now, it is like it is lost. And 

I perhaps will act like other people who are like me behave. We 

don’t tell. We just don’t tell, we just, as I say, nobody will know 

whether I am eating or not, and nobody will know whether my 

house is cold. In fact, we will make a joke out of it. We will put 

a whole lot of scarves and things on the clothes rack, and people 

come in, we will say come on in, and put on a jacket. I mean, this 

is our behavior. This is our style, when things get really tough. 

108

I belong to an organization of people sort of like me, and it has 

already been announced that the room that we have in the special 

building, the heat is going to be up to, I think they said something 

like 68, it is lower than the average, and they are telling us if we 

are going to meet there, we are going to have to come with our 

overshoes, so to speak. 

Mr. MARKEY. Well, how do you react, with your scarves and turning down the heat, and perhaps not eating as much during the winter, when you see that in the last 3 months, that Exxon made $10 

billion, but nobody is saying we want to help you, Mrs. Tucker? 

Ms. TUCKER. Well, I am very angry, but I was talking to a couple 

of my elder friends, and they just feel like victims. They sort of 

said, what can we do? That is just the behavior. They may be 

angry, but they don’t express it. Actually, the younger people, that 

is my children, and that age, express the anger quite vividly, where 

people my age tend to express anger, but it is a little softer. We 

really feel more like victims. 

Mr. MARKEY. Well, we thank you, Mrs. Tucker, for coming here 

today. And we wish that there was more that the Congress and the 

Bush Administration was willing to do, but it is not, and you 

should, unfortunately, prepare for a tough winter, because while 

the oil companies are reporting all these profits, there is no plan 

to increase the funding so that you would qualify, and people like 

you would qualify, to reap some benefit that could contrast with 

the windfall profits that all the oil and gas companies are reaping 

at your expense. This is all coming out of your pocket, Mrs. Tucker. 

You are the one, and all your friends, who are having their pockets 

emptied out and handed over to these oil companies, and I just 

think it is disgusting. 

Mr. SHIMKUS. The gentleman’s time has expired. The Chair 

would recognize the gentleman from New Hampshire, Mr. Bass. 

Mr. BASS. Thank you, Mr. Chairman. 

Mr. Stibolt, as I recall, your company’s terminal in my friend 

from Massachusetts’s district provides 40 percent of our region’s 

gas supply on a peak day. Is that correct? 

Mr. STIBOLT. Well, what I said is that 40 percent of what is supplied went through our terminal. Those resources are distributed to 

a number of regional storage tanks operated by different companies, so our company isn’t specifically controlling 40 percent. It is 

really a much smaller number, but we think that provides about 

a 40-percent capability on a peak day, yes. 

Mr. BASS. Do you think that an addition Northeast or New England LNG facility would have a—what do you think the effect it 

would have on our ability to meet tight supply days, meet our goals 

for tight supply days? 

Mr. STIBOLT. Well, it will give you more flexibility, because you 

are downstream of the bottlenecks coming through the pipeline systems. On a cold day, it is really those pipeline constraints that set 

the price. So the more you can get supply into the region downstream of the bottleneck, the more adaptable you are to extreme 

market conditions. 

Mr. BASS. So the Fall River, there is a proposal for an LNG plant 

in Fall River, that would probably double the supply for New England. Is that correct, or do you know the answer to that? 

109

Mr. STIBOLT. I don’t specifically know the answer, with respect 

to that project. Of course, we have our Neptune Project, that would 

significantly increase supply as well. 

Mr. BASS. Thank you. I heard my friend from Illinois, Mr. 

Shimkus, mention that, talk to Ms. Manoogian about LNG supply, 

to only point out that New Hampshire actually is an exporter of 

electric energy, because of the construction of a very large nuclear 

power plant, Seabrook, which my friend from Massachusetts is also 

well aware of, yet we have, in New Hampshire, made significant 

sacrifices over the years to provide energy for not only our State, 

but other parts of New England. 

Ms. Manoogian, I was wondering if you would be willing to address the issue of advanced funding of LIHEAP. Do you think that 

if we—there are certain programs, Public Broadcasting, for example, that are, to name one, that is advance funded. Do you think 

advance funding LIHEAP would be helpful to you in planning for 

consumptions and applications, and so forth? 

Ms. MANOOGIAN. I know, for those of us that operate heating programs, that an advance funding mechanism would very much be 

helpful, and would also be a much more prudent use of their resources. We are, you know, going into the winter season right now. 

It is kind of hard when you don’t know what a Federal appropriation is going to be, in terms of how to set your eligibility criteria, 

your benefit criteria, and also, for those of us who operate heating 

programs, essentially, the way the LIHEAP funding comes in, it 

precludes us from being able to take advantage of energy costs 

when they are lower. You know, with advance funding, we would 

be able to secure purchases of energy on behalf of low income residents and other consumers similar to Ms. Tucker, at a time when 

heating prices are lower, as opposed to getting us to, you know, at 

least in our State, the way that we operate our fuel assistance program, we are basically purchasing during the peak of the season, 

which doesn’t, again, seem the most prudent way to operate a heating assistance program. 

Mr. BASS. Other than the advance funding idea, do you have any 

other suggestions on the administrative side as to how we could 

improve LIHEAP? 

Ms. MANOOGIAN. Well, again, I think, you know, with the advance funding, enabling those States that operate heating programs to be able to purchase when energy prices are low, for heating assistance, as opposed to during the peak of the season, it 

would be tremendously valuable. It also would permit us to, in a 

much more administratively efficient manner, operate our LIHEAP 

program, whereby our sub-grantees, the community action agencies, will know who they can put on staff, and how long they can 

have them on staff for. 

Mr. BASS. One of the provisions that was added to the Energy 

Bill when it was in this committee would allow LIHEAP funds to 

be used for energy sources other than oil, gas, and I suppose, coal. 

There is also another provision that would allow weatherization 

funds to be used to install alternative energy systems in houses. Do 

you have any plans to take advantage of this new provision or not? 

Ms. MANOOGIAN. Yes, in our State, we actually—our LIHEAP 

benefits can go to the purchase of cordwood, and now, we can also 

110

go to the purchase of wood pellets. We are also working on the 

weatherization side, with our community action agencies, to explore ways to invest in renewable energy on the weatherization 

program, such as solar water heaters, and other renewable, and 

other opportunities for renewable sources in the weatherization 

program. And that was huge, to be able to open that door for the 

weatherization program, to take advantage of the renewable energy. 

Mr. BASS. Ms. Manoogian, my time has expired. As a constituent 

of mine, and a resident of New Hampshire, I want to welcome you 

here to Washington, and I have very much enjoyed your testimony, 

and I think the committee will benefit from it, and I yield back to 

the chairman. 

Mr. SHIMKUS. I thank the gentleman for yielding. I think that 

concludes the questioning of our second panel. 

Mr. MARKEY. Mr. Chairman. Mr. Chairman. 

Mr. SHIMKUS. I would remind the gentleman we have a third 

panel, who have been waiting very patiently. 

Mr. MARKEY. I just have a couple of questions. Because two of 

my constituents are on the panel, and I would just appreciate your 

indulgence for a couple of minutes. 

Mr. SHIMKUS. The Chair will yield for one question. 

Mr. MARKEY. Mr. Stibolt, Mr. Bass just questioned you about the 

Fall River facility. As you know, there are four different proposals 

for Massachusetts, although there are none for New Hampshire, 

and he seems particularly interested in the Fall River project, but 

not particularly interested in your project. Perhaps you could enlighten the committee as to how much additional natural gas you 

believe you could bring in to New England by siting your facility 

offshore, rather than onshore, which is what the other facility is 

right now, and the Fall River facility would be as well, and why 

you think that that is a better way of going, having your offshore 

proposal be the one that is approved by the FERC? 

Mr. STIBOLT. Yeah. I think the volumes we can deliver are comparable. I mean, these things are typically a 700 million cubic foot 

per day to as much as bcf per day. I don’t have the exact number 

for that project off the top of my head, but that would be the order 

of it. They are going to be similar in terms of volume. 

Mr. MARKEY. And would that be a doubling of capacity for everything? 

Mr. STIBOLT. Yeah. Yeah, it would. 

Mr. MARKEY. So in other words, when Mr. Bass was talking 

about 40-percent peak capacity, you are saying you might be able 

to increase that to 60 or 80-percent peak capacity, and so we have, 

right now, we have four different proposals in Massachusetts, but 

the FERC and this committee, by the way, seems to favor one 

project in Fall River, and that is on land, with the Governor and 

the mayor opposing it, whereas you are proposing something that 

would be offshore, that would provide the same amount of natural 

gas, dramatically increase the supply, and be in a location which 

is 10 miles or further offshore, just bringing it in in a pipe. So why 

do you think there is a continuing bias by the Bush Administration 

to put it onshore, when you are here testifying that you are ready 

111

to do it economically offshore right now, with very little homeland 

security problems that would be attached to it? 

Mr. STIBOLT. Well, I don’t know. I won’t comment on whether 

there is a bias or not. I think we like our project, clearly, as you 

well know. We think it is a very good project. It is relatively new 

technology, but we think it is very safe, very secure technology, so 

we are excited about it. We think there will be more opportunities 

to apply that technology. 

Mr. MARKEY. Would it be theoretically possible for you to bring 

your pipeline right into New Hampshire, right into Hampton Beach 

or Rye Beach? Would that be an entry point that is possible? 

Mr. STIBOLT. Well, I know with Neptune, we are tying into the 

Hub Line System, which is operated by Duke. 

Mr. MARKEY. Right. 

Mr. STIBOLT. And that serves the whole region. In terms of other 

locations off of New England where you could do this——

Mr. MARKEY. Right. I just——

Mr. STIBOLT. [continuing] I am not an expert on that. 

Mr. MARKEY. It seems Mr. Bass wants——

Mr. BURGESS. Mr. Markey——

Mr. MARKEY. [continuing] and I would just suggest that—they 

are his constituents. Perhaps you could look at just bringing a pipeline right into New Hampshire, right into Hampton Beach or Rye 

Beach. 

Mr. BURGESS. In fairness, I should recognize Mr. Bass for a follow-up question, if he has one. Does the gentleman seek recognition? 

Mr. BASS. Yeah. Mr. Chairman, I just want to express my excitement about my friend from Massachusetts’s endorsement of the offshore LNG facility, which I heard, and I want to thank him for 

that, because I, too, endorse that as well. So he and I agree that 

this a very high priority, and I would be very happy to see that 

built along with the Fall River project, because I do believe, as I 

believe he does, that it is very important to provide adequate LNG 

and natural gas capability for New England, so that we don’t have 

these terrible gas shortages that we are faced with during the winter. So with that, I will yield back to the chairman. 

Mr. BURGESS. And I thank the gentleman for yielding. 

Mr. MARKEY. By the way, I do not include——

Mr. BURGESS. This concludes——

Mr. MARKEY. If I may, a point of personal privilege, Mr. Chairman. 

Mr. BURGESS. [presiding] the gentleman is recognized. 

Mr. MARKEY. I thank the Chair very much. I just want to make 

it clear that I do not endorse this gentleman’s proposal. My only 

point was to make out that there are four separate Massachusetts 

projects, which Massachusetts should be able to decide what it 

wants. And by the way, there is also two additional Canadian 

projects. 

Mr. BURGESS. Okay. 

Mr. MARKEY. All of them would benefit New Hampshire, but it 

should be the decision—and those two projects have already been 

approved, which is additional natural gas. My only point is that 

that is a decision which should be made by the New England reVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00115 Fmt 6633 Sfmt 6602 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
112

gion, and not by the FERC, and it just seems to me that just focusing on the Fall River project obscures the fact that there are five 

other projects that could all serve the very same purpose, and I 

thank the Chair. 

Mr. BURGESS. Very good. Thank you. Thank you, panel, and now, 

we are going to hear from our third panel. And I thank everyone 

for their indulgence, while we went a little long. I welcome the 

spirit of bipartisanship between New Hampshire and Massachusetts. I think that is a beautiful thing. 

And we are very pleased to welcome our third panel this afternoon, and I again thank all of you for your indulgence. We are 

going to be hearing from Mr. Charles Davidson, from Noble Energy, Incorporated, from the great State of Texas, and welcome, 

Mr. Davidson. 

We will also be hearing from Mr. Skip Horvath, from the Natural 

Gas Association. We will be hearing from Mr. Bob Slaughter, National Petroleum and Refiners Association. Mr. Phillip Wright, Williams Pipeline Company, representing the Interstate Natural Gas 

Association of America. And Mr. Brian Castelli, did I pronounce 

that correctly? 

Mr. CASTELLI. Yes, you did. 

Mr. BURGESS. Mr. Brian Castelli, the Alliance to Save Energy. 

Welcome all, and again, thank you for your patience today. We will 

begin with the testimony of Mr. Davidson. 

All of your remarks, of course, are submitted, your written remarks are submitted for the record, and we will hear from you 

now. Thank you. 

STATEMENTS OF CHARLES D. DAVIDSON, CHAIRMAN, PRESIDENT, AND CEO, NOBLE ENERGY, INC.; R. SKIP HORVATH, 

PRESIDENT, NATURAL GAS SUPPLY ASSOCIATION; BOB 

SLAUGHTER, PRESIDENT, NATIONAL PETROCHEMICAL AND 

REFINERS ASSOCIATION; PHILLIP D. WRIGHT, SENIOR VICE 

PRESIDENT, GAS PIPELINE, WILLIAMS PIPELINE COMPANY, 

ON BEHALF OF INTERSTATE NATURAL GAS ASSOCIATION OF 

AMERICA; AND BRIAN CASTELLI, EXECUTIVE VICE PRESIDENT AND COO, ALLIANCE TO SAVE ENERGY 

Mr. DAVIDSON. Thank you, Mr. Chairman. I am Chuck Davidson, 

Chairman, President, and CEO of Noble Energy, and also, I am the 

Chairman of the Domestic Petroleum Council, representing the 

largest U.S. independent exploration production company, and also 

today, I am testifying on behalf of the Independent Petroleum Association of America and the International Association of Drilling 

Contractors. 

I am very pleased to be here to discuss the current natural gas 

supply and price situation, and how we might improve it for both 

the near as well as the longer term. I think we have to start out 

and remind ourselves that the current tight natural gas market 

should not, unfortunately, surprise us. Many of us have been warning about such a market for years. For instance, in 2003, the National Petroleum Council told us through their study that we needed to make policy changes to fulfill our gas supply potential. By 

and large, those detailed recommendations, of not only that study 

but others, until recently have been ignored. 

113

Clearly, conservation on the near term is very important, and 

that could be an effective action to offset some of what we are seeing today’s natural gas market, and certainly, we wholeheartedly 

support that. We also support increased Congressional appropriations to LIHEAP, which we have heard from a number of panelists 

today, as well. Our written comments include four recommendations. I will highlight them just briefly. First of all, industry and 

government must work together to restore as quickly as possible 

the production that has been shut in in the Gulf of Mexico from 

Hurricanes Katrina and Rita. 

According to the Mineral Management Service, as of last Friday, 

they were still 1 million barrels per day of oil production, and over 

5 billion cubic feet of natural gas production shut in in the Gulf of 

Mexico as a result of the hurricanes. This represents some 68 percent of the daily oil production and 55 percent of the daily gas production from the Gulf of Mexico. 

As we look for additional supplies of natural gas near term, there 

can be no more obvious source than gas currently shut in as a result of the hurricanes. The industry knows this. We are investing 

unprecedented funds that may ultimately reach billions of dollars 

to repair and replace the damaged infrastructure. Second, I think 

our recommendation is to have immediate, visible, and responsible 

action by our land management agencies to improve and speed the 

processing of permits. On multiple use lands administered by the 

Department of the Interior’s Bureau of Land Management alone, 

there is a backlog of over 3,000 drilling permits. An analysis for the 

DPC showed that just clearing out the first year of the backlog, we 

could see as much as 105 billion cubic feet of additional natural gas 

production in the Rockies. That is enough natural gas to supply 

1.25 million additional households in that first year. I think that 

such action would certainly be recognized and understood in the 

natural gas markets. 

Third, we would recommend immediate action by Congress and 

the Administration to see leasing of the remaining Sale 181 area 

in the eastern Gulf of Mexico as early as next summer. The original Sale 181 area was administratively reduced before bids were 

received in 2001. However, discoveries that were made in the area 

that was leased provide much better understanding of the energy 

potential of the unleased portion. First, production from what is expected to be, perhaps trillions of cubic feet of additional discovered 

reserves could probably begin flowing to the market within 18 

months to 2 years of a lease sale. 

Finally, we would recommend immediate action to be taken to 

allow selective removal of prohibitions against energy exploration, 

development, and production offshore. The natural gas resources in 

current moratoria areas that prevent exploration and production of 

approximately 90 percent of our coast outside of Alaska could be 

tremendous, and we must change our decades-old moratoria policy 

in view of not only our growing energy demand, but also, our 21st 

Century offshore exploration and production technology, that allows clean, safe extraction of oil and natural gas from deeper and 

deeper waters, with seabed wells and fewer facilities. 

At a minimum, states should be allowed to opt out of moratoria 

off their coasts and share in the resulting revenues generated by 

114

production. The House Resources Committee has taken bold action 

on such an approach by including the Ocean State Options Act in 

its budget reconciliation package. 

I think one final point in conclusion, on prices. We in the exploration and production sector are price takers. We sell our oil and 

gas in the world and national markets, in which forces well beyond 

our control determine price levels. Higher prices do give us financial strength, and certainly, for the independent E&Ps, where we 

advance, we invest a substantial amount of our profits back into 

drilling. That is very important. But we are not served well by 

volatile prices, and so from that aspect, we are aligned with our 

customers and consumers. The volatility is not a healthy environment, and we clearly believe that increased supply in the future 

will help reduce that volatility going forward. 

So I think we need to recognize this is as not only a short term, 

but a long term situation, and that we need to move forward in all 

these areas of recommendations that would assist in supply response for both near term as well as long term. With that, that 

concludes my summary comments, and I will certainly be available 

for questions later. 

[The prepared statement of Charles D. Davidson follows:]

PREPARED STATEMENT OF CHARLES D. DAVIDSON, CHAIRMAN, PRESIDENT AND CEO, 

NOBLE ENERGY, INC. AND CHAIRMAN, DOMESTIC PETROLEUM COUNCIL ALSO ON BEHALF OF INDEPENDENT PETROLEUM ASSOCIATION OF AMERICAAND THE INTERNATIONAL ASSOCIATION OF DRILLING CONTRACTORS

Mr. Chairman, I am Chuck Davidson, Chairman, President and CEO of Noble Energy and the Chairman of the Domestic Petroleum Council (DPC) that represents 

the largest U.S. independent exploration and production companies. 

Today I am testifying on behalf of my company and the DPC, and also for the 

Independent Petroleum Association of America and the International Association of 

Drilling Contractors. 

I am very pleased to be here to discuss the current natural gas supply and price 

situation—and how we might improve it for the nearer, as well as the longer, term. 

We—government and the exploration and production industry—have potential to 

improve even this winter’s natural gas situation for our consumers. But we must 

have prompt action. 

I will explain actions in four areas that can help, perhaps very significantly. 

First, however, we need to remind ourselves that the current tight natural gas 

market should not surprise us. Many in our industry, in trade associations and in 

think tanks have been warning of such a market for years. In 1999 and again in 

2003, for example, the National Petroleum Council told us in the most comprehensive studies of their times that we had to make policy changes to fulfill our gas supply potential and ensure the best future for consumers. By and large the detailed 

recommendations of those and other studies have, until recently, been ignored. 

Now we have more attention to our natural gas supply situation that provides a 

solid basis for reaching consensus on overdue supply actions. Unfortunately that is 

because of current and projected high prices, industrial demand destruction and consumer hardship. 

Clearly conservation is the most immediate and effective action that can offset 

some of what we see in today’s natural gas market. We support it wholeheartedly. 

We are seeing increased efforts by governments and natural gas consumers across 

a broad spectrum to focus more attention on conservation. (And we support increased congressional appropriations for the Low Income Home Energy Assistance 

Program (LIHEAP) to aid our most vulnerable consumers while we work to ensure 

wise gas use.) 

In addition, as this Committee and others have heard clearly, current and projected prices are causing businesses and industrial users to not only reduce gas demand by process improvements and fuel switching, but also by planning to make 

future investments overseas where natural gas costs less. These actions highlight 

that, while conservation is good and even necessary, it is not enough—and the more 

115

dramatic forms of conservation can have economic effects as manufacturing and investment in the United States decreases. 

The bottom line is that there must be a market recognition and understanding 

that more natural gas supply is on the way. 

RECOMMENDATIONS

To provide that market recognition and understanding, we must see the following: 

Industry and government must work together to restore as quickly as possible production that has been shut-in as a result of Hurricanes Katrina 

and Rita. 

According to the MMS, as of last Friday, October 28, 2005, there was still one 

million barrels of daily oil production (1.0 MMBpd) and 5.5 billion cubic feet of daily 

natural gas production (5.5 Bcfpd) shut-in in the Gulf of Mexico as a result of Hurricanes Katrina and Rita. This shut-in production represents approximately 68% of 

the daily oil production and 55% of the daily gas production from the Gulf of Mexico. 

As we look for additional supplies of natural gas near-term, there can be no more 

obvious source than gas currently shut-in as a result of these hurricanes. The industry knows this and is investing unprecedented funds that may ultimately reach billions of dollars to repair and replace damaged infrastructure. In the meantime, not 

only money, but also a lot of creativity is being expended to find ways to accelerate 

the return-to-production. 

An example from my company relates to a new deepwater gas well that was about 

to come on production just as Hurricane Katrina hit. Even though the gas sales line 

to shore was intact, this well had to remain shut-in because damage to downstream 

oil pipelines resulted in there being no outlet for the liquid condensate that was to 

be produced with the gas. As a solution, we and our partners secured a barge and 

produced the condensate into the barge so that natural gas could flow from this 

high-rate well. 

This is just one of many examples of creative actions being taken everyday as 

companies look for ways to accelerate the restoration of Gulf of Mexico production. 

In my view, nothing should have higher priority than these efforts. 

Immediate, visible and responsible action by our federal land management 

agencies to improve and speed processing of energy permitting. 

On multiple-use lands administered by the Department of the Interior’s Bureau 

of Land Management alone there is a backlog of more than three thousand applications for permits to drill (APDs) that are awaiting final approval. 

An analysis done for the Domestic Petroleum Council—and a similar analysis 

done for the Department of the Interior that has yet to be released—demonstrates 

that adequate funding and resources to process and clear out those backlogged 

pending APDs could increase natural gas reserves in the Rocky Mountain region by 

several trillion cubic feet—some of which would begin flowing soon and would make 

a difference in today’s tight market. 

The DPC analysis shows that in the first year of increased work to clear the backlog we could see as much as 105—billion cubic feet of additional natural gas production from the Rockies. That’s enough natural gas to supply one and a quarter million additional households in that first year. 

We know that the BLM has made significant progress in permitting—and is processing more permits than ever. That progress needs to continue, but the demand 

for permits to meet natural gas consumer needs continues to rise, so we must see 

further processing improvements, including reduction of permit restrictions that are 

not essential for environmental protection, and speed. 

Other agencies, especially the Department of Agriculture’s U.S. Forest Service, 

have even further to go and must follow the BLM lead. 

The prospect of such action would be recognized and understood in the natural 

gas market. 

Immediate action by Congress and the Administration to see leasing of the 

remaining Sale 181 area in the Eastern Gulf of Mexico as early as next 

summer. 

The original Sale 181 area was administratively reduced before bids were received 

on the remainder in 2001. Discoveries in the portion that was leased provide much 

better understanding of the energy potential of the unleased portion. First production from what is expected to eventually be trillions of cubic feet of additional discovered reserves could probably begin flowing to market within 18-months-to-twoyears of a lease sale. 

116

Such a lease sale, based on appropriate congressional findings and direction, and 

based on the environmental work already done, could be held as early as next summer. The prospect of such action—and more gas coming to market as additional Rockies supply also ramped up—would be recognized and understood in the natural gas 

market. 

Immediate action should be taken to begin allowing selective removal of 

prohibitions against energy exploration, development and production 

offshore. 

The natural gas resources in current moratoria areas that prevent exploration 

and production off approximately 90 percent of our coasts outside of Alaska could 

be tremendous. 

In fact, Atlantic and Pacific natural gas resource estimates are approximately 

what we believed to be in the Gulf of Mexico in the mid-70s. But in the area of the 

Gulf in which we have been allowed to search for oil and gas we have produced 

three times the 70s’ amount and we estimate five times more remaining. The more 

we explore, the more we know. 

We must change our decades-old moratoria policy in view of both our growing energy demand and our 21st century offshore exploration and production technology 

that allows clean, safe extraction of oil and gas from deeper and deeper waters, with 

seabed wells and fewer facilities 

At a minimum states should be allowed to opt out of moratoria off their coasts 

and share in resulting revenues generated by production. The House Resources 

Committee has taken bold action on such an approach by including the Ocean State 

Options Act in its budget reconciliation package. 

Action by the Congress to approve such legislation—with its prospect of more natural gas supply coming to market in addition to more from the Rockies and the expanded Sale 181 area—would be recognized and understood in the natural gas market. 

CONCLUSION

One final point—on prices. We in the exploration and production sector are price 

takers, selling our oil and gas into world and national markets in which forces well 

beyond our control determine price levels. 

Higher prices do give us greater financial strength. This is essential in a business 

that may be somewhat less risky because of better technology, but in which much 

higher capital requirements (a billion dollars for one offshore project, for example) 

and operating costs make our risks every bit as important as theirs were to the 

wildcatters of bygone eras. 

But, in common with consumers, we are not well served by volatile prices. Planning for future investment requires ability to reasonably assume or project prices 

to support that investment. The prospect of volatility clouds our view of what we 

can afford to prudently spend in the future for new supply. More supply reduces 

the volatility that we see in markets such as today’s and is in everyone’s interest. 

While there is great concern for the current high prices for natural gas, we need 

to recognize that this is not only a short-term problem, but also long-term as well. 

Long-term natural gas prices as reflected in the futures markets have also risen 

substantially, implying that there is a market perception that natural gas supplies 

will be tight for a long time. There is currently an opportunity to change this perception by taking meaningful and visible action on the recommendations presented 

here today. 

Working together on supply, as well as conservation, government and industry 

can make real differences in the natural gas outlook for our country. 

But policy action such as I have outlined is needed now. 

Thank you. 

I would be glad to answer questions.

Mr. BURGESS. Thank you, Mr. Davison. We will now hear from 

Mr. Horvath. 

STATEMENT OF SKIP HORVATH 

Mr. HORVATH. Thank you, Mr. Chairman for this opportunity. I 

am Skip Horvath, President and CEO of the Natural Gas Supply 

Association, NGSA. We represent the major natural gas producers 

of the United States. 

117

And let me be among those who commend this Congress for a 

successful, bipartisan effort to get the recent EPACT through over 

the summer. Since that time, my members have put forth quite a 

few billions of dollars worth of investment that will help bring new 

gas supply to this country, and that certainly has been helped by 

that act. 

Let me talk about this winter for a little bit. The recent hurricanes have wreaked unprecedented havoc on the natural gas industry. Very unusual destruction in the Gulf of Mexico very recently. 

Full recovery will take roughly a year. We hope to beat that, but 

a year is realistic. However, we have seen enough of the recovery 

pace recently to be able to say with some confidence that residential and commercial customers served by local distribution companies holding firm transportation and gas supply agreements will 

continue to receive natural gas service sufficient to meet their requirements throughout the winter, even during periods of peak demand. 

We do share concerns others have expressed about potential regional problems, especially in New England, where some electric 

generators may be relying on less expensive interruptible contracts, 

and they may, indeed, get interrupted this winter. We also acknowledge that bills will likely be high this winter, and we urge 

conservation efforts that will help lower the bills, and we also support LIHEAP. 

Now, let me explain from a broad national perspective how this 

winter will work in terms of the number. The Gulf of Mexico is responsible for about 10 bcf a day of natural gas supply, and that is 

about 13 percent of the daily winter consumption. As of today, 

about half of that is still shut in, half of that, about five bcf a day 

is still shut in. Over the winter, we expect recovery to allow us to 

have only 2.5 bcf a day shut in. 

Now, let us look at the overall demand picture and supply picture for the Nation. Demand is expected to be roughly, a little 

under 73 bcf a day for the winter. That is down a little bit. We expect about 60 bcf a day of supply from the following sources: domestic supply, Canadian producers, Canadian imports, and liquefied natural gas, LNG. Now, that is still short about a little less 

than 13 bcf a day. But we haven’t factored in storage. Once you do 

take storage into account, we still have about 600 bcf that can be 

used in case the weatherman is wrong, and we do, indeed, have a 

colder than expected winter. 

Now, the U.S. is blessed with a highly flexible natural gas network, and natural gas does find its way to where it is valued the 

most. While there may be some localized problems, and there is a 

potential for that every winter, not just this winter, we have 

enough supply to meet firm demand from a national perspective, 

and a market that will deliver the gas locally when it is needed 

and valued the most. The hurricanes that served as a wakeup call, 

to both natural gas customers and the industry. Without access to 

new natural gas resources, the diversification of supply sources, 

and relief from delivery constraints, the potential for localized natural gas disruptions and upward pressure on prices, as we may see 

this winter, will persist over the coming years. 

That concludes my remarks. Thank you. 

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1 Approximately 75 Bcf/d (Source: Energy Information Administration) 

[The prepared statement of Skip Horvath follows:]

PREPARED STATEMENT OF SKIP HORVATH, PRESIDENT AND CEO, NATURAL GAS

SUPPLY ASSOCIATION

Mr. Chairman and members of the subcommittee, my name is Skip Horvath and 

I am the president and CEO of the Natural Gas Supply Association (NGSA). Today, 

I am testifying on behalf of the major natural gas producers and marketers comprising our association. Thank you for the opportunity to participate in this timely 

forum. 

The impact of the hurricanes was devastating in terms of natural gas production 

in the Gulf of Mexico. These shut-ins have exacerbated the tight natural gas supply 

and demand balance in the United States during the last several years. Today, I 

would like to share with you NGSA’s winter season outlook and hurricane recovery 

updates, as well as provide some facts regarding market conditions. 

First of all, we share legitimate concerns about regional natural gas constraints 

and costs that could impact customers, particularly during peak days, this heating 

season. These constraints could be most evident in those regions that rely heavily 

on supplies from the Gulf of Mexico. 

To put the importance of the Gulf of Mexico into perspective, at pre-hurricane levels, the offshore region’s production of 10 billion cubic feet per day (Bcf/d) represents 

approximately 13 percent of average daily winter consumption.1 As of Monday, approximately 5.4 Bcf/d was shut-in in the offshore region. This represents approximately 7 percent of average daily winter consumption. 

While sensitive to potential regional constraints, I want to clarify that I am here 

today to address market fundamentals from a broad, national perspective. In our 

fifth annual Winter Outlook, released September 28, we outlined the key supply and 

demand factors we expect to affect natural gas prices this heating season. 

We anticipate upward pressure on wholesale natural gas prices as a result of public projections of relatively flat production, hurricane-related production losses, and 

an increase, relative to last winter, in seasonal heating demand in the residential 

and commercial sectors. Another factor in our assessment is that it cost more to put 

gas into storage this summer, and we anticipate those higher costs will be noticeable in customers’ home heating bills in the coming months. 

Today, we have further post-hurricane updates to some of the numbers in our 

Winter Outlook, as well as additional data that supports our assessment and demonstrates that the market is responding appropriately to temporary Gulf of Mexico 

production delays. 

We have had a couple of macroeconomic changes since we last presented our Outlook. For example, GDP growth has been lowered for the winter, from 3.4 percent 

to about 3.3 percent, and manufacturing is down, from 2.9 percent to 2.7 percent, 

which indicates some demand coming off. 

Weather is always the most critical factor in determining demand during the winter heating season; it is also the most difficult to predict. Using government weather 

data, we are predicting warmer than normal temperatures across much of the Western States, with near-normal temperatures in the East and East Central States. 

Based on this forecasting provided by the National Oceanic and Atmospheric Administration (NOAA), the winter is expected—in aggregate—to be slightly warmer 

than normal, but colder than last winter. 

Given that weather scenario, and the decline in the GDP and manufacturing 

index, our revised estimate for U.S. natural gas demand this winter is now 72.7 Bcf/

d, down 0.7 percent since Hurricane Rita. 

On the supply side, prior to the hurricanes, the nation’s 6,000 natural gas producers were on a pace this year to expand domestic production. Now, factoring in 

the effects of the hurricanes, despite increases in capital spending and rig counts, 

production is projected to be relatively flat this winter, due in large part to the decline rate in traditional basins. According to the consulting firm Energy and Environmental Analysis (EEA), post-hurricane data show that annual well completions, 

for example, are projected to increase to 26,100 from 23,400, and the rig count is 

forecast to increase this winter to 1,189, from 1,025 last heating season, indicative 

of an accelerating response to ongoing tight-market conditions. 

Although we anticipate relatively flat production overall, there are additional 

amounts that may not make it to market early in the winter, due to the continuing 

recovery of processing plants from hurricane damage. Downstream issues continue 

to have a dampening effect on some supply—although we are still trying to assess 

the extent of that effect. 

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2 Canadian 10.0 Bcf/d; offset by 1.1 Bcf/d export to Mexico (Source: Energy and Environmental 

Analysis) 

Any decline in traditional supplies, however, is being offset somewhat by an increase in unconventional production, as well as pipeline and LNG imports. Since our 

Winter Outlook—and in response to market conditions since the hurricanes—projected net pipeline imports have increased to 8.9 Bcf/d.2 Imports as a whole will continue to play a critical role this winter to help compensate for some hurricane-related production losses, and to add further certainty to the marketplace. In fact, according to EEA, LNG imports are now expected to increase 28 percent from last 

winter. For this winter, however, our LNG and Canadian import capability will be 

limited by existing infrastructure, as well as competing worldwide demand for LNG. 

Since our preliminary assessment of the effects of Hurricanes Katrina and Rita 

on natural gas supply, new data from EEA suggests that the total hurricane disruption will average about 2.5 Bcf/d during the official heating season, November 1 

through March 31. In total, reflecting the shut-in supply in the Gulf of Mexico, domestic, Canadian and liquefied natural gas (LNG) supplies are expected to amount 

to about 60 Bcf/d. 

Storage is the last piece of the supply puzzle needed to balance supply and demand. We are now at the end of the traditional injection season, and inventories 

are above the five-year average at more than 3.1 trillion cubic feet (Tcf). With one 

more reporting week to go, we are confident that storage will be healthy this winter, 

potentially even reaching the 3.2 trillion cubic feet (Tcf) mark. A storage inventory 

level at 3.1 Tcf translates to almost 21 Bcf per day on average. Coupled with the 

60 Bcf per day domestic and imported production, it should be more than adequate 

to serve the U.S. firm-service demand requirements under at least normal winter 

weather conditions. 

There are four scenarios that could impact the supply demand balance that I’ve 

presented for you today: 1) slower than anticipated rate of supply/infrastructure recovery from the hurricanes, 2) colder than normal weather conditions, 3) natural gas 

quality restrictions and 4) lower-than-projected levels of LNG or Canadian imports. 

Weather is probably the most critical factor this winter or any winter. Severe 

weather conditions can alter the supply-demand balance significantly and, as is the 

case anytime there is a heavy regional dependency on a single supply source, there 

is the risk of localized constraints. 

Let me emphasize: under most weather scenarios (including those more conservative than the weather predicted by NOAA), supply and demand will balance, meaning there is no natural gas supply shortage. There are, however, access and infrastructure constraints. The industry’s challenge this winter will be getting available 

supply to where it is needed, and we’ve been working hard to not only restore damaged facilities, but to reroute supply to bring it to market and address these regional issues. 

While producers and the industry as a whole continue to work around the clock 

to ease potential constraints, customers can also play a critical role this winter. As 

we highlighted in our Outlook, end-use conservation will be a big help this heating 

season in offsetting the price impact of production losses. For example, recent statistics from the Department of Energy reportedly show that precautionary conservation to reduce demand by only 5 percent would amount to a savings of 3.5 Bcf/d—

which alone would more than compensate for the projected Gulf of Mexico shut-ins. 

Conservation can be as simple as customers installing programmable thermostats, 

or turning their thermostats down by only two degrees from their usual setting. 

These measures will be the most effective, efficient and money-saving precautions 

customers can take to alleviate heating season impacts. 

Altogether, urgent efforts by producers and the industry are focused on ensuring 

adequacy and reliability this winter. Although heating costs are still projected to increase—significantly in some regions—this data supports our view that ample storage, coupled with import and production responses, will likely mean sufficient overall supply for this winter. Ongoing conservation precautions also can help ease localized constraints, and all will help to protect the nation’s firm-service customers this 

winter. 

Importantly, under normal weather conditions, even with the affects of the hurricanes on the supply coming from the Gulf of Mexico, our market balances itself with 

the help of Canadian and LNG imports, and production from other regions in the 

U.S., such as the Mid-Continent. Allowing the market to work to move supply to 

address localized imbalances, and to facilitate needed infrastructure repairs, is the 

most important step government can take in the short-term. Additional government 

actions to expand future supply, as outlined by others in our industry, could also 

have a calming effect on the futures market. 

120

Going forward, it is our sincere hope that this hurricane season serves as a national wake-up call with regard to natural gas and overall energy policy. Promoting 

the use of clean-burning natural gas should be coupled with access to new supplies 

to help fuel growing demand. The impact of the hurricanes on the market has underscored the importance of increasing supplies and resource diversity. 

The Energy Policy Act of 2005 is a good first step, but more needs to be done. 

It is in our national interest to continue to expand supply resources, as outlined by 

other industry participants on this panel, both to help stimulate economic expansion 

and to reduce air pollution, creating a more secure energy future for America. Without additional and diversified sources of supply, the market will continue to be at 

risk for disruptions like Katrina and Rita, and the higher costs that inevitably result. 

Thank you, Mr. Chairman, for this opportunity to outline our assessment of the 

challenges we face this critical heating season.

Mr. BURGESS. And thank you, Mr. Horvath. We will hear from 

Mr. Slaughter. 

STATEMENT OF BOB SLAUGHTER 

Mr. SLAUGHTER. Thank you, Mr. Burgess, Mr. Boucher. I am Bob 

Slaughter. I am the President of the National Petrochemical and 

Refiners Association, NPRA. Our members include those who own 

or operate virtually all U.S. refining capacity and petrochemical 

manufacturers. 

Today’s hearing focuses on two important and timely issues. The 

first is the cost and availability of natural gas. It presents a challenge for both refiners and petrochemical producers. Refiners use 

large quantities of natural gas, and petrochemical producers rely 

on natural gas supplies for use as a feed stock. NPRA urges Congress to take immediate action to increase domestic natural gas 

supplies by opening up OCS and onshore areas currently subject to 

moratoria and other restrictions on exploration and production. 

The Nation can no longer afford to place off limits critical supplies of natural gas that are needed for residential, commercial, 

and industrial use. The U.S. is in the process of exporting its petrochemical industry, due to concerns about the availability and cost 

of future gas supplies. Action is needed in short order to protect the 

hundreds of thousands of jobs that depend directly or indirectly on 

the domestic petrochemical industry, a major contributor to the 

U.S., State, and local economies. 

Second, the Nation’s refiners and petrochemical manufacturers 

have made considerable progress in recovering from the effects of 

Hurricanes Katrina and Rita. Those storms, at one time or another, shut down roughly 30 percent of U.S. refining capacity. Hurricane Rita shut down about 16 major U.S. refineries. NPRA members joined other sectors of the oil and gas industry in working 

around the clock to bring as much of the affected supply back online as quickly as possible. A great deal has been accomplished. As 

of November 1, roughly 4 million barrels per day of refining capacity hit by the storms has returned to full operation. Most petrochemical facilities hit by the storms have also restarted. 

The EIA has noted that gasoline supply has returned to preKatrina levels with the help of significant gasoline imports during 

recent weeks. As always, higher prices served as a magnet to attract additional supplies needed to address a temporary market imbalance. Now, with most of the refineries restarted, domestic production has ramped up, and import levels should eventually return 

121

to normal volumes. EIA also announced yesterday a significant 

drop in U.S. average gasoline prices to pre-hurricane levels. Due to 

high crude costs, however, current gasoline prices do remain above 

those in 2004. 

There is also positive news regarding distillates, which include 

home heating oil. During the key winter months of the winter heating season, heating oil demand is met by refinery production, imports, and inventory stocks. For much of 2005, refinery distillate 

production, which is indicated in this first chart, has been higher 

than the average during the past 4 years, which is good news. Distillate inventories were reaching relatively comfortable levels at the 

time of the hurricanes, but supplies were drawn down while refinery disruptions caused by the hurricanes were most severe. 

The attachment two, or our board No. 2, will show you the magnitude of the storms’ effect day by day on refinery operations. The 

good news is that as of last week, U.S. distillate inventories, including both home heating oil and highway diesel, were slightly 

higher than the stocks on hand at this time last year. Diesel prices 

have not yet returned to pre-Katrina levels, and diesel prices pretty 

much set the standard for the whole distillate curve. Strong worldwide demand for distillate has resulted in higher than normal 

prices for diesel, compared with gasoline, for much of this year. 

However, EIA did announce yesterday that average diesel fuel 

prices fell by over $0.28 in the past week. 

At this very early point in the heating season, demand for home 

heating oil itself is roughly the same as it was last year, but as 

with most winters, actual demand for heating oil will be greatly affected by weather conditions. NOAA projects a slightly more severe 

winter than last year, but it remains to be seen whether that scenario will play out. If additional heating oil supplies are needed beyond those produced in domestic refineries, imports are likely to be 

available from Canada, the Virgin Islands, Venezuela, and perhaps 

Europe if winter conditions there are not severe. 

Temporary price spikes can occur if suppliers are short, but those 

situations usually quickly react to the arrival of additional heating 

oil in response to market incentives. A lot of the discussion today 

has been about natural gas price supply and price concerns. This 

situation could significantly impact the heating oil market. If interruptible gas customers abandon the gas market because of high 

prices this winter, they will rely on heating oil supplies to replace 

their usual fuel. Many utilities are required to hold reserve inventories to address this eventuality, and it is hoped that this would 

act to mitigate the impact of additional, unexpected demand for 

home heating oil. 

We would argue that this possibility of additional demand for 

home heating oil this year would help provide another good reason 

why Congress should not delay in taking action to increase domestic production of natural gas. As others who have testified today 

say, we are supporters of LIHEAP. We do, unfortunately, that bills 

will be higher this year, as predicted by the EIA and others. We 

think that conservation is important, as is adequate LIHEAP funding. 

122

And so we want to thank you again for the opportunity to discuss 

these issues today, and we look forward to responding to your questions. 

[The prepared statement of Bob Slaughter follows:]

PREPARED STATEMENT OF BOB SLAUGHTER, PRESIDENT, NATIONAL PETROCHEMICAL

AND REFINERS ASSOCIATION

Mr. Chairman and members of the Subcommittee, thank you for the opportunity 

to appear today to discuss issues related to petroleum refining and the home heating oil market. My name is Bob Slaughter and I am President of NPRA, the National Petrochemical & Refiners Association. NPRA is a national trade association 

with 450 members, including those who own or operate virtually all U.S. refining 

capacity, and most U.S. petrochemical manufacturers. 

Today’s hearing focuses on important and timely issues. The cost and availability 

of natural gas presents a challenge for both refiners and petrochemical producers. 

Refiners use large quantities of natural gas and petrochemical producers depend on 

natural gas supplies for use as feedstock. NPRA urges that Congress take immediate action to increase domestic natural gas supplies by opening up to exploration 

and production OCS areas currently subject to moratoria. The nation can no longer 

afford to place off limits critical supplies of natural gas that are needed for residential, commercial and industrial use. The nation is in the process of exporting the 

U.S. petrochemical industry due to concerns about the availability and cost of future 

natural gas supplies. Action is needed in short order to protect the hundreds of 

thousands of U.S. jobs that depend directly or indirectly on the domestic petrochemical industry. 

I have been asked to address my remarks today to trends in the home heating 

oil market. Given the tightness in refining capacity generally, the high cost of crude 

oil, damage caused by two major hurricanes and the strong pressure on the industry 

to continue to keep up gasoline production levels in light of consumer demand, challenging conditions have emerged for this winter’s heating oil market. 

A snapshot of current conditions 

The nation’s refiners and petrochemical manufacturers have made considerable 

progress in recovering from the effects of hurricanes Katrina and Rita. Those storms 

at one time or other shut down roughly 30% of U.S. refining capacity. Hurricane 

Rita shut down about 16 major U.S. refineries. At the same time, the effects of Hurricane Katrina still lingered, as four major refineries remained offline due to the impact of that earlier storm. The refining industry has joined other sectors of the oil 

and gas industry in working around the clock to bring as much of the affected capacity back on line as possible. A great deal has been accomplished. As of November 

1, roughly 4 million barrels per day of refining capacity hit by the storms has returned to full operation. Most petrochemical facilities have also been returned to full 

operation after the storms. 

Remaining offline at this date are four facilities: BP’s Texas City refinery, which 

is shut down for repair; ExxonMobil/PDVSA’s Chalmette refinery, which is expected 

to be fully operational later this month, ConocoPhillip’s Belle Chasse refinery, and 

Murphy Oil’s Meraux refinery, expected to start-up in the first quarter of 2006. The 

U.S. Energy Information Administration has noted that gasoline supply has returned to pre-Katrina levels with the help of significant gasoline imports during recent weeks. With most of the refineries restarted, domestic production has ramped 

up and import levels should eventually return to more usual volumes. EIA also announced yesterday a significant drop in U.S. average gasoline prices, returning to 

pre-hurricane levels. Due to continued high crude prices, however, current gasoline 

prices do remain above those in 2004. 

There is also positive news regarding distillates, including home heating oil. During the key winter months of the home heating oil season, demand is met by refinery production, imports and inventory stocks. Refinery distillate production (as indicated in attachment one) have been higher than the average of the past four years 

for much of 2005. Inventories were reaching comfortable levels at the time of the 

hurricanes, but those supplies have been drawn down somewhat to provide supply 

during the time when refinery disruptions caused by the hurricane were most severe. (See attachment 2 for the magnitude of the storms’ effect on refinery operations.) 

The good news is that as of last week, U.S. distillate inventories, including both 

home heating oil and highway diesel, were slightly higher than the stocks on hand 

at this time last year. Strong demand for distillate worldwide has resulted in higher 

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than normal prices for diesel when compared with gasoline for much of this year. 

Diesel prices have not yet returned to pre-Katrina levels, but EIA announced yesterday that diesel fuel prices fell by over 28 cents in the past week. 

As with most winters, demand for home heating oil will be greatly affected by 

weather conditions. NOAA is projecting a slightly more severe winter than last year, 

but it remains to be seen whether that prediction will play out as anticipated. If 

additional heating oil supplies are needed beyond those produced in domestic refineries, imports are likely to be available from Canada, the Virgin Islands, and perhaps Europe if winter conditions there are not severe. As always, a price spike can 

occur if supplies are temporarily short, but such situations are usually quickly addressed by the arrival of additional supplies in response to market incentives. 

There has been much discussion at this hearing of concerns about natural gas 

supply during this winter. That situation could also impact the heating oil market. 

If interruptible gas customers abandon the natural gas market because of high gas 

prices this winter, they would rely on heating oil supplies to replace their usual fuel. 

Many utilities are required to hold reserve inventories of heating oil to address this 

eventuality, and it is to be hoped that this supply would act to mitigate the impact 

of additional, unexpected demand for home heating oil. The possibility that industrial natural gas customers might present additional challenges for home heating 

oil consumers is another good reason why Congress should not delay in taking action to increase domestic production of natural gas. 

Refining and Home Heating Oil 

Basically, our nation has two sources of heating oil: domestic petroleum refining 

and imports. For their part, refineries produce heating oil as a part of the ‘‘distillate 

fuel oil’’ product family that also includes diesel fuel. Distillate products are shipped 

throughout the United States by pipelines, barges, tankers, trucks and rail cars. 

Past experience and EIA analysis confirm that refiners are limited in the amount 

of heating oil they can make during the winter to meet the demands of the October 

to March heating season. Some winter heating oil is produced by refineries in the 

summer and fall months and stored for winter use. During the coldest winter 

months, the inventories built in summer and fall are used to help meet the high 

demand. Refiners can increase heating oil production in the winter only to a modest 

degree. 

As indicated previously, imports can make up the difference when distillate and 

heating oil stocks are low. Primary sources of imported distillate are Canada, the 

Virgin Islands, and Venezuela. 

Whether imported or produced by domestic refiners, heating oil is then stored in 

a terminal that services a particular area served by retailers. For example, heating 

oil may be delivered to a central distribution area, such as New York Harbor, where 

it is then redistributed by barge to other consuming areas, such as New England. 

Once heating oil is in the consuming area, it is redistributed by truck to smaller 

storage tanks closer to a retail dealer’s customers, or directly to residential customers. 

Current Supply/Demand Picture for Home Heating Oil 

According to the U.S. Energy Information Administration, about 8.1 million 

households out of 107 million total use heating oil to heat their homes. This fuel 

oil is primarily used for residential space heating, a fact that creates great seasonal 

variations in demand. Home heating oil is a seasonal product, with most consumed 

between the months of October and March. 

Home heating oil demand is also limited geographically, with households in the 

Northeastern United States consuming about 78 percent of total U.S. demand. 

While total demand has stayed about the same over the last year, residential and 

wholesale prices are up by 56 and 39 percent respectively. The reasons for volatility 

are clear. 

Refiners have been working hard to address the lingering impacts of the summer’s 

storms. The industry faced unprecedented logistical, facility, and personnel complications with the impact of two major storms in rapid succession. The dedicated 

employees of these facilities deserve most of the credit for the rapid return to service 

of so much capacity, as do their employers. The refining companies in many cases 

provided for the shelter, safety and security of these workers and their families. Despite so great a loss of productive capacity in such a short time, it is important to 

note that the nation experienced only very isolated and short-lived transportation 

fuel shortages. 

NPRA commends the federal government for acting quickly and decisively in the 

face of these supply outages. Several steps taken in the days and weeks following 

these storms helped refiners provide consumers with the products they need. The 

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Administration released crude oil from the Strategic Petroleum Reserve (SPR) to assist refiners who were short crude supplies as a result of hurricane damage. NPRA 

applauds this appropriate utilization of the reserve in a time of crude-oil supply crisis. The decisive steps taken to judiciously use crude oil from the SPR during this 

emergency enabled several refineries, otherwise unaffected by the storms, to receive 

the crude oil required to keep the refineries in production. 

NPRA also notes that the Environmental Protection Agency provided temporary 

fuel waivers that made it easier to supply fuels to affected areas. The waivers pertain to both gasoline and diesel specifications. NPRA appreciates the efforts of EPA 

and commends the agency for its diligence in gathering the necessary information 

to protect both fuel supply and environmental concerns. 

The Department of Homeland Security also deserves recognition for temporarily 

lifting Jones Act requirements in order to allow non U.S. flagged vessels to transport much needed refined products from one U.S. port to another. These actions provided additional flexibility to the marketplace and have helped refiners to continue 

to meet demand. 

Other Factors Which May Lead to Volatility in the Heating Oil Market 

There is no one single answer for why home heating supplies can be tight, although the market has historically been a volatile one. Among the reasons for this 

are the following: 

1. Seasonality of demand. Because heating oil is essentially a winter product, the 

laws of supply and demand dictate that consumers feel the greatest pinch precisely 

at the time when heating oil is in the most need. While transportation fuels are 

somewhat seasonal (particularly gasoline), the demand curve is not nearly so biased 

towards one season as is the demand curve for heating oil. As a result, moderate 

changes in distillate inventories can have relatively profound impacts on the heating 

oil market. 

Data collected over the last few weeks show that unusually warm weather in the 

Northeast has dampened demand for fuel oil and resulted in stable distillate supplies. These factors have resulted in futures price declines, as November contracts 

have given way to December trading, according to data reported by Bloomberg. 

However, heightened demand overseas, coupled with interrupted distribution attributable to this summer’s hurricanes may create rather volatile conditions. Rapid 

changes in temperatures or prolonged storms can result in spikes in demand at the 

very time when some infrastructure (harbors, barge traffic, truck traffic, etc) are 

constrained for making deliveries at optimal rates. 

2. Crude oil costs. Just as with gasoline production, one of the greatest cost factors affecting home heating oil is the cost of the underlying crude oil input. Crude 

prices are of course a product of worldwide supply and demand factors well beyond 

the control of the refiner or the heating oil vendor. In particular, heightened crude 

demand in India and China has affected the crude market. Crude input accounts 

for approximately 42 percent of heating oil cost. 

3. Competition in local markets. While NPRA does not represent the retail sector, 

we can point out some obvious characteristics of retail markets. Some heating oil 

markets are served by multiple vendors, whereas others may have only one primary 

vendor. As a result, not all local retail markets are as competitive as might be the 

case under optimal conditions. 

4. Differential overhead. The retailing of home heating oil is labor intensive and 

can be complicated from a logistical point of view. Some of the most significant markets for heating oil have a relatively high cost of doing business, and do not always 

react as quickly to market stimuli. EIA recently stated that ′′Prices also are impacted by higher costs of transporting the product to remote locations. In addition, 

the cost of doing business by dealers can vary substantially depending on the area 

of the country in which the dealer is located. Costs of doing business include wages 

and salaries, benefits, equipment, lease/rent, insurance, overhead, and state and 

local fees.′′ Distribution and marketing costs alone account for some 46 percent of 

the cost of a gallon of heating oil. 

5. Fuel switching. Demand for home heating oil is roughly the same as it was last 

year at this time (4.293 mmb on 10/26/2005 compared to 4.368 mmb a year ago, a 

change of only -0.075). As previously mentioned however, with the price of natural 

gas substantially above its historic average, and with some homes in the Northeast 

capable of utilizing either gas or oil heating, there may be some switching from natural gas to fuel oil, but this is difficult to predict. 

Addressing Volatility in the Heating Oil Market 

Some policymakers have suggested that the federal government should adopt 

price control mechanisms on heating oil and other refined products, sometimes at 

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the wholesale level, to combat the current rise in fuel prices. NPRA urges Congress 

to reject this advice. 

As previously noted, in the immediate aftermath of both Hurricanes Katrina and 

Rita, there were but a few reports of supply shortages or market distortion. Reliance 

on market forces provided appropriate market signals to help balance supply and 

demand even during these difficult times. Enactment of politically tempting but 

marketplace disrupting price controls is absolutely the wrong cure for the situation. 

President Reagan eliminated price controls on oil products immediately upon taking 

office in 1981. He was outspoken about the inefficiencies and added costs to consumers that resulted from America’s ten-year experiment with energy price controls 

during the 1970s. 

The energy price and allocation controls of the 1970s resulted in supply shortages 

in the form of long gas lines. Studies have shown that, although intended to reduce 

costs, controls actually resulted in increased costs and greater inconvenience for consumers. The benefits of market pricing became clear soon after the elimination of 

price and allocation controls in 1981. The U.S. Federal Trade Commission stated in 

an extensive study published this June that the price of refined products over the 

past two decades has been on average lower than any time since 1919. It is important to note that a ‘‘windfall profit tax’’ is merely another form of price control. Price 

caps and other forms of price regulation are no more effective in the 21st century 

than they were in the 1970s. Interference in market forces always creates inefficiencies in the marketplace and extra costs for consumers. 

There are numerous, more market sensitive, strategies available to consumers 

and policy makers that can address heating oil volatility or at least somewhat ameliorate its consequences. 

Some heating oil consumers, in recognition of potential price increases, may fill 

their storage tanks during lower demand periods. While most homeowners do not 

possess sufficient storage capacity for an entire winter, such behavior can address 

price increases during shoulder or transitional seasons. Consumers may, therefore, 

arrange to have their tanks filled in late summer or early fall when prices are generally lower. 

In addition, many of the nation’s 9300 heating oil retailers offer budget plans or 

fixed price protection programs to help stabilize monthly bills. Home energy audits 

can also ensure that furnaces and other appliances are running efficiently before the 

season begins. Conservation gains attributable to weatherizing (i.e., installing the 

proper insulation in houses and around hot water heaters) as well as caulking and 

weather stripping windows and doors to seal out cold air also help save energy. Installing a programmable thermostat is another way to reduce heating fuel costs. 

For those living on fixed incomes or under other significant budget limitations, 

both Federal and State energy assistance programs are available. For example, the 

Low Income Home Energy Assistance Program (LIHEAP) is a Federal program that 

distributes funds to States to help low-income households pay heating bills. Additional State energy assistance and fuel fund programs may be available to help 

households during a winter emergency. 

Thank you again for the opportunity to discuss this important issue of winter fuel 

supply with you today. I look forward to responding to your questions.

Mr. BURGESS. Thank you, Mr. Slaughter. Now, we will hear from 

Mr. Wright. 

STATEMENT OF PHILLIP WRIGHT 

Mr. WRIGHT. Thank you, Mr. Burgess and members of the subcommittee. I bring you greetings from the home of the National 

League champions. My name is Phil Wright, and I am Senior Vice 

President and General Manager for Williams Gas Pipeline Company. 

I am responsible for the operation of about 15,000 miles of interstate natural gas pipelines, extending from the Rocky Mountains to 

the Pacific Northwest, and from the Gulf Coast into the Southeastern United States, Eastern seaboard, and ultimately, into the 

New York City metropolitan area. 

I am here today on behalf of the Interstate Natural Gas Association, which I will refer to as INGA. INGA members transport over 

95 percent of the Nation’s natural gas through a network of 

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180,000 miles of pipelines. Following restructuring of the natural 

gas industry, gas pipelines are no longer in the role of buying and 

selling the commodity. Thus, the role of the interstate pipelines is 

similar to that of a trucking company. We provide the natural gas 

transportation services, including storage, that our customers need. 

The Federal Energy Regulatory Commission regulates virtually 

every aspect of our business, including the rates we charge. Our 

costs, as Chairman Kelliher testified, is the smallest part of the delivered price of natural gas, typically less than 10 percent of the 

consumer’s total bill, and we do not, therefore, benefit from higher 

natural gas prices. 

At the outset, let me say that we agree with NGSA, in that our 

best judgment is that sufficient supplies will be available this winter to meet residential and commercial demand. Storage levels are 

good, ahead of the 5 year average, and production from the Gulf 

of Mexico, while significantly below pre-hurricane levels, is gradually returning. 

Having said this, the industry faces very real challenges this 

winter that could require some regulatory allocation of deliveries to 

certain customers at certain times. As of early this week, about 55 

percent of the daily production from the Gulf of Mexico, which accounts for roughly 20 percent of the Nation’s supplies, remain shut 

in due to the storms. Complicating the situation is that a number 

of natural gas processing plants in the Gulf were damaged by the 

hurricanes. Several of these facilities may be out of operation during most, if not all, of the winter. And a certain amount of unprocessed natural gas can be accepted into the gas pipeline network, 

but if the quantity becomes too high, liquids in the unprocessed gas 

can cause safety and operational problems. And if this occurs, pipelines may have to limit the volume of unprocessed gas that we can 

accept, to preserve the operational integrity of the transmission 

and distribution network. 

I would assure you that we are doing all we can to repair or bypass the hurricane damage to natural gas infrastructure in the 

Gulf. Despite heroic efforts, however, the damage is too widespread, and the amount of repair work too great for everything to 

be repaired in time for the winter heating season, which is upon 

us. To assess the potential damage, or excuse me, impact of the 

storm on supplies, INGA retained an economic consultant, EEA, to 

analyze the supply and demand outlook for the coming winter. 

A key focus of the study was to assess the likelihood of scenarios 

which could result in regulatory allocation of supply to certain customers, primarily industrial users and electricity generators during 

certain times. The EEA analysis concludes that residential and 

commercial customers served by local distribution companies holding long term, firm transportation and supply entitlements, will 

continue receiving natural gas. Thank you. The study concludes 

that residential and commercial customers served by local distribution companies holding firm transportation and gas supply entitlements will continue receiving service throughout the winter, even 

during periods of peak demand. This will remain the case, even in 

situations where State allocation plans are implemented due to 

supply constraints. 

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These customers will receive natural gas this winter, albeit at a 

higher price. Clearly, the severity of the winter weather will be a 

critical factor in determining how natural gas markets will balance. 

If the weather is colder than normal, the probability of regulatory 

gas supply allocations becomes greater. Historically, this type of 

winter occurs one in every seven winters. New York and New England will be the most likely to have spot regulatory allocations 

under all of the scenarios analyzed in the study, although other 

States might also be affected should the winter be colder than normal. Should such a scenario occur, it would likely be near the end 

of the winter, after storage supplies have been depleted. 

So what can be done? The short term imperative is repairing the 

infrastructure as quickly as possible. That means expediting permitting and approvals for repair work. It also means the various 

levels of government should consider the value of granting companies some forbearance from legal restrictions that might otherwise 

frustrate their ability to coordinate assessment and repair activities. Both the energy industry and the government must educate 

consumers in advance, so they are prepared for higher bills, and 

have the ability to implement strategies for conserving energy. 

Funding of the Low Income Home Energy Assistance Program is 

critical in helping needy families cope. State regulators should be 

reviewing their allocation plans, and preparing to implement them, 

if necessary, including coordinating any plans with local electric 

generators, who would be some of the most likely customers to 

have supplies allocated. As well, large gas consumers should be in 

close consultation with their suppliers to ensure that the gas they 

are counting on can be supplied and delivered. 

Some have complained about the environmental risks associated 

with expanding offshore energy to include waters outside the western Gulf of Mexico. Still, after three significant hurricanes in 2 

years, it is time to concede that apprehensions about the environmental consequences of offshore energy development are greatly 

overstated. Production is growing in the Rocky Mountain region as 

several pipeline projects have been proposed to bring that gas east, 

but access to public lands, seasonal drilling restrictions, and the 

timely issuance of permits remain a problem in some areas. 

To enable the financing and development of $61 billion of critical 

natural gas infrastructure this Nation needs by 2020, we urge 

State commissions to support more balanced supply and transportation contract portfolios for the utilities they regulate. Long term 

contract commitments are critical to enabling that infrastructure to 

be developed. 

Some have questioned whether the energy industry is investing 

enough capital into the North American market to develop supply, 

to mitigate prices in the long term, and while I can only speak for 

the interstate gas pipeline sector of the industry, I want to assure 

you we are committed to this market long term, and are investing 

capital at a robust pace. 

I will be prepared to respond to questions. Thank you. 

[The prepared statement of Phillip D. Wright follows:]

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PREPARED STATEMENT OF PHILLIP D. WRIGHT, SENIOR VICE PRESIDENT, GAS PIPE- LINES, WILLIAMS, ON BEHALF OF THE INTERSTATE NATURAL GAS ASSOCIATION OF

AMERICA

Mr. Chairman and Members of the Subcommittee: Thank you for the opportunity 

to testify on this important topic. My name is Phil Wright, and I am Senior Vice 

President for Gas Pipelines at Williams. Williams is the second-largest transporter 

of natural gas in the United States, transporting about 12 percent of the natural 

gas consumed. We operate three interstate pipelines which provide natural gas to 

major markets on both the east and west coasts including Atlanta, the Carolinas, 

Philadelphia, New York, Seattle, Portland and Florida. These systems total about 

15,000 miles of pipe, transporting natural gas from the Gulf of Mexico, Canada, the 

Rocky Mountains and other production areas. 

I am here today on behalf of the Interstate Natural Gas Association of America 

(INGAA). INGAA is a trade organization that represents the interstate natural gas 

transmission pipeline companies operating in the U.S., as well as comparable companies in Canada and Mexico. Its members transport over 95 percent of the nation’s 

natural gas through a network of 180,000 miles of pipelines. 

NATURAL GAS PIPELINE INDUSTRY

Before discussing the winter outlook for natural gas supplies, I first want to make 

a few points about the structure of the natural gas industry. The natural gas industry has never been as vertically integrated as the oil and electric power industries. 

Put differently, it is the exception and not the rule for a single company to be significantly involved in all segments of the industry. These segments can generally 

be broken down into the following categories: production, gathering and processing 

(also known as midstream services), interstate pipelines, marketing, and local distribution. Some of these segments are subject to economic (i.e., rate) regulation at 

the federal or state level, while others are not subject to any rate regulation. 

The Federal Energy Regulatory Commission (FERC) regulates the rates, terms 

and conditions of service for the interstate pipeline segment. As part of the natural 

gas industry restructuring that occurred during the 1980s and early 1990s, the 

interstate pipeline industry gave up its merchant role as the provider of bundled 

wholesale natural gas services. Under the current industry structure, interstate 

pipelines transport and store natural gas, but do not produce, purchase or sell the 

commodity. An interstate pipeline is analogous to a trucking company that provides 

both transportation and warehousing services for goods, but that does not take title 

to the goods. The maximum rate an interstate pipeline may charge for transportation and storage is set by FERC on a pipeline-by-pipeline basis, based upon the 

costs incurred by a specific pipeline to provide such services. 

Pipeline transportation and storage is the smallest part of the cost of natural gas 

delivered to residential and commercial customers—typically about 10 percent of the 

total retail cost of natural gas. (See Appendix 1) Pipelines earn their revenues by 

charging the regulated rates for transportation and storage set by FERC; since pipelines have no role in purchasing and reselling natural gas they do not benefit from 

higher commodity prices. 

The shippers (i.e., customers) on interstate pipelines—who may be local distribution companies (LDCs), municipal gas companies, electric generators or industrial 

companies—are responsible for purchasing natural gas and arranging pipeline 

transportation and storage. Each shipper is responsible for its own portfolio of natural gas supply, transportation and storage. A customer’s natural gas supply portfolio may include long-term and short-term contracts and spot market purchases, as 

well as financial instruments to manage price risk. In the case of pipeline transportation, a shipper can choose to purchase firm transportation that ensures yearround availability (including on the coldest days of the year) or a shipper can choose 

to purchase various types of non-firm transportation that may be interrupted during 

periods of greatest natural gas consumption. Non-firm capacity generally is sold at 

rates lower than firm service, but the shipper accepts the risk that this capacity will 

be unavailable during a peak period when firm transportation customers are fully 

utilizing their entitlement to pipeline capacity. Pipeline companies build additional 

facilities to add pipeline capacity if shippers are willing to sign long-term firm contracts for such capacity. Still, due to the time required to comply with new construction certification and permitting requirements and to actually construct the facility, 

there often is a multi-year lag between the inception of a pipeline project and when 

natural gas can flow through the newly-completed capacity. 

While the business model for the natural gas industry is not vertically integrated, 

there are significant operational interdependencies between the industry’s various 

segments. This is especially true regarding off-shore production in the Gulf of MexVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00132 Fmt 6633 Sfmt 6621 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
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ico, an important consideration in evaluating gas supply availability for the upcoming winter. Generally speaking, the chain of delivery is as follows: Natural gas is 

first produced at off-shore platform or wellhead facilities; it is then gathered and 

transported through smaller diameter gathering pipelines for redelivery to FERCregulated transmission pipelines for transportation to onshore processing plants. 

There, the natural gas is processed to remove hydrocarbon liquids, such as propane 

and butane. Those processed liquids must be transported, via dedicated pipeline, 

barge or truck, to markets for those products, such as refineries and petrochemical 

facilities. Once the liquids are removed, the natural gas is fit for consumption and 

is redelivered into the interstate pipeline network where it is transported to enduse customers. These systems all must work together for natural gas to flow onshore, and from there to the millions of customers downstream. If any link in this 

delivery chain is disrupted, the remaining links in the chain will be affected in some 

way. 

Hurricanes Katrina and Rita have highlighted these interdependencies. In cases 

where multiple links in the supply chain have been damaged, we cannot repair only 

a single link and expect natural gas supplies to return to pre-hurricane levels. All 

of the links must be working in order to achieve that result. 

EFFECT OF THE HURRICANES

Mr. Chairman, two major hurricanes striking back-to-back at the heart of our nation’s energy system have caused an unprecedented disruption in our Gulf-based 

natural gas infrastructure. The federal waters in the Gulf of Mexico account for 

about 10 billion cubic feet per day (bcfd) of natural gas production, which is about 

20 percent of total U.S. production. As of early this week, about 55 percent of this 

daily production, or about 5.5 bcfd, remained ‘‘shut-in’’ due to the storms. To place 

this number in perspective, the United States typically consumes on average 61 bcfd 

nationwide. Given the tight supply/demand balance that the nation already was facing before the hurricanes, this loss of supply—even if only temporary—is cause for 

concern as we begin the winter heating season. 

The media, and indeed most Americans, have focused most intently on how the 

twin hurricanes have affected the price and supply of gasoline. Gulf Coast oil production and refineries are a critical part of the nation’s infrastructure for obtaining 

supplies of gasoline, jet fuel and fuel oil. Nonetheless, the United States imports almost 60 percent of its petroleum supplies from overseas. This means that a shortterm increase in imports can mitigate some portion of the impact of the hurricanes 

on petroleum supplies. When it comes to natural gas, however, the United States 

still produces 85 percent of the total supplies needed to meet domestic demand. 

Most of the remaining supply comes from Canada. The United States’ ability to import natural gas from outside North America is far more limited than with petroleum, given the small number (5) of operational liquefied natural gas (LNG) import 

terminals in the U.S. Therefore, even as the country remains focused on gasoline 

prices, the more profound and protracted impact of the hurricanes will be on natural 

gas prices and supplies. 

I want to assure the Committee that we are doing all we can to repair or bypass 

the hurricane damage to natural gas infrastructure in the Gulf region. The dedication of our employees, in the face of losing their homes and possessions and having 

their families uprooted, has been phenomenal. Across the industry, people are showing up to work long hours even as they have no place to go home to. Supporting 

our employees with temporary housing within the region so they can continue to repair and operate critical energy facilities is crucial to speeding the pace at which 

natural gas supplies in the Gulf can be brought back online. 

WINTER SUPPLY OUTLOOK

Let me now turn to our outlook for the winter heating season. There can be no 

doubt that, compared to last year, there will be less natural gas delivered from the 

Gulf of Mexico region this winter. The damage is too widespread, and the amount 

of repair work too great, for everything to be repaired in time for the winter heating 

season. The fundamentals of supply and demand in the North American natural gas 

market already were tight before hurricanes Katrina and Rita. Consequently, any 

loss of supply—even a relatively small one—can have a disproportionate impact on 

natural gas prices over the winter. This tight supply and demand balance places 

extra emphasis on natural gas storage. 

While it is largely invisible to the public, the United States has a significant 

amount of natural gas storage scattered throughout the country. These storage facilities, typically located in depleted oil and gas fields, usually are filled during the 

warmer months when there is excess natural gas supply and pipeline capacity to 

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move it. Storage fills are generally completed by November 1st, which is the beginning of the winter heating season. During the coldest winter days, which typically 

are the days of peak natural gas demand, storage withdrawals meet more than 50 

percent of the daily natural gas load in some market areas. 

Prior to the hurricanes, storage fills were proceeding at total volumes above the 

five-year average. The hurricanes slowed storage fills somewhat, but volumes still 

remain ahead of the five-year average. On this first week of the winter heating season, the storage fill stands at about 3.1 trillion cubic feet—a robust number given 

the damage in the Gulf. The significant damage to industry and to homes and businesses in the Gulf region greatly reduced natural gas demand September and October. This loss of load partially offset the diminished natural gas production from the 

Gulf and freed up gas supply that could be diverted to storage in preparation for 

the upcoming winter. 

Still, it cannot be emphasized enough that storage supplements’ but does 

not replace—natural gas flowing through the interstate pipeline network.

Many of the interstate pipelines serving the Midwest, Northeast and Southeast 

draw their primary supplies from the Gulf region. There are physical limits on how 

much natural gas can be drawn from storage on a daily basis and it is assumed 

that storage will be withdrawn at its full capacity on a peak day. Therefore, if supply constraints limit the volumes of natural gas available for transportation, peak 

day conditions could create deliverability challenges in some markets. While peak 

day conditions could occur at any point during the winter, the risk of deliverability 

challenges will become greater as storage becomes increasingly depleted during the 

late winter months. This could create significant operational challenges for pipelines 

in late winter, particularly if cold weather, limited supply availability, and low storage cause customers to attempt to take more gas from a given pipeline than has 

been delivered to the pipeline on their behalf. 

I should also mention the importance of returning damaged natural gas processing facilities to service. As mentioned previously, natural gas processing plants 

remove the heavier hydrocarbons entrained within produced natural gas. These natural gas liquids include propane, ethane and butane. Once removed, there is a separate market for these liquids, principally in the petrochemical industry. Just as with 

oil refineries in the Gulf region, however, a number of natural gas processing plants 

were damaged by the hurricanes. Several of these facilities may be out of operation 

during most, if not all, of the winter. 

This presents another operational challenge for pipelines. A certain amount of unprocessed natural gas can be accepted into the natural gas pipeline network. If the 

quantity of heavier hydrocarbons in the gas stream becomes too high, however, 

these substances can ‘‘drop out’’ of the natural gas stream as liquids and collect in 

pipelines and end-use equipment. This is a particular concern during the winter 

heating season when the lower ambient temperatures cause the temperature of the 

flowing gas to drop, increasing the volume of heavy hydrocarbons that will return 

to the liquid state. This phenomenon can cause safety and operational problems as 

slugs of liquids work their way through sensitive equipment. Therefore, as off-shore 

production facilities come back on line, it is also important to bring corresponding 

processing capacity back on line as well; otherwise, pipelines may be compelled to 

limit the volumes of unprocessed natural gas that can be accepted during the winter 

heating season in order to preserve the operational integrity of the transmission and 

distribution pipelines and protect end-users. Pipelines may be compelled to enforce 

their tariffs strictly (in this case, for gas quality) to protect system integrity, even 

if it means reducing the volumes of natural gas that can be delivered during peak 

demand periods. 

WINTER SUPPLY ANALYSIS

Because of our concern about these potential winter supply scenarios, INGAA retained an economic consultant, Energy and Environmental Analysis Inc. (EEA), to 

analyze the adequacy of natural gas supplies (including gas storage) for the upcoming winter. This study includes a detailed analysis of the effects on natural 

gas deliverability from Hurricanes Katrina and Rita. The primary objective of 

the study is to analyze the likelihood that, due to the effects of the hurricanes, individual natural gas markets (i.e., consuming regions) within North America could experience difficulties that would lead to supply curtailment for certain customers (primarily industrial users and electric generators). 

INGAA believes that the EEA study is noteworthy in several respects. First, the 

study is premised on EEA’s Gas Market Data and Forecasting System, a model of 

the North American natural gas market that examines supply and demand balances 

at individual points within the natural gas infrastructure. This permits an analysis 

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of individual natural gas markets that takes into account the particular features of 

the infrastructure and gas flows, rather than just making assumptions based upon 

nationwide aggregate supply and demand. EEA’s model has been used for three 

widely referenced natural gas market studies in recent years: the 2003 National Petroleum Council study; the 2004 and 2005 INGAA Foundation studies on natural 

gas infrastructure needs; and the 2005 American Gas Foundation study. 

Second, the EEA study has benefited from broad participation by representatives 

from both government and industry. This has included natural gas industry representatives from individual pipeline companies, natural gas processing companies 

and natural gas producers. Trade association participants have included INGAA, the 

American Gas Association (AGA), the Natural Gas Supply Association (NGSA), the 

Independent Petroleum Association of America (IPAA) and the American Petroleum 

Institute (API). Federal agency participants have included representatives from the 

Department of Energy (DOE), the Energy Information Administration (EIA), the 

Minerals Management Service (MMS) and FERC. The input assumptions for the 

study represent the collective views of all these participants. 

One key point in the results is worth mentioning first. The EEA analysis concludes that, assuming curtailment plans work as expected, residential and commercial customers served by local distribution companies that hold firm 

transportation and gas supply entitlements will continue receiving natural 

gas service, sufficient to meet their requirements throughout the winter, 

even during periods of peak demand. These customers will receive natural gas this 

winter, albeit at higher prices. The study, however, does not, and cannot, account 

for individual cases where a particular LDC, municipal utility or gas marketer may 

experience difficulties because it has not adequately secured transportation or supply for the winter. Still, should they occur, such situations would be isolated. 

The EEA study examines three different hurricane recovery and supply scenarios 

this winter—a base case, a best case, and a worst case. These supply scenarios are 

then analyzed within the context of winter weather probabilities to determine the 

likelihood that particular consuming markets will experience stressed conditions as 

the weather turns colder. EEA assumes that an average of between 2.5 bcfd (best 

case) and 3.5 bcfd (worst case) of Gulf supplies will be missing from the market due 

to hurricane damage. This loss of supply is netted against supplies from other 

sources to determine an overall effect on gas supply. This will result in higher-thannormal gas commodity prices, even if the winter is relatively mild. 

EEA’s analysis makes an important point that should not be lost on policymakers. 

That is, even before the hurricanes, natural gas supply and demand were very tightly balanced and there already was some potential for supply challenges this winter. 

The hurricanes simply have increased the probability that both industrial and 

power generation customers in certain markets may experience supply disruptions. 

The severity of winter weather will be a critical factor in determining how natural 

gas markets will balance. Industrial demand destruction, as a result of high commodity prices, will help maintain this balance to a point. Still, if the weather is colder-than-normal, the probability of gas supply curtailments becomes greater. 

What do we mean by ‘‘gas curtailments?’’ For purposes of the EEA study, the term 

is defined as follows: a curtailment situation occurs when the analysis indicates that 

gas supply into a market will be insufficient to meet all demand even after all economic alternatives have been exhausted. As gas commodity prices move higher due 

to tight supply and high demand, many customers will scale back their consumption 

and the market will re-balance. In some limited circumstances, however, economic 

forces alone might not be enough to balance the market. In these cases, certain customers must be removed from service for short periods in order for the market to 

balance. Generally speaking, these curtailments affect industrial and power generation customers. 

These curtailments would be localized. The likelihood of such curtailments would 

increase if winter weather is five percent or greater colder than normal. Historically, 

this type of weather occurs in one out of every seven winters. 

Curtailments, if any, are likely to be concentrated east of the Mississippi River, 

with the likelihood being greatest in the Northeast. This is because the United 

States east-of-the-Mississippi region is far more dependent on Gulf Coast natural 

gas supplies than is the rest of the country, and because the Northeast (compared 

to other regions) has fewer natural gas supply alternatives. Therefore, New York 

and New England have the highest probability of gas curtailments in all the scenarios, although other states might also be affected should the winter be colder than 

normal. (See Appendix 2) 

Delayed recovery of Gulf Coast supplies significantly increases the likelihood of 

curtailments as well, particularly on the East Cost. This is illustrated by the worst 

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case scenario in the EEA analysis and highlights the need to facilitate Gulf Coast 

energy infrastructure recovery as quickly as possible. 

One final point about gas curtailments. If and when necessary, gas curtailments 

will not be a large percent of total winter natural gas load. Still, because such mandated interruptions would be concentrated within a particularly cold week or two, 

a significant part of the total industrial and power load within an affected market 

could be curtailed for that span of time. 

SHORT-TERM RECOMMENDATIONS

What can be done? As previously mentioned, the short-term imperative is repairing the infrastructure as quickly as possible. That means expediting permitting and 

approvals for repair work. It also means the various levels of government should 

consider the value of granting individual companies some forbearance from legal restrictions that might frustrate their ability to coordinate assessment and repair activities. The twin hurricanes have resulted in extraordinary damage, and extraordinary measures are needed to get systems repaired on a timely basis 

Also in the short-term, both the energy industry and the government must educate consumers in advance so they are prepared for higher bills and have the ability 

to implement strategies for conserving energy. This is important, because unlike the 

gasoline price that is posted at the local gas station, the consumer sees the price 

of natural gas after the fact when he or she receives a bill for the previous month’s 

consumption. Many of you are already familiar with some of these measures, including weatherization of homes, regular inspections of furnaces and changing of filters, 

installing programmable thermostats and setting thermostat a couple of degrees 

cooler than normal. Funding the Low Income Heating Energy Assistance (LIHEAP) 

program is also critical in helping needy families cope with rising heating costs. 

The EEA analysis also points to the need to review curtailment programs. The 

last time that natural gas supply curtailments were a major issue—during the 

1970s—FERC regulated interstate pipelines played a major role in instituting curtailments. Due to the restructuring of the natural gas industry, however, interstate 

pipelines no longer are gas merchants and pipeline tariffs no longer address supply 

curtailment based on end-use priority. Such curtailments now are largely the purview of state public utility commissions, and state regulators should be reviewing 

their plans and preparing to implement them if necessary. This would include coordinating any plans with local electric generators who would be some of the most 

likely customers to be curtailed. 

Wholesale natural gas customers should also be consulting with their suppliers 

about firm supply arrangements. This includes portfolios of storage, flowing supply, 

pipeline transportation and peak shaving. In the absence of such supply verification, 

wholesale customers—and in some cases, the retail customers served by such wholesale customers—may be in for some rude winter surprises. 

LONG-TERM RECOMMENDATIONS

In the long-term, Mr. Chairman, we agree with many on this Committee that 

more must be done to diversify our supplies of natural gas. Hurricanes Katrina and 

Rita have clearly demonstrated the nation’s high degree of reliance on the Gulf region to meet its energy needs. Other regions within the United States can, and 

should, be a part of the nation’s energy supply and infrastructure development 

strategy. Yes, many groups have complained about the environmental risks associated with expanding offshore energy to include waters outside the western Gulf of 

Mexico. Still, after three significant hurricanes in two years, it is time to concede 

that apprehensions about the environmental consequences of offshore energy development are greatly overstated. The fact that we have not had significant environmental damage from off-shore production platforms after Ivan, Katrina and Rita 

must stand for something. Our national energy policy should not be premised on hypothetical problems or on assumptions based on incidents from 40 years ago. 

In addition, the United States must build new liquefied natural gas import terminals to keep pace with our demand for this fuel. Most of the new terminals that 

recently have been approved by FERC have are proposed to be constructed in the 

Gulf of Mexico region. While there are good reasons why this region is attractive, 

such as access to an extensive pipeline network, it stands out that the Gulf has been 

attractive for energy infrastructure development because it offers the ‘‘path of least 

resistance’’ in terms of ‘‘Not in My Back Yard’’ type opposition. Perhaps the hurricanes, and the effects this winter on natural gas prices and the larger economy, will 

convince other regions in the United States of the importance of having a geographically diverse mix of these facilities. 

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For both supply and infrastructure development, a re-focus on long-term contracting is needed. When natural gas commodity prices were low due to excess supply, state public utility commissions discouraged their regulated gas LDCs from entering into long-term contracts for natural gas supply and transportation. Long-term 

contracts, however, are critical to financing and developing new supplies and infrastructure (pipelines, storage and LNG terminals). Long-term contracts also are an 

insurance policy against high prices and volatility. A joint task force representing 

the National Association of Regulatory Utility Commissioners (NARUC) and the 

Interstate Oil and Gas Compact Commission (IOGCC) recently produced a set of 

recommendations intended to encourage a return longer-term contracting in the natural gas industry; INGAA urges state commissions to review the NARUC/IOGCC report and to support more balanced supply and transportation contract portfolios for 

regulated utilities. 

Finally, it is worth examining the factors that have precluded electric generators 

from installing dual-fuel capability when building a gas-fired power plant. Over the 

last decade, dual-fueled facilities—facilities that can operate on both natural gas 

and fuel oil—have been discouraged by emissions limits and by the difficulty in 

siting oil storage facilities on site. Also, the rules in some electric power markets 

provide such generators no assurances that the additional capital cost of such facilities can be recovered in the price received for electricity. These factors have compelled developers to build power plants totally dependent on natural gas. These 

same market rules have discouraged electric generators from contracting for firm 

natural gas transportation and storage service. Should natural gas supplies remain 

tight this winter, these facilities will face the choice of either paying huge fuel 

charges, or not running at all 

CONCLUSION

Some have questioned whether the energy industry is investing enough capital 

into the North American market to develop supply and mitigate prices in the longterm. Mr. Chairman, while I can speak only for the interstate pipeline sector of the 

industry, I want to assure you that we are committed to this market long-term and 

are putting our capital into this market as a result. An INGAA Foundation report 

released last year suggested that the industry would need to invest approximately 

$61 billion between now and 2020 in order to keep pace with demand. This is for 

natural gas infrastructure—pipelines, storage and LNG terminals—in the United 

States and Canada. As an industry we are moving forward with that investment, 

and I am including a list of the proposed projects announced in 2005 as an example. 

(See Appendix 3) 

Before I conclude, I want to suggest some public policy responses that should not 

be undertaken. During a crisis, it is easy to overreact in ways that are ultimately 

counterproductive. The first suggestion I would like to leave you with is this: please 

do not try to regulate commodity prices. This country actually did regulate natural 

gas prices for many years, resulting in artificial supply shortages and a 

misallocation of resources. Similarly, the government should not attempt to pick 

winners and losers in allocating scarce supplies among end-users. Some have debated limiting the use of natural gas for electric generation. This too was tried in 

the past and failed miserably. While it can be painful in the short run, the market 

really does the best job of efficiently allocating scare resources and sending the right 

price signals that will solve supply problems. 

Mr. Chairman and Members of the Subcommittee, I thank you once again for the 

opportunity to testify, and I will be happy to answer your questions.

Mr. BURGESS. Thank you, Mr. Wright. Mr. Castelli. 

STATEMENT OF BRIAN T. CASTELLI 

Mr. CASTELLI. Thank you, Mr. Burgess. Thank you for inviting 

us here to testify today. My name is Brian Castelli. I serve as the 

Executive Vice President and Chief Operating Officer of the Alliance to Save Energy. 

We are a bipartisan, nonprofit coalition of more than 90 businesses, government, environmental, and consumer leaders. The Alliance’s mission is to promote energy efficiency worldwide to 

achieve a healthier economy, a cleaner environment, and a greater 

energy security. Representative Ralph Hall and Ed Markey of your 

committee are both on our board as Vice Chairmen. 

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I respectfully request that a full list of the Alliance’s board of directors, and its associate members, be included in the record as 

part of this testimony. 

Mr. BURGESS. Without objection. 

Mr. CASTELLI. While some of you may find it odd to see an energy efficiency organization represented on a panel with supply 

side trade associations, rather than with energy consumers, the key 

message I want to leave with you today is that energy efficiency 

is our Nation’s greatest energy resource. 

Past energy efficiency measures produced more energy than any 

other single resource to meeting our energy needs of this Nation, 

including oil, natural gas, coal, or nuclear power. Energy efficiency 

is the quickest, cheapest, and cleanest way to balance energy supply and demand. Energy efficiency helps meet our energy needs 

without hurting the environment. Furthermore, it is not imported, 

it is invulnerable to supply disruptions, and generally costs much 

less than adding energy supplies. 

The need to increase our energy efficiency resource has never 

been more clear. A typical Midwest or Northeast household may 

spend over $1,000 more for gasoline next year, and $700 more for 

winter heating fuels than it did a couple of years ago. I have three 

requests of you today to help energy efficiency address shortages of 

natural gas and heating oil. 

First, immediate steps are needed to address winter heating demand and prices, and to help in rebuilding in the wake of the hurricanes. The fastest way to address an energy supply shortage, and 

probably the only way to have a significant impact on prices this 

winter, is consumer education. When a series of rolling blackouts 

and electricity price spikes hit California in 2000 and 2001, the 

State undertook a massive outreach campaign that reduced peak 

summer demand by 10 percent in less than a year, thus helping 

to avoid future shortages. The Energy Bill authorizes a similar national program. We need at least $10 million in immediate funding 

for outreach and education this winter, as well as additional funding for the Energy Star program. 

In the wakes of Hurricane Katrina and Rita, hundreds of thousands of homes will be rebuilt with Federal aid. The most reasonable course of action is to build these homes so that they are extremely energy efficient. They should at least be required to earn 

the Energy Star label. If that course of action is chosen, the aid recipients will not have to turn around and ask for more help to pay 

high energy bills, and those houses then become part of the energy 

solution, not part of the problem. In addition, more Federal assistance should be provided to the Gulf States to update their building 

energy codes, and to train builders and inspectors, so that all the 

new housing meets minimum standards. 

Second, we need to work on the Energy Bill that was enacted in 

August. That bill is really an important to-do list, rather than a 

completed product. The Energy Bill included important tax incentives for highly energy efficient new buildings, vehicles, and equipment. However, to make these incentives effective, we need the implementing rules out as soon as possible. We need to move up the 

effective dates, and we need to extend the incentives beyond the 2 

years which most are scheduled to last. 

135

The Energy Bill included 15 important new appliance efficiency 

standards, though we remain very concerned, since DOE is years 

behind in setting about 20 standards required under previous laws. 

This program requires effective and vigilant oversight, as well as 

increased funding. Other programs in the Energy Bill that need 

funding to have a major impact on natural gas and oil needs are 

detailed in the written testimony I have provided to this committee. 

Let me quickly note here, though, for the record, that existing 

Federal programs also have a tremendous potential for cost effective energy savings. Yet, the 2006 budget request for energy efficiency is down 14 percent just since 2002. For these policies and 

programs to have an impact, they need implementation, oversight, 

and funding. 

Third, although I am hesitant to broach this subject, we need a 

new Energy Bill. In the Energy Policy Act of 2005, there is a gaping hole where transportation policy should be. The Alliance estimates that the Energy Bill will save virtually no oil. We cannot afford to wait 13 years for another Energy Bill to fill this hole. The 

economic, environmental, and national security costs of our insatiable oil demand are too high. 

The Alliance recommends consideration of two policies that could 

be as effective and as straightforward increase in CAFE standards, 

and we hope will be much more politically palatable. First, is to 

close a number of the loopholes that weaken existing CAFE standards. Several reforms are needed to bring actual fuel efficiency closer to current standards. One, base CAFE on realistic testing of fuel 

economy. Two, treat SUVs and minivans like the passenger vehicles they are. Three, include heavier SUVs under CAFE. And four, 

treat dual fuel vehicles based on actual alternative fuel use. 

Second, a new, innovative approach to efficiency of cars and light 

trucks could be a national feebate system. Such a system would impose a national security surcharge, or fee, on inefficient vehicles, 

and then use those funds collected to provide a rebate to fuel efficient vehicles. There would be cost to the Federal Government, and 

it would not be a net tax increase. A feebate would create an incentive for automakers to use fuel efficient technologies in the vehicles 

they produce, and create an incentive for consumers to buy more 

efficient vehicles. 

A number of policies to save natural gas also should be reconsidered in light of the sharply higher natural gas prices. Energy efficiency is our largest energy resource, and it should be our first energy priority. We hope you will both work to ensure the fine energy 

provisions of the last Energy Bill are fully funded and implemented, and use the increasing pressure for action to fill the gaping hole in that bill. 

I would be pleased to answer any questions. 

[The prepared statement of Brian T. Castelli follows:]

PREPARED STATEMENT OF BRIAN T. CASTELLI, EXECUTIVE VICE PRESIDENT AND COO, 

ALLIANCE TO SAVE ENERGY

INTRODUCTION

My name is Brian T. Castelli and I serve as the Executive Vice President and 

Chief Operating Officer of the Alliance to Save Energy, a bipartisan, nonprofit coaliVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00139 Fmt 6633 Sfmt 6621 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
136

tion of more than 90 business, government, environmental and consumer leaders. 

The Alliance’s mission is to promote energy efficiency worldwide to achieve a 

healthier economy, a cleaner environment, and greater energy security. The Alliance, founded in 1977 by Senators Charles Percy and Hubert Humphrey, currently 

enjoys the leadership of Senator Byron Dorgan as Chairman; Washington Gas 

Chairman and CEO James DeGraffenreidt, Jr. as Co-Chairman; and Representatives Ralph Hall, Zach Wamp and Ed Markey and Senators Bingaman, Collins and 

Jeffords as its Vice-Chairs. Attached are a list of the Alliance’s Board of Directors 

and its Associate members, which I respectfully request be included in the record 

as part of this testimony. 

THE TIME IS NOW FOR ENERGY EFFICIENCY MEASURES

The startling and immediate effects of Hurricanes Katrina and Rita on energy 

prices have dramatically highlighted our need to bring energy supplies and energy 

demand into balance. In the immediate wake of Katrina, gasoline prices nationwide 

shot up over $3 a gallon for the first time. While they have since dropped slightly, 

they are still almost double prices at the beginning of 2004. Heating oil prices have 

risen similarly. Natural gas prices have gone up even more. Spot natural gas prices 

doubled between 2002 and the beginning of this year, doubled again by the end of 

August, and are still rising to record highs. 

These prices are causing real hardship for the American people. At current gasoline prices, a typical two-car household would spend over $1,000 more for gasoline 

than it did in 2004. And with winter approaching, the squeeze on American wallets 

will only increase. The U.S. Energy Information Administration expects natural gas 

heating costs for a typical Midwestern household to rise $500 (61 percent) this winter compared to last year and $700 (107 percent) compared to the 1999-2004 average. Northeastern heating oil costs are expected to rise $400 (31 percent) compared 

to last year, and $700 (80 percent) compared to the 1999-2004 average. Some households already living on a tight budget will not be able to pay these costs and still 

have adequate funds to pay for food and rent. At the same time, natural gas prices 

are forcing chemical and fertilizer companies to shut down plants in the United 

States and move those jobs overseas. 

While the hurricanes have highlighted the problem, the fundamental causes are 

not going away so quickly. Energy prices are soaring because America’s gluttonous 

energy consumption is outstripping supply. The United States has only 2 percent 

of the world’s known oil reserves, and 5 percent of the world’s people, but uses 25 

percent of the world’s oil. And now the same pattern is being repeated with natural 

gas. 

Although measures to increase energy supplies are necessary, we must not fool 

ourselves into believing that we can produce our way out of the problem. U.S. production of oil and of natural gas is lower than it was in 1970, while our energy consumption has steadily risen. Even the National Petroleum Council has concluded 

that natural gas supplies from traditional North American production will not be 

able to meet projected demand, and that ‘‘greater energy efficiency and conservation 

are vital near-term and long-term mechanisms for moderating price levels and reducing volatility.’’ It is time to turn serious attention to the demand side of the 

equation, to reducing our energy use. 

ENERGY EFFICIENCY IS AMERICA’S GREATEST ENERGY RESOURCE

Energy efficiency is the nation’s greatest energy resource—efficiency now contributes more than any other single energy resource to meeting our nation’s energy 

needs, including oil, natural gas, coal, or nuclear power. The Alliance to Save Energy estimates that without the energy efficiency gains since 1973 we would now 

be using at least 39 quadrillion Btu more energy each year, or 40% of our actual 

energy use. Much of these savings resulted from federal energy policies and programs like appliance and motor vehicle standards, research and development, and 

the Energy Star program. 

Energy efficiency is the quickest, cheapest, and cleanest way not only to tackle 

our current energy cost issues, but also to meet the anticipated future growth in 

energy demand in the U.S. The enormous contribution of energy efficiency to meeting our energy needs is achieved with little or no negative impact on our wilderness 

areas, our air quality, or the global climate. Energy efficiency enhances our national 

and energy security by lessening requirements for foreign energy sources. Further, 

energy efficiency is invulnerable to supply disruptions; is rarely subject to siting disputes; is available in all areas in large or small quantities; and generally costs much 

less than it would to buy additional energy. 

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Energy-efficiency and conservation measures have a proven track record of balancing demand and supply much faster than drilling, constructing power plants, or 

new import facilities. When a series of rolling blackouts and electricity price spikes 

hit California in 2000-2001, the state undertook a massive electricity efficiency outreach campaign that reduced peak summer power demand by 10 percent and reduced overall electricity use by 7 percent in less than a year, thus helping avoid 

further shortages. The cost was just 3 cents per kWh. The American Council for an 

Energy-Efficient Economy estimates that a small decrease in natural gas demand 

(2-4 percent) could result in a decrease in wholesale natural gas prices of as much 

as 25 percent over the next few years, with vast savings for consumers and energyintensive industries. 

THE TIME IS NOW TO MAKE THE ENERGY BILL REAL

Many of the policies needed to increase use of energy efficiency as a major energy 

resource are enacted, and many of the programs are in place. But these policies 

must be carried out, and the programs must be funded, or they will do no good. In 

particular, the recently enacted energy bill (the Energy Policy Act of 2005, P.L. 109-

58) is really an important ‘‘to-do list,’’ rather than a completed product. The Alliance 

to Save Energy estimates that the new energy law could save 5 percent of all U.S. 

energy use by 2020, and a higher percentage of natural gas—if it is fully implemented and funded. If the law is widely ignored, the savings will be a fraction of 

that amount. 

Existing federal programs also have a tremendous potential for energy savings. 

A 2001 National Research Council report found that every dollar invested in 17 Department of Energy (DOE) energy efficiency research and development (R&D) programs returned nearly $20 to the U.S. economy in the form of new products, new 

jobs, and energy cost savings to American homes and businesses. Environmental 

benefits were estimated to be of a similar magnitude. DOE itself estimates that its 

efficiency and renewables programs will result in major savings, including $134 billion in energy bills, 157 GW of avoided new conventional power plants, 1.9 quads 

of natural gas, and 213 MMTC of greenhouse gas emissions in 2025. Yet the fiscal 

year 2006 budget request for energy efficiency is down 14 percent after inflation just 

since 2002, and core research and development funding (excluding grants and the 

fuel cell FreedomCar program) is down 31 percent in those four years. 

Following are some key implementation and funding needs for programs that 

have the potential to save large quantities of natural gas and, in some cases, oil. 

Note that one of the most effective ways of reducing natural gas consumption is to 

reduce electric demand, as most peaking power plants and most new power plants 

are fueled by natural gas. Similarly, any reduction in the consumption of oil products (gasoline, jet fuel, etc) helps reduce the stress on heating oil supplies. 

Consumer education: As was demonstrated in California, the fastest way to address an energy supply shortage, and probably the only way to have a significant 

impact on prices this winter, is consumer education and associated incentive programs. In particular, there is an immediate need for funding for the energy efficiency public information campaign authorized in the energy bill section 134. This 

important program was authorized by the Congress at $90 million per year, from 

fiscal year 2006 through fiscal year 2010. It is intended to provide consumers with 

energy saving tips like maintaining and repairing heating and cooling ducts and 

equipment, insulating and weatherizing homes and buildings, properly maintaining 

tires and cars, and purchasing energy-efficient products and equipment. Importantly, the program could ensure that consumers and businesses are made aware 

of the important energy-efficiency tax incentives included in the energy bill (see 

below). It also could be coordinated with, and could support, other programs, including the appliance rebate program and state demand-side management programs. 

Coupling such efforts would optimize use of federal funding and ensure the greatest 

impact in terms of changing consumer behavior. 

Additional funding is equally important for the Energy Star program. Energy Star 

is a successful voluntary deployment program at EPA and DOE that has made it 

easy for consumers to find and buy many energy-efficient products. Energy Star is 

the best demonstration of how effective government consumer education can be. For 

every federal dollar spent, Energy Star produces average energy bill savings of $75 

and sparks $15 in investment of new technology. Last year alone, Americans, with 

the help of Energy Star, prevented 30 million metric tons of greenhouse gas emissions—equivalent to the annual emissions from 20 million vehicles, and saved about 

$10 billion on their utility bills. 

Tax incentives: The energy bill included important tax incentives for highly energy-efficient new homes, improvements to existing homes, commercial buildings, 

138

heating and cooling equipment, appliances, and hybrid vehicles. These incentives for 

consumers and businesses have the potential to help transform markets to embrace 

energy-efficient technologies and thus to help the best buildings, vehicles, and 

equipment become mainstream. 

However, there are several immediate needs to make these incentives effective. 

First, IRS, with the assistance of DOE, must get the implementing rules out as soon 

as possible. Many important details and interpretations were left to the agencies. 

We also hope these rules will make determining eligibility and applying for these 

incentives as simple as possible. Without clear rules and procedures, only ‘‘free-riders’’—those who were going to buy the products anyway—likely will take a chance 

on the incentives, and the opportunity for meaningful and sustainable market transformation will be lost. 

Second, we need to move up the effective date of the incentives from January 1, 

2006. Under current law consumers that want to put in a better furnace or new 

windows need to wait until next year, well into the winter heating season, if they 

want to take advantage of the incentives. We already have begun consumer education programs aimed at winter heating; however, we are reluctant to inform consumers of the ‘‘soon-to-be available’’ incentives, as purchases that are important to 

managing energy use and costs this winter may be delayed until the current effective date of the incentives. This creates a conundrum, as the incentives are an important tool to change consumer behavior, but represent a potential barrier to immediate action, which is what we are seeking to encourage. 

Third, we need to extend the incentives beyond the two years most are scheduled 

to last. It is almost impossible to plan and build a commercial building in two years, 

so large segments of the market are effectively excluded from the incentive by the 

short time horizon. For the best-selling hybrid vehicles, the tax incentives may have 

an even shorter horizon, as the law includes a per-manufacturer phase-out triggered 

by the sale of 60,000 eligible vehicles. The incentives were mostly planned to last 

four to five years, and their effectiveness will be multiplied if the eligibility is extended and the manufacturer vehicle volume cap is removed or increased. 

Appliance standards: National appliance and equipment efficiency standards provide an efficiency baseline that American consumers can trust, provide uniform national rules for manufacturers, and slash wasteful energy consumption with one 

broad and effective stroke. The federal appliance standards program has been 

among the most effective of all efficiency measures. The program already has saved 

an estimated 2.5 percent of all U.S. electricity use and saved consumers billions of 

dollars in energy bills. 

The energy bill includes a package of fifteen new energy-efficiency standards that 

were negotiated between energy-efficiency advocates, product manufacturers, and 

states. DOE is required to set standards for additional products, as well as to update many of the standards set in law. 

The Alliance is pleased that DOE recently codified the legislated standards in 

rules. However, we remain very concerned that DOE is years behind the statutory 

deadline for setting about 20 standards required under previous laws. For example, 

an updated standard for residential furnaces and boilers was due in 1994. This is 

one of DOE’s highest priorities as it is one of the most effective ways to save natural 

gas. The most recent delay, announced last December, means that DOE will not set 

this standard until late 2007 at the earliest, and that the standards will not go into 

effect until at least 2010. According to the American Council for an Energy-Efficient 

Economy, each year of delay in just three of these national standards—residential 

furnaces and boilers, distribution transformers, and commercial air conditioners and 

heat pumps—has locked in $7.1 billion in higher energy costs for consumers and 

businesses. 

Largely due to the delays in the DOE program, a number of states are setting 

state standards on products not regulated by the federal government in order to reduce the cost, reduce the environmental impact, and increase the reliability of their 

energy systems. In addition, the work on state standards has been a key incentive 

to reaching agreements on federal standards. 

The new energy bill adds additional standards to DOE’s list of responsibilities. 

Even the legislated standards require test procedures that were not included in 

DOE’s recent rulemaking. This program requires effective and vigilant oversight. In 

addition, as establishing standards requires a rigorous, time consuming, and costly 

rulemaking process, increased funding to the DOE standards program is critical to 

ensuring that the enormous potential of this program is achieved. 

We are disappointed that this committee recently amended the budget reconciliation bill to preempt all state standards on digital television adaptors, opting instead for very weak efficiency criteria on those DTAs subsidized by the federal government. This action, which preempts effective state DTA standards that already 

139

are in place or are under consideration by states, would establish a terrible precedent as well as increasing energy use and costing consumers millions of dollars. I 

hope the committee will reconsider its support. 

Building codes assistance: While residential and commercial building codes are 

implemented at the state level, the states rely on DOE for technical specifications, 

training, and implementation assistance. Full adoption of and compliance with upto-date building codes could save almost as much energy as appliance standards. 

The energy bill includes an authorization of $25 million per year for building codes 

assistance to states. Part of the funding increase would be for a new program to 

encourage states to adopt the latest codes and then assist them in achieving high 

rates of compliance. Such assistance is especially critical in the Gulf states to ensure 

that the massive rebuilding in the wake of the hurricanes is performed at least to 

minimally acceptable efficiency standards. We urge funding for this program. 

In addition, we are concerned that DOE is significantly behind in providing information and guidance to the states on both residential and commercial building energy codes. DOE is required within one year of a residential or commercial model 

energy code update to make a determination on whether that update save energy; 

however, DOE still has not made the required determinations on the 2003 residential IECC, the 2004 Supplement, the newly adopted 2006 IECC, the 2001 ASHRAE 

commercial standard, or the 2004 ASHRAE standard. DOE must apply the necessary human and financial resources to ensure timely determinations on the codes. 

State and utility energy-efficiency programs: Over the last two decades, states 

worked with regulated utilities using ‘‘Integrated Resource Planning’’ and demandside management programs to avoid the need for about 100 300-Megawatt (MW) 

power plants. However, utility spending on public benefit programs nationwide has 

been cut significantly since the mid-1990’s. In recent years some states have adopted innovative policies to rebuild these programs, including public benefits funds, energy efficiency performance standards, incentive rate structures, and priority in infrastructure planning. But the benefits of these programs have not spread to many 

other states. 

The energy bill requires a study by DOE along with the National Association of 

Regulatory Utility Commissioners (NARUC) and the National Association of State 

Energy Officials (NASEO) of ‘‘best practices’’ among the states in demand side management (DSM) and other energy efficiency resource programs (Sec. 139). In addition, it authorizes $5 million per year for an innovative new pilot program to provide funding assistance to several states (3 to 7) to assist in the design and implementation of energy efficiency resource programs designed to lower electricity and 

natural gas demand by 0.75% a year. Again, funding is needed for this program. 

Federal energy management: America’s largest, single energy consumer is the federal government. According to the 1998 Alliance to Save Energy report, Leading by 

Example: Improving Energy Productivity in Federal Government Facilities, the federal government wastes $1 billion in taxpayer dollars each year on its buildings that 

use energy inefficiently. 

DOE’s Federal Energy Management Program (FEMP) is a rare example of a program that actually saves the government money. At an average cost of $20 million 

per year, FEMP has helped cut federal building energy waste by nearly 21 percent 

from 1985-1999—a reduction that now saves federal taxpayers roughly $1 billion 

each year in reduced energy costs. However, much more can be done, and the added 

targets, standards, and authorities in the energy bill will help. 

We are especially pleased that the energy bill extended authority for Energy Savings Performance Contracts (ESPCs) through FY 2016. This unique program allows 

federal agencies to contract with the private sector to upgrade the efficiency of federal buildings. The contractors put up the money for the improvements and are paid 

back out of the utility bill savings. By law the payments can be no more than the 

savings. The agency saves energy at no additional cost, the companies build their 

business and create jobs, and the government saves money and pollution. Unfortunately, the ESPC program is still trying to get back on its feet after its authorization lapsed for a year in 2004. 

The advice and assistance of FEMP is critical to the success of this program. 

FEMP support also is necessary for successful implementation of other federal energy management provisions in the energy bill—to provide guidance on building metering (‘‘You can’t manage what you can’t measure’’), help agencies comply with the 

product procurement rules, and help agencies meet the overall energy reduction targets. Without FEMP’s support, the federal energy management title probably is not 

worth the paper it is printed on. More funding is needed to ramp up ESPC use and 

to undertake these other activities. 

140

THE TIME IS NOW TO MOVE BEYOND THE ENERGY BILL

Although the energy bill includes a number of programs with the potential to save 

natural gas, of course many other effective policies were not included. And even 

though the major authors of the bill all cited high gasoline prices as a key rationale 

for the bill, there is a gaping hole where transportation policies should be. The Alliance estimates that the energy bill will save virtually no oil—small savings from 

the hybrid tax credit and other policies will be roughly canceled out by the extension 

of the fuel economy standard loophole for ‘‘dual-fueled’’ vehicles. This hole was noted 

by virtually every major editorial page in the country, and even noted by the authors of the bill as gasoline prices jumped even higher in the wake of Hurricane 

Katrina. 

We cannot afford to wait thirteen years for another energy bill to fill in this hole, 

or another thirty years for an effective transportation policy. The economic, environmental, and national security costs of our insatiable oil demand are too high. While 

the Alliance recognizes that politically this is one of the most difficult areas to address, we must act now to bring our oil use under control. 

ADDITIONAL OPPORTUNITIES FOR OIL SAVINGS

The Alliance recommends consideration of two policies that could be as effective 

as a straightforward increase in Corporate Average Fuel Economy (CAFE) standards, and we hope will be more politically palatable: 

Close CAFE loopholes: CAFE standards passed by Congress in 1975 led to a 70 

percent increase in America’s gas mileage over the subsequent decade. However, 

CAFE standards have remained static for almost two decades due to political gridlock. The current standards of 27.5 miles per gallon for automobiles and 21 mpg for 

light trucks are roughly the same as in the mid-1980s. Furthermore, real on-road 

fuel economies are much lower than those numbers would suggest—the average fuel 

economy of cars and light trucks is only around 20 mpg. And as the sales of SUVs 

have exploded, average vehicle fuel economy has actually declined since 1988. Even 

if the political will to raise CAFE standard numbers does not exist, there are several 

reforms that could close major loopholes and thereby bring actual fuel economies 

closer to standards already required under existing law:

• ‘‘Truth-in-testing’’ loophole: By law, CAFE is based on the fuel economy tests that 

were used for model year 1975. EPA recognized that those tests are inaccurate, 

and in 1984 started reducing reported fuel economies by about 15%. Because 

driving patterns have changed, real gas mileage is likely 20-25% below CAFE 

numbers. Testing procedures for CAFE need to be updated to reflect increased 

congestion, higher speed limits, use of air conditioning, more powerful vehicles, 

and other changes. • ‘‘SUV’’ loophole: When light trucks were given a lower standard, pickup trucks 

and vans were used primarily for businesses and farming, and represented only 

about 20% of vehicles sold. Today, about half of all light-duty vehicles sold in 

America qualify as ‘‘light trucks’’ for CAFE. Most of those are SUVs and 

minivans, most are used as passenger or family vehicles, and they average 

roughly 40% more fuel for each mile driven than the average passenger car. 

SUVs and minivans should be reclassified as what they are: passenger vehicles. • ‘‘Hummer’’ loophole: CAFE standards only apply to vehicles under 8,500 pounds 

(gross vehicle weight). In fact, EPA does not even test or report the fuel economy of larger vehicles, yet their mileage is generally much lower. Manufacturers are selling more and more of these super-large SUVs and pickup trucks, 

such as GM Hummers and Ford Excursions. CAFE standards should cover 

these heavier vehicles. • ‘‘Dual fuel’’ loophole: Automakers that produce vehicles that can run either on 

gasoline or on an alternative fuel, usually ethanol, can claim CAFE credit as 

if the vehicles ran on the alternative fuel one-half of the time. Unfortunately, 

dual fueled vehicles today run on gasoline 99% of the time. With only a few 

hundred ethanol fueling stations, the infrastructure does not exist to supply 

these vehicles with ethanol. This credit has allowed manufacturers to put more 

gas guzzlers on the road, and thus increases gasoline use. It should be modified 

to require actual use of the alternative fuel. • Vehicle fuel use ‘‘feebate’’: A new, innovative approach to efficiency of cars and 

light trucks is a national ‘‘feebate’’ system. Such a system would impose a national security surcharge, or ‘‘fee’’ on inefficient vehicles, and then use the funds 

collected to provide a ‘‘rebate’’ to fuel efficient vehicles. 

How would a national feebate work? In one approach, a fee or rebate would apply 

to manufacturers of all new light-duty passenger vehicles—including SUVs and 

minivans. The amount would be based on 25 cents per gallon of gasoline estimated 

141

to be used over the lifetime of the vehicle. The fee or rebate would then be determined relative to a mid-point fuel economy. This dividing line between fees and rebates would be set each year such that the total fees would just pay for all the rebates, so there would be no net revenue or cost to the government. 

A feebate would create an incentive for manufacturers to use fuel-efficient technologies in the vehicles they produce, and hence should increase the availability of 

efficient vehicles, as well as creating an incentive for consumers to purchase more 

efficient vehicles. As fuel economies increased, the mid-point fuel economy would be 

ratcheted up, creating an incentive for continual improvement, but never out of line 

with the existing market. 

ADDITIONAL OPPORTUNITIES FOR NATURAL GAS SAVINGS

As I mentioned, there also are a number of other policies to save natural gas that 

should be reconsidered in light of sharply higher natural gas prices. The Alliance 

recommends consideration of two additional sets of policies. 

Federal building codes: Although the energy bill requires new, stricter standards 

for energy efficiency in buildings owned by the federal government, it passed over 

several opportunities to improve standards for buildings regulated by or paid for by 

the federal government. These standards could help transform the housing market 

and make the federal government into a market leader rather than a market laggard. They include:

• Manufactured housing: Even before the hurricanes, ‘‘mobile homes’’ accounted for 

131,000 buildings last year, about one in twelve new homes. Because they are 

manufactured in central factories, they are regulated not by the states but by 

the federal Department of Housing and Urban Development (HUD). Like many 

states, HUD is years behind in adopting up-to-date building codes—their standard has not been modified since 1996. These buildings are used like site-built 

homes. There is no reason they should not meet the same current model energy 

code. Setting this floor would reduce the energy bills of mobile home owners, 

many of whom are low income and many of whom rely on federal LIHEAP assistance, by 9 percent. 

• Federally subsidized housing: New public housing and new housing with federally 

assisted mortgages also must meet a federal standard, currently the 1992 Model 

Energy Code as set in the Energy Policy Act of 1992. This standard should be 

updated to the most recent model codes. Rebuilding with federal subsidies in 

the wake of the recent hurricanes and other natural disasters also should be 

subject to a federal standard to ensure recipients receive high-quality homes 

and that neither the victims nor the federal government pay for unnecessarily 

high energy bills. To ensure cost-effective energy savings based on criteria with 

which local builders and manufacturers are already familiar, both manufactured and site-built homes built with federal disaster assistance should qualify 

for the Energy Star label. 

• Privatized military housing: About 37,000 units of housing are being built each 

year with federal assistance in order to move service members out of the barracks and into newer private housing. The federal government indirectly pays 

the energy bills through an energy allowance. We should require that this housing too qualify for the Energy Star label. 

State and utility energy-efficiency programs: As described above, a number of 

states are implementing innovating energy-efficiency policies and funding mechanisms. Several states have recently passed an energy efficiency resource standard 

(EERS), requiring electricity utilities to meet customer needs in part through demand-side management (energy efficiency and load reduction) programs rather than 

by constructing new facilities and purchasing energy. An EERS sets a specific target 

for demand or use reduction due to DSM programs, and requires monitoring and 

verification of the program savings. The programs have generally been found to save 

electricity much more cheaply than it could be generated and delivered. Several of 

the states are now implementing an EERS as part of or alongside renewable electricity generation standards. 

The Senate bill included a requirement that state PUCs consider this and other 

energy efficiency policies. This directive also was included in the Energy Efficiency 

Cornerstone Act (HR 3263), sponsored by the Alliance Vice-Chairs in the House, 

Reps. Wamp, Hall, and Markey, and by a number of other members including Reps. 

Allen, Sherrod Brown, Gonzalez, Green, Murphy, and Heather Wilson. This provision could be an effective tool to save natural gas around the country. We urge its 

renewed consideration. 

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CONCLUSION

Energy efficiency is our largest energy resource, and it should be our first energy 

priority. American consumers need a balanced energy policy that takes aggressive 

steps to save energy wherever and whenever it is cost-effective and feasible. 

Many of the policy options identified by the Alliance, such as standards, tax incentives, and federal energy management, have been proven effective on the national 

level. Federal programs that support research, development, and deployment of energy-efficient technologies also have proven effective and deserve greater funding. 

Other policies, such as those targeted at the transportation sector, are sorely needed 

to ensure a secure and sustainable energy future in the U.S.. 

The Alliance to Save Energy applauds the fact that this committee is willing to 

wade back into the rough waters of energy policy. With respect to energy efficiency 

provisions, which must be a cornerstone of any such energy policy, we hope you will 

both work to ensure the fine provisions of the last energy bill are fully funded and 

implemented, and use the increasing pressure for action to fill the gaping holes in 

that bill. Additional administrative and legislative action to save natural gas and 

oil is the only way to assure that we give the American people immediate, cost-effective and sustainable assistance in addressing spiraling energy costs and an ever-less 

secure energy future.

Mr. BURGESS. Thank you, Mr. Castelli, for your testimony. With 

the 4 hours that we have spent on energy efficiency for ceiling fans 

here in this committee earlier in the year, I don’t look forward to 

another Energy Bill, but you know what, you may get your wish. 

Mr. Davidson, I asked a question of one of the members of the 

other panel earlier, about the over, you know the Bush Administration drill anywhere, any time, on anything. But in the Clinton Administration, they had over 2,400 drilling permits in the Rocky 

Mountains. In the Bush Administration, under 1,500. So at this 

point, when supply is more important than ever, can you kind of 

help us understand why that would be? 

Mr. DAVIDSON. I think clearly, drilling has been increasing in the 

Rocky Mountains, and it is an area that has demonstrated great 

resources for our country. And so clearly, the rig activity is at very 

high levels, but we continue to build a backlog of permit requests. 

And as I noted in the testimony, we now have some 3,000 permits 

in backlog. 

Clearly, at today’s prices, the industry sees tremendous opportunity, particularly in some of these new areas that have tighter 

gas, but a lot of gas potential, and we have a great desire to continue to pursue the drilling programs. They have made progress. 

There has definitely been some progress in trying to speed up permit processing. But I think it, in the case of the Federal agencies, 

in some instances, they have needed additional funding and resources to be able to handle the volume of activity. 

Many of these are short duration wells, so they end up being 

very high volume. We are in the midst now of drilling shallow wells 

that sometimes will only take a week to drill, and so it results in 

a high volume of activity. 

Mr. BURGESS. Very well. You described the industry as being 

price takers. I always thought that was doctors and farmers, but 

Congress, I would expect, would have a difficult time seeing a powerful industry like yours as a price taker. Can you expound on that, 

and explain the nature of the natural gas or oil marketplace, so we 

can understand that statement a little bit better? 

Mr. DAVIDSON. Well, I think it is, when it gets to oil, it is perhaps even simpler, because oil is a global market that we supply 

and demand, and it is actually a very diverse industry. And cerVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00146 Fmt 6633 Sfmt 6602 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
143

tainly, when we look at it from the independent sector, which is basically companies that explore for, find, and produce, we basically 

just produce in the pooling points. And as the market sees supply 

and demand at those points, and prices are established through 

supply and demand, we basically just sell into that market. 

I would also add that the financial markets do play an important 

part, particularly with the smaller companies, such as what I represent, because in our case, where we have perhaps not as strong 

a balance sheet as others, and we invest a very high percentage in 

many years, in fact, in the most recent full year, 2004, over 150 

percent of the E&Ps cash-flows were reinvested into the business. 

We have to go into the futures market in many instances and 

hedge future prices, so that we can eliminate some of the volatility, 

because we cannot simply afford to see the ups and downs of 

prices, so in that case, we are very dependent on what is established in those markets, and we do not have the ability to affect 

that. Our job is to find and produce natural gas and oil as efficiently as effectively as we can. 

Mr. BURGESS. We have heard a lot on this committee about how 

pernicious the high profits are in the energy industry, and yet, at 

the same time, it seems to me with all the discussion of what is 

shut in in the Gulf of Mexico, you are going to have to make substantial capital outlays in the very near future. Can we expect that 

type of investment from the energy industry? Can we expect investment in siting refineries in this country, as we tried to encourage 

with Energy Bill II? 

Mr. DAVIDSON. Well, I think I can best speak for the exploration 

and production side of the business. I really can’t speak for the 

downstream refining, since I don’t represent integrated companies. 

But from the exploration and production side, the independents, we 

have traditionally been major drillers in this country, and again, 

investing a substantial or more than all of our cash-flow back into 

the business. I can speak clearly for my own company, where we 

carry a substantial debt. We invest in a capital program that is 

more than our earnings, and we are building for the future. 

And so I am very confident, with the markets that we are in, 

that certainly, my company sees great incentive to make future investments in new areas, as well as the existing areas that require 

repair from the hurricanes. 

Mr. BURGESS. Very well. I will recognize the gentleman from Virginia. 

Mr. BOUCHER. Well, thank you very much, Mr. Chairman. Mr. 

Horvath, I have several questions for you. First, I was pleased to 

hear you indicate that you are a supporter of the Low Income 

Home Energy Assistance Program. You didn’t say in your oral testimony very much more than that. Do you support funding for that 

at the full authorization level, which is $5.1 billion? 

Mr. HORVATH. Yes, we do, and we also support the DOE’s weatherization program, which is the other side of LIHEAP, so we don’t 

have to use LIHEAP quite so much in the future. 

Mr. BOUCHER. Do you know how much that program is funded 

at, the one at DOE? 

Mr. HORVATH. I am sorry. I don’t know the current level. 

144

Mr. BOUCHER. Okay. Are there others on the panel who would 

like to comment with regard to LIHEAP? I believe, Mr. Davidson, 

you had indicated your company’s support for it. 

Mr. DAVIDSON. Yes. The organizations I represent supported the 

full funding of LIHEAP. 

Mr. BOUCHER. At $5.1 billion? 

Mr. DAVIDSON. Full funding, yes. 

Mr. BOUCHER. Okay. Mr. Wright, would you care to comment? 

Mr. WRIGHT. We are, as well, supportive, but we have not addressed as an association just yet at what funding level. We would 

probably defer to others in that debate. 

Mr. BOUCHER. Okay. That is fine. Mr. Castelli. 

Mr. CASTELLI. Yes. We supported the $5.1 billion level for 

LIHEAP, and we have also supported a doubling of the weatherization program, which is also very critical. 

Mr. BOUCHER. Okay. Do you know the level of funding for weatherization? 

Mr. CASTELLI. I believe the current level of funding is around $220 million a year. 

Mr. BOUCHER. It is a far smaller program. 

Mr. CASTELLI. Far smaller program, but it has much longer term 

effects. 

Mr. BOUCHER. Right. Okay. Thank you. I only have one other 

question, and I will address this initially to Mr. Horvath, and Mr. 

Wright, you may also want to comment on this. 

I understand that while the projections for home heating costs 

for this winter, for people who heat with gas are approaching a 50-

percent increase, 48 percent, I think, is the exact number, and for 

people who heat with oil, something on the order of a 32-percent 

increase is expected. But for people who heat with electricity, the 

increase is really expected to be only in the single digits. In fact, 

4-percent increase over the previous year comes to mind. 

But I am wondering if that is going to be the situation for all 

people who heat with electricity. And the reason I ask the question 

is this. I have been told that depending upon how the utility that 

serves them acquires natural gas, assuming the utility is fueled 

with natural gas, that there could be a dramatic difference in end 

user cost, the cost to the consumer, based upon that gas acquisition 

charge. I have heard testimony from several of you that you will 

have adequate gas supplies to accommodate the needs of those who 

have firm contracts. The non-firm contracts, I gather, will be a different situation. Perhaps you will have adequate supplies when 

needed. Perhaps, I think, Mr. Wright, you made some reference to 

having to reallocate deliveries schedules, or something to that effect, and I am wondering what the situation might be with regard 

to those non-firm contracts. 

So several questions. First of all, do you know what percent of 

the total gas demand at this time is non-firm? Second, are you 

going to have adequate supplies this winter to serve all of the nonfirm customers? Third, do you anticipate any disruption of those 

supplies, based on scheduling or other factors? And then, I will 

come back to where I started, what possible effect would there be, 

in terms of price for electricity purchase by the consumer, particularly the one who heats with electricity, depending upon whether 

145

or not the utility that supplies him has firm or non-firm contracts 

for gas delivery? And if you could translate that into a projected 

price for the guy who is served by a utility that has non-firm contracts, that would be very helpful. 

So there are a number of questions there. Mr. Horvath, do you 

want to begin with that? 

Mr. HORVATH. I will start. I don’t believe anybody knows how 

much non-firm gas there is. There is no real way of recording that, 

because there are so many gas customers. I will defer to Mr. 

Wright, who may have a little more information on that, through 

a recent study that they have done. 

On the adequate supplies for non-firm, I think I did address that, 

and we would concur with Mr. Wright and INGA that that is problematic for this winter. We are geared toward a firm customer 

base, in terms of long-term infrastructure, because that is what it 

takes, long-term contracts, and for those who choose to go interruptible, they pay less for that, and they get less service for that. 

Mr. BOUCHER. So there is some doubt as to whether there will 

be an adequate amount of gas for the non-firm customer, is that 

right? 

Mr. HORVATH. There are interruptions every winter for those 

who have not paid for firm delivery, and this winter should be no 

different. Some would say it might be a little worse. We are saying 

we will get through it for the firm contracts. The interruptibles will 

be interrupted to some extent, and we tend to agree with INGA 

that the Northeast is probably the most problematic. 

Mr. BOUCHER. While we are on this point, let me ask you one 

other question. I am told that a number of merchant plants operate 

on a spot market purchase procedure, and really choose not to have 

firm contracts for gas delivery. Is that generally right? 

Mr. HORVATH. Well, it is true that some do. I don’t know the percent, but some do operate on a spot basis. That is correct. 

Mr. BOUCHER. And to the extent that electric utilities, then, are 

acquiring their generation from these merchant power plants, they 

could be at risk, in terms of the price to them. 

Mr. HORVATH. They could be, and that gets to your last question, 

which was the effect on electricity. Nationally, about less than 20 

percent of electricity is generated by natural gas. That is why the 

increase for electricity will be lower to those who heat with electricity than for natural gas or oil. 

Mr. BOUCHER. But for an electric utility that happens to be primarily gas-fired, and depends on merchant generation to acquire 

its power, where there are not firm contracts, the end customer for 

that utility could be at risk of very major price increases this winter. Is that correct? 

Mr. HORVATH. It is possible. And again, it just depends on how 

much their portfolio is fueled by natural gas. 

Mr. BOUCHER. Yeah. Okay. Mr. Wright, would you like to comment? 

Mr. WRIGHT. Generally, I concur with Mr. Horvath’s comments. 

We do not have a percentage of the non-firm either, but in the written testimony that I submitted to the subcommittee, we have detailed several scenarios, a base, a worst, or a best case for the recovery of Gulf Coast supply, which is the driver we analyzed in deVerDate 0ct 09 2002 12:44 May 02, 2006 Jkt 000000 PO 00000 Frm 00149 Fmt 6633 Sfmt 6602 F:\DOCS\26995.TXT HCOM1 PsN: JOEP
146

tail as to pressure on gas prices. And we did see, for a number of 

days, and as Mr. Horvath noted, this has occurred every winter, 

you will have some level of allocation that has to occur, where people who don’t hold firm contracts have to be interrupted, but only 

for a matter of days, and only for a short period of time, based on 

the scenarios that we analyze. So we are not looking here for a 

major sort of a dislocation. A lot turns on how cold the winter will 

be. 

And finally, with respect to the effect on the prices for those who 

heat their homes with electricity, much has to do with what the 

mix of fuels are for that generation. 

Mr. BOUCHER. I understand. Okay. Gentlemen, thank you very 

much. My time has long expired. Thank you, Mr. Chairman. 

Mr. BURGESS. If the gentleman would like to continue his questioning, we can have, we have time for a second round. The panel 

seems a little thin up here. Then if I could have the indulgence of 

the panel for just a couple of follow-ups. 

Mr. Wright, you talked about gas into the pipelines that was perhaps had impurities. Who makes the decision of who gets in and 

who has to stay out? Who decides what gas is put into the pipeline? 

Mr. WRIGHT. The impurities to which I am referring are really 

gas liquids, and those are removed from the gas stream near the 

production area, and become the building blocks for petrochemicals, 

ethane, propane, butane, and heavier. Generally, pipelines publish, 

well, all pipelines publish tariffs that have standards within them, 

and some are more explicit than others as to the entrained level 

of liquid allowed, but generally, it is pretty dry gas, gas that has 

been substantially removed, that is transported. And the reason for 

that is interstate gas pipelines use large compressor stations, and 

liquids are highly incompressible, gas is highly compressible, and 

it can actually damage the equipment. As well, if it gets very cold, 

the liquids will drop out, and so it is somewhat of an operational 

call on a given pipeline system, to manage its operations and reliability and stability, and so while there is not today a hard number 

standard that I could quote to you, I can tell you that generally, 

the assumption for most gas interstates is that liquids have been 

removed to a substantial extent. 

Mr. BURGESS. Very well. Thank you. And Mr. Castelli, I would just make the observation, if $3 a gallon gasoline doesn’t drive people into more fuel efficient vehicles, I don’t know what the government can do that will make that happen. 

Mr. Horvath, I have one last question, and if I could do the math 

right, and bear with me for a minute. In your testimony, you indicate that currently, 5.4 billion cubic feet of natural gas from the 

Gulf of Mexico is shut in as a result of the hurricanes. The State 

of Louisiana reports another 1.3 billion cubic feet of natural gas 

shut in as a result of the storms. Based on your testimony, this 

would represent a total of about 8.6 percent of average daily winter 

consumption. Did we do that math right? 

Mr. HORVATH. I am not sure those two are additive. I don’t think 

the second number is—maybe there is some double counting there. 

Mr. BURGESS. Very well. But in the absence of the hurricanes, 

would there have been, then, a 5- to 8-percent increase in the natural gas supply this winter? 

147

Mr. HORVATH. We would have that, all that hurricane gas back 

on the market right now. 

Mr. BURGESS. And if we had that gas back on, would we have 

an additional 5- to 8-percent supply? Since we have got that percentage shut in, in the Gulf of Mexico, if the hurricanes hadn’t happened——

Mr. HORVATH. We would have that gas now, so on top of what 

we have now, yes, that extra 5 or 8 percent. 

Mr. BURGESS. So we would have 105 percent to 108 percent of 

what we had last year. 

Mr. HORVATH. There would be some Canadian imports that 

would be displaced. We are scrounging this year for extra supplies, 

so you can’t just subtract numbers, because those wouldn’t otherwise have been here. 

Mr. BURGESS. Where is the additional gas, if there is additional 

gas, where would it be coming from? 

Mr. HORVATH. Some of it is from Canada. They have increased 

their amounts from last year. And we have additional LNG as well 

this year, this winter——

Mr. BURGESS. Very well. 

Mr. HORVATH. [continuing] we might not have otherwise seen. 

Mr. BURGESS. I thank everyone for their indulgence today. I 

know it has been a very, very long day, and thank you for your testimony. It has been very helpful, I know, to Mr. Boucher and myself, and I am sure the rest of the committee as well. So thank you 

very much for your testimony. 

This subcommittee is adjourned. 

[Whereupon, at 5:05 p.m., the subcommittee was adjourned.]

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