U.S. GOVERNMENT PRINTING OFFICE

65–909CC WASHINGTON : 2000

SUMMER ENERGY CONCERNS FOR THE AMERICAN

CONSUMER

HEARING

BEFORE THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

JUNE 28, 2000

Serial No. 106–136

Printed for the use of the Committee on Commerce

(

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COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

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

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C O N T E N T S

Page

Testimony of:

Bradley, Justin D., Director, Environmental Programs, Silicon Valley

Manufacturing Group ................................................................................... 82

Brown, Mark H., Executive Vice President for Association and Club Services, American Automobile Association ....................................................... 85

Browner, Hon. Carol M., Administrator, Environmental Protection Agency .................................................................................................................... 16

Frank, J. Louis, President, Marathon Ashland Petroleum, L.L.C. .............. 88

Gale, Roger W., President and CEO, PHB Hagler Bailly ............................. 99

Gerken, Marc S., President, American Municipal Power, Ohio .................... 103

Nemtzow, David M., President, Alliance to Save Energy ............................. 107

Pillari, Ross J., Group Vice President of Marketing Worldwide, BP

Amoco ............................................................................................................. 115

Pitofsky, Hon. Robert, Chairman, Federal Trade Commission .................... 11

Ports, Michael, President, Ports Petroleum, Inc ............................................ 117

Richardson, Hon. Bill, Secretary of Energy, Department of Energy ............ 25

Slater, Hon. Rodney E., Secretary of Transportation, Department of

Transportation .............................................................................................. 21

Thompson, Jerry, Senior Vice Resident, Citgo Petroleum Corporation ....... 120

Material submitted for the record by:

Bilbray, Hon. Brian P., a Representative in Congress from the State

of California, prepared statement with attachments ................................. 150

Brown, Mark H., Executive Vice President for Association and Club Services, American Automobile Association, letter dated July 18, 2000, to

Hon. Thomas Bliley, enclosing material for the record ............................. 304

Frank, J. Louis, President, Marathon Ashland Petroleum, L.L.C., letter

dated July 13, 2000, to Hon. Thomas J. Bliley, enclosing material

for the record ................................................................................................. 195

Gerken, Marc S., President, American Municipal Power, Ohio, letter

dated September 11, 2000, to Hon. Thomas Bliley, Jr., enclosing material for the record .......................................................................................... 320

Mears, Mike, Vice President, Williams Transportation & Terminals, letter

dated July 17, 2000, to Hon. Thomas Bliley ............................................... 306

National Corn Growers Association, prepared statement of ......................... 317

Thompson, Jerry, Senior Vice Resident, Citgo Petroleum Corporation,

letter dated July 18, 2000, to Hon. Thomas J. Bliley, enclosing material

for the record ................................................................................................. 186

Vaughn, Eric, President and Chief Executive Officer, Renewable Fuels

Association, prepared statement of ............................................................. 310

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SUMMER ENERGY CONCERNS FOR THE

AMERICAN CONSUMER

WEDNESDAY, JUNE 28, 2000

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COMMERCE,

WASHINGTON, DC.

The committee met, pursuant to notice, at 9 a.m., in room 2123,

Rayburn House Office Building, Hon. Tom Bliley (chairman) presiding.

Members present: Representatives Bliley, Tauzin, Oxley, Bilirakis, Barton, Upton, Stearns, Cox, Deal, Largent, Bilbray, Lazio,

Cubin, Rogan, Shimkus, Wilson, Shadegg, Pickering, Fossella,

Blunt, Bryant, Hall, Boucher, Brown, Gordon, Rush, Stupak, Sawyer, Wynn, Green, McCarthy, Barrett, Luther, and Capps.

Staff present: Jim Barnette, chief counsel; Cathy VanWay, majority counsel; Joe Stanko, majority counsel; Hugh Halpern, parliamentarian; Kevin Cook, science advisor; Kelly Zerzan, majority

counsel; Robert Meyers, majority counsel; Ramsen Betfarhad, majority economist, Robert Simison, legislative clerk; Elizabeth Brennan, legislative clerk; Peter Kielty, legislative clerk; Sue Sheridan,

minority counsel; Alison Taylor, minority counsel; and Rick Kestler,

minority professional staff.

Chairman BLILEY. The committee will come to order. I ask you

to take seats, please.

The Chair recognizes himself for an opening statement.

As my colleagues and our guests know, we don’t have full committee hearings very often, but it is a testament to this committee’s

importance to the House that every now and then an issue arises

that demands the attention of all of us in one room. Today we are

going to be talking about energy and consumer protection, the environment and tourism, and all in the exercise of our rights and responsibilities under the House rules to conduct oversight on matters within the committee’s jurisdiction.

We are here today for answers. Our constituents back home are

concerned about the sticker shock at the gas pump and the headlines they read about the electricity demands. I want to get to the

bottom of what is causing price hikes for gasoline and what we in

Congress can do about it. I also want to make sure that we have

a steady, affordable power supply this summer and in the future.

When it comes to electricity, my views are well known. There

should be a limited Federal regulatory role, but at the same time,

all consumers, everyone from homeowners to high school principals

to manufacturers deserve to have confidence that their needs will

be met. We need to determine today whether they will have reliVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 E:\HEARINGS\65909 pfrm03 PsN: 65909
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able electricity in the future or find out what this committee needs

to do to make that confidence a reality.

The committee has a full day today, and the Chair would appreciate the cooperation of all members in completing our agenda. All

members’ opening statements will be made a part of the record.

Without objection, so ordered. All members may insert materials

relevant to today’s hearing into the record. Without objection, so ordered.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. TOM BLILEY, CHAIRMAN, COMMITTEE ON COMMERCE

The Committee will come to order. The Chair recognizes himself for an opening

statement.

As my colleagues and our guests know, we don’t have full Committee hearings

very often. But it is a testament to this Committee’s importance to the House that

every now and then an issue arises that demands the attention of all of us in one

room.

Today we are going to be talking about energy. But we are also going to be talking

about consumer protection, the environment, and tourism—and all in the exercise

of our rights and responsibilities under the House Rules to conduct oversight on

matters within the Committee’s jurisdiction.

We are here today for answers. Our constituents back home are justifiably concerned about the sticker shock at the gas pump and the headlines they read about

electricity demand. I want to get to the bottom of what’s causing price hikes for gasoline and what we in Congress can do about it.

I also want to make sure that we have a steady, affordable power supply this

summer and in the future. When it comes to electricity, my views are well known.

There should be a limited Federal regulatory role. But at the same time, all consumers—everyone from homeowners to high school principals to manufacturers—deserve to have confidence that their needs will be met. We need to determine today

whether they will have reliable electricity this summer and in the future—or find

out what this Committee needs to do to make that confidence a reality.

The Committee has a very full day today and the Chair will appreciate the cooperation of all Members in completing our agenda.

Without objection, all Members’ opening statements will be made part of the

record. So ordered. Without objection, all Members’ may insert materials relevant

to today’s hearing into the record. So ordered.

The Chair now recognizes the gentleman from Michigan for an opening statement.

PREPARED STATEMENT OF HON. W.J. ‘‘BILLY’’ TAUZIN, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF LOUISIANA

Thank you Mr. Chairman, and I thank you for holding this hearing on such an

important issue on such a timely basis.

It is only fitting that this is a Full Committee hearing today because the issue

of rising gas prices falls within the jurisdiction of almost all of our Commerce subcommittees.

Mr. Chairman, I have quite a few questions today for our witnesses, and I know

that almost every member here today has questions of their own, so I will keep my

opening remarks very brief.

There is really only one issue before us today: whether the current panoply of

state and federal regulations governing gasoline production in America today—including reformulation standards and taxes—are affording our nation of consumers

with reasonable prices at the pump.

The answer, of course, is NO.

Now there are a number of factors that cause gas prices to fluctuate—some are

local while some are of national consequence. In the final analysis, however, I have

concerns that the reformulated gasoline program is the real culprit here as opposed

to the activities of oil companies.

Despite that gas prices have been unregulated for years, what we have here is

a clear case of regulation increasing the price of gasoline. As the requirements increase . . . it becomes more difficult and costly to make gas that meets formula and

performance standards...the supply of gasoline decreases as a result... and naturally, prices go up. It’s really as simple as that.

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On the record, I want to say that I am not fooled by the purported reasons for

or the scope of the FTC, administration induced, investigation. To attribute the rise

in gas prices to anything other than this administration’s failure to prevent escalation is really laughable to me.

I would say to the Administration that energy policy is as important to Louisiana’s Third District as any issue before Congress. As a result, I am as well versed

in energy issues than almost any other issue I deal with, and I know better than

to believe that some conveniently fabricated collusion is all of a sudden the reason

for rising gas prices.

For years, the reformulated gas standards have been driving prices up by increasing the cost of production, and now all of the sudden... now that it’s clear we have

a problem...the Administration, almost overnight, now wants us to believe that a

handful of bad-actor oil companies have caused the problem overnight. Never mind

the faulty EPA science... never mind the Administration’s poor judgment.

I, for one, have never witnessed such a political ploy in my entire career as a Congressman. How convenient a scenario!

Now, let’s talk about this sudden phenomenal and mysterious collusion that the

Administration hasn’t said a thing about until just last week?

The Administration now asserts absolutely that collusion is to blame, yet needs

to investigate as a means of gathering more information to justify its position.

There are two observations I can make about that. For one, the research usually

comes first, and then dictates the conclusion. This Administration, however, prefers

to make a public assertion for political reasons, and then go selectively fish for supporting data. Second, I’m not sure what new, earth-shattering information this investigation will produce that is not already included in the FTC’s record of review

of the BP/Amoco, Exxon/Mobil, and Shell/Texaco mergers.

Make no mistake, if the White House’s concerns about collusion were genuine, or

at least consistent with its public position, then the FTC would be doing much more

than just investigating! It would be out trying to enjoin this collusion under the

broad statutory authority that it claims to have whenever doing so facilitates the

White House’s agenda.

The most unfortunate thing, however, about this investigation is that it will not

solve the nation’s problems this Summer. While the Administration remains busy

supervising the FTC’s insipid development of a phantom scapegoat, America will

continue to pay highly inflated gas prices across the country under the mistaken belief that once Mr. Gore deals with these few bad actors that everything will magically return to normal. What nonsense!

Fortunately, I think that the American public is smart enough to recognize what’s

going on here. Things don’t go so awry on a nationwide basis as a result of some

isolated and local bad faith, even if there is some merit to the FTC’s charges—

which, as I’ve said, are suspect at best in light of the timing of the FTC’s enlightening discovery.

Today, I’m here to send the message to Mr. Gore that I don’t buy it. And, I will

do my best to ensure that the public doesn’t buy it either.

With that, Mr. Chairman, I yield back, and I look forward to today’s discussion.

PREPARED STATEMENT OF HON. MICHAEL BILIRAKIS, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF FLORIDA

Thank you Mr. Chairman.

First, let me commend you for scheduling today’s hearing on summer energy concerns for the American consumer. Rising gasoline prices is an issue that certainly

has the attention of my constituents and the rest of the American public. I believe

it is imperative for us to examine the causes behind these rising prices.

Earlier this year, the Energy Information Agency predicted that, even barring

major refinery disruptions this summer, average retail gasoline prices could reach

a monthly average of $1.75 to $1.80 per gallon. In some parts of the country, gasoline prices have already exceeded these predictions.

In my district, the price for a gallon of regular gasoline ranges from $1.51 to

$1.57. A gallon of premium gasoline can cost as much as $1.78. A year ago, a gallon

of gas cost just 98.2 cents in Florida. It is easy to understand why so many Americans are seeing red when they visit their local gas station.

Many factors may be contributing to the rising price of gasoline. One matter

under review today has been a particular focus of the Health and Environment Subcommittee—implementation of the reformulated gasoline program (RFG).

Over the past two and a half years, we have held three hearings which specifically

addressed the RFG program. At our most recent hearing, on March 2, 2000, we exVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00007 Fmt 6633 Sfmt 6621 E:\HEARINGS\65909 pfrm03 PsN: 65909
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amined several questions concerning national implementation of the program, including water contamination associated with the fuel oxygenate, methyl tertiary

butyl ether, or MTBE.

Today, I think we must examine the price experience of Phase II of the RFG program in the Midwest and the specific causes for the runup in gasoline prices in that

area. But we must also closely review the Environmental Protection Agency’s continuing implementation of the RFG program and why it did not, or could not, predict the difficulties which have been experienced in Chicago and Milwaukee.

The RFG program is a mature program. It has been in law for almost ten years

and final regulations were issued in February of 1994. It is therefore disturbing that

it wasn’t until early June, or after the final downstream implementation date of the

Phase II program, that EPA began to ask why refiners were having difficulty in

meeting the demand for RFG and why prices had escalated far beyond other areas

of the country. While I have not drawn any conclusions on this matter, I also find

it hard to believe that there were not some signs on the horizon of the difficulties

that lay ahead.

I also remain concerned regarding the Agency’s apparent inability to move forward with any determination concerning a request from California for waiver of the

2 percent federal oxygenate standard for RFG. EPA has been ‘‘reviewing’’ this matter for 15 months. It has every last bit of data it requested from the State of California since early February. And yet, Administrator Browner last week would not

even venture a tentative date as to when the Agency would complete its work.

Last May, I indicated that EPA inaction on this matter looked like ‘‘stonewalling’’

on the part of the Agency. Today, unless I hear differently from the witnesses, I

think the EPA’s intransigence on this matter is more like the Great Wall of China

stretching endlessly into the distance with no end in sight.

It is simply not credible or believable that the Agency cannot address this technical issue when, in the next breath, it acts to promulgate major revisions to air

standards, new fuel standards for cars and diesels, and endless paper and litigation

on the ozone transport rule. Whatever the reason for inaction, at this point, EPA’s

inaction cannot be based on questions of technicality or difficulty, but rather must

be based on deliberate intent or total incompetence.

I am anxious to hear from today’s witnesses and look forward to working with

my colleagues on this important issue.

Thank you, Mr. Chairman.

PREPARED STATEMENT OF HON. STEVE LARGENT, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OKLAHOMA

Mr. Chairman, you are to be commended for holding this very important full committee hearing on two issues that will predominate this summer’s headlines—gas

prices and electricity reliability. I want to welcome our illustrious panel of witnesses, and pay a special word of welcome to one of my constituents who will be

testifying on the second panel, Mr. Jerry Thompson, Senior Vice President of Citgo.

Mr. Chairman, in the interest of time, I will keep my opening remarks brief, over

the course of the past few weeks we have seen of barrage of political finger pointing

because of increased gas prices. I’m sure there is enough fault to go around, but

Americans have grown weary of the political blame game. They just want congress

and the administration, as well as industry, to work together to find a long term

solution to ensure reliable and affordable energy prices.

This morning we will also look at the constraints being placed on our national

electric transmission system and the current balkanization of the grid. As an eternal

optimist, I want to say to all those skeptics and nay sayers who believe that we cannot pass comprehensive restructuring legislation which ensures open and non-discriminatory access to the grid, I am confident this committee, will in fact, prove you

wrong.

Both Chairman Bliley and Chairman Barton, as well as all members who have

worked on this issue, are to be commended for their diligent efforts.

Mr. Chairman, I look forward to having a constructive dialogue with our witnesses, and again thank you for holding this very important hearing.

PREPARED STATEMENT OF HON. RICK LAZIO, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF NEW YORK

Mr. Chairman, I applaud you for holding this hearing on this critical issue today.

I look forward to the insights and suggestions from our witnesses.

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Mr. Chairman, there is a gas crisis in New York and America today. And what

New Yorkers and all Americans deserve—immediately—is relief from escalating fuel

prices. The bottom line is that we need to take action to lower gas prices—now.

Mr. Chairman, New Yorkers are being gouged at the gas pump. The average price per gallon in our state is up to $1.70. These outrageous gas prices affect all New

Yorkers, making driving more expensive, and raising the cost of every item moved

by truck—from food to clothes to household goods.

Many small, fuel-intensive businesses already are suffering the effects of high gas

prices. For a small company that consumes 50,000 gallons of diesel fuel in a month,

the increase in prices in the past year will cost that company an additional $40,000

per month. High gas prices have the most impact on poor, elderly, and rural New

Yorkers.

Mr. Chairman, the CATO Institute calls the flat 4.3 cents per gallon federal gas

tax one of the most regressive of all federal taxes. Most New Yorkers earning less

than $ 1 0,000 per year commute to work in cars, so a flat tax rate falls disproportionately on these poor as a percentage of their income. Rich or poor, you still pay

the same amount at the pump. Rich or poor, you still have to drive about as far

to work and to the grocery store. But our lower income families have less money

with which to pay at the pump.

The Tax Foundation says excise taxes such as the gasoline tax are five times more

burdensome for lower-income households than they are for wealthy taxpayers.

Here is what I believe we need to do—now.

First, we must repeal the Clinton-Gore gas tax. The gas tax was established in

1993. The Clinton-Gore gas tax increase costs New Yorkers over three hundred million dollars a year.

Second, the Administration must begin pressuring the OPEC nations to take real

steps to increase production, increase the supply of oil, and help lower prices. In

1991, America committed its prestige and its blood to help protect many of the Mideast oil-producing nations. It is time for us to call in that debt.

Third, we need to immediately open the Strategic Petroleum Reserve to increase

the supply of fuel on the market. The reserve was created to ensure a stable supply

of oil during a crisis. Let me tell you—gas prices approaching $2.00 a gallon means

a real crisis for New Yorkers.

Some have expressed concern that eliminating the federal gas tax would affect the

amount of money the states get for road construction. This year’s federal budget surplus is nearing $250 billion. The surplus will likely total $2 trillion over the next

ten years. The taxpayers helped build this surplus—they deserve to get some benefit

from it. We should use part of the surplus to offset any reduction in federal highway

funds.

Mr. Chairman, last night I, and the majority of this House, voted again to reauthorize the Strategic Petroleum Reserve and to create a Northeast Regional Heating

Oil Reserve. I have been an early and consistent supporter of the Northeast reserve,

but I recognize that it alone is not a complete solution. I look forward to working

with our colleagues in the other body to make that reserve a reality.

Mr. Chairman, this is a great nation and it deserves great things from its leaders.

This gas crisis was no surprise. We in New York saw it coming when we watched

our heating bills double overnight last winter. We cannot understand how the administration could have sat by and done nothing to avoid last winter’s heating oil

crisis from becoming this summer’s gas crisis.

Mr. Chairman, you are to be commended for holding this hearing, and I look forward to working with you and this Committee on this important issue.

PREPARED STATEMENT OF HON. BARBARA CUBIN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF WYOMING

The United States now relies on foreign imports for 56% of our crude oil needs.

In the last eight years domestic oil production has declined 17%. A decade ago there

were over 650 drilling rigs exploring for oil in the U.S., today there are only 153.

The popular scapegoat for high gasoline prices are our Middle East allies of Desert

Storm and the remainder of OPEC nations. But much of the responsibility for our

addiction to foreign oil is the result of policies emanating from the Clinton/Gore Administration. This administration has formulated an anti-energy policy that for

eight years discouraged oil exploration and reduced our domestic energy to a shadow of its former self. As a result, American’s are paying for that 10,000 mile economic intravenous drip at the pump and at the cash register. Transportation costs

are skyrocketing; everything that rolls, floats, or flies costs more to operate. From

food and clothing to computers and telecommunications equipment—all goods and

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services cost more. lt’s not just the gas for your family car; our national security

and health of our economy are at stake.

Wyoming has benefited from a rise in oil prices. But we are once again on the

upswing of the infamous roller-coaster economy so prevalent in a State dependent

on natural resources. The downturn surely will follow. I do not support artificial energy prices—whether low from a temporary oil glut, or high from withholding crude

from the market. We must have an energy policy that creates a stable market to

support a vibrant domestic energy industry while providing affordable energy to

power our expanding economy. The law of supply and demand is basically immutable. Neither the President nor Congress can force prices lower when demand remains constant or increases at the same time supplies have decreased. Rather we

should attack the problem from both ends of the equation.

From the supply side, we should require the Clinton/Gore Administration to disclose, in a report to Congress, the extent of domestic oil and gas resources which

lie beneath public lands and outer continental shelf (OCS) areas deemed off-limits

to exploration and development. This showing must include undiscovered resources

estimated by objective scientific means as well as know reserves. Likewise, the report should include an assessment of domestic hydrocarbon resources which are not

getting to markets in a timely manner because of extraordinary delays in lease

issuance and/or permitting of wells and pipelines, such as we have already seen

with respect to coalbed methane in the Powder River Basin. Energy experts agree

the public lands and OCS have the best potential for significant new discoveries of

oil and gas anywhere in the United States. In this manner, Congress will have baseline for policymaking regarding federal oil and gas supplies. Other factors for increasing domestic supplies include tax incentives for companies to spend more of

their exploration budgets here at home rather than in foreign countries. Senator

Hutchison has introduced such a package which deserves debate, passage by Congress and a signature of the President. On the demand side, Congress and the Administration should continue efforts for increased efficiencies in power generation,

transmission and usage. When calculating the demand for oil and natural gas, we

must not neglect the significant role of coal and uranium resources in electric power

generation, including research and development in cleaner burning of fossil fuels.

Likewise, the Administration must acknowledge the impact of an upcoming decision

to classify fly ash from coal-burning plants to be a hazardous substance. Coal-fired

electricity rates will increase significantly if this environmentally benign ash cannot

be used in the reclamation of the very mines whence it came. There are a number

of directions we can go to secure more domestic energy. The bottom line is we have

the resources and the technology to responsibly produce the energy America needs

to power industry and fulfill the needs of all Americans. Future generations will pay

an even higher price down the road if we fail to answer the call.

PREPARED STATEMENT OF ROY BLUNT, A REPRESENTATIVE IN CONGRESS FROM THE

STATE OF MISSOURI

Mr. Chairman: When it comes to concerns about gasoline and diesel prices, my

constituents in the Seventh District of Missouri aren’t interested in fingerpointing,

scapegoating, or demogogery. MTBE and RFG aren’t what’s being discussed by husbands and wives around the kitchen tables. They want lower fuel prices, stable supplies, and they want it now, not 6 months or a year from now.

Families want assurances that they aren’t going to have to decide whether to put

gas in their car to go to work or food on the table to feed themselves. Farmers want

to make sure that they can afford the fuel to operate their tractors to plant and

cultivate crops now but still be in business when it comes time to harvest this fall.

Small business owners are concerned that their customers won’t have the money to

buy their goods and services or that the higher cost of transportation and supplies

will drive them out of business. Members of volunteer fire departments are even

telling me that higher fuel prices are reducing the number of firefighters who are

showing up to help out their neighbors in time of need.

Higher fuel prices impact everyone. Mr. Chairman, I’m supporting an immediate

suspension of the federal tax on motor fuels, 18.4 cents on gasoline and 24.4 cents

on diesel fuel. That’s a tax cut that will immediately go directly into the pocketbooks

of every American family that drives a car or a truck.

Because as a nation we can’t afford to stop building and maintaining roads, I also

propose that we reimburse the Highway Trust Funds the dollars we would have collected in the same 90 day period. This suspension transfers over $7 Billion dollars

out of the Treasury Department on Pennsylvania Ave and moves it to Front Street

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America, out of the reach of those in Washington who have never met a new or expanded entitlement program they couldn’t love.

But once we’ve get fuel prices under control, the American people are demanding

the Truth.

They want to know how the three-fold failure of the Energy Department to build

adequate international relationships with our foreign oil suppliers, to encourage development of domestic petroleum supplies and to promote alternative energy systems led to higher motor fuel prices.

They want to know why the Energy Department was napping—in the words of

Secretary Richardson—as the cost of foreign oil virtually tripled in less than two

years and as inventories of US fuel supplies reached their lowest levels in many

years.

They want to know whether there is any truth to published reports that the current Administration encouraged OPEC production cuts to help some countries pay

off debts to US banks.

They want to know whether there’s been price gouging by refiners and retailers.

They want to know why the Energy Department claims that reformulated gasoline only costs pennies more per gallon, the Congressional Research Service estimates the cost at about 25 cents per gallon, but the marketplace placed the cost

at as much as 40 cents per gallon.

And in my Congressional district people want to know why gasoline and diesel

fuel being unloaded at two terminals in our district were priced as much as 30 cents

more per gallon than fuel a couple of hundred miles away.

Mr. Chairman, our citizens not only want the truth, they are demanding the

truth. My colleagues, I can assure you that the American public is as mad as hell,

and they are going to hold what they perceive as ‘‘do nothing’’ politicians accountable.

I call on the Senate to quickly approve the Oil Price Reduction Act of 2000 which

would reduce, suspend, or terminate any foreign aid, include military assistance, to

any country determined to be engaged in oil price fixing to the detriment of the

United States economy.

I call on my colleagues to join with me in supporting a 90 day suspension of federal motor fuel taxes.

I also want to call on the members of the President’s Administration to pursue

with utmost urgency your review of the causes of the current increase in fuel prices

and to either make the necessary changes yourself or come back to this Congress

with concrete proposals for reducing prices at the earliest date possible.

PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

Mr. Chairman, I appreciate this hearing and hope that it produces a serious discussion of the issues at hand. While it might be tempting to engage in a festival

of fingerpointing to assign responsibility for the recent rise in gasoline prices, we

might find at the end of this hearing that some of those fingers will be pointed at

us.

In the last few weeks, the price of a gallon of gasoline in some Midwestern cities

jumped 60 cents overnight. A number of explanations for those increases have been

offered.

One is that a new reformulated gasoline requirement is responsible. Reformulated

gasoline had its origins in the Clean Air Act Amendments submitted to the Congress by one George H.W. Bush, and signed into law by him in 1990. We had a spirited debate in this Committee on this issue—Secretary Richardson remembers it

well, because he was then one of our members—and I warned at the time that reformulated gas might be more expensive or produce distribution problems.

Nonetheless, there is no credible evidence that the reformulated gas requirements

are entirely or even primarily responsible for the recent price spike. In fact, in some

areas reformulated gas is cheaper than regular gasoline.

A second explanation is that we are having supply problems, specifically, accidents causing the interruption or curtailment of service at two pipelines. As Secretary Slater knows, I have had some choice words of criticism for the competence

of the Office of Pipeline Safety. But I also warned, when this Committee considered

pipeline legislation almost two years ago, that we were blissfully ignoring safety.

The Committee, of course, chose to ignore my warnings instead. We’ve since seen

pipeline accidents take the lives of children in Washington state, and we’ve been

made aware that there is indeed an economic component to pipeline safety.

8

We’ve also seen accusations and insinuations of good old-fashioned price gouging

by the oil companies. Chairman Pitofsky’s agency is in the process of investigating

those questions, and while I wouldn’t prejudge its results, I have a strong suspicion

that at a minimum, what we have here are some practicing capitalists.

Finally, the Administration has been accused of lacking an energy policy. That’s

a charge that can also be leveled at a Congress that has not only failed to reauthorize the Strategic Petroleum Reserve, but whose leadership actually proposed eliminating SPRO and disposing of its petroleum contents. The Congress also proposed

abolishing the Energy Information Administration, our first line of defense against

our own ignorance on energy matters.

There is, frankly, enough responsibility to go around. The harsh fact is that we

only pay attention to energy issues when there is a price spike or a supply disruption. No matter where our discussion leads us today, I would hope that we look at

these issues as longer term, sustained projects. Many of the proposed solutions currently under discussion are simply designed to get us through the next election.

PREPARED STATEMENT OF HON. RALPH M. HALL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF TEXAS

Mr. Chairman and Members of the Committee—I thank you for holding this hearing today. Last week I requested that you schedule this hearing to take testimony

from witnesses who have actual knowledge of how gasoline and other refined petroleum products are produced, refined and marketed. In that letter I urged you to

hold this hearing now so if we learn there are problems with how these markets

are operating, we have enough time before adjournment to find the appropriate remedies, if there is evidence of price collusion among sellers. While price gouging is

not illegal, perhaps we can put the spotlight on it if it is occurring in the supply

chain.

In the last week however, the rhetoric has escalated to a fever pitch, with Democrats blaming Republicans, Republicans blaming Democrats, and consumer groups

blaming the oil companies about the situation we find ourselves in today. We in the

Congress are fine practitioners of the blame game. But I think it’s time we look inward at ourselves, at this government. And if we do, I believe we will find that for

a long time we have been negligent in our responsibilities to ensure a reliable supply of crude oil at stable prices. It may be, as the cartoon character Pogo once said,

‘‘We have met the enemy and it is us.’’

Nobody likes lower energy prices than I do, but the low prices of last year were

every bit as much of a market signal that something was wrong as the relatively

high prices that we see posted at the pump are today. The oil industry and its industry economists foresaw this escalation of prices more than a year ago. And yet

here we are today castigating them for what they told us would ensue if we didn’t

act. As a government we sat idly by, and not only did nothing, but we actually allowed domestic production to decline significantly, because we thought that in low

prices there was a real free lunch. Well, the check now has to be paid.

We have not had the courage to pursue what really ought to be our objective—

and that is stable oil prices. It has taken us years of inaction to dig ourselves into

this quagmire, and it will take some years to get us out of it. But we can make

a commitment, while prices are high, to enact legislation to provide stability in oil

prices—even after prices have declined. We simply can’t continue to be as shortsighted as we have been to date.

What needs to be done? For starters we need to pass the tax package that has

been championed by Wes Watkins of Oklahoma. It’s not all the industry needs, but

it’s a start. With the record budget surpluses projected over the next ten years, surely we can afford the revenue loss that will benefit our constituents much more than

it will cost them.

We need to enlarge our drilling options. An offshore rig is never nearly as unsightly as a ship laden with American soldiers and sailors going off to fight in a

foreign land for energy. Make no mistake—the United States will go to war for energy—when ours is completely depleted.

Japan in the late 1930s was forced to go to Malaysia for energy after Secretary

of State Cordell Hull and Secretary of War Henry Stimson cut off their supply of

energy. Hitler went east. We also sent 400,000 troops to Kuwait but never mentioned the real reason we sent them there—to keep a bad person and an unfriendly

nation from controlling one-half of the world’s energy.

I’m an environmentalist, but I don’t like to think of body bags. We are nearing

a day and time when realism tells us to protect an environment by serving our

country and by drilling on the Alaskan North Slope, offshore and on federal lands

9

now locked away from exploration and production. The signs that the environmentalists hold up saying ‘‘No Nukes’’ can say ‘‘No Wars.’’

There is something we should include if we adopt a new energy policy—and that

is to provide an incentive to look for energy and a reward for finding it.

We also need to stop arguing about whether it’s fossil energy or renewable energy

that ought to be in our energy future. The fact of the matter is, we need them both!

Let’s cough up the dollars to support renewable energy technology and energy efficiency and support fossil energy R&D, too. There’s much more oil and gas to be produced in this country, but we have to develop the technologies to extract it at reasonable cost. Coal also deserves support. After all, our coal resource will be here

long after the oil and natural gas resource base has been depleted.

Mr. Chairman, we are the envy of the world with our diverse energy resource

base. France, Germany and Japan would kill to have our domestic energy resources,

and the people we have who are pursuing research in advanced combustion technologies, renewable energy resources and energy efficiency. Many writers say that,

even at current prices, by world standards gasoline is a big bargain. They tell us

to try filling up in France or Italy and see what you pay. Even so, we need to increase our domestic production capability to help bring about a more stable market.

Let’s take a hard look at how these markets are working and make certain that

they are working properly. That is our job here today. I am willing to work with

you and the other members of the Committee to move any legislation that will deal

with the longer-term, more fundamental problems that prevent us from achieving

stable prices.

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

FROM THE STATE OF OHIO

Thank you, Mr. Chairman. By now we have already heard many explanations for

high gasoline prices. Maybe we will learn something new from this hearing. But I

have yet to hear a satisfactory explanation for the dramatic jump in gas prices in

the Midwest earlier this month.

I look forward to the results of the Federal Trade Commission’s investigation into

possible antitrust activity in the Midwestern gasoline markets. I have urged the

President to ensure the FTC has all the resources it needs to conduct a speedy investigation, and the Justice Department is poised to take enforcement action quickly

if any wrongdoing is found.

But I suspect these huge price spikes can be explained in one word: price-gouging.

With supplies tight and the summer driving season beginning, the oil industry saw

the opportunity to reap windfall profits at the expense of our constituents. My constituents don’t have any trouble identifying the price increases as price-gouging.

They have been calling me, and demanding to know what I’m doing about it.

They’re not happy when I tell them, ‘‘Price-gouging is not illegal.’’

While price-gouging is legal, it isn’t right. On April 10, 1962, six major US steel

producers announced a sudden increase in steel prices. President John F. Kennedy

was absolutely furious. He denounced the price increase in no uncertain terms. He

said,

Price and wage decisions in this country, except for a very limited restriction

in the case of monopolies and national emergency strikes, are and ought to be

freely and privately made. But the American people have a right to expect, in

return for that freedom, a higher sense of business responsibility for the welfare

of their country than has been shown in the last two days.

Some time ago I asked each American to consider what he would do for his

country and I asked the steel companies. In the last 24 hours we had their answer.

Three and four days later, in response to President Kennedy’s ringing denunciation, the steelmakers canceled their price increases.

Distinguished Administration witnesses, I call on you and the President to use the

same bully pulpit, as President Kennedy did, to call for lower gas prices now.

I also urge the Republican leadership in this Congress to call for lower gas prices

immediately. Remember that you represent American citizens—workers, small business owners, families—not just oil companies. Stop telling us the Administration

doesn’t have an energy policy. President Reagan and President Bush didn’t have an

energy policy any more comprehensive than President Clinton’s.

It is truly ironic that the Republican leadership wants to eliminate the Department of Energy, refuses to invest in energy efficiency, and refuses to invest in developing new sources of energy renewable sources. Yet the Republican leadership tells

10

the public the high prices at the gas pump are because the Democrats we don’t have

an energy policy.

Let’s get these prices down as quickly as possible, and make sure we work together on our long-term energy policy. Thank you, Mr. Chairman.

PREPARED STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF NEW JERSEY

Mr. Chairman, this hearing is supposed to address ‘‘summer energy concerns.’’

Well, I am concerned about what we are facing and are likely to face this summer—

in terms of exorbitant gas prices and impending blackouts and brownouts—and

what we, particularly in the northeast, are going to face in the fall with respect to

heating oil prices.

However, it seems to me these crises could be, or could have been, avoided. Yes,

we may be witnessing some price gouging by the oil companies, and I hope we’ll

explore that angle in depth here this morning. Yet, this committee last addressed

a comprehensive energy policy in 1992 with the Energy Policy Act of 1992. And, for

the first 4.5 years the Republicans controlled this Congress, they conducted no oversight on oil & gas policy at all. Moreover, the first hearing of this Congress was on

the Iraqi oil-for-food program, during which Mr. Barton declared oil prices were too

low. Our chairman also stated he knew OPEC was going to cut supply but took no

action to protect our Nation’s consumers. That was over one year ago.

The Republicans now claim to have an energy policy—their ‘‘sham’’ policy consists

of trying to abolish the Department of Energy, cutting funding for renewable energy,

energy conservation measures, and fuel-efficient vehicles far below the Clinton-Gore

Administration’s requested levels, and repealing fuel taxes that pay for our nation’s

transportation infrastructure.

Mr. Chairman, I am concerned about rising gas prices and about the reliability

of our electric transmission system. Supplies are already barely available for gasoline, and natural gas supplies are going to be tight for heating, cooling, and keeping

the lights on this summer and fall. Mr. Chairman, as we will hear from at least

one witness (Alliance to Save Energy), the only way to address these problems in

the near-term, as well as the long-term is to look at energy conservation, alternative

energy resource development and other measures to reduce the burden on the grid

and on our fossil fuel resources.

We must take a long-term approach to ensure this Nation’s energy independence

and energy security. The Republicans have done everything they can to gut Democrats’ and the administration’s attempts to do so.

Let me also briefly address two other issues. First, I will examine the reformulated gasoline issue. Reformulated gasoline now costs only approximately five cents

per gallon more than conventional gasoline—and this includes the newest, more

stringent requirements and includes blending with ethanol. But, in case anyone

feels this is too much to pay, I have joined my colleagues, Mr. Barrett, Mr. Kucinich,

and Mr. Baldacci in introducing legislation, H.R. 4739, which addresses the Unocal

patent for reformulated gasoline. Unocal can be seen to have a monopoly on the

blending process for reformulated gasoline. Other refiners have cut back supply to

avoid paying high prices for the license to these patents. Our legislation would enable the Attorney General to extend authority she currently has under the Clean

Air Act to the reformulated gasoline program, so that these patents would be more

readily available to all refiners, thereby enabling refiners to increase supplies, and

in turn, bring down prices.

Finally, let me discuss pipeline problems which have disrupted the flow of petroleum products to the midwest. I look forward to hearing from the Department of

Transportation (DOT) on this aspect of today’s hearing. I am fairly confident that

these breakdowns have likely also led to the recent increase in gas prices. I have

long fought for tougher pipeline safety legislation to prevent such accidents. Now,

I am working with Rep. Inslee to introduce strong pipeline safety legislation that

would require inspections to detect corrosion of hazardous liquid pipelines. These inspections should prevent the type of accident that occurred with the ‘‘explorer’’ pipeline. My legislation also contains strong enforcement provisions to further prevent

operators from trying to avoid complying with requirements. And, as many of you

know, I have passed one-call legislation so that excavators ‘‘call before they dig’’ to

also try to avoid pipeline interruptions.

Thank you, Mr. Chairman.

11

PREPARED STATEMENT OF HON. BILL LUTHER, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF MINNESOTA

I would like to thank the Chairman of the Committee for holding this important

hearing. During this hearing I would like to address two concerns with regard to

soaring gasoline prices in Minnesota and the Midwest:

First, the Federal Trade Commission has recently launched an investigation into

possible price collusion in Midwestern markets. The state of Minnesota will be included within the Midwest geographical region that the Commission will investigate. I am very concerned over allegations of price collusion, and I hope this hearing will provide Chairman Pitofsky with an opportunity to set forth the general

structure of the FTC’s investigation. I realize and appreciate the sensitivity of disclosing preliminary information, and I certainly respect the FTC’s discretion in this

regard. But to the degree that he is so empowered, I would appreciate it if Chairman Pitofsky could inform the Committee of how the FTC generally plans to investigate the rising prices on the American consumer.

On this point, I would like to submit into the record an article appearing in the

June 23 edition of the Minneapolis Star Tribune. That article reports that an

unnamed major oil company, which controls 40% of the Twin Cities market, was

going to reduce gasoline prices by 7 cents a gallon the next day. This sudden action

came on the heels of another news report two days earlier that announcing that the

FTC would include Minnesota within its regional investigation of price collusion.

Mr. Chairman, it is my hope both Chairman Pitofsky and our witnesses can explain

this sudden drop in prices.

My second concern is with Phase II of the reformulated gasoline program or RFG.

Many in Congress have blamed the Administration and the EPA for the mandates

under the Clean Air Act—in particular, they blame the EPA’s recent regulations

that require certain metropolitan areas to sell the cleaner-burning summertime

RFG. Phase II of this program became effective in January of this year and Phase

II RFG was due at the pump on June 1st. This timetable roughly coincides with

the spike in gasoline prices. However, no metropolitan area in Minnesota was required to participate in Phase II, nor did Minnesota elect to opt into the program

on a statewide basis. Nonetheless, Minnesota gasoline prices soared to $1.90 a gallon, a price on par with prices in Milwaukee and Chicago. It is my hope that EPA

Administrator Browner and our witnesses can explain how RFG has adversely affected gasoline prices in Minnesota, when the entire state is not under any of Phase

II’s requirements.

It is vitally important that Congress address the needs of the American consumer

in this matter. Whether it be price collusion, reformulated gasoline, defective pipelines, or general market economics, the American consumer needs relief. This can

only be accomplished through a thorough understanding of the causes of the current

situation. I therefore look forward to hearing all of the testimony.

Chairman BLILEY. Mr. Dingell is not here, so we will begin with

our witnesses. So we will start on the left with the Chairman of

the Federal Trade Commission, Mr. Pitofsky; followed by Ms.

Browner of EPA; Mr. Slater, the Secretary of Transportation; and

Secretary Richardson.

STATEMENT OF HON. ROBERT PITOFSKY, CHAIRMAN,

FEDERAL TRADE COMMISSION

Mr. PITOFSKY. Thank you very much, Mr. Chairman. I am

pleased to have this opportunity to discuss with members of this

committee the matter of recent price increases in the price of gasoline, particularly in the Midwest. As you know, motorists in the

Midwest have been subjected to remarkably large and abrupt price

spikes in gasoline prices. In Chicago, prices for regular reformulated gasoline hit a high of $2.13 on June 20 and reportedly as

high as $2.50 at some gas stations. In Milwaukee, on June 20 the

price was $2.02. By the middle of June, motorists living in the Midwest States including Illinois, Wisconsin and Michigan were paying

the highest retail gasoline prices in the United States. And the

question from all of us is why is this happening?

12

Some have speculated that the price increase in the Midwest is

occurring because of the decision of the OPEC countries to curtail

production, because of the increase in demand for crude oil in Asia

as those economies recover, or the increase in the demand in the

United States as a result of the summer driving season. But all of

those factors should affect the east coast, the west coast and the

Midwest approximately in the same way. Therefore, it seems unlikely to me at this time that these factors would account for price

increases for reformulated gas in the Midwest that are 30, 40 or

even 50 cents higher than for reformulated gasoline in other parts

of the country.

Others have suggested that the price increases relate directly or

indirectly to the decision originally made by Congress and implemented by the EPA to introduce Phase II summer blend gasoline

into particular parts of the Midwest. The Phase II gasoline used in

the Midwest involves a new ingredient not used in many other

parts of the United States and may have caused adjustment difficulties in the production process and may have decreased refinery

yields. There have also been some transportation difficulties in two

pipelines serving the Midwest, although one of those pipeline difficulties occurred in March and appears to have been largely, if not

completely, solved, and the other involved a rather minor spill. But

small disruptions of supply in a tight market can cause severe

price fluctuations.

Finally, some have suspected that the Midwestern price increase

is as a result of some sort of collusion or conspiracy among producers in the area or noncollusive opportunism by refiners and

other marketers taking advantage of market dislocations resulting

from the introduction of a new form of gasoline.

The FTC’s decision to initiate a formal investigation of gasoline

prices in the Midwest has met with strong bipartisan support from

Members of Congress and from the administration. We have heard

from over 100 Members of Congress, both sides of the aisle, Republican and Democratic, urging or supporting this investigation. We

have begun to serve subpoenas on major oil companies operating

in the Midwest, we will serve additional subpoenas in the near future and will eventually take testimony under oath.

One of the virtues of an investigation like ours is that we can

come down from the mountaintop of speculation and suspicion and

look more closely at how these substantial price increases came

about. Among the issues that we will address are the following: Assuming that the price increases were triggered at the refinery or

terminal levels, which firms led off the price increases and when,

and why did they move in that way? Which firms followed the initial price increases and in what time period?

As to companies that led or followed, what were their levels of

inventory of conventional gasoline and reformulated gasoline at the

time decisions were made to increase prices? Were those levels

lower than usual?

To what extent did the introduction of reformulated gasoline increase the costs of refiners and terminal outlets? What were the

production levels in the months leading up to the introduction of

reformulated gasoline, and what were the production levels since?

13

1This written statement represents the views of the Federal Trade Commission. My oral presentation and response to questions are my own, and do not necessarily represent the views of

the Commission or any other Commissioner. 2 Energy Information Administration, Office of Oil and Gas Daily Price Report (June 12, 2000).

In comparing average RFG prices at different times and at different places, it should be noted

that RFG requirements may differ between summer and winter and also between localities. 3 EPA Data, RFG-CG Price Information, based on Oil Price Information Service data (June

14, 2000, June 23, 2000). 4 Id.

5See R. Kemper & K. Mellen, ‘‘As Pressure Builds, Price of Gas Falls,’’ Chicago Tribune (June

23, 2000). 6 EPA Data, RFG-CG Price Information (June 14, 2000).

7 Energy Information Administration, Motor Gasoline Watch (June 21, 2000) at 2.

Assuming that demand for gasoline is relatively inelastic, that is

in the short run, almost all motorists and small businesses will pay

the additional money rather than discontinue driving or abandon

their cars, what were the reasons for the price increase?

Finally, is there any direct evidence of collusion?

The good news is that prices at refineries, terminals and at least

some retail outlets in the affected areas appear to have fallen in

the last week or so. We will also investigate why the prices have

fallen in the way that they have.

I have committed the Federal Trade Commission to conduct a

thorough, fair and objective study of gasoline price levels throughout the Midwest and, depending on what our investigation finds,

to take appropriate action. Assuming the parties cooperate, I hope

to have a status update on the progress of our investigation for the

Congress by the end of July. Thank you, and of course I will be

glad to answer questions.

[The prepared statement of Robert Pitofsky follows:]

PREPARED STATEMENT OF HON. ROBERT PITOFSKY,1 CHAIRMAN, FEDERAL TRADE

COMMISSION

I. INTRODUCTION

Mr. Chairman and members of the Committee, I am pleased to appear before you

today at this hearing on the important topic of summer energy concerns, and to

present the Federal Trade Commission’s testimony, which will focus on recent increases in gasoline prices in certain Midwest markets. Competition in the energy

sector—particularly in the petroleum industry—is vital to the health of the economy

of the United States. Antitrust enforcement has an important role to play in ensuring that the industry is, and remains, competitive.

Consumers in some Midwest markets, such as Chicago and Milwaukee, have experienced considerable price increases in gasoline since early spring, and prices have

continued to spike up in the past month. The national average retail price of reformulated gasoline (‘‘RFG’’) increased from $1.29 to $1.67 per gallon from November,

1999 to June 12, 2000.2 In Chicago, the average RFG price rose from $1.85 per gallon on May 30 to $2.13 on June 20.3 From May 30 to June 20 in Milwaukee the

increase was from $1.74 to $2.02.4 During the week of June 19, RFG prices at some

Chicago gas stations apparently rose as high as $2.50, although they reportedly receded several cents towards the end of last week.5

Conventional gasoline prices in the Midwest have also risen substantially in recent weeks. National average retail prices increased from $1.25 to $1.61 per gallon

for conventional gasoline between November, 1999 and June 12, 2000.6 Average conventional gasoline retail prices in the Midwest rose from $1.55 to $1.85 per gallon

from May 29 to June 19, 2000.7 Increases as dramatic as those seen in recent weeks,

without any obvious complete explanation, call for scrutiny by antitrust enforcement

authorities to determine whether they result from collusion or other unlawful anticompetitive conduct.

The FTC is a law enforcement agency with two related missions: to preserve competition in the marketplace for the ultimate benefit of consumers and to protect consumers from deceptive or unfair practices that may injure them more directly. Unlike agencies that focus on particular industries, the Commission’s statutory authorVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 E:\HEARINGS\65909 pfrm03 PsN: 65909
14

8 Energy Information Administration, Update: A Year of Volatility-Oil Markets and Gasoline,

June 21, 2000 (West Texas Intermediate crude oil spot prices). 9On June 21, OPEC announced a production increase of 708,000 barrels per day. ‘‘OPEC

Agrees to Increase Oil Production,’’ Wall Street Journal (June 22, 2000) at A3. 10St. Louis received EPA waivers to delay implementation of Phase II RFG until early June,

because of a break in the Explorer pipeline which serves the region. St. Louis uses primarily

MTBE-based RFG, which many observers believe to be less costly than ethanol-based RFG. St.

Louis has not so far experienced price increases as great as those in Chicago and Milwaukee. 11 Union Oil Co. v. Atlantic Richfield Co., 208 F.3d 989 (Fed. Cir. March 29, 2000).

ity covers a broad spectrum of sectors in the American economy, including the energy industry and its various components. The Commission’s Bureau of Competition

shares responsibility for antitrust enforcement with the Antitrust Division of the

Department of Justice. The Commission also shares its expertise in both competition

and consumer protection matters by providing advice to the States and to other federal regulatory agencies.

Consumer welfare is the goal of antitrust enforcement across all industries. Its

importance is particularly clear in the energy industry, where even small price increases can strain the budgets of many consumers, particularly those with low and

fixed incomes, and of small business, and, as a result, can have a direct and lasting

impact on the entire economy. In fiscal years 1999 and 2000 to date, the Bureau

of Competition spent almost one-third of its total enforcement budget on investigations in energy industries.

Today, we provide an overview of our investigation into whether illegal conduct

has led to gasoline price increases in Chicago, Milwaukee, and elsewhere in the

Midwest.

II. POTENTIAL CAUSES OF THE CURRENT PRICE SPIKES

Publicly available information suggests that several factors may have contributed

to the recent spikes in prices. The first factor is the reduced global supply of crude

oil. In the second half of 1999, OPEC countries, joined by several non-OPEC oil exporting countries, curtailed the global supply of crude oil. During the same time period, a number of Asian economies began to recover from a regional recession, causing increased demand for petroleum products. Moreover, in recent months, many

foreign economies have experienced impressive growth, while the U.S. economy has

continued its record expansion. The result is that worldwide consumption of crude

oil has exceeded production, and world and U.S. inventories have been drawn down.

Refiners responded to the crude price increases caused by this crude shortage by

cutting gasoline production and using inventories of gasoline to meet demand, in the

expectation that inventories could be replenished once crude oil prices dropped, with

the result that the spread between crude oil and conventional gasoline increased.

All of these factors have led to tight supply situations in many countries.

In the Spring of this year, the OPEC countries agreed to increase production in

an attempt to moderate the price of crude petroleum, which had increased from a

low of about $12 a barrel in February 1999 to over $32 a barrel in March 2000.8

The announcement of the Spring supply increase caused crude prices to dip temporarily, but they have since recovered, reaching $33 a barrel earlier this month, in

the face of continued world-wide economic expansion and summer increases in demand for gasoline. It remains to be seen whether, when and to what extent OPEC’s

announcement last week of a further crude supply increase will reduce prices.9

Chicago, Milwaukee, and other places, principally in the Midwest, have suffered

particularly severe recent price increases that cannot be explained solely by the

OPEC actions and other world market factors, which would have an impact on all

regions of the United States. One factor specific to the Midwest markets that may

have contributed to the price increases was the introduction of EPA Phase II regulations for summer-blend reformulated gasoline that went into effect on May 1, 2000

at the wholesale level in both Chicago and Milwaukee. The new, more-stringent regulations require that winter-blend gas be drained from storage tanks before the

summer-blend supply could be added. These regulations may have led to abnormally

low inventories. According to some reports, summer-blend Phase II RFG is proving

more difficult to refine than anticipated, causing refinery yields to be less than expected. The ethanol-based RFG used in Chicago and Milwaukee is reportedly proving to be the most difficult of all to make. Further, St. Louis has now entered the

RFG program for the first time, thus adding additional demand to an already tight

Midwest RFG supply situation.10 Moreover, the recent appeals court decision upholding Unocal’s patent for some formulations of RFG may have caused some refineries to change RFG blends in an effort to avoid infringement, leading to production

delays and decreased refinery throughput.11 As with the OPEC factor, RFG-related

15

12 According to Energy Information Administration figures, average retail prices throughout

PADD II (the Midwestern Petroleum Administration for Defense District) rose 18.9 cents for

RFG and 29.4 cents for conventional gasoline from May 29 to June 19. See Energy Information

Administration, Motor Gasoline Watch (June 21, 2000) at 2. 13 Environment News Service, ‘‘Gasoline Spill Threatens Dallas Water Supply’’ (March 13,

2000). 14 EPA/DOE briefing of results of field interviews to FTC staff, 6/14/2000 and to Midwest/

Northeast Congressional Caucus, 6/16/2000. 15 15 U.S.C. § 41 et seq. The Commission does not have criminal enforcement authority. The

Antitrust Division of the Department of Justice has exclusive responsibility for criminal enforcement of the antitrust laws, pursuant to authority granted under the Sherman Act. 15 U.S.C.

§ 1 et seq. If we uncover evidence of criminal activity, however, such as hard-core price fixing,

we can forward the matter to the Antitrust Division. 16Subpoenas and CIDs are two methods of requiring the submission of certain information

needed for an investigation. The Commission has authority to issue both. There are certain administrative and procedural advantages to each type of compulsory authority. Subpoenas are

generally preferable for document discovery or in-person testimony, while CIDs may be superior

for obtaining interrogatory responses or information and for service on foreign entities. Naturally, the Commission seeks evidence from witnesses on a voluntary basis where appropriate

or feasible.

issues seem unlikely, however, to provide a complete explanation for recent Midwestern gas price increases, given that in the Midwest as a whole, conventional gasoline prices have risen more dramatically than RFG prices since the end of May.12

Another possible factor underlying the price increases could be the break in the

Explorer pipeline last March. This pipeline moves refined petroleum products from

the Gulf of Mexico through St. Louis to Chicago and other parts of the Midwest.13

Explorer is still not operating at full capacity.14

These supply and demand factors could explain the Midwest price increases in

whole or in part. However, these price spikes are particularly large. None of these

factors precludes the possibility that collusion may have occurred at some point that

further contributed to higher gas prices for consumers. If non-collusive marketplace

events do not explain the price spikes, that may provide circumstantial evidence

that illegal activity has taken place. In addition, we may find more direct evidence.

As we undertake this inquiry, we do not know what we will find.

III. THE FTC’S INVESTIGATION

The Commission protects competition by enforcing the antitrust laws. We do not

regulate or attempt to determine the reasonableness of energy prices. Instead, we

investigate whether or not specific anticompetitive and unlawful conduct has occurred that interferes with the operation of the free market. Thus, our investigation

will not determine whether prices are too high or too low, but only whether there

is reason to believe that the antitrust laws have been broken.

For analytical purposes, it is best to think of the Commission’s antitrust enforcement authority as divided into merger and nonmerger sectors. Enforcing the law

against anticompetitive mergers prevents the accumulation of unlawful market

power, that is, the ability profitably to raise prices above competitive levels. The

matter we are discussing today involves enforcing the nonmerger provisions of the

antitrust laws. There are two principal types of nonmerger conduct that may have

unlawful anticompetitive effects: (1) the illegal acquisition or maintenance of monopoly power, which typically consists of a single firm’s exclusionary conduct to prevent

or impede competition; and (2) collusion among two or more independent firms to

increase prices, curtail output or divide markets. Our investigation will focus on

whether any industry participants have engaged in collusion because it does not appear, at the outset, that any single oil company has sufficient market power to raise

prices unilaterally.

The Commission has initiated a formal investigation into the causes of the recent

gas price increases in the Midwest. This will be a civil investigation conducted pursuant to our authority under the Federal Trade Commission Act.15 The investigation

is being spearheaded by our Midwest Regional Office, located in Chicago. We are

working closely with the Attorneys General of the affected States to coordinate our

combined efforts.

The Commission’s investigative process in a nonmerger collusive practices case involves a thorough search for evidence that the industry participants are engaging,

or have engaged, in collusive behavior prohibited by the antitrust laws. Once a formal investigation is opened, staff typically requests from the Commission the authority to use compulsory process. The Commission has approved the use of compulsory process in this investigation, permitting the issuance of both subpoenas and

Civil Investigative Demands, and the taking of depositions under oath.16 Process

will be used to take testimony and gather evidence from the various entities that

16

refine, transport and distribute gasoline in the Midwest, as well as suppliers and

customers, and other knowledgeable or affected persons. The Commission already

has begun issuing subpoenas to the entities involved in the chain of gas supply to

the affected region. These entities include refiners, pipeline owners and operators,

terminal owners and operators, and blend plant owners and operators. Our staff

also has begun conducting interviews with market participants, consumers, corporate users of gasoline, and others with potential knowledge of relevant facts. The

objective is to determine who raised prices, and whether there was any illegal contact, communication or signaling among competitors before or during the time of the

price increases.

The Commission must show more than parallel behavior among market participants to prove collusion. The fact that all companies raise prices at the same time

is not sufficient evidence of collusion. The courts have held that some ‘‘plus factor’’

must be present to demonstrate that an agreement was reached. Behavior that

would be unprofitable ‘‘but for’’ collusion may be evidence that such an agreement

exists.

Beyond this general description of what the Commission is undertaking, we can

make no further comment about the particulars of this on-going, non-public investigation. We must emphasize that an FTC antitrust investigation is not a quick fix.

The Commission will provide an interim status report by the end of July, but it may

take significantly longer than that to conduct the thorough investigation that this

matter deserves. Our objective is to determine whether there has been any illegal

conduct, and, if there has, to determine who was responsible and either bring the

matter to court or initiate our own administrative proceeding. We need to develop

solid documentary and testimonial evidence in order to be able to bring a case.

Based on the FTC’s extensive experience in conducting these kinds of investigations,

we know this can be done only through a careful and fact-intensive analysis. We

cannot say at this time when the investigation will be concluded.

We assure you that our investigation will be thorough, objective and as expeditious as possible. The FTC has an excellent staff of lawyers and economists with

considerable experience in the oil industry who are working on this investigation,

and we will pursue this matter vigorously.

Chairman BLILEY. Thank you, Mr. Pitofsky.

Ms. Browner.

STATEMENT OF HON. CAROL M. BROWNER, ADMINISTRATOR,

ENVIRONMENTAL PROTECTION AGENCY

Ms. BROWNER. Thank you, Mr. Chairman and members of the

committee. We appreciate the opportunity to appear today. We are

here today because we share your concern about the gasoline

prices, particularly in the Chicago-Milwaukee areas. Consumers in

those markets are entitled to the very same benefits received by

other Americans. They deserve fair market prices at the pump, and

they deserve cleaner, healthy air. There literally is no good reason

why consumers in Chicago and Milwaukee cannot have both.

Nationwide, regular gasoline is selling on average at $1.65 per

gallon. The cleaner burning gasoline, excluding the Chicago and

Milwaukee areas, is selling at $1.64 per gallon, a penny less than

conventional gasoline. Approximately 30 percent of the gasoline

sold in the United States is cleaner burning gasoline, and on average as of today it is selling for less than conventional gasoline.

Even in Chicago the wholesale price for cleaner burning gasoline

is less than the wholesale price for conventional gasoline in nearby

markets.

On June 15, after an investigation by EPA and DOE staff, an investigation of supply issues relating to the high prices in Chicago

and Milwaukee, an investigation that produced no good explanation from the oil companies serving these areas, Secretary Richardson and I asked the Federal Trade Commission to officially

launch its own investigation. From the moment word of our letter

17

to the FTC reached the press, and maybe this is coincidence, but

maybe not, wholesale prices began to decline precipitously. Prices

have fallen from a high of $1.60 per gallon wholesale at the time

we issued our letter to $1.20 per gallon wholesale today.

We hope that retail prices at the pump will follow the downward

trend. And there has been some good news about retail prices

starting to decline. Since Monday we have seen a drop of retail

prices on the order of Chicago, 9 cents per gallon; Milwaukee, 10

cents per gallon; but the consumers are not seeing the full effect

of these changes at the pump despite the drop in wholesale prices,

almost a 40-cent drop in wholesale prices.

Mr. Chairman, I am sure that all of us in this room today are

very, very troubled by this situation, and we believe that the oil

companies who serve these markets still owe you, but, most importantly, the people of this region, an explanation. We know from our

review that throughout June and before June, supplies of cleaner

gasoline in the region have been adequate. Terminals where the

cleaner gasoline is stored for delivery to the pump have contained

ample supply. There are 650,000 more barrels of cleaner gasoline

in the Chicago-Milwaukee area this June than there were last

June. We also know from our review that throughout June the

pipelines and other distribution systems for getting the gas to Chicago and Milwaukee have been able to handle the full demand for

moving gasoline from the oil companies. Since mid-March, the Explorer pipeline from Houston to Tulsa has been running at 90 percent capacity. North of Tulsa it is at 100 percent of capacity.

Finally, we know that the cost of producing cleaner gasoline is

4 to 8 cents more per gallon, and that the preference of Midwestern

States—this is their preference and not mandated by Congress or

the EPA, to use ethanol as an additive only adds very marginally

to that very small increase.

I want to be clear. This administration strongly supports the use

of ethanol as an oxygenate in gasoline. Ethanol has been used for

years. This is not a new additive. It has been part of our gasoline

supply in this country for the better part of a decade, and it has

been used very, very successfully.

In 1990, Congress passed the Clean Air Act, the new revised

Clean Air Act, and in that act Congress mandated the cleaner

burning gasoline nearly unanimously. Congress voted in support of

a congressional requirement that the most polluted cities be required to sell cleaner gasoline. The oil companies were put on notice in 1990 that they would be selling cleaner gasoline in certain

regions of the country. EPA entered into a 6-month process with

the oil companies in 1993 as to what the specifics of that cleaner

gasoline recipe would be. We reached a final agreement with the

oil companies 7 years ago as to what kind of gasoline, the recipe

for cleaner gasoline, that they would be required to deliver to consumers June 1 of this year; 7 years’ notice to the oil companies of

what they were required to do.

The Federal Trade Commission, I assume, and from the words of

the Chairman who joins us here today, does not take investigations

lightly, and as we understand, as the FTC stated before launching

its formal investigation that it, too, could find no explanation for

the price spikes that plagued the people of region. That is why we

18

believe that they have honored their request to find out what is behind these price spikes.

In recent weeks EPA has received some requests to waive the

cleaner burning gasoline program. Let me assure you that we take

these requests very, very seriously, and let me also assure you that

we leave all options on the table while we continue to monitor gasoline supplies. Our first commitment is to bring fair prices at the

pump to the people of the Midwest, particularly Chicago-Milwaukee areas. That is why waivers must be applied responsibly.

Since supplies of cleaner burning gasoline already are in the system, they are in the pipeline, they are in the terminals, they are

in the tanks, the trucks, since they are already in the system, the

granting of waivers actually could send the cost of gasoline back

upwards, yet again we could see gasoline prices in the Midwest rising.

Since the cleaner burning gasoline program began 5 years ago—

this is the second phase of the program, the first phase actually

began 5 years ago—it has resulted in annual reductions of 105,000

tons of smog-forming pollutants and 24,000 tons of toxic air pollutants. This is equivalent to eliminating the smog-forming pollution

generated by 16 million cars. As a result of this program, the

health of tens of thousands of people is being protected every summer from respiratory disorders, particularly children who are very,

very vulnerable to asthma attacks. That is why we want to make

sure that the people of Chicago, the people of Milwaukee receive

fair treatment both at the pumps——

Chairman BLILEY. Could you summarize?

Ms. BROWNER. [continuing] and in terms of receiving the full protection of their health from air pollution. People in many other

markets throughout the U.S. are receiving these benefits. We believe the people of Chicago and Milwaukee deserve the same.

We know that cleaner burning gasoline is not the problem. We

know that ethanol is not the problem. We are grateful that prices

at the pump seem to be dropping, but we still deserve an adequate

explanation from the oil companies that serve Chicago and Milwaukee about why prices there have been so high. Thank you.

[The prepared statement of Hon. Carol M. Browner follows:]

PREPARED STATEMENT OF HON. CAROL M. BROWNER, ADMINISTRATOR, U.S.

ENVIRONMENTAL PROTECTION AGENCY

Thank you, Mr. Chairman and Members of the Committee, for the invitation to

appear here today. I appreciate having the opportunity to share what we know

about the recent sharp increases in gasoline prices, particularly in the Midwestern

part of the country. I also will explain the Environmental Protection Agency’s efforts, in coordination with the Department of Energy and the Federal Trade Commission, to address the situation.

Mr. Chairman, first and foremost we are very concerned that consumers receive

the air quality benefits of the clean burning gasoline (also called reformulated gasoline, or RFG) program at a fair and reasonable price. In the following testimony I

will show that the cost of producing RFG does not account for the extremely high

price differentials we have seen in the Chicago and Milwaukee areas. As EPA reviewed the various requests for waivers from the RFG program, factors such as the

pipeline, tank turnover and patents were examined. We do not believe that these

factors adequately explain the price differentials that we have seen in the Chicago

and Milwaukee areas.

Let me begin with a history of the RFG program.

19

History of RFG

When Congress passed the Clean Air Act Amendments of 1990 it put in place a

number of programs to achieve cleaner motor vehicles and cleaner fuels. These programs have been highly successful in protecting public health by reducing harmful

exhaust from the tailpipes of motor vehicles. In the 1990 Amendments, Congress

struck a balance between vehicle and fuel emission control programs after extensive

deliberation. The RFG program was designed to serve multiple national goals, including air quality improvement, enhanced energy security by extending the gasoline supply through the use of oxygenates, and encouraging the use of domesticallyproduced, renewable energy sources.

Congress established the overall requirements of the RFG program by identifying

the specific cities in which the fuel would be required, specific performance standards, and an oxygenate requirement. The oil industry, states, oxygenate producers

and other stakeholders were involved in the development of the RFG regulations in

1991 through a successful regulatory negotiation. EPA published the final regulations establishing the detailed requirements of the two-phase program in early 1994.

Thus, the oil companies and other fuel providers have had six years to prepare for

the second phase of the program that began this year. In addition, the oil industry

has been involved in an EPA RFG implementation advisory workgroup since 1997

and at no time during those discussions did the companies raise concerns about production, supply or distribution problems that might occur.

The first phase of the federal reformulated gasoline program introduced cleaner

gasoline in January 1995 primarily to help reduce vehicle emissions that cause

ozone (smog) and toxic pollution in our cities. Unhealthy smog levels are a significant concern in this country, with over 100 million people living in 36 areas currently violating the 1-hour ozone standard.

The federal RFG program is required by Congress in ten metropolitan areas

which have the most serious air pollution levels. Although not required to participate, some areas in the Northeast, in Kentucky, Texas and Missouri have elected

to join, or ‘‘opt-in’’ to the RFG program as a cost-effective measure to help combat

their air pollution problems. At this time, approximately 30 percent of this country’s

gasoline consumption is cleaner-burning reformulated gasoline.

The Clean Air Act Amendments of 1990 also required that RFG contain 2.0 percent minimum oxygen content by weight. Neither the Clean Air Act nor EPA requires the use of any specific oxygenate. Both ethanol and MTBE are used in the

current RFG program, with fuel providers choosing to use MTBE in about 87 percent of the RFG. Ethanol, however, is used exclusively in RFG in the upper Midwest

(Chicago and Milwaukee).

Ambient monitoring data from the first year of the RFG program (1995) confirm

that RFG is working. RFG areas showed significant decreases in vehicle-related tailpipe emissions. One of the air toxics controlled by RFG is benzene, a known human

carcinogen. The benzene level at air monitors in 1995, in RFG areas, showed the

most dramatic declines, with a median reduction of 38 percent from the previous

year. The emission reductions which can be attributed to the RFG program are the

equivalent of taking 16 million cars off the road. About 75 million people are breathing cleaner air because of cleaner burning gasoline. Since the RFG program began

five years ago, it has resulted in annual reductions of smog-forming pollutants of

at least 105 thousand tons, and toxic air pollutants by at least 24,000 tons.

As required by the Clean Air Act, the first phase of the RFG program began in

1995 and the second phase began in January of this year. As an example of the benefits, in Chicago, EPA estimates that the Phase II RFG program will result in annual reductions of 8,000 tons of smog-forming pollutants and 2,000 tons of toxic vehicle emissions, benefitting almost 8 million citizens in the Chicago area facing some

of the worst smog pollution in the nation. This is equivalent to eliminating the emissions from 1.2 million cars in Illinois.

Administration Response to Increasing Prices

In early June, as gasoline prices rose, particularly in the Midwest, EPA and DOE

invited Midwest oil refiners to a meeting in Washington, DC. Simultaneously, EPA,

DOE and the Energy Information Agency (EIA) sent two teams of technical experts

to the Midwest to investigate the situation and to talk to refiners, distributors, pipelines, jobbers, terminal operators and retail outlets. Following those meetings, which

occurred on June 12 and 13, EPA Administrator Browner and DOE Secretary Richardson sent a joint letter on June 15 to Chairman Pitofsky requesting that the Federal Trade Commission conduct a full and expedited formal investigation into the

pricing of RFG in Chicago and Milwaukee.

Since June 15, the wholesale price of reformulated gasoline has dropped by over

38 cents per gallon in Chicago and Milwaukee. The Oil Price Information Systems

20

(OPIS) has reported that the wholesale price differential between RFG and conventional gasoline in nearby cities has dropped to less than 1 cent a gallon in Chicago

and 8 cents a gallon at Milwaukee terminals.

In our discussions, representatives of oil companies listed a number of factors

which they believed contributed to the price differential between RFG and conventional gasoline in the Midwest. These included: the additional cost of producing RFG

phase II, temporary shutdown of the Explorer Pipeline, the difficulty with replacing

winter gas with summer blends (draining tanks), and the Unocal patent. I would

now like to discuss each of these factors and show why EPA believes even taken

together they do not account for the high gasoline prices.

Production Costs for RFG Do Not Explain Price Increases

As I stated earlier, we are very concerned that consumers receive the benefits of

the RFG program at a fair price. Across the country hundreds of communities are

benefitting from RFG II for pennies per gallon. In fact, this Monday (June 26), the

average retail price of conventional gasoline across the country was $1.65 per gallon.

EPA has calculated, based on EIA and OPIS surveys, that the average retail price

for RFG II everywhere except in Chicago and Milwaukee was $1.64 per gallon, while

the average retail price in Chicago and Milwaukee was $2.08 per gallon.

EPA strongly disagrees that the RFG program is responsible for increases in gasoline prices in the Midwest. In fact, EPA’s estimates of the average cost for the production of Phase II RFG range from 4 to 8 cents more per gallon than conventional

gasoline (with the use of either ethanol or other oxygenates). Several studies agree

with EPA’s estimates of the average costs:

Analysis by Bonner and Moore Management Science, a nationally recognized

firm that specializes in refinery cost analysis, estimated that RFG I would add

3-5 cents more per gallon to the average cost compared to conventional gasoline.

Subsequent studies by Bonner and Moore and Oak Ridge National Laboratory

estimated that RFG II would add 1-2 cents to the average cost of RFG I or 4-

7 cents to the average cost of conventional gasoline. Oak Ridge National Laboratory estimated that the average added cost of blending ethanol into RFG II

as compared to RFG I was about 1 cent more per gallon.

As I have already stated, over the past week, the wholesale price differential between RFG and CG has dropped dramatically in the Chicago/Milwaukee area. We

do know that this differential is now in line with differentials observed in other

parts of the country. EPA does not believe that the cost of complying with RFG regulations accounts for the extremely high price differentials we have seen in the Chicago-Milwaukee areas.

Temporary Shutdown of Explorer Pipeline

EPA investigated the situation with the Explorer pipeline to respond to the waiver requests we received and would like to share our findings. The Explorer pipeline

has historically provided 10 to 15 percent of the RFG supply for the Chicago/Milwaukee area. The outage of the pipeline in mid-March meant a loss of 108,000 barrels of RFG destined for the Chicago area. Chicago consumes about 200,000 barrels

of gasoline a day. Thus, the RFG lost due to the Explorer pipeline outage was less

than one day’s RFG needs for Chicago. Since mid-March, the Explorer pipeline from

Houston to Tulsa has been running at 90 percent capacity, while the pipeline north

of Tulsa to the Midwest has been capable of operating at 100 percent capacity. The

supply of RFG to the Midwest has increased this year over last year and, in fact,

for the month of June refiners expected to supply 650,000 more barrels of RFG this

year than last year. The Explorer pipeline has informed us that more RFG could

be sent if the companies elected to do so. For example, the pipeline company has

informed us that, beginning earlier this month deliveries of RFG to Chicago have

increased by approximately 100,000 barrels per ten day cycle.

Tank Turnover

Tank turnover refers to the need to replace winter gasoline in terminal storage

tanks with summer blends. Fuel providers have been doing this for over ten years

to comply with summertime gasoline volatility requirements. This normally begins

in April and, as required by regulation, the tanks at terminals must all meet summertime RFG requirements as of May 1st.

Unocal Patent

EPA has heard comments as to the impact of the Unocal patent. While we understand that this matter may be in litigation, the refiners have told us in meetings

with them that they are able to produce RFG that is not subject to the patent. In

our discussions with refiners and with Unocal, no one has identified any cost or supVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 E:\HEARINGS\65909 pfrm03 PsN: 65909
21

ply issues related to the patent that could in any way explain the price increases

for RFG that we have seen in the Midwest over the last two months.

Waiver Issues

In recent weeks there have been many calls for EPA to waive the RFG Phase II

requirements in Milwaukee and Chicago. The RFG regulations provide for an administrative waiver under very limited circumstances—extreme and unusual circumstances, such as Acts of God or natural disaster, where the refiner or importer

is unable to comply with the RFG requirements despite their exercise of due diligence and planning. The various criteria for an administrative waiver under the

regulations have not been met in the Milwaukee or Chicago area, so EPA has treated all of the requests for a waiver as requests for enforcement discretion. Enforcement discretion is normally used in situations such as occurred in St. Louis early

this spring, where the short term shut down of the Explorer pipeline led to actual

and acute shortages. The pipeline supplies on average 70 percent of fuel delivered

to St. Louis.

For Chicago and Milwaukee the supply of RFG continues to be adequate and

prices are going down. All refiners have strongly recommended that EPA not grant

RFG waivers. It is highly uncertain what effect a waiver would have on supply and

prices. Refiners would need to make adjustments and switch gears, imposing short

term costs and the possibility of supply problems. No RFG Phase I is currently

available, and supplies of conventional gasoline are tight as well. Waiving the RFG

Phase II requirements under these kinds of circumstances could exacerbate the supply and price situation in the Midwest, for both RFG and conventional gasoline.

Conclusion

In closing, I would like to reiterate the following points:

• Clean burning RFG II is providing public health benefits to almost 75 million citizens nationally and nearly 8 million in the Chicago area alone.

• EPA believes the cost of producing RFG II does not account for the extreme prices

being paid by Midwest consumers. The pipeline disruption, the tankage issue,

the Unocal patent and its implications, as well as ethanol use, have all been

analyzed. EPA does not believe that these factors adequately explain the price

increases we have seen in recent weeks.

• We are concerned that consumers are paying these high prices for RFG II.

This concludes my prepared statement. I would be pleased to answer any questions that you may have.

Chairman BLILEY. Thank you.

Secretary Slater.

STATEMENT OF HON. RODNEY E. SLATER, SECRETARY OF

TRANSPORTATION, DEPARTMENT OF TRANSPORTATION

Mr. SLATER. Mr. Chairman, members of the committee, I am

pleased to join Secretary Richardson, Administrator Browner, and

Chairman Pitofsky here today. I personally am pleased to have the

opportunity to provide to the committee information regarding the

status of our efforts at the U.S. Department of Transportation to

ensure the safe and efficient transport of motor fuels to consumers

nationwide. The administration is fully committed to a sound, comprehensive approach to energy policy across the Federal Government. We are prepared to take whatever steps are necessary to

promote a sound energy policy that keeps transportation moving

and our economy growing.

Just yesterday the President announced good news regarding our

Nation’s strong economy, a budget surplus of more than $211 billion this year and a projected surplus over the next 10 years that

will be over $1 trillion more, larger than the forecasts just 4

months ago. President Clinton, working with this Congress and the

American people, has set a new economic course of fiscal discipline,

expanded trade, greater investment in our people and in our future, and clearly, transportation and the fuels concerns that we are

22

here to discuss today will have an impact on this overall question.

Our efforts to date, though, have produced the longest economic expansion in our Nation’s history. Our commitment is to continue

that.

At the U.S. Department of Transportation we have a transportation policy with energy security as an essential component. It is

balanced by an approach that recognizes our role in regulating the

transport of resources and influencing the aggregate demand by

transportation users. One element of regulating the transport of

energy resources is ensuring the safe, reliable, and environmentally

sound operation of the Nation’s pipeline transportation system, including more than 150,000 miles of pipelines that transport 60 percent of the crude oil and petroleum products consumed nationally.

I can assure you, Mr. Chairman and members of the committee,

that our pipeline restrictions have not significantly affected the

supply of gasoline in the Midwest. To ensure, though, the safe operation and enforcement of our regulations covering the design,

construction and inspection, testing and operation, and the maintenance of our pipelines is a top concern of the Department and this

administration.

We achieve compliance with our regulations through our own

programs, and we work in partnership with State agencies to oversee intrastate pipelines. The administration introduced, as you

know, the most comprehensive pipeline safety bill ever produced in

the country. It is now before the committee and the Congress, and

we thank you for your support and consideration of this measure.

We are hopeful that we will have it as a matter of law by the end

of this congressional session.

The Research and Special Programs Administration is keeping

close watch on two gasoline transmission pipelines in particular,

which are currently operating at a 20 percent pressure reduction

because of potential problems with pipeline integrity as corrective

efforts are pursued. These are the Wolverine pipeline operating between the Chicago area and Detroit and the Explorer pipeline serving St. Louis and Chicago. If I may, Mr. Chairman, I would like

to give a little information about the current status of both of those

pipelines.

The Wolverine pipeline failed June 7, releasing some 1,700 barrels of gasoline. The operator has reduced operating pressure by 20

percent until it can check the welds of the pipeline. We anticipate

that the operator will complete this work and resume normal operations within 3 weeks. Operating at reduced pressure, however,

Wolverine is currently meeting the prefailure level of demand in

the eastern part of Michigan, and I underscore that. Supply in the

western part of the State was not affected. Again, any restrictions

here have not affected service in the Midwest.

As relates to Explorer, the pipeline failed on March 7 in Texas,

releasing approximately 12,000 barrels of gasoline due to failure in

a longitudinal seam. The operator reduced the operating pressure

by 20 percent and developed a plan to address the safety issues

that may have played a role in the failure. Although the Explorer

pipeline continues to operate at a 20 percent reduction in operating

pressure, the addition of drag-reducing agents to the products in

23

the pipeline has enabled the operator to maintain most of its normal volume despite the pressure reduction.

Again, there is no evidence that either of these pipelines, although they have reduced pressure, have not been able to meet the

needs of the American people and especially in the Midwest. The

Explorer company reports that its shippers’ tanks in the St. Louis

area are at capacity, and that it is meeting the shippers’ demand

for reformulated gasoline as well. This means that the 20 percent

pressure reduction has minimal impact on the supply of petroleum

products at Chicago and other Midwest points.

Mr. Chairman, I would like to close by saying while I have addressed specifically the issue of these pipelines, we would like to

just underscore the fact that we have a very comprehensive transportation program dealing with energy efficiency. I work with the

automobile industry to produce new generation vehicles. I work

with Amtrak under the leadership of Governor Tommy Thompson

and former Governor Mike Dukakis to bring intercity high-speed

rail service not only to the Northeast corridor, but across the country. I have worked with the trucking industry to deal with midsize

and heavy-duty trucks to provide 21st century truck capacity and

fuel efficiency in the future as well. We are also working with the

Congress to promote certain provisions in our administration’s bill

that will allow us to invest even more in transit and intercity rail

and fuel-efficient vehicles.

I would like to close with the fact that last year for the first time

in more than four decades, we actually saw significant usage of

transit by the American people, some 9 billion passengers. We believe that this provides a significant alternative to single-occupancy

vehicle use in the country. Again, it represents a comprehensive

approach to fuel efficiency and dealing with the security needs of

the Nation.

With that, Mr. Chairman, I join my colleagues in being ready,

willing and able to respond to any questions that you and other

members of the committee might have.

[The prepared statement of Hon. Rodney E. Slater follows:]

PREPARED STATEMENT OF HON. RODNEY E. SLATER, SECRETARY OF TRANSPORTATION

Mr. Chairman, Mr. Dingell, and Members of the Committee: I am pleased to join

Secretary Richardson, Administrator Browner, and Chairman Pitofsky here today to

provide the Committee with the status of our efforts at the Department of Transportation to provide for the safe and efficient transportation of motor fuels to consumers nationwide. The Administration is fully committed to a sound, comprehensive approach to energy policy across the federal government, and I would like to

lay out the short-term and longer-term initiatives we are undertaking at the Department of Transportation.

Focusing first on the retail supply of gasoline, we at DOT are responsible for regulating the safe, reliable, and environmentally sound operation of the nation’s pipeline transportation system, including more than 150,000 miles of pipelines that

transport 60 percent of the crude oil and petroleum products consumed nationally.

To provide for the safe operation of this vast transportation network, the Department’s Research and Special Programs Administration enforces regulations covering

the design, construction, inspection, testing, operation, and maintenance of pipeline

systems. We achieve compliance with our regulations through a partnership with

state agencies, which not only oversee intrastate pipelines, but also participate with

the federal government in addressing issues of local concern involving interstate

pipelines.

Just one year ago, on June 10, a terrible tragedy struck Bellingham, Washington,

when an interstate gasoline pipeline ruptured, resulting in the deaths of three

24

young people. Safety is our highest priority at the Department, and we are working

now with Congress to expand our safety authority for regulating hazardous liquid

pipelines. Early last year, your Committee reported a bill to the House to reauthorize the pipeline safety program. In April, the Administration transmitted its comprehensive legislation to reauthorize and strengthen the Department’s pipeline safety program. The Senate Committee on Commerce, Science, and Transportation recently reported a bill to address public awareness, enforcement, environmental protection, and federal-state partnerships to accomplish our goals. We look forward to

working with you to achieve passage of a reauthorization bill in the 106th Congress.

The Research and Special Programs Administration is keeping a close watch on

two gasoline transmission pipelines, which are currently operating at a 20% pressure reduction because of potential problems with pipeline integrity, as corrective

efforts are pursued. These are the Wolverine Pipeline operating between the Chicago area and Detroit, and the Explorer Pipeline serving St. Louis and Chicago.

On June 7, the Wolverine Pipeline failed in Jackson, Michigan, releasing 1,700

barrels of gasoline. The pipeline was out of service for several days for initial cleanup, investigation, and repair. The failure appeared to be caused by a defective weld

on a fitting and the operator has reduced operating pressure by 20% until it can

check welds on similar fittings on the pipeline. We anticipate that the operator will

complete this work and resume normal pressure within three weeks.

Operating at the reduced pressure, Wolverine is currently meeting the pre-failure

level of demand in the eastern part of Michigan, but could not make up for the demand that was unmet during the few days it was out of service. Supply in the western part of the State is unaffected. It should be noted that Michigan does not participate in the Clean-Burning Gasoline (or RFG) program.

On March 9, an Explorer pipeline failed near Greenville, Texas, releasing approximately 12,000 barrels of gasoline. The failure—in a longitudinal seam—may have

resulted from a systemic defect in the pipeline. The operator reduced the operating

pressure by 20 percent and developed a plan to address the safety issues that may

have played a role in the failure.

The operator’s plan to address safety issues includes internal inspection of the

pipe with an inspection tool that is designed to detect seam defects. The inspection

has been done and the operator expects to have preliminary analysis of the data

on the seams done in early July and full analysis completed by the beginning of

September. The operator is also reviewing the corrosion prevention provided for the

pipeline. Although the pipeline continues to operate at a 20% reduction in operating

pressure, the addition of drag reducing agents to the products in the pipeline has

enabled the operator to maintain most of its normal volume despite the pressure

reduction. Further, the company reports that its shippers’ tanks in the St. Louis

area are at capacity and that it is meeting the shippers’ demands for reformulated

gasoline. This means that the 20% pressure reduction has minimal impact on the

supply of product that Explorer can deliver in the areas north of Tulsa, including

Chicago and other Midwest points.

I would like to address two other areas of potential concern. The U.S. Coast

Guard is actively monitoring both the Lake Charles, Louisiana, and Port Houston,

Texas, ship channels over concerns that sunken barges or platforms may be interfering with crude oil shipments to refineries located there. In fact, the sinkings have

not significantly interfered with shipping since they occurred and were marked.

Some have suggested that the ‘‘Hours of Service’’ limitations should be suspended

on the number of hours fuel delivery truck drivers can work. Our authority in this

area is strictly limited to emergencies, such a major snowstorm. Based on our analysis to date, we have not found that a shortage of drivers is a significant factor in

supplying fuel.

The pressure on motor fuel prices should allow us to focus better on the long-term

initiatives that can assure our nation’s energy security. In the case of my Department, I must emphasize to this Committee, which played a key role in enacting the

Corporate Average Fuel Economy statutory requirement in 1975, the energy security risks of continuing the current prohibition Congress has placed on our ability

to fully analyze CAFE levels and options for increased fleet economy. The fuel economy of the automobile fleet has increased more than 50 percent since CAFE standards were put in place, reducing our dependence on foreign oil and saving billions

of gallons of oil and billions of dollars for the consumer. Striking the newest prohibition, contained in the House version of the FY2001 Appropriations Bill, would signal

a new chapter in U.S. resolve to promote fuel efficiency and save U.S. households

hundreds of dollars each year.

Our Department, the Department of Energy, and the Environmental Protection

Agency are pursuing the technological advances in automobile propulsion that will

usher in a new generation of passenger motor vehicles that will consume much less

25

fuel and produce significantly less pollution than current internal combustion engines. We urge Congress to fully fund these programs. In addition, the Congestion

Mitigation and Air Quality Improvement Program (CMAQ) continues to fund a wide

variety of transportation improvement projects—such as Intelligent Transportation

Systems, new transit, bicycle and pedestrian improvements, and alternative fuel

projects—that will reduce fuel consumption and congestion and improve air quality,

thus having a positive impact on the quality of life. The Clean Fuels program established in the Transportation Equity Act for the 21st Century has never been implemented because in both FY99 and FY00, the appropriations acts transferred the

funds to and earmarked the funds for the Capital Bus program. The Department

is prepared to implement the program and has initiated rulemaking.

We have before Congress a proposal for use of unanticipated fuel excise taxes, the

so-called RABA dividend, that would boost transit and intercity passenger rail use.

Both of these alternative modes of travel can reduce passenger vehicle miles and

take pressure off gasoline supplies. I urge Congress to include these options in their

deliberations about the current situation in the Midwest, and in setting longer-term

energy policy for our great nation.

In conclusion, I want to assure the Committee that the Department of Transportation remains committed to ensuring a safe transportation system that meets our

national interests and enhances the quality of life for the American people, today

and in the future.

I would be pleased to join my colleagues in answering any questions the Committee Members may have.

Chairman BLILEY. Thank you, Secretary.

Now it is a pleasure to welcome an alumnus of this committee,

the star of the Democrat baseball team for years, to bat cleanup

for the administration.

STATEMENT OF HON. BILL RICHARDSON, SECRETARY OF

ENERGY, DEPARTMENT OF ENERGY

Mr. RICHARDSON. Thank you. It is good to be back and join

Chairman Pitofsky, Secretary Browner and Secretary Slater and to

see my friends again.

Mr. Chairman, our energy policy is based on the following principles. First, market forces, not artificial pricing; second, diversity

of supply and strong diplomatic relations with energy-producing

countries; third, improving the production and use of traditional

fuels through new technology development; fourth, diversity of energy sources with long-term investment in alternative fuels and energy sources; fifth, increasing efficiency in the way that we use energy; and last, maintaining and strengthening our insurance policy

against supply disruptions, and that is adequate management of

the Strategic Petroleum Reserve.

We are seeing some good signs in our oil and gas markets thanks

to the adherence to this policy that I believe Administrator Browner mentioned, and I am pleased to report that the Energy Department’s Energy Information Administration reports that conventional regular gasoline prices have dropped 3 cents per gallon over

the past week nationwide; and in the Midwest, where we have expressed concern about very high prices, the Agency reports a drop

of 7 cents per gallon for conventional regular. Reformulated gas is

down 12 cents a gallon in the Midwest.

This is encouraging news. Nonetheless these prices are still unacceptably high, and hopefully they signal a trend, but time will

tell.

Part of the relief is coming from work that we have done over

the past 6 months when we moved aggressively to help improve

supply. I have talked with the oil-producing nations. OPEC has

26

heard our concerns and have twice increased oil production. Right

now there are roughly 3.5 million barrels per day more oil on the

market than this time last year. That is meaningful. As the supply

and demand move toward equilibrium over the next few months,

we will see downward pressure on prices.

So we have had some success, but we need to find more lasting

solutions because right now we are still encountering very low

stocks and soaring demand. We want stability in prices and, therefore, are best served by adhering to our energy policy. The President has looked to do so, rolling out proposals to increase domestic

production, spur energy efficiency, and increase the use of alternative energy sources. You will recall that we had a heating oil

shortfall, and in response the President released almost a third of

a billion dollars in funds so that low-income individuals could pay

their heating bills. He asked for $600 million more in low-income

housing energy assistance funds, and the President is seeking an

additional $19 million from Congress in low-income home weatherization.

We address the issue of supply through increased support for

tankers, small business loans for distributors and other small businesses impacted by high prices, and encourage refiners to increase

production. We are also seeking to turn around domestic production of oil, develop alternative sources of energy and increase energy efficiency. We are also looking to help independent oil producers test new production technologies, lend a hand to small producers in existing fields, develop some tax credits in G&G expensing marginal wells to help those independent producers. We are

helping refiners deal with the new EPA rules through our

Ultraclean Fuels Program. We have established at the Department

an Office of Energy Emergencies to coordinate with States and

other Federal agencies regarding any energy-related crises.

Still, demand remains very high, the highest ever for this time

of the year. Refineries in the U.S. are operating at 96 percent utilization, 99 percent in the Midwest, so I don’t think that the production boosts are going to immediately push prices lower, but I think

in time we will see the price pressure ease a bit.

The Administrator has talked about our concern for gasoline

prices in the Midwest and Chicago and Milwaukee. Our experts are

talking to EPA, and we are coordinating our efforts to bring relief

to consumers, and we all know about Chairman Pitofsky’s investigation, which I think is key to answering some of the lingering

questions, his investigation of pricing practices in the region.

Mr. Chairman, as I conclude, let me just mention other steps

that we have taken in the past 2 weeks to meet some unexpected

issues. On June 15 I ordered a limited exchange of crude oil from

the Strategic Petroleum Reserve’s West Hackberry site, the two refineries, after a commercial dry dock collapsed near Lake Charles,

Louisiana, and shows our commitment to responding quickly. The

Army Corps of Engineers has worked over time to dredge a new

canal, and oil traffic is moving again. And when there was a pipeline problem near St. Louis, as the Secretary and the Administrator mentioned, the EPA granted a waiver that postponed implementation of their new rule on reformulated gasoline until the

problem was solved.

27

There is a lot we can do together in a bipartisan fashion, Mr.

Chairman, as we move ahead in the crucial days of the Congress

of the President’s $4 billion tax package of tax incentives for supporting the domestic oil industry, for renewable energy, for purchasing more efficient cars, homes and consumer products. We

need to increase our Federal investment in domestic sources of energy, particularly in energy efficiency and energy-efficient technologies for factories and homes and renewable energy. We need to

reestablish the Partnership for a New Generation of Vehicles,

which is languishing. We need to do more in natural gas and distributed power generation systems. We need to reauthorize, Mr.

Chairman, the Strategic Petroleum Reserve. I need the full authority to act on an energy emergency. We need the regional Northeast

home heating reserve low-income energy assistance programs.

Let me conclude with something that you and this committee are

working on, and, I must say, most effectively, and we hope that you

conclude action on it, and that is the issue of the soundness of our

electricity grid. I know that the committee is working in a bipartisan fashion, and we urge you to act. We are concerned about the

reliability of the grid this summer and over the next several years.

We need to do everything we can to keep the lights on and the air

conditioners humming when temperatures soar, and during the

last several summers utilities have been stretched to the limit.

Spot prices for electricity rose dramatically. Factories were forced

to shut down their operations and send workers home. Some areas

experienced rolling blackouts. I am concerned about the tight electricity in the Pacific Northwest and California. We appointed a

power outage study team to identify what went wrong. The Post

team, the team we appointed, determined that we need a new

framework to adjust for liability problems. Their report implies

that things could get worse before they get better.

Mr. Chairman, we need a comprehensive restructuring bill. I

know you are working on it, and I urge support for this initiative.

Chairman BLILEY. Thank you, Mr. Secretary.

We will now begin the questions. The Chair will enforce strictly

the 5-minute rule so that everybody gets a chance to ask questions.

I will also point out that it has come to the Chair’s attention that

we will probably have a vote at 10. It is the Chair’s intention to

keep the hearing going, so those of you who are not asking questions, if you could go vote and come back quickly, we can keep this

going.

The Chair recognizes himself for 5 minutes.

In your investigation, Chairman Pitofsky, it is my understanding

that the taxes on a gallon of gasoline in Chicago—am I right that

they are about 65 cents?

Mr. PITOFSKY. I think that is about right.

Chairman BLILEY. How does that compare on average for the

rest of the country?

Mr. PITOFSKY. I can’t answer that. I can get the answer for you.

Taxes vary, of course, and I am not sure about the level of taxes

in all parts of the country.

Chairman BLILEY. My Cajun tells me that it is 36 percent of the

price.

28

Secretary Richardson, yesterday a major generating facility went

down in the Northeast, and the day before a major facility in the

Pacific Northwest and California went down. As a result, both regions remained very vulnerable to power outages. How close did

they come?

Mr. RICHARDSON. In New England the unexpected loss of the

Seabrook nuclear plant caused some concern. Fortunately, a cold

front rolled through the area yesterday, and the situation is expected to be much better today.

On the west coast, the Pacific Northwest right now is experiencing an extreme heat wave, and we have the Bonneville Power

Administration and our Federal teams in a preparatory status.

There could be some rolling blackouts there, but because of the intensive efforts that we have made around the country in some of

these reliability summits, I think we are ready.

California, they are having extremely hot weather. Emergency

measures were taken yesterday, and the region just barely was

able to avoid rolling blackouts.

Chairman BLILEY. What steps can we take to begin to reduce the

vulnerability of the Nation’s interstate transmission grid?

Mr. RICHARDSON. Mr. Chairman, I think you are doing this right

now working on legislation. We have an adequate transmission

generating capacity in the country. We have to do more in emergency energy efficiency. I think a bill that deals with reliability,

with transmission, with more generating capacity, that has an investment portfolio that contains our commitments to renewable energy.

In other words, Mr. Chairman, pass our comprehensive electricity bill, fund energy efficiency programs, and help us with our

energy grid research and development initiatives, but most importantly I think the fact that the Senate and the House are moving

is promising, but I urge you to move as fast as you can.

Chairman BLILEY. Thank you.

Administrator Browner, we will be hearing testimony later today

that puts much of the blame for volatile gas prices on a patchwork

of constantly evolving government rules and regulations designed

to protect the environment, including reformulated gas rules, refining requirements and so forth? Chairman Pitofsky specifically cites

the introduction of Phase II regulations for reformulated gas as one

specific factor that could have caused, and I say could have caused,

recent price spikes in the Midwest. Has the Clinton Administration

conducted a review of the environmental requirements that apply

to the gasoline industry from soup to nuts, refining, distribution

and consumption, to ensure that the industry is being regulated in

a holistic way, or are we still doing it on an ad hoc basis?

Ms. BROWNER. The requirements that we have put in place in

terms of refineries and how they do their business are in keeping

with the 1990 Clean Air Act amendments. Since it was passed by

Congress, there has only been required for sale two new types of

gasoline, RFG I and RFG II. EPA did late last year adopt a new

requirement for conventional gasoline and the reduction of sulfur

because of the very real health problems associated with high sulfur content. We worked with the industry to craft a flexible proVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00032 Fmt 6633 Sfmt 6602 E:\HEARINGS\65909 pfrm03 PsN: 65909
29

gram. They get between 4 and 6 years to make those adjustments

in sulfur content.

The truth of the matter is if you look at what EPA or Congress

has required of the oil companies in terms of cleaner gasoline over

the last two decades, the only requirement that is currently in

place is the requirement for Phase II of the reformulated gasoline.

And as I said earlier, that recipe was the product of a negotiated

rulemaking with the industry on the order of 7 years ago. So we

gave them a lot of flexibility and a lot of notice as to what the specific recipe would be.

Chairman BLILEY. The Chair now recognizes the gentleman from

Tennessee Mr. Gordon.

Mr. GORDON. Thank you, Mr. Chairman.

First let me thank this distinguished panel of public servants for

joining us this morning, and thank you for the many personal, financial, and family sacrifices that I know that you have given really to make our country or help make our country the envy of the

world. In terms of quality of life and economic prosperity, you have

all played a tremendous role in that. It would be sort of

counterintuitive to what we do in Congress, but it would be interesting to have a hearing where you can come up and tell us about

the successes and challenges that you have overcome. That is the

reason that the rest of the world looks to us as really a leader.

Secretary Richardson, you have inherited as many big-time problems as any Cabinet Secretary could, and I want to thank you for

reversing the government practice of opposing nuclear workers’

health claims and also for many of those cleanups.

I know that you have taken a large role or really the lead role

in trying to help OPEC increase its production. Could you tell us

a little more about if you are expecting additional increases, what

we can do, and what we can expect there? And also the administration is not a Lone Ranger in establishing energy policy. What can

we in Congress do to give you more tools to help increase production as well as help us get more through conservation out of the

energy sources that we have?

Mr. RICHARDSON. Congressman, since we started working with

OPEC and engaging them forcefully, as I say, there have been 3.5

million barrels more per day in 2 decisions that they made, 1 in

March and 1 about 10 days ago in June. We think that these are

favorable developments, but they are still modest steps. I believe

we need a strategy in this country that does not rely on imported

oil, that develops alternative sources of energy, that deals more

with energy efficiency and energy renewables and helps our domestic producers. I think that is the key.

We are particularly concerned, Congressman, about a refinery

problem in Kuwait, an explosion that took place that should affect

supplies principally to Asia, but eventually we are studying the

ramifications for what it means for us.

OPEC is going to meet again in September, and our objective will

be to urge them to keep an open mind about further production increases. Their last increase is close to 800,000 barrels per day, and

if you add non-OPEC countries, Mexico, Oman, possibly Norway,

that they will do more, we could be close to 900,000 barrels a day.

That is important to the American consumer because we do need

30

more production, more supply. Demand is exceedingly high. Having

more production, not just for the international economy, but for the

world economy, for our economy, is important.

I would just close by saying we need to work together to pass the

President’s tax incentives on energy efficiency, on domestic oil and

gas reduction, on alternative sources of energy, on renewable energy, on the comprehensive electricity bill which is part of the

soundness of our grid. On an emergency basis we need to have an

authority for the Strategic Petroleum Reserve. I am worried about

a potential emergency. For the Northeast, we need the authority to

establish a home heating reserve. But these are initiatives that we

can work together on.

Mr. GORDON. Secretary Browner, based upon the 1990 Clean Air

Act that you mentioned passed virtually unanimously as a bipartisan effort, could you give us a little history lesson on what was

the reason for this Clean Air Act? What were we trying to accomplish, and why are we now 10 years later—where are we?

Ms. BROWNER. I think in 1990 there was a shared bipartisan

agreement that we needed to do more for cleaner air in this country, and I think with good cause, and in a very, very thoughtful

way the Congress crafted the Clean Air Act, which looked to all of

those who contribute to air pollution in this country to really do

their fair share, whether it be mobile sources or stationary sources.

I think Congress was particularly concerned about the levels of

pollution in the most affected and polluted areas and put in great

specificity for the requirements for cleaner gasoline, including a requirement that the cleaner gasoline would have an oxygenate, and

in essence today there are two oxygenates.

Mr. GORDON. What is the real basis? What is the payoff?

Ms. BROWNER. With cleaner gasoline, we are seeing dramatic reductions. It is equivalent to taking 16 million cars off the road.

That means better health protections for our children, fewer asthma attacks and respiratory illnesses. Now, the job is not done, and

we need to continue to work together, but clearly the 1990 amendments, the clean air amendments, are contributing to cleaner air.

Chairman BLILEY. The Chair now recognizes Mr. Tauzin.

Mr. TAUZIN. I thank the Chair.

Mr. Pitofsky, you have a lot of work to do at your agency, and

before you go off spending a lot of taxpayer money chasing down

this investigation that everybody seems to want you to follow, I

would urge you to look at two places quickly. The first is an article

in the Chicago Sun Times dated June 26, 2000, by Ben Lieberman.

I am going to quote from it quickly. He talks about how, first of

all, Joe Lockhart has blamed this on oil company shenanigans.

Gore said big oil is gouging American consumers, and Carol Browner indicated this is not about the reformulated gas program. But

the title is White House and Federal bureaucrats are trying to find

out who is behind the recent surge in gasoline prices, particularly

in Chicago and Milwaukee. Somebody ought to just hand them a

mirror. It points out that your investigation should not take long.

The real lesson here is when Federal Government micromanages

fuel supplies, costly unforeseen problems emerge. The solution is

for legislators and regulators to consider such possibilities before

31

taking action, not to divert blame by concocting silly conspiracy

theories after.

They list the reasons why they have these problems in Chicago

and Milwaukee: First, the June 1 date for the Chicago area on the

reformulated gas. The June 1 date, middle of the summer, high

peak demand, we switch to a reformulated formula that applies

only to this area, leaving stocks at a low level when consumers

need supplies.

Second, greater-than-expected difficulties in producing and delivering the type—the special type of reformulated gas that is required in the Midwest because it is blended with ethanol that has

to be shipped separately to mixing plants in the region.

Third, the pipeline problems that Secretary Slater talked about,

and the fact that, completely ignored by the EPA, the cumulative

effects of its many clean fuel requirements. One-third of the Nation

using reformulated gas, but mostly the nonethanol type, and there

are 10 different varieties required around the country, while twothirds use conventional gasoline. So if you run short of the special

varieties, you can’t call upon conventional gasoline to fill the gap

or another variety because it doesn’t fit the special requirements of

a given area.

Finally, other federally imposed fuel requirements add to the cost

of specific States and regions.

I would cite one other place you can look and save us a lot of

money before you do a lot of investigations. After all, you have already done extensive investigations looking at the BP-Amoco,

Exxon-Mobil and Shell-Texaco mergers. I am sure that you have

got a good record that you can look at and see what is happening

regarding potential collusion.

Look at the Department of Energy publication, a beautiful explanation, a primer on gasoline prices. It tells us what went wrong in

Chicago, and it predicts what was going to go wrong. It actually

predicts. I want to read from your own publication. The State of

California operates its own reformulated gasoline program with

more stringent requirements even than the Federal Government.

California prices are more variable than others because there are

relatively few supply sources of its unique brands of gasoline outside the State. California refineries need to be run at fullest capacity in order to meet the State’s demand. If more than one of its refineries experiences difficulty at the same time, California’s gasoline supply becomes very tight, and prices soar. They mention the

further away the necessary relief supplies are, the higher and the

longer the price spike will be. Further in the publication, tighter

environmental standards will be a factor in higher prices.

The lack of available refining capacity is already contributing to

higher retail prices in California and is expected to spread to other

States. Mr. Richardson, you predicted this. You talked about supply problems, chain of supply problems, the special Federal laws

that require special gasoline in parts of the country, and you predicted the price spike in the region of the Midwest. You all knew

it was coming. Vice President Al Gore in his book talks about the

day when the awful gasoline combustion engine will be a thing of

the past and has recommended higher taxes and higher prices on

gasoline and on energy for years. The administration has said, save

32

the climate, we ought to use less gasoline. You predict that prices

are going to go up, and then you try to scapegoat the investigation.

Mr. RICHARDSON. Could I respond?

Mr. TAUZIN. Please do.

Mr. RICHARDSON. First of all, we did not predict this. This publication is entirely consistent with our view and Secretary Browner’s

view that what needs to happen is despite the transportation problems, despite the refinery problems, despite the pipeline problems,

the price differential for reformulated is 2, 3 cents, the price spike

of 30 to 40 cents is still unexplained.

Mr. TAUZIN. How do prices get bid up? I want to know that. How

do prices get bid up when shortages occur as they have occurred

in Chicago?

Mr. RICHARDSON. The policy of this administration and the past

administration has been that government does not get involved in

pricing.

Mr. TAUZIN. But you help create shortages, and when you do, the

independent service stations bid up the price because the branded

cannot keep up with their own branded stations. Shortages are

self-induced by the government which produces these prices.

Mr. RICHARDSON. The Department of Energy and the EPA have

sent teams to the Chicago and Milwaukee area, and what we concluded is that the oil companies needed to give answers. There was

too much of a price differential that could not explain this price disparity between the Midwest and the rest of the country.

Mr. PITOFSKY. Mr. Chairman, may I say a word?

Mr. Tauzin, we did not open this investigation because of what

was said in op-ed pages. We opened this investigation because of

a remarkable spike in prices. The west coast for years had the

highest prices in this country. Now that questionable honor goes to

motorists in Illinois, Wisconsin and Michigan. We want to find out

why, and let me assure you here today that we will look at the factors that you have mentioned along with all other factors in this

picture.

Chairman BLILEY. The Chair now recognizes the gentleman from

Michigan, Mr. Stupak.

Mr. STUPAK. Thank you, Mr. Chairman. My district, most of us

are 500 miles from Milwaukee, Chicago and even further to Detroit. Our gas prices are $2.37, and they are not coming down. A

part that continues to baffle me, and I have this chart from an earlier briefing, and I think it is an EPA chart, but the data is from

the Oil Price Information Service, and it shows the retail price at

$2.12, but the wholesale price is down to about a buck 30. That is

about an 80 cent spread. I don’t have the updated charts.

Can anyone tell me why the wholesale price we have the spike,

and then it goes down, but the retail price continues to go up? Why

doesn’t it go down when the wholesale price goes down? I am in

northern Michigan. We don’t have reformulated gas. We should

have conventional gas. We don’t have disruptions. Why are we in

northern Michigan paying $2.37? That is the high. That is for regular unleaded gas around the Petoskey area. Why don’t our prices

go down? Why don’t they go down when the wholesale price goes

down? Can anyone answer that one?

33

Mr. PITOFSKY. I cannot. It is a matter of some concern, and I

have been rather bewildered why Michigan is now in the top three

in terms of motor oil prices even though there are no reformulated

gasoline requirements. There was a pipeline break that may have

made a difference, but it didn’t seem to make that much difference.

Mr. STUPAK. That is in the Lower Peninsula.

Mr. PITOFSKY. Rather than trying to speculate, I would rather

get the evidence and report back.

Mr. STUPAK. Ours comes from Green Bay. It is a buck 86 down there. Why are we over $2? Why don’t they come down when

wholesale drops? Why does retail stay up?

Ms. BROWNER. One of the things that has been completely puzzling to us is why you started to get a wholesale drop in ChicagoMilwaukee with no factual changes. Nothing changed until we

asked for an FTC investigation, and then prices dropped precipitously on the order of 40 cents a gallon wholesale. That is why we

welcome the FTC investigation. There is no credible answer put

forward for Chicago-Milwaukee or your area.

Mr. STUPAK. Some members are saying and one of our Senators

in Michigan is also saying we ought to get rid of the 18.4 cents

Federal excise tax, and let’s say you did that. How would that

lower the price at the pump? Is there any guarantee the price at

the pump would go down 18.4 cents?

Mr. SLATER. I can respond to that, Congressman Stupak. There

is no indication that the price would go down even if you reduced

the Federal gasoline tax. I can tell you that we would not be seeing

the record level investment in the improvement of our transportation system, not only in Michigan, but across the country, by virtue of action of this Congress working with the administration to

pass the largest surface transportation bill in the history of the

country in 1998.

Just before you came in, I mentioned in my comments that we

have followed the situation as relates to Wolverine pipeline, and

even with the restriction that they have put on their service, they

have resumed service to the prefailure rate in the eastern part of

Michigan, and western Michigan was never affected. Your area was

never affected. I would also like to make the point that Michigan

and the automotive industry are working in partnership with this

administration to deal with the alternative measures that we have

to take to deal with our long-term fuel dependency needs, especially as relates to new generation vehicles, the 21st century truck,

and again I wish to underscore the leadership that Michigan is providing in that regard.

Chairman BLILEY. The gentleman’s time has expired. There will

be another round.

Mr. STUPAK. Thank you.

Chairman BLILEY. The Chair now recognizes the gentleman from

Florida, Mr. Bilirakis.

Mr. BILIRAKIS. Thank you.

Ms. Browner, as you know, EPA has been considering a request

from the State of California for a waiver of the 2 percent oxygenate

mandate for RFG. Your agency stated in writing that EPA has

been working with California since the Governor’s request in

March 1999 to determine if a technical case can be made that the

34

2 percent oxygenate requirement is preventing or interfering with

NOX in California. EPA received this formal request from California last April, over 14 months ago. You certainly know, I think,

that this matter has been of great interest to this committee. We

brought it up many times, many letters have been written on numerous occasions concerning this waiver, and all those inquiries I

would ask unanimous consent may be made part of this record.

What have we been told? I can cite the record here, but it would

take up my time. On May 6, 1999, we were told by your Assistant

Administrator that the Agency ‘‘did not want to waste a lot of time

on this. I don’t want the committee wasting their time either.’’

Later that month we were told that EPA wanted to await the recommendations of the blue ribbon panel before taking any action,

and once the blue ribbon recommendations were final, we were told

in November 1999 that once EPA received additional information,

your agency would work expeditiously to complete our technical

analysis of this request.

I could go on and on here into February of this year and March

of this year. It is now early summer. You have been consulting

with California for 15 months on this matter. You have full knowledge of the California RFG program. You have had every last piece

of information that you have requested for the last 139 days, and

it seems like you have had more than enough time and that is tied

in of course to what is happening here today, but by what specific

date will EPA complete its California waiver request? I am sort of

preempting Mr. Bilbray.

Ms. BROWNER. First of all—and you said this, and I think it is

important to make certain that everyone understands—we did not

have all of the technical information from California—and they

have said this in writing—until February of this year. Yes, there

were discussions that went on. There were meetings that went on,

but a full application was not submitted to EPA until February of

this year.

Second, I would like to point out this is the first time that this

question has been posed to EPA, the question being does the 2 percent oxygenate which Congress wrote into the law in 1990, does

that perhaps interfere with California’s ability to meet air pollution

standards? California has made a State decision, which we support,

to ban MTBE. We think that MTBE as an oxygenate additive is not

responsible anymore. It contributes to very real drinking water pollution problems.

Mr. Bilirakis, we are the first to tell you that this analysis is an

analysis of first impression, and it is simply more difficult than we

ever envisioned. We have, in the course of conducting the analysis,

had to add additional analysis to what we thought was the original

list of questions and issues, and I give you our commitment that

as soon as we are done—and we are working, we have contractors

working around the clock—we will make all of this public. We will

make all of the analysis public. We will take comment on whether

or not the ways in which the analyses were done are appropriate,

and we will do all of that before we make any final decision visa-vis the California request. It is taking more time. It is a question

of first impression.

Mr. BILBRAY. Would the gentleman yield?

35

In 1995, Mary Nichols was directly questioned by a Congressman

from San Diego about this question. We have been in dialog since

1995. This is not something that your Agency has not been aware

for a long time.

I yield back to the gentleman from Florida.

Mr. BILIRAKIS. You stated that your Agency would be able to

complete the assessment by early summer of 2000.

Ms. BROWNER. It is far more complicated than we thought it

would be. One of the questions that we had to look back at is not

simply does ethanol and the 2 percent ethanol requirement perhaps

interfere with what California is attempting to do, but does MTBE

interfere. So there are more questions than we are having to answer to justify——

Mr. BILIRAKIS. You can’t give us a specific date?

Ms. BROWNER. I would love to give you a specific date. Unfortunately, at this point in time I can’t.

Chairman BLILEY. The gentleman’s time has expired.

The Chair now recognizes the gentleman from Ohio Mr. Sawyer.

Mr. SAWYER. Thank you, Mr. Chairman.

I think if there is anything that we have heard this morning and

we have seen mounting evidence for in recent days is that this is

a problem that has a complexity of cause behind it, and at this

juncture it may not be possible to add up the total contributing factors and come out with a balanced slate.

Let me ask you very quickly, Administrator Browner, you say in

your testimony that the RFG program is not adequate to explain

price differential. Does it contribute, and can you say at this point?

Ms. BROWNER. In developing the RFG recipe in 1993, we did look

at what would it cost to make cleaner gasoline, and our cost estimates, which have not been disputed, were roughly 4 to 8 cents a

gallon. And ethanol may bring an additional increment, but it is

only an increment. So for the nonethanol RFG, it is on the order

of 4 to 8 cents. And I think our point is proved out. When you look

at the price of reformulated gasoline, the cleaner gasoline being

sold across the country, if you take out Chicago and Milwaukee,

what you see is a price virtually identical to the price of conventional, the noncleaner gasoline.

Mr. SAWYER. You have said that pipeline problems are not sufficient to explain the price differential that you have seen. Do they

contribute, and if so, can you put a value on that?

Mr. SLATER. As far as we have tested it, there are no significant

impacts by virtue of the restrictions underway. The restriction is

20 percent of operating pressure, but we have actually been able

to make up, in one instance in particular, with the flow in the pipeline to actually rise back to the prefailure level, and that deals with

specifically the area of Michigan.

Mr. SAWYER. Secretary Richardson, you have been working for

months with regard to the particular diplomatic questions that surround large-scale base supply. Clearly over time that has been a

contributing factor to the kinds of things that we have seen. Can

you put a value on that, and can you put a timetable on the downward trend that we are likely to see?

Mr. RICHARDSON. Congressman, let me be one that, I guess, adds

all of the contributing factors to the gasoline price rises that I

36

think are happening. There is no question that the international

situation, the high price of crude, is a factor. There is no—there

has also been, as we mentioned, refinery problems. There is unusually high demand at this very moment. Stocks are low, both gasoline, crude oil, nationally and internationally.

Mr. SAWYER. Is there a specific component of the cost that can

be attributed to that?

Mr. RICHARDSON. I know that the Library of Congress came out

with some percentages that we differ with, but we believe that all

of these are contributing factors. There is also one that has not

been discussed, and that is the utilization rates of refineries at 96

percent nationwide. But I think what is key in the Midwest is what

Chairman Pitofsky has said. The differentials should not be so high

at 40 cents.

Mr. SAWYER. It is no accident that I waited until last to go to

Mr. Pitofsky.

If these don’t add up, then it seems to me that the point that you

made in your testimony, the fact that all companies raise prices at

the same time, is not sufficient evidence of collusion. The courts

have held that some plus factor must be present to demonstrate

that behavior was reached; but for the quotation, collusion may be

evidence that such an agreement exists.

Is this absence of any identifiable cause for a substantial portion

of the price differential sufficient to meet that test?

Mr. RICHARDSON. That would be a plus factor. The courts have

said if price movements are unexplained by economic circumstances, then that is a plus factor justifying an inference that

the movements may have been as a result of collusion.

Mr. SAWYER. Thank you very much.

One final comment. Secretary Richardson, as you know, we have

been working very hard together and within this committee to try

to deal with the electric grid and reliability problems that you mentioned in your testimony. I have to ask you, if we were to pass the

reliability legislation that stands before us freestanding, would that

be sufficient to deal with problems this summer, or is that, coupled

with transmission, a longer term problem?

Mr. RICHARDSON. We need a comprehensive bill. Don’t give me

just the reliability provision. I think we need transmission generation. We need the renewable portfolio. We need to give FERC the

authority that it needs. We need the regional transmission organizations. Make it comprehensive.

Mr. SAWYER. Would it be fair to say that it is more important

to do it right than to do it immediately?

Mr. RICHARDSON. Yes, but we have an imminent problem that we

have to deal with.

Mr. SHIMKUS [presiding]. Thank you, my friend from Ohio, and

you better hurry if you are going to get to the vote.

Administrator Browner, you mentioned there was a 4 to 5 cent

price differential on average, and a small portion of that could—

only a small portion could be attributed to ethanol. Can you expand

on that and also tie that into the recently released report that we

received from the CRS last week?

Ms. BROWNER. First of all, Congress gave flexibility to the refiners and the States on which oxygenates they would use. We fully

37

support the decisions made by Wisconsin and Illinois to go to ethanol. We think that it is good policy. When we look at the cost associated with cleaner gasoline using ethanol, we see at best a

penny beyond the cost inherent in cleaner gasoline, which is something on the order of 4 or 5 cents higher than conventional gasoline. But when you look at the costs across the country, what you

are seeing right now is that the cleaner gasoline, RFG gasoline, is

selling for virtually the same price as conventional.

I might also point out that there are other cities that use ethanol, and we don’t see the same kind of price differentials that we

see in Illinois and Wisconsin. For example, Louisville is about 50

percent clean gasoline ethanol market, and yet their prices are very

much in keeping with the rest of the country, I think, again, lending support that it is not the RFG program, and it is not the ethanol additive. It has to be something else which no one has explained.

Mr. SHIMKUS. Thank you.

This is a question for Secretary Slater, but first I want to recognize Secretary Richardson. You were a strong supporter of the biodiesel program, and we were able to pass the addition to the

EPACT which allowed renewable credits for fleet vehicles.

Secretary Slater, we have a proposal, and this is in conjunction

with Karen McCarthy, to use the same biodiesel equivalent to address the CMAQ portions, cleaner burning, and the Soybean Association just released a report, and this is how it ties to the EPA,

biodiesel tied to 90-day subchronic inhalation study of exhaust

emission required under section 211. When our side talks about a

national energy policy, biodiesel is a perfect example of how you,

through the supporting of CMAQ, can support a position taken by

DOE, which I think now because of this study would be supported

by EPA. And so I am asking you to look at the CMAQ legislation,

and maybe that is something that we can move that would decrease reliance on foreign oil, improve air quality and would help

the transportation system. Can you respond to that?

Mr. SLATER. Mr. Chairman, I think your point is well taken.

What it does is it underscores the fact that when we passed the

TEA-21 legislation in 1998, not only did we pass a bill to provide

record level investment in highways and transit, but as Administrator Browner said, we also passed one of the most potently significant bills. It is largely based on the flexibility and the creativity

that we have within the CMAQ program.

Your suggestion that we work together in this regard is well

placed. We are actually doing so, but we would like to work closer

with you and your colleagues to move this effort forward.

Mr. SHIMKUS. Thank you. I think it addresses national energy security, clean air and all of the above.

Secretary Slater, can you address the pipeline issue and the debate currently whether ethanol transportation in the pipeline

versus petroleum-based is—works against each other? I have heard

comments that ethanol can flow in pipelines just like petroleumbased gasoline, and that should not be a hinderance to the cost debate?

Mr. SLATER. Clearly that is our belief. And the key from our vantage point is assessing the integrity of the pipeline and the safety

38

of it. We have, as I noted earlier, about 150,000 miles of pipelines

across the country. Those pipelines transport about 60 percent, as

noted, of the crude oil moving across the country, and so it is a

very important transportation system, very critical to the economic

strength of the Nation, and in this instance we have really worked

closely with the Congress to deal with the capacity capability of

two pipelines in particular, Wolverine and Explorer.

Mr. SHIMKUS. Thank you. I would like to give my colleague, Mr.

Green from Texas, if he has a question directed to Administrator

Browner, that is the one you should take because she is leaving.

Mr. GREEN. I thank you. I am glad we are having this hearing,

and I welcome Secretary Richardson back to this committee, as a

friend and former Member of Congress. And I followed you at the

Department of Energy coming from Houston, some of the things

that you have been trying to do, boosting domestic production and

negotiating with oil-producing countries. We would like to see more

domestic production.

First of all, I am just shocked seeing the last question about producing—transporting ethanol through pipelines. We have had testimony that that is not possible. It has to be trucked.

Ms. BROWNER. You can’t.

Mr. GREEN. So it is not as efficient to move as an oil-based additive, RFG?

Ms. BROWNER. We agree that you cannot send it through a pipeline.

Mr. GREEN. So I can truck it over the road cheaper than I can

use a pipeline?

Ms. BROWNER. In some instances that is the case.

Mr. GREEN. It disagrees with what your Department has said. I

am concerned about the possible ban on MTBE because of the problems with ethanol, and I know that the Congressional Research

Service said that ethanol wasn’t a contributing factor. I think that

was interesting because my colleague from Michigan stated that

the wholesale price is lower, but the retail price is higher, and

every one of you talked about how it is the Big 7 oil companies—

that disparity is they sell it to a jobber or distributor, and they sell

it to a retailer. I hope that the investigation looks at the whole

gamut instead of saying we have the Big 7, and they are bad. The

information that you all agreed to today would not show that there

has been a price spike in wholesale. Hopefully the FTC and everyone will address that, too.

In March of this year, the DOE presented testimony to the committee that if MTBE were not used in gasoline, that refiners outside of California would have to spend a billion to $2 billion in capital investments to continue producing an acceptable quality of gasoline. I know in this committee and in the halls of Congress, I have

heard ethanol can replace MTBE, and just from the statement

that, again, you can’t transport ethanol most efficiently, because I

hope that our EPA doesn’t tell me that it is more efficient to truck

across the country than it is using a pipeline. I hope that is not

the case.

And to replace ethanol, we don’t have any other substitute, and

yet we can grow all of the corn we want to, and it is not available.

39

I hope that our agencies will be looking for something, if not

MTBE, something like it, that it is not a problem.

My question is do we believe that a ban on the use of MTBE and

gasoline would contribute to increases in the price of gas, since

DOE has the price of gasoline, and then we will get to EPA?

Ms. BROWNER. If I might respond, the administration has been

very vocal in asking Congress to work with us to craft legislation

that would lift the 2 percent oxygenate requirement currently in

the law, which means that MTBE would not be——

Mr. GREEN. That is not my question. I asked if we stopped

MTBE today or 3 years from now, and all we have is ethanol,

would that increase the price of gas at the pump?

Ms. BROWNER. Our position is that you should change the law.

You can change the law and replace it with a renewable standard,

which is a responsible thing to do.

Mr. GREEN. Is ethanol the renewable?

Ms. BROWNER. We are suggesting that it could be biomass, rice

waste, yard waste. There is a tremendous opportunity in this country to go to a renewable standard.

Mr. GREEN. I support the effort for a renewable, but it cannot

produce the volume that we need to have. Ethanol cannot produce.

If we eliminate reformulated—and, again, I hope that is the case—

if we eliminated MTBE, and we have had testimony here, if we did

that, we would have a price spike in gas.

Ms. BROWNER. The solution is to change the law. That has been

our position from the beginning.

Mr. GREEN. Sure, we can change the law, but that is not what

is happening now. You are here to talk about the issue of why we

have high gas prices in the Midwest. The Midwest utilizes mostly

ethanol.

Ms. BROWNER. Because it is readily available, and it is cost-effective.

Chairman BLILEY. The gentleman’s time has expired.

Mr. GREEN. Thank you.

Chairman BLILEY. The Chair recognizes Mr. Oxley.

Mr. OXLEY. Thank you, Mr. Chairman.

In my opening statement I talk about the fact that today we are

importing 52 percent of our oil. During the Arab oil embargo, that

was 43 percent. Last month the administration delivered testimony

outlining the Clinton-Gore energy policy, and there was a reference

to one project in the government Industry Oil Reservoir Class Program that added 2.4 million barrels of oil from one field. EIA recently estimated that ANWR contained 10 billion barrels of recoverable oil. Why does the Clinton and Gore administration’s energy

policy continue to ignore the possibilities of developing that resource in the ANWR region?

Mr. RICHARDSON. Congressman, we are opposed to the use of development of ANWR for oil and gas production because of environmental importance of the region. It is our view that in addition to

that, 70 percent of the American people support protection of

ANWR for future generations.

Mr. OXLEY. I wonder if that policy was taken before gas prices

went sky high?

40

Mr. RICHARDSON. You are making a good point. We need to boost

domestic production. We have a package on domestic oil and gas

production that deals with marginal wells, G&G expensing, delayed

rentals. Deep water royalty relief, I think we need to reauthorize

that late this year. We are working in Federal lands in protecting

environmentally sensitive areas.

Mr. OXLEY. How much oil could you—given your policy, how

many barrels of oil would that produce?

Mr. RICHARDSON. I will get that for you.

[The following was received for the record:]

Estimates of added oil production due to various tax incentives are:

Marginal well tax credits:

• The Administration continues to examine marginal well tax credit proposals that

are cost effective and targeted to prevent well shut-ins.

• Estimates of added oil production from such a credit have ranged from approximately 10,000 barrels of oil per day to 150,000 per day depending on the particulars of the tax credit and forecasts of future oil prices

G&G expensing:

• DOE estimates that allowing 100% expensing of all G&G costs in the year incurred would result in 25,000 barrels of oil equivalent per day.

Delay rental payment expensing:

• DOE has not estimated the added oil production from this tax provision.

Deepwater royalty relief:

• MMS forecasts that natural gas production from deepwaters in the gulf of Mexico

will increase from the current 1 Tcf per year to 2.5 Tcf per year by 2010. This

increase will be hi response to deepwater royalty relief incentives as well as improvements in technology.

Mr. OXLEY. Ten billion?

Mr. RICHARDSON. This is a combination issue with the Department of Interior, as you know, because we are dealing with public

lands. But the administration’s view is that this would not be a

wise move. There is enough domestic production in the rest of the

country. We are proceeding——

Mr. OXLEY. Then why are we now relying on over half of our oil

supplies from overseas?

Mr. RICHARDSON. That has been a historical trend throughout

administrations. The good news is that we have reduced our reliance on OPEC, and we have gotten more from Canada, Mexico,

Venezuela, our own hemisphere and other non-OPEC sources.

The cornerstone of our policy should be to boost domestic production, to not have so much reliance on imported oil, and what we

need to do there is to deal with tax credits for energy efficiencies,

domestic oil and gas production, energy renewables. We need to

find ways to tap our own and help our own domestic resources.

Mr. OXLEY. If all of that happened, can you even get close to 10

billion barrels as projected by working ANWR?

Mr. RICHARDSON. I think there is disputes about the impact of

ANWR. I have seen varying reports about how much you can get,

Congressman. My point is that this administration, based on the

biodiversity, on the environmental importance of the region, the

fact that we are in the north slope of Alaska already drilling——

Mr. OXLEY. Thank God we were up there. If we were sitting here

25 years ago and debating this same issue, Prudhoe Bay and building the pipeline—the pipeline project, now 20 percent of our oil

41

comes from Alaska, that passed by 1 vote in the Senate. The Vice

President broke the tie. What if we had not had the courage and

the foresight to open up Alaska. And I would suggest to this administration this is the same old song where it is never the right

place to discover oil in our own country, it is never the right time,

there are always environmental concerns. We have shown that we

can drill for oil in Alaska safely and do it environmentally and

produce the kind of oil that the American public is expecting and

taking for granted.

Now all of a sudden we can’t drill in ANWR, which, by the way,

was the original site favored by the environmentalists, and the potential for developing three times the amount of oil that has been

produced at Prudhoe Bay, and I find that a shortsighted, knee-jerk

reaction to radical environmentalists, and I think it is a big mistake, and we should not be wringing our hands about high gas

prices when we don’t have the courage to develop our own domestic

supplies.

Chairman BLILEY. The gentleman’s time has expired. The gentleman from Texas Mr. Barton.

Mr. BARTON. Thank you, Mr. Chairman. Welcome to the energy

and commerce committee.

Secretary Richardson, how much energy domestically does the

United States produce in terms of quads, do you know, quadrillion

units of Btus?

Mr. RICHARDSON. Can I call my Energy Emergency Agency expert?

Mr. BARTON. Sure.

Mr. RICHARDSON. We will give you that in the course of the questioning.

Mr. BARTON. Let me try another angle. Obviously we don’t

produce as much as we consume.

Mr. RICHARDSON. Right.

Mr. BARTON. As Secretary of Energy, you have spent quite a bit

of time in the last 6 months encouraging other nations to produce

more oil so they can export it to the United States?

Mr. RICHARDSON. More so the first round of OPEC in March than

the last time. Most of my work was done through the telephone

and meetings here.

Mr. BARTON. The record shows that you have traveled extensively, and obviously if you have been on the telephone, you know

more about that than I do. But shouldn’t we also be trying to maximize to the extent possible what we produce domestically?

Mr. RICHARDSON. Congressman, here is where you and I can

work together. Just recently the administration, the President, announced a new policy that deals with domestic oil and gas production. There are three steps that I think are very important that

independent producers would like to see: marginal well tax credit

that we can work on in its formulation, what is called G&G expensing, and delay rentals.

Mr. BARTON. I think I only have 5 minutes.

Mr. RICHARDSON. My point is that we have a deep water royalty

relief tax provision that we need to renew. We are trying to, in

Federal lands, improve the access.

42

Mr. BARTON. In spite of these herculean efforts on behalf of the

Clinton Administration, is oil production going up or down in this

country? It is going down. You know it is going down, and I know

it is going down. What are we doing on nuclear power? Does the

veto on the nuclear waste disposal bill, does that help or hurt nuclear power?

Mr. RICHARDSON. Congressman, we have—we came to you on the

nuclear waste bill with a provision that advanced the process, that

Department of Energy would take title, we would move forward

with legislation based on scientific——

Mr. BARTON. You never put that proposal in writing. That was

a red herring. I asked you point-blank to put it in writing and——

Mr. RICHARDSON. I testified to it in front of you.

Mr. BARTON. You testified in vague, fuzzy, feel-good terms about.

Sure, you did that. I will admit that.

Here is my point, and we are going to have a second round, so

I am not going to belabor this, but I haven’t seen any major initiative by the Clinton Administration to actually increase domestic

energy production of any kind in this country, whether it is nuclear, oil or gas, coal, even solar and renewable. Now, we are a

growing economy. If we are going to continue to grow, at some

point in time we need to think about how to increase production

of energy in this country. Don’t you agree with that?

Mr. RICHARDSON. Congressman, I disagree with your characterization. We have budgetwise submitted increases, and we have not

gotten them. I get the point you are making. My view is that we

need to work together to pass a balanced package that involves energy efficiency and domestic production. That is our message.

Mr. BARTON. Let me switch to the Administrator at the Environmental Protection Agency. The PM 2.5 standards that your Agency

put out a little over a year ago when we had the hearing before

this committee on a bipartisan basis, my recollection was that we

strongly encouraged that those be delayed so we could do the

science and make sure that the standard made sense. Is that your

recollection?

Ms. BROWNER. You are referring to the PM 2.5, and we are engaged in what Congress directed us to do, to do a 5-year review.

Mr. BARTON. Didn’t the court just strike the standard down?

Ms. BROWNER. The court has raised a question as to whether or

not Congress, in granting to EPA the authority to set public health

air pollution standards based upon the best available environmental standards——

Mr. BARTON. Didn’t the court strike it down and say that you

were legislating and not implementing, and that Congress should

do that instead of EPA?

Ms. BROWNER. That is the question that is before the Supreme

Court, whether this body should set air pollution standards, or

whether the Environmental Protection Agency should set air pollution standards. That is the question before the Supreme Court.

Mr. BARTON. Should energy policy be set by the Department of

Energy, or should it be set de facto by what the Environmental

Protection Agency does?

Ms. BROWNER. Mr. Barton, my job is clean air, clean water for

the people of this country.

43

Mr. BARTON. Would you agree that the Clinton Administration

energy policy has been set de facto by what you have done at the

EPA?

Ms. BROWNER. Absolutely not. I am acting within the guidelines

of what Congress told me to do in 1990, which was to set a recipe

for cleaner gasoline. We did that with the industry in a negotiated

rulemaking in 1993. They have had 7 years’ notice to bring cleaner

gasoline. That cleaner gasoline means better health, fewer respiratory ailments and asthma attacks for tens of thousands of people in this country. It is environmental policy. It is public health

policy. That is what we do at Environmental Protection Agency.

Chairman BLILEY. The gentleman from Chicago, Mr. Rush.

Mr. RUSH. Thank you, Mr. Chairman.

I have a couple of questions for Ms. Browner. Since the beginning of this gasoline crisis, ethanol has taken a lot of blame for the

skyrocketing gasoline prices. Today’s hearing, a little later the industry may argue that they are for ethanol, but when this first

made national news and ethanol was blamed, no one from industry

defended ethanol or the RFG program. I would take any industry

praise of ethanol and the RFG program clearly with a grain of salt

and some kind of misgivings. I think that they have been very disingenuous in their whole approach.

I, like many other observers of this crisis, believe that the oil

companies are not in favor of the RFG program and ethanol, and

I believe this crisis is a convenient way for the industry to scare

the gas-buying public into some kind of disfavoring ethanol or discrediting ethanol. I would like for you to share your thoughts on

my theory.

Ms. BROWNER. I do think that it is very, very noteworthy that

the two areas where the cleaner gasoline price spikes occurred

were in the areas where ethanol is used because of the State decision, and it is a decision that this administration supports, and we

think that it is good for farmers in the region. There is nothing

that we can find to justify the price spikes based on the local requirement to use ethanol. Ethanol is used in other areas of the

country, not exclusively like it is in Chicago and Milwaukee, but,

for example, in Louisville, when 50 percent of their cleaner gasoline

is an ethanol-based cleaner gasoline, and yet we don’t see these

kinds of price spikes. If ethanol were the cause, we should see it

in other parts of the country.

I certainly think that the questions that you pose are legitimate

questions. Why were only two areas of the country subject to these

kinds of price spikes? And I certainly think, based on what the

Chairman of the FTC has said, those are the kinds of questions

that they are going to be looking at.

We think that ethanol is an important part of a fuels program

in this country, and we would like to see a law passed by this body

replacing the oxygenate requirement with a renewable standard,

which would give ethanol an opportunity to be a part of cleaner

gasoline both today and in the future.

Mr. RUSH. Currently there is a proposal at OMB for a carbon

monoxide credit rule, otherwise known as a VOC adjustment, that

might give a slight break to RFG, and as I represent an area that

44

relies heavily on ethanol, I would encourage you to work with relevant stakeholders to finalize this rule quickly.

Can you tell me the status of this rule?

Ms. BROWNER. Smog is a result of two components in gasoline,

VOCs—which are volatile organic compounds—and carbon monoxide. When you add ethanol to gasoline, you decrease the amount

of carbon monoxide. So we are considering an adjustment to the

Reid Vapor Pressure that could take into account the benefits of

ethanol, the carbon monoxide reduction. You also get toxic reductions.

We are hoping to make that proposal public as soon as possible,

perhaps as soon as late this week, early next week. We were delayed in making our proposal public specifically for the reasons

that you note. We worked very closely with the State of Illinois,

who brought forward some ideas that we thought were responsible

and should be incorporated into our proposal. We are hopeful that

will be put into the Federal Register in the next week at the latest,

and then we would take comment. It is a proposal. We would review those comments and make a final decision in time for next

year’s clean gasoline program.

Mr. Chairman, this issue came up earlier. The cleaner gasoline

program is a summertime cleaner gasoline program. That is why

it takes effect when it does, June 1. That is when smog, air pollution levels go up. This is a summertime program that we are talking about. It is in effect for about 15 weeks out of the year during

the time when you have the highest human health and public

health concerns because of pollution levels.

Chairman BLILEY. The gentleman’s time has expired.

The Chair now recognizes the gentleman from Michigan, Mr.

Upton.

Mr. UPTON. Thank you, Mr. Chairman.

Mr. Slater, I just want to correct something in your testimony

when you said that the pipeline supply did not affect western

Michigan. My district cannot get any further west. I have Lake

Michigan, and it did dramatically impact our district. We have

talked to our suppliers again this morning.

Mr. Pitofsky, I want to say, I was on the—doing a radio talk

show, I guess, about 2 weeks ago, and it talked—I had a call from

a constituent who said while he was at church, he came out and

the price at the gas station across the street went up 8, 10 cents

a gallon, and he asked me what might have caused that. My suggestion was that perhaps the owner showed up that morning to

raise the price.

I, too, have a lot of concerns about how the price in the wholesale

cost can go down 40 cents, and yet the prices at the pump actually

went up, didn’t even stay stable. My gas prices were $2.15 a week

and a half ago. Monday when I left Michigan to come back, they

are $1.89. I am looking anxiously to seeing your report as it impacts the Midwest.

Mr. Richardson, I subscribe to the supply/demand theory, and I

can remember well last winter when we had a spike in gas prices.

At about that time, the OPEC nations were meeting. In fact, on the

House floor we took up legislation that provided the President authority to turn off the spigot of foreign aid if they didn’t open the

45

spigot with regard to increased production. In fact, they did increase production. At least they said they would. Have they complied fully with what they agreed to last winter?

Mr. RICHARDSON. Congressman, the answer is there has been an

increase since you mentioned that floor debate of 3.5 million barrels per day increase. The increase right after your intervention by

close to 2 million barrels per day, we believe they have done it.

There is always what is called leakage.

Mr. UPTON. So they did 100 percent of what they said that they

would do last winter?

Mr. RICHARDSON. I am never going to answer absolutes again in

my life, but they have pretty much stuck to what they said that

they would do both in their March increase, which is close to 2 million barrels per day if you add OPEC and non-OPEC, and the only

changes have been in, for instance, Iraq. They may be doing less

than anticipated. Non-OPEC, Mexico, Norway, have pretty much

done what they said they have. So the answer is generally yes.

Mr. UPTON. Although most experts said that the increase they

agreed to last week wouldn’t impact the price very much at all,

how quickly will they step up production to meet that goal?

Mr. RICHARDSON. Usually it takes 6 weeks for the oil to hit the

tankers and get into this country. Our view is that it will have a

modest positive effect when you have more production, and we are

looking at 800,000, 900,000 when you add OPEC and non-OPEC.

The problem has been unusually high demand and low stocks, low

stocks of gasoline and crude, both nationally and internationally.

That has been a fundamental problem, and then when you add the

other concerns about transportation and the pipeline and refinery

problems, it adds to the ability of crude oil and gasoline to come

into our market.

Mr. UPTON. Where does the oil that we currently pump in Alaska

go? Doesn’t a lot of it go to Japan?

Mr. RICHARDSON. A lot does.

Mr. UPTON. Eighty percent?

Mr. RICHARDSON. I don’t have the statistics, but it is high.

Mr. UPTON. Is there any effort to perhaps divert that back to the

United States?

Mr. BILBRAY. No oil refineries.

Mr. RICHARDSON. Do you want me to yield, Congressman?

The problem is a number of California Members have approached

us about moving that, but if I can yield.

Mr. BILBRAY. If the gentleman would yield, one of the problems

is that the oil refineries on the west coast, there has not been a

new oil refinery built there in 30, 40 years. The oil has to be refined somewhere.

Mr. PITOFSKY. I can be of some help on this. There was a portion

of Alaskan oil that was shipped out of the west coast to Asia, but

as part of our negotiations with the parties in the BP-Arco matter,

the parties have agreed that that kind of exporting would discontinue in the future.

Chairman BLILEY. The gentleman’s time has expired.

The gentleman from Florida Mr. Stearns.

Mr. STEARNS. Thank you, Mr. Chairman. My questions are for

Secretary Richardson.

46

Let me follow up with what Mr. Barton had mentioned. How

much petroleum does this country produce? Do you know?

Mr. RICHARDSON. I think my expert——

Mr. STEARNS. Do you know personally? How about how much

gas? How many tons——

Mr. RICHARDSON. Let me bring the Energy Information Agency.

Mr. STEARNS. I understand what you are saying. You don’t know.

Staff has indicated to me that they asked at this hearing that

you provide testimony. The other groups have. The Environmental

Protection Agency provided testimony before the hearing. The Department of Transportation did, the Federal Trade Commission.

Your office was the only one that did not provide testimony. In fact,

I am told by staff your office refused, yet May 24 you provided testimony. Why aren’t you providing testimony?

Mr. RICHARDSON. Congressman, I don’t know the facts on that.

I had prepared testimony that was—that I gave.

Mr. STEARNS. Senator Byrd complained about your responsiveness. You knew about this hearing. The other agencies provided,

and you refused to do it. Not only did you not provide it, when they

came and asked you for it, you would not provide it.

Mr. RICHARDSON. I don’t think that is a fact, Congressman. This

is my former committee. I rapidly——

Mr. STEARNS. I can’t hear you.

Mr. RICHARDSON. I told the chairman I would be available to

stay as long as he needed me. I confirmed coming to this committee

immediately, and I will stay as long as I am needed. The testimony

is essentially the same testimony that I provided yesterday. I have

been testifying——

Mr. STEARNS. There has been a whole new scenario since you testified in May.

Let me ask you another question. This is your budget that you

request from Congress, and I assume that you and your staff, realizing how important energy is, that is the mission of your Department—on page 135 do you think that you requested more for research and development in the area of coal and power systems in

your budget? Do you think it was an increase request or a decrease?

Mr. RICHARDSON. It was a slight decrease.

Mr. STEARNS. Nine percent.

Mr. RICHARDSON. Let me explain why. Because we postponed two

coal generation plants that had been ahead of schedule. That was

the reason. And we expect to make that shortfall up next year.

Let me also answer your question about production. The United

States produces 5.7 million barrels per day. But on coal, I will go

through nuclear, we increased our contribution to nuclear, the Nuclear Regulatory Research Institute; oil and natural gas, we have

increased, Congressman——

Mr. STEARNS. Reclaiming my time.

Mr. RICHARDSON. —fossil fuels.

Mr. STEARNS. In petroleum and oil technology research and development, do you think that your budget you requested went up

or down?

Mr. RICHARDSON. It went up.

Mr. STEARNS. It went down 8.2 percent.

47

What about plant and capital equipment? It went down by 23

percent. So your Agency, whose mission is to try and come up with

alternative energy resources through research and development,

right here in this report is not even requesting enough money to

do the job, and you are coming here to say that you are doing the

job?

Mr. RICHARDSON. You need to add our request for solar, renewable energy, wind, geothermal. You need to ask for our energy efficiency budget. The Congress has only funded 12 percent of the

President’s energy efficiency budget in the last 7 years.

I don’t want to get——

Mr. STEARNS. Your overall request is down 7 percent in this

graph.

You mentioned OPEC, and you said that this country is going to

Venezuela to try and get extra sources. Isn’t Venezuela part of

OPEC?

Mr. RICHARDSON. Let me give you the members of OPEC.

Mr. STEARNS. Is Venezuela part of OPEC?

Mr. RICHARDSON. Yes.

Mr. STEARNS. The fact that you cited Venezuela separately as a

country you are——

Mr. RICHARDSON. My point is that we are getting our sources a

lot from our hemisphere, Canada, Mexico, Venezuela. My point is

Mexico is not a member of OPEC. Neither is Canada. Our reliance

on OPEC, Congressman, in the last few years, as a source of supply

for the United States has declined.

Mr. STEARNS. My point is, Mr. Richardson, if I came up here, I

would know these facts. I would make sure that your budget included increased funding if you want to take the high ground to

say that the Department is actually trying to solve this problem.

And in the larger sense, OPEC, as we all understand, is a cartel.

It is a monopoly. And this might be a question for the Secretary

of the Federal Trade Commission. Here the Justice Department

and the administration is trying to break up all of these companies

like Microsoft and has this aggressive plan to do so. Why isn’t the

administration going after OPEC and using the leverage and the

power it has through the executive branch to try and do something

about this cartel?

Mr. PITOFSKY. I can’t speak to diplomatic efforts in this area. As

far as the law is concerned, challenging an agreement among sovereign states raises all sorts of difficult questions, the so-called act

of State doctrine, and the Sovereign Immunity Act.

Mr. STEARNS. You could use your influence. You could use resources. You could use lots of things; trade, which I don’t think

that the administration is using fully.

Chairman BLILEY. The gentleman’s time has expired.

The Chair announces that we will now take a 5-minute recess.

[Brief recess.]

Mr. TAUZIN [presiding]. The Chair recognizes Mr. Bilbray for a

round of questions.

Mr. BILBRAY. I would like to thank the Administrator for staying.

Administrator, I just want to make sure that in California all

these years we have been trying to address the issue of not only

cleaner burning gasoline, but also more cost-effective. We had

48

prices spiking for a long time. Now the 32 million people of California see this huge reaction in the Midwest, and we say, hey,

doesn’t anybody remember we are out here in California, too? It is

almost like a perception that the Midwest really matters, but California is just taken for granted.

That aside, I would just like you to articulate that after telling

the Governor, the Chairman, and this Member of Congress, and

telling the California delegation Democrats and Republicans unofficially that it was going to be early summer, now it has been 139

days, 24 hours in those days, waiting patiently and being told,

wait, one more study, one more report. We have been doing this for

years. What is your explanation of why we do not have an answer

in California?

Ms. BROWNER. The question that California has posed is a question of first impression. No one else has ever brought that question

to EPA. No one has ever done the analysis. It has simply never,

ever been done.

I am sure everyone can appreciate that it is a more complicated

analysis than we originally thought. We are looking at all of the

oxygenates and whether the 2 percent requirement may in any way

hinder California’s efforts, and California is leading the way on

cleaner gasoline, and you, as a member of the Air Resources Board,

were a part of this.

No one has forgotten California, but we want to make sure that

we do the technical work. This body calls me up here all of the time

and says, do the technical work. It simply is taking longer. I apologize for it taking longer, but I know you and everyone up here

wants it to be done accurately.

Mr. BILBRAY. I have never heard anyone who has looked at what

California is proposing who had real scientific basis saying that

California was trying to retreat from an air quality issue.

Ms. BROWNER. We are not suggesting that at all.

Mr. BILBRAY. I have been informed that the Governor of Illinois

wants to backslide and come off of number 2. California is asking

for the flexibility to go to number 3.

Ms. BROWNER. We agree.

Mr. BILBRAY. We heard your testimony today. Somebody watching these hearings will hear what you just said, but remember

what you said two questions ago to the gentleman from Chicago,

saying that we want a renewable mandate, and we want it guaranteed up front. The trouble—is the crime that California is committing is we are trying to get a clean gasoline, but we are not willing

to commit to a renewable standard?

Ms. BROWNER. You know that I am incredibly supportive of the

California clean fuels program. We at EPA have in many instances

worked to adopt components of that program because we see the

benefits of it. There are two issues in front of all of us, but quite

simply, the issue of MTBE is one where we have agreement. We

all believe that the oxygenate additive MTBE presents far too

many water pollution problems and, therefore, should be removed.

We share your Governor’s commitment to that. We have asked this

body to pass legislation to do that. We are suggesting that in passing that legislation, it is an opportunity to create a renewable

standard. And your own State has been supportive of a renewable

49

standard. Your rice farmers are supportive. They see an opportunity for biomass to——

Mr. BILBRAY. Reclaiming my time. The State of California has

said that we would love to work toward it. But the renewable formula, the problem is not MTBE, the problem is a mandate of content that was well-intentioned in 1990 that has been proven to be

deficient in the year 2000. The content mandate and what we are

asking you—and I want to say this again, when I hear you say renewable, I support renewable, but I don’t support a Federal mandate that gives one product or one industry a monopoly. We have

already got enough problems with the gas industry having too

much of a monopoly. I don’t want to transfer from one industry to

another.

Ms. BROWNER. We are the ones asking for investigations and

saying that renewable should include your rice farmers.

Mr. BILBRAY. What I want to know is that the consumer—you

have a clean air strategy that we are trying to do. We are trying

to say that we have a cleaner, less expensive gasoline. Why won’t

the Federal Government allow us to do it? And you are saying that

you can’t prove yet that it is cleaner?

Ms. BROWNER. Mr. Bilbray, I have not said yes or no, and you

are well aware of that. This body has told me I have to do a level

of scientific analysis and present it to the public. California gave

me their evidence in February. Taking additional time to ensure

that the scientific analysis that this body always demands of EPA,

and they have every right to demand, is properly done is my job.

Mr. BILBRAY. I will go back and say with the science we have in

California, you have 139 days since you got the last piece of paper.

You know, Mary Nichols and your staff members have known since

1995, that California came up with a better environmental option

than a mandated content, and all we are asking is that you give

us the flexibility to do better. We are not asking to backslide or

back off like the Midwest. You have got professors in California,

you have got editorials in the San Francisco papers that strongly

support this administration, but they are asking questions. Why is

it such a big deal now that it is in the Midwest with a price spike,

and it has been—it hasn’t been a big deal when we were in California?

Let me tell you flat out, I would love to see that we don’t wait

until August in L.A. when there can be a grand announcement

made one way or the other or the fact that California is being

taken for granted while the Midwest is now a political hotbed. This

is not just this Congressman saying that. I hope that we are not

playing politics. We have asked patiently. We have been patient

through two administrations saying we have a better mousetrap.

We know it. Why can’t you give us an approval to do better, unless

what it is is having basically a mandated content for certain products is essential to this administration’s policy, and I don’t think

that the public health should be sacrificed for that.

You want to talk about ethanol, and you know that we were

taken to court and we won the case before the court that a mandated content that hurt the environment was not going to be mandated.

50

Mr. TAUZIN. The gentleman’s time has expired. The gentlewoman

may respond.

Ms. BROWNER. No administration has done more for cleaner air,

and, Mr. Bilbray, we have enjoyed a positive working relationship

for the benefit of your constituents and all of the people of California. You know that we are trying to get a scientific, a technically

accurate answer. This isn’t about politics. This is about a complex

analytical process. This is about science, and as soon as we have

that done, we will make it fully publicly available, and everyone

can comment on it.

Mr. BILBRAY. We waited for the National Academy of Science and

study, study, study. The consumer and the environment back in

California is saying, when will we get the answer, and the answer

is not coming when it was promised.

Thank you for coming today.

Mr. TAUZIN. The gentleman’s time has expired.

The gentleman from Ohio Mr. Brown.

Mr. BROWN. On April 10, 1962, six U.S. Major steel producers

announced a sudden increase in steel prices. President Kennedy,

reacting furiously, said a few days later, on price and wage decisions in this country with very limited restriction in the case of monopolies and national emergencies, strikes are and ought to be freely and privately allowed. The American people have a right to expect, however, in return a higher sense of business responsibility

for the welfare of their country than has been shown in the last

2 days by the steelmakers.

President Kennedy continued, some time ago I asked each American to consider what he would do for his country, and I asked the

steel companies the same. In the last 24 hours we had their answer.

Four days later, in response to President Kennedy’s ringing denunciation, the steelmakers canceled their price increases.

I would like to ask each of you, I ask distinguished members of

this administration, and I would like to ask the President to do the

same, use the bully pulpit to demand accountability from oil companies for whatever you want to call it, price gouging, perhaps collusion, as Mr. Pitofsky might prove. I would ask also for the Republican leadership that they quit calling names and use the same

bully pulpit to make that case that the oil companies have used

every excuse, blaming clean air laws, pipeline breaks and everything they can, to raise prices even more than any of those single

elements should suggest.

Unfortunately, the Republican answers have been, eliminate the

DOE, refuse to invest in energy efficiency, refuse to invest in developing new sources of energy-renewables resources and fail to reauthorize the Strategic Petroleum Reserve.

I would ask Secretary Richardson, what do these failures on the

part of this Congress, the proposal to abolish the Department of

Energy, the refusal to invest in energy efficiency and reauthorize

Strategic Petroleum Reserve, what has this meant to oil prices?

Mr. RICHARDSON. It has prevented us from having a balanced energy policy. I think what this administration has done is unprecedented economic growth, but at the same time we have lowered

sulfur emissions. I think this is one of the main points of AdminisVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00054 Fmt 6633 Sfmt 6602 E:\HEARINGS\65909 pfrm03 PsN: 65909
51

trator Browner. We need a balanced approach, one that helps our

own domestic oil and gas producers, and we have before the Congress legislation to help them, tax incentives for energy efficiency,

for fuel, for vehicles, for homes, for places of work, tax incentives

for renewable energy.

We have increased investment, and we need to increase investment in domestic sources of energy-efficient technology for factories

and homes, weatherization of low-income houses. The PNVG program was cut in Congress, which basically allows us to have more

fuel-efficient cars, and do so in a time certain, and funding for that

is going down.

Our efforts on natural gas, distributed power generations, we

have, I think you mentioned, the Strategic Petroleum Reserve. As

the Energy Secretary I have authority to do this in national supply

emergencies. We need the full authority. I know that the House

has moved, but the Senate has not yet.

We need also authority for a regional home heating oil reserve.

We have not gotten it.

My point here is not to point fingers. We need to work together

and deal with these issues in a bipartisan fashion, I think, if anything because of these high gasoline prices. If we approach both the

demand and the supply side and the investment side, we can deal

with this problem more effectively, and we can keep the fundamental goal of economic growth with protecting the environment.

I think we have done that.

Ms. BROWNER. Mr. Chairman, I just wanted to thank the committee for honoring the long-standing prior commitment that I had.

I was able to stay through the first round of questioning. If I might

ask leave of the committee to have Gary Guzy, our general counsel,

could answer questions in my absence.

Chairman BLILEY. Sure. We may submit some written questions

to you until later.

The gentleman’s time has expired.

I recognize Mr. Tauzin.

Mr. TAUZIN. Let me follow up on something, Mr. Richardson. I

wanted to get my 2 cents in and didn’t properly welcome you as

a former colleague and friend. Let me first commend your Department, and I want those folks who may be tuning into this hearing

to know that you published this primer on gasoline prices that is

available at www.eia.doe.gov on Web, and I assume that they can

also contact your Agency and get this pamphlet. It is a great explanation of how retail gasoline prices occur in the marketplace. It is

also, and I want to point out again to you, a real statement that

anticipated the price spikes in the Midwest. It says that lack of

available refining capacity, which is continually going down in

America and affected by these reformulated requirements, the lack

of refining capacity is already contributing to higher retail prices

in California, that Mr. Bilbray pointed out, and is expected to

spread to other States.

You predicted that it was going to happen. You should not be

surprised by it. I want to offer this for the record, among the documents that we file, and I ask unanimous consent that it be part

of the record.

Chairman BLILEY. Without objection, so ordered.

52

Mr. TAUZIN. Also dated July 3, an article in Business Week, entitled ‘‘Who Is to Blame,’’ this has been about pointing fingers. The

people in the administration are trying to blame the oil companies

in calling for the investigation, and there is concern about EPA’s

decisions. But the article does a good job, and I want to quote one

phrase: ‘‘the trouble in the Midwest should have come as no surprise to gasoline consumers in California. After the State mandated

its own special reformulated gasoline that they blend in March

1996, the price of gasoline took off, jumping 30 percent to $1.60 a

gallon. Consumers were outraged. There were at least four separate Federal and State investigations of the California gas prices.

No charges of improprieties were ever filed. Capacity in the State

is so tight, whenever there is a refinery outage, gasoline marketers

must fine out-of-State refiners who can meet the California requirements.’’

It is as simple as that. I suspect that you are going to go forward

with your investigation because that is what you guys want to do,

but I would ask you to consider the fact that every time this happens and all of the investigations go forward, we get the same answers. That it is marketplace disruptions in some cases caused because of new requirements in the content of gasoline for which the

marketplace has a hard time adjusting.

I want to quickly take you through what I have learned about

the situation in the Midwest, Mr. Richardson, and ask you, Mr.

Pitofsky and Mr. Slater, and Mr. Guzy of the EPA, to think about

what is happening in that marketplace before you go around charging people with corruption and chicanery. When ethanol has to be

added to gasoline, it has to be shipped in separately and mixed

near the marketplace, and the refining capacity drops, and shortages occur.

When refiners that have their own branded gasoline stations out

there no longer have enough gas for this new reformulated mix to

sell to the independent marketers, the independent marketers

begin bidding up the price to get some of that supply. In a shortage

the independents start bidding the price up, and the branded products have to keep up with that price spiral because otherwise their

stations would go dry. The article talks about that 5 or 6 cents reformulated cost amounting to a 16-cent increase in gasoline prices

when you create shortages.

What I am trying to say, and I hope that you look at this, there

is a reason why we have had low gasoline prices across the country

and a spike only in certain regions of the country, and it isn’t because we only have gasoline shortages, we have a lot of oil flowing

into this country. It is regionalized. And it is regionalized because

of the fact that we decided, rightly or wrongly, on a drop-dead date

of June in the middle of the demand season to impose new regulations for which there are short supplies. If we are going to cure it,

we quit all of these charges and countercharges and simply understand how these markets work and maybe implement these

changes on a gradual transitional phase instead of a drop-dead

June 1 in the middle of the summer when everybody is using automobiles to get around the country.

Chairman BLILEY. The gentleman’s time has expired.

The Chair recognizes the gentleman from Minnesota, Mr. Luther.

53

Mr. LUTHER. Thank you, Mr. Chairman. I wrote you, and I appreciate you having the hearing.

A lot of references have been made to Chicago and Milwaukee.

I represent the metro area of Minneapolis-St. Paul. I assume your

comments are the same with Minnesota in general, and there is

nothing specifically about that area that would differ in your comments. I am assuming that unless somebody says something differently, because obviously we are greatly concerned, as well as

Milwaukee and Chicago.

I appreciate the final words that Mr. Tauzin said because I think

it is too bad—Mr. Chairman, I wish you had made those comments

about no finger-pointing earlier in the hearing. I missed some of it

because of the floor action, but I don’t think anything would be

more inappropriate here than to try to cast blame on a particular

administrator or a particular Department over this particular

issue.

When President Clinton took office, he clearly recognized the importance and the need for a strong, long-term energy policy for this

country, and I think that through his actions he has been working

in that direction, and I don’t think that it is appropriate to be casting any blame. And what I hear being said as I follow this issue

is that nobody can put their finger on it and say this is an explanation for what is going on, and that is exactly why the FTC is

going to do what it is going to do, and that is highly appropriate.

Obviously, a couple of days after the FTC made that announcement, there were further changes in the whole pricing of this product. That needs to be looked at and scrutinized. We need to get to

the bottom of it because this finger-pointing—you wonder why the

American public is fed up with politicians. I come from Minnesota,

the home of Jesse Ventura. This finger-pointing is the classic reason that Americans are fed up with the political parties and the political process.

What we need to do is get to the bottom, get to the bottom of

the facts, and that is what I hear you saying you are going to do,

and that is what we ought to do.

Would it be helpful if we brought people other than the Secretaries here; would it be helpful if we brought people from the industry in? How can this committee be helpful in getting to the bottom of what is going on, and how can we take action? I would like

to know—if there is nothing that we can do during this period of

time, please indicate. If there is something that we can do other

than bringing heads of departments in and other people that could

bring some answers, I would like to know.

Mr. PITOFSKY. On the narrow question of price behavior in the

Midwest, I think we have all of the authority that we need. Yes,

we will conduct this investigation. Maybe your interpretation of

what will happen here is right. Maybe the evidence will show that

no cases should be brought. As far as I am concerned, that does not

mean that we should not investigate. I believe the people who are

paying these high prices and being hurt by these high prices are

entitled to an explanation, and that is what we will do.

As to the committee’s role, I don’t think that we need any assistance on this, but on the broader questions of OPEC, international

oil industry and so forth, I leave it to others to respond.

54

Mr. SLATER. Congressman, I have shared our analysis of the

pipeline situation, so I would let my earlier comments speak to the

question.

When it comes to the broader balance comprehensive energy policy, there are a number of things that we currently have before the

Congress that would clearly be helpful to us: providing the resources for the advanced vehicle program, supporting our efforts to

continue to work with the automobile industry to move forward on

our PNGV initiative, new generation vehicle.

Also, we have a major initiative with the trucking community in

that regard as well. We announced that during Earth Month in Detroit with Mack Truck, Oshkosh and Caterpillar. We would like to

be able to move forward aggressively on those measures.

We would like for the Congress to reconsider the prohibition to

the administration as relates to our moving forward on reviewing

and analyzing CAFE standards. We have seen a 50 percent increase in fuel efficiency since that measure was passed in 1975 and

believe that we can make significant progress as we continue to

work in partnership with all interested parties in this regard.

Clearly, our ability to continue to provide record-level funding for

transit initiatives and intercity rail we believe also provides significant benefits.

I made a comment earlier about the fact that last year we enjoyed, for the first time in 40 years, significant ridership in transit,

about 9 billion passengers. That accounts for or represents literally

billions of gallons of oil saved.

Also, Amtrak has enjoyed, over the last 3 years, increases in ridership and improved service, and so I do believe that those measures provide great opportunities for us to balance our transportation system and to also bring fuel efficiency to a greater realization across the transportation enterprise.

Mr. RICHARDSON. Congressman, I would simply add, this is the

Energy—used to be the Energy and Commerce Committee. You

have primary jurisdiction over energy. I would suggest this is an

issue that should involve environmental groups, the oil companies.

It should involve citizens groups, labor unions, business people.

I think we can find solutions. We need to find a national solution, and what I am concerned about is that we are looking at

strictly regional problems. I think we have to have a national policy, and the Secretary mentioned a number of initiatives that we

need passed.

But, at the same time, there is also an international dimension

which I have been dealing with which, you know, you might call

some experts in that area to deal with the international ramifications. We are concerned both on the national side but also on the

international side, factors that we can’t control like the explosion

in Kuwait of this refinery, like other disruptions that occur that involve infrastructure, and I think Secretary Slater can also contribute to this.

So I would urge you to have a national dialog on energy, with

the objective being a bipartisan energy policy that might help us

get through this not just the summer but long range more effectively than we have.

Mr. COX [presiding]. The gentleman’s time is expired.

55

Mr. GUZY. If I may respond very briefly. One of the things that

has characterized the cleaner fuels, cleaner gasoline program has

been the significant lead time that the industry in fact has had to

be able to meet the requirements with the initial phase in 1995

and phasing in in the Year 2000, and we would just ask that the

administration has submitted principles to address the challenge

posed by MTBE. We think they represent a serious effort to grapple with those issues, and we would ask this committee to consider

those and move that forward. In addition, we would ask Congress

to fully fund the administration’s request for energy efficiency.

Mr. COX. The gentleman’s time is expired.

The Chair recognizes himself for 5 minutes and welcomes his

former antitrust professor to the panel. Unlike the President and

the First Lady, I didn’t study under Professor Bork. I studied

under Professor Pitofsky, but hopefully I learned something in the

process.

Mr. PITOFSKY. I look forward to your questions.

Mr. COX. Fortunately, a sufficient number of years has passed,

I am not motivated to take advantage of the opportunity where I

might have been as a student.

We are right now in the country, as we are all commiserating,

more dependent on foreign oil than ever. Our own domestic production has gone down, down, down, down over the last 15 years, and

we are not stimulating domestic production. To the contrary, it is

being depressed. We are also not doing much to rely on nuclear

power, not to my knowledge. I would ask the Secretary, does the

administration formally support the construction of any ongoing

nuclear power plant projects? Is there any construction project

under way in the——

Mr. RICHARDSON. Mr. Chairman, let me just say the administration supports nuclear power as one of our options, and we have

committed to that through increased research funds, as I mentioned earlier, and the issue of certification of new nuclear power

plants through the Nuclear Regulatory Commission, but there have

been no pending issues right now.

Mr. COX. Have any new nuclear power plants come on line during the Clinton Administration?

Mr. RICHARDSON. In the entire 7 years, no. Since 1975, none

have come on line.

Mr. COX. Are there any currently under construction that the administration has supported?

Mr. RICHARDSON. Well, it is not a question of whether we support

them or not, Congressman. It is an issue of licensing. And, as I

have said, we believe that nuclear power is part of the energy mix,

and we are supportive of efforts to increase research in nuclear

power.

One of the problems——

Mr. COX. Are you supportive, for example, of the immediate construction of the light water nuclear power plant somewhere in

America?

Mr. RICHARDSON. Well, if it is fully licensed, yes.

Mr. COX. And then where would this be going on?

Mr. RICHARDSON. Well, I think the Nuclear Regulatory Commission has a number of pending nuclear licensing issues. I will say

56

to you, one of my more immediate concerns is, the Seabrook nuclear power plant yesterday in new England has had some problems, and we are trying to work on that.

Mr. COX. The reason I ask the question is I do know the administration is supporting at taxpayer expense the construction of two

light water nuclear reactors in North Korea. We agreed to pay for

Kim Jong-Il and his regime to have two light water nuclear reactors, something to my knowledge this administration would never

support in America; and I am just wondering why in North Korea

we are supporting the construction of nuclear power plants instead

of some safer means that doesn’t pose a proliferation threat. Because, as we have heard in testimony, when those two nuclear reactors come on line in North Korea they will produce enough plutonium to make 60 bombs a year.

Mr. RICHARDSON. The reason for that is what is called the

Agreed Framework that we signed with North Korea some 4 years

ago.

Mr. COX. Well, I am very familiar with the Agreed Framework.

I am just trying to contrast the administration’s willingness to pay

for it at U.S. Taxpayer expense, the construction of nuclear power

plants in North Korea, and the lack of any nuclear power progress

in the United States for the whole 7 years of the Clinton-Gore administration.

Mr. RICHARDSON. Congressman, the issue is not that we are stopping it. The issue is licensing. There are strict standards that have

to be followed. We believe that nuclear power has to be part of the

mix. We have increased research for nuclear power. We tried to resolve the nuclear waste issue.

One of the problems in nuclear power is the very high cost of

building new nuclear power plants. The technology has not been

advancing as rapidly as it should.

But, again, on the North Korea issue, what we got in return,

Congressman, was a moratorium on reprocessing of North Korean

nuclear weapons.

Now, there has been a breakthrough in North Korea. As you

know, there is an easing of tensions, but the issue of the reactors

is something that is pending right now.

Mr. COX. I just would have hoped that the U.S. input there

would have been toward hydroelectric power or even coal, if we

can’t do it as cleanly as hydro, or some other means of providing

electricity to people in North Korea who are admittedly very, very

poor and not pose that proliferation threat.

On petroleum, Alaska is twice the size of Texas. Can we do more

exploration in Alaska?

Mr. RICHARDSON. Yes, Congressman, and this administration has

supported exploration in the North Slope, a petroleum reserve in

Alaska. We also believe that initiatives that we submitted on marginal well tax producers, GNG expensing delayed rentals, if approved by the Congress, would help in the exploration there. Some

of the more salient issues relating to exploration in Alaska is the

ANWR issue; and we have said that we believe that for environmental reasons, for biodiversity, ecological reasons it is not in the

national interests to explore in the ANWR.

57

Now, we do support further exploration. We have a proposal to

deal with the deep water relief initiative. We have some areas in

coastal areas where there is exploration. Off the coast of Florida,

off the coast of California, we think it is too environmentally sensitive.

Mr. COX. I agree with that. But certainly not with putting all of

that vast acreage of Alaska off limits. I would yield the Chair at

this point—to the chairman for his return.

Mr. TAUZIN [presiding]. The chairman recognizes the gentleman

from Chicago, Mr. Rush.

Mr. RUSH. Thank you, Mr. Chairman.

Mr. Secretary, Secretary Richardson, of course, we are concerned

about the escalating and skyrocketing costs of gasoline at the

pump. Of course, in my District, we are experiencing crises. People

who have marginal lifestyles and people who are living on fixed incomes are experiencing all kinds of havoc because of the rising or

the cost of gasoline.

However, I want to project forward a couple of months, and in

March 1999, March 23, 1999, there was an announcement by

OPEC that its member states were banding together to reduce the

world supply of petroleum, and then again in October 1999, an announcement by the Energy Information Administration that prices

for home heating oil will increase by 44 percent.

You know, that alarms me. Because I want to know, you know,

for those same individuals who are experiencing this crisis in their

lives because of the rising costs of gasoline, are we to expect similar crises as far as heating oil in the winter months, especially if

we experience a severe cold winter season? And, also, is there any

specific legislation that Congress has presented to the President to

help stem the sharp increase in oil prices, given the fact that we

are now reacting to the crisis that we are presently involved in and

having projected a future crisis that is right around the corner?

Mr. RICHARDSON. Congressman, for your constituents—and I

have been in your district, and I know how painful it has been both

in summer and in winter, the summer with air conditioning; and

I recall being in Chicago at a time when some of your constituents

were suffering because of the extreme heat wave and lack of air

conditioning.

What we think is necessary, Congressman, is several steps: Low

income energy assistance—the President has resubmitted additional funds to provide low income energy assistance on an emergency basis. We need those funds from the Congress.

In addition to that, for constituents in Chicago and other parts

of the country, our weatherization programs need to be expanded

and reauthorized, and we have proposed that.

On home heating oil, we are concerned, Congressman. This is

why we have proposed a home heating oil reserve of 2 million barrels based on a national supply emergency in case of a potential

emergency, not based on market or price issues but based on an

actual supply emergency. That has been languishing. I understand

something passed the House yesterday, but it is not moving in the

Senate.

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I need full authority also for strategic petroleum reserve which

can be used for national supply emergencies. I need the full authority to use that. We don’t have that at this time.

In addition, we are going to continue our energy diplomacy which

basically recognizes that what the international community needs,

and we are all tied in here, is price stability, not so much volatility.

That is what has been happening, and we are talking about developing countries and producer and consuming countries. And the

price of oil is over 30, it is too high. At 10, it was too low. So what

you want is something in between but dictated by the market.

We are also moving aggressively I think, as many have mentioned, with EPA and the Department of Transportation to deal

with the pipeline and refinery problems that unexpectedly happened.

In addition, too, Congressman, we are talking to the American

people about just taking some simple steps that involve energy efficiency. For example, finding ways to deal with the inadequate generation and capacity that exists, for instance, washing dishes and

doing laundry in early morning or late evening when it is cooler

or closing your blinds or drapes or shades to prevent sunlight from

entering your room or something. Just a simple turning lights off

in rooms you are not using and changing filters in air conditioners.

Now this is not supreme sacrifices, but if we did that we could

save money, consumers would save money and electricity.

Mr. TAUZIN. Gentleman’s time has expired.

Mr. Slater, you wanted to respond also?

Mr. SLATER. Yes, Mr. Chairman.

I just wanted to mention that since transportation costs in many

households are second only to housing costs, that one other thing

we could do is to really promote the use of commuter choice, to help

people in their use of transit. I mentioned that we had 9 billion

passengers last year. We have the capacity to significantly increase

this number, and this kind of tax incentive is very helpful. I know

Congressman Wynn is very interested in this, especially in the

Washington, DC, metropolitan area, but you have got a great transit program in Chicago, and I do think that could provide some relief for families that we have concerns about.

Mr. TAUZIN. The gentleman’s time is expired.

The Chair recognizes the gentleman from Oklahoma, Mr.

Largent. Mr. Wynn will be next.

Mr. LARGENT. Thank you, Mr. Chairman.

I want to say I differ a little bit with the gentleman earlier that

asked questions. Mr. Richardson—Secretary Richardson said that

the Department of Energy hasn’t done anything related to energy,

and I would say that I want to applaud the Department of Energy

and the administration’s effort on electricity restructuring because

it is something that I think we are all going to feel the negative

consequences of not having done anything sooner this summer. And

I know that you have been traveling the countryside and warning

of potential brownouts. In fact, some of those have already occurred. With the warmer-than-expected spring that we have had

both in San Francisco and Detroit, they have had problems. So I

wanted to say thank you for your effort, and we will continue to

work with you to try to move that forward.

59

But I wanted to ask you and Mr. Guzy the question of what impact the more stringent environmental requirements have had on

supply of petroleum products in this country.

Mr. Guzy, would you go first?

Mr. GUZY. Our belief is that the cleaner gasoline requirements

can be fully met and have been historically fully met without any

adverse impact on supply of gasoline in the country. We look at the

significant involvement that the industry has had in helping us

craft this program first through a regulatory negotiation and then

through working with us to ensure that there was adequate lead

time to ensure that refineries could get up to speed, that the transportation infrastructure for the products would, in fact, be up to

speed. We look at how across the country, if you exclude the two

areas in Chicago and Milwaukee where we have seen these inexplicable price spikes, the fact is that conventional gasoline is slightly higher in price at the wholesale level than reformulated gasoline

but only slightly, and our understanding is that, in fact, even for

these two areas there should be adequate supply to meet the consumer needs.

Our belief is, in fact, that the source of the problem here is not

the cleaner gasoline requirements at all but that the American people should have some explanation of it.

Mr. LARGENT. So is it your contention that the price spikes are

a result of big oil companies profiteering?

Mr. GUZY. Well, that certainly is one possible explanation. That

is why Administrator Browner and Secretary Richardson asked the

FTC to conduct that investigation. Because we have looked at all

of the other issues that possibly could be an explanation, whether

it be the pipelines that supply the area, whether it be the changes

in technology that the refiners agreed are appropriate for meeting

Congress’ mandate for cleaner gasoline, whether it be the production of ethanol as preferred locally in these two areas, and none of

them in our view can account for the huge, huge price differentials

that there has been.

And then when you look at the fact that, as soon as the request

for an investigation came in, since that time, since June 15th, the

wholesale level in prices have dropped precipitously, some 40 cents

per gallon, and there seems to be no change in the underlying factors that would account for that, we are left only wondering whether it is the issue of the kind of prices that large oil companies in

fact are charging for their product, and that is why the FTC has

been asked to investigate this.

Mr. LARGENT. It seems to me that what you are saying—and I

am glad that you reiterated because I think that is exactly what

Secretary Browner said before you—or Administrator Browner said

before you. And yet I think what you say is really counterintuitive

to my way of thinking because, in fact, the number of refineries in

this country has decreased by about half, I believe, in the last 10

or so years, and the number of products that they are required to

produce has escalated unbelievably as a result of both local regulators and national regulators like the EPA setting down these

mandates. And, in fact, in our second panel I think we will probably hear some of the explanation for what you refer to as being

60

inexplicable for the different variations in prices around the country.

But in the testimony of the second panel this is one of the

maps—I know you can’t see that, but you can see just from the various colors—these are all the various products that refiners—and,

again, we have half the number of refineries in this country than

we used to have—have to produce because of either local or national new environmental requirements in terms of what goes in

gasoline. And one of those happens to be Tulsa, Oklahoma, which

is the district that I represent.

It is a county-wide initiative to meet clean air standards to stay

in attainment with the EPA’s newer, more stringent air requirements; and they have gone to what is called a Reid Vapor Pressure

8.0 Agreement. Now in order to get that, there is one pipeline that

comes up from Texas. They combine two different types of gasoline

to produce this 8.0 Reid Vapor Pressure type gasoline that is sold

only in Tulsa, Oklahoma. Nowhere else in the country is this gasoline required. There has been a disruption of supply to Tulsa; and,

as a result of that, Tulsa has experienced some of the highest

prices in the country where we have traditionally always been one

of the lower places to buy gasoline.

And so I would say, to my way of thinking, this is a very real

explanation of why the prices are higher in Tulsa, is because the

new environmental requirements that Tulsa County has entered

into to stay in attainment with the EPA has created a supply and

demand problem. We are the only place that requires this. The

supply is limited, so the price goes up. Don’t you think that is a

reasonable explanation?

Mr. TAUZIN. The gentleman’s time is expired.

Mr. GUZY. We would be, obviously, pleased to work with you to

look at the particular challenges that are posed in your district.

But I would say where we have looked very closely at that in Chicago and Milwaukee there are in fact no more blends of gasoline

that are required this season, this May-June timeframe, than there

were in previous seasons. So for the Chicago-Milwaukee price

spikes, that cannot be an explanation for why they are occurring.

That is why we are left with the request for an investigation, for

the FTC to conduct it.

Mr. TAUZIN. Gentleman’s time is expired.

The Chair recognizes the gentleman from Maryland, Mr. Wynn,

for a round of questions.

Mr. WYNN. Thank you, Mr. Chairman. I apologize if I am covering ground that has been previously discussed, but we have had

some parliamentary maneuvers that have kept me somewhat occupied.

With respect to the SPRO, there are a couple of proposals, one

to use the existing reserves, the other to create a separate reserve

for home heating oil. The argument has always been that, to the

extent that we put more reserves out into the marketplace, that

foreign oil just basically makes adjustments restraining the market

so that it really doesn’t accomplish anything, that you still have an

inadequate supply. Do you agree with that analysis?

Mr. RICHARDSON. Congressman, basically, yes, although I will

say that what we are asking for in the home heating oil reserve,

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which is a new proposal, is something that would be used only in

supply emergencies, not based on market or prices. Our objective

there is humanitarian, in the event of a supply shortage to have

2 million. In terms of the strategic petroleum reserve, the full authority that I have to manage the strategic petroleum I don’t have

right now because of a failure to reauthorize the legislation that is

needed.

Mr. WYNN. If you had it, could you use it to address price problems as opposed to the emergency problems? In other words, the

problems that the Northeast has experienced, the problem that the

truckers experienced earlier in the spring, could you use that authority to put product on the market?

Mr. RICHARDSON. Ultimately, the President makes that decision,

but the answer is, technically, no, Congressman. The law specifically sets national supply emergencies, not pricing issues.

Now, what we also have in this country is low stocks, high demand. So we have a multiplicity of factors right now that are in

play. But I think to be absolutely certain, so that we are fully protected, I think it is important we get that full authority which has

been still languishing, not in this body but in the other.

Mr. WYNN. If the full authority would not enable you to respond

to pricing problems, is there some other mechanism, another type

of reserve that ought to be used for these pricing problems?

Mr. RICHARDSON. You know, Congressman, it has been, I guess,

traditional in our energy policy bipartisan, that the government

doesn’t get involved in pricing issues, that we find other ways of

protecting the consumers. I mentioned the low income energy assistance, the weatherization initiatives, other ways to soften the

blow.

Mr. WYNN. In the absence of a major infusion of funding in the

low income assistance, which I am a big supporter of, it seems that

the consumers are basically vulnerable to these inexplicable price

spikes.

Mr. RICHARDSON. That is right, and this is why we are urging

that we make sure that we fund these programs, the weatherization, low income energy assistance.

Mr. WYNN. If your investigation reveals that these price spikes

are not in fact inexplicable but are explained by price gouging,

what action would you take?

Mr. RICHARDSON. Well, I think this is——

Mr. PITOFSKY. That probably is something I ought to field.

If we find illegal behavior, our first step would be to go to court

and get an injunction and to stop it. That would be our principal

action. And, in addition, it is possible that if there was illegal behavior, some of the money that the sellers accumulated is ill-gotten

gains, is illegally acquired gains. If so, I think we would take steps.

We would certainly explore whether there were ways to get that

money back to consumers. That is awfully difficult in the oil business, but we would look at it.

Mr. WYNN. Could you mandate reductions?

Mr. PITOFSKY. No, we wouldn’t do that. We don’t do that. Our

goal is to ensure a free and competitive marketplace. We don’t fix

prices. We don’t roll back prices. We depend on the market.

62

If individual companies distort the market through conspiracy,

then we make them stop. And just to finish, there is a possibility

that we could require disgorgement of illegal profits back to the

Treasury.

Mr. WYNN. Back to the Treasury but not back to the consumer?

Mr. PITOFSKY. You could try that, but the problem is, how do you

show which consumer bought what gas at what price? The recordkeeping would be very difficult, but there might be ways in which

that could be accomplished.

Mr. WYNN. Let me ask the Secretary one other question. These

whole circumstances we have experienced since the spring seems to

call into question whether or not we have adequate domestic supplies, adequate domestic production. People suggested environmental regulations, people suggested a lot of reasons. What would

be your suggestions with respect to increasing domestic production?

Mr. RICHARDSON. Well, Congressman, you know, the President has a package, $4 billion in tax credits for energy efficiency, for

fuel efficient vehicles, for efficient technologies in homes, factories,

residences, energy efficiency initiatives that also combine efforts to

save energy. In addition to that, we have a substantial package to

help our domestic production. Specifically, Congressman, you know when oil was $10 a barrel

our domestic oil and gas producers were really hurting. Many were

wiped out. In fact, even though it is at $30 now, a lot of them still

need a little boost, still need to get back. And this is why we have

proposed a package to assist them, including loans to get back up,

including marginal low tax credit, including some tax provisions

that make it easier to drill and to explore within the country.

Mr. BARTON [presiding]. Unfortunately, the gentleman’s time has

expired, and we have got a lot of members. The gentleman from

California, Mr. Rogan. I was told it was Mr. Rogan. Mr. Bilbray

seems disappointed, but I am told Mr. Rogan is next in line.

Mr. ROGAN. Mr. Chairman, I hope this is the only time during

our mutual service in Congress I disappoint Mr. Bilbray.

Mr. BARTON. The gentleman is recognized for 5 minutes.

Mr. ROGAN. Mr. Chairman, thank you for calling the hearing;

and I also want to thank our distinguished panel for appearing

today. Like some of the other members, please accept my apologies

for missing part of the hearing. I think, Secretary Richardson, you

more than most are sensitive to what happens when there are a

number of procedural votes that call us away.

If I ask any questions that have been asked already, please tell

me, and I won’t pursue the area, and I will be happy to look at the

transcript.

But I especially wanted to ask, first, Secretary Richardson about

his statement a few minutes ago that the administration came to

the conclusion that ANWR exploration was not in the national interest. Let me share with you just a few facts from the reports that

I have read that have caused me to feel that that is not an appropriate analysis; and if I am mistaken in the underlying assumptions, please correct me.

It is my understanding, Mr. Secretary, that the administration is

refusing to open 1⁄100 of 1 percent of ANWR to oil exploration, and

if that had been opened, that would open the same amount of oil

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or would make available the same amount of oil to us as 30 years

of imports from Saudi Arabia and that the proposed drilling footprint is only about three square miles on an area that encompasses

some 58 million acres of land. And, finally, that everyone from the

local Eskimos to workers up there were encouraging this because

the Eskimos were saying that they were going to get much more

revenue for hospitals and roads. Obviously, the workers would have

the motivation for employment concerns. Are those facts and figures essentially correct?

Mr. RICHARDSON. Congressman, I don’t usually totally duck questions, but let me just say that this is an issue that probably is best

addressed to Secretary Babbitt now because it is a Department of

Interior jurisdiction.

I will say, though, that the administration has concluded for ecological reasons that it is not in the national interest to drill at

ANWR, that there is sufficiently other areas in Alaska and in the

rest of the country that domestic oil and gas can be drilled and explored, and as part of a package there, we have produced a number

of tax incentives to help our domestic oil and gas production. There

are other parts of Alaska, Alaska Preserve, the North Slope that

we have supported drilling, but ANWR, I can get into a statistical—you know, we have these figures, you have those figures, but

I don’t want to do that, and I think Secretary Babbitt could probably do that much better.

Mr. ROGAN. That is a fair answer. And I want to preface this by

saying I am not trying to bait you, and I am not trying to play any

game of ‘‘got you’’.

The fact is, as a Member of Congress I sit and I see gasoline

prices in my district and around the country skyrocketing. People

want to know why, and I am trying to figure out what is the appropriate answer without unfairly pointing fingers. But when I look at

those figures from ANWR exploration and I couple that with other

figures that have been made available to our committee, such as

when the administration began there were some 650 or so oil rigs

producing in the United States, there are now only 153, that domestic oil production has plummeted 17 percent, these type of facts

indicate to me that there appears to be at least some hostility from

this administration to domestic oil production, and ANWR just

tends to be one example of that. I would be happy to hear you comment on it.

Mr. RICHARDSON. Well, I don’t think there has been hostility. In

fact, we have worked very closely together with the domestic oil

and gas industry, especially in the last couple of years. We have

had deep water royalty relief. I did mention these domestic oil and

gas provisions that we just initiated. We did have a number of royalty simplification initiatives.

In your own State, we had that Elks Hill privatization. That involved unusual cooperation with the oil companies. We have had a

number of depletion initiatives for small producers. We have had

a number of other efforts to improve the technology. The Department of Energy funds many technology exploration techniques that

are used for the oil and gas industry.

But you are correct, Congressman, there has been a reduction in

domestic oil and gas production; and they were especially hit hard

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a year and a half ago when oil was at $10 a barrel. Regions where

I used to represent were hit very badly. And my point here is that,

even though oil is now at $30, a lot of those small independent producers are still hurting. We still need to get them back on their

feet, and this is what we are trying to do.

Mr. ROGAN. Mr. Chairman, I see my time is about to expire.

Thank you, Mr. Secretary.

Mr. BARTON. The distinguished gentleman from Virginia, the

ranking member of the Energy and Power Subcommittee, Mr. Boucher, is recognized for 5 minutes.

Mr. BOUCHER. Thank you, Mr. Chairman. I want to join with

others in welcoming these distinguished witnesses today; and I

want to say a special word of welcome to our former colleague on

this committee, the Secretary of Energy, Secretary Richardson. Mr.

Secretary, I understand that you, in response to a question earlier

this morning, indicated that the administration would not support

at the present time legislation that is designed to restructure the

electricity market, which is limited just to what we are calling system reliability assurances and also as a component of that measure

would include measures designed to bolster transmission. Would

you care to give us something of a formula for what the administration would recommend in terms of legislation for industry restructuring? Would it be sufficient, for example, for us to simply

perfect the 1992 Act and facilitate a wholesale market for electricity generation and sale or do we need to take the next step and

do those things necessary to create a national retail market at the

same time? What is your formula?

Mr. RICHARDSON. Well, Congressman, that is our view to standalone reliability legislation. We believe it is not a comprehensive

solution. It happened in the Senate, and we believe the approach

that this committee has taken, that Congressman Dingell and you

and Barton and Bliley, at looking at broader issues—we have got

to address the transmission issue. We have got to address the generation issue. We have got to address the capacity issue, interstate

transmission systems, the repeal of PURPA, the repeal of PUHCA,

all on a comprehensive basis. It is our view that if we don’t address

horizontal market power what you are going to have is utilities

may be able to inhibit the entry of new competition, and this would

prevent investments in new power plants and the electricity grid.

We urge you to work with us. We are having potential brownouts

and power outages around the country. We need to do this in a bipartisan fashion.

I know Congressman Pickering took the lead in putting together

initial legislation. We want to work with you to do this, but we

think that it is important that we not just do stand-alone reliability. That will not fix the distribution problems that are inherent in the system.

Mr. BOUCHER. Thank you for the answer. I think you will find

a willing audience here to accept your invitation for a larger measure, and I accept your suggestion of what some of the elements

ought to be.

As you indicated earlier, we have approved in the House legislation to renew the President’s authority to manage the Strategic Petroleum Reserve. The Senate has not acted on that measure. I am

65

wondering, if we are successful in adopting renewal legislation, if

you would be interested in doing something which I would put in

the category of a rather clever move. I read earlier this year that

your office was perhaps considering this, and I would like your

comment concerning it.

We only have about 500 million barrels in the Reserve in round

numbers, and it has a capacity of 700 million barrels, and so it is

below its capacity rather substantially. Your office had been considering a way to fill the Reserve, essentially at no cost to the taxpayer, and that would be through the immediate loan of some petroleum from the Reserve to companies that are interested in putting that petroleum into the market and then having those companies replenish the Reserve with that amount plus a premium, interest, if you will, at a future point and that premium or interest

would be an amount sufficient to fill the Reserve.

I would assume, as a first matter, that you do not have the statutory authority currently to engage in that transaction, given the

fact that we have not renewed the President’s authority to manage

the SPR, and I would appreciate your comments on that.

Second, if you get the authority you need, would the Department

be interested in pursuing that kind of approach?

Mr. RICHARDSON. Congressman, I first have to commend Congressman Largent and his leadership on restructuring. I missed his

name, and I would never have forgiven myself because of his leadership on it and not because he said some nice things about me,

but that is a fact.

Let me just say, right now, the authority for the Strategic Petroleum Reserve, because it has not been fully authorized, is called

the Energy Policy and Conservation Act, and a lot of these issues

are murky. For instance, I acted on the Strategic Petroleum Reserve 2 days ago on precisely what you describe, which is basically

a swap. It is to deal with a dry dock emergency in Louisiana. With

Citgo and other energy companies, we moved 500,000 barrels because of that emergency. It was basically an exchange.

So I have the authority to do that. My lawyers felt I did.

For the regional reserve for the Northeast, it is murky; and for

use in terms of a national emergency, I just need the full authority

to do that.

What you have also described with the Strategic Petroleum Reserve, you can sell off oil or you can swap it. What I think my main

job as Energy Secretary is, is to make sure that the Strategic Petroleum Reserve is well managed and is strong. We did, Congressman, fill it up to about 579 with what is called royalty in kind,

where we exchange with the Department of Interior barrels of oil.

And my objective is to fill it up, and we did fill it up at that time

when the price of a barrel of oil was at $10. So it was a smart decision. It was one of the first things that we did.

I think one of the efforts that I hope this committee engages in

is ways together we can make sure that the Strategic Petroleum

Reserve is better managed and we can use it more based on market

principles. And we can be creative, as you mentioned, but I think

the statute does make sense that it should only be used for national supply emergencies, and this is why we have been cautious

in using it.

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Mr. BARTON. The gentleman’s time has expired.

The gentlewoman from New Mexico is recognized for 5 minutes.

Mrs. WILSON. Thank you.

I look with some amusement at some of the statements that the

reason for high prices is that ‘‘big oil is gouging American consumers.’’ It would sound silly if it weren’t said by straight-faced

people.

I have been watching both what has been said here today and

in the last couple of weeks. It sounds very familiar to me, because

I am a mother of young children.

When I walk into the living room and there is a mess on the floor

and I ask, ‘‘Where did this come from?’’ the first answer I get is,

‘‘I don’t know.’’ Which, I think, Mr. Guzy, is the preschool equivalent of saying, ‘‘It is inexplicable.’’

The second answer is, ‘‘Well, maybe we should see if somebody

came in through the garage and made this mess.’’ Mr. Pitofsky,

that is the translation of, ‘‘We definitely need to investigate.’’

Then there is the old standby, ‘‘He started it.’’ Usually, when

that happens to me at home, I tell my kids. ‘‘We should start over

on this discussion and always remember that it is important to tell

the truth and take responsibility for your actions.’’

Preschool rules don’t usually apply in Washington, and I suspect

that is because we don’t have adult supervision here. But I think

it is time that we stopped pointing fingers and laying blame and

saying, ‘‘I don’t know’’ and making silly statements like, ‘‘the real

reason is that big oil is gouging American consumers’’ and get

down to some real answers and real analysis.

If it is so easy for the big oil companies to manipulate the market

that we think that this is the only possible reason this can be happening, why did the big oil companies leave the price so low for so

long if it was so easy to get a higher price?

Mr. GUZY. Congresswoman, I can’t speculate as to what their motives may have been, and maybe it helps to go back to indicate

what our understanding is isn’t simply saying we don’t know. What

we have done is done a very careful investigation of the situation

to look at a variety of issues that perhaps could be contributors to

these price spikes.

After looking at each of those, we have determined that, in fact,

they do not seem to be the explanation for it. Whether it be the

cleaner gasoline requirements that took effect in June of this year,

whether it be the adequacy of supplies, whether it be transmission

difficulties, whether it be some patent disputes that may be affecting the industry—and each of these we have looked at and each of

these we find have not provided an explanation.

For cleaner gasolines, as I said before——

Mrs. WILSON. It is a straightforward question. And my kids try

that, too. If we all talk forever and change the subject, we do okay,

but we don’t answer the question.

Mr. GUZY. I am attempting to answer the question.

Mrs. WILSON. The question is, if it is so easy for big oil to manipulate these prices, why did they continue with low prices for so

long?

67

Mr. GUZY. I can’t speculate about the pricing practices that they

have. What I can tell you is the facts that we have and as we know

them in this situation.

Mrs. WILSON. Mr. Richardson, I know that you have some energy

analysts that look at energy markets and prices and so on. How

much do we really know about these micro markets and the fact

that, in this current situation, one of the big differences from the

1970’s is the disparity between regions? How much do we really

know about how these operate and how much—in terms of models

and analytical tools and all of these other factors like different

kinds of products required and pipelines and surface transportation

and all of those kinds of things?

Mr. RICHARDSON. We have the Energy Information Agency,

which was created by this committee, which is an independent statistical agency within the Department of Energy that looks at all

of these trends and models. And if you want to ask a specific question, I have one of our specialists here on oil, if you choose to do

that.

Mrs. WILSON. I guess what I am asking is, are these still simple

demand and supply models and are we able to deal with micro environments? There must be factors at play in these smaller markets. What do we know? And are the tools available to look at

them?

Mr. RICHARDSON. The answer is, yes, there are tools available.

These predictors generally are right, but they are not always right

in terms of some of these predictions.

Now, what they do is—what they follow very carefully is gasoline

and the oil price nationally and internationally, but they have a capacity to look at international models and look at the Asian market

and what is happening with Europe and the effect of the refinery

problem that I mentioned in Kuwait and factor it into a model that

is more micro and moves into this country.

Mr. BARTON. Congressman Barrett, is recognized for 5 minutes.

Mr. BARRETT. It is a pleasure to see all of you this morning.

I had contact with people from your offices, since I represent Milwaukee and that was the spot where a lot of this began. I understand the comments of my friend from New Mexico and her feeling

that there is a lot of finger pointing here, and I can tell you that

the consumers in my neck of the woods, they don’t care whose

fault, they want the prices lower. That is the only thing that matters, and we can argue until the cows come home as to whose problem it is.

I also understand that there have been people in the press and

here in Congress who have scoffed at the notion of market manipulation, but I have to admit in this whole dialog there is one paragraph in a newspaper that sort of jumped out of me from my local

press. It wasn’t a quote. It was a gentleman who represents the industry in Wisconsin, and he was talking about why Chicago and

Milwaukee had higher prices than Louisville and St. Louis and

these markets. I think it is instructive, because Chicago and Milwaukee are the two communities that exclusively use ethanolbased RFG. Louisville and St. Louis provide sort of an interesting

test case because those are the two markets that have a combination of ethanol-based RFG and MTBE-based RFG. In Louisville, it

68

is a 50/50 mix; and St. Louis, it is 30 percent roughly ethanol and

70 percent MTBE.

And the question that was posed to him was, why are the prices

lower in those communities than Milwaukee and Chicago since

those communities used ethanol-based RFG as well? The response

was, well, the difference in those communities is that there was

competition from MTBE.

Now, I say that, Mr. Pitofsky, for your benefit because that really

jumped out at me. I thought, wait a minute, we have all of these

profit-making companies, and presumably they are all trying to

maximize their profits and compete against each other. But the answer that somehow in St. Louis and Louisville they were competing

against MTBE but there was no sort of interproduct competition

that had been introduced in the other areas made me think and

infer from that comment that the ethanol-based producers would

act in concert unless they were forced to compete with somebody

else.

Mr. Richardson, do you want to comment on that?

Mr. RICHARDSON. Congressman, first of all, to answer your question about the Midwest, and I know that you are very targeted toward Wisconsin, but I think this applies to us, first of all, overall,

crude oil prices remain very high, but what is particularly apparent

in the Midwest is there is higher demand in the Midwest than the

national average. It is about 3 percent compared to 1.6 percent.

That is one factor.

The second factor is gasoline inventories. In other words, stock

was low going into the summer driving season. In other words, I

think the statistic is 15 percent less than last year.

Third, RFG 2 came into the market using ethanol, and no MTBE

came into the Chicago-Milwaukee area.

Fourth, there were distribution problems at the start of the season, and I think Secretary Slater mentioned them. The Explorer

pipeline shut down. This was a net loss to the Chicago Milwaukee

area of 6 million barrels. That is significant.

Now, the question becomes, despite all of that, we could not attribute—after we sent teams into your district, into your city, into

the city of Chicago, we could not attribute why there was a 40 cent

differential between conventional and RFG 2. I remember our

phone call: 40 cents, what is the reason?

I think this is the reason, that the FTC is involved here, without

necessarily pointing fingers. I think this is a basic fact that we

don’t have, and this is a fact that we are searching for an answer.

The oil companies just have not explained why this has happened,

and this is why I think the FTC is examining this. This is why we

are here.

Mr. BARRETT. Mr. Pitofsky, am I missing something here with

the St. Louis and Louisville analysis and comparing it to ChicagoMilwaukee?

Mr. PITOFSKY. I don’t think that you are. Part of our job is to

compare communities where prices spiked up and try to get an explanation as to what is going on here. You suggest one, which is

that there was not much ethanol competition. We will look at that.

I don’t think that it is useful to speculate too much in this area

69

or rush to judgment. But that is certainly something that we will

look at.

In answer to the previous question from Ms. Wilson, why have

oil prices have been so low in this country for so long, the answer

is competition. Why did they spike up? There are two possibilities.

One is that competition somehow was thwarted by private behavior; and the other is that, in a competitive market, there were good

reasons why the prices spiked. And it is our job to report back

which of those are true.

Mr. BARTON. The gentleman from Arizona, Mr. Shadegg, is recognized for 5 minutes.

Mr. SHADEGG. Thank you.

I am troubled by some questioning that went on earlier, Mr.

Pitofsky. You have a basic understanding of economics, I assume?

Mr. PITOFSKY. I hope so.

Mr. SHADEGG. You understand the law of supply and demand?

Mr. PITOFSKY. I do.

Mr. SHADEGG. Ms. Wilson asked a question about gouging. There

was a direct reference to gouging earlier here when my colleague,

Mr. Stupak, held up a chart and it showed here is the retail price

of gasoline and here is the wholesale price and it showed the

wholesale price going down but the retail price of gasoline not

going down. And he said, how do you explain that? When the

wholesale price of gasoline goes down, the retail price must go also

down. Why isn’t it happening? And every member of the panel said,

we have no idea how that could possibly happen. It looks to us—

and the line of testimony was, it must be gouging.

You certainly understand and would agree with me that, in determining price, cost is not the only factor, is it?

Mr. PITOFSKY. No, it is certainly not.

Mr. SHADEGG. If in the course of your study you find that the demand remained constant and supply fell, that prices not only could

stay constant but continue to go up, retail prices could continue to

go up in order, for that matter, to hold down demand and to reflect

the fact that supply has gone and demand has remained constant—

I am puzzled that not a single member of this panel said that. And

it was all, gee, it looks like gouging, but we will get into it. Certainly you would agree if you find supply went down but demand

stayed constant, that would explain that differential, wouldn’t you?

Mr. PITOFSKY. Yes. In my opening statement I went out of my

way to say that we are not just going to look at prices but also at

the levels of inventory and the supply question and the production

question. I completely agree with you that you have to look at the

price——

Mr. SHADEGG. I have to move on. I apologize. I appreciate that

point.

Mr. Guzy, I want to go to a couple of other issues. The EPA pretty well acknowledges through all of its documents that there is a

5 to 8 cent per gallon cost of RFG, reformulated gasoline.

Mr. GUZY. That is correct.

Mr. SHADEGG. Ms. Browner seemed to imply because the retail

costs in some places of RFG is a penny below the price of nonRFG,

perhaps there is no price differential in the cost of its production.

70

Mr. GUZY. That was not intended to be the implication of her

statement. It shows that the RFG is able to be produced and supplied in an acceptable fashion to consumers.

Mr. SHADEGG. The experts that I have heard from said, look, it

is more difficult to produce the base gas. And that is why, when

we converted to produce the base gas for the RFG for the June 1

deadline, supply went down and therefore costs went up. You don’t

flat reject that premise? You don’t say that is impossible, that

couldn’t have been a part of the factor?

Mr. GUZY. We are aware of the length of time that the industry

has had to prepare for the change.

Mr. SHADEGG. It could have been in the transition, June 1, a

lower production and therefore a lower supply and that was a contributing factor?

Mr. GUZY. That could be a contributing factor, but you have to

ask the question, why did that occur, given the amount of lead time

that the industry had?

Mr. SHADEGG. One other point that Ms. Browner made, she said

granting a waiver could cause costs at the pump to go up. Yet the

waiver wouldn’t mandate the sale of nonRFG gas. It would simply

say, you may sell RFG gas or nonRFG gas, in which case I am at

a loss to understand how granting a waiver could cause the cost

to go up.

Her implication was, since there is already RFG in the pipeline

and in the trucks and tanks, they would have to spend money to

take it out of those trucks. There is no reason to believe that they

would do that. They would deliver what they have left of RFG and

add on top of it nonRFG?

Mr. GUZY. We have talked to refiners, and what they tell us is,

were EPA to grant a waiver, many of them, their practice would

be to try and sell the slightly less costly to produce conventional

gasoline and hold in reserve the reformulated gasoline.

Mr. SHADEGG. If they did that, prices would go down?

Mr. GUZY. And the effect would be to have some very severe and

unpredictable supply disruptions for conventional gasoline. What it

would also likely mean is that the distribution of that conventional

gasoline would be over an area where it now currently is, and that

could lead to cost spikes as well.

Mr. SHADEGG. Mr. Secretary, one of the issues here has been

what is causing this cost. You have a publication, a primer on gasoline prices that says, long term, years 2000 to 2020, it states tighter environmental standards on the quality of gasoline will also be

a factor in higher prices. In your testimony here today, you are not

saying that that is not a factor in the cost, are you?

Mr. RICHARDSON. No. I said, Congressman, with respect to the

Midwest, there are some price differentials, 2 to 3 cents that are

involved. I did not say it is not a factor.

Mr. SHADEGG. And you are not disavowing your statement here

in the brochure?

Mr. RICHARDSON. I am not.

Mr. BARTON. The gentleman from Texas, Mr. Hall, is recognized

for 5 minutes.

Mr. HALL. Thank you, Mr. Chairman.

71

Mr. Pitofsky, you talked about prices being lower because of competition. The competition that we see in the oil patch—I think the

facts are that we are not allowed to compete, Delta Drilling in

Tyler, Texas, for example.

And my friend who has reason for concern, Mr. Barrett over in

Wisconsin, he talks about a fair price. I fear that we are not going

to get a fair price until we get some stable oil prices, and that is

what we need because we need incentive for people to drill.

The rhetoric has escalated to a fevered pitch, with Democrats

blaming Republicans and Republicans blaming Democrats and consumer groups blaming the oil companies. Frankly, I think the low

prices of last year when we had nobody crying out to us, they were

every bit as much of a market signal that something was wrong as

the relatively high prices that we are seeing today is a signal to

us.

Energy States get very little attention by the Congress. There

are 10 of us. Forty other States use it, and we are outvoted four

to one when we try to get stable prices. Little guys have to find

the oil and gas; big guys buy it. Little guys have to borrow money

to do it. The bank won’t talk to them, even when it is $30 a barrel,

because there is no stability.

I think I have some very simple questions to ask. A lot can be

answered with yes or no. I might start with my friend Mr. Richardson. Who sat right here for many years. Bill, do we need larger

drilling options? Yes or no?

Mr. RICHARDSON. Yes.

Mr. HALL. Do you remember or do you remember studying in history how in the late 1930’s Cordell Hull and Henry Stimson forced

Japan to go south into Malaysia for energy?

Mr. RICHARDSON. Yes, vaguely.

Mr. HALL. But you passed that course, I know. They forced

Japan south for energy when they cutoff their energy, and what ensued? War. That is an easy yes, isn’t it?

Mr. RICHARDSON. Yes.

Mr. HALL. Do you think Hitler went east into Ploesti oil fields

for energy? Was he looking for oil and gas?

Mr. RICHARDSON. Yes.

Mr. HALL. Well, energy is the thing that people will fight for.

Countries will fight for energy, won’t they?

Mr. RICHARDSON. Yes.

Mr. HALL. And this country sent 400,000 or 500,000 over to a

country not because we loved Kuwait but to keep a bad guy from

controlling over half of the world’s supply of energy. Those are all

easy yeses. Now what are we doing about it?

Let me ask you about protecting the environment. We want to

protect the environment, but is there going to be a time when we

put protecting our country above even protecting the environment?

And wouldn’t a ship laden with American soldiers and sailors—we

would fight for energy—look a lot worse than an offshore drilling

rig?

Mr. RICHARDSON. Yes.

Mr. HALL. And can you envision a time when we would have to

do that, and how far away are we from doing that?

72

Mr. RICHARDSON. Congressman, I think the key—we can have

sensible energy development and protect the environment. I think

we are doing that. I think we have to strike a balance, and I think

you know how to do it, too.

Mr. HALL. The gentleman from California suggested a moment

ago that for just a small percent of 1 percent of drilling in ANWR

or on the Federal lands or offshore or on the North Slope could relieve our situation immensely. That is also true, whether or not you

agree that they ought to do it or not. It would, in time—it is not

an overnight solution, but it would, in time, give our people a

chance to produce and find a stable supply of energy?

Mr. RICHARDSON. I think I can say that, yes, it would increase

production in this country but at the risk of what we consider serious ecological damage. And we believe that there are parts in this

country that we can do domestic production more effectively—in

your State and my State, in the Southwest.

I think we need more technology. I think we need—I have been

with you, and I have seen those independent producers. We have

a package to give those marginal well gas producers a little tax relief to deal with some price fluctuations at $10 barrel and G&G expense at Legg Reynolds. If we concentrate on helping our oil and

gas people right now, we can deal with some of these issues.

Mr. HALL. That is part of the Wes Watkins package, and we

ought to adopt it right now.

Mr. RICHARDSON. The President is for it, and we are for it, yes.

Mr. HALL. I have been approached by some Californians who are

owners of the so-called California Offshore Oil and Gas Energy Resources, and I think you are familiar with them. They are interested in swapping the Federal lease interests they have off the

California coast for bonus credits to be used in the central and

western Gulf of Mexico or offshore. Now if California doesn’t want

that production and they don’t want to take that position and the

leadership in the field of energy and Texas is willing to, why not

do that? Why not approve those? I think the Minerals Management

Service oversees the production of offshore oil and gas reserves,

and what would hold them up from doing that?

Mr. RICHARDSON. Congressman, I am going to duck your question. That is Interior. That is Federal. I think maybe you ought to

talk to Secretary Babbitt. I am not familiar with that swap issue,

with that proposal. If I can get back to you.

[The following was received for the record:]

1. DOE does not have a position on the proposal by the California Offshore Oil

and Gas Energy Resources group to trade leases that they hold on the OCS off California for bonus credits to bid on leases in the Gulf of Mexico.

2. There is precedent for this type of ‘‘swap’’, however. In the past, MMS has traded existing leases that could not be developed due to some restrictions for reduced

royalty rates on future leases for the companies in question.

Mr. HALL. Leases have been in existence for 20 years without

any commercial production because of continued opposition from

the people in California. Maybe the people in Texas don’t have that

opposition.

Mr. BARTON. We expect a vote on the rule almost any minute.

I have sent Congressman Bilirakis over to vote and come back immediately so we can continue the hearing. We want to give the

73

members a chance to ask a second round of questions, then we will

take a lunch break.

The Chair is going to recognize himself for a second round of

questions.

Secretary Slater, I want to start off by asking you a question. Do

you think if we restricted all of the oil production in the United

State, including Alaska, and said it could only be used for gasoline

and if somehow we could set up our refineries so that they produced 100 percent gasoline from oil, would we produce enough oil

in this country to fund all of our transportation needs for gasoline

and aviation fuel?

Mr. SLATER. Probably not.

Second, even beyond the issue of the quantity there, we really,

I think, have almost limitless opportunities when it comes to looking at alternative fuels. One of the enjoyable and significant successes that we have experienced, Mr. Chairman, working with the

automobile community, is that we have actually produced prototypes of automobiles that will get three times the fuel efficiency,

and Ford Motor Company is talking about mass producing those

automobiles in the 2003 model year.

Mr. BARTON. The reason I ask the question, the primary reason

we are doing this particular hearing today, is because gasoline

prices have gone up more in the Midwest than they have in the

rest of the country; and our citizens, our constituents, want us to

do something. But facts are facts. We use about 19 million barrels

of oil a day in the United State. We only produce about 8 million

barrels a day.

Mr. SLATER. That is correct.

Mr. BARTON. For transportation fuel purposes, we use about 12

million barrels a day. So even if we use all of our oil just for transportation purposes, we would still have to import 4 million barrels

of oil a day. And, actually, since you only get about 66 percent gasoline from a barrel of oil, we would have to produce—we would

have to import about 6 million barrels. So under any scenario, we

are going to be importing oil into this country.

That brings us to a much larger question than why gasoline

prices are high in the Midwest.

When I asked my first question to Secretary Richardson about

how many quads of energy that we produce in this country, he said

that he would get back to me. We produce about 73 quadrillion

BTUs of energy. We consume about 97, so we have a 24 quad

shortfall that we have to import.

The real policy question today is, what is the United State government doing to minimize imports, to minimize importation of energy? We cannot be self-reliant in oil production. Nobody that I

know of says that we can get oil production up to 19 million barrels

a day. I think the peak has been around 10 or 11 million barrels

a days, and it is down to 7.5 to 8 million barrels a day.

We ought to be focusing on what our national policy is to minimize importation of energy, and that is why I asked the question

to Secretary Richardson, what we have done as a country the last

7 or 8 years under the Clinton Administration to maximize understanding the environmental impact of our energy? And I come to

the conclusion—and it is a conclusion that is just mine, I don’t say

74

that it is a fact—we can do much more with nuclear power and

natural gas and much more in clean coal technology and much

more in solar and all of the other alternative energies, and we are

not doing it.

Now, Congressman Stearns, who was here earlier, had the budget review for the DOE for the budget submission for this budget

year. And in this book it shows that the Clinton Administration request for hydrocarbon resources for R&D went down. It didn’t go

up. It went down.

I am going to ask again, and this is really—we hate to pick on

Secretary Richardson, but he is the Secretary of Energy. Does the

Clinton Administration share the subcommittee chairman’s view

that we ought to be trying to find ways to shrink that gap between

producing 73 quads and using 97 quads?

Mr. RICHARDSON. I fundamentally disagree with some of your

budget numbers.

Mr. BARTON. They are your budget numbers.

Mr. RICHARDSON. You need to pass them, and this has not happened in the last 7 years.

Mr. BARTON. The Clinton Administration could at least request

increases.

Mr. RICHARDSON. We have, especially in the area where I explained, in the coal area, because of a postponement of two generation plants until the next fiscal year——

Mr. BARTON. So this budget book is wrong?

Mr. RICHARDSON. No. I don’t want to get into a statistical dispute

with you.

Mr. BARTON. These are your numbers.

Mr. RICHARDSON. I did find out your quad answer.

Mr. BARTON. According to my chart, it is 73 quads—which I

knew at the time.

Mr. RICHARDSON. Your quad answer, a few billion or trillion here

is accurate because our Energy Information Agency tells us, in

terms of consumption, that the January-February average of this

year is 16.6 quadrillions of BTUs. Now the production for this same

period is 11.3 quadrillions of BTUs. The difference is net imports

and stocks, inventory changes.

Mr. BARTON. That is on a monthly basis, not an annual basis.

Just to show you that I understand what you are telling me.

Mr. RICHARDSON. You are a very smart man.

I think the solution to what we are trying to get at is we need

to boost domestic production, and my point is that we have some

proposals out there that you need to approve.

Mr. BARTON. My time has expired. I need to recognize Mr. Sawyer.

But the DOE Energy Outlook, which is another document that

your Department puts together—I actually read these things sometimes. Our production is increasing about 1 half percent a year.

Our consumption is increasing about 2 percent annually. So our

consumption is increasing 4 times faster than our production, and

if we don’t change that in some way, there are going to be a lot

of hearings about why prices are going up. Because if you are not

producing it domestically and you have to import it, the nations

that we import our energy from—and they may be our allies and

75

friends, but they don’t have the same political requirement to minimize costs and prices. That is a pure fact.

Mr. RICHARDSON. The problem with the world—you have the

world consuming 75 million barrels per day and producing 73.

What we tried to do, and I think successfully, is move the production up with some of these countries.

Mr. BARTON. My good friend from Ohio has waited. We will continue the dialog. The distinguished gentleman from Ohio, Mr. Sawyer, is recognized for 5 minutes.

Mr. SAWYER. Thank you, Mr. Chairman.

Mr. Secretary, if you would like to finish your answer to that, I

would be pleased to give you the time to do so.

Mr. RICHARDSON. No, I am okay, Congressman.

Mr. SAWYER. You and Secretary Slater have mentioned a couple

of ways that we can make a difference in our fuel consumption. Let

me mention one that is enormously important.

The appropriate inflation of tires makes a huge difference in fuel

consumption, and simply checking your tires once a month not only

decreases fuel consumption dramatically but it increases the life of

a tire in a way that probably doesn’t serve the tire industry, which

I have represented for some time as well, but would nonetheless be

good for the energy policy of this country.

Secretary Richardson, you were asked by my friend from Michigan awhile back about oil from Alaska. If I recall correctly, it

seems to me that in 1995 one of the first acts of the new Congress

was to insist on the sale of oil from Alaska, previously limited out

of the Alaska pipeline to other countries. I think it was Japan

those sales were dominantly made to. So that those sales were

done as a product of the work of this body as much as anyplace

else. Am I not correct about that?

Mr. RICHARDSON. You are correct. And when we talked about the

clean air issue in 1990—I was with all of you here when we passed

the Clean Air Act, and we put June as the date. I remember that.

I don’t know whose amendment it was, but I was involved in that

reformulated gasoline issue. So the administration is acting like

any administration on the mandate from Congress. I am not trying

to blame—June is the date that was fixed by the Act.

Mr. SAWYER. Let me say that I like to think that I have something to do with this whole restructuring struggle as well.

Mr. RICHARDSON. I should have mentioned you. Do you want me

to do it again?

Mr. SAWYER. That is okay.

I yield back the balance of my time.

Mr. BARTON. The gentleman from Florida, Mr. Bilirakis, is recognized for 5 minutes.

Mr. BILIRAKIS. Thank you. I came back because I wanted to get

in this second round.

Mr. Richardson, Mr. Secretary, you are from New Mexico. I think

you have an understanding of the oil depletion allowance even

though it is something that existed before you were very old. Do

you believe in the oil depletion allowance? Should we reinstate it?

We are talking about production.

76

Mr. RICHARDSON. Congressman, I would have to consult with

higher beings before I answer that. Energy policy is made by the

President. There are a lot of people participating——

Mr. BILIRAKIS. But you are here representing the President, and

you have a personal opinion, too.

Mr. RICHARDSON. One of the things that I found, Congressman,

which means that the best job I ever had was sitting next to you,

is that when I make statements now sometimes—and this really

worries me—markets move, and it makes me a little uncomfortable. So even giving you my personal view—I would be pleased to

come back and give you an answer on that.

[The following was received for the record:]

1. Yes, I do support the oil depletion allowance. This is a common tax provision

for nonrenewable resources, such as oil and natural gas, to account for the loss in

value of a resource asset as it is depleted through production.

2. The oil and gas industry do have the depletion allowance available to them in

the Federal tax code.

3. Currently, major integrated oil companies are allowed to use cost-based depletion, while independent companies are allowed to use either a cost-based or percentage depletion allowance. The percentage depletion allowance is 15% of gross revenue

from a property subject to net income limitations on how much depletion can be

claimed for tax purposes in any year.

Mr. BILIRAKIS. I think it is critical that we know the administration position. Because, apparently, it has been included in tax relief

legislation in the last couple of years or so; and it would be interesting to know the administration position on that. If we are talking about doing something about production in this country and encouraging it, I think we ought to seriously take——

Mr. RICHARDSON. We do have a number of other initiatives which

I will be glad to brief you on domestic oil and gas production.

Mr. BILIRAKIS. I studied petroleum engineering. I had a professor

that kept harping on it. I guess he could see what was coming

downstream.

Mr. Pitofsky, you said many times, and I agree with you, the job

of the Commission is to ensure free market, free competition, fair

competition, et cetera, et cetera. And then you also said, if individual companies distort the market, then we make them stop. I

think those are kind of your exact words.

Well, you are in the process now of trying to determine if individual companies have distorted the market or are in the process

of distorting the market. Do you have that data available to you?

Let me just expand upon that, and maybe I might ask Mr. Richardson at the same time. Is certain reporting data required of the

oil companies in terms of production, costs of production, in terms

of refinery costs all of the way down from the time you get the oil

from the wellhead and natural gas from the wellhead to the point

that it gets to the consumer? Is that data available on a regular,

routine basis? I am not talking about regulation here now or anything of that nature, but I am talking about data that would be

available so that Mr. Pitofsky’s people can readily get at this problem and come up with some sort of an answer sooner rather than

later. And if it isn’t available, should it be?

Mr. PITOFSKY. The oil industry is remarkable in the extent to

which data is available. Certainly, data on prices and I think data

on output. I am not sure about cost because that is proprietary.

77

Mr. BILIRAKIS. But that is significant to your investigation.

Mr. PITOFSKY. Absolutely.

Mr. BILIRAKIS. Somewhere along the line you are going to have

to come up with that information.

Mr. PITOFSKY. We have already worked with the State AGs, EPA

and the Department of Energy. We have a lot of information, but

we need more. We have issued subpoenas, and I assume that we

are going to get the information that will help us to understand

why this price spike has occurred.

Mr. BILIRAKIS. You know, someone was saying yesterday on the

floor that oil and natural gas, natural gas that we use in our homes

and buildings and the gasoline that we move from one point to another, is as much a public utility as electricity and whatnot that

we use to heat our homes and cool our homes. And even though

we are talking up here about deregulating electricity—some are not

as keen on that as others—but it is certainly occupying an awful

lot of our time. I just wonder if maybe the oil production people are

maybe not forcing us almost to consider regulation. That is a nasty

word—regulation. Any comments?

Mr. PITOFSKY. I hope not. I really believe that deregulation has

served the country well. There are people who take advantage occasionally of deregulation. They enjoy the old world where price fixing was going on, and you have to crack down on those people. But

I am not enthusiastic about regulating price and entry. I don’t

think that it has worked well. Sometimes you need it.

Mr. BILIRAKIS. I am not suggesting it, but I did want to get some

idea on data and whether or not there should be more required to

be furnished. That is something to think about, Mr. Chairman and

Mr. Secretary. Thank you.

Mr. BARTON. I thank the gentleman from Florida.

I am going to try to get the three members still here, and then

we are going to excuse this panel and take a break.

We go to Mr. Barrett from Wisconsin for 5 minutes.

Mr. BARRETT. Thank you.

Last night I spent some time, and this morning as well, going

over the minutes from the Phase II RFG Implementation Work

Group. This was a group that was comprised of employees of the

EPA, I assume some employees of DOE, industry representatives,

some people from the States.

And I went through the minutes of all 12 meetings—the group

met 12 times: four times in 1997, four times in 1998, four times

in 1999—and I did that because what I felt all along, again referring to the situation in the Midwest, was that somebody was asleep

at the switch or else there is funny business going on here. As I

went through, I was looking for any evidence or any discussion of

what was going to happen to the price of this gasoline.

I will say—and, Mr. Richardson, Barry McNutt from your office

in September, 1997, said, prices are volatile; and he also said, in

October 1998, that the supply looks tight. But those are the only

two real references in 12 different meetings by anybody attending

those meetings that made any reference at all to the price situation.

I raise that because, at the same time, I look at a press release

from Tosco Corporation this year dated April 25, and it states, ‘‘ReVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00081 Fmt 6633 Sfmt 6602 E:\HEARINGS\65909 pfrm03 PsN: 65909
78

fining margins to date in the second quarter are excellent throughout our system. Our major maintenance work for the balance of the

year is not significant. Low inventory levels in the U.S. and

throughout the Atlantic basin, combined with more stringent gasoline specifications, will, we believe, result in a continuation of

strong refining margins.’’

I read that to say that the oil companies knew that they were

sitting in a great situation. Supply is tight. They are about to enter

into a new program where the consumer in these two areas is

going to be forced to purchase their product. Yet, in the 12 meetings, nobody from industry ever mentioned this, at least as reflected here. And I am thinking, what is going on? They are part

of this working group to make sure that this program is going to

take off successfully, and there is just a complete silence on this

issue. Then, all of a sudden, everything hits the fan; oh, those are

just market forces.

Again, since the FTC is doing this investigation, I think it is important to know why at those 12 meetings, and maybe there are

verbatim transcripts, I think it is important to look at that. That

is my criticism of the industry.

But at the same time, to the EPA, I have to say, how come nobody is looking at this? And if we are going to go into this program

next year, are we going to see the same thing next year, Mr. Guzy?

Mr. GUZY. Congressman, I think you have a very important observation there, and it is that not only was there extensive lead

time for the industry and extensive consultation with the industry

on the appropriate formulation of the product to bring to the market, but, in fact, there has been extensive consultation and work

with the industry to ensure that implementation would occur

smoothly. And throughout that work, this issue of some kind of

mismatch between the supply and the demand, any issue of the difficulty of providing boutique products, any of these claims that we

are now hearing were, in fact, not raised.

That certainly informed the administrator’s judgment when she

sent a letter and requested the investigation from Chairman

Pitofsky and the FTC.

Mr. BARRETT. If DOE is coming in and saying prices are volatile,

supply looks tight, why didn’t EPA ask these questions? I can’t let

you off the hook entirely here.

Mr. GUZY. The implementation effort is a collaborative effort administration-wide. We work closely with DOE and did to be able

to address these issues.

But the other important point and question to ask is, on the back

side, why have prices been able to come down so precipitously after

the initiation or the request for an initiation of an investigation

without any fundamental change in the underlying issues and conditions? And that is something that has us very concerned, and we

believe that there should be appropriate answers to that as well.

Mr. BARRETT. Since it is a program that the EPA administers,

don’t you think that the EPA had some obligation to make sure

that supply was adequate? They were sitting on their hands, not

saying a word, but nobody asked them.

Mr. GUZY. We did a survey throughout this period leading up to

the May 1 and June 1 dates for initiation of this program this year

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of the industry and found throughout those contacts that the supply issues were never raised. We were assured that there was adequate supply.

Mr. BARTON. The gentleman from Michigan, Mr. Upton, for 5

minutes.

Mr. UPTON. Thank you, Mr. Chairman.

As I listened to the testimony this morning, there were a couple

of things that I noted that were a little conflicting. I want to go

over those statements.

Mr. Pitofsky, in your statement you said on page 5 these regulations, referring to RFG, may have led to abnormally low inventories.

Mr. Richardson, you said a little earlier that stocks were low

going into the summer, perhaps as much as 15 percent less, I presume, from the year before. Yet Ms. Browner, when she testified

before she left—and on page 7, it says, the supply of RFG to the

Midwest has increased this year over last year. In fact, for the

month of June, refiners expect to supply 650,000 more barrels of

RFG this year than last year. EPA is saying we have more. The

FTC and the Department of Energy are saying that we have less.

Mr. RICHARDSON. Congressman, I was referring to the Midwest.

Mr. UPTON. Right. That is what EPA was referring to, the supply

of RFG to the Midwest has increased this year.

Mr. RICHARDSON. I don’t think that there is an inconsistency

here.

Mr. GUZY. We have also noted that there is an increased level

of demand in the Midwest and other parts of the country this year

as well.

Mr. UPTON. As much as 100,000 barrels per 10-day cycle? That

is what Ms. Browner said in her statement. I don’t know how that

comports with the earlier testimony.

Mr. PITOFSKY. My statement was that they may have been lower,

and one of the things that we will find out in our investigation is

the levels of inventories at the time this new program went into

effect.

Mr. UPTON. I would be interested in getting the results of what

you find out.

You indicated that you are working with the State Attorneys

General, I presume one of them is Michigan, and I have a lengthy

letter I know from my State Attorney General to Marathon asking

for information by the end of the week. I presume that you are

working very closely with her; is that correct?

Mr. PITOFSKY. I am sure we are, yes.

Mr. GUZY. The figures cited by the administrator were for the entire month of June, and our understanding is that there was some

significant additions of supply through—pipeline supply that came

later during this month period; and the fair question is, why was

that supply not provided earlier on if stocks were low in the area?

Mr. UPTON. I have one more question. Mr. Richardson, one of the

advantages of when you left this Congress was that you are no

longer playing for the Democratic baseball team, particularly at

third base where you are quite a slugger, and I remember you put

a tag on me sliding into third, and I don’t think that they have won

since you left.

80

I would like to think that the decision in March by the OPEC

nations was somewhat responsible because of the Gilman resolution that we passed here in the House trying to provide a little

more clout to the administration in terms of ramifications if they

did not increase their supply. What can we do before they meet in

September to provide you a little larger baseball bat like you had

when you played on the Democratic team?

Mr. RICHARDSON. Work with me before you do an initiative, a

bill. I think there are ways that we can work together and have

a unified strategy. I think it is important.

Mr. TAUZIN [presiding]. There are votes on the floor. Mr. Bilbray

will be the last for this panel, and we will dismiss you with our

great thanks for your patience. Then we will recess until 10 minutes after the last vote on the floor in this series and take up our

second panel.

Mr. BILBRAY. A question to the Secretary of Energy. Bill, you

know my constituents in San Diego are complaining about the immense heat. We are not used to that heat. We have this local

brownout threat all through California. The debate surrounding

the national electric restructuring legislation is now centered

around two core issues, transmission and reliability. As we have

seen what is happening in California, those two issues are intertwined and—as we face shortages in transmission and generation

capacity.

But what about the other two issues that go hand in hand, reliability and transmission, interconnection and distributed generation, which is a fancy name for allowing small, innovative ways of

getting onto the grid and providing cleaner, smaller, more efficient

energy in the system. How do you see that interrelationship as we

package this issue?

Mr. RICHARDSON. We are for it. Distributed generation is competitive. It is good. We think it should happen. We think that distributed generation would flourish under competition, and would be

ideal for your region in California.

But I just want to stress, since I have this committee here and

I have a lot of legislators here, it makes sense to have a comprehensive bill. Don’t just give us reliability. We need to deal with

generation and transmission, with PURPA and PUCA, with renewable energy, with distributed generation. We need to deal with this

comprehensively.

Mr. BILBRAY. Let me say that transportation and EPA, those of

us in California, you know that we have put new fuel formulas in,

and we have seen these spikes every time. I want to know, how

much are you involved personally or your staff involved in trade

decisions, embargo decisions? How much are you integrated into

those decisions? And let me tell you why. Let me tell you why.

The administration announced that they were pulling the embargo in Iran on caviar and Persian rugs, but not on oil. I know that

my average working class citizens need that caviar and Persian

rugs, but why was oil forgotten down the line? It seems with all

of the rhetoric about caring about the working people of America,

the trade relationship was not only absurd from the working man’s

point of view but ridiculous in terms of needing energy and oil.

Mr. RICHARDSON. Our relationship with Iran is not that good.

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Mr. BILBRAY. It is good enough to buy their caviar.

Mr. RICHARDSON. There is a difference with national security,

commodities and caviar. We are still concerned about Iran’s support for terrorism and their weapons of mass destruction.

Mr. BILBRAY. We will buy their Persian rugs, but we won’t allow

our people to buy their oil?

Mr. RICHARDSON. There has been an improvement. We want to

have a government-to-government dialog, but Iran has not chosen

to do that. The Secretary of State I think very skillfully opened the

door and started with those products. But getting into energy, that

is more serious.

Mr. BILBRAY. Bill, you know where I come from, a working class

background. To the average citizen out there, it looks like the people who are lobbying for trade, for the embargo to be lifted, tend

to be those consuming or selling the product, and that the priority

looks like caviar and Persian rugs are getting more sensitivity in

the administration than the oil supply for American consumers. I

am just telling you that it looks terrible. And, as the Energy Secretary, I hope you are saying, we are not burning Persian rugs to

generate our economic prosperity, but we are burning oil. I ask

that they be more sensitive to our energy demands when they start

figuring this out.

Mr. Chairman, I appreciate that. Let me say to the Transportation Secretary, trip reduction programs are something that the

EPA and Transportation is looking at.

Mr. SLATER. Yes.

Mr. BILBRAY. We have flex time as one of our great successes in

California. Twenty percent of the fuel used for commuting can be

reduced with flex time. The State of California just outlawed flex

time by requiring that anything over 8 hours has to be paid overtime, no matter what. What is the EPA’s and what is the transportation’s attitude about a State or local government requiring an

employer to pay more to implement the flex time strategies as opposed to the old 8 hours a day, 5 days a week, rather than going

to the 10-4?

Mr. TAUZIN. Speaking of time, we are out. The gentleman can respond.

Mr. SLATER. I had a great time last week in your fine city with

the major transit grant, and I look forward to going back, and it

is all designed to give us the kind of choices we need as we remain

the most mobile society in the world.

Mr. BILBRAY. Government needs to give the consumer choice, not

just the private sector.

Mr. TAUZIN. Thank you Chairman Pitofsky, Mr. Guzy, your boss,

Secretary Slater and Secretary Richardson. You do us an honor

and obviously maintain our Constitution when high-ranking officials of the Cabinet and the agencies come and discuss these

issues. We certainly appreciate seeing you.

We hope, frankly, whatever flows from this hearing and whatever comes out of the investigations, that as soon as possible we

can rationalize these markets so Americans won’t have the great

shocks to deal with in the future. Thank you very much.

The hearing stands in recess until 10 minutes after the last vote

in this series.

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[Brief recess.]

Mr. TAUZIN. The committee will please come back to order.

What I would like to do is assemble the second panel. We are

going to try to complete the testimony this afternoon. Other members will be arriving in due order from the floor and we have I

think about an hour where we can take testimony.

Let me remind all members that it will be very, very helpful if

the members of the panel would keep in mind that your written

statements are part of our record, so I will ask you to please not

spend time reading them to us. What I would like you to do is

spend the 5 minutes you have just hitting the highlights, if you

have a demonstration or some chart or some way that you want to

demonstrate what are the main points that you want to make in

your testimony.

You can see, when members arrive, Q and A takes quite awhile.

I will begin by introducing our second panel, Mr. Justin D. Bradley, Mark Brown, J.L. Frank, Roger Gale, Mark Gerken, David

Nemtzow, Ross Pillari, Michael Ports, and Jerry Thompson, Senior

Vice President of Citgo Corporation. Now we will hear from the industry.

We will begin with Mr. Justin Bradley. If you can, summarize,

and keep your mind and eye on the little lights.

STATEMENTS OF JUSTIN D. BRADLEY, DIRECTOR, ENVIRONMENTAL PROGRAMS, SILICON VALLEY MANUFACTURING

GROUP; MARK H. BROWN, EXECUTIVE VICE PRESIDENT FOR

ASSOCIATION AND CLUB SERVICES, AMERICAN AUTOMOBILE ASSOCIATION; J. LOUIS FRANK, PRESIDENT, MARATHON ASHLAND PETROLEUM, L.L.C.; ROGER W. GALE, PRESIDENT AND CEO, PHB HAGLER BAILLY; MARC S. GERKEN,

PRESIDENT, AMERICAN MUNICIPAL POWER, OHIO; DAVID M.

NEMTZOW, PRESIDENT, ALLIANCE TO SAVE ENERGY; ROSS

J. PILLARI, GROUP VICE PRESIDENT OF MARKETING

WORLDWIDE, BP AMOCO; MICHAEL PORTS, PRESIDENT,

PORTS PETROLEUM, INC.; AND JERRY THOMPSON, SENIOR

VICE RESIDENT, CITGO PETROLEUM CORPORATION

Mr. BRADLEY. Thank you, Mr. Chairman and members of the

committee. My name is Justin Bradley, Environmental Director for

the Silicon Valley Manufacturing Group. We are 175-plus member

companies started in 1977 by David Packard and other high tech

leaders in Silicon Valley in response to the energy crisis that was

happening at that time.

That issue was dealt with, and for a long time it wasn’t on the

radar screen for our organization; and it is in the last quarter it

has come to our attention, in large measure because of Secretary

Richardson alerting us about potential outages and, of course,

weather-related happenings that have brought it to our attention

more forcefully.

A little more about Silicon Valley. We represent one in four of

private employees in the Valley of 250,000. That is a $150 billion

local economy. One-third of the Nation’s venture capital is expended in the Valley, and in terms of productivity, $300,000 per

worker compared to $200,000 nationally. So things are working

very well, and we are concerned about energy and energy reliVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00086 Fmt 6633 Sfmt 6602 E:\HEARINGS\65909 pfrm03 PsN: 65909
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ability jeopardizing the habitat, for what is happening in many

other parts of the country much like it is there.

What I want to do is focus on something that I brought with me.

This is the Silicon Valley Business Journal and in it are three articles which illustrate what we are talking about. And there is a

good news-bad news aspect to each one—$800 million data center,

2 million square foot what they call an ‘‘Internet hotel,’’ full of servers.

The good news is, it is a great investment; it makes the U.S.

more of the hub for the Internet and e-commerce making it happen.

The bad news is that it uses 10 to 12 times as much energy as a

regular facility. This was not foreseen when energy deregulation

happened. This is the nexus that we are dealing with today.

The good news is that our economy is growing tremendously. The

bad news is that we had not planned for the energy that it takes

to deal with 2-million-square-foot facilities for computers and peripherals and the cooling that it takes to make these things happen.

The next article is, the Maine Governor came and visited us. The

good news is, what we are is an incubator for a lot of things that

happen in the rest of the country. So if we are dealing with the

issue, it often happens in other parts of the country. If we solve

things where we are, it benefits the country as well.

The one that we don’t like in the middle, more blackouts predicted this summer. Yesterday Silicon Valley—the State of California had a Stage 2 alert. That is the third one that we have had

in the last 5 weeks. We are not used to this. In June, on June 14,

we had rolling blackouts. Those are unplanned removal of customers from the grid. It affected over 100,000 customers.

If I may just mention who some of those are: Apple COMPUTER,

Cisco, AMD, Selectron, some of those were affected. They were calling asking what are we doing about energy here in the Valley.

We are looking at market-driven solutions that we hope can be

addressed from this point of view. Others like Sun and HP did voluntary cutbacks of their power and there are many others.

Just a few facts to give the committee an idea of the connection

between the Internet e-commerce, and just to remember the ‘‘e’’ in

e-commerce is energy; many don’t remember that. It is dependent

on the electrons getting there reliably.

We have only begun to understand how much energy is needed

to meet the digital economy’s needs. A Palm Pilot has the potential

to reach the Internet, and it would appear that the energy needs

are the batteries, but if you are connected to the Internet, it has

the energy equivalent of a refrigerator. One-third of the power in

your home goes to your refrigerator.

As we proliferate new technology, we need to provide for it. A

laptop, it is not 150 watts to run that; if you are Web surfing, it

is 1,000 watts. I already mentioned server farms. Eighty percent of

the Internet goes through the United States, and a large portion

of that, through Silicon Valley; 200 million computers in the U.S.,

add on the peripherals, and it is still growing.

What I want to let you know is, it is about reliability. We do not

need just reliable power, the way it was in 1960, we need not just

99.9 percent reliability, but 6 to 7 times the reliability, which is beVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00087 Fmt 6633 Sfmt 6602 E:\HEARINGS\65909 pfrm03 PsN: 65909
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tween 30 seconds of downtime per year and less than a second, because companies who rely on the Internet for their commerce can’t

afford to be cutoff by power that is lost. In terms of the impact, one

expert reported a hit from $75 to $1 million a day. Companies that

have called me on the phone are saying they were losing millions

of dollars per hour. If it was the right building at the right time,

it would be $50 million per hour. So it has got a leveraged effect

on the economy of Silicon Valley and, by extension, the country.

Chairman BLILEY. Could you summarize, Mr. Bradley?

Mr. BRADLEY. Yes.

So the solution we are seeking is threefold. We believe the responsibility of the user is to use energy more efficiently, and we

need to remove market impediments to distribute generation so

that the market, which is new, can take its place in the fast track

investment in infrastructure, transmission and generation capacity.

Thank you very much.

[The prepared statement of Justin D. Bradley follows:]

PREPARED STATEMENT OF JUSTIN D. BRADLEY, DIRECTOR OF ENVIRONMENTAL AND

ENERGY PROGRAMS, SILICON VALLEY MANUFACTURING GROUP

Mr. Chairman and members of the committee: Good morning, my name is Justin

D. Bradley, Director of Environmental and Energy Programs for the Silicon Valley

Manufacturing Group. I come from San Jose, California.

For many in Silicon Valley last week, computers were blank; offices were dark

and fabrication plants were silent. The sound you did hear was high tech executives

fuming at the unrecoverable losses to their companies, our economy, and nearly

100,000 residents who were directly impacted by the rolling blackouts of Bay Area

customers. This was predicted. Only 100 hours prior to the June 14 record-breaking

regional heat wave, several energy experts speaking at a Silicon Valley Energy

Summit hosted by Oracle warned of interruptions this summer.

How could this happen? The Governor of California, Gray Davis wants to know

too.

Davis issued a letter to the California Public Utilities Commission and Electricity

Oversight Board last week to investigate circumstances that led to area blackouts,

causing significant economic loss to Silicon Valley businesses. They have until August 1 to report and present a plan to fixthe problems. However, that may be too

late for the summer of 2000 and 2001.

We believe the California Independent Systems Operator, that ordered the rotating blackouts, has been doing a good job ‘‘reshuffling the deck’’ when demand peaks

and power loads need to be redistributed. But when demand exceeds capacity of the

system, it’s like playing with a deck with only 49 cards. Somebody is dealt a losing

hand.

The impact of these losses to Silicon Valley is difficult to measure. Information

is competitive advantage and therefore closely guarded. Several Manufacturing

Group companies did report significant losses measured both in dollars and time to

market, and considered the situation unacceptable.

Additionally, a June 22 Reuters article reports that economists from the high-tech

and energy sectors are projecting local companies can expect ‘‘a hit from $75 million

to $100 million a day in Silicon Valley if there isn’t enough electricity to keep industry on line.’’ Even this estimate seems conservative since just one high tech company reported losses exceeding $3 million in three hours when their manufacturing

facility was blacked out.

These numbers illustrate the quiet vulnerability of high tech and the need for virtually uninterruptible power. The local power grid is able to reliably supply power

99.9% of the time, or about eight hours of downtime per year, which was fine for

1960. This is unacceptable for many given the steeper potential losses for companies

at the forefront of the digital economy. They need ‘‘six to seven nines’’ (99.9999 to

99.99999%) of reliability, or between 30 seconds to less than 1 second down per

year.

Silicon Valley Manufacturing Group companies are seeking a solution. As a first

step we have formed an Energy Task Force comprised of both public and private

sector representatives to remove the barriers and build the needed energy capacity.

85

Colorado understands the risk. They are contracting to build nine power plants

to increase generating capacity by more than 25% by 2005, an Aunprecedented@

rate. Will Californians be as responsive to our energy infrastructure needs? That depends on how hot the weather gets this summer and it’s ability to cool the NIMBY

attitude that has effectively stopped needed generation and transmission infrastructure investment.

Chairman BLILEY. Mr. Brown.

STATEMENT OF MARK H. BROWN

Mr. MARK H. BROWN. Mr. Chairman and members of the committee, thank you for providing AAA the opportunity to testify

today.

I oversee AAA’s travel insurance, automotive and other lines of

business. We have 88 affiliated clubs across the country with 1,100

branches, and we serve 43.5 million members in North America.

We are the largest travel organization, and we think we are unique

in that regard and we are in a unique position to monitor the gasoline price situation in the United States.

Mr. Chairman, Americans have always valued their freedom of

mobility. Today, motorists are having freedom squeezed at the gas

pump, and as they try to understand why these things are happening, they have asked us assistance in seeking answers. We operate a 24-hour check on the Internet on gas prices, and this morning they were $1.64, 50 cents higher than a year ago today. As we

heard this morning, $1.64 would be well received in the Midwest.

Literally, prices are out of whack in some of these regions. While

there are no easy answers that we can provide our membership, we

are faced with the difficulty in answering why, and there are several points we would like to convey to the committee.

The first is that despite these high prices and all of the frustrations at the pump, Americans are traveling in record numbers. We

project that there will be 37.5 million travelers this Fourth of July

weekend, 32 million will do it by car, and that is the biggest jump

from last year to this year we have had since 1993. Clubs around

the country were contacted for comments regarding travel. Members are traveling closer to home, and they are looking for travel

opportunities within their State. They are opting to take more direct routes and less scenic routes. Members are evaluating the cost

of airline transportation and redirecting vacation dollars to lower

price hotels and meal options.

The vacation travel element is a fundamental of American life.

Fuel prices at the current levels will not deter Americans from

traveling. However, that is not to say that gasoline prices are not

placing a real burden on working people who rely on their automobile to go to and from work, run errands or take their children

to and from school and other activities central to life.

Cars are not a luxury; they are a necessity. Many people and

families do not have the ability to simply forgo using a car, and

that is why this issue hits home to Americans.

While vacation travel plans are being altered, gas price hikes are

painfully regressive. They hurt lower- and fixed-income people

more than others, and during the Persian Gulf War there was a

clear link between pricing and price fluctuations. That link isn’t

quite as clear today as it was then as the earlier finger-pointing

and accusations about the blame is being assigned, and yet we fail

86

to come up with the remedy. We are importing more oil than we

ever have and the recent EPA Phase II RFG requirements are definitely having unintended consequences.

Speaking on behalf of AAA, I can assure the committee that

pump politics will not ease the considerable angst that Americans

motorists are going through right now. They want a serious discussion on how the situation will be avoided in the future.

Like any serious problem, we must address it at the root cause.

What we do today must take into consideration the long-term consequences for gas prices and consumers. I think we ought to take

the current situation as a wake-up call to adopt a more comprehensive national energy policy, one that includes the development of

alternative fuels, increased domestic crude inventory and refining

and better forecasting, so we don’t get caught off guard regionally

or nationally.

For our part, AAA recognizes it is equally important to educate

consumers. AAA is making every effort to inform our motorists

about the way in which they can conserve fuels and drive more efficiently. A smarter, more informed consumer reduces gas on the demand side, and we have the Gas Watchers Guide that we distribute extensively.

Mr. Chairman and committee members, I want to thank you for

this opportunity to provide comment and I certainly look forward

to any questions or issues you have. Thank you.

[The prepared statement of Mark H. Brown follows:]

PREPARED STATEMENT OF MARK H. BROWN, EXECUTIVE VICE PRESIDENT FOR

ASSOCIATION AND CLUB SERVICES, AAA

INTRODUCTION

Thank you for providing AAA the opportunity to testify at today’s hearing: ‘‘Summer Energy Concerns for the American Consumer.’’ My name is Mark Brown. As

the Executive Vice President for AAA’s Association and Club Services. I oversee

AAA’s National Office travel operations.

With 85 affiliated clubs and more than 1,100 branch offices, AAA is one of the

largest travel organizations in North America and is the largest provider of leisure

travel in the country. Last year, AAA clubs generated $3.4 billion in travel agency

sales, primarily to AAA’s 43 million members. Against this backdrop, AAA has been

monitoring the gasoline price situation carefully since prices began their upward

spiral earlier this year.

As a public service, AAA maintains a nationwide gasoline price report on the

Internet, which is updated every 24 hours. At the beginning of this week, that report showed that the national average price for a gallon of regular unleaded gasoline was $1.65. This compares to $1.14 a year ago, or a 51-cent increase. In the volatile markets of the upper Midwest and Great Lakes where prices spiked to well over

$2.00 a gallon last week, we are beginning to see prices come down, but they remain

‘‘out of whack’’ with national prices, and continue to be a source of frustration to

our members.

Once again, America’s motorists are caught in a squeeze as they try to understand

what is happening at the gas pump. They look to AAA, the largest motor club in

the country, for answers. We have done our best to provide explanations without

assigning blame or unnecessarily adding panic to the situation.

But, Mr. Chairman, it has been difficult. We have yet to see satisfactory answers

to the current price situation. Unfortunately, efforts to find the truth have been

dwarfed by finger pointing and accusations that seem geared less towards accounting for the dramatic fluctuations in price and more towards election politics. Discussion of this issue should be apolitical so that we can get to the root cause of the

problem.

Despite the difficulty in answering the ‘‘WHY’’ part of the question, there are several points AAA wishes to convey to the committee.

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MOTORISTS ARE TRAVELING DESPITE IT ALL

Despite their frustrations, Americans are traveling in record numbers. AAA

projects that, despite high gas prices, 37.5 million Americans will be traveling this

July 4th holiday. Of those traveling, 32 million are expected to go by motor vehicle.

This is nearly a 4% increase over the previous year and is the greatest one-year

jump for this holiday since 1993. What this tells us, Mr. Chairman, is that travel

is a fundamental fact of American life. Fuel prices in and of themselves will not

deter Americans from their travel plans. America’s booming economy coupled with

high consumer confidence in the job market makes people feel more comfortable

about spending time and money on a vacation.

In anticipation of my testimony, we invited each of our AAA Clubs around the

country to share with us their observations about what they are seeing in members’

travel requests and patterns. Certainly, they will be traveling in record numbers,

but there are no discernible national or regional trends to indicate how or whether

members are changing travel/vacation plans based on higher gas prices.

For example, let’s look at the upper Midwest where gas prices soared to over

$2.00 per gallon. AAA Michigan reports that their members are planning trips closer to home; 41% of respondents to their club survey indicated that they will be traveling within the state; 35% of respondents said higher gas prices would impact their

travel plans.

At the same time, in Chicago where gas prices are the highest in the country, our

motor club has told us that they see no discernible difference in members travel

plans or that members intend to travel shorter distances this year as a result of

higher gas prices.

Our Western Clubs are seeing marginal to no effect on members’ travel plans.

But, some of our clubs are seeing subtle shifts in members’ travel plans. For example,

• Members are traveling closer to home and looking for more travel opportunities

within their state;

• Members are opting to take more direct routes to their destinations, as opposed

to scenic routes that might take longer and require more fuel;

• Members are evaluating the costs of air transportation versus traveling by car in

determining their travel plans;

• There may be a redirecting of vacation dollars from higher priced hotels and restaurants to lower cost accommodations and fast-food chains to offset higher fuel

costs.

While high ,as prices may be aggravating to America’s travelers, they are not

enough to force postponement or cancellation of a long-sought vacation. Often planning for that family vacation occurs many months in advance of the actual trip. In

addition to the anticipation and excitement of planning for the trip, reservations

and deposits are made. Employers have been notified of employee leave plans. As

long as there is assurance that fuel supply will remain uninterrupted, high prices

will not deter Americans from traveling. That’s because fuel prices represent a relatively small portion of leisure travel expenses. A family driving 1000 miles should

be prepared to spend an additional $25 over and above last year’s fuel prices to

make the trip. That’s hardly enough to cancel that long-sought vacation.

IT’S THE DAILY ROUTINE THAT HURTS

But, Mr. Chairman, there is no denying that high gasoline prices are placing a

real burden on working people who must rely on their automobile to get to and from

work, run errands, or take their children to and from school or the various recreation activities which are central to family life today. That’s where the pinch is

being felt. High gas prices impose a heavier burden on lower and fixed income people that we cannot ignore.

Mobility is a cardinal feature of American life. Americans value their freedom to

choose where they live and work and how they commute between home and the office place. And, Americans are choosing to drive more than ever before. Since 1970,

the U.S. population has grown by 30%, the number of licensed drivers by 61%, the

number of vehicles by 90% and the number of miles driven each year by an amazing

130%.

Americans clearly treasure their mobility. and the mode of transportation of

choice is their automobile. That’s why the issue of gas prices hits home. That’s why

motorists are frustrated by unanticipated or unexplainable price hikes.

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MOTORISTS WANT ANSWERS

In the past, there has been a clear link between world or market events and resulting price spikes. Whether it was war in the Persian Gulf or suffering through

another Arab embargo like we saw in the 1970s, motorists could clearly identify,

and understand the reasons for price variations. Those links are less clear today.

Absent a clear, understandable ‘‘cause and effect’’ relationship, motorists are left

to wonder who or what is interfering in the marketplace. Anxiety is further heightened when motorists in certain parts of the country see their gas prices skyrocketing

beyond the national average, with no good explanation for why these price differentials exist.

On June 15 AAA called on the Environmental Protection Agency to issue a 90-

day cooling-off period during which current requirements that reformulated fuels be

offered as part of local clean air compliance programs would be waived. In addition

to helping motorists during the heavily traveled summer months, the cooling-off period would give the EPA and the Department of Energy time to determine why

some states, as opposed to others, are bearing a disproportional burden of price

hikes.

AAA also supports the Federal Trade Commission’s investigation of oil companies

to determine whether price gouging may be occurring.

Speaking on behalf of AAA, I can assure you that ‘‘pump politics’’ will not ease

the considerable angst of America’s motorists. They want answers and better yet,

serious discussion of how this situation can be avoided in the future.

CONCLUSION

Mr. Chairman, we learned in the 1970s that reliance on foreign oil to meet a substantial portion of our energy requirements could wreak havoc on America’s consumers and our economy. Those lessons are the same today. The fact that our economy remains strong has allowed Americans to live with an aggravating situation.

Let’s view it as a ‘‘wakeup’’ call to adopt a comprehensive national energy policy.

That policy should include development of alternative fuels. And, while the purpose

of today’s hearing is to focus on the effects of this summer’s energy concerns, remember that winter is not that far away. If not careful, decisions made by refiners

today could negatively impact the home heating oil situation not too many months

from now.

For our part, AAA is making every effort to help educate members and other motorists about the many ways in which motorists can conserve fuel and run more energy efficient cars. Our ‘‘Gas Watchers Guide’’ stresses to motorists that how you

use your car can be just as important as which vehicle you use. A smarter, more

informed consumer can help reduce the demand side of this equation.

Chairman BLILEY. Mr. Oxley.

Mr. OXLEY. I would like to introduce the next witness. Mr. Frank

is a long time friend and my constituent in my hometown of Findlay, Ohio. He has been a leader in the oil industry for a number

of years, and we are pleased to have him participate in the panel

discussion today.

I yield back the balance of my time.

Chairman BLILEY. I hope, Mr. Frank, that he doesn’t hustle you

on the golf course.

STATEMENT OF J. LOUIS FRANK

Mr. FRANK. I try to watch it when I am out on the golf course

with him.

Thank you very much, Congressman Oxley. I am Louis Frank,

President of Marathon Ashland Petroleum, and I welcome the opportunity to tell you our story today, because I think we have a

good story to tell to explain the situation.

Let me start by saying that a very competitive gasoline market

ultimately determines the price of gasoline. When there is a supply

shortage in the competitive market, prices tend to rise to whatever

level is necessary to balance demand with supply. When supplies

return to normal levels, prices return to normal levels. Just such

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an imbalance of supply and demand occurred in the Midwest over

the past few weeks, and that is the reason that prices in the area

surged.

First, worldwide crude oil prices have risen and been quite volatile. Second, refineries in the Midwest can supply only 75 percent

of the region’s demand. The balance, which is about 42 million gallons per day, must be transported into the region, and that would

mean that a company twice my size, a new company, would have

to be installed, to make it self-sufficient, that is dependent on the

pipelines to get product to where it is required.

A very small amount is shipped by truck from neighboring

States, but the vast majority of this product comes in from the Gulf

Coast by barge up the Mississippi River or by two large pipeline

systems; and if you look at the exhibit on the side—and there is

one attached to my testimony—recent events illustrate the fragile

nature of the refining products distribution system in the Midwest.

A significant problem at a refinery or in the transportation system

can create a shortfall of supply, and when this happens, the system

has little or no capacity to play catch-up.

In March, one of these critical pipeline systems, the Explorer

Pipeline, which you heard discussed extensively this morning, experienced a line failure followed by a 6-day outage, which resulted

in a shortfall of 336 million gallons of product deliveries into the

Midwest. That is approximately 8 million barrels.

Explorer was repaired and returned to system, but part of the

system must operate at a reduced capacity pending completion of

certain tests. As a result, the region continues to suffer a shortfall

of up to 2 million gallons per day of pipeline deliveries into PADD

II.

More recently, Wolverine pipeline, which carries about 40 percent of Michigan’s petroleum needs from Chicago, also experienced

a release and resulted in a 9-day interruption of supply in that

area. That pipeline system has since returned to service. But as

you heard this morning from the Secretary of the Department of

Transportation, it is only shipping historic levels of gasoline into

the Michigan market, whereas the State of Michigan was in dire

straits for gasoline supply, and the city of Detroit and the surrounding counties require a 7.8 special gasoline mixture, and literally ran out of gasoline.

Another factor which contributed to the supply/demand imbalance was a new Phase II reformulated gasoline called RFG II, requirements which became effective on June 1 of this year. This gasoline is more difficult to make, there is no denying that, and the

U.S. EPA regulation required us to drain our tanks of winter grade

product before we accept deliveries of the low vapor pressure summer grade of gasoline in March and April at almost exactly the

same time as the supply disruptions occurred with the Explorer

pipeline.

As if these supply issues were not enough, EPA’s decisions to

grant three waivers from the RFG requirements for the St. Louis

area, without any sort of penalty, became the straw that broke the

camel’s back in this supply scenario. Conventional gasoline that

was originally destined for Chicago and the Milwaukee areas was

immediately diverted to St. Louis. This contributed to a gasoline

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shortage of conventional gasoline that was destined for Chicago

that, in turn, led to the severe price increases for those products

in Chicago.

What did my company do in response to the gasoline supply and

demand imbalances in the Midwest? We continued to manage our

supplies as prudently as we know how, and we took immediate and

extraordinary steps to bring supplies into the Midwest. We ran our

refineries and pipelines at full capacity, we utilized trucks and

barges to bring product in from as far away as Newfoundland.

We have been asked by the U.S. EPA and the Department of Energy to comment on what could be done by the Federal Government

to improve the Midwest supply situation in the short run. Our answer was submitted in writing on June 13 and is attached to my

testimony. At the top of our recommendation is a suggestion that

the United States Department of Transportation should take steps

to get Explorer and Wolverine running at full capacity as soon as

possible.

I would like to add that my company is working on longer-term

infrastructure projects that could help ease situations like we have

just experienced. For example, we are seeking rights-of-way and

permits to construct a new refined petroleum products pipeline to

serve the growing central Ohio market, but our progress has been

hampered due to right-of-way litigation over what is the definition

of petroleum for condemnation of right-of-way lands, and gasoline

has not been judged to be——

Chairman BLILEY. Would you try to summarize?

Mr. FRANK. I would say that we have also joined with two other

companies, a joint venture land pipeline from the Gulf Coast to the

Midwest that would supply significant portions of gasoline right

into the southern Illinois market and further into the Midwest.

In conclusion, I would say that I can’t help but be outraged at

the allegations that my company has had the burden of receiving:

collusion and price gouging and price fixing, when our employees—

and there are 28,000 of them—have been working around the clock,

7 days a week, to bring supplies into the Midwest and see where

they are needed.

And that would conclude my statement, sir.

Chairman BLILEY. Well, I hope in your court case—when you

have to define what ‘‘petroleum’’ is, I hope you don’t have to define

what ‘‘is’’ is.

Mr. FRANK. None have ever come to the conclusion that there

has been that conspiracy that has been alluded to.

[The prepared statement of J. Louis Frank follows:]

PREPARED STATEMENT OF J. LOUIS FRANK, PRESIDENT, MARATHON ASHLAND

PETROLEUM LLC

Good afternoon. I’m J. Louis Frank, President of Marathon Ashland Petroleum

LLC, a company that makes and markets most of its products in the midwest.

I welcome this opportunity to discuss the gasoline market conditions we have just

experienced in our part of the country and I look forward to answering any questions you or other members of the committee might have.

Let me start by saying that a very competitive gasoline market ultimately determines the price of gasoline. Worldwide, crude oil prices have risen rapidly and substantially. Refiners have experienced severe increases in the cost of raw material

over a relatively short period of time. With this backdrop of rising crude costs, a

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series of pipeline disruptions and other circumstances created a supply and demand

imbalance in the midwest.

When there is a supply shortage in a competitive market, prices tend to rise to

whatever level is necessary to balance demand with supply. When supplies return

to more normal levels, prices tend to return to lower levels. This is a matter of simple economics in a market economy. Just such an imbalance of supply and demand

occurred in the midwest over the past few weeks, and that is the reason that prices

in the area surged. Let me explain.

Refineries in the midwest can supply only about 75% of the region’s demand. The

balance, about 1 million barrels (or 42 million gallons) per day, must be transported

into the region. A very small amount is shipped in by truck from neighboring states,

but the vast majority of this product comes in from the gulf coast by barge or by

one of two large pipeline systems. (see attached exhibit titled ‘‘Regional Fuels Program.’’) Recent events in the midwest illustrate the fragile nature of refining and

products distribution in the midwest. A significant problem at a refinery or in the

transportation system can create a shortfall of supply, and when this happens the

system has little or no capacity to play catch up.

In March, one of these critical pipeline systems, the explorer pipeline, experienced

a line failure followed by a six-day outage, which resulted in a shortfall of about

8 million barrels (or 336 million gallons) of products to the midwest. Explorer was

repaired and returned to service, but part of the system must operate at a reduced

capacity pending completion of certain safety tests. As a result, the region continues

to suffer a shortfall of up to 50 thousand barrels (or 2.1 million gallons) per day

of pipeline deliveries.

More recently, wolverine pipeline, which carries about 34% of Michigan’s petroleum needs from Chicago, also experienced a release that resulted in a nine-day

interruption of supply to that area. That pipeline system has since returned to service, but it too is running at reduced capacity.

Another factor that contributed to this supply-demand imbalance in the midwest

was the new Phase II Reformulated Gasoline (RFG) requirements which became effective June 1. Phase II RFG for the Chicago and Milwaukee markets is one of a

number of unique fuels that Marathon Ashland Petroleum must make for different

parts of the country. (See attached exhibit titled ‘‘Regional Fuels Program.’’) This

gasoline is more difficult to make than the previous formulation. United States Environmental Protection Agency (EPA) regulations required us to virtually drain our

tanks of winter grade product before we could accept deliveries of the low-vapor

pressure summer grade of this gasoline in March and April. We had to begin building inventories of this new gasoline from ground zero at almost exactly the time as

the supply disruptions with explorer were unfolding. In addition, concerns with

Unocal’s gasoline patents may have constrained production of Phase II RFG.

If these supply issues were not enough, EPA’s decision to grant three waivers

from the RFG requirements for the St. Louis area without any sort of penalty became the straw that broke the camel’s back. In a letter dated May 18, 2000, describing one of these waivers, the EPA acknowledged the shortage of RFG in the St.

Louis area, citing the explorer outage, and encouraged marketers in that area to

build up their inventories of RFG while distributing conventional gasoline in the

market. The result was predictable.

Conventional gasoline that was originally destined for the Chicago and Milwaukee

areas was immediately diverted to St. Louis. This contributed to conventional gasoline shortages that in turn led to severe price increases for those products in the

chicago and milwaukee markets. These shortages and price increases eventually

spread to other parts of the midwest. (see attached exhibit titled ‘‘Chicago Market

Wholesale Gasoline Prices.’’)

What did my company do in response to the gasoline supply and demand imbalances in the midwest?

We continued to manage our existing gasoline supplies as prudently as we knew

how, and we took immediate and extraordinary steps to bring additional supplies

into the midwest. In fact, we have supplied about 10% more gasoline to the midwest

this year than last year. To do this we ran our refineries at full capacity, and, because pipelines were not available, we utilized higher cost trucking and barges to

bring product in from other areas. We contracted to ship gasoline in from as far

away as Newfoundland, Canada.

What could be done to improve the midwest supply situation in the short run?

While midwest inventories are slowly building and prices appear to be dropping,

the supply situation is still quite tenuous. Any further pipeline or refinery problems

could cause the supply shortage to recur. At their request, Marathon Ashland Petroleum submitted to the EPA and United States Department of Energy (DOE) a list

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of measures that government could take to provide some short-term relief to the

midwest.

At the top of this list is the recommendation that the United States Department

of Transportation (DOT) take whatever steps are necessary to get explorer and wolverine safely running at full capacity as soon as possible. We also recommend that

DOT grant relief on driver hour restrictions for transport drivers in the midwest

and that the larger trucks used in Michigan be allowed in other midwest states.

Temporary removal of terminal vapor recovery units limits and tank operating restrictions will be of help in certain locations. A complete list can be found in the

attached copy of Marathon Ashland Petroleum’s letter to EPA and DOE.

My company is currently working on several longer-term infrastructure projects

that could help ease situations like the one we just experienced. We’re seeking

rights of way and permits to construct a new refined petroleum products pipeline

to serve the growing central Ohio market, but our progress has been hampered due

to right-of-way litigation. We’ve also joined two other companies to convert a natural

gas pipeline into a new products pipeline from the Gulf Coast to the midwest, including the Chicago area. Federal and state governments could help by expediting

the permitting process for these significant projects as well as others our company

has planned, and by rethinking the demands on petroleum refining and marketing

posed by new fuels regulations.

It is often mentioned that the United States does not have a cohesive national

energy policy—one that would recognize the importance of ample, affordable and

clean energy for the nation. Such a plan would encourage a viable and vital domestic petroleum industry—both upstream and downstream. it would also emphasize

the need to increase the energy independence of the United States. Ideally it would

then provide our citizens sufficient energy at a cost that will sustain our economic

growth in an environmentally responsible manner.

Significant components of a comprehensive national energy policy would include

the following features:

• encourage increased crude oil production from marginal wells—those that produce

less than 10 barrels per day.

• open federal lands for environmentally responsible exploratory drilling for crude

oil.

• open offshore areas for drilling in deep waters.

• recognize the need for strengthening the downstream infrastructure of the domestic petroleum industry—the sector that includes refining, pipelining,

terminaling and marketing.

In closing, let me say that I am very proud of the way Marathon Ashland Petroleum responded to this situation and, on behalf of the 28,000 employees of my company, I am sincerely and profoundly offended by any allegation or insinuation that

we have engaged in either price gouging or collusion with our competitors.

And I am equally offended by assertions that prices have come down in response

to calls for an FTC investigation. As I said in my opening remarks, the gasoline

market is highly competitive and the market ultimately determines the price of gasoline. Prices in the midwest went up in response to a supply/demand imbalance and

they have responded as additional supplies became available in the market. It is

a matter of simple economics. However, the system is fragile and any significant disruption in a refinery or in the distribution system could result in another supplydemand imbalance in the midwest.

Again, I appreciate this opportunity to appear before this committee, and I look

forward to answering any questions you or other members of the committee may

have.

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Chairman BLILEY. Mr. Gale.

STATEMENT OF ROGER W. GALE

Mr. GALE. Thank you very much, Mr. Chairman. I appreciate the

chance to talk to you about the electric system of the United States

and its reliability as part of your investigations today.

Our firm has 300 energy consultants in 15 offices around the

world, and we work for the largest utilities in the world, as well

as many of the smaller municipals and co-ops. Our sense is, for the

most part, the utility industry in North America has done an excellent job of providing the reliability that has been necessary to this

point, but unless there is a major rebuilding of that system, the

distribution system and major expansion of the transmission system, we will begin to see a fairly rapid deterioration in quality in

the years ahead.

Right now, we see that the incentives to do that rebuilding of

transmission and distribution are simply not there, particularly on

the transmission side, and it is critical that the industry be given

those incentives through the State regulatory process and through

activity by Congress. When we look at the generation sector, data

we have shows that there are about 207,000 megawatts of new generation planned in the United States, about 44,000 megawatts of

new generation actually under construction. There are problems, as

anybody in the generation business will tell you, in getting plants

sited and built, but that part of the industry is doing well, the price

signals, the opening of the market that FERC has managed over

the years has put that part of the industry in a relatively good position to do its job well and to go out and build.

There has been a lag in construction, so we do have some delays

and we do have shortages in some regions, but that part of the situation is being fixed. The problem we face is primarily a delivery

problem of the transmission system that is balkanized, sets poor

pricing signals and has congestion that is advantageous for some

of the owners to maintain rather than what you would have in a

more competitive industry, incentives to get rid of that congestion

by growing and increasing the markets.

We don’t see any one step where there is an instant solution to

this problem, but we very much support the activities of this committee and the Chair to take a look at these issues. Reliability can

best be addressed, we think, by focusing on the things that are in

most need of attention, and that is the transmission system. We

need to put in place a competitive, move-energy-for-profit system.

It will be in the interest of all Americans to do that.

Congress has got to take the lead and make the effort to do that.

This is a project that is no less important and no less ambitious

and probably, over the next 20 years, no less costly than building

the interstate highway system and building all of the fiberoptics

and all of the additions that we are putting into our telecommunications facilities. Unlike the interstate highway system, this can be

done without government money, and it can be done on a purely

for-profit basis if the rules are right and Congress establishes a set

of parameters that make sense. It is critical in our mind to see this

happen quickly.

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What we see as important is that Congress quickly address the

issue of siting to build new lines. In the 1930’s, Congress gave the

natural gas industry a siting regime that allows for Federal siting

of transmission. It is time to work on that issue for Federal electric

regulation for siting.

I know that is a sensitive and difficult issue. It raises tremendous issues about Federal and State authorities, but without greater ability to site and to deal with things on a comprehensive,

multistate, regional, long distance delivery basis, we will not be

able to solve in a comprehensive way some of the issues.

We have to provide incentives to upgrade the current system.

Today, in the Northeast, we can increase the amount of electricity

going through the existing transmission lines by 20-25 percent

without stringing a new wire. In some of the western States, it is

probably 40 to 50 percent increases in the amount of electricity

going through existing wires if we allowed and had incentives for

people to invest money in upgrading the switching and delivery

system.

On top of that, we are estimating a 3.7 percent increase in construction in the total volume and length of the transmission system

in the next 8 years, almost nothing. It takes 25 years to add transmission in this country because of the difficulty in siting. We need

a for-profit incentive to run the system as efficiently as possible.

We realize that there is a great debate about the value of a forprofit transmission system, as opposed to an RTO structure that is

incentivized without being privately owned or for profit. There a

great deal of reasoned debate on both sides of this issue, but unless

the profit incentive is there and there is an incentive to buy and

price and put transmission assets together into larger entities, we

are not going to get the economies of scale and the management

depth that we need.

It is also an issue that has gotten an awful lot of environmental

attention over the years. We have not seen as much of that over

the years, but the siting effort is one that has to be dealt with.

And finally, there have to be adequate rates of return. The industry will tell you it is not high enough and it never will be high

enough, but today there is much less certainty about what it ought

to be, and it needs to be the range of a gas pipeline, and they are

happy to tell you that their rates are not as high as they should

be. It is not so much the rate as it is the predictability and the ability to know that one can plan and build around a rate of return.

A final point that I think is important to emphasize, and it has

not been dealt with yet by Congress, nor much by the States, and

it is a point that was raised in the first presentation by Mr. Bradley, looking at Silicon Valley. PG&E, I remember being quoted as

saying that they recognize that they have a 1930’s-vintage distribution system in Silicon Valley and that is the distribution system

that we do run in this country. It is reliable, and it has been maintained well, although expenditures have gone down in the last 10

years; but that system needs upgrading. And Congress at this

point, Mr. Chairman, I don’t think, is ready to take over control of

the distribution system from the States, but Congress could certainly use its powers to encourage the States to provide additional

incentives, to provide higher rates of return and recognize, as marVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00104 Fmt 6633 Sfmt 6602 E:\HEARINGS\65909 pfrm03 PsN: 65909
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kets have opened and utilities have been put in the position of having price caps and price freezes, they are in a difficult position to

be able to upgrade system until those caps and those freezes expire.

This is a very excellent system, but it is one that Congress needs

to work on and move quickly to try to encourage incentives to rebuild. Thank you.

[The prepared statement of Roger W. Gale follows:]

PREPARED STATEMENT OF ROGER W. GALE, PRESIDENT AND CEO, PHB HAGLER

BAILLY

As Americans become more dependent on e-commerce and e-information in their

daily lives, the quality and reliability of electricity supply also becomes more important. America’s electric utilities—investor-owned, public, cooperatives and federal—

have generally done an excellent job of providing reliable service. But a massive rebuilding of the electric delivery system over the next two decades is needed to maintain quality service in the new e-century. We are already beginning to see deterioration in reliability in some parts of the country.

This summer and for ensuing summers we will continue to muddle through but

it is time for Congress and the states need to work together to build a new regulatory compact for the new century. In addition to competition issues, Federal legislation needs to deal with reliability head-on and needs to be passed as soon as possible to create a consistent national framework for success. There is no instant,

‘‘one-step-we’re-there’’ solution but an aggressive first step on reliability is needed

now. By raising the reliability issue, Congress has already had a constructive impact focusing attention on our national vulnerability.

This summer, as in previous summers, some consumers may be affected by power

failures as the industry learns how to cope with competition. Competition will eventually lead to improved reliability but we are now going through a period of trialand-error in getting the rules of competition right. Congress can assist by creating

a consistent set of transparent wholesale pricing and access rules. Especially in

transmission, there will be few incentives to upgrade and expand the system until

Congress creates a single set of transmission rules and encourages as much of a national market as is technically possible, with siting rules, independent management

and control, higher rates of return and investment incentives. A competitive moveenergy for-profit transmission system is in the interest of all Americans.

The electric generating industry is doing an excellent job of catching-up following

a fallow period in which little new generation was built. According to PHB Hagler

Bailly’s database, more than 207,000 megawatts of new capacity is planned with

more than 44,000 megawatts actually under construction. Temporary shortages of

electricity generating capacity in the Midwest and other regions are being quickly

resolved with the installation of new units including peaking plants. The dramatic

and now sustained improvement of nuclear plant performance is also an important

contributor to supply in some regions. Having successfully weaned itself of its dependence on oil to generate electricity, few of America’s electric power companies

are part of today’s oil price problem.

Delivering electricity to the customer is emerging as the real long-term problem.

Congested transmission lines, bad pricing signals, and balkanized control all contribute to the problems we now face. The Federal Energy Regulatory Commission

has done its share to focus attention on these issues and has pushed the limits of

its regulatory authority and needs additional authority from Congress to get the

rules right. Not everyone wants FERC to have more authority but without a stronger federal role, the market will continue to be a collection of fiefdoms, instead of

the vibrant growth-oriented business sector that this country needs right now.

Based on industry statistics, current plans call for adding only 3.7% to the total capacity of the existing transmission system over the next 8 years. And with no incentive to upgrade existing lines with electronic switching and other improvements,

America faces a potential transmission crisis in the years ahead.

In addition, America’s electric distribution system that brings power from the

transmission grid to our homes will require a massive rebuild in the next 20 years.

While the transmission system needs to be expanded, the distribution system requires major overhaul. Most utilities operate their systems reliably but the systems

lack automated controls and other backups, and with the growth of distributed generation, major changes will be needed. Few utilities are able to make these investments because rates of return are not high enough and because in many states

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there are rate freezes in place as part of the settlements that are opening markets

to customer choice. Blackouts in major cities in last few years highlight the need

for a massive investment. Competition will keep consumer prices down although, as

we are witnessing in telecommunications but not in electricity, the right price incentives will also encourage system investment and upgrades as new players enter the

market and compete with the incumbents.

In short, the existing utility infrastructure has served us well but we are already

overdue in starting the rebuild we need. Congressional leadership is critical to creating the national incentives to get this job done. This job is as big and as important

as was the construction of the interstate highway system and the huge investment

that is now taking place in fiber optics and other communications links. It can be

accomplished without any government subsidies—but only if Congress passes comprehensive electric industry legislation that creates the right financial incentives for

utilities and new players to move forward—now.

Turning to specifics, what is needed?

The most important congressional action is to create a new independent transmission industry with siting authority to build new lines, incentives to upgrade existing systems, for-profit incentive to run the system as efficiently as possible,

strong attention to environmental concerns, and adequate rates of return that exceed today’s limits.

Transmission is the weak link in the system. Companies that own generation

should not be allowed to control transmission. FERC is paving the way for these

changes but Congress needs to step in immediately to create a comprehensive,

transparent set of wholesale transmission pricing and siting rules. Congress may

not yet be ready to tackle federal siting for electric transmission but it needs to realize that it established federal siting rules for gas pipelines more than 65 years ago.

Siting of electric transmission like gas transmission and telecommunications should

be a federal responsibility.

Congress needs to provide its blessing to the development of Regional Transmission Organizations and send a strong signal that we need to move quickly toward creation of a North American transmission system, that includes Canada and

Mexico, built around large regional organizations that are incentivized to encourage

new construction and eliminate congestion. There is legitimate debate about the

number of RTOs we’ll eventually need but while recognizing the need for regional

diversity, the rules have to be similar enough to create a seamless market.

Congress needs to signal the industry that it encourages self-regulation of reliability through the new North American Electric Reliability Organization (NAERO).

Federal legislation is needed to enable NAERO to take on this responsibility.

Congress needs to encourage the states to provide new incentives to distribution

owners to upgrade their networks. If the states don’t respond, Congress should work

with FERC and the Department of Energy to establish rigorous distribution system

performance standards and to encourage states to allow utilities to invest more in

upgrading local distribution systems. Innovative performance-based rates can provide the push needed to get capital flowing. Without a significant increase in investment, adequacy of service will decline just at the time that more and more Americans are becoming dependent on the Internet as part of their daily lives for everything from paying bills and shopping to doing homework. Price freezes that have

been imposed to protect the consumer need to be reexamined in light of the need

to invest more now in preventing the deterioration of service. Distribution remains

a state-level responsibility but Congress needs to take the initiative to fix this growing nationwide problem.

Congress needs to work with the Department of Energy and others to quickly

commercialize e-based energy management technologies that can dramatically improve energy efficiency and environmental compliance. Automated meter reading,

wired appliances and the ability for consumers to remotely control their energy demand through the Internet is one of the most promising ways to reduce overall demand. Combined with distributed generation, these market-based technologies have

the potential for being the single biggest improvement in energy use and environmental stewardship.

None of these reforms can be implemented this summer, but speedy, decisive action now to provide the electric power industry with market-based incentives, will

mean we won’t have to worry about this every summer.

Thank you.

Chairman BLILEY. Thank you.

Mr. Gerken.

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STATEMENT OF MARC S. GERKEN

Mr. GERKEN. Thank you, Mr. Chairman and members of the

committee. For more than 15 years, AMP-Ohio has been involved

in the competitive purchase and delivery of wholesale power as an

aggregator for its members, who total 83. Ohio’s electric systems

gained access to transmission wheeling and the ability to shop electricity generation services long before the Energy Policy Act of 1992

that requires wheeling of wholesale power.

As an active participant in the wholesale power market, AMPOhio has experienced the benefits of competition as well as the

threats of system reliability and price spikes of the past few years.

While maintenance of system reliability is a traditional purview of

engineers and utility operators, the system is showing signs of

emerging crisis and Congress must move.

Public power systems nationally support the consensus of NERC

and narrow legislation that creates an enforceable system of mandatory reliability standards. Unfortunately, enacting this legislation alone will not ensure system reliability nor will it tackle the

underlying problems.

Our organization sits on every one of those boards, and you must

remember that they are usually maintained by merchant people.

While there are constrained transmission interfaces, a lot due to

the fact that we are moving power from East to West and from

West to East, we also need generation addition and transmission

improvements. In our opinion, the root cause of these problems is

market manipulation and market structure. If Congress is serious

about promoting system reliability, we encourage you to break the

hammerlock that encumbered utilities have over transmission systems.

With the transmission system owned and operated by vertically

integrated utilities, there is an inherent incentive to manipulate

the transmission system to the advantage of a utility’s own generation and sales. In recent years, at AMP-Ohio, we have been told

months in advance that there are no, or zero, transfer capabilities

for an entire month to move one single kilowatt hour of power.

In past years we have not been asked to run generations that

could reduce transmission constraints, with the host utility seemingly preferring to keep the constraint in place. On one occasion

last year a major company sent well over 2,000 employees home in

the middle of the day because of voltage restrictions. Also, in recent

years we have been told that we could not move power in either

direction on a transmission line, something that my understanding

the laws of physics suggests is completely impossible.

The bottom line is that the current arrangement doesn’t work. In

our viewpoint, it is like permitting a trucking company to own the

interstate highway system and having that trucking company provide its own trucks preferential access and multiple lanes while

shunting competitors to a clogged toll road.

We believe that Congress can fix these problems. To that end, we

encourage Federal lawmakers to: affirm FERC’s authority to promote formation of regional transmission organizations, RTOs, that

are truly independent, geographically broad and operationally robust; Facilitate the interconnection of generation and load to the

transmission grid. In the last year, we have had a host of privately

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owned companies willing to cite generation peak savings because it

is a lot easier. They don’t have 3 years to do it.

Provide FERC appropriate jurisdiction over all uses of the transmission system and also authorize FERC to be the ‘‘cop on the

beat’’ to remedy situations where generation markets power undermines the competition.

I commend Chairman Bliley for spotlighting a lot of these issues.

I understand that private utilities believe today’s transmission

constraints will be relieved if only FERC approved higher rates of

return or other incentives. Let me offer my following observations

to this:

Failing to relieve the transmission constraint allows the utility

to charge substantial premiums on power sales from generation

plants that represent the majority of the utility investment. Transmission is a modest share of the utility plant investment. Bumping

up the rate of return by a few basis points would have a minimal

impact on utilities’ bottom line. Simple math suggests that the lack

of incentives is not the principal impediment to relieving transmission constraints; rather, these constraints further utilities’ profits.

Transmission siting is and will remain a significant problem, especially when we are building a line in one State that is going to

benefit another State in a greater capacity. We believe that giving

the independent RTOs planning authority for expanding transmission service for the entirely regional market is the solution.

Transmission remains a monopoly function. As such, it should receive a regulated rate of return, the existence of which for many

years did not seem to impede investment in utilities. Instead, returns are simply excessive profits.

I read with interest a recent news report about an internal

FERC memo, and the memo noted that while transmission owners

post volumes of data on the Open Access-Same Time Information

System, which is called OASIS and is a scheduling software, it is

nearly impossible for anyone to use OASIS to obtain pertinent data

for overseeing transmission market behavior and assessing how

well the markets are working. I would suspect that this may cause

you pause. We hope this bolsters the call for reform as outlined

above.

I can tell you that in 1999 we had an instance where this occurred. We went to FERC, we showed them the OASIS data and

it didn’t prove anything in their eyes. We feel that it has to be bolstered even better.

AMP-Ohio stands ready to work with the committee to provide

legislation that provides both system reliability and effective competition in the electric utility industry. Thank you very much.

[The prepared statement of Mark S. Gerken follows:]

PREPARED STATEMENT OF MARC S. GERKEN, ON BEHALF OF AMERICAN MUNICIPAL

POWER-OHIO, OHIO MUNICIPAL ELECTRIC ASSOCIATION, TRANSMISSION ACCESS

POLICY STUDY GROUP, AND AMERICAN PUBLIC POWER ASSOCIATION

Introduction

Good morning, Mr. Chairman and members of the committee, I am Marc Gerken,

President of American Municipal Power-Ohio in Columbus, Ohio.

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I am pleased to appear before you today representing the concerns of AMP-Ohio,

the Ohio Municipal Electric Association (OMEA), the Transmission Access Policy

Study Group (TAPS) and the American Public Power Association (APPA).

AMP-Ohio is a nonprofit wholesale power supplier and services provider for municipal electric utility systems, including 78 of Ohio’s 85 community-owned electric

utilities, three in Pennsylvania and two in West Virginia. Ohio municipal electric

systems account for approximately six percent of the electric sales in Ohio, serving

about 350,000 meters statewide. Our organization has 183 employees between our

headquarters and power plant operations, and total operating revenues of more than

$223 million. Our members receive their power supply from a diversified resource

mix, including: wholesale power purchases through AMP-Ohio and on the open market; energy produced at the 213-megawatt, coal-fired Richard H. Gorsuch Generating Station operated by AMP-Ohio; individual community-owned generation facilities; and municipal generation joint ventures such as the 42-megawatt, run-of-theriver Belleville Hydroelectric Project. Ohio’s municipal electric systems do not own

significant transmission facilities, and therefore are transmission dependent. In

1999, the non-coincidental peak for AMP-Ohio member communities was 1,958

megawatts. Our energy control center has handled arrangements to move power

across as many as 18 different transmission systems in one year.

For more than 20 years, AMP-Ohio has been involved in the competitive purchase

and delivery of wholesale power as an aggregator for its members. Through interventions in regulatory proceedings involving Ohio investor-owned electric companies, Ohio municipal electric systems gained access to transmission wheeling and

the ability to shop for electricity generation services long before the federal Energy

Policy Act of 1992 required the wheeling of wholesale power. As a result, Ohio has

experienced the benefits of a competitive wholesale market for many years, and

Ohio municipal electric systems played a key role in this arena. By the same token,

our experience in the competitive market has provided us with first-hand examples

of the presence and abuse of market power and underscores our position that market power must be addressed legislatively for consumers to receive reliable service

and for wholesale and retail competition to be a success.

The OMEA is the state and federal legislative liaison for Ohio’s municipal electric

communities. TAPS, a coalition of transmission dependent utilities in more than 29

states, advocates open, non-discriminatory transmission access. APPA is the national service organization representing the interests of more than 2,000 municipal

and other state and local government-owned utilities throughout the U.S. While

APPA member utilities include state public power agencies, and serve many of the

nation’s largest cities, the majority of APPA members are located in small and medium-sized communities in every state except Hawaii. APPA members produce

about 12 percent of the nation’s energy and serve about 15 percent of all kilowatthour sales to ultimate consumers in the U.S.

Our recent experiences in the wholesale market

As an active participant in the Midwest wholesale power market, AMP-Ohio has

experienced the threats to system reliability and price spikes of the past few years.

While there are constrained transmission interfaces and a need for generation and

transmission additions—in our opinion, the root cause of these problems are market

manipulation and market structure.

If Congress is serious about promoting system reliability, we encourage you to

break the hammerlock that incumbent utilities have over the transmission system.

With the transmission system owned and operated by vertically integrated utilities,

there is an inherent incentive to manipulate the transmission system to advantage

a utility’s own generation and sales.In recent years, we have:

• Been told months in advance that there would be zero transfer capability for an

entire month and that we would be unable to move a single kilowatt-hour of

energy;

• Not been asked to run generation that could reduce a transmission constraint,

with the host utility seemingly preferring to keep the constraint in place; and

• Been told that we could not move power in either direction on a transmission

line—something that my understanding of the laws of physics suggests is impossible.

I’ll offer a few specifics on the third event, which clearly resonates in my memory

since I was working closely with our energy control center at the time it occurred.

At 2 p.m. on July 30, 1999, AMP-Ohio had 20 megawatts of load available from a

member generator in one Ohio utility control area. We attempted to transmit that

20 megawatts to serve member load that had experienced an interruption of a power

resource in a different utility control area. Our request for transmission was denied

due to a claimed lack of available transmission capacity (ATC). Interestingly

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enough, a check of the ATC across the interconnection in the opposite direction

showed no capacity in that direction either. We were amazed that an interface could

be fully loaded in both directions at the same time—one would think that some unloading would occur, even be encouraged, as opposing reservations or uses are made.

Given this physical fact, we had to question whether the assertion about ATC was

accurate. The end to this story is that the replacement power for the interrupted

resource was provided at a cost of $4,000 per megawatt hour by the control area

utility—about 40 times the cost of generating our own power.

The bottom line is that the current arrangement does not work. In our viewpoint,

it is like permitting a trucking company to own the interstate highway system—and

having that trucking company provide its own trucks with preferential access and

multiple lanes, while shunting competitors to a clogged toll road.

Need for comprehensive federal legislation

We believe that Congress can and must fix these problems. To that end, we encourage federal lawmakers to enact comprehensive legislation that will:

• Affirm FERC’s authority to promote formation of and require participation in regional transmission organizations (RTOs) that are truly independent, geographically broad and operationally robust; • Facilitate the interconnection of generation and load to the transmission grid; • Provide FERC appropriate jurisdiction over all uses of the transmission system;

and • Authorize FERC to be the ‘‘cop on the beat’’ to identify and remedy situations

when generation market power undermines competition.

While maintenance of system reliability is the traditional purview of engineers

and utility operators, the system is showing signs of an emerging crisis that Congress must address.

Public power systems nationally support the consensus NERC/NAERO legislation

that creates an enforceable system of mandatory reliability standards. Unfortunately, enacting this legislation alone will not ensure system reliability, nor will it

tackle the underlying problems.

For example, as the Committee knows, last summer a Midwest utility ‘‘leaned’’

on the transmission system and drew into its system 1,800 MW of power that it

did not own. The utility apparently did this in order to avoid paying the high market prices at the time. With adoption of the NERC reliability language, that utility

would be required to pay the cost of then-prevailing power—rather than repaying

the system later when prices are lower. However, the reliability-only legislation does

not remove the underlying incentives that caused the problem.

Only the placing of control of the interstate transmission grid in independent

hands can fix this problem. We strongly support affirming FERC authority to promote RTOs. At a minimum, Congress must affirm the underpinnings of FERC Order

2000—both the stipulated ‘‘functions and characteristics’’ and the reserved authority

to require RTO participation in order to receive market based rates or as condition

for approving a merger.

There are parties interested in building new generating capacity. In fact, AMPOhio has undertaken an aggressive campaign to place small generators in our member communities to bolster system reliability and displace high-cost market purchases. We also are implementing a member and customer load curtailment program in anticipation of the likely constraints in the coming weeks.

However, as many public power systems nationally have experienced and are experiencing, incumbent utilities have an incentive to frustrate the interconnection of

these new units in order to retain the supply shortage that drives up prices and

favors their own generation additions. I know the difficulty of gaining interconnection agreements. Many of our member communities have fought for years against

utility refusals to add second interconnections to promote system reliability. Transmission owners can send you on a wild goose chase of studies and reports that cause

costly delay.

We believe that reliability will be improved by placing all uses of the transmission

grid under a single set of rules. Currently, FERC has unclear jurisdiction over that

portion of the transmission system used for providing bundled retail sales. While

some will suggest that the current split jurisdiction assures reliability to ‘‘native

load’’ customers, our view is that it creates a black box that prevents the open markets that are needed to benefit all consumers. If a utility says it has no transmission

capacity available to others because it is needed for its own use, can we be sure that

this isn’t market manipulation in the name of reliability? Utilities have been known

to reserve all of the transmission import capacity into their control area in the unlikely event that every single generation plant in the control area simultaneous

shuts down.

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I understand that the private utilities believe today’s transmission constraints

would be relieved if only FERC provided higher rates of return and other ‘‘incentives.’’ Let me offer the following observations to debunk this demand for FERC

‘‘candy’’:

• Failing to relieve a transmission constraint allows a utility to charge substantial

premiums on power sales from generation plants that represent the majority of

utility investment. Transmission is a modest share of total utility plant investment. Bumping up rates of return a few basis points would have minimal impact on a utility’s bottom line. Simple math suggests that the lack of ‘‘incentives’’ is not the principal impediment to relieving transmission constraints;

rather, these constraints further a utility’s profits.

• Transmission siting is and will remain a significant problem, especially in situations where the ultimate beneficiaries of expanding or building a line in one

state are located in another state. We believe that giving independent RTOs

planning authority for expanding transmission to serve an entire regional market is a solution.

• Transmission remains a monopoly function. As such, it should receive a regulated

rate of return—the existence of which for many years did not seem to impede

investment in utilities. Incentive returns are simply excessive profits.

Another aspect of ensuring reliability is an adequate and skilled workforce.

Conclusion

I read with interest the recent news reports about an internal FERC memo. The

memo noted that, while transmission owners post voluminous data on the Open Access Same-Time Information System (OASIS), ‘‘it is nearly impossible for anyone to

use OASIS to obtain pertinent data for overseeing transmission market behavior

and assessing how well the markets are working.’’ We hope this report bolsters our

calls for reform outlined above.

AMP-Ohio, OMEA, TAPS and APPA stand ready to work with the Committee to

promote legislation that advances both system reliability and effective competition

in the electric utility industry.

Chairman BLILEY. Thank you, Mr. Gerken.

Mr. Nemtzow.

STATEMENT OF DAVID M. NEMTZOW

Mr. NEMTZOW. Thank you for allowing the Alliance to Save Energy to testify.

I admire how you are trying to link the multiple crises of heating

oil, natural gas prices and of electricity, and I brought, as part of

the solution, a technology that can help solve all three of those simultaneous crises.

I am David Nemtzow, and I am President of the Alliance. We are

a bipartisan, nonprofit coalition of business, government, environment and consumer leaders. Over 70 companies belong to the Alliance. We were first founded by Senator Charles Percy during the

oil crisis of the 1970’s, and we are now co-chaired by your colleagues, John Porter and Ed Markey.

Through much of the 1990’s, many Americans told the Alliance

not to worry about energy efficiency, that our efforts were falling

on deaf ears because prices were so low, they were not registering.

Of course, they are now registering, and consumers are facing a variety of crises—as we speak, $2-plus a gallon gasoline; States and

cities and regions may not have enough electricity to meet peak demand this summer; and of course, the hidden crisis of natural gas

futures prices, which have doubled, and it is only June.

So it is a challenge to summarize what this means for American

consumers, but I am sure they feel like they are on the TV show

‘‘Survivor.’’ Instead of the multiple threats from this desert island,

consumers are facing multiple assaults from energy crises, and I

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think, like the TV show, they are wondering if they are still going

to be standing by the end of the summer.

I won’t review what the other experts have said about the mystery of gasoline prices in the Midwest and about what we have

heard about electricity reliability and customers in the Bay Area of

San Francisco and New York City and Detroit have already witnessed reliability problems this summer; and the Midwest, including your State, Mr. Chairman, may be next if things continue poorly.

I would like to suggest for your consideration—and I think Mr.

Barton was particularly eloquent about this point earlier today—

the problem that the Nation faces and that you have gone over is

that there is a fundamental mismatch between supply growth and

demand growth. And I brought my Monthly Energy Review in case

you are going to ask more questions about the numbers in them

this afternoon, Congressman.

We have a long-term problem, and in the 1990’s we have seen

rapid growth in the consumption of energy. Coal went up 14 percent; natural gas went up 15 percent in consumption; petroleum,

13 percent; electricity, 17 percent. And let me focus on gasoline:

Gasoline consumption in this country went up 1.2 million barrels

a day, and it is expected to be up 1.7 million barrels a day. That

is the equivalent of adding another California worth of gasoline

consumption if we continue business as usual, and that is a longterm problem that needs a long-term fix.

I will say briefly that energy efficiency has been an enormous

part of this resource. If we look at energy efficiency contributions,

we find that energy efficiency contributes 22 percent of the energy

mix of this country. If we think what our energy use would be if

it weren’t for this smarter use of energy, that makes energy efficiency the No. 2 energy source after petroleum. There are many

studies that support that and show the benefits.

Unfortunately, there are is not enough success. Let’s look at the

opportunities to continue to improve energy efficiency. We know

cars are the biggest issue here. Unfortunately, new cars are less efficient than the cars going off the road. This is a trend that has

been reversed, and this Congress has an opportunity to reverse

that by supporting research and development and tax credits for efficient cars and, of course, CAFE fuel economy standards. The

CAFE standards have already saved this country 3 million barrels

a day in oil consumption. That has lessened demand, and future

CAFE can decrease demand by 1.5 million barrels.

You talked earlier, Mr. Chairman, and your colleagues, about finger-pointing. Mr. Tauzin talked about assigning blame. There is

plenty of blame to go around. But that also means that there is

plenty of opportunity to go around, and the automakers have an

opportunity to market fuel-efficient cars, as Honda and Toyota are

doing, and the Big Three are behind them.

The State governments—Governor Pataki has been a leader in

linking reliability to energy efficiency.

The administration certainly has responsibilities starting with

their energy efficiency rules for air conditioners which are 8 years

late; statutorily set by this committee, they are 8 years late. Perhaps this committee should ask the administration for a list of all

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cost-effective energy efficiency measures, and ask for a status report on how they are doing.

Consumers have a responsibility. That is why I brought this programmable thermostat. You can lower your heating in the winter,

air conditioning in the summer.

And in conclusion, I will say this Congress has an opportunity

to increase research and development spending, to reverse the vote

you had to kill the PNGV program, and to remove the CAFE rider

and to pass the tax credits that are proposed by your colleague

Congressman Bill Thomas.

Thank you again for having this hearing. I know that this committee works in a bipartisan fashion, and American consumers

know that they will need your support in the future to meet these

challenges.

[The prepared statement of David M. Nemtzow follows:]

PREPARED STATEMENT OF DAVID NEMTZOW, PRESIDENT, ALLIANCE TO SAVE ENERGY

Mr. Chairman and Members of the Subcommittee, thank you for the opportunity

to testify before you today regarding the current crises in U.S. energy supply, demand, and distribution.

My name is David Nemtzow. I am the President of the Alliance to Save Energy,

a bi-partisan, non-profit coalition of business, government, environmental, and consumer leaders dedicated to improving the efficiency with which our economy uses

energy. Senators Charles Percy and Hubert Humphrey founded the Alliance in

1977; it is currently chaired by Senators Jeff Bingaman and James Jeffords as well

as your colleagues, Representatives John Porter and Ed Markey.

Seventy companies and organizations currently belong to the Alliance to Save Energy. If it pleases the Chairman I would like to include for the record a complete

list of the Alliance’s Board of Directors and Associate members, which includes the

nation’s leading energy efficiency firms, electric and gas utilities, and other companies committed to cutting their energy bills.

Mr. Chairman, thank you for inviting me here today to speak about the consumer

implications of the current energy crises. The Alliance to Save Energy was founded

by Senator Charles Percy in 1977 in response to the oil shocks in that decade. Those

events threw our nation into an economic recession and changed forever the way

this nation thinks about its energy supply. But since that time, Mr. Chairman, we

have been long on thought about energy policy and very short on action.

Large and small consumers of energy now face a double threat—they are paying

skyrocketed prices for energy and have to address uncertainty of supply. Fundamentally, these threats have a single source. Demand for energy in this country is outstripping affordable and reliable supplies. Some industries and policymakers will

call only for new supplies, when the fastest, cheapest, and cleanest way to help consumers is to cut demand by using energy more efficiently.

Mr. Chairman, the last attempt to consider a comprehensive energy policy was

during the debate over the Energy Policy Act of 1992 (EPAct). That law made some

significant decisions about energy policy. It began the deregulation of the electric

system. It provided tax incentives for wind and solar energy, while giving Alternative Minimum Tax relief to independent oil and gas producers. EPAct expanded

research and development of energy-efficient technologies and enacted a further

round of consensus appliance efficiency standards, as well as putting new requirements on the federal government to reduce its energy use.

The absence of several provisions from EPAct also amounted to critical decisions

about energy policy that have had huge implications. The legislation did not contain

any provision to raise fuel economy standards for cars and trucks. By leaving this

controversial issue untouched, Congress and the Administration decided to leave the

issue of oil supply, gasoline price, consumption, and technology to chance—to let

market winds blow as they might and let wishful thinking serve as the guiding force

for energy policy.

One of the most recognizable phrases in American life, Mr. Chairman, alleged to

have been uttered by George Washington, is that those who do not learn from history are doomed to repeat it. I heard this in elementary school, on up through graduate school. It rolls off the tongue with a certainty that is rarely challenged. The

situation in which we now find ourselves with respect to fuel prices is an egregious

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proof of the old maxim. Mr. Chairman, we spent the eight years since the passage

of EPAct hoping, with our eyes closed and our fingers crossed, that oil prices would

not rise, that OPEC would fail to regain its internal cohesion, hoping against hope

that we would not have to pay politically or economically for our inability to protect

ourselves from energy price fluctuations.

And for awhile Mr. Chairman, the skies were sunny. During the middle of the

1990s, gasoline hit its lowest real price since World War II. Attempts to raise our

continued vulnerability to oil prices were met with, ‘‘don’t worry, be happy.’’ Five

years ago, people told us at the Alliance to Save Energy that our attempts to promote energy-efficiency were falling on deaf ears because energy prices were so low

that they didn’t even register as a concern in public opinion polls.

The polls have changed, Mr. Chairman. Wishful thinking won’t cut it with the

American people now, as the polls now scream that gasoline prices are now their

number one issue of concern. We face a variety of crises in energy now. $2-3 dollar

per gallon gasoline is only one. States and cities in vulnerable areas may not have

enough electricity during hot weather this summer because the transmission system

may not be able to support increased electric load and demand. The price of natural

gas futures has doubled during the past four months, leaving significant uncertainty

about what families and factories all over the nation will have to pay during the

coming heating season. And what about the broader question of crude oil supply.

Clearly, attempts to persuade OPEC to lift production curbs have not succeeded as

an energy policy.

It’s not hard to sum up the effects on consumers of this set of crises. They are

paying much higher prices than usual, they are not happy about it, and the future

holds nothing but uncertainty. Gasoline prices are a mystery in search of a scapegoat, adding significantly to household expenses. With respect to heating oil, natural

gas, and electricity, what was once a certainty is no longer. Heating oil supply and

price fluctuated wildly last winter. Will the same happen with natural gas at twice

last year’s price? Can consumers affordably heat their homes? Will there be enough

power this summer on hot days to keep the lights on, the food fresh in the refrigerator, and computer systems safe from interruption?

In addition, Mr. Chairman, other factors have come to bear on the nation during

the past decade. We have witnessed the rise of global climate change during the

1990s—the hottest decade on record by far. Not only is climate change a direct function of our reliance on fossil fuels and our uncontrolled demand for energy, a warmer climate is contributing directly to problems with electricity supply and distribution. With respect to climate change, wishful thinking has again been standard operating procedure.

Mr. Chairman, I come here making the same case that the Alliance made in 1992

during the Energy Policy Act. Energy-efficiency is a fundamental answer to each of

these problems. It’s time we wake up, Mr. Chairman, and look at our energy situation from the perspective of both supply and demand. The pure supply-side strategy

has led us to the situation we are in now. Wishful thinking about how the market

will provide has led us to real hardship for real American families, with only more

to come down the road.

Energy-efficiency—in passenger vehicles, homes, offices, and industrial processes—can lead us to a much more stable energy future. And while investment in

demand reduction leaves us less vulnerable to foreign cartels, price fluctuations, and

supply disruptions, that investment puts dollars back into the pockets of Americans

and improves our environment by reducing pollution. We can reduce the root cause

of climate change at low cost by creating, building, and selling more efficient cars,

trucks, computers, air conditioners, appliances, and industrial motors.

But we can only do this, Mr. Chairman, if we, as a nation, are willing to end energy policy by wishful thinking.

You have asked that I address price and supply issues regarding crude oil, gasoline, natural gas, and electricity. I will do this in turn after giving some background

on energy efficiency and transforming effect it has had on the economy and the environment.

Energy Efficiency as an Energy Source

In order to gain a more full appreciation of the value of energy-efficiency and reducing demand, we have to think differently about our nation’s energy supply. Too

often, energy-efficiency is regarded as a ‘‘nice thing to do,’’ or something that we

would do ‘‘if we could.’’ Mr. Chairman, energy-efficiency is a driving force in our

economy. In fact, it supplies—or recycles—more energy to our economy than any

source other than oil.

Energy Administration data for 1999 shows that energy-efficiency is responsible

for contributing 21.8 percent of our available energy supply:

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Quads %

Domestic and Imported Oil ............................................................................................................................. 37.7 30.8

Energy Efficiency ............................................................................................................................................. 26.7 21.8

Natural Gas ..................................................................................................................................................... 22.0 17.9

Coal .................................................................................................................................................................. 21.6 17.6

Nuclear ............................................................................................................................................................. 7.7 6.3

Geothermal & Renewables .............................................................................................................................. 3.5 2.9

Hydro ................................................................................................................................................................ 3.4 2.8

These results indicate that fossil fuels had fallen to 66 percent of our nation’s energy supply in 1999. In no way do we believe that fossil’s share of our energy mix

is insignificant, or less important when considered as a lower percentage share.

However, getting into our heads that energy-efficiency measures provided more than

one-fifth of our nation’s energy supply takes some getting used to, and it is why it

bears repeating in light of our current energy crises.

Mr. Chairman, slowly, but surely the facts are bearing out that energy-efficiency

has been a transformational force in our nation’s economy over the past 20 years.

In order to make accurately informed decisions as a nation and as a government,

we have to recognize not only the energy we use, the pollution we emit, and the

dollars we spend for heat, transportation and industrial fuel. We must just as conscientiously account for the energy saved, the pollution avoided, and the dollars

spent on more productive uses that have all been enabled by the use of energy-efficiency measures. Only then can we fully appreciate what an asset energy-efficiency

has been to the U.S., and understand the huge remaining untapped potential of existing and future technology to reduce energy use.

Energy-Efficiency as a Catalyst for Economic Growth

Some critics attack the contribution of energy-efficiency over time by saying that

after all the money we have spent on energy-efficiency, we are still using more energy than we did before. This analysis is simplistic and inaccurate. The correct

measure of energy-efficiency in the economy is not overall energy use, but energy

intensity. Energy intensity is the amount of energy we use per unit of economic output. So of course our nation has grown in population and economic activity—and

therefore in aggregate energy use. However, our energy use per unit of GDP has

dropped significantly. For example, during 1998, U.S. energy use rose 0.3 percent,

but energy use per unit of GDP fell by 3.5 percent.

In March of this year, the Rand Corporation completed a study assessing California energy-efficiency programs, entitled ‘‘The Public Benefit of California’s Investments in Energy Efficiency’’. In it, the authors conclude that without the realized

reductions in energy intensity in California between 1977 and 1995—achieved largely due to energy-efficiency programs—the California economy (GSP) would have

been 3 percent smaller in 1995 than it was.

They go on to say, ‘‘in other words, the benefit in 1995 to the California economy

from improvements in industrial and commercial energy intensity since 1977 ranges

from $875 to $1300 per capita...from 1977 to 1995, California utilities spent a cumulative total of $125 per capita (1998$) on energy-efficiency programs in the commercial and industrial sectors.’’ In addition, the study finds that 1.6 million tons of

nitrogen oxides, sulfur dioxide, carbon oxides, and smog-causing organic compounds

were avoided by reductions in energy intensity.

The Rand study goes on to detail how energy-efficiency, by reducing energy intensity, creates more fertile ground for economic growth. A dollar spent on energy is

an unproductive dollar. A dollar spent keeping the lights on for another hour is a

less profitable investment than one spent on innovation or marketing. An economy

with declining energy intensity is one that is ripe for continued economic growth.

To fully appreciate the value of energy efficiency, we must undertake more efforts

such as the recent Rand Corporation study to quantify its economic value to the nation.

Crude Oil Supply

EIA expects that crude oil prices will remain high through the remainder of the

year, then begin to fall as supply begins to outpace demand. That is possible. But

it is also possible, Mr. Chairman, that we are dealing with a new OPEC. Soon after

the 1978 oil embargo, we saw OPEC fall apart as an effective organization ands lose

its ability to dominate world oil prices. This time, OPEC decided to squeeze consuming nations enough to jack up prices, then relax the pressure a little less. Mr.

Chairman, just that gentle squeeze by OPEC now has this nation in crisis.

112

If you were the oil ministers of OPEC, and the price of your lifeblood just increased to the highest point in more than 20 years, I think that you would feel that

the tactic had worked. You might even try to push it further, gradually squeezing

the oil consuming nations more and more tightly. Mr. Chairman, the EIA forecast

for lower prices next year are completely dependent on OPEC significantly increasing production. I don’t believe we can afford to count on this happening.

Our main uses for oil, Mr. Chairman, are for transportation and home heating.

Obviously, transportation is by far the greatest use. Our dependence on foreign supplies has grown to well over 50 percent and is likely to top 60 percent during this

decade. While important on an environmental level, the argument over whether to

drill in the Arctic National Wildlife Refuge is nearly irrelevant for energy policy. At

best, it is only a stopgap measure that might yield the nation a few weeks worth

of oil. Our domestic production of oil cannot effectively hold off increasing demand.

Making domestic production the issue is no longer a credible way to address national energy policy. We must reduce our thirst for petroleum.

Gasoline Price Increases

The fuel economy of automotive fleets sold in this country peaked in 1988 at 28.5

miles per gallon. Now, cars going off the road and out of service are more efficient

than the ones coming on. At a time when gas prices are high and looking to stay

high, our fuel efficiency is moving in the wrong direction.

The last major push for an increase in CAFE standards came in 1991. The political might of the auto companies was sufficient to put down that effort, and the auto

companies themselves became perhaps the chief proponent of the strategy of energy

policy by wishful thinking. It worked well for them, because the policy of wishful

thinking allowed the auto industry to increase the size and performance of the average vehicle, while decreasing fuel economy, all with the cooperation of the federal

government. Now American consumers are faced with prices two times the amount

they paid for a gallon of gasoline a year ago. And chances are great that they drove

to the pump in a sport utility vehicle that falls well below the CAFE average.

The auto industry has traditionally argued that they could not comply with an

increase CAFE because adequate technology did not exist. They claimed it would

mean less safe cars, cars that are too small, cars that nobody wants to buy. In part

as a response to these complaints, the federal government created the Partnership

for a New Generation of Vehicles (PNGV), a joint public private-partnership with

the U.S. auto manufacturers to develop auto technology with the goal of producing

a car that carries the size and safety level of a 1993 Ford Taurus, but that gets

80 miles to a gallon of gas. The federal input to PNGV has been roughly $1.5 billion

over the 7 years of the program.

The PNGV program has spurred a worldwide race in auto technology toward

cleaner, more efficient cars. The first result of that competition has been the introduction in U.S. showrooms of gasoline-electric hybrid cars—specifically the Honda

Insight and the Toyota Prius that can travel more than 70 and 60 miles per gallon

respectively. In addition, each of the U.S. manufacturers has created a prototype car

intended for full production within the next three years.

Further, PNGV has made strides in emissions reduction, advanced lightweight

materials for safety, and other areas. It is time for taxpayers to start getting back

their investment in auto technologies that many believed the auto industry should

have achieved on its own. Because of PNGV, the technology and safety should be

off the table as impediments to increasing CAFE ́. PNGV sought to leapfrog the modest increase in CAFE sought in 1991. With these hurdles out of the way, it is high

time to relieve what has become a crisis situation for the nation—and support an

increase in CAFE standards to at least 40 miles per gallon.

Driving habits can have a great effect on the fuel economy of individual vehicles.

For consumers to conserve fuel when they drive:

• avoid jackrabbit stops and starts

• drive at the speed limit; fuel economy falls as speed rises

• plan trips in advance and map out the shortest route

• call your local domestic auto dealer and ask when they expect to be selling gasoline-electric hybrid cars

• urge Congress to increase CAFE standards

Natural Gas

This country has bet a lot on natural gas. The vast majority of new electric generation planned in the states will be powered by natural gas. Most new homes going

on the market this year are heated by natural gas.

All of a sudden, natural gas supply is proving to be remarkably fragile. The price

per thousand cubic feet has roughly doubled since the beginning of the year. Storage

113

levels in this injection season are 20 percent lower than last year. EIA speculates

that imports may rise significantly, and that fuel oil will become a cheaper source

of fuel to generate electricity until late next year.

The wager that we have made on natural gas as the energy source of the future

now needs to be reconsidered in a climate of major price instability. As states have

deregulated their electric systems, many have opted for set pricing in a first stage

of transition. Many of these decisions were made in a climate of cheap, stable, natural gas prices. It will be interesting to see whether a high, unstable price will destabilize any existing state restructuring arrangements.

By far, the most important consideration, however, is the effect that higher prices

will have on homeowners that heat with natural gas. Far more Americans heat with

gas (52 percent) than fuel oil (10 percent). If price and supply constraints sent heating oil users into a crisis this past winter, a natural gas spike could send shock

waves orders of magnitude larger both economically and politically.

For natural gas consumers, it would be wise to enter the heating season with your

home as fully weatherized as possible. Some steps to take include:

• weatherstrip windows and doors to prevent leakage; • install a setback thermostat to automatically turn the heat down during work and

other times you regularly leave the house; • make sure your home has efficient windows and is insulated as fully as possible; • always look for the Energy Star label when buying heating equipment and other

appliances.

Electricity Reliability

Roughly half of the states have now passed legislation to restructure their utility

systems, Mr. Chairman. Some states have fashioned plans for legitimate competition, while others have merely cemented the market position of existing utilities for

the near term. There is currently little uniformity in the ability of generators to sell

and distributors to purchase power off the grid in states and major metropolitan

areas. The existing transmission system, created to satisfy regional and local demands,

will not effectively serve as the power superhighway envisioned by a brave new

world of electric competition. Transmission bottlenecks have created the possibility

of significant interruptions in service during periods of peak summer demand, yet

transmission upgrades could take many years before relieving vulnerable areas.

Mr. Chairman, we can all agree that attempts to fashion a truly comprehensive

federal restructuring bill now seem dead for the year. While the Senate could still

pass a bill creating a reliability governance body, and you could report your transmission discussion draft, it will not materially affect this summer’s potential blackouts, brownouts, and price spikes. In fact, I don’t believe that state and local public

officials should plan on relief from federal legislation anytime soon. That is not because it can’t or won’t happen—although it still remains a daunting political task—

but because state and local officials must start thinking about what they can do to

reduce their risk of power interruptions and shortages.

The federal restructuring debate has thus far been very long on attention to the

supply side of the equation, and short on focus on the demand side. Mr. Chairman,

as we see it, we aren’t looking at a power shortage as much as we are faced with

highly inefficient air conditioning. If we cut peak demand, we are addressing the

heart of reliability problems—not focusing on building a system to specifications

that are only required a few times a year. Demand side options generated significant economic savings during the past decade. Demand management and energyefficiency accounted for reduction of 30,000 MW peak demand during the 1990s

through state mandated and voluntary utility measures. Roughly half of that came

from energy-efficiency options. Mr. Chairman, two-thirds of that amount was

achieved for between 2 and 3 cents a kilowatt hour, a price that is looking better

every day with increased natural gas prices.

But, Mr. Chairman, those energy-efficiency investments are drying up at just the

time that we need them most. Utility investments in energy-efficiency have fallen

by more than 70 percent since 1993. The reason for this is documented, as utilities

saw the onset of competition and became less sure of their future market, their ability to benefit from longer term investments in efficiency became less certain. However, if these cheap, highly effective reductions in peak demand had continued

throughout the nation, we might be facing a considerably more stable situation relative to reliability.

State and local officials have ample motivation to undertake demand side measures to lessen their vulnerability to shortages and other incidents. The greatest

might simply be self-preservation. When the lights go out, Mr. Chairman, people get

mad. And they aren’t going to be mad at the head of the RTO, or the Chairman

114

of the FERC. They’ll be mad at their elected representatives for not protecting them

from such a crisis. With uncertainties about when transmission relief will come to

reliability hot spots, unstable conditions may realistically remain for years to come.

States, cities, towns, and co-ops—especially entities that are transmission dependent—should take a hard look at how they can reduce peak demand.

Take the city of Austin, Texas. The Austin City Council took matters into its own

hands several years ago and instituted an aggressive set of incentives for energyefficiency. These included new building design, retrofit of existing buildings, and rebates for the purchase of energy-efficient air conditioners. Since the early 1990s,

Austin has managed through several tough cooling seasons without having to buy

a single kilowatt off the grid, fully avoiding any interruptions or other incidents,

and avoiding 402 megawatts of peak demand. (As the local utility, they also avoided

having to build a 400 megawatt coal plant, with its attendant sulfur, nitrogen, mercury, and carbon emissions.)

My advice to Governors, Mayors, City Councils, and others is: use your surplus

to reduce electricity demand. These investments pay off in spades as we find in the

Rand study of California. You attack the root of reliability problems, peak demand.

You reduce pollution for your community. Finally, demand reduction serves as insurance against the delays of the legislative, permitting, siting, and construction

processes for new generation and transmission.

We urge Congress to help states to make just these kind of investments. From

the outset of this debate, we have advocated the creation of a public benefits fund

that would match state expenditures on a variety of public goods that states used

to be able to compel utilities to do. Because competition has limited states’ ability

to make utilities invest in such things as universal and affordable service, energyefficiency, and renewable energy, a public benefits fund would give them assistance

in bolstering their state or city from the uncertainties of reliability and fluctuating

prices.

New power plants and beefed-up wires are important parts of the blackout-prevention solution. But energy efficiency is not only cheaper in most cases, it also

saves consumers money on energy bills and reduces air pollution. It can be the least

expensive form of blackout insurance; let’s not wait to buy our policies until the next

blackout hits.

Consumers can use a wide variety of measures to reduce their own electricity

use:

• Buying Energy Star room air conditioners and central air conditioners, windows

and other appliances.

• Getting professional service on existing air conditioning systems to make sure

they run at peak efficiency.

• Cleaning air conditioning system air filters every month to keep systems running

efficiently.

• Using programmable thermostats to raise temperature settings a few degrees during weekday afternoons.

• Choosing to run clothes washers, dishwashers, other electric appliances outside of

peak hours (typically afternoon-early evening)

Utilities can help by:

• Promoting Energy Star air conditioning, windows, and other Energy Star appliances.

• Promoting AC service and testing programs to bring existing systems up to par.

• Offering load control and thermal storage incentives to customers.

The federal government can help by:

• Proposing a strong new efficiency standard for residential air conditioners this

summer.

• Including a public benefits fund in electric utility restructuring legislation to support efficiency programs.

• Increasing funding for Energy Star and other efficiency programs at EPA and the

Department of Energy.

State and local governments can help by:

• Creating public benefits funding for energy efficiency in utility deregulation legislation.

• Working with the federal government, private industry, and utilities to promote

Energy Star and other efficiency programs.

• Adopting the International Energy Conservation Code for new buildings.

Chairman BLILEY. Thank you, Mr. Nemtzow.

Mr. Pillari.

115

STATEMENT OF ROSS J. PILLARI

Mr. PILLARI. Thank you, Mr. Chairman. My comments are directed principally at the impact of the recent supply disruptions

and dislocations in the Midwest, but also at the nature of the supply situation as we look forward to the summer months.

While the Midwest region is the most recent example of gasoline

price volatility around a supply/demand imbalance, we have seen

similar market conditions in California and New England for heating oil, all in the last 12 months. Each of these situations centers

around a temporary supply/demand imbalance.

In the last 2 weeks, my company has participated in extensive

discussions with the DOE, EPA, and most recently at a briefing

chaired by the Speaker of the House of Representatives. At these

discussions, many have outlined the pipeline outages, low inventory levels, high demand, and other exacerbating issues that have

led to tight supply in the Midwest. I will not repeat those. Instead,

I would prefer to explain how BP Amoco has responded to the market conditions in the Midwest and how we have met the needs of

our customers.

During the past several months, we have supplied all of our commitments for both conventional and RFG fuels. We have operated

our refinery in the Midwest at maximum capability and to maximize gasoline output. This includes producing higher volumes of

RFG fuels than last year. We have purchased additional supplies

from nontraditional and remote sources. We have shipped blend

stocks to the Midwest from BP Amoco refineries in other regions.

We have met the environmental regulations in all of our markets,

including St. Louis, where we did not utilize the temporary waiver

granted by the EPA.

As we look out into the summer months, we expect to meet our

commitments to our customers and have taken steps to supply the

increasing demand for transportation fuels in the Midwest and

other regions of the United States.

Under normal operating conditions, the consumers can expect

adequate supplies this summer. We also expect to be able to meet

our continuing commitment to cleaner fuels throughout the summer, including our commitment to continue to introduce cleaner,

lower sulfur fuels in markets that are not yet subject to regulatory

requirements.

However, as we think about the coming months, the supply system in the United States is finely tuned and as demand for products during summer months continues to increase, the supply infrastructure has become very stressed. Any outages, particularly

affecting pipelines or refineries, can cause severe product shortages, resulting in tight supplies and short-term price volatility in

the marketplace as it seeks to balance supply and demand.

To minimize the effects of any disruption, we continue to operate

our refineries at high levels of production, and inventories are

building to normal levels. However, nobody can predict outages,

shutdowns, excess demand or other factors that could upset the

balance of supply and demand as we move through the summer.

As a final point, we believe the conditions in the marketplace reflect the balancing of supply and demand. We have seen market

prices in the Midwest react to supply disruptions, and we are seeVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00119 Fmt 6633 Sfmt 6602 E:\HEARINGS\65909 pfrm03 PsN: 65909
116

ing them react again as supply grows in the affected areas of the

Midwest. While it would be imprudent to predict what will happen

this summer, we are doing everything we can to meet our supply

commitments during the peak driving season.

Thank you.

[The prepared statement of Ross J. Pillari follows:]

PREPARED STATEMENT OF ROSS J. PILLARI, GROUP VICE PRESIDENT FOR MARKETING,

BP AMOCO GROUP

Good morning. My name is Ross Pillari and I am Group Vice President for Marketing for the BP Amoco Group. I am pleased to appear here this morning and

speak on behalf of my company about the issue of ‘‘Summer Energy Concerns for

the American Consumer’’. BP Amoco is a supplier of fuels for both transport and

power in the United States and is a supporter of clean fuel initiatives.

My comments this morning are directed principally at the impact of the recent

supply disruptions and dislocations in the Midwest and the nature of the supply situation as we look forward into the summer months. While the Midwest region of

the USA is the most recent example of gasoline price volatility around a supply/demand imbalance, we have seen similar market conditions in California and in New

England for heating oil, all in the last 12 months. Each of these situations centers

around a temporary supply/demand imbalance.

In the last two weeks my company has participated in extensive discussions with

the Department of Energy, Environmental Protection Agency, and most recently at

a briefing chaired by the Speaker of the House of Representatives. My company

along with others from the energy industry have outlined the pipeline outages, low

inventory levels, high demand, and other exacerbating issues that have led to tight

supply in the Midwest. I do not plan to repeat these facts this morning, but would

be happy to take questions on any of these specific issues.

Instead, I would prefer to explain how BP Amoco has responded to the market

conditions in the Midwest and how we have met the needs of our customers. This,

I believe will give us insight into how the summer supply/demand concerns can be

met.

During this past several months:

—we have supplied all of our commitments for both conventional and RFG fuels;

—we have operated our refinery in the Midwest at maximum capability and to

maximize gasoline output. This includes producing higher volumes of RFG fuels

than last year;

—we have purchased additional supplies from non-traditional and remote sources;

—we have shipped blend stocks to the Midwest from BP Amoco refineries in other

regions;

—we have met the environmental regulations in all of our markets, including

St.Louis, where we did not utilize the temporary waiver granted by the EPA.

As we look out into the summer months, we expect to meet our commitments to

our customers and have taken steps to supply the increasing demand for transportation fuels in the Midwest and other regions of the United States. Under normal

operating conditions the consumers can expect adequate supplies this summer. We

also expect to be able to meet our continuing commitment to cleaner fuels throughout the summer, including our commitment to continue to introduce cleaner, lower

sulfur fuels in markets that are not yet subject to regulatory requirements.

However, as we think about the coming months, the supply system in the USA

is finely tuned, and as demand for products during the summer months continues

to increase versus prior years, the supply infrastructure has become very stressed.

Any outages, particularly affecting pipelines or refineries, can cause severe product

shortages, resulting in tight supplies and short term price volatility in the marketplace as it seeks to balance supply and demand.

To minimize the effects of any disruption, we continue to operate our refineries

at high levels of production, and inventories are building to normal levels. However,

nobody can predict outages, shutdowns, excess demand or other factors that could

upset the balance of supply and demand as we move through the summer.

As a final point, we believe the conditions in the marketplace reflect the balancing

of supply and demand. We have seen market prices in the Midwest react to supply

disruptions and we are seeing them react again, as supply grows in the affected

areas in the Midwest. While it would be imprudent to predict what will happen this

summer, we are doing everything we can to meet our supply commitments during

the peak driving season.

117

I would be pleased to take questions.

Mr. TAUZIN [presiding]. Thank you.

Mr. Ports.

STATEMENT OF MICHAEL PORTS

Mr. PORTS. Good afternoon, Mr. Chairman and members of the

committee. My name is Mike Ports. I am President of Ports Petroleum Company, Inc., an independent motor fuels marketer

headquartered in Wooster, Ohio. Ports Petroleum owns and operates 70 retail motor fuels outlets in 12 States in the Midwest and

the Southeast. I appear before this committee today as a representative of the National Association of Convenience Stores, NACS, and

Society of Independent Gasoline Marketers of America, SIGMA.

As an independent motor fuels marketer in the Midwest, which

has experienced some of the highest gasoline prices in history in

recent weeks, I am familiar with the impact these price increases

have on my business and on motorists. Four years ago the Senate

Energy Committee held a hearing on the increase in retail gasoline

prices that occurred during the spring of 1996. At that time, a representative of Independent Gasoline Marketers told that committee, and I quote, ‘‘The Federal and State governments regulate

the gasoline refining and marketing industry with little or no

thought given to costs, distribution difficulties or market efficiencies. Congress must acknowledge that future EPA and State

actions, if the present course is followed, will lead to further market disruptions and higher gasoline prices at the pump.’’

His prediction could not have been more accurate. Over the past

8 years, Congress, State officials, and the Environmental Protection Agency have crippled what was previously one of the most efficient commodity distribution systems in the world—the United

States fungible grade motor fuels distribution system. In short, we

need to look no further than our Federal and State governments

to pinpoint a principal cause of the current increase in retail gasoline prices. While this may not be a welcome message to this committee today, it is an accurate one.

The government witnesses at today’s hearing offered various explanations for the recent increases in gasoline prices. EPA, and

perhaps others, will seek to distance themselves from the cries of

outraged consumers by blaming the oil companies for price

gouging. While such statements may play well in the press, there

is no evidence of such pricing collusion. It appears that EPA and

the administration is more interested in demonizing an entire industry than holding an intelligent discussion of the real causes for

the price increases.

There are very rational and much less sinister causes for the recent gasoline price increases: the elevated crude oil prices; the uncertainty caused by the Unocal patent case; pipeline breaks and

power outages; the advent of the ever more stringent Phase II reformulated gasoline program, the RFG program’s oxygenate mandates, which results in the balkanization of the country into ethanol RFG markets and nonethanol RFG markets and the continued

fragmentation of the country’s motor fuels distribution system by

boutique fuels; the increasingly complex impact that the gasoline

futures market and Wall Street traders have on wholesale and reVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00121 Fmt 6633 Sfmt 6602 E:\HEARINGS\65909 pfrm03 PsN: 65909
118

tail gasoline prices; and historically low gasoline inventories. In reality, it is amazing, given repeated political and governmental interference in the motor fuels and marketing industry, that retail

gasoline prices have remained as low as they have over the past

decade.

However, as the saying goes, there is no free lunch. It should not

be surprising to policymakers that after tens of billions of dollars

in environmental compliance costs borne by refiners and marketers, the complete fragmentation of the motor fuels distribution system and the politically motivated diverse motor fuels formulations,

there is a price to pay, a price that ultimately must be paid by consumers of gasoline and diesel fuel.

As long as the motor fuels refining and distribution system

works perfectly, supply and demand stay roughly in balance and

retail prices remain relatively stable. However, whenever a refinery

goes down, overseas crude oil production is reduced, the weather

disrupts smooth product deliveries or a new regulatory curve ball

is thrown at the motor fuels refining and marketing industries, we

do not have the flexibility to react and counterbalance these forces.

As a result, NACS and SIGMA predict that wholesale and retail

gasoline and diesel fuel price volatility will become the norm, not

the exception, as we have seen in California. Current high retail

gasoline prices in the Midwest and elsewhere already show signs

of retreating. However, in NACS’s and SIGMA’s opinion, it is only

a matter of time before the next supply and distribution crisis occurs.

In sum, if we are looking for a scapegoat for our gasoline prices,

then we will learn little today. If we try to fix the current situation

with more government intervention, we will only make the situation worse. NACS and SIGMA conversely urge this committee and

this Congress to understand the diverse and complex origins of the

current increases in gasoline prices. These origins are not simple

or even inconvenient—they do not fit nicely into a sound bite. But

they are accurate and they are here for the foreseeable future.

Thank you for the opportunity to present this testimony, and I

will be pleased to answer any questions that I have raised.

[The prepared statement of Michael Ports follows:]

PREPARED STATEMENT OF MICHAEL PORTS, PRESIDENT, PORTS PETROLEUM, INC.,

REPRESENTING THE NATIONAL ASSOCIATION OF CONVENIENCE STORES AND THE

SOCIETY OF INDEPENDENT GASOLINE MARKETERS OF AMERICA

Good morning, Mr. Chairman and Members of the Committee. My name is Mike

Ports. I am President of Ports Petroleum, Inc., an independent motor fuels marketer

headquartered in Wooster, Ohio. Ports Petroleum owns and operates 70 high volume

retail motor fuels outlets in 12 states from Ohio to Nebraska, south to Mississippi,

and east to Georgia.

I appear before this Committee today as a representative of the National Association of Convenience Stores (‘‘NACS’’) and the Society of Independent Gasoline Marketers of America (‘‘SIGMA’’). NACS is a national trade association of more than

2,300 companies that operate over 60,000 convenience stores nationwide with some

750,000 employees. Over 75 percent of NACS’ member companies sell motor fuels.

SIGMA is an association of approximately 260 motor fuels marketers operating in

all 50 states. Together, SIGMA members supply over 28,000 motor fuel outlets and

sell over 48 billion gallons of gasoline and diesel fuel annually—or approximately

30 percent of all motor fuels sold in the nation last year.

I appreciate the invitation to appear at this hearing to present testimony on the

recent increases in retail gasoline prices. As an independent motor fuels marketer

in the Mid-West, which has experienced some of the highest gasoline prices in hisVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00122 Fmt 6633 Sfmt 6621 E:\HEARINGS\65909 pfrm03 PsN: 65909
119

1Testimony of Thomas L. Robinson before the Senate Committee on Energy and Natural Resources, May 9, 1996.

tory in recent weeks, I am all too familiar with the impact of these price increases

both on my business and on motorists.

Four years ago, the Senate Energy Committee held a hearing on the increase in

retail gasoline prices that occurred during the Spring of 1996. At that time, a representative of independent gasoline marketers told that Committee: ‘‘The federal

and state governments regulate the gasoline refining and marketing industry with

little or no thought given to costs, distribution difficulties, or market efficiencies.

Congress must acknowledge that future EPA and state actions, if the present course

is followed, will lead to further market disruptions and higher gasoline prices at the

pump.’’ 1

His prediction could not have been more accurate. Over the past eight years, Congress, state officials, and the Environmental Protection Agency have crippled what

was previously one of the most efficient commodity distribution systems in the

world—the United States’ fungible grade gasoline distribution system. Repeatedly

over the past eight years, these government officials and agencies have combined

to fragment the nation’s gasoline markets into dozens of distinct areas. This fragmentation has discarded the traditional system of providing affordable gasoline to

American consumers, replacing it with a patchwork of different gasoline markets

with little or no thought given to supply and distribution logistical concerns.

In short, we need look no further than our federal and state governments to pinpoint a principal cause of the current increase in retail gasoline prices. While this

may not be a welcome message to this Committee today, it is an accurate one.

The government witnesses at today’s hearing will offer various explanations for

the recent increases in recent gasoline prices. EPA, and perhaps others, will seek

to distance itself from the cries of outraged consumers by blaming the oil companies

for ‘‘price gouging.’’ While such statements may play well in the press, there is no

evidence of such pricing collusion. Indeed, such demagoguery is clearly motivated

by election year political considerations and a desire to avoid any hint of responsibility for the current crisis. After all, it is easier to demonize an entire industry than

to hold a thoughtful discussion of the real causes for the price increases.

EPA’s witness also may recite its statistics regarding the relatively low incremental cost for manufacturing the new motor fuels that have been mandated over

the past eight years. However, EPA’s numbers, and the Agency’s assurances to Congress and others, are relevant only if there is sufficient supply of these motor fuels

to meet the markets’ demands. While summertime Phase II RFG may cost only five

cents more per gallon for a refiner to produce, if supplies of this gasoline fall short

of demand in a particular market like Chicago or St. Louis, then the price of this

product will rise high enough to attract the necessary supplies from other markets.

In short, EPA’s manufacturing costs statistics are irrelevant if the gallons of gasoline do not or cannot reach the appropriate markets.

There are other, very rational and less sinister causes for the recent gasoline price

increases, including elevated crude oil prices, the uncertainty caused by the Unocal

patent case, pipeline breaks and terminal outages, and the advent of the ever more

stringent Phase II reformulated gasoline program. All of these causes contributed

to the current price increases. NACS and SIGMA also note that the following additional causes must be examined as well when considering why retail gasoline prices

are so high in some areas of the country:

• the RFG program’s oxygenate mandate, which most would agree serves no environmental purpose and results in the balkanization of the country into ethanol

RFG markets and non-ethanol RFG markets;

• the continued fragmentation of the country’s motor fuels distribution system into

scores of different areas with different gasoline formulations;

• the increasingly complex impact that the gasoline futures market, and Wall Street

traders, have on wholesale and retail gasoline prices; and,

• historically low gasoline inventories, caused by the destruction of the gasoline refining and marketing industry’s confidence that EPA and state governments

will place good public policy and good economics over short-term and parochial

political considerations.

In reality, it is amazing, given the repeated political and governmental interference in the gasoline refining and marketing industry, that retail gasoline prices

have remained as low as they have over the past decade. These historically low

prices are, in fact, a tribute to ingenuity and resiliency of the gasoline refining and

marketing industry. We believe the FTC will come to the same conclusion regarding

the recent increase in gasoline prices because they will look at the evidence, rather

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than the opinion polls, to discover what has happened. We intend to help them gather that evidence.

However, as the saying goes, there is no free lunch. It should not be surprising

to policy makers that after tens of billions of dollars in environmental compliance

costs borne by refiners and marketers, the complete fragmentation of the motor

fuels distribution system, and the politically-motivated diverse gasoline formulations, there is a price to pay—a price that ultimately must be paid by consumers

of gasoline and diesel fuel. As long as the motor fuels refining and distribution system works perfectly, supply and demand stay roughly in balance and retail prices

remain relatively stable. However, if a pipeline or refinery goes down, overseas

crude oil production is reduced, the weather disrupts smooth product deliveries, or

a new regulatory curve ball is thrown at the motor fuels refining and marketing industries, we do not have the flexibility to react and counterbalance these forces. As

a result, NACS and SIGMA predict that wholesale and retail motor gasoline and

diesel fuel price volatility will become the norm—not the exception.

Californians have become somewhat accustomed to motor fuels price volatility

over the past five years because California is in fact the laboratory for the fuels programs that EPA currently is forcing on the rest of the country. When a refinery in

California goes down, or a pipeline breaks, the impact on retail prices is almost immediate. In California, retail gasoline prices can increase by 40 cents per gallon

within two or three days. When retail prices get high enough to attract supply from

other markets, then eventually the supply shortage is alleviated and retail prices

start to fall.

Current high retail gasoline prices in the Mid-West and elsewhere already show

signs of retreating as crude oil production increases, product shortages are replenished, and wholesale prices to marketers come down. However, in NACS’ and SIGMA’s opinion, it is only a matter of time before the next supply and distribution crisis occurs. It may take another four years, or it may occur later this year.

And EPA is not done with the nation’s motor fuels markets yet. Just last month,

EPA proposed a restrictive regulatory scheme for diesel fuel—the fuel that moves

most of the commercial transportation in this country. If EPA’s plan for diesel fuel

has a similar impact that its programs for gasoline have had on overall supplies and

the motor fuels distribution system, then retail price volatility will spread from the

gasoline markets to the diesel fuel markets—with potentially severe consequences

for our nation’s economy.

In sum, if we are looking for a scapegoat for high gasoline prices, then we will

learn little today. If we try to fix the current situation with more government intervention, we will only make the situation worse. NACS and SIGMA, conversely, urge

this Committee and this Congress to understand the diverse and complex origins

of the current increases in gasoline prices. These origins are not simple or even convenient—they do not fit nicely into a sound bite. But they are accurate and they

are here for the foreseeable future.

While consumers generally have responded to public polling that they are willing

to pay more for gasoline and diesel fuel to have cleaner air, the recent supply crises

and price spikes—and the resultant howls of protest from consumers and elected officials—give rise to significant questions regarding the public’s support for environmental programs that will lead to substantially higher retail prices for gasoline and

diesel fuel and ultimately harm the nation’s continued economic expansion.

Thank you for the opportunity to present this testimony. I would be pleased to

answer any questions my testimony has raised.

Mr. TAUZIN. Thank you, Mr. Ports.

Mr. Thompson.

STATEMENT OF JERRY THOMPSON

Mr. THOMPSON. Thank you. I am Jerry Thompson, Senior Vice

President of CITGO Petroleum, headquartered in Tulsa, Oklahoma;

and according to the latest data available, it is the second largest

marketer of gasoline in the United States.

I am pleased to have the opportunity to speak before this committee about gasoline supply and price as well as the overall issue

of providing the energy that is so critical to the American people

and to this Nation’s economic well-being.

We at CITGO empathize with those families whose household

budgets have felt the impact of rapidly rising gasoline prices in the

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Chicago, Milwaukee and other Midwest markets. It is our sincerest

hope that a sound national energy policy emerges from hearings

such as this to avoid future recurrences.

Unfortunately, the American people’s ability to depend on gasoline where they need it, when and how they need it, is in jeopardy

as a result of our Nation’s regulatory and energy policy. The gasoline situation we are discussing today is a classic study of the relationship of supply, demand and price. In a free market system, the

price of a commodity like gasoline is not so much the cost of manufacturing and delivering the finished product, but rather the relationship between the consumer’s demand for the product and the

manufacturer’s ability to supply it to the marketplace.

In the current situation, the price of gasoline in the Midwest was

driven up by the inability to manufacture and deliver the products

to the marketplace to meet consumers’ demand. Once again, the

consumer has been forced to pay for hidden impacts of actions

taken over the course of several decades, primarily by the EPA.

We agree with the findings and conclusions of the June 16, 2000,

Congressional Research Service memorandum which attributes the

price increase to the following five factors: one, higher crude oil

prices. Crude oil costs have risen by 30 cents a gallon compared to

1 year ago and by 48 cents a gallon compared to a year-and-a-half

ago.

Two, special fuel reformulations. About 30 percent of the gasoline

sold in the United States is RFG. In the Midwest, refiners primarily use ethanol to provide the mandated oxygen content. This

means that RFG from the rest of the country cannot be shipped to

the Midwest if additional supplies are needed; refiners must ship

a special blend stock called RBOB, which is very difficult to manufacture.

During the first 2 months of this year, our Lamont, Illinois, refinery produced more RBOB than in 1999. But as we began making

a new Phase II RBOB, we quickly fell behind last year’s production

because it was more difficult to blend than we had anticipated. It

has taken until June for us to learn how to efficiently blend this

product and catch up with last year’s RBOB production levels.

No. 3, low inventories. To convert to the tighter specification of

the new summer grade RFG II, refiners, as well as terminals, virtually emptied their storage tanks to minimize the time required

to convert the tanks from winter grade to summer grade, to be

ready for the summer driving season. On their Web site, the Energy Information Agency states that at current inventory levels,

there is the equivalent of 2 days of consumption in available inventory. When supplies are this low, any disruption in supply results

in price increases.

No. 4, operational problems. Two pipelines serving the upper

Midwest have experienced operational problems at the time when

refinery and terminal inventories were low. This prevented these

inventories from being replenished. This was further exacerbated

when two refineries in the Chicago area were temporarily shut

down. Both of these refineries’ outages reduced the availability of

gasoline in the Midwest.

The Unocal patent has caused several refiners to scale back our

RFG production to avoid patent infringement.

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1 National Petroleum News—Market Facts 1999, Mid-July, 1999

The inescapable fact is that the U.S. pipeline and distribution

system was designed to handle a half a dozen grades of gasoline.

As shown partially on this chart, today it has to cope with more

three dozen grades of ‘‘boutique’’ gasoline. No single refinery can

manufacture all these fuels, so they have to be shipped all over the

country to where they are needed. Each of these fuels has to be

kept segregated, separate pipelines and shipments and separate

compartments. Daniel Yergen has called this the ‘‘balkanization of

America.’’ Our Nation can no longer substitute fuels from one area

of abundant supply into areas of insufficient supply because they

are literally different fuels. A patchwork of fuels mandated by different State regulators has unintentionally constrained manufacturers’ ability to refine and supply gasoline to the marketplace.

The Midwest, which includes the Chicago and Milwaukee markets, is a net consumer of gasoline. In 1998, the Midwest consumed

475,000 barrels a day, more gasoline than the refineries in that

area could manufacture; 350,000 barrels a day had to be shipped

from the Gulf Coast, primarily by pipeline, and another 160,000

barrels a day of gasoline had to be shipped from the East Coast.

It is clear to see that a supply problem in the Midwest, the Gulf

Coast or the East Coast has a definite impact on product pulled

from one region to fill shortages in another.

The important point to recognize is that the root cause of the

current price and supply situation stems from the unfortunate fact

that this Nation’s only energy policy is driven by the Environmental Protection Agency. In reality, it is not a policy, but a patchwork quilt of regulations and requirements which has been added

to every year since the Clean Air Act was passed in 1970.

We are already faced with the next wave of requirements, diesel

fuel. The end result of these and a host of other EPA regulations

staring us in the face ensure that more refineries, unable to afford

the capital investment required to comply with these regulations,

will drop out, further tightening supply. Clearly, unless we develop

a cohesive energy policy, one that considers this Nation’s energy

needs, the sustainability of affordable energy in America is in serious jeopardy.

[The prepared statement of Jerry Thompson follows:]

PREPARED STATEMENT OF JERRY E. THOMPSON, SENIOR VICE PRESIDENT, CITGO

PETROLEUM CORPORATION

Good morning/afternoon.

I am Jerry Thompson, Senior Vice President of Development and Technological

Excellence of CITGO Petroleum Corporation. CITGO is a U.S. corporation

headquartered in Tulsa, Oklahoma. Our roots extend back to the early 1900’s as

Cities Service Company. While our products are marketed throughout most of the

U.S., we primarily serve those regions east of the Rockies. We own and/or operate

a network of modern refineries in Houston, Corpus Christi, Texas, Lake Charles,

Louisiana, and Lemont, Illinois. In addition, we own asphalt refineries in Paulsboro,

New Jersey and Savannah, Georgia. To get our products to where the American

public needs them, we own one of the nation’s most extensive systems of petroleum

terminals. According to the latest data available, CITGO is the second largest marketer of gasoline in the United States with 10.3 % share of the market.1

I am pleased and honored to have the opportunity to speak before the House Commerce Committee about gasoline supply and price, as well as the overall issue of

providing the energy that is so critical to the American people and to this nation’s

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2 CERA Special Report—Gasoline and the American People, May, 2000 3 Congressional Research Service—Midwest Gasoline Prices, June 16, 2000

economic well-being. CITGO and the rest of the refining, marketing and transportation industry share your concern regarding the current issues. CITGO empathizes

with those families whose household budgets felt the impact of the rapidly rising

gasoline prices in the Chicago and Milwaukee markets. It is our sincerest hope that

a sound, cohesive national energy policy emerges from hearings such as this. What

America needs is an energy policy that ensures the quality of life that the American

people expect and deserve.

I’d like first to discuss the key factors contributing to the current situation. I will

conclude by discussing a positive and constructive path forward based on solid economics—one that ensures the clean, affordable fuels that are necessary to this nation’s well-being.

The oil and gas industry has done an excellent job of providing cleaner fuels at

an affordable price. As a result, Americans have access to inexpensive transportation fuels; a fact that has contributed to our overall high standard of living. In

fact, using constant 1999 dollars, the average retail price of gasoline, including

taxes, decreased from $2.27 a gallon in 1918 to $1.16 a gallon in 1999, according

to research by Cambridge Energy Research Associates, (CERA) one of the world’s

leading energy research firms.2

Unfortunately, American’s ability to depend on gasoline where they want it, when

they want it and how they want it is in jeopardy as a result of our energy and regulatory policy. The gasoline situation we are discussing today is a classic study of the

relationship of supply, demand and price. In a free market system, the price of a

commodity like gasoline is not so much a factor of the cost of manufacturing and

delivering the finished product, but rather the relationship between consumers’ demand for a product and manufacturers’ ability to supply it to the marketplace. In

the current situation, the price of gasoline in the Midwest was driven up by the inability to manufacture and deliver the products to the marketplace to meet consumers’ demand. Once again, the consumer has been forced to pay for the hidden

impact of actions taken over the course of several decades—primarily by the EPA.

For background, I want to briefly discuss the key factors that have contributed

to the current situation. In their June 16, 2000, memorandum,3 the Congressional

Research Service attributes the price increase to the following five factors:

• Higher crude oil prices. Refiners’ crude acquisition costs have risen by the

equivalent of 30 cents per gallon as compared to one year ago and 48 cents per

gallon as compared to year and a half ago.

• Special Fuel Formulations. Reformulated gasoline or RFG is required in numerous areas designated by EPA as ozone non-attainment areas. About 30 percent of the gasoline sold in the United States is RFG, including the Chicago and

Milwaukee markets. In the Midwest, however, refiners use ethanol instead of

MTBE (the additive used in most other RFG areas to meet the oxygen requirements of the RFG programs). This means that RFG from the rest of the country

cannot be shipped to the Midwest if additional supplies are needed. Refiners

must ship a special blend stock used to make RFG in the Midwest, called

RBOB, which is very difficult to manufacture. Let me tell you what happened

at CITGO’s Lemont, Illinois, refinery—one of the six refineries in the area. During the first two months of this year, our refinery produced more RFG than in

1999. But as we began making the new Phase II RBOB, which was mandated

by EPA regulations, we quickly fell behind last year’s production because it was

more difficult to blend than we had anticipated. It has taken until June for us

to learn how to efficiently blend this product and catch up with last year’s

RBOB production levels.

• Low inventories. According to the Department of Energy’s. Energy Information

Agency (EIA), crude oil and gasoline inventories started the summer driving

season at extremely low levels. These lower inventories are the result of converting to EPA’s Phase II RFG ‘‘summer’’ specifications. To convert to the tighter specifications of the new summer grade RFG II, refiners, as well as terminals, virtually empty their storage tanks to minimize the time required to convert the tanks to be ready for the summer driving season. In their website, EIA

states that there is the equivalent of only two days’ of consumption in available

inventory. When supplies are this low, any disruption results in price increases.

• Operational problems. Two pipelines serving the upper Midwest have experienced operational problems, at the time when refinery and terminal inventories

were low This prevented these low inventories from being replenished. As stated in DOE’s just issued ‘‘Primer on Gasoline Pricing,’’ disruptions such as these

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4The Lundberg Letter—Distribution Crisis Hits the Midwest, June 22, 2000

in a tight regional market have the potential to lead to significant price increase—as evidenced in the upper Midwest in recent weeks. This was further

exacerbated when the Mobil Joliet refinery was slow coming up after a turnaround, and the Clark Blue Island Refinery experienced a power outage that

has left it essentially inoperable. Both these refinery outages reduced the availability of gasoline in the Midwest. Finally, just this month, the ship channel

through which we receive crude oil and ship out finished products at our Lake

Charles refinery was blocked because of a freak accident disrupting our ability

to ship products to all markets. • Patented RFG Process. A recent federal court ruling that Unocal has a valid

patent on a blend formulation related to the new summer RFG has caused RFG

production to be scaled back at several refiners. For instance, CITGO’s Lake

Charles refinery has the ability to produce about 15,000 barrels per day of summer grade RFG, but to avoid the patent issue, we have cut production to about

4,000 barrels per day.

The Congressional Research Service memorandum concludes that about ‘‘25 cents

of the regional price increase is due to transportation difficulties and another 25

cents, roughly estimated, could be due to the unique RFG situation in Chicago/Milwaukee.’’

The inescapable fact is that the U.S. pipeline and distribution system was designed to handle a half dozen grades of gasoline. Today, it has to cope with more

than 3 dozen grades of ‘‘boutique’’ gasoline. Keep in mind that no refinery can manufacture all of these fuels, so they have to be shipped all over the country to where

they are needed. Each of these fuels has to be kept separate from the time they are

manufactured—separate pipeline shipments, separate tankage, separate compartments on barges and trucks. Daniel Yergen has rightly called this the Balkanization

of America. Our nation can no longer substitute fuels from areas of abundant supply

into areas of insufficient supply because they are literally different fuels. A patchwork of fuels mandated by different state regulators has unintentionally constrained

manufacturers’ ability to refine and supply gasoline to the marketplace. [See attachment #1]

Let’s look specifically at the Midwest. PADD II, which includes the Chicago and

Milwaukee markets, is a net consumer of gasoline. In 1998, for instance, PADD II

consumed almost 475,000 barrels per day more gasoline than the refineries in that

area could manufacture. According to the just-released National Petroleum Council’s

report, in order to have supply meet the demand in PADD II, 350,000 barrels per

day had to be shipped in from the Gulf Coast, primarily by pipeline, and another

160,000 barrels per day had to be shipped in from the East Coast. It is clear to see

that a supply problem in the Midwest, the Gulf Coast or the East Coast has a definite impact as product is pulled from one region to fill shortages in another.

In my hometown of Tulsa, we are experiencing a situation that graphically illustrates this point. Like many other regions, Tulsa has experienced in recent weeks

sharp increases in gasoline prices. Here’s why: our local regulators have entered

into an agreement with EPA so that a special gasoline with 8.2 Reid Vapor Pressure

(RVP) is sold in Tulsa county during summer months. Tulsa is the only area in the

nation where this particular gasoline is sold. As a result, no refiner manufactures

it, but rather two different gasolines are mixed together to meet the 8.2 specification. Most of these two kinds of gasoline come from refineries on the Gulf Coast and

are transported by pipeline to Tulsa. That was not a problem in 1999. Unfortunately, since last year, 98 counties in East Texas that are along the pipeline that

connects Tulsa to the Gulf Coast refineries now require one of the gasolines that

is blended to make Tulsa’s fuel. That increased demand from motorists in the Texas

counties caused an increase in the price of gasoline in our Tulsa market when the

summer driving season began. Once again, this is a simple case of the relationship

of supply, demand and price.

This is a recurring theme around our country. As local regulators create new and

different gasolines, refiners no longer have the flexibility to quickly shift supply to

the areas of greatest need. The result is that situations that previously could have

been corrected very quickly, take much longer for the system to correct. This longer

correction time creates shortages, which in turn creates price spikes. The delicate

balance of the supply and demand system can be upset by the slightest disruption.

This price and supply situation is not the first such occurrence in this nation, nor,

unfortunately, will it be the last unless industry warnings are heeded. Similar situations arose in 1989 with the advent of EPA’s regional RVP regulations, again in

1995 when Phase I RFG was introduced and again in 1999. According to industry

expert Trilby Lundberg,4 despite persistent industry warnings, ‘‘We are in a nightVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00128 Fmt 6633 Sfmt 6621 E:\HEARINGS\65909 pfrm03 PsN: 65909
125

mare of patchwork environmental regulations which will wreak havoc with gasoline

supply and price stability. The wide variety of regulations affecting formulas has

created wide price disparities around the country and made the distribution of gasoline more problematic.’’

The important point to recognize is that the root cause of the current price and

supply situation stems from the unfortunate fact that this nation’s only energy policy is driven by the Environmental Protection Agency. In reality, it’s not a policy

at all but a patchwork quilt of regulations and requirements that has been added

to every year since the Clean Air Act was passed in 1970.

This hodge podge of regulations fails to take into consideration the American people’s needs or the refiners’ ability to produce and distribute this increasingly complex range of products. It’s a refiner’s nightmare—one that is now beginning to affect the American people.

And it appears there is no end in sight. We are already faced with the next

wave—EPA’s requirements for ultra-low sulfur gasoline and diesel specifications.

The end result of these and the host of other EPA regulations staring us in the face

ensure that more refiners, unable to afford the capital investment required to comply with these regulations, will drop out, further tightening supply. Clearly, unless

we develop a cohesive energy policy—one that considers this nation’s energy needs,

the sustainability of affordable energy in America is in serious jeopardy.

Thank you.

126

127

Mr. TAUZIN. Thank you, Mr. Thompson.

Mr. Ports, unfortunately we have seen a lot of finger-pointing

about the Strategic Petroleum Reserve; and we have reauthorized

the Strategic Petroleum Reserve twice, and there have been three

sales from that reserve in this administration, and we have also

sold Elk Hills, which was a National Security Naval Reserve. It

has been sold to the private sector, so we probably have less security in those reserves than we did just 7 years ago.

But putting all of that aside, Mr. Ports, you make the case that

it is time to have a thoughtful discussion about the real causes of

these price increases, understanding them, we can start making

recommendations.

And, Mr. Frank, you pointed out what we might use in terms in

making policy.

Mr. Thompson, you point out correctly—and I think Mr. Largent

pointed out earlier, when the EPA director was here—that so much

of the policy on gasoline that is critical to consumers in the marketplace is now determined by EPA in direct rulemaking on reformulated gasoline or in the obvious pressure that comes from communities that are out of compliance with Clean Air and have to adopt

their own special ‘‘boutique’’ gasolines to meet the standards of attainment of Clean Air as they currently exist, not even considering

the new ones EPA tried to impose and the courts said were unconstitutional.

But the biggest problem that I see—and I am trying to put together all of your testimony and there are an awful series of

events.

Two pipelines crashing, weakening the delivery of material to the

Midwest, a continued operation at 20 percent pressure down. If you

simply were able to bring them back to normal operation, you could

certainly deliver more product to the Midwest.

The Mobil Joliet refinery, slow to turn around and the Clark

Blue Island suffering power outages, and the Lake Charles refinery, blockage in the port.

EPA granting waivers to St. Louis—why they got three waivers,

I don’t know—and all of a sudden, products get shifted over to St.

Louis that might otherwise have ended up at Chicago or Milwaukee.

We are seeing literally, as indeed you pointed out, Mr. Thompson, so accurately, the balkanization of the American energy supplies. Daniel Yergen wrote ‘‘The Prize’’; it is probably the best explanation of the history of the oil and gas industry that I have ever

read. We had him as a guest of our committee, and I had a chance

to meet him.

What he is telling us is that if we continue this process of mandating ‘‘boutique’’ content for gasoline in each of the communities

of America to meet EPA standards, to meet the local community

standards, to achieve EPA air quality attainment, if we continue

this process, we will all be like California where the shortest disruption in refining capacity, the shortest disruption in delivery systems, will automatically spike prices up. And I saw from a number

of your testimonies, we are going to go through this one with a lot

of blame and finger-pointing, and we are going to conclude that we

have a problem on our hands, this lack of one area to supply anVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00131 Fmt 6633 Sfmt 6602 E:\HEARINGS\65909 pfrm03 PsN: 65909
128

other area because it doesn’t have the same gasolines and the same

requirements.

We are all going to be like California. This is going to get repeated again and again, not just this summer but over and over

again. We are not only going to have shortages in the gasoline market, but as the energy needs of the e-commerce society continue to

grow despite our best efforts at conservation and alternative fuels,

we are going to see more and more blackouts, brownouts and price

spikes on consumers regionally generated, not because we don’t

have enough crude or gasoline, but because our refining capacity

can’t keep up with all of these little markets that require separate

tanks and pipelines and separate trucks and separate market, if

you will, conditions, all of which can cause us to become little Californias, all subject any day to having price spikes that all of us are

going to have to explain to our constituents.

Have I described the world as it really is?

Mr. Frank.

Mr. FRANK. Yes, sir, I think your explanation this morning and

here this afternoon describes the situation very accurately. Whereas PADD II, if we looked at it as a discrete source, instead of being

one homogenous tank of supply of gasoline into the Midwest, when

one area was experiencing a shortage, it could flow from another

area. Because of the patchwork nature of ‘‘boutique’’ fuels to be

supplied to separate markets, each one has to stand on its own two

feet, much as was described by Congressman Largent this morning;

and it has to have its own inventory and its own supply, and it is

more prone to disruptions, as any kind of infrastructure problem

relates.

Mr. PORTS. I would say that we are definitely there. We are similar to California throughout the United States on gasoline, but we

have a chance to save diesel fuel. The EPA has proposed regulations that, frankly, will potentially carve up the diesel fuel market

in a similar manner, maybe not as dramatic. But the fear is that

we can go through the same thing on that side.

Mr. TAUZIN. Mr. Luther is recognized for 5 minutes.

Mr. LUTHER. Thank you. I appreciate this opportunity.

I know all of you were present this morning when we had the

administration officials testifying, and my recollection is that they

indicated that the pipeline situation would have had minimal impact on the current situation; and second, I think, if I recall the

testimony correctly, there was testimony that the Phase II program

could have very little impact.

In addition to that, let me just say, as I understand it, Minnesota, the State that I represent, is not subject to the Phase II

program.

So my question to each of you would be, first of all, what is the

most concrete answer to the geographical differences?

Second, why there would be a reduction a day or two after the

FTC announces an investigation, a price lowering?

Third, why the retail prices don’t follow the reduced wholesale

prices?

Mr. FRANK. The Secretary of Transportation said that the impact

of Explorer was only minimal and that the volume of gasoline hisVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00132 Fmt 6633 Sfmt 6602 E:\HEARINGS\65909 pfrm03 PsN: 65909
129

torically shipped to the Chicago market was essentially the same

as what it has been in the past. That, in fact, is true.

The rest of the story is that that pipeline capacity has been reduced from 540,000 to 490,000 barrels a day. The same amount is

going to Chicago. The rest of it was basically dropped off into another pipeline, the Williams pipeline that goes to Minnesota, and

that pipeline system is running 50,000 barrels a day short of supply, and that is why I think you have seen the price response in

the Twin City area, just like in Chicago. The whole thing is trying

to compensate itself as people are hauling product to try to satisfy

demand, but the pipeline system has caused a shortage of gasoline

into PADD II.

The Chicago market is getting what it normally required on a

historic basis, but the inventories were depleted to very low levels.

And I would like to show you an exhibit here what happened when

the waiver was initialed in the St. Louis area, that the inventories

in PADD II immediately started falling. And then they built slightly and started falling again, and only recently, in the last 3 weeks,

have they started building; and the numbers that were available

just last night, which are shown on the far right-hand side, have

shown a significant build in PADD II.

The way I would describe that is, the free market is working. Demand has decreased our sales in PADD II; people have quit driving

as much as they were previously, and inventories are starting to

build back up to a more stable condition. But the Minneapolis area,

St. Paul, the Twin Cities, suffered by the fact that Explorer was

down. And that is where the shortage was showing, and Chicago

was not able to replenish their gasoline supplies. They were receiving just historic demand levels until consumption dropped, and

that is why we started seeing the build.

Mr. LUTHER. Then, if you can, comment on the second and third

points as well.

Mr. FRANK. That is the investigation and the price decline, and

another graph here that we have shows that—remember the inventories reached their low point on June 2 and started building again.

Here shows when the waivers were announced and what the

price response was and when the inventories started to build.

On June 7, after the inventories were showing a build, prices

started down right then. The Administrator of the EPA and the

Chairman of the FTC had announced the investigation at that

time. There were calls for investigations all of the way up that

price ramp, but the market was ignoring them and reacting to the

free market system; and the prices continued to rise to allocate

supply and demand together.

The prices started down on June 7; this is public information.

And then when the Blue Island Refinery that Congressman Tauzin

referenced had a fire on a Thursday, and they announced that they

had the fire, the spot market went up 10 cents a gallon that night.

Mr. TAUZIN. The gentleman had a third question, if you would

respond.

Mr. FRANK. The answer to the third question is that prices always lag at the street in an up-rising market; as independent businessmen operating service stations are trying not to lose market

share, the price goes up; and if they raise the price, they are not

130

selling as much, so the street price lags going up and it also lags

coming down. When it is lagging coming down they are trying to

recover what they lost when it was going up, and that is a general

explanation of why street prices respond as they do.

Spot prices react immediately. They are simultaneous, rack

prices of suppliers react almost that quick, but the street price

lags. Even though prices were quoted this morning as not being

down very much in various areas, in the Chicago market, for instance, a survey of street price that is we take every day shows

that street prices are down 20 cents a gallon, not 3 to 4 or the 40

cents that was quoted.

They are coming down, the free market is working, and they will

continue to follow free market prices as they correct to supply and

demand.

Polls are really popular. I know here everybody likes to look at

polls. Our customers vote every day, and we are able to take a poll

every day. They vote with their tires. If we are in the right price

perspective with our products, people are not buying.

Mr. LUTHER. If I could just mention, to find a better price in the

Twin Cities area, they would have worn the tires off their car looking. So it doesn’t always work that way. In a perfect situation, that

is the way it is supposed to work.

Mr. THOMPSON. Very quickly to respond to your first question,

what we had was a confluence of three events that, any one taken

in isolation would not have the dramatic impact that we experienced, but those three experiences were the pipeline outages that

we talked about that occurred at the same time that we had inventories at historic low levels as we were converting from winter

grade gasoline to summer grade; and this applies to conventional

gasoline as well as RFG. So inventories of all gasoline were low at

the time we had the outages.

That came on top of a requirement for refiners to blend a gasoline that we had never blended before, and we had a learning curve

that we had to come up to to learn how to efficiently blend this gasoline. In the early stages, we had to do a lot of touch-up blending

that kept supplies off the market, because we cannot ship product

that is off specification.

So it was a confluence of these three events that caused the dramatic price increases; any one in isolation would not have had the

effect that we saw.

Mr. TAUZIN. Mr. Oxley.

Mr. OXLEY. Thank you, Mr. Chairman. I wish I could go back

and get some of the headlines when we had the oil embargo and

some of the other price spikes. Senator Metzenbaum would always

come out and say, this was a part of the oil companies and they

were all colluding; and then they would have an investigation by

the Justice Department and the FBI. And at the end of the day,

everybody found out there was no collusion, this was supply and

demand, this is how markets work—surprise, surprise—and then

you would have another spike, and we would go through the same

drill.

It is Groundhog Day. Mr. Gore’s spokesman, he is convinced that

the oil companies are, quote, ‘‘in large part responsible for the price

of gasoline.’’ I guess he means the recent high price. I wonder if

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they were responsible for the low price of gasoline a few months

ago.

Mr. FRANK. The price of crude oil has gone up 300 percent, from $10 a barrel to $30 a barrel, and to cope with that in any kind of

retail market is extremely difficult. And I would suggest that when

the price would move from 80 to 90 cents a gallon last year, people

were complaining about the high prices.

And given no other shortage, in a normal operating environment, if they were 50 cents higher, which is what $20 a barrel equates

to, I would submit that we would be here at this hearing today,

and FTC would be having an investigation, and nobody would understand why the prices went up.

I think the American society has gotten to where we expect low

energy prices, ‘‘I think my electric bill is too high and my natural

gas is too high and gasoline bill is too high.’’

The real problem is that this business has earned in the past 10

years—and it is the same for 20 years—a 5 percent return on capital employed. The Standard & Poor’s 500 has earned 17 percent.

The cost of capital is 10 percent. With the cost of capital at 10 percent and earning 5 percent, that means we are really liquidating

the downstream business in the United States. And if you ask me,

what would I invest in today, should I invest in a downstream company, you would be better advised to buy a CD from your local

bank because your return would be higher.

This cannot go on, Congressman. You are seeing public statements by large refiners and marketers that they are exiting this

business, they are moving on.

Mr. OXLEY. I have always thought we get telephone calls from

constituents, basically, ‘‘the price of gas is too high,’’ or accusing

the oil companies of gouging.

There is a quote from Vice President Gore calling for a Federal

Trade Commission investigation, ‘‘Put our feet on the brakes of big

oil’s price gouging.’’ This is from a Wall Street Journal op-ed piece

by Steven Lansburg, professor at the University of Rochester. In

other words, he says, it is fine for big powerful entities to set prices

by fiat ignoring supply and demand as long as those entities have

names that begin with Federal.

And again, I think it does point out the difference in supply and

demand in the free market versus those who would try to socially

engineer through various commissions and government entities,

and I find it rather interesting that we come around this every several years and have the same old argument.

My guess is, if we have this hearing—as a matter of fact, we

would not have this hearing 4 weeks from now because of what you

say, if supply is starting to come into line with demand, there is

no need and this will all be a bad memory for all of us.

My concern is that we will forget about the short-term problem

and ignore the real long-term policy of having an energy policy of

this country that basically says we can be fat, dumb and happy

with low energy prices, but we are not willing to make the commitment to finding more domestic sources of oil. And I find that tragic,

and my guess is, until the public really understands that, we are

going to be in the same mess some time in the future; and we will

have the same arguments and the same hearings and the same finVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00135 Fmt 6633 Sfmt 6602 E:\HEARINGS\65909 pfrm03 PsN: 65909
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ger-pointing, but it doesn’t direct itself to the long-term solution.

And in the meantime, we continue to increase our dependence on

foreign oil.

What a shame, and shame on us.

Mr. FRANK. That is exactly right. The way I view it, this entire

country, across all sectors of energy, is crying out for a national energy policy that will enable them to be able to survive as we go forward; at the kind of returns that I am talking about, the downstream business will not attract the investments necessary to be

able to provide the energy needs of the country.

Mr. TAUZIN. Mr. Barrett.

Mr. BARRETT. I do represent Wisconsin, and the motorists in

Wisconsin feel like they are being gouged. There is no doubt in

their mind that they believe they are being gouged. I agree with

them.

Today, I hear the talk, it is the ‘‘boutique’’ gases. Well, in southeastern Wisconsin, we replaced RFG 1 with RFG 2, not exactly a

proliferation of gases.

I hear talk about the Unocal decision. The Unocal decision applies to all reformulated gas, but the spike has occurred in the ethanol-based regions. Why on ethanol but not MTBE-based gasoline?

I hear people saying that we have to have a national policy, government has to work with industry. That is exactly what was attempted in the meetings that were held over the last 3 years—four

meetings a year with industry representatives, the EPA, to have a

smooth transition to the RFG 2 program.

I have gone through the minutes of these meetings, and never in

these meetings did I see a single reference by any member of the

industry to supply problems. Now, I look at that and I am thinking, if there are supply problems, why aren’t we going to know that

before this program takes off? And, instead, what I see is a statement from Tosco in April of this year, ‘‘Low inventory levels will

result in a continuation of strong refining margins.’’

You knew there was a shortage, but you didn’t tell the EPA. So

who gets gouged?

Mr. FRANK. This battle was fought back in the 1990 Clean Air

Act days, and I was a part of that. I have been here for a long time.

I testified before the EPA in public hearings that there could be

supply disruptions, that there could be people who elect not to

make these gasolines because of the investments necessary. I made

those statements, and in meetings with the EPA and the Department of Energy; and I have continued to make those kinds of statements.

Mr. BARRETT. I have gone through the minutes, and I don’t see

a single representative saying that. If there was a supply problem,

why wasn’t that brought to the attention of the EPA? Either someone was asleep at the switch or someone is pulling a fast one. But

what strikes me is, we have a situation where I will predict that

each of your companies will have record profits this year.

Mr. FRANK. That may well be true.

Mr. BARRETT. The people in my neck of the woods feel like they

are being gouged.

Mr. FRANK. My company has produced 18 percent more reformulated gasoline than last year, and we put 18 percent more into the

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‘‘boutique’’ fuels; and some of it comes from efficiencies in processing, and some comes because our production of conventional gasoline is down, and the production of ‘‘boutique’’ fuels, reformulated

gasolines, is up.

Mr. BARRETT. Mr. Pillari, the spread in Milwaukee between the

wholesale price and retail price is 67 cents. Back on June 9 it was

38 cents. Will we see a decrease in the spread, and what will it be

when the market settles out?

Mr. PILLARI. I would not like to forecast what prices will be.

Mr. BARRETT. What is the industry average difference between

the wholesale and retail price?

Mr. PILLARI. Let me go back to where we have been. In the past,

I think you would have seen the spreads between those fuels to be

anywhere from 2 cents to 10 cents a gallon depending on the supply/demand situation.

Mr. BARRETT. Between wholesale and retail?

Mr. PILLARI. Sorry, I wouldn’t want to predict what it will be.

Mr. FRANK. In the Milwaukee area—from the information I have

available through the day before yesterday, in Milwaukee the

wholesale price is——

Mr. BARRETT. My question is, in the industry, what is the expected, normal differential between wholesale price and retail

price? It can’t be a difficult question.

Mr. Thompson?

Mr. FRANK. We have a higher expectation than what it has run,

that gets us to at least recovering our cost of capital.

Mr. TAUZIN. Mr. Thompson, would you attempt to answer? The

gentleman’s time has expired.

Mr. THOMPSON. You have to look at that on a before-tax basis because each tax situation, State-by-State, location-by-location, is different so you have to look at it on a before-tax basis. Typically, the

before-tax price between a wholesale price terminal at the truck

rack and that pretax price that the dealer will charge at the street

is typically 12 cents a gallon.

Mr. BARRETT. Between wholesale and retail, and we are seeing

67 cents right now?

Mr. THOMPSON. Yes. And as Mr. Frank pointed out, the majority

of the service stations in this country today are owned and operated by independent businessmen who make their own pricing decisions based on competitive factors in their marketplace.

Mr. BARRETT. Your company is vertically integrated.

Mr. THOMPSON. We have over 14,000 service stations in the

United States that carry the CITGO flag. Those are all owned and

operated by independent businessmen who have their own freedom

of choice over pricing, and they use that freedom to set prices on

a competitive basis based on their local marketplace.

Mr. TAUZIN. The gentleman’s time has expired.

Mr. BARRETT. Mr. Chairman, I honestly thought that was a pretty easy question; and I am disappointed that I couldn’t get an answer about the average spread between wholesale and retail prices.

I thought someone in the industry would know that.

Mr. TAUZIN. The Chair would, for the sake of the gentleman,

refer to the EIA reports which are available to the committee,

which does show the spread.

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Mr. BARRETT. I have the spread. I would think that there would

be an industry norm of what the differential is between the wholesale and retail price. None of the representatives could give me an

answer to that.

Mr. TAUZIN. There was testimony in the record that the prices,

the spreads between what independent businessmen pay and what

they charge at retail is set in the marketplace. The gentleman got

an answer.

Mr. BARRETT. No, I didn’t get an answer. If it was set in the market, they would have what the average was.

Mr. TAUZIN. The Chair has to control the time.

The Chair recognizes the gentleman from Texas, Mr. Barton,

chairman of the Subcommittee on Energy for his 5 minutes.

Mr. BARTON. I think Mr. Barrett has a very valid point. It looks

like the spread is what the market will bear, and his constituents

are suffering for it.

Could we put the chart back up that shows the Chicago market

wholesale gasoline prices just for a second?

Now, if this were a political problem that could be solved politically, I would look at that chart, and I would look at the blue line

and the black line and the red line at the bottom, and I would say,

Congressman Tauzin and Congressman Bilirakis and Senator Lott

just do a lot better job politically than the Congressmen and Senators in the Chicago market, and all we have to do to do is send

Tauzin and Bilirakis and Senator Lott to Chicago.

Mr. UPTON. And do you send an interpreter, too?

Mr. BARTON. It is not a political problem, it is a market problem.

I would like to go back. We produce about 73 quads of energy in

this country, and a quad is 1,000 trillion BTUs, and a BTU is the

amount of energy it takes to raise a gallon of water 1 degree Fahrenheit. So we are producing about 73 quads and we are consuming

about 97 quads, and that shortfall is coming in from overseas; and

until we take steps to minimize that shortfall, the price mechanism

in an open market is going to go up when there is higher demand.

It is that simple.

But with this group, I want to focus on the specific problem—and

Mr. Barrett has talked about it, and it is one of the focuses of the

hearing—and that is why prices are higher in some parts of the

country than other parts of the country and, specifically, up in the

Chicago and Milwaukee area.

I am going to read from the committee brief and then I am going

to ask if you gentlemen agree or disagree. It says, ‘‘RFG is a smaller percentage of the regional gasoline supply in the mid continent

than in most other regions. Essentially it is used only in Chicago

and Milwaukee’’—and there is a chart which shows that—‘‘the rest

of the regions use conventional fuel.

‘‘Those cities have virtually banned MTBE from RFGs sold in

their cities. Instead, ethanol is used to increase the oxygen content

of RFG to minimize carbon monoxide emissions. In current market

conditions, the price of the gasoline-based material need for oxygen

blending, called RBOB, rather than the cost of ethanol has become

the primary factor in the region’s high prices.

‘‘The difficulty stems from the fact that RFG volatility, the speed

of evaporation, is limited by regulation. Ethanol is much more volaVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00138 Fmt 6633 Sfmt 6602 E:\HEARINGS\65909 pfrm03 PsN: 65909
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tile. In order for the ethanol blend RFG to fall under the overall

volatility limit, the volatility of the RBOB to be used in ethanol

blending must be low. This is a matter of blending volatile ethanol,

a physical fact that cannot be changed, with special reduced-volatility RBOB.

‘‘The difficulty arises because low-volatility RBOB is hard to

manufacture and there is very little demand for this material outside the Chicago-Milwaukee gasoline market. Most of the required

material is made in six refineries in Illinois whose total capacity

is approximately 1 million barrels a day. When demand exceeds

local refiner’s ability to manufacturer the low-volatility RBOB, supplies are brought in from the Gulf Coast by pipeline.

‘‘Low-volatility RBOB is a specialty product. Not all refiners can

or will manufacture gasoline to such specifications. Shipping presents difficulties stemming from the unique nature of the product.

It is usually shipped in relatively small quantities. Additionally,

transportation bottlenecks affect the price and availability.’’

Do you agree or disagree with that?

Mr. FRANK. I think I agree with that. The basics are that the

RBOB has to have a Reid vapor pressure of 5.8 pounds.

Mr. BARTON. That is by Federal law.

Mr. FRANK. That is lower than what you blend with MTBE,

which is a low vapor pressure blend stock——

Mr. BARTON. So we have a specialty product.

Mr. FRANK. So you have to refine to get the petroleum component

of the RBOB to a much more sophisticated or stringent level to be

able to accommodate putting the ethanol with it.

Mr. BARTON. If you will prepare answers for the written record,

I would appreciate it. If this committee can segregate the problem

to a political solution, we will apply a political solution; but I am

going to be very surprised if we find a political solution. It is a

long-term strategy of energy production and conservation that we

have worked on together over time, that includes the environmental issues that drive our energy policy in this country.

Mr. TAUZIN. The gentleman’s time has expired.

Mr. PILLARI. I think you are correct in that making RBOB does

require much lower RVP. We invested over the last 2 years in a

refining complex prepared to make it.

Mr. NEMTZOW. There may be a policy solution that is different

from a political solution or a market solution.

Mr. MARK BROWN. I think the people of Milwaukee will have a

difficult time with some of the explanations. We have a distribution

problem and a supply and demand problem and predatory pricing

somewhere in the food chain.

Mr. TAUZIN. The gentleman’s time has expired.

The gentlewoman from Missouri, Ms. McCarthy, is recognized.

Ms. MCCARTHY. I wish that more of our Midwest delegates were

here to engage today. We have competing interests with serious

health care issues on the floor, and I know that many other members would like to be here to participate in this important discussion. Please understand that we at least have gotten some semblance of order on the floor now.

I wanted to ask three panelists in particular to comment, but

anyone may weigh in.

136

Mr. Gerken, I want to thank you for the realistic assessment on

the reliability problems that we have in electricity delivery. This is

the committee that is grappling with deregulation, and I wonder if

you can expand upon your assertions with regard to the reliability

problems in electricity and that they may very well be traceable to

market manipulation.

If you can give the committee some examples, I think that would

be helpful.

Mr. Nemtzow, I want to commend you for speaking very realistically about the fact that there is plenty of opportunity to go around

here. I have been grappling with this issue since the 1970’s, and

there seems to be a reluctance to increase the R&D spending and

provide the tax credits to encourage alternatives and invest in renewables and efficiency programs and help power plants to modernize; and I wondered if we could expand on, just realistically,

what this current Congress should be doing.

Mr. Pillari, why are some oil companies like BP so ahead of the

curve and embracing opportunity, diversifying and creating a winwin solution for the environment and the economy? You see the future and your company embraces it, and how can we get other companies to do the same?

Thank you.

Mr. GERKEN. I will go first. One of the things that we think, and

Secretary Richardson said today, we support it, a comprehensive

bill. Stand-alone reliability will not get this done. FERC Order

2000 was a pretty decent order, but the problem was that it allowed voluntarism on the creation of RTOs; and in layman’s terms,

that is just a bigger area that controls transmission. And it is supposed to be an independent operation because right now the majority of the generating companies own the majority of the transmission system.

The manipulation is allowed to occur because the people that are

setting the capacity calculations on an hour-to-hour, day-to-day,

month-to-month basis are those same people, the owners. Just like

I gave you the illustration of the highway. At any time during the

day, based on weather or an outage or capacity reserves, in essence, if there is zero capacity from one interface to the other, what

probably is occurring is the incumbent transmission owner, who

also owns generation, is setting a huge margin to back up maybe

100 percent of his generation in case one of his plants goes down;

which means there may be a lot of capacity available in a true

sense, but they are holding it back from anybody’s use because they

want to reserve it for themselves.

As an organization, our members have invested $150 million in

hydro renewable resources at above-market prices. We have invested in load management systems to shed load, to defer the off

peaks of air conditioning and hot water heaters to non-peak times.

I support my colleague on the left on energy conservation, but

the real crux is, FERC has the ability to establish the RTOs. The

voluntarism is not working. I have attended the RTO workshops

put on by FERC. It is not getting done, and I think they have to

move, and Congress needs to push that along—they have the tools

to do it—and a comprehensive bill will follow, and it will work.

137

Mr. NEMTZOW. At the rate our Nation’s energy situation is going,

it won’t be only members from the Midwest who are here with

troubled constituents, you said, realistically, before this Congress.

So let me give you six suggestions that I think pass the realistic

test for this Congress. No. 1 is to hold hearings, not only ones like

this on the big picture, but specific ones. Why does the Federal

Government waste $1 out of $4, wasting $2 billion a year? That is

the subject of oversight hearings that this committee does so well.

No. 2, research and development spending. The House of Representatives voted, in what I would call an astonishing vote, 214

to 211, to kill the PNGV, automakers working with the National

Labs. You need to reverse that.

Three, deployment programs such as the Energy Star program

and programs that help educate. Those need full funding.

No. 4, push the administration on their 8-year-late air conditioning rulemaking and liberate them from the rider on CAFE that

prevents them from even thinking about fuel economy standards.

No. 5, the Public Benefit Fund which should be part of any comprehensive restructuring legislation. This fund will help consumers

meet their electricity needs and will help utility companies have

funds for reliability investment.

Six, the bill introduced by Congressman Matsui and Congressman Thomas on tax credits. You have a giant surplus. Tax credits

to promote energy efficiency goals will help the Nation’s energy

posture, will help taxpayers have lower tax bills and will be wildly

popular.

That is my list of six. I have a hundred more.

Mr. PILLARI. Congresswoman, thank you for your comments. I

would raise just two points on why we take the positions we do on

clean fuels and climate changes.

One, we think that we have an obligation to provide our customers with products that don’t do harm to air, water or humans.

We think that is the kind of company that we would like to have.

Second, it is good business. We believe, in the long run, that customers will prefer environmentally clean and safe products. It is

not easy to do everywhere. We try to do it where we can, and I am

not sure that I want to convince my competitors to do the same

thing, because it may be an advantage as we go forward.

Ms. MCCARTHY. Thank you, gentlemen.

Mr. UPTON. The Chair recognizes Mr. Shimkus.

Mr. SHIMKUS. Mr. Thompson, I fill up at a lot of your stations

in southwestern Illinois and I appreciate the ethanol mix you provide.

Chicago price spikes, there has been debate between industry

and the administration. The State of Illinois submitted a request

to get relief from Phase II in November 1999. Had the administration acted on that, as they did in Missouri, how would that have

affected the supply problem in Chicago? In your verbal testimony,

you mentioned the increased time effort, energy, of doing the formula for Phase II.

Mr. THOMPSON. I think a waiver may have had a dampening effect on the severity of the price shortage, but again, as I said earlier, it was the confluence of really three events which caused the

very severe shortage.

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Mr. SHIMKUS. I also want to mention two other things. First, a

question.

I know Williams Energy will be sending a letter to USDA saying

that they can transport ethanol via pipeline. I would ask the three

oil industry representatives here, do you believe that?

Second, do you believe—is it a fact that currently, in Brazil, ethanol is being shipped over the pipeline today?

Mr. Frank.

Mr. FRANK. Ethanol cannot be shipped through the normal

logistical pipelines.

Mr. SHIMKUS. So you are saying that they do not ship ethanol

via the pipeline?

Mr. FRANK. I don’t know about Brazil——

Mr. SHIMKUS. If Williams does make the statement, you would

dispute that?

Mr. FRANK. Ethanol is a solvent. It picks up water, condensation

and rust.

Mr. SHIMKUS. Mr. Pillari?

Mr. PILLARI. I have not seen the Williams proposal. We have not

seen any evidence. For the reasons that Mr. Frank mentioned, I

don’t know what is happening in Brazil.

Mr. SHIMKUS. Mr. Thompson?

Mr. THOMPSON. I believe Brazil is shipping ethanol by pipeline.

The National Petroleum Council study released last week looked

into that issue. The conclusion was, that system would not work in

the U.S. pipeline system. I am not sure whether Williams will be

successful or not.

Mr. SHIMKUS. Thank you. I appreciate the short comments.

Two other comments I want to bring up in my time. First of all,

we have not talked much about diesel, although Congresswoman

McCarthy, I am a promoter of biodiesel, and this is just an appeal

to the industry. There are folks out there that would never want

to see another diesel engine or diesel fuel used in this country.

I would also turn your attention to the recently released report

required, under section 211(b) of the Clean Air Act. I think for the

industry—for my soybean growers, I think a good marriage can

occur that helps decrease reliance on foreign oil and helps increase

commodity costs. And I would encourage you to look in those directions. And I know many of you are, but this study, I think, is going

to be very helpful in doing that.

Finally, Mr. Chairman, I ask unanimous consent to submit for

the record a release by the Renewable Fuels’—Eric Vaughn of the

Renewable Fuels Association; he is testifying in another committee.

I want to read one statement and ask the industry to respond to

this. Basically, he goes through a calculation saying if wholesale is

$1.24 and 10 percent displacement, there is a possibility of a decrease in the cost per gallon. Does anyone want to comment on the

Renewable Fuels position, how if you increase the volume of ethanol in the system that there could be a reduction? RE-85 pump

sites in the Chicago area, which is 85 percent ethanol, average gas

price is $1.24 a gallon.

Mr. FRANK. I would say, sir, that the company that I am with

is the largest user of ethanol in the United States. We consume 25

percent of the Nation’s consumption, and the infrastructure that

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exists today for the ethanol production, you have to spread it out

to where it is available in regional markets, because it can’t be

shipped through these pipelines until you put in special alloy pipelines that don’t have rust or scale or water in them.

It would have to be something like stainless steel. I think that

ethanol can play a bigger role.

Mr. SHIMKUS. Thank you.

I yield back the balance of my time.

Mr. UPTON [presiding]. Thank you. I just want to say a number

of things before, perhaps, we close.

First of all, I want to speak for the members that have not been

here this morning and this afternoon. This is certainly an important topic, but as you may not know, we have an important piece

of legislation on the floor, prescription drugs, and our committee is

very involved in that debate and I know that a number of members

on both sides of the aisle have been working that issue, and that

is why we have had so many votes today.

I apologize for those members not here and I know that unanimous consent was made early on for opening statements and that

will, in fact, be part of the record.

Mr. Nemtzow, I also want to congratulate you on a couple of your

comments with regard to PNGV 2 weeks ago, but I have received

some pretty good assurances that when that bill comes out of conference with the Senate that we will have adequate levels of funding, and those dollars will help build more fuel-efficient engines

that will help all Americans, particularly with the struggling issue

of fuel cost.

I would like to address my 5 minutes that I have to Mr. Frank,

Mr. Pillari and Mr. Thompson. Maybe—if the chart with regard to

the pipeline route might be put back up.

Ms. Browner from EPA, this morning she said that the Explorer

pipeline has informed us that more RFG could be sent if the companies elected to do so? Is that correct? Are you not sending as

much as you can at this point, based on the regulations that are

out there with regard to the safety of the pipeline?

Mr. FRANK. I am sending as much as I can, sir. The pipeline carries conventional gasoline, ‘‘boutique’’ gasolines like Tulsa uses, the

RFG gasoline. All of those are in there. If you didn’t send diesel

fuel, you could send more RFG.

Mr. UPTON. Then you would have a shortage of something else?

Mr. FRANK. Yes.

Mr. UPTON. Mr. Pillari, would you agree with that?

Mr. PILLARI. Yes, you can substitute. In our case, we have been

able to meet the needs of RFG for our customers. We have done

it through a number of routes, including a little bit on that one.

Mr. UPTON. Mr. Thompson?

Mr. THOMPSON. I agree with Mr. Frank’s answer. The pipeline is

operating at capacity.

Mr. UPTON. You don’t have any unused capacity that is in there

now? You are sending as much as you can in the allotments that

you’ve chosen, based on the demand that you have got?

Mr. THOMPSON. Yes. And RFG would have to substitute for another product, which is also needed in those same marketplaces, so

it would just shift the shortage.

140

Mr. UPTON. Prior to that statement that she indicated, she indicated this as well: The supply of RFG to the Midwest has increased

this year over last year, and in fact, in the month of June, refiners

expect to supply 650,000 more barrels of RFG this year than last

year.

Does that jibe with what your companies know?

Mr. FRANK. I can’t corroborate that statement. The real crux is

what the RBOBs are doing, that is, what is shipped through the

pipeline.

What is reported through the EIA as RFG gasoline is just a very

small component that has already been blended with ethanol, and

the supplies appear to be decreasing.

Mr. UPTON. One of you had a chart up there showing the supply

of the inventories; it showed a decline, that chart here. As we try

to get to the bottom of this, what I heard her say this morning, she

is saying that we have a larger inventory this year than we had

at the same time last year.

Do you agree with that or not?

Mr. FRANK. The supply in PADD II, I would say is definitely

shorter.

Mr. UPTON. Based on that, you would think that is the case.

Mr. Pillari, do you think that is the case?

Mr. FRANK. Chicago would not have run out. It has to go somewhere, and Chicago is the only market other than St. Louis, which

really doesn’t use the same RFG that Chicago does. That is not

happening in PADD II.

Mr. PILLARI. Production of RFG in our case is up. Total gasoline

production is down, and demand is high.

Mr. UPTON. Would you say that you had a larger inventory starting in June, of RFG?

Mr. PILLARI. Our company had a smaller inventory than last

year.

Mr. UPTON. Mr. Thompson?

Mr. THOMPSON. Yes, our inventories of RFG were down in the

Chicago market.

What we have done, to try to bring more supply into the Chicago

area, is barge gasoline blending components from our Gulf Coast

refineries up the Mississippi River to this market, to bring more

supply and avoid this pipeline constraint in bringing more supply

up from the Gulf Coast.

Mr. UPTON. What percent of the supply of gasoline actually goes

up the Mississippi in barges? Is there a lot?

Mr. FRANK. The biggest supplies are the Tepco pipeline and the

Explorer pipeline. All of the barges that are available are running

between the Gulf Coast, Louisiana, primarily and the upper Midwest. You cannot get additional barges. You cannot find trucks,

they have all moved up to the Midwest and are being used to haul

supplies from oversupplied areas to undersupplied areas.

Mr. UPTON. I know that my time is rapidly expiring.

Mr. Frank, are you aware of the letter that our Michigan attorney general sent to Ms. Mary Ellen Peters?

Mr. FRANK. I am very much aware of that.

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Mr. UPTON. Mr. Pillari and Mr. Thompson, did your companies

get—did you have an inquiry made by our attorney general in

Michigan?

Mr. THOMPSON. I am not aware of one.

Mr. PILLARI. I am not aware of one.

Mr. UPTON. Mr. Frank, have you made any movement in terms

of responding?

Mr. BARRETT. May I get a copy of that?

Mr. UPTON. Yes, I will be glad to make you a copy.

Mr. FRANK. This is a full-scale investigation of the same type

that the FTC is going to conduct. We are cooperating with the Attorney General. Yesterday, we testified at a meeting similar to this

in Michigan, with representatives, and explained the situation that

we have.

Mr. UPTON. Was this in Lansing?

Mr. FRANK. That’s correct. We explained the situation, that we

had supplied 335 million gallons more into PADD II, and 241 million gallons of that went into the Michigan market to try to solve

that problem. We were hauling gasoline by truck from Indianapolis

to upper Michigan and trying to cope with that problem as other

suppliers ran out.

At the end of the hearing yesterday, they were quite praiseworthy of the efforts that we had gone to in trying to keep Michigan supplied. The Attorney General wasn’t a part of that, and the

investigation is going to continue; and I think that that is just a

waste of taxpayers’ money. It certainly straps our resources to be

going through a full-scale State investigation in three or four

States, or five, and have a Federal one also.

Mr. UPTON. I would love to see when you officially respond to the

attorney general if you might send us a copy. I will make it a part

of our committee record as well.

I have one question with regard to Marathon’s Niles’ facility with

regard to the transport of refined gasoline products. Niles is in my

district, and I have been there a number of times. I am curious in

terms of, I guess, the allegation or the charge that the attorney

general makes with regard to fuel that was available to independent jobbers, and that perhaps—reading between the lines

here, that perhaps Marathon was looking at helping their outlets,

and the independent jobbers were excluded from participating, perhaps in conjunction with the broken pipeline.

I am more than amazed that the Secretary of Transportation indicated that it did not impact western Michigan which was, as far

as I can see, never the case, it always impacted western Michigan,

whether it be Niles, Kalamazoo.

If you would prepare a response regarding the impact on the

independents——

Mr. FRANK. We have gasoline supplies for independent jobbers

and our contract customers. We were contracted to have them selling Marathon products, and that is a contractual obligation. We

meet those responsibilities first, but we always were able to direct

the independent jobber where they could buy unbranded gasoline

at various terminals; and quite frankly, the transportation resources necessary to keep Michigan supplied; that we could not satisfy on our own. All of the independent jobbers normally have

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trucking resources of their own, and we were asking them to help

out in the supply situation by moving to noncustomary supply

points and hauling gasoline to places where it was needed.

Mr. UPTON. Thank you, and I will turn the gavel over to Chairman Tauzin.

Mr. TAUZIN [presiding]. Mr. Barrett is recognized for 5 minutes

Mr. BARRETT. At this point in the hearing, there is usually nobody

left, and ordinarily I would have been one of those to leave, too; but

as you may have inferred from my earlier questioning, this is a

real issue for me and I frankly can’t go home and say, well, I tried.

I have to keep plugging away here and find out what we have to

do to get these prices down in Milwaukee.

Earlier, I was asking about the differential between the wholesale price and the retail price, and maybe we can have a little

primer here for me so I understand it.

Today, the wholesale price of gas in Milwaukee for RFG is a

$1.18. That is the price that the gas station pays for it, Mr. Frank?

Mr. FRANK. I’m sorry?

Mr. BARRETT. The wholesale price today, which is $1.18 for reformulated gas, is that the price that the gas station pays your company for it?

Mr. FRANK. The wholesale price is not the same as the rack

price. They normally track fairly closely, but they are not necessarily the same.

Mr. BARRETT. I might be missing something basic here. The

wholesale price, we are talking about what the gas station pays for

it, as opposed to what you pay for it.

Mr. FRANK. What I would call the ‘‘wholesale price’’ is what we

sell to independent jobbers who don’t use our brand.

Mr. BARRETT. So today the differential in Milwaukee is 67.15

cents between the wholesale price and the retail price.

Who is getting that money?

Mr. FRANK. If I am selling to an unbranded jobber, he is paying

the price that I am charging for it, and he is selling at the street

price, so that differential accrues to the independent businessman

who is setting prices in the free market system.

Mr. BARRETT. So today the retailer is making 67 cents a gallon,

as opposed to, on June 9, when he was making 38 cents a gallon?

Mr. FRANK. Three weeks ago, sir, he may have had a negative

20 cent margin.

Mr. BARRETT. And your company, though, keeps no records of an

average, on an annual basis, an average between the wholesale

price and the retail price?

Mr. FRANK. Yes, that is a matter of public information.

Mr. BARRETT. Again, I am just trying to figure out what a

ballpark——

Mr. FRANK. I don’t know what the average is, but it is readily

available.

Mr. THOMPSON. Mr. Congressman, may I ask a question for clarification? When you quote your $1.67, is that the price posted on the

pump at the street?

Mr. BARRETT. What I am reading from is data provided by the

Oil Price Information Systems. Wholesale prices exclude taxes.

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Today, the wholesale price in Milwaukee is 1.18.88. The retail

price, these are both for RFG, is $1.86.03.

Mr. THOMPSON. Excluding tax, or including tax?

Mr. BARRETT. Excluding taxes. The wholesale tax, excluding

taxes.

Mr. THOMPSON. Okay, that was my question. I wanted that clarification.

Mr. BARRETT. Let’s just put you in my shoes now. Where do I put

the pressure on to get that down?

Mr. FRANK. I would suggest that you let the free market work,

and it will come into line with supply and sort itself out.

Mr. BARRETT. Let me ask you this then: Again, Mr. Thompson

indicated, at least for Citgo in the eastern United States, I don’t

know what the situation is in the Midwest, there was an independent relationship, at least I inferred there was an independent

relationship. With Marathon, what is the relationship between

your company and the retailer? Are they independent or are they

part of a vertical integrated system?

Mr. FRANK. We have some company-operated stations that are

direct supply that are in the discounted—we call it value priced—

end of the market that sell at relatively low prices.

Mr. BARRETT. Again, I just need a rough—percentage-wise, what

percentage of your stations are independent; and what percentage

have some sort of tie to you?

Mr. FRANK. Well, I would say that the Marathon brand stations,

who are dealer and jobber operated, all have a tie to me as contract

customers, and that, roughly, we would say that, on an annual

basis, we sell about 40 percent of our volume to the independent

classic trader.

Mr. BARRETT. And for BP Amoco, Mr. Pillari?

Mr. PILLARI. Roughly, because I am not that familiar with it——

Mr. BARRETT. I understand.

Mr. PILLARI. Roughly, we have around 60 to 65 branded outlets

in that market, and about a dozen of them are outlets that we operate directly. So the rest of them would be full dealer.

Mr. BARRETT. Okay, in terms of the normal flow, how many days

behind the wholesale market does the retail market respond?

Mr. FRANK. That is really sort of subjective. It depends on the

amount of the decline. But I would say it would be around 2 weeks.

Mr. BARRETT. So would you expect—again, I am going to go

home, and they are going to say, we have seen a 40 cent drop in

the wholesale prices. When can we expect to see——

Mr. FRANK. You are misinterpreting my comment, I think, in

that if the price fell a dime at the wholesale level today, roughly

it takes 14 days to be translated to the street level. That may be

plus or minus.

Mr. BARRETT. Okay. Again, so my question is, we have seen a 40

cent wholesale drop since June——

Mr. FRANK. It didn’t all happen on 1 day.

Mr. BARRETT. I know, since June 16. So again inferring from

your statement, I would think we would see in the next couple

weeks a 40 cents drop in the retail——

Mr. FRANK. I don’t know about those particular prices. I am telling you what we would normally see, historically. We haven’t seen

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price changes like this in modern history, of this magnitude. We

didn’t see them going up, we didn’t see them coming down. The

independent businessman never recovered his loss while that curve

was going up, and he is trying to do some of that today.

Mr. BARRETT. Mr. Pillari, what do you expect to see?

Mr. PILLARI. Let me talk about two things. Firstly, if you go back

to last May when all of this started, the month of May the price

of gasoline moved 68 cents, and on average in the Midwest we saw

the retail price move only 40 cents up in about a 4-week period.

So it took 4 weeks, and it still didn’t recover.

On the way down, in the last 2 weeks, since about the middle

of the month, the numbers seem about right to me. We have seen

the wholesale price drop about 40 cents. And in the Midwest, in

total—it varies in different markets, we have seen a drop of about

20 cents in 2 weeks.

Mr. BARRETT. So you do expect to see it drop another 20 cents?

Mr. PILLARI. I don’t want to predict or say what I expect.

Mr. BARRETT. Would you be surprised if it did?

Mr. PILLARI. I wouldn’t want to say or predict what I expect.

Mr. BARRETT. Mr. Brown, you made a reference to predatory

pricing. What were you speaking of there?

Mr. MARK H. BROWNWhat I was speaking of specifically, as I

think you pointed out, we perhaps have a supply and a demand imbalance, and I would be the last to sit here and attempt to accuse

it on big oil. But I would say that your consumers, certainly in your

market and a number of Midwest markets, are paying unnecessarily pricing. When you want to blame EPA for the RFG or if it

is just the street battle, it is wrong.

Mr. BARRETT. Okay. Thank you, Mr. Chairman.

Mr. TAUZIN. Thank you, Mr. Barrett.

Mr. FRANK. We often have in this industry have investigations

going on in the same State for predatory pricing and price gouging,

simultaneously.

Mr. TAUZIN. At the same time. Thank you, Mr. Barrett.

Let me—this is part of the record, but I just want to reference

it, because it helps in an understanding of the series of questions

that we just asked and answered.

We have filed in the record the primer on gasoline prices that

was prepared by EIA, and it breaks down in 1999 the price of a

gallon of gasoline as follows: 37 percent is the average price of

crude, although that varies a bit from 31 to 39 percent across the

country depending upon other factors in the price; Federal and

State taxes amount to 36 percent of the price of a gallon of gasoline; refining costs and profits amount to 13 percent, on average,

again; distribution, marketing, retail station costs and profits, normally again amount to 14 percent. This is a breakdown prepared

by EIA, an independent, as you know, voice within our Energy Department on energy information.

It further goes on to say that Federal, State and local taxes are

a large component. Taxes, not including county and local taxes, account for 36 percent. Within this national average, Federal excise

taxes are 18.4 cents, State excise taxes average 19.96 cents. There

is a big impact of State taxes here. Also seven States levy additional State sales taxes, some of which are applied to the Federal

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and State excise taxes. In addition, local county and city taxes can

have significant impacts on the price of gasoline.

It goes on to say, Mr. Barrett, that only 28 percent of service station outlets today are company stations that are owned or leased

by a major oil company and operated by its employees. Nearly 72

percent are owned by independent dealers, free to set their own

prices. The price on the pump reflects both the retailer’s purchase

cost for the product and other costs of operating the service station.

It also reflects local market conditions, which apparently is one of

the big problems now in the Midwest, and factors such as the desirability of the location, market strategy of the owner, in this case

some of the problems with dislocation.

I want to, before we close, take you through a couple of your testimonies and see if I can get a picture here.

In one of your testimonies, I think it was Mr. Frank, you pointed

out that one of the problems you had that may have led to low inventories, and that could have led, Mr. Barrett, to shortages which

may have created some of this ripple effect, was that the EPA regulations required you to virtually drain your tanks of the winter

grade product before you could accept deliveries of the low vapor

pressure summer grade of this gasoline in March or April.

In effect, you had to virtually empty your tanks and face the

June 1 deadline for going to this second phase reformulated with

empty tanks. That on June 1, if the delivery systems weren’t perfect, we could almost predict there were going to be shortages,

right, Mr. Frank?

Mr. FRANK. Yes, sir, that is right. The emptying of the tanks is

because of the restriction. The tight specification on reformulating

gasoline was much different than the winter grade gasoline.

Mr. TAUZIN. You can’t mix them together.

Mr. FRANK. You can’t have the mixing.

Mr. TAUZIN. So you had to empty your tanks. In effect, the regulations set the region up for conditions that almost predicted shortages.

Mr. FRANK. Yes, sir.

Mr. TAUZIN. Because if anything happened to supplies, and apparently a lot did, refineries went down, pipelines went down,

fights over patented reformulated products—I noticed one of you

mentioned a cut of—Mr. Thompson, you mentioned 4,000 barrels a

day in a 15,000 barrel per day refinery. That is one-third. Nearly

one-third of the refinery production was cut, is that right?

Mr. THOMPSON. No. No, sir, let me clarify that. At our Lake

Charles, Louisiana, refinery, we have the capability of producing

15,000 barrels a day of summer grade RFG. We had to cut that to

4,000 barrels a day to avoid patent infringements.

Mr. TAUZIN. Wait a minute. You had to cut from 15 all the way

down to 4?

Mr. THOMPSON. Yes, sir.

Mr. TAUZIN. So you cut two-thirds of the production.

Mr. THOMPSON. Yes, sir.

Mr. FRANK. Congressman, essentially what the Unocal patent

has done was to patent the 1990 Clean Air Act, and that seems to

be bad public policy to me.

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Mr. TAUZIN. Well, that is something we can look at. I mean, here

we have a patent problem that affected the capacity of the refiners

by two-thirds to produce the material that should have been in the

pipeline. We have the pipelines breaking, we have ship collisions

in the port, and we have an EPA regulation that required you to

empty the tanks before you could even depend upon those delivery

systems. And we are going, why do we have a shortage?

Second, I want to understand this market. I tried to talk about

it with the first panel, and we didn’t have a lot of time, but maybe

you can help me. I am told that when a shortage like that develops,

that refiners—now some of you guys own refineries, you can help

me here—that refineries obviously in a short production situation

are more likely to take care your name brand stations rather than

sell products to independent marketers. Is that correct?

Mr. FRANK. I would say that there is an obligation to supply your

contract customers. But in Chicago we were selling bulk supplies

to other refiners, and we were selling independent unbranded gasoline. In Detroit, in that situation, as others were running out, we

lent gasoline to one of the refiner suppliers.

Mr. TAUZIN. In fact—I want to get you in here too, Mr. Pillari—

I was told—and help me if this is true or not—that when those situations occur, that one of the incentives you have to go out and sell

some of your product to other refiners or to other marketers, independents, is that they begin bidding up the price?

Mr. FRANK. Yes, sir.

Mr. TAUZIN. There is a shortage. They are not going to get any

fuel, so they are going to have stations running on empty with this

reformulated requirement, and you don’t have enough to go around.

So they start bidding up the price, right? Anyone jump in here and

help me.

Mr. PILLARI. I would say, Congressman, instead of branded, I

would use the term contract customers.

Mr. TAUZIN. That is a good correction. So it is not necessarily

branded, it is contracted.

Mr. PILLARI. We serve our contract——

Mr. TAUZIN. You have to serve your contract stations, those you

have an obligation to serve.

Mr. PILLARI. Because they have committed to us, and we have

committed to them.

Mr. TAUZIN. So in order for the independents, who do not have

a standard contract with you, to get fuel, they have to bid the price

up. They have to somehow convince you and other refiners that it

is worthwhile selling fuel to them, so they bid the price up.

Mr. PILLARI. That is right.

Mr. SCOTT. Mr. Chairman, my name is Greg Scott, just for the

record. I had to replace Mr. Ports. He had a plane to catch.

When supplies get short, the independent marketers are generally the first to feel the pinch. So if Mr. Ports were here, he

would tell you that as the supplies got short in the Midwest——

Mr. TAUZIN. You got hit first.

Mr. SCOTT. He has been hauling gasoline from West Virginia,

from Tennessee, from Missouri, up into that market.

Mr. TAUZIN. He made the point in his statement that, while summertime Phase II RFG may cost only 5 cents per gallon for a reVerDate 11-MAY-2000 08:23 Dec 15, 2000 Jkt 010199 PO 00000 Frm 00150 Fmt 6633 Sfmt 6602 E:\HEARINGS\65909 pfrm03 PsN: 65909
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finer to produce, if the supplies of this gasoline fall short of demand in a particular market, like Chicago, St. Louis, then the price

of the product will rise enough to attract necessary supplies from

other markets.

So not only are you bidding with these refiners to get some of

their supply but you are going out in other markets and bidding

up the price in other markets, is that right?

Mr. SCOTT. That is correct.

Mr. TAUZIN. So that, having paid more for it to get it, you now

have to translate into higher retail costs in the Chicago-St. Louis

marketplace?

Mr. SCOTT. Based upon competition, yes.

Mr. TAUZIN. Now, this is the trick that intrigued me. When your

contract stations—now, I am looking more to the refiners. When

your contract stations now are faced with independent stations who

now have significantly higher prices than they have, what is their

problem? I am told they have a real problem with that. Could there

be a run on their stations if they don’t raise their prices? I am told

that happens. Does that really happen in the marketplace?

Mr. FRANK. The same things happens at the terminal. We would

call that an inversion, when the unbranded price of gasoline goes

over the branded price.

Mr. TAUZIN. What happens then?

Mr. FRANK. Then the branded jobbers are buying brand gasoline

at a lower price, and some of them elect to resell it to unbranded

buyers.

Mr. TAUZIN. I am told this happens—and correct me if this is

wrong, because I would love to know for the record. I am told that

two things happen when the unbranded independent has to go out

and pay more to get the product and therefore charges more at the

retail pump for it—that the station across the street has to now be

concerned about all those other customers coming over and buying

up his cheaper product and draining his tanks.

Mr. FRANK. That is right.

Mr. TAUZIN. That he can no longer satisfy his normal customers.

Is that a real problem?

Mr. FRANK. Yes, sir.

Mr. TAUZIN. And when that happens, he is incentivized to raise

his own prices to match those of the independent who has, by necessity, bid the price up to get some product.

Mr. SCOTT. I would suggest, Mr. Chairman, one of two things

will happen. Either the contract dealer will come up to the

unbranded price, defensively, as you just suggested, or the independent is going to have to go down below his or her cost.

Mr. TAUZIN. Which means you take a loss.

Mr. SCOTT. Which means we are taking a loss on every gallon.

Mr. TAUZIN. Rather than taking a loss, if you can raise your price

and if the others are incentivized to raise it with you, then you get

what occurred in Chicago, Milwaukee and other Midwestern cities.

You get this price spike going up, and you get prices in the retail

market that far exceed the normal spread between wholesale and

retail, is that right?

Mr. FRANK. Yes, sir. No supplier wants to be in the position of

having to tell his customer that I don’t have anything to sell you.

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Mr. TAUZIN. That is my point. My point is, if everybody around me has raised their prices to $1.70, and I am at $1.50, there is no

question that everybody is going to flock to my store. I am going

to empty my tanks, and now my regular customers who show up

the next morning come to me, and I can’t take care of them, and

I may, in fact, lose all my good will with my regular customers.

It creates an incentive for that dealer to raise his prices. He can

maximize profits, why not do it while he can, and why not do it

in order to hold your customers? That is basically the sort of the

incentives that work in that kind of a strange marketplace, right?

Mr. FRANK. There is a tussle in the mind of every supplier that

they go to to try to rationalize that situation.

Mr. TAUZIN. Therefore, the conclusion of Mr. Ports was that the

EPA’s manufacturing cost analysis, what we heard from Carol

Browner, that this should have only cost 4 or 5 cents, that when

they put in place the June 1 deadline, go to reformulated gas Phase

II, and it should have only cost 4 or 5 cents, Mr. Ports’ conclusion

is those statistics are irrelevant if the gallons of gasoline—of the

right boutique, I might add—do not or cannot reach the appropriate market. It is irrelevant, because the shortages start this

chain reaction of spiraling up prices.

Mr. FRANK. Once the investments are made, you hope that everybody tries to recover the cost of that investment. But the cost has

nothing to do with the selling price in a product short market.

Mr. TAUZIN. So we don’t have a natural marketplace working.

Let me thank you. I simply want to conclude the hearing—I

think all the members have worn themselves out, as well as I am

sure you are very tired, too—with the request I know that Chairman Bliley would ask of you as we conclude this very long and very

informative hearing.

The first request is that we are going to keep the record open.

If you have additional comments—you heard a lot of discussion,

you may want to add to the record, clarify some points, straighten

out some incorrect information, supplement your statements.

Second, you have heard a number of members talk about we

have seen enough finger pointing and blaming. What we are trying

to do is find the causes and cure them. If you had to recommend

to us—and I know you filed a recommendation to the EPA and to

the Energy Department. If you had to recommend to us a series of

policy decisions that might be achievable in a bipartisan fashion,

not the kind of fights we are talking about over ANWR, we understand we are not going to achieve a solution there, but the kind of

solutions that might make these marketplaces more rational and

avoid the kinds of shortages that developed in California, now in

the Midwest, and potentially across America, if you could tell us

the one, two, three, four, five things we ought to do as legislators

for this country, concerned as Mr. Barrett is, as we all are, about

consumers getting ripped off, to make sure marketplaces work,

what would that series of recommendations be?

If you can please do that in concise form for us, I think the hearings then have better meaning for all of us, because it tells us

where we should go from here to avoid the next one.

I also want to thank—yes, the staff has reminded me, I should

thank our electricity witnesses. We didn’t ask a lot of questions

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about electricity. We have had a lot of hearings and, as you know,

a lot of potential markups of a electricity deregulation bill, so we

focused on gasoline. But we thank you so much for being here.

Let me thank you all again. You have been extremely patient.

Chairman Bliley and the entire committee wishes to again express

its appreciation for your utmost patience and your contributions

today.

The hearing stands adjourned.

[Whereupon, at 4:50 p.m., the committee was adjourned.]

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