```

[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

  ONGOING ENERGY CONCERNS FOR THE AMERICAN CONSUMER: NATURAL GAS AND 
                              HEATING OIL

=======================================================================

                                HEARING

                               before the

                    SUBCOMMITTEE ON ENERGY AND POWER

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 28, 2000

                               __________

                           Serial No. 106-168

                               __________

            Printed for the use of the Committee on Commerce

                   U.S. GOVERNMENT PRINTING OFFICE
67-634                     WASHINGTON : 2001

                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               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

                                 ______

                    Subcommittee on Energy and Power

                      JOE BARTON, Texas, Chairman

MICHAEL BILIRAKIS, Florida           RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               KAREN McCARTHY, Missouri
  Vice Chairman                      TOM SAWYER, Ohio
STEVE LARGENT, Oklahoma              EDWARD J. MARKEY, Massachusetts
RICHARD BURR, North Carolina         RALPH M. HALL, Texas
ED WHITFIELD, Kentucky               FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia             SHERROD BROWN, Ohio
TOM A. COBURN, Oklahoma              BART GORDON, Tennessee
JAMES E. ROGAN, California           BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ALBERT R. WYNN, Maryland
HEATHER WILSON, New Mexico           TED STRICKLAND, Ohio
JOHN B. SHADEGG, Arizona             PETER DEUTSCH, Florida
CHARLES W. ``CHIP'' PICKERING,       RON KLINK, Pennsylvania
Mississippi                          JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York                (Ex Officio)
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)

                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Cooper, Roger, Executive Vice President for Policy and 
      Planning, American Gas Association.........................   157
    Evans, Robert B., President, Duke Energy Gas Transmission 
      Corporation................................................   128
    Harris, Byron Lee, West Virginia Consumer Advocate Division, 
      Public Service Commission..................................    79
    Hoecker, Hon. James J., Chairman, Federal Energy Regulatory 
      Commission.................................................    47
    Lindahl, George, III, Vice Chairman, Anadarko Petroleum 
      Corporation................................................   125
    Madden, Kevin, Vice President and General Manager, Home and 
      Building Control, Federal Market, Honeywell International..   144
    Matthews, Hon. Charles R., Commissioner, Texas Railroad 
      Commission.................................................    65
    Mazur, Hon. Mark J., Acting Administrator, Energy Information 
      Administration, Department of Energy.......................    56
    Moniz, Hon. Ernest J., Under Secretary for Energy, Science 
      and Environment, Department of Energy......................    22
    Santa, John, CEO of Santa Energy, on behalf of The Petroleum 
      Marketers Association of America...........................   134
    Strongin, Steven, Managing Director, Goldman, Sachs & Co.....    84

                                 (iii)

  

 
  ONGOING ENERGY CONCERNS FOR THE AMERICAN CONSUMER: NATURAL GAS AND 
                              HEATING OIL

                              ----------                              

                      THURSDAY, SEPTEMBER 28, 2000

                  House of Representatives,
                             Committee on Commerce,
                          Subcommittee on Energy and Power,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:40 a.m., in 
room 2322, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Stearns, Largent, 
Shimkus, Shadegg, Bryant, Boucher, Hall, McCarthy, Sawyer, 
Markey, and Pallone.
    Also present: Representative Green.
    Staff present: Cathy Van Way, majority counsel; Miriam 
Erickson, majority counsel; and Sue Sheridan, minority counsel.
    Mr. Barton. The Subcommittee on Energy and Power of the 
Commerce Committee will come to order. Today we are going to 
have a hearing on ongoing energy concerns for the American 
consumers, with specific regard to natural gas and home heating 
oil.
    I want to apologize for being late. I normally start right 
on time. I held a press conference this morning at 9:30 on this 
issue; and there were a lot of press questions, and it took 
longer than it should have. So I want to apologize to my 
distinguished witnesses this morning for being late and to my 
colleagues for keeping them waiting. I don't normally do that.
    I want to welcome everyone to today's hearing. Today's 
hearing was intended to focus on the causes of the recent 
increase in the price of natural gas, the continued increase in 
oil prices and what we could do to address them. Unfortunately, 
a lot of the time for this hearing is going to probably be 
spent talking about the administration's politically driven 
decision to release oil from the Strategic Petroleum Reserve.
    The American consumers deserve a national energy policy 
that is comprehensive, long-term and well-interrogated. The 
goal should be to maximize domestic resources and minimize 
dependence on foreign resources. Components of a comprehensive 
strategy include, at a minimum, greater use of nuclear power, 
clean coal technology, natural gas, oil, renewable energy, 
incentives for conservation and incentives for alternative 
energy sources.
    Under the umbrella of NAFTA, I believe that it is time to 
begin to think about coordinating a Western Hemispheric energy 
policy with our NAFTA partners Mexico and Canada. Both of those 
nations have significant untapped natural resources. Within our 
own borders, I believe that we need to reassess the 
advisability of putting so many of our remaining potential 
mining and drilling areas off limits for various environmental 
and local political reasons.
    In past hearings of this subcommittee, we have learned 
about some of the things that resulted in today's energy 
crisis. The environmental policies that require refineries to 
produce boutique fuels specially formulated for the season or 
region have significantly reduced the flexibility of the fuel 
delivery system. Environmental policies have also made it 
difficult to site and build new energy extraction, 
transportation and refining infrastructure. So our existing, 
aging infrastructure must handle a record level of demand.
    Today, our oil refineries are operating at close to 100 
percent capacity, somewhere between 92 and 96 percent. 
Similarly, policies that prohibit the development of domestic 
energy resources automatically work to increase our dependence 
on foreign energy sources, giving the OPEC cartel an increased 
capability to establish the energy policy for the United 
States.
    Finally, the extremely low energy prices that we saw 
several years ago resulted in a lag in investment and in 
exploration and production, and that is hurting us today.
    Most administrations facing the challenges in our energy 
sector would initiate a meaningful debate on energy policy. The 
Clinton-Gore Administration apparently has instead chosen to 
take a political shortcut by releasing oil from the Strategic 
Petroleum Reserve. I have serious questions about this action. 
I question the administration's authority to swap oil from the 
Reserve in this manner.
    Even if the administration has such authority, I question 
if it is being used in accordance with the direction given to 
it by the Congress in the Energy Policy and Conservation Act, 
the act that authorizes the SPR.
    I certainly question the timing of the release. We are told 
that the purpose of this swap is to increase the fill level for 
the Reserve. Yet all public statements and press releases talk 
about moderating market forces and increasing the supply of 
refined products, like heating oil, on the market. Scant, if 
any, mention has been made of increasing the amount of oil in 
the Reserve, which today stands at approximately 570 million 
barrels.
    If the purpose is to fill the Strategic Petroleum Reserve, 
why did the administration wait until 6 weeks before the 
election to fill the Reserve by releasing oil? If the purpose 
of the release is to increase heating stocks, why didn't the 
administration come to Congress to ask for authority and money 
to address the problem with heating oil stocks rather than 
using the Reserve in a manner that was never contemplated by 
the statute?
    The contract system to be used in the allocation of the oil 
being released does not require it to be refined into fuel oil. 
So one can honestly question if the fuel oil supplies will 
really increase as a result of the move.
    I question why the administration decided to release the 
oil over the valid objections of the Treasury Secretary, and I 
question what the long-term impact of this drawdrawn will have 
on oil markets, both in terms of consumer prices and investment 
by the industry.
    It is true that Vice President Gore and several Members of 
Congress, including my good friend, Mr. Markey, who is going to 
have his say in just a minute, have called for release of oil 
from the Strategic Petroleum Reserve. All I can say to that is, 
if only the administration was so compliant every time a Member 
of Congress asked it to do something.
    But according to the administration's own Secretary of the 
Treasury, Larry Summers, such a release would only be a short-
term solution at best and may not even have any significant 
impact. I am going to quote from the memo that Secretary 
Summers of the Treasury Department sent to the President of the 
United States, and I quote:
    ``Chairman Greenspan and I believe that using the Strategic 
Petroleum Reserve at this time as proposed by DOE would be a 
major and substantial policy mistake. It would set a new, ill-
advised precedent and the claim that the exchange is nothing 
more than a policy of technical SPR management would simply not 
be credible in the current environment.''
    The memo goes on to say, ``The downsides of an SPR exchange 
outweigh the limited benefits.''
    He also says, ``Using the SPR at this time would be seen as 
a radical departure from past practice, as an attempt to 
manipulate prices. The SPR was created to respond to supply 
disruptions and has never been used simply to respond to high 
prices or a tight market. Given the substantial size of the 
proposed sale and its proximity to both the OPEC meeting and 
the November election, it will be impossible to argue credibly 
that the proposed exchange is simply a technical SPR management 
policy.''
    Yet that is what I expect the subcommittee is going to hear 
today from Under Secretary Moniz, that the proposed exchange is 
simply a technical SPR management policy. He has to say that, 
because a straightforward release from the Reserve would have 
been illegal under current circumstances.
    The President would have had to have declared that a 
national emergency exists and that there may be a significant 
or would be a significant reduction in supply which is of 
significant scope and duration. Since the creation of the 
Reserve, that high standard has been met once and used by an 
administration when Iraq invaded Kuwait for oil, and we fought 
to right that wrong. That release was scheduled to be 33 
million barrels and turned out to be, I believe, 17 million 
barrels.
    This subcommittee is very sympathetic to consumers that are 
vulnerable to high prices. It stands ready to work with the 
administration on improving the intersection point of supply 
and demand, but no option to remedy high prices should include 
the use of one of our strategic assets intended for use only in 
emergency situations not for short-term political expediency. 
No one would requisition a strategic bomber reserve of B-1s, B-
2s and B-52s to use as commercial airliners if the price of 
airline tickets got too high in one part of the country. It 
would be ridiculous to put that strategy in place and use that 
strategic asset when we have a market imperfection.
    As chairman of this subcommittee, I cannot accept the 
decision to release oil from the Strategic Petroleum Reserve 
cavalierly. It is a basic change in the role that our Strategic 
Petroleum Reserve has been intended to fill. If the this 
precedent is established and left unchallenged, any future 
Secretary of Energy and President can abuse the discretion of 
the law when market forces and political forces make it 
politically expedient.
    When I asked the briefing team from DOE yesterday if they 
could do this more than once, they with a straight face said 
yes, they could announce such an auction, if I remember 
correctly, every week.
    Now, I simply don't think that is acceptable under the law 
as it exists today, and I am going to do everything that I can 
to prevent that abuse of the Strategic Petroleum Reserve. I am 
going to formally request in writing today that the Department 
of Energy and the President explain to Congress in writing 
their policy justification for the action they plan to take, 
the legal authority for the action they plan to take, and the 
unique circumstances that require it to be taken at this 
particular time. That letter will get to the President and the 
Secretary late this afternoon or early tomorrow morning.
    I have three more pages of statement, but I have way 
overextended my time, so I am going to put that in the record. 
Suffice it to say, when we scheduled this hearing, it was 
supposed to be about broader policy questions in the natural 
gas markets and the fuel oil markets. The decision to release 
the Strategic Petroleum Reserve has heightened that issue.
    I wish the Secretary of Energy were here today. I 
appreciate the Under Secretary, Dr. Moniz, being here, but this 
is a big, big deal. You can't change the use of the Strategic 
Petroleum Reserve for political purposes and expect it to go 
unchallenged.
    With that, I turn to my good friend, the gentleman from 
Massachusetts, the Honorable Edward Markey.
    Mr. Markey. I thank you, Mr. Chairman, and I commend you 
for calling today's hearing to examine the current energy 
crisis facing our Nation, and that is just what we are facing 
right now, a looming energy crisis.
    Of course, some folks down in Texas may have another term 
for what we are experiencing. They call it profit-taking 
opportunities. But for consumers throughout this Nation, 
consumers who are worried about whether there will be enough 
supplies for home heating oil this winter and whether they will 
have to choose between heating and eating, this is a real 
crisis.
    Now, you can do two things when you see a crisis looming 
ahead. You can go into denial or you can take action to avert 
it. President Clinton and Vice President Gore have chosen to 
act. The administration has moved decisively to diffuse the 
short-term supply crisis we are facing by ordering the release 
of 30 million barrels of oil from the Strategic Petroleum 
Reserve. At the same time, the administration has put forward 
proposals to address our Nation's longer-term energy needs.
    This plan includes tax incentives for production, for 
efficiency and renewables, investments in alternative energy 
sources, more energy-efficient buildings and appliances, 
alternative fuel vehicles and transition toward a more 
efficient and competitive electricity marketplace.
    What has been the Republican response? Denial, denunciation 
and delay. They deny the need to use the Strategic Petroleum 
Reserve, they denounce the administration for acting, and they 
delay action on the administration's energy plans.
    So far this year, the Republicans have slashed solar 
renewables and conservation programs by $1.3 billion below what 
the Clinton-Gore Administration asked for so that we could have 
a long-term energy plan.
    They have failed to pass legislation the administration 
requested to provide tax credits to keep marginal wells in 
production, or tax credits to spur investment in renewable 
energy sources and energy-efficient technologies. And now the 
Republicans are mobilizing to challenge the administration's 
plan to deploy the Strategic Petroleum Reserve.
    That is only for real supply emergencies, say Governor Bush 
and Republican leaders in Washington.
    Well, the stockpiles of home heating oil in the Northeast 
are 60 percent below the levels of last year, and consumers are 
facing the possibility that there may be literally no oil in 
the tank in the event of an early cold snap. I would say we 
have an emergency. Even as we meet at this very moment, out on 
the floor of Congress is the other part of this doubleheader. 
In fact, the Republicans have brought the Energy and Water bill 
out to the floor at this very moment and they have stripped out 
of the bill the language which reauthorizes the Strategic 
Petroleum Reserve and authorizes a Northeast Home Heating Oil 
Reserve--taken it right out of the bill.
    So think of this as a story in two parts, as we speak, as 
we meet right now, 2 weeks before Congress adjourns with winter 
looming. You know, George Bush says that President Clinton is 
doing this 45 days before an election. Up in New England, we 
say he is doing it 45 days before winter starts. Just a 
different perspective as to what, in fact, the needs of the 
American people may be.
    But the big oil Republicans say we can't use the Reserve. 
Never mind that when DOE has done an oil swap to help out a big 
oil company, as it has done three times in the last 4 years, 
the Republicans never complained. Never mind the fact that only 
a few years ago Representatives Armey and DeLay joined 35 other 
Republicans to introduce a bill that would eliminate the Energy 
Department and abolish the Strategic Petroleum Reserve. Never 
mind that only 4 years ago, the Republicans were tapping the 
Reserve as a slush fund to pay for their tax cuts and budget 
priorities. Never mind that the Republicans have failed to even 
reauthorize the Strategic Petroleum Reserve under the Energy 
Policy and Conservation Act and that the authorization expired 
back on March 31.
    Never mind any of that. The Reserve is suddenly sacred to 
the GOP. It can't be touched to help consumers.
    I even read some disturbing articles in the press that 
yesterday you, Mr. Chairman, are considering introduction of 
legislation that would prevent the administration from moving 
forward on its plans to release oil from the Reserve. Here is 
how the press reported on your plans just yesterday:
    ``Futures contracts hit new highs on afternoon reports that 
U.S. Republican lawmakers, led by Congressman Joe Barton, 
Republican of Texas, were trying to block the release of crude 
oil from U.S. reserves on procedural grounds. `The market is 
down on the release,' said oil market analyst Tom Bentz. `If 
there is not going to be a release, we are going to snap back.' 
'' So that is the message from the markets. Stop the release 
and we will snap oil prices right back up to $38 a barrel.
    Why would you possibly want to drive oil prices back up and 
prevent American consumers from getting the help they are going 
to need this winter? That is like the Boston Red Sox saying we 
really aren't going to need Babe Ruth next season. Let's trade 
him to the Yankees.
    Well, I don't want to see the American public afflicted 
with an energy policy curse of the Bambino. The Strategic 
Petroleum Reserve, the Strategic Petroleum Reserve is our own 
``Sultan of Swap'' to deploy when the Middle East oil despots 
and multinational oil companies curtail supplies. That is why 
I, along with 70 of my House Democratic colleagues, including 
Minority Leader Gephardt and Dave Bonior and Caucus Chairman 
Frost, have signed on to a letter urging you to abandon your 
plans to block the release from the Strategic Petroleum Reserve 
to help consumers across this country.
    We go on to say that we are fully prepared to fight any 
efforts to prevent this oil from getting into the market, and I 
am fully confident that we can and will prevail in such a 
battle.
    I look forward to hearing from our witnesses today on the 
administration's decision to release the oil from the Reserve. 
I am glad that we are actually having this hearing, because I 
think the American public clearly understands that their best 
interest is on the side of the American government using its 
oil to battle the governments of other countries who are using 
their oil to undermine the American economy.
    I thank you, Mr. Chairman. I look forward to the witnesses.
    Mr. Barton. Thank you, Congressman.
    I point out that we announced the hearing before they 
announced the release of the SPR, but I would also point out 
that, as you well know, the Red Sox, when they swapped or sold 
Babe Ruth, they later regretted it. So you might want to think 
about that a little bit, too.
    Mr. Markey. That is my point, I think. Thank you for 
restating the central point.
    Mr. Barton. Your habit of selling oil, we may, I think, 
regret if we make that a precedent, is my point.
    Mr. Hall. Mr. Chairman, would the gentleman yield?
    Mr. Barton. Briefly, before I go to Mr. Bryant.
    Mr. Hall. I think Mr. Markey's remarks are another reason 
and occasion the former railroad commissioner, Jim----
    Mr. Barton. Hightower?
    Mr. Hall. No, not Hightower. From Kerrville.
    Mr. Matthews. Jim Nugent.
    Mr. Hall. Jim Nugent, before this committee answering Mr. 
Markey, when Mr. Markey asked him if he did really say, Let the 
Yankees starve----
    Mr. Markey. Freeze.
    Mr. Hall. [continuing] and freeze in the dark; and he 
denied it. And I gave him a chance to correct it, and he said I 
didn't say what Mr. Markey said. I said, what did you say? He 
said, I said, Let the thieving Yankees freeze and starve.
    Mr. Markey. No, we say the same thing about the Yankees, 
okay? But--it is in the other half of my metaphor, but when it 
comes to oil, we understand your attitudes toward that in the 
Northeast and Midwest.
    Mr. Hall. When you are fooling with Texas and our Governor, 
you have read that sign ``Don't Mess with Texas,'' and I will 
talk to you January 1 of this next year.
    Mr. Barton. It is obvious that we have a happy 
subcommittee, even though it is a serious issue that is under 
discussion today.
    The distinguished gentleman from Tennessee, Mr. Bryant, is 
recognized for an opening.
    Mr. Bryant. Thank you, Mr. Chairman. It is always a 
pleasure to follow the likes of Eddie Markey and Ralph Hall. I 
don't know how I can top that.
    But like my colleague from Massachusetts, I too have 
concerns about our chairman and some of the statements he has 
been making about this issue, in particular, one that is in 
today's Journal, Congressional Daily, where he says that--Mr. 
Barton says this, ``that we see no controlling legal authority 
to tap this reserve.''
    Are you going to next tell us you invented the Internet?
    Mr. Barton. Well, if I did, I would; but I didn't, so I 
won't.
    Mr. Bryant. Let me just say very briefly, I know we have a 
vote on here, that this is not a new problem.
    The price of heating oil last winter was up. The Clinton-
Gore Administration then really didn't lift much of a finger to 
address the fuel problem; and I might say that my concern here 
is certainly for the Northeast and that they have adequate 
heating oil, but it seems like the administration, this 
Clinton-Gore Administration, only becomes concerned about this 
shortage in heating oil in the Northeast every 4 years.
    That was the case in 1994. As I read newspaper stories from 
that time, when Mr. Clinton himself was engaged in a race for 
the presidency with Senator Dole; and this article, quoting 
from it, the St. Petersburg Times, it says, ``Not to be 
outdone, President Clinton announced the sale of oil from the 
Nation's Strategic Petroleum Reserve and asked the Energy and 
Justice Departments to investigate the reason for the higher 
gasoline prices,'' and so on.
    Again, he announced that. I don't think that was actually 
ever consummated, but here we are 4 years later, just before an 
election, and unfortunately it appears that there is at least a 
hint of some of the same motivation; that is, election-year 
politics versus the other years that were involved where the 
Northeast has faced similar situations.
    Let me add my complete statement to the record. I can go on 
and on, but I want to leave this panel and these witnesses that 
will be testifying today with a challenge of talking about 
whether or not the release of this 30 million barrels of oil is 
good public policy.
    I want to, as much as I can, reserve judgment on this 
question although, quite frankly, I am impressed with what 
Secretary Summers and Mr. Greenspan say about this. They don't 
think it is good public policy and, in fact, recommend strongly 
against this. But I hope we can get some answers to this.
    But I would point out, too, that since its creation, this 
reserve has--I think only one time has the President used his 
authority to actually dip into that, and that was during the 
Gulf War.
    The other question that is lingering here is, is it good 
politics? Not just, is it just good public policy for the 
Nation, but is it good politics? And there we get into why are 
we doing this every 4 years? And we really won't know that 
answer, will we, until November 7.
    I will say this much, if the American public is really 
listening on this issue, I think it would be outraged that for 
the last 8 months, when we all have been paying these extremely 
high prices, that now, simply because the President wants to 
help out the Vice President, he is willing to release oil from 
the Strategic Reserve to give him a bounce in the polls.
    I thank the chairman for the time, and I hope that the 
American people will recognize that the members--I hope all 
members on both sides of the aisle are calling for good, sound 
policy and not just politics; and I yield back my time.
    [The prepared statement of Hon. Ed Bryant follows:]

PREPARED STATEMENT OF HON. ED BRYANT, A REPRESENTATIVE IN CONGRESS FROM 
                         THE STATE OF TENNESSEE

    Thank you Mr. Chairman. Mr. Chairman, I appreciate your holding 
this hearing today. As part three of an ongoing investigation into our 
nation's energy policy, I have personally found these to be very 
enlightening, and I am looking forward to hearing from our 
distinguished witnesses.
    As elected officials, I believe that when we are here in 
Washington, participating in hearings, or marking up legislation, we 
should leave partisanship at the door and focus on our energies on 
accomplishing the people's business. But Mr. Chairman, as reluctant as 
I am to inject partisanship into our work in this committee, I really 
must cry foul at what is an obvious misuse of our nation's resources 
for personal and political advancement.
    As most Americans are aware we are currently suffering through some 
of the highest fuel costs in our nation's history with oil prices 
recently hitting a year high of $37.50 a barrel. Prices at the pump are 
sky rocketing and concerns are again being raised about the 
affordability of home heating oil. For some, this has meant an economic 
inconvenience, for others serious hardship, but all of us have spent a 
lot more of our paychecks on fuel that we are used to.
    Now, this is not a new problem. The price of home heating oil was 
high last winter and the price of gas began going up last spring. But 
apparently the Clinton/Gore Administration can't lift a finger to 
address fuel prices unless we are less than 6 weeks from an election.
    Let me offer some specifics. Last winter, when the Northeast was 
faced with low home heating oil stocks resulting in unusually high 
prices, many Members of Congress called on the President to release 
supplies from the Strategic Reserve. According to the Congressional 
Research Service, the Clinton Administration ``resisted calls for an 
SPR drawdown, arguing that this was not the sort of situation for which 
the SPR was intended.'' At the time, Vice President Gore concurred with 
this view, warning that using the Strategic Reserve to influence the 
oil market would be futile because ``all they [OPEC] would have to do 
is cut back a little bit on supply.''
    A lot has changed in just a few short months. Last week, new polls 
came out showing that the Vice President was now in a dead heat and 
perhaps even behind in the Presidential race. At about the same time as 
these polls came out, Vice President Gore changed his position on the 
reserve and ``publically'' appealed to President Clinton to tap the 
strategic reserve to ``ensure that oil prices stabilize at a lower 
level . . . [which] should help increase the supply of home heating oil 
and build up stocks before the winter months approach.
    To no one's surprise, rather than continue to oppose this type of 
drawdown, President Clinton announced the that he will release 30 
million barrels from the reserve.
    Is a 30 million barrel release good policy? I have reserved 
judgement on this question, and I hope that today's hearing will better 
education us on this particular question. I would point out, however, 
that since its creation in the 70s, only once has a President used this 
authority and that was during the Gulf War.
    Is this good politics? We won't know the answer to that question 
until November 7th. But, if I were the American public, I would be 
outraged that for the last eight months, I had been needlessly paying 
higher prices simply because the President wanted to wait until a 
release from the Strategic Reserve would give Vice President Gore the 
biggest bounce in the polls.
    I thank the chairman for the time, and hope the American people 
will recognize that the Members on this side of the aisle are calling 
for sound policy, not politics.

    Mr. Barton. I thank the gentleman.
    Does the gentleman from Texas wish to make an opening 
statement, Mr. Hall? Mr. Hall, do you want to make an opening 
statement right now or are you going to come back? Do you want 
to go vote and then come back?
    Mr. Hall. What do you want me to do? You are the chairman.
    Mr. Barton. Well, Mr. Largent, do you want to make an 
opening statement now?
    I am not going to start the hearing until the members that 
were present while I was absent have an opportunity to make an 
opening statement.
    Mr. Hall. Will I have an opportunity when I come back?
    Mr. Barton. You will have an opportunity when you come 
back.
    Mr. Hall. I will be right back.
    Mr. Barton. You will come back?
    Mr. Shimkus. I have already voted.
    Mr. Barton. You have already voted?
    Mr. Shimkus. Yes.
    Mr. Barton. Mr. Shimkus is going to take the chair.
    Make your opening statement, John, and then stop. Okay? We 
don't want to start the hearing until I am back and the members 
that were here at the beginning are back.
    So I am going to turn the chair over to Mr. Shimkus for an 
opening statement only and then we will suspend the hearing.
    Mr. Shimkus [presiding]. Thank you, Mr. Chairman.
    I had a real long opening statement. I wasn't going to make 
it long because everything was covered, but maybe I should drag 
it out now. But my intent is not to do that.
    I will highlight just briefly some of the comments that I 
made earlier this morning, and I do hope that throughout this 
hearing we also address--the SPR is going to be the big issue 
we are going to talk about today, and that is what happens in 
the timing of hearings, but I think there are also some other 
critical issues that we need to address--energy reliability 
being one, the natural gas issue and that.
    So let me begin by reiterating stuff that many of you have 
heard me say over my 4 years of being on the subcommittee, that 
I do feel we have been shortchanged maybe on both sides by our 
inability to work toward a consensus national energy policy. 
One side will say they have one; the other side will say they 
don't. We say we have one; the other side says we don't have 
one. And that does not do our public--it does not serve us very 
well.
    I do know that imported oil has increased 58 percent. 
Fifty-eight percent of our import is now foreign oil, which is 
up from mid-30 percent during the Gulf War.
    That shows a backward approach to an energy policy. I think 
most Americans would be aghast that we are now more reliant on 
foreign imported oil than even before the Gulf War, and 
obviously our approach is to try to change that.
    A national energy policy takes in many different aspects. 
Imported oil will always be a portion of the portfolio. We will 
never relieve ourselves, but the oil reserves that we have in 
this country should be part of our energy policy. The other 
energy-producing capabilities that we have through coal and 
through nuclear are going to be part, have to be part, of a 
national energy strategy.
    Of course, my personal favorite is biofuels, which many of 
you have worked with. I have had some small successes in 
biodiesel, included in the Energy Policy and Conservation Act. 
I think that is a step in the right direction. And the debate 
with ethanol, it is all part of it. It is not going to consume 
all of the energy portfolio, but it should be a portion. Just 
like any investment portfolio should be diversified, our energy 
portfolio should be diversified.
    As we see today, we are here because--it is not because of 
our overreliance on imported oil.
    The second issue I want to talk about is to address the 
SPRO issue, which--I also had the opportunity to meet with 
folks from the Department of Energy yesterday, and I appreciate 
the time.
    As a former Army, active Army officer, reservist, concerned 
with national defense, I think about the Strategic Petroleum 
Reserve and I highlight the first word, ``strategic.'' I think 
Chairman Barton was right on the line saying that if you have a 
strategic bomber fleet, you don't transform those to carry 
passengers if the prices of airline tickets go up. If you have 
a Strategic Petroleum Reserve, and it is really not that much, 
if we have a stoppage in the sea lanes, what are we going to 
use to fuel the tanks? What are we going to use to provide the 
jet fuel? What are we going to use for our amphibious assault 
vehicles? That is there for our national security.
    So when I see what I think is the misuse of it for whatever 
purpose we will delve in today, I see it as an assault on our 
men and women in uniform who may be life and death utterly 
dependent upon our Strategic Petroleum Reserve to fuel the 
weapons of war, should we need it; and that is my focus as 
still being involved with the defense forces of our Nation.
    The third thing that I mentioned already this morning is 
this whole debate over price and supply, and there will be 
quotes flying around from everybody. I know that we had some 
important hearings about the high gasoline prices in the 
Midwest this summer--so high, in fact, that the Governor of the 
State of Illinois and the State legislature rolled back the gas 
tax, so high that the Governor of Indiana did it--he could do 
it by rule--but not high enough to release any oil from the 
Strategic Petroleum Reserve.
    I don't think I would make a very good administration 
official, especially if I had risen through the ranks and would 
have to tow the party line on decisions made by the executive 
branch, which I think deep down inside our heart we know that 
there are other reasons for the release at this time, and we 
will go into that.
    This is a great committee. We deal with great issues. An 
energy policy is critical as our Nation moves forward, and we 
have to balance the environmental debate with our needs for a 
reliable source of supply and a balanced approach. Hopefully we 
will get through the battle, go back to some more strategic 
thinking at the end of the hearing.
    With that, I see no more of my members having returned from 
the vote, so at this time I will recess the hearing, subject to 
the call of the Chair.
    [The prepared statement of Hon. John Shimkus follows:]

 PREPARED STATEMENT OF HON. JOHN SHIMKUS, A REPRESENTATIVE IN CONGRESS 
                       FROM THE STATE OF ILLINOIS

    Good morning, Mr. Chairman and to all who have shown up this 
morning. I am looking forward to this hearing today.
    For the past several months, I would say that our country has been 
on the verge of an energy crisis. Oil and natural gas prices have sky-
rocketed to almost record highs. The price increases now pose a real 
threat to our country's continued economic growth. What can be done?
    What we have heard from this Administration is the blame game. They 
blame, as they call it, ``Big Oil.'' They blame corporate America for 
gouging the American consumer. They blame the Republican controlled 
Congress for not passing their energy agenda (which as Chairman Barton 
has mentioned is being held up by Democrats in the Senate). They'll 
blame anybody and everybody, as long as it isn't them.
    EPA was not willing to take the blame for the gasoline price spikes 
in the Midwest this summer. They knew what was coming. All they had to 
do was say there may be some supply problems for a few months while a 
new, cleaner blend of gasoline enters the market and this will likely 
cause the price of gasoline to increase for a short time. But they 
couldn't, they blamed everyone else. They've been investigating oil 
companies for months with nothing to show for it. Even the Department 
of Energy doesn't agree with EPA.
    And then, as oil prices continued to stay high this summer, we've 
heard VP Gore on the campaign trail blaming ``Big Oil.'' Big Oil he 
says is the problem. It couldn't be his administration. They've done 
everything they can, right?. They've made domestic oil production a 
major priority, right? That's why small wells all over Illinois have 
closed down. That's why there hasn't been drilling in ANWR, even though 
most Alaskans favor the drilling.
    And then we have the Strategic Petroleum Reserve (SPR). While it 
may be well intentioned, the move to ``swap'' some reserves will do 
little to address our nation's heavy dependence on foreign oil and most 
likely will not impact price. While a President himself has technically 
only drawn from the SPR once, during the Persian Gulf War, this most 
recent action to allow the Secretary of Energy to ``swap'' oil reserves 
marks the second time that President Clinton has ordered large releases 
from SPR, both have happened to take place in the months before 
Presidential elections. The SPR was established to protect Americans 
from a cut-off of oil imports, not to manipulate prices and not for 
political gain!
    On one hand we have Secretary Richardson saying releasing oil is 
all about supply and that supplies are down across the country. On the 
other hand we have both President Clinton and Presidential candidate 
Gore saying it is about price. Still yet, we have DOE staff saying this 
was done to increase oil in SPR?
    Which is it? Are we taking from SPR because of supply problems, or 
because of the high prices or for politics?
    To be honest, this seems to sum up this administration's whole 
energy policy, confusing. One agency is doing one thing, while another 
is doing something completely different. Al Gore is out there saying 
Big Oil is gouging the consumer for profits, while Secretary Richardson 
is saying on ``Meet the Press'' that oil companies will actually make 
money because of the SPR ``swap''. Secretary Richardson is saying we 
are doing all we can to increase domestic production, yet the President 
has used his executive powers to severely limit oil and gas activity on 
government lands, including ANWR in Alaska. DOE has been trying to 
increase the use of renewable fuels, but rules and possible waivers 
issued by EPA run contrary to that. And this isn't even going into the 
contradicting policies concerning nuclear fuel, hydro power and coal. 
In the end we are left confused, paying more for oil and no energy 
future.
    With regards to home heating oil, I would like to mention one thing 
that may help the supply problem. Biodiesel. Since biodiesel is made 
domestically with renewable resources, using it at blended levels with 
home heating oil would still reduce dependence on foreign oil and 
increase our supply. While there may be some concerns with using 
biodiesel as home heating oil, there should be no problems when blended 
at low levels between 5 to 20%. Even at those small levels, it could 
stretch supplies enough to last the winter and keep the prices at 
reasonable levels.
    Although we are currently talking about biodiesel's use in the home 
heating oil market this year because of the high price of heating oil, 
to help avoid this situation in the future, we should be developing a 
long-term strategy for integrating biodiesel and other alternatives 
into home heating oil every year. Biodiesel can help displace imported 
petroleum, improve air quality and support domestic industries like 
agriculture.
    I happen to think that our nation should not rely only on just one 
energy source such as natural gas, coal or wind to generate power, but 
all of these sources. It is the smart thing to do over the long haul. 
Just like any good retirement portfolio, our energy industry should be 
diversified.
    Again, thank you for having this hearing today Chairman Barton. I 
yield back the balance of my time.

    [Brief recess.]
    Mr. Barton. The subcommittee will come to order. We expect 
another vote in approximately an hour. We would like to finish 
our opening statements and, if possible, get the first panel's 
testimony before we go into questions.
    The Chair would recognize the gentlelady from Missouri, 
Congresswoman McCarthy, for an opening statement.
    Ms. McCarthy. I thank the chairman. I just wanted to make 
sure I wasn't bumping my most senior member, Mr. Hall.
    I appreciate the opportunity to make a few brief remarks 
and to put the rest of my remarks in the record.
    I am concerned about the direction in which this hearing 
seems to be going with regard to efforts that are under way to 
try to address a very real need for the American consumer, that 
is, the need for an affordable fuel to get products to them, 
get them to the workplace and keep this strong economy going.
    There was one other time in recent history when strategic 
oil reserves were used, and it did something not unpredictable, 
but rather parallel to what we anticipate and are experiencing 
currently in Mr. Gore's effort to use these resources again to 
address consumer needs; and that is that it lowered the oil 
prices which was, in fact, a boon for the consumer and 
certainly was something to, in the world of economics, take 
note of. But certainly there was no other--there was no 
particular downside in that period in our history, and I don't 
anticipate one now.
    But what I do find frustrating and what I do anticipate is 
lots more rhetoric about what we should be doing to address our 
energy needs rather than action; and that is a very real 
concern that I have had in my short service on this 
subcommittee, that as we talk about energy restructuring and as 
we talk about some of the global climate concerns that we have, 
we fail to really fund the programs adequately that we need to 
be funding that the National Energy Policy Act earlier in this 
decade recognized would get us more stability, less dependence 
on foreign fuels and certainly a better atmosphere and climate, 
our commitment to the globe and to our children.
    So I hope today's hearing will move in the direction of 
some substantive things that we can be doing, as policymakers 
here in the Congress, to see that we carry out some of the very 
good ideas proposed by a previous Congress and reiterated when 
the National Energy Policy Act was renewed; and that we rise 
above the tendency to be political or partisan or finger-
pointing and, instead, walk away from this experience with some 
goals in mind that we can achieve even now, this late in the 
session, and certainly as we move forward in the next session.
    Thank you very much, Mr. Chairman.
    Mr. Barton. Thank you. The Chair would recognize Mr. Hall 
for an opening statement.
    Mr. Hall. Mr. Chairman, thank you very much, and members of 
the committee. I certainly appreciate your convening this 
hearing today to take an early assessment of the outlook for 
the prices and supply of natural gas and heating oil as we move 
into the winter days that are ahead.
    Most of our talk right now has been about SPRO, and the 
President's recommendation and all that. That is important and 
maybe it is important to the American people to know that we 
care, that we are trying to do a little something. So I am not 
terribly critical of that. I don't really, deep down, support 
it, but if 5 or 6 days of maybe an effort to lower gasoline 
prices helps the American people, maybe that is good.
    But, you know, the big--the big fish here is escaping us, 
and that is supply. We have to get into a supply, some type of 
a steady, dependable supply. What we will hear from these 
witnesses, these men who will testify here--and I thank them 
for their time, because it takes time to come up here, it takes 
time to get ready, it takes time to sit there and listen to all 
of us make our speeches. We thank you for your time, and I 
recognize a great group here who will give us some good input, 
but I don't believe we are going to hear a very pleasant 
scenario.
    It is a strong signal of how quickly things can change in 
the energy markets of the world. About 18 months ago, this 
committee was holding hearings on the impact of low prices on 
exploration and production for oil and natural gas. Experts 
told us then of impending problems, but Congress didn't do 
anything about it. We didn't do anything to stimulate domestic 
exploration or production. We didn't do anything about it to 
give some stability to oil and gas or energy prices to where 
the little guys that find energy--they look for it and find it, 
and the big guys buy it; but the little guys have to have some 
incentive to look for it, and they have to have some funds to 
look for it.
    No bank can loan money to look for oil or gas or energy 
today, no matter how high the prices are, because we don't have 
any duration--they don't have anything, and they would have 
their files checked and tossed out, or written down by 
examiners when they got there.
    Today we need these additional supplies of oil and natural 
gas. We go to the fields and find that the infrastructure to 
support exploration and drilling programs is in terrible shape. 
I can go by Tyler, Texas, and see the stacked rigs at Delta 
Drilling; and it cries out loud and gives me testimony of the 
fact that the oil and gas industry is in trouble. And when the 
oil and gas industry is in trouble--there are 10 States that 
produce it, the other 40 use it; and when we want good 
situations for the oil and gas producers, we are outvoted 4-to-
1. We have to trade something for it.
    Service companies have left the business, the rigs have 
been cut up for scrap and, most importantly, many of the people 
who have knowledge of how to get oil and natural gas out of the 
ground, they have left the business. I am not talking about the 
chairman of the board or the head of the drilling outfit. I am 
talking about the guy that does the rig, the tool pusher. They 
are all in 7-Elevens now. They are working. They are retrained 
or they are driving long-line trucks. We are going to have a 
hard time ever getting them back.
    In this good economy, a lot of people have found other jobs 
and cannot be expected to return.
    Mr. Chairman, we ask ourselves, why do we continue to make 
these mistakes? Or as we would say in East Texas, why do we 
continue to eat our seed corn? And that is exactly what we are 
doing. It is because we fall for the lure of lower oil and gas 
prices, and I am not indifferent to that. I like paying 99 
cents at the pump instead of $1.49, or as much as $2 in some 
States, but I also recognize that low prices are every bit as 
much a sign of an energy crisis as the relatively high prices 
we find ourselves paying now. What is missing, once again, is 
stability, price stability.
    Today oil is a worldwide commodity, and we no longer have 
the ability to set the price. There may have been a day and 
time when we could. We complain about it, yet we do nothing 
about it. Domestic oil and gas production continues to decline 
even as demand grows.
    Members, what is wrong with this picture? We have the 
ability to produce and influence the world price of oil. We 
have that ability. We have to be willing to provide the tax 
incentives to encourage domestic oil and gas production, not 
just when the prices are high, but when they are inevitably 
going to fall, and they go up and down. There is no longer a 
need to worry about unjustly enriching the big oil companies. 
They are largely gone now; they have gone offshore and they are 
not likely to return.
    We also have to be willing to take a look at our public 
lands and permit additional exploration and production on 
them--Alaska, the Pacific--Atlantic coast and Pacific coast, as 
well as the onshore lands. Don Young has a bill in this 
Congress that if we would all tie on to it, get together--I 
invite the environmentalists to come into it because they are a 
great part of it.
    I hope I am an environmentalist, but let me tell you 
something. An offshore rig off of Santa Barbara doesn't look 
near as bad to me as a troop ship laden with our boys and girls 
going somewhere to fight for energy, and don't you ever think 
this country won't fight for energy. We will. We sent 400,000 
kids to a desert over there. That was a war over energy. We 
didn't love the Emir of Kuwait; we couldn't have cared less. We 
didn't want a bad guy to get all the energy in that part of the 
world.
    So that is the answer. Japan went south into Malaysia when 
Cordell Hull and Henry Simpson cut their energy off. Hitler 
went into the Ploesti oil fields. History repeats and repeats 
and repeats that energy is a national asset, and that is 
something that we have to remember and to take care of.
    Other developed countries without the fuel resources that 
we have would like to be in our position. The United States can 
influence the price, but we have to pay to play.
    Mr. Chairman, I don't want to go over, but I applaud the 
administration for recognizing that natural gas is a clean, 
efficient fuel that is highly suitable for electric power 
production. However, they have only worked half the problem. 
They have neglected the supply side, and unless there is a 
substantial supply response, we are not only likely to have 
high prices but natural gas supply shortages as well.
    As good as natural gas is for a variety of uses, and I 
respectfully say that it ought to be the fuel of the future, we 
shouldn't neglect coal. Dr. John McKetta, an eminent lecturer, 
a professor and engineer, said that if we could but mine our 
coal, we have enough coal to double the output of the total of 
the OPEC nations all put together. Now, that is saying 
something. Coal has the potential to be as clean a fuel as gas, 
but more research has to be done.
    Other States have to put scrubbers on their coal. We have 
to have the technology to develop clean coal technologies to 
reach these goals.
    I have sympathy--I kid Mr. Markey and we go back and forth 
at one another, but I respect his problems for the North and 
East and for their need for heating oils. He and I worked on a 
bill together to try to reduce that. You know what all the 
pitfalls are there, but I recognize them, as does Mr. Markey. 
We want the same thing; we want a supply system for this 
country.
    With that, Mr. Chairman, I yield back my time.
    Mr. Barton. Thank you, Mr. Hall.
    The gentleman from Oklahoma, Mr. Largent.
    Mr. Largent. Thank you, Mr. Chairman. I want to thank you 
for holding this hearing this morning to look at what the 
American consumer can expect to pay for natural gas and heating 
oil in the coming months.
    Unfortunately, I have a sense that consumers will have to 
continue to pay higher electricity prices and more to heat 
their homes until Congress and the future administration work 
in a cooperative effort to develop a long-term, comprehensive 
energy policy.
    We will hear from Mr. Moniz, Under Secretary of Energy, of 
DOE's plan to release 30 million barrels of oil from the 
Strategic Reserve over the next 30 days to bring down gas and 
heating oil prices. Additionally, the administration plans to 
release $400 million in LIHEAP funds to assist low-income 
households; and I have questions of Mr. Moniz in this seemingly 
contradictory behavior, because I have a letter here dated 
February 24 that argued against releasing oil from the 
Strategic Reserve.
    Mr. Chairman, you held a press conference this morning 
questioning the administration's authority to release oil from 
the Reserve, and I wholeheartedly agree with your assessment 
that the SPRO is for emergencies and not a tool to reduce oil 
prices.
    The administration may think that this is a great election 
year campaign tool, but from a public policy standpoint, it is 
shortsighted and potentially dangerous.
    I commend members' attention to the testimony of Mr. Steven 
Strongin, managing director of Goldman Sachs. Mr. Strongin is 
here this morning. He hit it on the nail squarely in his 
assessment as to why--quote, ``Why has storage capacity failed 
to keep pace with demand?'' The answer in it--lying in its 
simplest form, is that the combination of regulation, taxes and 
direct market intervention has made the return on capital in 
the oil industry a break-even proposition at best, and has made 
investing in the downstream, refinery, marketing, storage and 
other aspects of the infrastructure, distinctly unprofitable.
    The market has responded by not providing the capital to 
expand, and the net result is the capacity constraints that you 
see today.
    What is the administration's solution? Releasing 30 million 
barrels from the Strategic Petroleum Reserve.
    I will be interested in hearing from our witnesses as to 
what free market solutions we should be examining, rather than 
a government command and control approach.
    I yield back the time.
    Mr. Barton. I thank the gentleman from Oklahoma.
    The gentleman from New Jersey, Mr. Pallone, is recognized 
for an opening statement.
    Mr. Pallone. Thank you, Mr. Chairman.
    Mr. Chairman, I have to say that I was really shocked to 
see the effort this morning by the Republican leadership to 
challenge the President's authority to tap the oil reserve, and 
I can't----
    Mr. Barton. Would the gentleman yield on that?
    Mr. Pallone. Yes.
    Mr. Barton. I don't want to tar the Republican leadership. 
That was a Joe Barton press conference, so you can be shocked 
at me, but don't tar my good friends in the leadership.
    Mr. Pallone. I apologize. I meant you, and I guess also 
Chairman Murkowski and a bunch of other people here, though; I 
guess the Ways and Means chairman and others.
    It doesn't mention the Speaker, that is true.
    Mr. Barton. Okay.
    Mr. Pallone. But let me say this. The reason that--I can't 
help, after I, you know, see what is happening here on the 
other side, but look at this as a situation--sort of classic 
situation of ``us versus them.'' You know, I am from the 
Northeast. People are going to be hurting. They want a 
response.
    We theoretically come down here because we are concerned 
about our constituents and their concerns. And the bottom line 
is that the President's ability and willingness to tap the SPRO 
is the only thing that in the short term is going to deal with 
this crisis in terms of price.
    I can't help but think that what is really going on here is 
that, you know, OPEC and big oil in the United States and, you 
know, the Bush-Cheney ticket obviously--you know, coming from 
an oil background, they are all against this because they don't 
want the price manipulated, because they don't care if the 
price is high, frankly. If they cared whether the price is 
high, they wouldn't have a problem with the President trying to 
do something to bring it down.
    You know, they have been criticizing Vice President Gore, 
as well, because he has been out there saying that the SPRO 
should be tapped. But I would say, you know, it is interesting 
because as my colleague said, Mr. Barton, not only Democrats, 
but some Republicans and a lot of Democrats called on President 
Clinton to do this swap. We had over 100 House Members, 
including 20 Republicans, such as the House International 
Relations Chairman Gilman and Representative Rick Lazio of this 
committee, that sent a letter to President Clinton requesting 
the swap.
    And I, for one, would not heed the allegations of the big 
oil ticket nor trust them to protect the Nation's consumers 
from high oil prices, particularly if the oil profits to which 
they are linked were at stake.
    Tuesday's Washington Post, in the business section, noted 
that this past Monday oil prices fell to their lowest levels in 
a month, from $38 to $32 a barrel in the wake of the 
announcement regarding the Strategic Petroleum Reserve. I 
understand that yesterday prices fell even more, and John 
Lichtblau, chairman of the Petroleum Industry Research 
Foundation, noted in the same Post article that the price drop 
reflects the fact that inventories will be increased. He went 
on to say that while very recently there has been speculation 
about $40-a-barrel oil, now there is speculation that it will 
drop to below $30. The assumption has changed directionally.
    What the President is proposing to do works. I don't really 
care about anything else because that is what the people want. 
They are the ones that are going to be suffering. If it works, 
we should do it.
    In fact, several OPEC ministers have been tacitly 
supportive of President Clinton's actions as well, because it 
creates greater certainty in the marketplace. The Venezuelan 
oil minister, and OPEC president Ali Rodriguez, reaffirmed the 
administration's belief and intent in releasing oil from the 
SPRO. I think oil prices will not remain at their high levels.
    In spite of this, according to Reuters, the Chair of this 
subcommittee wants to stop the White House--and he has 
admitted--from conducting the SPRO swap. I just don't 
understand the whole theory here. I don't understand why the 
chairman and some of the other Republicans are trying to make 
an issue of this when it works to keep the price down and to 
bring the price down, which is what we should be concerned 
about if we care about the public and our constituents.
    Let me go on to a second thing because I know the time is 
short. The other thing that is really bothering me now is that 
I see Murkowski and others using this as an excuse to try to 
destroy the environment.
    Just 2 days ago, Senator Murkowski was on the Senate floor 
once again pushing for drilling Alaska's last remaining open 
space, the Arctic National Wildlife Refuge. Not only is he 
advocating a policy of environmental destruction, but drilling 
the Arctic Refuge won't produce a drop of oil for many months, 
so it is not going to do anything in the short term, and on the 
other hand, would only produce several months' worth of supply. 
Instead of drilling the Arctic Refuge, we should be banning 
exports of Alaskan oil to other countries.
    Senator Murkowski also has been pushing for abolishing the 
fuel tax and for offshore drilling, and yet there has been 
bipartisan support in both Chambers to the existing moratorium 
on offshore drilling for quite some time and widespread 
bipartisan opposition to doing away with the fuel tax.
    Now, it is the big oil GOP leadership in both the House and 
the Senate that were reluctant to investigate whether the oil 
companies were profiting excessively from the gas price spikes 
this summer, and the Clinton administration's investigation has 
proven that the increase in price was not due to environmental 
standards as the Republican majority had alleged in their 
attempt to divert attention from the oil giants' greed. They 
don't want to do anything--the other party doesn't want to do 
anything about the price, and they want to use this as an 
excuse to try to destroy the environment and go after ANWR and 
everything else.
    Now let me say, what should the Republicans, who are in the 
majority, be doing? Instead of trying to reverse the positive 
steps the administration has taken and making these false 
accusations, I would challenge the GOP leadership to adopt the 
sound energy policy, which they have failed to do; pass the 
measures that the Democrats have been advocating and have been 
proposed by the Clinton-Gore Administration in its budget 
request. Above all, we should be implementing measures that 
sustain our natural resources, practical measures that would 
conserve energy, promote our long-term energy security and 
promote international competitiveness in alternative energy 
resources, all without sacrificing our economic growth.
    We hear today that the bill, the Energy and Water bill that 
is on the floor right now, actually cuts research in solar 
energy and other things that the President had proposed. They 
are going in the opposite direction if they want to conserve 
and they want to come up with alternatives.
    Before we adjourn, the GOP leadership should pass the 
administration's request for funding and tax incentives for 
energy efficiency and renewable energy measures, efficient 
energy research and development, weatherization and alternative 
fuel vehicles, and mass transit.
    I just don't understand the whole theory on the other side. 
It is against the will of the people who want the prices to 
come down. It is against the environment and preservation of 
the environment. And above all, they are doing nothing to try 
to conserve energy resources and make it so that we have a 
sound energy policy. And any excuse to suggest anything else is 
going on here on the part of the majority party, I think is 
just an effort in trying to pull the wool over the eyes of the 
public.
    Thank you, Mr. Chairman.
    Mr. Hall. Would the gentleman yield?
    Mr. Pallone. Oh, sure, Mr. Hall.
    Mr. Hall. I think that you have made some good points here, 
and I am kind of like the old storekeeper that said, I ignore 
the impossible and cooperate with the inevitable.
    So along that line, if they are going to take out of the 
SPRO--and it appears that they are going to; I am not just dead 
set against it if it helps the American people or even makes 
them feel like we have some feeling for them--but would you 
join in a sense of Congress to ask the President, when they 
refill that 30 million barrels, that they not go for Pemex oil, 
that they get domestic oil here no matter what the price is?
    Mr. Pallone. Let me say this----
    Mr. Barton. Well, this is an opening statement. I like to 
hear a debate between members of the Democratic Caucus, but I 
don't think we need to do it here.
    Mr. Hall. I believe he is going to agree with me, Mr. 
Chairman. I wish you would give him another 30 seconds.
    Mr. Barton. I don't think he is going to agree with you.
    Mr. Pallone. Well, no.
    What I am going to say, Mr. Hall, is that when you were 
speaking before about the need to encourage domestic oil 
production--I am not talking about an ANWR offshore, but just 
in general--I think that we should do whatever we can to do 
that, whether it is tax incentives or some of the things you 
propose. I mean, I think those things make sense.
    I just don't want the offshore drilling and the ANWR and 
that, but I agree with you that we need to do more to encourage 
domestic production, absolutely.
    Mr. Hall. You are very sensible and you were a good 
chairman of the subcommittee, and I respect you. I am going to 
ask you to help me with that sense of Congress when we get 
under way. Thank you.
    Mr. Barton. The gentleman from Florida is recognized for an 
opening statement.
    Mr. Stearns. Mr. Chairman, I just briefly just want to 
maybe comment on what Mr. Pallone talked about.
    The Kyoto Protocol talked about less dependence on oil and, 
in fact, trying to bring discipline into the market by letting 
the prices move in the direction that they would to encourage 
people to come up with alternative energy sources and also to 
get people to discipline themselves.
    So I think the one thing, Mr. Chairman, that Mr. Pallone is 
forgetting is that we have to allow the markets to have a 
little swing here so that discipline can come in place; and the 
Kyoto Treaty, the protocol, was talking about just that.
    I don't think there is any conspiracy here. I think OPEC is 
trying to get the price of oil higher and Americans are 
increasing their dependence. What we need to do--I think the 
Senator from Alaska is correct, that there is probably some 
nice way that we can start using the Alaskan oil reserves and 
do it environmentally in such a way that we protect the 
environment; and I think that can be done. Certainly, if we 
have that large a supply of oil, that would be helpful to bring 
down, and I don't think it will destroy the environment.
    So I think it is important that my colleagues realize that 
there is a way to balance the exploring of oil with the 
environment, and we have done that every day.
    His description that we do the will of the people, that is 
fine, but that is a short-term solution. The long-term solution 
is to get the American people less dependent upon foreign oil 
and develop our alternatives ourselves.
    What the President did is a short-term solution. It could 
have actually been done by just deleting some of the foreign 
tax--the Federal tax that is on the gasoline; and this swap 
that the President is doing, it might be a short-term solution, 
but I think this committee and what we are trying to do is work 
out long-term solutions so that the people are less dependent 
on foreign oil, we have alternative sources, we use our 
environment in such a way that we have the fruits of our oil 
supplies, at the same time protect the environment and at the 
same time protect the people from themselves in the sense of 
giving them incentives to discipline themselves to use less 
gasoline.
    Thank you, Mr. Chairman.
    Mr. Barton. I thank the gentleman.
    Does the gentleman from Texas, Mr. Green, wish to make an 
opening statement?
    Mr. Green. Mr. Chairman, I appreciate the opportunity, but 
not being a member of the subcommittee and having a great deal 
of interest in the issue, I just appreciate the chance to sit 
in.
    Mr. Barton. We appreciate it.
    Mr. Largent, you did give an opening statement, I believe, 
right?
    Mr. Largent. Yes.
    Mr. Barton. Seeing no other members present, we are going 
to let the long-suffering first panel actually testify now. We 
are going to start with the Under Secretary, Dr. Moniz, and we 
will go right to the distinguished chairman of the Federal 
Energy Regulatory Commission.
    We have the distinguished former chairman and current 
member of the Texas Railroad Commission, Mr. Matthews, and we 
will continue on.
    I have read most of the opening statements. I know that 
they are a little bit longer than 5 minutes. I am going to 
recognize each of you for about--let's try 8 minutes, and if we 
need a little bit more time, we'll allow it. Does Mr. Shadegg 
wish to make an opening statement?
    Mr. Shadegg. Mr. Chairman, I have an opening statement, but 
since you have closed opening statements, I will simply insert 
it in the record. I have a hunch you heard my opening 
statement.
    Mr. Barton. We will give you an opportunity if you want.
    Mr. Shadegg. I have a hunch you heard my opening statement 
at our press conference earlier this morning. I think this is 
an important hearing. I thank you for holding it.
    I have to tell you that I am worried about the policy we 
are embarked upon and look forward to hearing the testimony of 
the witnesses.
    [The prepared statement of Hon. John Shadegg follows:]

    PREPARED STATEMENT OF HON. JOHN B. SHADEGG, A REPRESENTATIVE IN 
                   CONGRESS FROM THE STATE OF ARIZONA

    Chairman Barton, I commend you for holding this hearing on the 
prices of heating oil and natural gas. Today's hearing is especially 
timely because of the Administration's recent decision to release 30 
million barrels of oil from the Strategic Petroleum Reserve (SPR) in 
order to force down the price of heating oil.
    I am very concerned with the decision to raid the SPR for three 
reasons. First, releasing oil from the SPR carries serious national 
security implications. The SPR is not intended as a hedge against high 
oil prices during an election year, it is a national security asset 
designed to keep our economy functioning during times of war and dire 
emergency. It was created in 1975 at the height of the Oil Embargo, 
during which our economy was literally being brought to a halt by 
severe shortages of oil. In fact, when Congress authorized the SPR, it 
specifically stated that the storage of oil would ``diminish the 
vulnerability of the United States to the effects of a severe energy 
supply interruption, and provide limited protection from the short-term 
consequences of interruptions in supplies of petroleum products.'' (42 
U.S.C. 6231) (emphasis added)
    This statutory Finding shows that the SPR was designed to deal with 
``severe interruptions'' to our country's energy supplies which could 
increase the ``vulnerability'' of the United States. Not the political 
vulnerability of individual candidates. The strategic vulnerability of 
the United States.
    Second, it is impossible to escape the conclusion that the 
President's release of oil from the SPR is for political reasons. After 
all, this President has done it before. On April 30, 1996, the 
President ordered the sale of 12 million barrels from the SPR for the 
stated purpose of lowering gasoline prices only three days after 
challenger Bob Dole proposed the repeal of the 4.3 cent gasoline tax. 
This year's decision to release SPR oil fits the pattern. The Vice 
President, in a battle for the states of the Upper Midwest, called for 
the release of SPR oil on September 21 and the President ordered the 
release the next day.
    The oil was released even though Treasury Secretary Lawrence 
Summers, with the support of Federal Reserve Chairman Alan Greenspan, 
bluntly warned on September 13 that the release of SPR oil would be ``a 
major and substantial policy mistake'' by using the SPR to ``manipulate 
prices'' rather than its intended purpose of handling supply 
disruptions. Of course when he realized his job was on the line, 
Secretary Summers contradicted himself, exactly like Energy Secretary 
Hazel O'Leary did following the President's 1996 SPR release.
    And while we are talking about fascinating episodes of history, let 
me just mention a proposal made in 1992 by the current Vice President 
of the United States. On page 349 of ``Earth in the Balance'', the Vice 
President specifically calls for imposing a new tax on heating oil and 
other petroleum products as producers of Carbon Dioxide. Surely he must 
have realized that imposing a new tax on a product would drive up its 
price.
    Finally, raiding the SPR will not decrease oil and gas prices over 
the long term: it is purely a short term fix. How do we know this? As I 
mentioned earlier, President Clinton released 12 million barrels from 
the SPR for sale on April 29, 1996. Its now September 28, 2000, 
Americans have just suffered through a summer of high gasoline prices, 
and the price of oil was $31.50 per barrel yesterday morning. So much 
for the effectiveness of releasing SPR oil on controlling longterm 
prices.
    Mr. Chairman, we are not faced by a severe disruption in our oil 
supplies nor is our economy being brought to its knees. We are faced 
with a combination of relatively tight supplies, a lack of refinery 
capacity and, in the gasoline market, some federal environmental 
policies which are making much of our gasoline more expensive to 
produce.
    The solution to this problem, and future shortages in oil supplies, 
is a comprehensive national policy which reduces our dependency on 
foreign oil by increasing domestic production. We currently depend on 
imports for 62.1 percent of our oil and as long as we have this level 
of dependence, Americans will be dependent upon the whim of a foreign 
cartel. It is my hope that this hearing will shed more light on this 
issue and help to show the long-term folly of releasing oil from the 
SPR to manipulate prices.

    [Additional statement submitted for the record follows:]

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

    Mr. Chairman: I'd like to commend you for holding this hearing. 
Energy supply and pricing issues are very much in the news. Last March 
consumers in the Northeast raised concerns over rising heating oil 
prices. This summer consumers across the country raised concerns about 
rising gasoline prices. Now, as we look towards another winter, 
consumers are worried about heating oil and natural gas prices. How can 
this be when the country is at the brink of broad new innovations and 
efficiencies in all power sectors.
    American consumers are worried about the sharp rise in prices to 
heat their homes and fill the car up. Natural gas prices are more than 
double what they were last year. Heating oil inventories are at 
historically low levels and prices are high. American consumers are 
making decisions to conserve and use energy efficiently, but sometimes 
that is not enough. This hearing will look at innovations to help 
consumers. It will look at supply problems that must be solved for the 
good of the country.
    Today, record demand for energy in the U.S. is straining the limits 
of an aging infrastructure. Administration policies to promote 
conservation are, by themselves, inadequate in a growth economy. Our 
dependence on foreign oil is not a conservation problem. It is not 
entirely an efficiency problem. It is more complex. I want to solve it 
with common sense. America must modernize its enrgy infrastructure to 
improve domestic power supply. Under this Administration investment in 
exploration and production for new sources of energy is lagging behind.
    This country is at an historical cross-road. A comprehensive, 
forward-thinking national energy policy is essential to carry our 
nation into the 21st Century.
    Our economy demands abundant energy supplies at affordable prices. 
Congress and the Administration need to be working on solutions to 
reduce dependence on foreign oil and bolster environmentally sound 
investment in power infrastructure. Short-term election year gimmickery 
such as drawing down the Strategic Petroleum Reserve will only add to a 
legacy of failed energy limitations.
    Using the Reserve in this manner hides from America the real 
prospects for long-term energy independence.
    Today I hope to learn the cause of the recent price increases, the 
long-term impact of the drawdown of the S-P-R, what we can be doing to 
ensure that an adequate supply of natural gas and oil reaches consumers 
in a timely fashion, and whether there are barriers to innovative 
technologies that can help us utilize our energy resources more 
efficiently. I also want to learn about what consumers can do to save 
money on their energy bills this winter.As always I am interested in 
affordable and reliable energy supply.
    I look forward to hearing from today's distinguished panel of 
witnesses. Thank you.

    Mr. Barton. Thank you, sir.
    So, Dr. Moniz, we will start with you; Mr. Mazur and then 
Chairman Hoecker, Mr. Matthews, Mr. Harris and Mr. Strongin. 
Welcome to the subcommittee again.

STATEMENTS OF HON. ERNEST J. MONIZ, UNDER SECRETARY FOR ENERGY, 
  SCIENCE AND ENVIRONMENT, DEPARTMENT OF ENERGY; HON. MARK J. 
MAZUR, ACTING ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION, 
DEPARTMENT OF ENERGY; HON. JAMES J. HOECKER, CHAIRMAN, FEDERAL 
    ENERGY REGULATORY COMMISSION; HON. CHARLES R. MATTHEWS, 
COMMISSIONER, TEXAS RAILROAD COMMISSION; BYRON LEE HARRIS, WEST 
VIRGINIA CONSUMER ADVOCATE DIVISION, PUBLIC SERVICE COMMISSION; 
  AND STEVEN STRONGIN, MANAGING DIRECTOR, GOLDMAN, SACHS & CO.

    Mr. Moniz. Mr. Chairman, thank you for the opportunity to 
testify once more before this committee today on energy policy. 
What I would like to do is to comment in these opening remarks 
on both some short- and long-term energy challenges facing the 
Nation and the administration's efforts to address them.
    Certainly economic growth, robust economic growth, over the 
last 8 years has dramatically increased demand for energy, both 
domestically and internationally. Energy demand in the United 
States is up 14 percent over the last few years, and the Asian 
economic recovery has accelerated worldwide demand for oil and 
other energy sources.
    In the near term, we are facing very low inventories of 
crude oil and distillate, including heating oil. Nationwide, 
our stocks of distillate, which include both heating oil and 
diesel fuel, are down 19 percent over the same time last year. 
On the East Coast, stocks are 40 percent lower than last year 
and in New England, my home region, the heating oil inventory 
shortfall is closer to 65 percent. Low stocks are an important 
indicator of the many problems in the market, but most 
importantly for today's discussion, they are relevant because 
in a typical winter stocks will provide up to 17 percent of the 
East Coast's winter heating oil supply.
    Recognizing the strong interest in the SPRO time exchange 
program, aimed at avoiding a heating oil crisis, I will 
describe a chronology leading to this action. Even though last 
winter was mild, the underlying high price of crude, 
transportation and refining problems and a sudden 2-week 
extreme cold snap sent prices of heating oil soaring. The 
Northeast region was threatened with spot heating oil 
shortages.
    At that time, Members of Congress called on the 
administration to sell oil from the SPRO. Secretary Richardson 
indicated that the heating oil problem did not constitute an 
emergency supply disruption and that a sale would be 
inappropriate.
    I would note that at that time there were preliminary 
discussions of the SPRO exchange as an alternative to the sale, 
which is allowed for in the statute as a way to acquire oil for 
the SPRO and does not require any emergency finding by the 
President.
    We had not, however, reviewed or exercised all of our 
options and instead elected to pursue other avenues to address 
the problem. Further, a SPRO release at that time would not 
have addressed that winter's heating oil problem because the 
cold snap occurred very late in the heating season.
    In January and February, the administration took several 
actions, including the release of $300 million in emergency 
LIHEAP funds, dispatching Coast Guard crews to expedite 
deliveries of product and loans to small businesses 
disadvantaged by temporary high prices. DOE renegotiated the 
contracts under its SPRO royalty in-kind program in order to 
keep oil on the then-tight market.
    After dealing with the immediate needs for heating oil to 
address the fundamental problem of low crude oil stocks, the 
administration opted for diplomatic efforts to encourage 
producing nations to put more oil on the market. So the 
Secretary took two trips to meet with OPEC and non-OPEC 
producing United Nations in February and March. Shortly after 
these missions, OPEC announced a 1.7-million-barrel-per-day 
increase in production. The price of oil declined by $7 or $8 
for 2 months, prior to the peak-demand, summer-driving season 
when oil and gasoline prices climbed again.
    In March, the President announced his support for a home 
heating oil reserve in the Northeast and urged the Congress to 
pass a series of initiatives, including oil and gas production 
incentives and incentives for energy efficiency and renewable 
energy.
    In June, demand for gasoline increased seasonally, and it 
took heroic refinery runs to meet peak gasoline demand. Oil 
prices increased, and there were signals over the summer that 
inventories of crude oil and distillate were lagging behind 
previous year numbers. On several occasions over the summer, 
DOE and EIA staff briefed congressional staff and White House 
officials on summer gasoline problems and our growing concern 
for this coming winter.
    In late June, OPEC increased production by another 700,000 
barrels. Again, crude oil prices declined slightly, although 
gasoline prices remained very volatile, rebounding in August 
before declining in recent weeks.
    In July, the President administratively established the 
Northeast Home Heating Oil Reserve and again called on Congress 
to pass a trigger mechanism that was appropriate for its use.
    This action was prompted by our growing concerns over low 
crude and heating oil inventories and a desire to have the 
Reserve filled before the start of the heating oil season in 
November. We were very cognizant of concerns that we not 
compete with private heating oil providers and that we acquire 
heating oil for the heating oil reserve before peak demand 
season.
    In early September, the Department acquired 2 million 
barrels of heating oil through an exchange of crude oil from 
the SPRO. The two storage sites for heating oil reserve will 
shortly be filled to the 2 million barrels.
    August inventory numbers, however, were alarming. Crude oil 
inventories were the lowest since 1976. Nationwide inventories 
of distillate were 20 percent lower than last year, on the East 
Coast 40 percent lower than the same time in 1999. At the same 
time, the National Weather Service predicted the coming winter 
would likely be closer to a normal winter as opposed to last 
year's which was, on average, very mild.
    In early September, OPEC announced another 800,000-barrel-
per-day production increase. Nevertheless, growing concerns 
over world excess production capacity and very tight crude and 
heating oil inventories put the price of oil to over $37 a 
barrel last week, last Wednesday, a highly unusual market 
reaction to the announcement of a sizable increase in oil 
supply.
    During the month of September, there were four separate 
occasions where the price of crude hit 10-year highs, and both 
API and EIA data indicated very little stock build, if 
anything, at a time when we would expect to start seeing 
increases.
    On September 12, 113 Members of Congress sent a letter to 
the President urging him to conduct an exchange of oil from the 
SPRO, including the chairman of the House International 
Relations Committee, and 13 of those members, both Democrat and 
Republican, are on this committee.
    I understand this is a long description of the 
circumstances leading up to the administration's decision to 
conduct an exchange of SPRO oil, but it is important the record 
on the administration's actions be clearly spelled out.
    The administration established a home heating oil reserve 
to address an actual supply emergency. We are conducting an 
exchange to avert one. EIA estimates that the temporary 
infusion of 30 million barrels of oil going into the market 
will likely net up to 5 million gallons of heating oil for the 
winter, a substantial amount against the oil inventory 
shortfall in this country.
    Equally important, the exchange will actually increase 
energy security when the exchange transaction is completed. 
There will be more oil in the SPRO, not less. We do not take 
the use of the SPRO lightly, but we do not apologize for using 
every tool available to us to ensure that Americans have 
adequate supplies of heating oil and distillate this winter.
    Indeed, this countercyclical time exchange operates on the 
same underlying principle as that being followed in the royalty 
in-kind program, a program that involves basically the same 
amount of oil as the time exchange, adds 28 million barrels of 
oil to the SPRO and has been widely praised by many, including 
those from oil-producing States, like Senator Murkowski. This 
is in contrast to the sell of 23 million barrels directed by 
Congress in 1996 and 1997 that had no connection whatsoever to 
energy challenges.
    The administration-proposed $5 million sale in 1996, 
referred to earlier, was part of the February 1995 budget 
submission to Congress, which was not an election year, in 
order to address a SPRO management issue, specifically, the 
need to decommission a storage site.
    Mr. Chairman, with your permission, I would like to submit 
a few letters of support for the time exchange for the record.
    Mr. Barton. Without objection.
    [The following was received for the record:]

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    Mr. Moniz. Let me turn then very briefly to longer-term 
issues.
    Mr. Barton. Briefly. You have about 22 seconds. So I will 
give you a little more time than that.
    Mr. Moniz. Thank you.
    A strategically focused national energy policy integrated 
with economic, environmental, security and technology policies 
is certainly critical to the well-being of Americans, our 
economy and our way of life. Building on the administration's 
energy policy documents of 1995 and 1998, Secretary Richardson 
today is issuing a report, Following the New Economy: Energy 
Accomplishments, Investments and Challenges. It reiterates--and 
I want to stress, it reiterates the bipartisan, core principles 
of U.S. energy policy: reliance on competitive markets as the 
first principle of energy policy; support for energy science 
and technology; promotion of government, industry, consumer 
partnerships; the use of targeted incentives in regulations; 
and facilitation of international cooperation.
    Powering the New Economy, this volume coming out today, 
sets forth many energy accomplishments and investments made 
within that policy framework and continuing preeminent 
challenges identified in the 1998 comprehensive national energy 
strategy. Of particular relevance to today's hearing are the 
challenge of enhancing America's energy security, a key issue 
being that of increasing oil supply in an environmentally 
responsible fashion, and very importantly, reducing oil demand 
through advanced technology development and the challenge of 
increasing the competitiveness and reliability of U.S. energy 
systems, particularly the electricity natural gas intergrid.
    The report lists many of the administration's actions in 
this area in place: a proposal to Congress promoting energy 
efficiency in vehicles to reduce demand; increasing domestic 
oil production, and I would note in Alaska, for example--of 
course, last year we opened up NPRA, which will have 
approximately--at least 2 billion barrels of economically 
viable oil; international investments; meeting increased 
refining and production capacity; the home heating oil reserve, 
LIHEAP; SPR management; infrastructure initiatives to meet 
technology needs of the electricity and natural gas intergrid; 
many more that I will leave you to read in the document.
    Mr. Barton. You really need to wrap up, Mr. Moniz.
    Mr. Moniz. Okay. And I will, Mr. Chairman, just say that 
the economic policies of the administration have helped ensure 
the Nation's successful transition from the 20th to the 21st 
century, from the Industrial to the Information Age. We also 
have significant challenges ahead as our 20th century energy 
infrastructures seek to keep pace with our 21st century energy 
needs and demands.
    We are proud of our energy accomplishments and look forward 
to working with industry, consumers, workers, 
environmentalists, the Congress, State and local governments, 
to meet the energy challenges of the next century.
    Thank you, Mr. Chairman, and I will be happy to answer 
questions.
    [The prepared statement of Hon. Ernest J. Moniz follows:]

PREPARED STATEMENT OF ERNEST J. MONIZ, UNDER SECRETARY, ENERGY, SCIENCE 
               AND ENVIRONMENT, U.S. DEPARTMENT OF ENERGY

    Mr. Chairman, over the past year we have seen considerable 
volatility in our energy markets. We have endured supply problems and 
price increases in heating oil and diesel fuel, gasoline, natural gas, 
and electricity. The year has not seen a season go by without a new 
energy challenge. Every region of the country has experienced 
significant price increases for petroleum products and, more recently, 
natural gas, and several specific regions have suffered through more 
dramatic spikes in prices for specific fuels or electricity.
    Many factors have contributed to these energy price increases and 
supply problems, but one of the most important is the dramatic economic 
growth experienced by the United States and much of the world in recent 
years. This growth has spurred increasing demand for energy, which came 
on the heels of severely low oil prices that had discouraged new 
exploration, production and development of oil worldwide. This 
increasing demand for energy, along with the rebound of Asian 
economies, strained the capacity of energy suppliers to boost 
production and to maintain adequate inventories.
    We are confident that market forces, given sufficient time, will 
respond by adding new production capacity and rebuilding inventories, 
and reliance on competitive market forces remains the ``first 
principle'' of our energy policy. But this response could have come too 
late to avoid significant oil supply problems this winter. To help 
minimize the adverse effects of these supply shortfalls on users of 
petroleum products, the President has directed the Department of Energy 
to release 30 million barrels of oil from the Strategic Petroleum 
Reserve over a period of 30 days, in exchange for larger amounts of oil 
when prices fall next spring. The President has also directed the 
Department of Health and Human Services to release $400 million in Low 
Income Home Energy Assistance Program (LIHEAP) emergency funds to all 
States to assist low income households facing significant increases for 
heating oil, natural gas and propane. Finally, the President has 
directed DOE, the Environmental Protection agency and other Federal 
agencies to take a number of other actions to help mitigate the adverse 
impacts these supply shortages and higher energy prices could have on 
all consumers this winter.
    While actions to address these immediate problems are important, we 
must maintain our focus on the long term health of the U.S. energy 
sector, economy and environment. It is this longer view that has 
enabled energy supplies to keep pace with demand and produced positive 
results for the economy, for the environment, for energy efficiency, 
and for consumers:

 From 1990 to 1999, the economy grew by 32 percent after 
        inflation and real disposable income grew by 28 percent.
 During this same period, electricity generation increased 22 
        percent, but emissions of criteria pollutants declined. And
 Total energy consumption increased 14 percent while the 
        economy's energy intensity has declined by 12 percent since 
        1992.
    To fuel the economic growth of the last decade, domestic production 
and generation of natural gas, coal, nuclear, renewables and 
hydroelectric power have increased. Domestic oil production is the only 
exception, although U.S. production declines are expected to flatten 
out by 2005, ending many decades of decline. Also, over the last 
several years, the rate of decline in domestic oil production has been 
reduced significantly.
    While declining U.S. oil production and increasing demand have 
meant increasing oil imports, these imports are now coming from more 
diverse and secure sources. The Western Hemisphere now supplies over 50 
percent of our imported oil, roughly double its share in 1980. In 
addition, we have diversified our sources of oil imports to the point 
where we are currently supplied by over forty oil-producing nations. If 
we include domestic oil production, three quarters of our oil is 
supplied from the Americas.
    Yes, there has been increased volatility in oil, gasoline, natural 
gas and electricity prices during the last eight months, but over the 
years--while the demand for energy has grown--real energy prices have 
come down, even when the recent price increases are taken into account. 
In real terms, residential prices for both electricity and natural gas 
today are about 25 percent lower than their peaks in the early 1980s. 
Similarly, most consumers are now paying about 35 percent less for 
gasoline, after adjusting for inflation, than in 1980. And today's 
lower energy costs are being paid by consumers whose earning power has, 
typically, increased sharply during the 1990's.
    These are substantive and tangible results. While recent price 
volatility imposes hardships on many citizens and businesses and 
presents an important challenge, this Administration's policies overall 
have helped generate unprecedented economic growth . . . met increased 
demand for energy from all sources . . . diversified our sources of 
energy supply . . . decreased energy intensity . . . and, even with 
increased energy use, held steady or significantly reduced the release 
of major air pollutants.
    To fuel the unprecedented economic growth seen during the Clinton/
Gore Administration, the nation's energy resources have expanded to 
meet ever-growing demand. At the same time, we have met the 
environmental imperatives associated with increased energy production 
and use. This progress has been achieved through a sustained, 
bipartisan commitment to these core principles:

 A reliance on competitive markets,
 Support for energy science and technology,
 Promotion of government/industry/consumer partnerships,
 Use of targeted incentives and regulations, and
 Facilitation of international cooperation.
    Using these principles, the Administration has achieved many 
significant energy accomplishments. Just to name a few:
    We are promoting efficient energy use in homes, buildings, and 
vehicles to reduce the nation's energy bills and reduce our reliance on 
imported oil. We've increased the production of new sources of oil and 
gas supply through technology advances and we are encouraging greater 
public/private partnerships to develop oil and gas resources. We've 
also lowered the costs of domestic oil and gas exploration through 
technology advances. We've encouraged international cooperation on oil 
and gas issues and investments in oil and gas infrastructures and 
production at home and abroad and we increased the size and security of 
our ``national oil insurance policy,'' the Strategic Petroleum Reserve.
    On the environmental side, we've improved the environmental 
performance of coal and we are economically generating more power from 
renewable energy sources to provide clean, abundant fuel for the future 
and reduce our reliance on imported and diminishing fossil fuel 
resources.
    We do, however, recognize that the current volatility of petroleum, 
natural gas and, in some regions, electricity prices, coupled with 
sustained economic growth, is straining consumer confidence, energy 
production and energy infrastructures. These strains will present 
several preeminent energy challenges for the first few years of the 
21st century.

                              OIL AND GAS

    Let me begin by talking about the challenges now facing the oil and 
gas sectors, and our responses to these challenges.
    Our oil and gas markets over the past year have been volatile. As 
you know, as part of the Administration's efforts to address market 
imbalances--while holding to our core principle of free market--we've 
talked extensively with oil producing nations. Secretary Richardson has 
also initiated efforts to reduce volatility in world oil markets 
through international cooperation and better oil market data. OPEC and 
other producers have heard our concerns and have boosted their output 
three times, with the most recent increases to come on-line in October.
    Our latest data show that there are about 3.5 million barrels-per-
day more oil on the market than at this time last year. That is a 
significant addition to the world market. And according to the Energy 
Department's Energy Information Administration, the latest addition of 
800,000 barrels-per-day--along with boosted production from non-OPEC 
producers--should enable the oil industry to finally begin rebuilding 
global stocks.
    I say ``finally'' because, while more oil has come onto the markets 
over the past year, demand has grown much faster than anticipated, 
increasing by 14 percent over the past few years. And as demand has 
absorbed additional supply from the market, the oil industry has been 
unable to aggressively refurbish stocks. This has resulted in a number 
of price increases across the range of petroleum products. We are 
seeing this at the gas pump, where drivers are paying an average of 
about $1.55 per gallon--up over 40 cents from last year, but down over 
10 cents from this past Spring.
    With heating oil inventories already at levels far lower than usual 
for this time of year--on the East Coast, oil inventories are 40 
percent less than last year and in New England that figure is closer to 
65 percent--we are facing the potential of a winter of oil supply 
shortfalls and another round of price increases for all petroleum 
products.
    To ensure that Americans have the fuel they need to heat their 
homes, President Clinton directed the Department of Energy to use the 
Strategic Petroleum Reserve to help bolster domestic oil supplies 
through an exchange program.
    The Department of Energy will exchange crude oil from the Reserve. 
Companies that obtain oil will be required to return comparable or 
higher quality crude oil to the Reserve in the fall of 2001. Because 
oil prices are expected to be lower then, the companies will return the 
amount they obtained plus additional quantities as a bonus percentage 
that will be specified in the offers. This ultimately will increase the 
amount of oil in the Reserve and enhance the nation's ``insurance'' 
against future energy supply disruptions.
    The President made the decision to carry out the oil exchange 
because of concerns that lagging petroleum product inventories could 
create potentially severe hardships for many American families this 
winter.
    Similarly, natural gas prices this winter are predicted to be much 
higher than last winter. Why? Because natural gas production has been 
relatively flat for several years, demand has been increasing, prices 
are high for competitor fuels, and working storage is low.
    With consumers expected to pay significantly higher prices for fuel 
oil, propane and natural gas this winter, the impact on low income 
households is likely to be particularly severe.
    To help lessen this impact the President directed the largest 
release in LIHEAP emergency funds ever. This early action will enable 
States to take steps now to help low-income households cope with high 
fuel prices this coming winter.
    The President has also asked Federal agencies to fill their heating 
oil tanks now in order to avoid contributing to increased demand in the 
middle of winter and DOE will encourage State and local governments to 
take similar actions. DOE will also be working with state utility 
commissions to encourage factories and businesses with interruptible 
gas contracts to act now to ensure they have adequate back up supplies 
of oil. The Environmental Protection Agency will be encouraging states 
to consider temporary adjustments in their sulfur content restrictions 
on home heating oil in order to make it easier to build heating oil 
inventories this winter. The Administration has addressed the issue of 
supply through increased Coast Guard support for tanker movements 
during the freezing weather, and Small Business loans for distributors 
and other small businesses impacted by high prices. DOE will continue 
to meet with representatives of the energy industry to encourage their 
cooperation with Federal efforts to assure that adequate supplies of 
affordable energy are available this winter.
    Recognizing the growing demand for natural gas in the United 
States, particularly for power generation, the National Petroleum 
Council was asked to undertake a comprehensive study of the capability 
of industry to meet potentially significant increases in future natural 
gas demand. The resulting December 1999 study, ``Natural Gas, Meeting 
the Challenges of the Nation's Growing Natural Gas Demand,'' listed 
seven major recommendations. Acting on these recommendations, the 
Administration established an Interagency Task Force on Natural Gas to 
review and implement certain recommendations of the National Petroleum 
Council on natural gas supply and infrastructure needs.
    Finally, the President has renewed his call for Congress to 
authorize permanently a home heating oil reserve with an appropriate 
trigger and to enact his energy tax package and budget initiatives. 
These steps would increase the number of homes occupied by low-income 
families that can be weatherized, help families and businesses buy 
fuel-saving cars, energy efficient homes and appliances, and would 
accelerate the development of cleaner, more efficient energy 
technology.
    Adequate budget resources will enable the Administration to 
continue its efforts to enhance energy security by improving the 
efficiency of motor vehicles and other end-use technologies, 
substituting alternative fuels, especially in the transportation 
sector, and by increasing and diversifying oil supplies, both 
domestically and internationally.

                              ELECTRICITY

    The electricity sector has not been immune from supply constraints 
and price volatility this year.
    And, as with oil and natural gas, there are many reasons why 
California and other regions have experienced short term capacity 
shortfalls that have produced unusual spikes in electricity prices.
    The patchwork of state-by-state actions to increase competition in 
the electric sector has created significant uncertainty in electricity 
markets--transmission markets are becoming increasingly regionalized, 
and market requirements that change at each state border are 
discouraging the investments we need to modernize and expand the 
nation's power grid.
    Plus, today's electricity infrastructure is being asked to operate 
in ways for which it was not designed, with every-growing demands for 
improved service and increased load. The digital ``New Economy'' is 
placing unprecedented reliability and power quality demands on the 
system. Power outages have already cost the U.S. billions over the past 
few years, and in the growing competitive environment of state-by-state 
restructuring, owners of transmission lines are increasingly focused on 
the bottom line--with far fewer incentives to comply with voluntary 
reliability standards or invest in system upgrades. The Administration 
anticipated these changes and introduced comprehensive electricity 
restructuring legislation over two years ago, but the Congress has 
failed to enact it.
    These uncertainties and the consequent inability of the industry to 
build the infrastructure needed to keep pace with demand, have 
translated into new, real, and growing problems. Generating capacity 
reserve margins have tightened. The construction of new major 
transmission facilities has virtually stopped. During this and recent 
summers, some regions of the country experienced major problems--as the 
heat rose, demand for electricity increased and, in at least one 
instance, the lights went out. In others, elected officials and utility 
executives made urgent public appeals for conservation to avoid the 
major rolling blackouts that could result from inadequate reserves 
caused by shortfalls in supply or unavailable transmission capacity due 
to aging distribution facilities. In addition, we are all aware of the 
price spikes that have occurred in electricity markets in California, 
the Pacific Northwest and parts of New York. Consumers in San Diego 
witnessed an increase of more than 100 percent in their electric bills 
this summer.
    Without Federal action, state restructuring programs cannot reach 
their full potential--and in the end, it will be electricity consumers 
that lose out. This is why the Clinton/Gore Administration proposed 
comprehensive legislation, which has languished on the Hill since 1998. 
Basic features of this legislation would:

 Clarify key authorities for Federal and State agencies with 
        respect to governance of the new electricity industry;
 Establish clear Federal policy support for retail and 
        wholesale competition;
 Maximize consumer benefits through mechanisms and authorities 
        to ensure true competition, including clear labeling for 
        informed choices;
 Support for public benefits such as low income assistance, 
        energy efficiency, renewable energy
 Reduce emissions through competition, which encourages 
        efficiency, green power and innovative services;
 Provide incentives for distributed generation;
 Strengthen system reliability while relying on traditions of 
        industry self-regulation.
    The electricity infrastructure in the United States currently 
delivers over $200 billion worth of electric services every year, and 
the industry has a book value of over $700 billion--we cannot neglect 
the engine that powers our economy. Electricity markets are crying out 
for the certainty needed to make essential investments in generation, 
transmission and distribution infrastructure.
    The Federal government needs to send out the right signals--to 
establish the ``rules of the road'' and develop a comprehensive roadmap 
so that consumers, businesses and the environment will all benefit from 
the promise of electricity competition.
    It is important that we act . . . we act wisely . . . and we act 
soon. The Clinton/Gore Administration stands ready--and has been ready 
over the last three sessions of Congress--to work with Congressional 
lawmakers to deliver on the promise of competition by passing 
comprehensive federal electricity legislation.
    Mr. Chairman, as in our oil markets, unparalleled economic growth 
has spawned burgeoning demand that is outstripping supply. Enactment of 
Federal electricity restructuring legislation, as proposed by the 
Administration will increase available power supplies and promote 
investment in the nation's transmission grid. It will also provide 
mechanisms for consumers to reduce their electricity consumption. These 
factors will help stabilize electricity markets and reduce customers' 
bills, and would go a long way towards resolving this problem.
    In addition to this Administration's unwavering support for 
restructuring legislation, we proposed a significant energy 
infrastructure initiative to meet the technology needs of the 21st 
century; formed a Power Outage Study Team to examine the reliability 
problems of last summer and make recommendations to prevent future 
power supply problems; hosted eleven regional electricity reliability 
summits to find ways to improve the reliability of our electric power 
supply; and created an Office of Energy Emergencies to anticipate, 
mitigate, and respond to the range of energy emergencies needs 
including electricity, natural gas and heating oil problems.
    Just recently, we worked with the General Services Administration 
to develop a plan for Federal agencies to reduce electricity 
consumption during power supply emergencies. This summer, when 
California was experiencing its problems, the President directed all 
Federal agencies to reduce consumption during peak hours. And the 
President directed the Power Marketing Administrations and the Army 
Corps of Engineers and the Bureau of Reclamation, which operate Federal 
dams, to provide as much power as possible to California this summer 
within the constraints of the law.
    Secretary Richardson wrote FERC Chairman Hoecker to request him to 
speed-up the Commission's investigation of California's electricity 
markets.
    And the President released $2.6 million dollars in emergency Low 
Income Home Energy Assistance Program funding and requested the Small 
Business Administration to help San Diego residents and businesses 
impacted by the increase in electricity rates.

                NATIONAL ENERGY POLICY FOR THE LONG TERM

    While it is urgent that we take the actions I have just described 
to address the immediate problems facing the energy sector, we must 
also continue to address the sector's longer term challenges.
Challenge #1: Enhancing America's Energy Security
    Our transportation sector is 97 percent reliant on liquid fuels, 
and economic growth has left world oil capacity only a few percentage 
points greater than world oil demand. While I have already summarized 
our actions to address the many short term problems facing the oil and 
natural sectors, we also have a strategy for the long term. To meet the 
mid to long term challenges, the Administration is developing ways to:

 Reduce overall demand for oil in transportation, industry, 
        buildings and power generation, especially through increased 
        efficiency in use;
 Increase domestic oil production through tax incentives and 
        technology investments;
 Promote international investment in developing the world's oil 
        resources; and
 Meet the need for increased production capacity.
Challenge #2: Increasing the Competitiveness and Reliability of U.S. 
        Energy Systems
    Electricity is increasingly the energy form of choice for myriad 
applications at home and at work. At the same time, the network of 
generation, transmission, and distribution facilities of electricity 
and the natural gas transportation system we use to fuel it, are 
strained by the increased demand for electricity and electricity 
services. Electric sector restructuring and improved reliability are 
needed in the short term. To address the longer term challenges of this 
sector, the Administration has:

 Proposed a significant energy infrastructure initiative to 
        meet the technology needs of the 21st century electricity/
        natural gas ``intergrid'';
 Proposed ways to eliminate key barriers to distributed 
        generation, paving the way for the entry of these new 
        technologies and systems into electricity markets.
Challenge #3: Mitigating the Environmental Impacts of Energy Production 
        and Use
    Americans place high value on environmental stewardship, and 
expanding energy use challenges our ability to protect the environment. 
The Administration has consistently advanced environmental goals 
through technology development, incentives, and regulation. Many of the 
accomplishments and investments discussed earlier, such as those 
dealing with end-use efficiency in the transportation, industrial and 
building sectors, directly provide environmental benefits. Other 
specific actions aimed at 21st century environmental challenges 
include:

 Mitigating global climate change through domestic and 
        international cooperation;
 Addressing global climate change through research and 
        development;
 Promoting environmental protection through tax incentives and 
        investments in energy efficiency, renewable energy;
 Promoting cleaner fuels;
 Supporting a vigorous program for solar, wind, and other 
        renewable energy sources focused on R&D, pilot projects, and 
        other initiatives;
 Advancing clean energy through a new International Clean 
        Energy Initiative;
 Creating DOE's 15th national laboratory, the National Energy 
        Technology Laboratory, to focus on technologies to meet the 
        Nation's energy needs for fossil fuel use in environmentally 
        sound ways;
 Enhancing carbon capture and sequestration programs.
Challenge #4: Providing Diverse Energy Technologies for the Future
    Today's technology investments are essential to meet tomorrow's 
energy needs. The pace of energy research and development needs to 
increase in line with the Administration's proposals submitted to the 
Congress over the last several years. The cumulative effect of lower 
appropriations levels will be felt in the years ahead. The Department 
of Energy has developed a comprehensive energy R&D portfolio analysis 
process, working with the private sector and the academic and 
scientific communities, to ensure that:

 Our energy investments reflect the Administration's strategic 
        energy goals;
 DOE's energy research and development portfolio addresses 
        emerging energy challenges; and
 DOE's energy R&D budget requests reflect energy priorities and 
        the investment levels necessary to meet our future energy 
        needs.
    The energy policies of this Administration have helped ensure the 
nation's successful transition from the 20th to the 21st century--from 
the Industrial to the Information Age. We also have significant 
challenges ahead of us as our 20th century energy infrastructures seek 
to keep pace with 21st century energy needs and demand. We are proud of 
our energy accomplishments and look forward to working with industry, 
consumers, workers, environmentalists, the Congress, and state and 
local governments to meet the energy challenges of the new century.

    Mr. Barton. Thank you, sir.
    We would now like to hear from the distinguished chairman 
of Federal Energy Regulatory Commission, the Honorable James 
Hoecker.
    We will recognize you for 8 minutes also, Mr. Chairman.
    Mr. Hoecker. It won't take me that long, Mr. Chairman.
    Mr. Barton. Good.

               STATEMENT OF HON. JAMES J. HOECKER

    Mr. Hoecker. Chairman Barton and members of the 
subcommittee, I am very pleased to be here today to testify 
about the current domestic natural gas market, especially the 
deliverability problems that have raised prices for American 
natural gas consumers.
    The prospect of higher prices this winter for natural gas 
is a matter of serious concern for businesses and consumers. I 
would not minimize the consequences for our citizens of today's 
price and deliverability issues, especially if our winter 
weather is extreme. But having said that, I want to express 
that regulatory and other public policy responses to this 
situation should be measured and balanced, in recognition of 
the fact that the fundamental structure of interstate natural 
gas markets is sound, in my estimation, and permit me to make 
three points in that regard.
    First, the Commission plays a key, but limited, role in 
U.S. natural gas markets, authorizing the construction of 
pipeline transmission and storage facilities that are needed to 
bring natural gas to the consuming public and regulating the 
rates for transportation and storage services.
    We have lacked jurisdiction over natural gas well-head 
prices since the late 1980's and we have never had authority 
over State-regulated local distribution or the retail sales of 
natural gas.
    But within its jurisdiction, the Commission is working hard 
to ensure that there is adequate pipeline infrastructure 
available at fair prices to serve the quickly growing demand 
for natural gas.
    The commission, while fulfilling its commitment to ensure 
that project development is environmentally responsible, has 
nonetheless authorized 6,000 miles of major pipeline facilities 
just since 1997.
    My prepared testimony shows that we are discharging our 
responsibilities more efficiently now than ever.
    Second, policy decisions by Congress and the Commission 
have created a transportation platform for a well-functioning 
commodity market for natural gas. Since the 1980's, this market 
has produced significant benefits for consumers in terms of 
availability of supply and reduction in price. Some of those 
benefits have come at the cost of a severe downturn in 
exploration and development, and that was the result of a 
collapse of natural gas prices 2 to 3 years ago.
    In response to the turnaround in prices recently, however, 
gas producers have responded by significantly increasing their 
level of drilling activity. I believe that this is evidence of 
a functioning market which transmits appropriate price signals 
across the interstate delivery network.
    And third, there are indeed many long-term solutions 
responding to the dramatic increase in energy demand. They 
include energy efficiency, delivery to the lower 48 of Alaskan 
natural gas, improved energy technologies, diverse supply 
portfolios, and better and more efficient electric power 
markets.
    But I would say that supply and demand curves and long-term 
forecasts don't heat people's houses and don't cook their food. 
So notwithstanding the fundamentally sound market approach to 
natural gas commodity pricing that we have, policymakers and 
market participants must acknowledge and respond to the 
consumer distress that can result from volatile natural gas 
prices, and they have to use the tools available to them to 
mitigate potential distress.
    Those tools include, first, use of long-term contracts and 
hedging techniques by local distribution companies to 
ameliorate the effects of price volatility; Second, employment 
of rate design and stabilization tools by State regulators, and 
oversight of LDC gas purchasing practices; Third, giving retail 
customers the ability to choose which suppliers and services 
available in the market they want and enabling them to 
determine their individual tolerance for price risk; and, 
Fourth, Federal and State government support for programs such 
as weatherization and LIHEAP to assist the most vulnerable 
energy customers.
    The FERC is committed to doing its part to make natural gas 
markets work for American consumers by working for responsible 
development of the pipeline infrastructure needed to support 
the expected historic growth in natural gas demand.
    I want to thank the committee and I will be happy to answer 
questions.
    [The prepared statement of Hon. James J. Hoecker follows:]

 PREPARED STATEMENT OF HON. JAMES J. HOECKER, CHAIRMAN, FEDERAL ENERGY 
                         REGULATORY COMMISSION

    Mr. Chairman and Members of the Subcommittee: Good morning. I am 
James Hoecker, Chairman of the Federal Energy Regulatory Commission 
(Commission). Thank you for inviting me to participate in today's 
hearing about current American natural gas and heating oil markets.
    As you know, the wellhead price of natural gas has doubled in the 
past year and will affect the price to end-users this winter. This 
price increase has led to questions about what the Commission and 
others can and should do in response. I would like to stress three 
basic points.
    First, the Commission plays a key, but limited, role in U.S. 
natural gas markets, authorizing the construction of pipeline 
transmission and storage facilities that are needed to bring natural 
gas to the consuming public and regulating the rates for transportation 
and storage services. We do not have jurisdiction over natural gas 
production or the price of natural gas at the wellhead or over local 
distribution or retail sales of natural gas. Within its jurisdiction, 
the Commission is working to ensure that there is adequate pipeline 
infrastructure available at fair rates to serve the quickly growing 
demand for natural gas.
    Second, policy decisions by the Congress and the Commission have 
created a well-functioning commodity market for natural gas. Since the 
1980s, this market has produced significant benefits for consumers in 
terms of availability of supply and reductions of price. Gas producers 
have responded to the recent price increases by significantly 
increasing the level of drilling activity. I believe that this is 
evidence of a functioning market which transmits appropriate signals 
across interstate delivery systems.
    Third, notwithstanding the fundamentally sound market approach to 
natural gas commodity pricing, policymakers and market participants 
must acknowledge and respond to the consumer distress that can result 
from dramatic increases in natural gas prices, and use the tools 
available to each of them to mitigate that distress. These tools 
include: (1) use of long-term contracts and hedging techniques by local 
distribution companies to ameliorate the effect of spot price 
volatility; (2) employment of rate design and stabilization tools by 
state regulators, and oversight of LDC gas purchasing practices; (3) 
giving retail customers the ability to choose which supplies, and 
services available in the market they want, enabling them to determine 
their individual tolerance for price risk; and (4) Federal and State 
government support for programs such as weatherization and LIHEAP to 
assist the most vulnerable customers.
    My testimony today will briefly describe the Commission's 
responsibility in regulating natural gas and current Commission 
policies governing the commodity market. After providing a quick 
overview of the state of wholesale natural gas markets, I will focus 
specifically on the Commission's pipeline certification activities and 
its efforts to facilitate authorization of pipeline capacity to meet 
growing demand and environmental and landowner concerns about new 
pipeline construction.

            I. THE COMMISSION'S ROLE IN NATURAL GAS MARKETS

    The Commission's role in the natural gas industry is largely 
defined by the Natural Gas Act of 1938 (NGA). Under the NGA, the 
Commission regulates the construction of new natural gas pipelines and 
related facilities and oversees the rates, terms and conditions of 
sales for resale and transportation of natural gas in interstate 
commerce. Regulation of retail sales and local distribution of natural 
gas are matters left to the States, as are the production and gathering 
of natural gas. The wellhead price of natural gas, which the Commission 
previously regulated, was gradually deregulated by Congress beginning 
with the Natural Gas Policy Act of 1978 (NGPA). All wellhead price 
controls on natural gas ended on January 1, 1993, pursuant to the 
Natural Gas Wellhead Decontrol Act of 1989 (Decontrol Act).
    Natural gas pipeline siting and construction is authorized by the 
Commission if found to be required by the public convenience and 
necessity under section 7 of the NGA. Besides the NGA, the Commission's 
actions on pipeline projects typically include consideration of factors 
under the National Environmental Policy Act and often entail 
consideration of a wide variety of issues under the Endangered Species 
Act, the Fish and Wildlife Coordination Act, the Coastal Zone 
Management Act and other such natural and cultural resource protection 
laws. In addition, the Commission must take into account the concerns 
of affected landowners along the pipeline project's right-of-way. These 
environmental and landowner issues have become increasingly prominent 
in certificate proceedings in recent years, and the Commission has 
responded by adopting landowner notification rules and a new policy 
statement on evaluation of certificate applications in September of 
1999.

   II. POLICY FRAMEWORK FOR COMPETITIVE NATURAL GAS COMMODITY MARKETS

    In 1978, the Congress began the process of decontrolling natural 
gas commodity prices with the Natural Gas Policy Act. In the face of a 
critical supply shortage, Congress opted to encourage market forces to 
play a more significant role in determining supply, demand, and price 
of natural gas.
    In 1985, because the Commission believed that pipeline 
transportation problems were preventing consumers from seeing the 
benefits of wellhead decontrol, the Commission issued Order No. 436. 
This was the first order to institute open access and non-
discriminatory transportation across a major energy delivery 
infrastructure. Open access pipelines had to allow gas buyers to 
purchase gas directly from production area sellers and to obtain 
transportation services on the same non-discriminatory basis as the 
pipeline companies served themselves.
    In 1989, the Congress enacted the Natural Gas Wellhead Decontrol 
Act, which ended all remaining wellhead price controls as of January 1, 
1993.
    In 1992, in Order No. 636, the Commission completed its open access 
transportation initiative by requiring interstate pipelines to exit the 
natural gas sales, or ``merchant,'' business. This effectively 
separated the transportation of gas from the sale of gas and removed 
both the opportunity and incentive for pipelines to discriminate among 
shippers or sources of supply. The Commission also required pipelines 
to permit firm shippers to resell their unused pipeline capacity rights 
(called ``capacity release''), creating a valuable and efficient 
secondary transportation market. More recently, in February of this 
year, the Commission issued Order No. 637 which, among other actions, 
waived the capacity release price cap for transactions of terms of less 
than one year. The information gained from this program should make 
market, and regulatory, responses even more effective.

              III. STATE OF NATURAL GAS COMMODITY MARKETS

    The pro-competitive policies pursued by Congress and the Commission 
have resulted in an integrated continental gas market that provides 
reliable service at efficient prices to consumers. As a result of the 
policies of the last 20 years, natural gas commodity markets today are 
competitive. There are about 8,000 producers operating over 300,000 
wells in the United States. There is truly a continental natural gas 
market in North America. The North American Free Trade Act and 
complementary pro-competitive regulatory policies on both sides of the 
Canadian-U.S. border have lead to the integration of Canadian and U.S. 
natural gas markets and projections of an increasing contribution of 
Canadian gas to meeting U.S. market growth. In the current market, 
natural gas buyers are no longer limited to buying from one or two 
pipelines and instead have a wide range of supply options that can be 
reached through various pipeline transportation options, including 
capacity release or gas purchases at market hubs. In addition, an 
active financial market has developed to allow buyers and sellers of 
natural gas to hedge against future increases in natural gas prices.
    This competition has produced substantial benefits for consumers. 
Inflation-adjusted delivered gas prices were substantially lower in 
1999 than they were in 1984, resulting in over $55 billion in lower gas 
costs in that year alone.
    Reserve prospects are very promising. Estimates range from 1,100 
trillion cubic feet (Tcf) to 1,700 Tcf--the equivalent of a 40- to 60-
year supply at current and projected requirements. Demand for clean-
burning fuel, technological development, industry ingenuity, and pro-
competitive policies have together created a natural gas market that is 
expected to grow by another 50 percent over the next decade and a half; 
from 21 trillion cubic feet today to 30-35 trillion cubic feet in 2015. 
A sizeable portion of the increase will come from gas-fired electric 
generation. The National Petroleum Council (NPC) believes that electric 
generation will account for nearly 50 percent of demand growth between 
now and 2015. Electric generation could create as much as 7 Tcf of gas 
demand by itself during that period.
    Unfortunately, spot wellhead prices for natural gas have roughly 
doubled over the last year. The wellhead price has averaged over $4.00 
per thousand cubic feet since June. (EIA Short-Term Energy Outlook, 
September 2000.) But wellhead prices made up only 31 percent of 
residential consumer's 1999 delivered price, on average; so a doubling 
of wellhead prices does not necessarily foretell a doubling of consumer 
prices. Moreover, transportation access has made the commodity market 
liquid and efficient and, despite recent price increases, consumers are 
still saving money compared to pre-competitive prices. In addition, the 
recent wellhead price increases have already prompted a market response 
by producers to increase the supply of natural gas. The number of 
natural gas drilling rigs in use, for example, has more than doubled in 
the past 15 months. This recent activity is not likely to be sufficient 
to increase the supply of natural gas in time to mitigate price 
increases this winter, however. After the lag associated with getting 
new production on line, however, a better balance of supply and demand 
can be restored in the future.
    In sum, the operation of the interstate natural gas market appears 
sound, as evidenced by the dramatic increase in drilling activity in 
response to market price signals. While I believe that competitive 
commodity markets are the best foundation for meeting consumer needs 
for reliable, reasonably priced natural gas, policymakers must 
acknowledge the financial burden, and even real consumer distress, 
caused by dramatic price fluctuations. The Commission, state 
regulators, local distribution companies, and customers each have 
opportunities to respond to the recent price increases.
    The Commission's principal role is to work to ensure that 
sufficient pipeline and storage infrastructure continues to be 
available to meet growing demand (recent pipeline certificate 
activities are discussed below), and to ensure that transportation and 
storage services are available at fair prices and nondiscriminatory 
terms and conditions. The Commission will be monitoring the gas market 
situation very closely this winter to ensure that pipeline 
transportation markets continue to work in the public interest.
    Local distribution companies (LDCs) have opportunities to manage 
spot market commodity price risk through a wide variety of instruments 
available in the market. Long-term contracts, futures contracts, 
options, swaps, collars, and various types of privately negotiated 
contracts are examples of financial instruments to manage risk. Risk 
management allows LDCs, or customers with retail choice, to choose 
supply arrangements that reflect their particular tolerance for price 
volatility.
    State regulators, for their part, have opportunities to mitigate 
retail rate volatility, for instance, by employing rate stabilization 
programs and oversight of LDC purchasing practices.
    Price volatility also highlights the continued importance of energy 
efficiency initiatives such as the Weatherization Assistance Program 
and other appropriate aid for low-income customers such as the Low-
Income Home Energy Assistance Program (LIHEAP).

                         IV. CERTIFICATE POLICY

    Adequate natural gas pipeline transmission and storage capacity is 
critical to support the continued functioning of these markets. Most 
electric generating plants planned for the next five years will use 
natural gas. Continued growth in natural gas consumption requires 
expanding and enhancing the existing natural gas transportation 
infrastructure. As stated earlier, much of the increase will come from 
gas-fired electric generation; perhaps as much as 7 Tcf of gas demand, 
estimated to represent nearly 50 percent of demand growth between now 
and 2015.
    The Commission has worked to ensure the adequacy of the 
transportation infrastructure by authorizing proposed construction of 
new natural gas pipelines in appropriate circumstances. Since 1997, for 
example, the Commission has authorized the addition of almost 6,000 
miles of pipeline, representing 17 billion cubic feet per day (Bcf/day) 
of new delivery capability to the pipeline network. (See Attachment 1). 
These facilities represent an investment of over $7.5 billion in 
natural gas transportation infrastructure. In light of probable demand 
growth for natural gas, the Commission continues to receive new 
proposals for pipeline development. (See Attachment 2). To respond to 
this market need, the Commission is committed to timely processing of 
applications for natural gas pipeline facilities. (See Attachment 3, 
showing pipeline certificate processing times).
    Recent reports concerning the potential construction of pipeline 
facilities to transport Alaska North Slope natural gas to consumers 
presents a significant opportunity to bolster our growing energy 
economy. As I testified before the Senate Committee on Energy and 
Natural Resources on September 14, the Commission is committed to 
timely processing of any proposed pipeline projects under its 
jurisdiction, including a reactivated ANGTS (Alaska Natural Gas 
Transportation System) project, or any other projects to transport 
Alaska North Slope gas under section 7 of the NGA.
    Even though I believe that our track record on certification of 
natural gas pipeline and storage facilities is a very good one, we 
cannot afford to rest on our laurels. I would note that the modern 
pipeline certificate proceedings are characterized by heightened and 
more organized landowner objections, environmental issues, and debates 
over regional needs for pipeline additions. In response to these 
concerns, the Commission adopted a new certificate policy that sets 
forth the factors the Commission will consider in determining whether 
new pipeline construction is in the public convenience and necessity. 
The Commission's Certificate Policy Statement, issued in September 
1999, establishes a policy against requiring existing customers of a 
pipeline to subsidize pipeline expansion, permits new flexibility to 
project proponents in making a showing of need for pipeline 
construction, and requires a weighing of public interest factors, 
including the impacts of new pipeline construction on landowners and 
affected communities in evaluating certificate applications. The Policy 
Statement provides the industry with guidance as to how the Commission 
will evaluate proposals for new construction, and provides a more 
transparent process for evaluating new projects.
    Further, the Commission is making every effort to ensure that the 
certification process is fair and efficient. On Tuesday of this week in 
Albany, New York, the Commission staff began its Gas Outreach Program 
to improve the certification process through collaborative processes. 
This meeting was the first in a series that the Commission staff is 
conducting across the country to identify the most effective and 
efficient processes that can be used to prepare pipeline applications. 
We are attempting to encourage the use of prefiling collaboration in 
resolving disputes among the applicant, landowners, resource agencies, 
and other parties most affected by pipeline development. Early dispute 
resolution will ultimately result in quicker and better Commission 
decisions.

                             V. CONCLUSION

    The recent price increases in natural gas markets have renewed 
concerns about the proper role of government in ensuring an adequate 
supply of energy at reasonable prices. The Commission believes in 
promoting a robust interstate natural gas market. It no longer 
regulates the wellhead price of natural gas. Yet, it does play a key 
role in overseeing the development and operation of the interstate 
pipeline grid. The Commission is committed to doing its part in making 
natural gas markets work for the Nation's consumers, by working toward 
the responsible development of the pipeline infrastructure needed to 
support the expected growth in demand for natural gas over the next 
decade.

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    Mr. Barton. Thank you, Mr. Chairman.
    We now want to hear from the witness from the Energy 
Information Agency, the Honorable Mark Mazur, is that correct?
    Mr. Mazur. Mazur.
    Mr. Barton. Mazur. You have been before the subcommittee 
before. We appreciate your attending again today and we will 
recognize you for 8 minutes.
    Mr. Mazur. Thank you, Mr. Chairman. It is good to be back 
here.
    Mr. Barton. Put the microphone close to you. That is a very 
sensitive mike.

                 STATEMENT OF HON. MARK J. MAZUR

    Mr. Mazur. Thank you, Mr. Chairman. It is good to be back 
here in front of the subcommittee.
    I would appreciate it if my entire statement could be in 
the record, and then I will be quite brief.
    Mr. Barton. Without objection.
    Mr. Mazur. I just want to focus on a small number of 
points. I am going to use some charts to illustrate my points.
    I want to reiterate that the Energy Information 
Administration is the independent forecasting and statistical 
arm of the Department of Energy; and basically we are focusing 
on the data that we have collected and then our forecasts, in 
particular our Short-Term Energy Outlook that we released in 
early September, for what we think the likely future paths of 
energy prices and supplies will be.
    Mr. Barton. We will stipulate that we think you are--at 
least the chairman thinks you are an honest broker, and you 
just try to do a really good job of getting the best data 
possible.
    Mr. Mazur. Thank you, sir.
    The first chart looks at crude oil prices. What we are 
looking at here is West Texas Intermediate crude oil prices, 
benchmark crude. What we saw happen throughout this year is a 
fairly steady progression of prices with a slight dropoff in 
the spring, but then a resumption of an increase in prices, and 
prices averaged about $31 a barrel for the month of August.
    They increased and peaked a little over $37 a barrel about 
a week ago; since then have dropped maybe $5 a barrel or so, 
and we project a slight decline over the coming months as we 
get additional supplies onto the market. So a gradual decline 
throughout 2001 is what our short-term forecasts show for oil 
prices.
    The second chart looks at crude oil inventories. U.S. crude 
oil stocks were about 285 million barrels in our most recent 
survey earlier this week. These are about 20, 25 million 
barrels below the levels seen at this time last year, and as 
the chart shows we don't expect to see an incredible amount of 
improvement in the short term. The green shaded area is the 
normal band, and you see the stocks being drawn down throughout 
1999 and then staying below the normal band throughout 2000; 
and projected well into 2001, still being below the normal 
band.
    What low stocks mean, it is a clear sign of a tight market 
in crude oil.
    We see a similar pattern when we get to stocks of 
distillate fuels. A drawdown in inventories in 1999 and 
inventories not rising fast enough to get up to the normal band 
throughout 2000, and our forecast shows below-normal 
inventories well into 2001.
    Heating oil stocks--while distillate stocks are heating oil 
plus diesel fuel generally, heating oil stocks are even tighter 
than this chart shows for overall distillate stocks.
    As Under Secretary Moniz pointed out, the level of 
tightness can be seen in percentage terms--total distillate 
stocks may be 20 percent below last year's levels, may be 15 
percent below 10-year average levels; heating oil stocks, 
somewhat tighter than that, may be 40 percent below last year's 
levels on the East Coast.
    I want to switch gears a little bit and move from oil 
issues and refined products to natural gas.
    What we have seen happen in natural gas prices this year 
has been a very rapid run-up, starting in approximately March 
or April of this year. Right now spot prices for natural gas 
are around $5 or a little above $5 per thousand cubic feet, 
approximately twice what they were at this time last year.
    The price run-ups are caused by a number of factors, and it 
is difficult to sort out the individual factors or put weights 
on them, but the combination of them has led to a fairly rapid 
run-up. These include things like relatively flat production 
over several years. We have seen U.S. production, or North 
American production, in natural gas being around the same level 
for the last 3 or 4 years.
    We have growing demand as the economy expands. We also see 
growing demand in the electricity generation sector as natural 
gas becomes one of the more favored fuels in that sector.
    We have an expected higher winter demand. As we head into 
the heating season, people are looking forward to normal winter 
weather in contrast with the relatively mild winters we have 
had the last 3 or 4 years, and we have low storage levels as we 
head into the heating season.
    This last chart looks at the gas storage levels. The shaded 
area again is the normal band, and you can see that the stock 
levels for natural gas were toward the high end of the band 
throughout 1998-1999, but as we go into 2000 and projected into 
2001, we are at the bottom end of that range.
    If you look at the level of stocks, we are approximately 10 
percent below the 5-year average for natural gas stocks at the 
beginning of September.
    So as we head into the heating season, there is concern 
that stocks are low. Again, markets are tight in natural gas as 
well as in any other heating fuels.
    Our projections are for higher heating bills for consumers 
as we head into the season. Both home heating oil consumers and 
natural gas consumers are expected to have somewhat higher 
bills as a result both of higher commodity prices and also 
greater consumption as we project a normal winter coming this 
year.
    That ends my prepared remarks. I will be happy to answer 
any questions.
    [The prepared statement of Mark J. Mazur follows:]

   PREPARED STATEMENT OF MARK J. MAZUR, ACTING ADMINISTRATOR, ENERGY 
                       INFORMATION ADMINISTRATION

    I want to thank the Committee for the opportunity to testify this 
morning. I will review the status of the current crude oil, heating and 
transportation fuel markets as well as the Energy Information 
Administration's (EIA's) short-term forecast for these markets.
    Today, as we face the upcoming heating season, inventories for 
heating fuels are generally low and heating fuel prices are relatively 
high. What we are seeing in the wholesale or spot markets for heating 
fuels includes:

 Spot No. 2 heating fuel oil (New York Harbor) averaging a 
        little over $1.00 per gallon for the first two weeks in 
        September. This is about 40 cents per gallon higher than last 
        year;
 Natural gas prices are at levels much higher than last year. 
        Henry Hub, Louisiana spot prices averaged $4.87 per million 
        British Thermal Units (MMBtu) through the first two weeks in 
        September, which is about $2.20/MMBtu higher than last year; 
        and
 Propane spot prices averaged 73 cents per gallon during the 
        first two weeks of September at Conway, Kansas, the area 
        serving the high usage Midwest region. This is about 33 cents 
        per gallon higher than they were a year ago.
    Transportation fuel prices are also high. National average retail 
diesel fuel prices on September 18 were $1.65 per gallon, which is 43 
cents per gallon higher than this time last year. National average 
prices on September 18 for regular gasoline were $1.56 per gallon, 29 
cents per gallon higher than last year.
    The world price for crude oil is both the source of much of the 
current high price situation in the United States, and also a crucial 
element of an eventual price decline. Crude oil prices for the first 
two weeks in September have averaged about $34 per barrel for West 
Texas Intermediate (a benchmark crude oil). This is about $11.50 per 
barrel or 27 cents per gallon more than last year.
    As I will explain, world petroleum demand exceeded world crude oil 
production in 1999 and early 2000. Petroleum inventories were used to 
meet the excess demand, drawing down stocks of crude oil, and prices 
rose in response. Today, world inventory levels are very low, and 
likely will remain low through the winter. Low inventories generally 
are a cause for concern because they leave markets vulnerable to price 
volatility.

Crude Oil Market
    Crude oil prices have more than tripled from late 1998 to today 
(Figure 1). Prices for West Texas Intermediate (WTI) crude oil rose 
more than $24 per barrel (57 cents per gallon) from under $11 per 
barrel in December 1998 to more than $35 per barrel recently. To put 
this in perspective, in today's dollars, prices for crude oil peaked in 
1981 at about $73 per barrel ($39 per barrel in nominal terms), more 
than twice today's levels.
    Crude oil markets tightened in 1999 as the Organization of 
Petroleum Exporting Countries (OPEC) and several other exporting 
countries reduced supply, and, at the same time, the recovery of the 
Asian economies increased demand. In 1999, world oil demand exceeded 
production, and inventories progressively declined. Organization for 
Economic Cooperation and Development (OECD) country inventories, those 
held by the world's largest industrialized countries, fell well below 
normal in mid-1999, and stayed there (Figure 2).
    OPEC increased production earlier this year, but world oil 
inventories are still well below normal. OPEC recently announced an 
800,000-barrel-per-day increase in aggregate production quotas, 
effective in October. In addition to increases in non-OPEC production 
projected by EIA, the various announced OPEC production quota increases 
should be adequate to begin the process of rebuilding inventories back 
toward normal levels. If our other forecast assumptions are correct, we 
expect to see world inventories approach normal levels sometime next 
year. However, this recovery is a slow process, and because we are 
beginning the winter with very low petroleum inventories worldwide, 
inventories will remain low through the winter and well into 2001 
(Figure 2). With low inventories worldwide, there is the potential for 
crude oil price volatility if there is a significant supply disruption 
or unusual demand strength.
    U.S inventories are similar to the world pattern (Figure 3). U.S. 
crude oil inventories (excluding the Strategic Petroleum Reserve) ended 
August at 289 million barrels. This is the lowest level for that time 
of year since 1976. U.S. crude oil inventories are projected to remain 
below normal levels for the entire winter and well into 2001.
    EIA's crude oil price forecast reflects a gradual recovery of world 
inventories towards more normal levels accompanied by slowly declining 
prices. By December, prices for WTI could be moving back towards $30 
per barrel, with further gradual declines throughout 2001. EIA's base-
case forecast has crude oil prices averaging about $2.50 per barrel (or 
6 cents per gallon) higher this winter than last (October through 
March).

Heating Oil
    Like U.S. crude oil inventories, U.S. distillate (mainly heating 
oil and diesel fuel) inventories are much lower than typical for this 
time of year (Figure 4). With low inventories, there is little supply 
cushion for unexpected changes in supply or demand. As we saw last 
winter, a sharp cold snap, for example, can lead to a dramatic price 
run-up.
    U.S. distillate inventories were 112 million barrels at the end of 
August, 14 percent below their 10-year average for this time of year. 
On the East Coast, which consumes about two-thirds of the nation's 
heating oil, inventories are even tighter. East Coast distillate 
inventories were at 40 million barrels, 31 percent below their 10-year 
average. Although we expect distillate production to be higher this 
winter than last (in part in response to fairly large refining 
margins), demand may also be higher if colder weather occurs in the 
Northeast (last winter had about 11 percent fewer heating degree-days 
than average) and diesel fuel consumption continues to grow. EIA 
expects that distillate stocks will be below normal throughout the 
winter and into 2001 (Figure 4). These low stocks mean there is the 
potential for price volatility in distillate markets this winter, not 
unlike that experienced last winter.
    While our most likely scenario has the United States entering the 
peak heating oil demand months with low distillate inventories, 
refineries are capable of producing more distillate than shown in our 
forecast. Compared to our forecast assumptions, higher crude 
utilization rates and distillate yields have been achieved 
historically, and current high distillate prices relative to crude oil 
should encourage greater production. This, in turn, has the potential 
to result in stronger inventory builds than shown--perhaps as much as 
5-10 million barrels more by the end of November.
    Residential heating oil prices on the East Coast are expected to 
average $1.32 per gallon this winter, which is about 15 cents per 
gallon higher than last winter (Figure 5). If winter weather is normal, 
consumers will be buying more distillate than last winter, since last 
heating season was relatively warm. Under these conditions, EIA expects 
that heating oil consumers will be paying higher bills, compared to 
last year. A typical consumer in the Northeast uses about 680 gallons 
of heating oil during the winter months. At $1.32 per gallon, such a 
consumer will be paying over $900 for fuel, which is about $140 more 
than last heating season.

Natural Gas
    Average natural gas wellhead prices this winter are likely to be 
much higher than the levels seen last winter. Spot prices have risen 
rapidly this year, and, in mid-September, were just over $5/MMBtu, 
about double their level at the beginning of the year (Figure 6). There 
are several factors contributing to this recent price run-up. U.S. 
natural gas production has been relatively flat for the last couple of 
years; demand has been fairly high this year, especially from 
electricity generators using natural gas as a fuel; demand is expected 
to be high this winter, under normal weather assumptions; prices are 
high in the distillate and residual fuel oil markets, competitor fuels 
for natural gas, keeping natural gas demand up; and current working 
storage levels are low--about 9 percent lower than their 5-year average 
levels for this time of year (Figure 7). The injection rate for gas 
into storage continues to be slow relative to last year's rates, which 
is keeping pressure on market prices.
    Current high prices are not expected to diminish until after the 
upcoming heating season, and we expect to see higher residential 
natural gas prices compared to last winter. However, because 
residential rates include capital costs, transmission, storage, and 
other overhead costs, a doubling of prices at the wellhead will not 
mean a doubling of residential bills. For a typical household in the 
Midwest, prices are forecast to average about $8.40 per thousand cubic 
feet, which is about 27 percent higher than last winter (Figure 8). We 
also expect households to consume more natural gas than last year, if 
this winter exhibits a normal weather pattern. The combination of 
higher prices and higher consumption will result in this typical 
household paying more than $730 for natural gas this winter, which is 
about $220 or approximately 40 percent more than the prior winter's 
heating bill. About two thirds of this $220 increase is attributable to 
higher prices, and the remaining one third is due to a return to 
average winter temperatures.

Propane
    Propane also merits some concern this year. Prices are high 
relative to last year, largely a result of crude oil price increases, 
but inventories are within normal ranges for all regions but the 
Midwest. Midwest inventories at the end of August were 14 percent below 
their 10-year average for this time of year. While stock levels in this 
region may yet recover, strong demand for crop drying could increase 
demand for propane, preventing stocks from completely rebuilding. The 
Department of Agriculture is predicting a record corn crop this year, 
but there is uncertainty as to the level of drying needs. Regardless, 
we are watching the Midwest propane situation closely.

Gasoline and Diesel
    Diesel fuel and heating oil experience similar price pressures. 
While these fuels have different sulfur levels, they come from the same 
part of a barrel of crude oil. Low-sulfur distillate stocks, which 
represent diesel inventories, generally are not below the normal range. 
But because diesel fuel can be used to serve heating oil markets, 
diesel prices tend to follow heating oil prices during the heating 
season. As we saw last winter on the East Coast, a price run-up in the 
heating oil market can spill over to diesel prices. This winter, we 
expect on-highway diesel fuel prices to average $1.49 per gallon, which 
is about 15 cents per gallon over last winter's prices.
    Gasoline markets are generally improving. We have passed the high 
demand, high production summer period and are now using the winter 
formulation gasoline, which is easier to produce than the summer 
formulation. Inventories are now in the normal range. However, 
temporary regional problems could still occur, such as those sometimes 
seen in California, when supply difficulties such as unanticipated 
pipeline or refinery shutdowns arise. On average, EIA expects gasoline 
prices this winter to be about 7 cents per gallon higher than last 
winter--mainly reflecting higher crude oil prices.

Summary
    In summary, we are in the midst of a year of volatility for crude 
oil, refined products, and natural gas. As we begin the winter heating 
season, prices for all heating fuels are higher than last year, and 
inventories are low. Although increased world crude production should 
begin to help markets build inventories back toward normal levels, the 
process likely will be slow, and petroleum inventories worldwide are 
likely to remain low into 2001. With low inventories for crude oil and 
refined products, unexpected supply disruptions or demand changes can 
cause disproportionate product price movements.
    EIA has been trying to help consumers prepare for the possibility 
of a winter of high prices and potential price volatility by alerting 
the public, industry, regulators, and Government decision-makers to the 
situation. In addition to our usual Web-based products and 
publications, we have made numerous presentations around the country 
and will be providing further information at our annual Winter Fuels 
Conference on October 6. EIA and the participating States will also be 
collecting and publishing heating oil and propane prices weekly this 
year, instead of twice per month, reflecting increased interest in this 
topic.
    This concludes my testimony. I would be glad to answer any 
questions you may have.

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    Mr. Barton. Thank you, sir. We appreciate that. We 
appreciate your being relatively brief.
    Mr. Mazur. On average, we are okay.
    Mr. Barton. On average, commendable.
    We are now going to go to the distinguished member of Texas 
Railroad Commission, the Honorable Charles Matthews, who--a 
point of personal privilege--is a personal friend of mine. He 
is the former mayor of Garland, Texas; has had extensive 
experience in the coal industry, the oil and gas industry; and 
is the past-elected Chairman of the Texas Railroad Commission--
and knew the name of Jim Nugent because that is the gentleman 
he beat to become a member of the Texas Railroad Commission 
several years ago.
    We appreciate your coming to Washington and we recognize 
you for 8 minutes.

             STATEMENT OF HON. CHARLES R. MATTHEWS

    Mr. Matthews. Thank you. I will say, the first thing, we 
have tried to clean up our language since Mr. Nugent left. We 
have tried to be a little more politically correct.
    I appreciate very much the opportunity to testify before 
this committee. I think before I get into my prepared remarks, 
it might be helpful if I put out a couple of points.
    The rest of these folks who spoke are from the national 
government and have a different perspective perhaps, but I 
think there are a couple of numbers that you might be aware of, 
that members of the committee need to be aware of. The oil 
business, after 100 years, in Texas is still the No. 1 business 
in Texas. It puts about $60 billion into the Texas GNP.
    We still produce about 25 percent of all of the domestic 
oil production in the country. We produce a third of all of the 
domestic natural gas in the country, and while we are large 
producers of natural gas, we are large consumers of natural 
gas, but we are also large exporters of natural gas. Last year 
we exported to the Midwest and the Northeast 1.7 trillion cubic 
feet of natural gas, and so we are a major player.
    And I am just going to talk very briefly, but my written 
remarks contain more of it. It is, I think, necessary for what 
happens in Texas, particularly on the GNP side, to be included 
in the debate, because we are such a large part of the market.
    Texas enacted its electric restructuring bill in 1999 which 
will open the Texas retail electric markets to competition. 
Because all of the announced new electric generation will be 
gas-fired, the demand for natural gas as a boiler fuel will 
continue to rise. A key component to the successful 
implementation of this legislation is the availability of 
natural gas at a reasonable price.
    Texas, as I have said, is the largest producer of natural 
gas in the United States. However, based on the decline in 
natural gas production and the shortage of skilled labor, I am 
concerned about the ability of the industry to meet the 
increased demand for natural gas, despite technological 
advances made in exploration and production. The ability to 
achieve the necessary level of production will depend upon the 
availability of equipment, labor and capital investment.
    The current demand-supply equation for natural gas is out 
of balance. An example of the demand-supply relationship is the 
fact that the United States and Texas both are well behind 
meeting the targeted amount of working gas and storage for the 
winter demand.
    I do not believe we should change the demand side of the 
equation through price controls or other governmental 
intervention. Instead, we need to make changes to the supply 
side by developing and advocating policies that help promote 
the exploration and production of natural gas. These policies 
include reopening training programs for oil field workers, 
developing tax incentives to stimulate drilling, and 
encouraging the continued development of new technologies.
    Let me just say in closing that Texas, since 1989, as every 
session of our legislature meets in the odd years, has 
introduced and successfully passed incentive programs to 
encourage various activities in the oil patch. Those have all 
worked. The return to Texas, to our economy, to our tax base, 
has always been well on the positive side.
    Many States around the country have followed our lead. We 
have a record of proving over and over again that tax 
incentives do work; they do stimulate activities out there and 
that the return to the taxpayer--it is not a cost, it is a 
return many times over what the size of the tax incentives are.
    Mr. Chairman, I appreciate the opportunity to be here. I 
will be available for questions.
    [The prepared statement of Charles R. Matthews follows:]

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    Mr. Barton. Thank you, Commissioner Matthews. That is the 
shortest I have ever heard you speak publicly. I am pleasantly 
surprised.
    Mr. Matthews. I am intimidated by this box.
    Mr. Barton. Okay.
    We now want to hear from Mr. Byron Lee Harris, who is the 
West Virginia Consumer Advocate in the Division of their Public 
Service Commission, from the great State of West Virginia.
    We will recognize you for 8 minutes, sir.

                 STATEMENT OF BYRON LEE HARRIS

    Mr. Harris. Thank you, sir. I am here to speak on behalf of 
the West Virginia Consumer Advocate Division and the National 
Association of State Utility Consumer Advocates, NASUCA. NASUCA 
is a national organization of 41 offices of utility ratepayer 
advocates in 39 States and the District of Columbia.
    NASUCA member offices operate independently from the 
regulatory commissions and their States, and are designated by 
State law to act as ratepayer advocates. I am the chairman of 
NASUCA's natural gas committee.
    Although the final bill received by natural gas customers 
is rendered by their local gas utility, the amount of that bill 
is determined by three distinct markets: the production market, 
which is not subject to price regulation; the interstate 
pipeline market, which is subject to regulation by the FERC; 
and the local distribution market, which is subject to 
regulation by State utility commissions.
    The high natural gas prices that are the subject of this 
hearing are due to increases in the prices at the wellhead. The 
interstate pipelines and the local gas utilities have not, for 
the most part, increased the rates that they charge for their 
services to a significant degree over the last year.
    There is also a difference in the recommended policy 
response from producers and State regulators. Producers 
recommend that free market forces should be permitted to 
operate and that these forces will eventually bring down the 
price of natural gas. The responses by State regulators, which 
I will discuss in further detail, advocate a more 
interventionist approach.
    The reason for this dichotomy is clear. The production 
market for natural gas is highly competitive, so market forces 
can be allowed to work. The distribution market, on the other 
hand, is still a regulated monopoly service. The primary 
statutory mandate of State commissions is to protect consumers 
from the unreasonable prices that would otherwise accrue in a 
monopoly environment.
    The appropriate regulatory response depends upon the model 
used to regulate natural gas in utilities in each State.
    Under the traditional model, the State commission allows 
the utility to pass through all of its prudently incurred costs 
for purchasing, storing and transporting natural gas to its 
customers. The potential responses to high gas prices in these 
States include modifying or extending budget payment programs, 
shifting recovery of costs away from winter months to even out 
consumers' annual bills, or doing nothing. Customers with 
difficulty in paying their bills could seek assistance from 
other agencies, not State utility regulators.
    Some States use the retail choice model in which customers 
are permitted to purchase their natural gas from the gas 
utility or from any other licensed entity. In these States, the 
most appropriate response is to conduct comprehensive education 
of customers regarding the expected price increases and to help 
them become more informed gas purchasers. The Commission should 
also include in their education efforts messages regarding 
energy conservation practices.
    A third regulatory model is the rate cap model, where the 
total rate charged by the utility is set and frozen for an 
extended period. Under the rate cap model, the utility cannot 
recover increased costs of gas from its consumers. Conversely, 
if the utility purchases wisely, it can retain the margin 
realized.
    This is the model used in West Virginia. As a result of the 
rate caps that we have in place, approximately 85 percent of 
West Virginia's natural gas customers will not experience an 
increase in their rates this winter, which has been estimated 
to be an $82 million savings.
    At current gas prices, an absolute freeze may not be the 
best option now. Commissions could opt for a modified cap that 
protects against price increases, but is flexible enough to 
capture potential price declines.
    Thank you for this opportunity to appear, and I will 
respond to any questions.
    [The prepared statement of Byron Lee Harris follows:]

   PREPARED STATEMENT OF BYRON LEE HARRIS ON BEHALF OF THE NATIONAL 
            ASSOCIATION OF STATE UTILITY CONSUMER ADVOCATES

    I am here to speak on behalf of the West Virginia Consumer Advocate 
Division and the National Association of State Utility Consumer 
Advocates (NASUCA). NASUCA is a national organization of 41 offices of 
utility ratepayer advocates in 39 states and the District of Columbia. 
NASUCA member offices operate independently from the regulatory 
Commission's in their states and are designated by state law to act as 
ratepayer advocates. Some offices are separately established utility 
advocate organizations whereas others are divisions of larger 
departments. The West Virginia Consumer Advocate Division, for example, 
is a division of the State Public Service Commission. We are, however, 
an independent division of the Commission and have the authority to 
appeal any finding, decision, or order of the Public Service 
Commission.
    The response of Consumer Advocate agencies to the dramatic increase 
in natural gas prices depends in large part upon the way in which the 
states currently regulate their natural gas utilities. The regulatory 
model varies from state to state, of course, but I have broken it down 
into three general categories: 1) the traditional model, 2) the retail 
choice model; and, 3) the rate cap model.
    The traditional way that states have historically regulated the 
prices charged by natural gas utilities was a bifurcated process. The 
two pieces of this process are often referred to as the base rate piece 
and the gas cost piece.
    Under the traditional approach there was one proceeding, generally 
referred to as a base rate case, that was used to determine the level 
of salaries, investment in plant and equipment and profit that should 
be allowed in the rate charged by the utility. Base rate proceedings 
were typically initiated by a filing made by the utility which may 
occur every year, every other year or may have as long as five years or 
more between cases. In between each base rate case, the utility was at 
risk for recovery of the costs included in that portion of its rates.
    The gas cost piece of the traditional rate setting approach is 
usually addressed in second type of proceeding which is variously 
called a gas cost recovery or purchased gas adjustment proceeding. In a 
purchased gas proceeding, the utility is permitted to adjust its rate 
to recover the cost of gas purchased, stored and transported on behalf 
of its customers. These adjustments may be made annually, quarterly or 
even monthly so that the utility is made whole for all of the costs its 
incurs in purchasing gas on behalf of its customers.
    Under the traditional bifurcated regulatory scheme, the final price 
of natural gas to the consumer was composed of anywhere from 25% to 35% 
in the base rate piece and 65% to 75% in the purchased gas adjustment 
piece. Thus only 25% to 35% of the utility's total expenses were at 
risk for recovery. The remaining amount was trued up through the 
purchased gas adjustment mechanism.
    I have identified three potential responses by regulators to the 
impending increases in gas prices under this traditional regulatory 
model. First, do nothing. By interfering with the price signals to 
consumers, regulators will inadvertently discourage conservation 
efforts. Conservation efforts, especially long term retrofitting 
measures, will of course help to keep prices lower in the future. The 
philosophy behind this approach is that consumers who are unable to pay 
their gas bills should seek assistance from other government agencies. 
Second, budget billing programs, where the customer is permitted to 
choose to pay a fixed amount throughout the year, may be modified or 
extended. In some states, the date for enrolling for budget payment 
plans may have already passed prior to widespread education efforts 
about the impending increases in natural gas prices. Those enrollment 
dates could be reopened to allow customers to choose the budget payment 
option. Third, regulators may want to amortize the impact of higher gas 
prices by shifting certain costs that would otherwise be recovered 
during the winter months to the summer months. Since most natural gas 
usage occurs during the five winter months, commissions can even out 
the monthly bills of consumers by deferring a portion of the impact of 
the price increases in natural gas until the non-heating months.
    Some states have discarded the traditional regulation model and 
operate under what I have termed the retail choice model. Under this 
model, the state commissions continue to regulate the base rate portion 
of the utility's price: the level of salaries, investments and profit. 
The purchased gas portion of the rate, however, is not regulated. 
Rather than have the gas utility buy gas on behalf of all of its 
customers, those customers are given the choice to buy their gas 
supplies from any licensed entity that it is willing to sell it to 
them. States that have opted for the retail choice model believe that 
competitive market forces from the interaction from many suppliers and 
many individual consumers buying and selling gas will yield lower gas 
prices than under the traditional regulatory model. My colleague in 
Ohio, Rob Tongren, the director of the Ohio Consumers Counsel is a 
proponent of the retail choice model. Under the Ohio retail choice 
model, customers may choose to continue to receive their gas purchased 
by their local gas utility or they can buy from a number of other 
suppliers available to them. The retail choice program that is operated 
on the Columbia Gas of Ohio system has enabled residential customers to 
achieve savings of 10% on their gas bills.
    I have identified 3 potential responses by regulators that use the 
retail choice model: Education, Education, Education. The idea behind 
the retail choice model is that regulators do not interfere in the 
determination of the price of gas between consumers and their 
suppliers. What regulators can do, however, is to provide consumers 
with information so that they may make informed choices. Earlier this 
month, the Ohio Consumers Counsel issued a press release informing 
customers of the expected gas price increases and telling them how they 
can get more information about their supplier options. The Consumers 
Counsel also provided some easy to implement energy saving measures 
that consumers can use to help lower their heating bills. A concerted 
effort to educate consumers as to the increases in gas prices, their 
options in light of those increases and energy conservation are 
important to help consumers manage their gas bills this winter.
    The third regulatory model, which we have adopted in West Virginia, 
is to set gas utility rates using rate caps for extended periods. The 
rate cap approach to regulation is not a new concept: it has been used 
for a number of years for telephone companies. And other states have 
used rate caps on the base rate portion of their gas utility's rates. 
What is fairly unique to West Virginia is that we have set a cap on the 
total gas utility rate--both the base rate and the purchased gas 
portions. As a result of the rate caps that we have with three of our 
largest gas utilities, approximately 85% of West Virginia's residential 
customers will see no increase in their gas rates this winter.
    The rate cap approach is fairly simple, we negotiate a rate to be 
charged by the utility and freeze that rate for a period of three 
years. The utility then has every incentive to seek more aggressive and 
innovative ways to manage its costs. The utility is free to prosper or 
fail depending on their success in making business decisions. All too 
often in utility regulation we are faced with requests for rate 
increases by utilities to reimburse them for the costs of what are 
essentially bad business decisions. Under the rate cap approach, 
utility consumers keep their bargained for rate whether or not the 
utility is successful in holding down its costs. At the end of the rate 
cap period we negotiate a new rate and incorporate ongoing savings the 
utility has achieved into the new rate.
    An intrinsic benefit of the rate cap approach is of course rate 
stability. It is our experience that utility consumers not only want 
their rates to be at a reasonable level, but they also want 
predictability. The rate cap insulates customers from the volatility in 
natural gas prices. Attached to this statement is a chart that 
demonstrates this benefit for our largest gas utility.
    The relatively flat line is the purchased gas rate that was used in 
the first three year rate cap period which began November 1, 1995. The 
other line is the estimate of what the purchased gas rate would have 
been if we had been changing those rates on a monthly basis. When this 
second line is above the flat line, consumers were better off under the 
cap than under traditional regulation and when it is below the flat 
line consumers were worse off. In addition to showing the savings that 
the rate cap approach has achieved, which I will discuss in a moment, 
this chart also shows how volatile rates would have been if we did not 
have the rate caps in place.
    In the first year of the rate cap, November 1995 through October 
1996, residential customers saved $8.6 million. Keep in mind that West 
Virginia is a small state, while $8.6 million does not sound like a lot 
of money, it represents a savings of 10%. We achieved a 9% savings 
again in the second year of the rate cap, but in the third year, gas 
prices were lower than the rate cap by a margin of 9%. Over the entire 
three year rate cap period, residential customers clearly benefitted 
from the rate cap.
    In 1998, we negotiated another three year rate cap which was 
implemented in November 1998. As you can see from the chart, even 
though we negotiated a small reduction in rates, it doesn't appear that 
we started off so well. Gas prices have been below the rate cap line 
for most of the period, only going above the line beginning in April 
this year. As all of you at this summit know, however, the futures 
prices for natural gas are trading today at much higher levels than any 
of the prices I have on the chart. Based upon the recent NYMEX futures 
prices, I estimate residential customers of this gas utility are going 
to save from $5 to $10 million per month this winter.
    While I am a proponent of the rate cap approach to regulating gas 
utilities, I recognize that the current natural gas price environment 
may not be the most opportune time to enter into an extended rate 
agreement. Just as potential home buyers may delay their decision to 
buy when interest rates are high, commissions may be reluctant to agree 
to rate caps at current rate levels. A modified rate cap that protects 
against upturns in prices but is still flexible enough to capture 
potential gas price declines may be the better regulatory approach at 
this time. This type of hedging is, after all, exactly what thousands 
of competitive gas buyers and sellers engage in to try to achieve a 
long term price they can live with.
    Whatever regulatory model is appropriate for your state, clearly 
something must be done to educate consumers about their options and 
assist consumers with their natural gas bills this winter. Perhaps your 
state's approach is that regulators should not interfere in the pricing 
of natural gas and that consumers are better assisted through other 
government programs. Keep in mind that the federal funding for energy 
assistance and weatherization programs has dropped by over 30% since 
1995. If your state takes a more active role in natural gas markets, I 
have outlined some regulatory options that I hope are useful. Thank 
you.

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    Mr. Barton. Thank you, Mr. Harris. We appreciate your 
coming up from West Virginia.
    Last but not least, we want to hear from Mr. Steven 
Strongin----
    Is that right, Strongin?
    Mr. Strongin. Yes.
    Mr. Barton. [continuing] who is the Managing Director of 
Commodity Research for Goldman Sachs Company in New York.
    Your testimony is in the record, and we would recognize you 
for 8 minutes. You are probably going to have to scoot over and 
push that microphone closer.

                  STATEMENT OF STEVEN STRONGIN

    Mr. Strongin. Thank you very much. It is a pleasure to be 
here.
    The question raised in today's hearings about the current 
level of oil prices can be answered in two very different ways, 
with very different implications.
    The first and obvious answer is to trace the direct causal 
chain which leads to a discussion of inventories and available 
production which has dominated the discussion so far.
    The second answer evokes a deeper discussion of why the 
entire energy infrastructure from oil well to refinery is near 
capacity, and why the system has so little flexibility and 
reserve capacity that only 18 months after record lows we are 
now into record highs.
    The obvious immediate cause of the current spike in oil 
prices is that inventories are near minimum operating levels 
and there is insufficient oil production globally to meet 
likely demand this winter. This supply constraint environment 
developed from a slowdown in global production capacity growth 
due to low price environments that prevailed in 1988, combined 
with a strong recovery and global demand by mid-1999 after the 
downturn precipitated by the Asian crisis.
    A further complication is that global access to refining 
capacity is currently very limited. Even if we could find more 
oil than our current estimates suggest is available, only a 
relatively small amount of that oil could be refined into 
heating oil in time for this winter. Thus, the net effect of 
new oil, whether it was either new production or increased 
releases of SPR oil, would be to push down crude prices while 
refined product prices to consumers would likely remain quite 
high and still be subject to significant upward spikes due 
either to the weather turning cold or any problems developing 
in the global refinery system.
    In essence, the system has simply run out of flexibility to 
adjust to new demands both at the oil well and at the refinery.
    The deeper and more important question is why the system is 
so fragile and has jumped from feast to famine and back again 
so fast. The key to this price volatility is the ability of the 
market to use inventory builds and draws to smooth out supply 
and demand balances. The problem is that capacity, as measured 
in days-forward consumption, has declined sharply over the last 
2 decades from 20 days in the 1980's to less than 9 days today.
    Simply put, due to a combination of regulation, taxes and 
direct market interventions by the government, the return on 
capital in the oil industry has been poor and investments in 
the downstream part of the business--refining, marketing, 
storage and other aspects of the basic infrastructure--have 
been distinctly unprofitable.
    The market has responded by not providing the capital to 
expand and the net result is the capacity constraints you see 
today.
    If you look at the industry as a whole today, the total 
value of the industry as measured by the market is only about 1 
percent higher than the cash that has been invested into it 
over the last 20 years. If you look at it in comparison, in 
terms of basic financials over the past 3 years, you can really 
see what is driving this. Utility and energy companies both 
have generated less than a 12 percent return on equity capital, 
which pales in comparison to the 20 percent returns achieved by 
companies in other industries such as technology, health care 
and financials--consumer cyclicals and others, where you are 
still seeing active investing.
    It is hardly surprising in this context that our energy 
infrastructure is at its limits and most of the investment 
activities are occurring elsewhere. The only long-term solution 
to this type of problem is allowing the return on equity to 
attract capital and create the incentives to invest. Bottom-
line returns simply have not been sufficient in a market 
context to justify investment, and the result is insufficient 
capacity.
    In this context, the recent SPR announcement must be viewed 
with caution. The modest increase in supply as created by the 
SPR release should allow refiners to operate their full 
capacity through early winter, while interfering only modestly 
with the return on capital necessary to attract new investment. 
While this modestly reduces the potential for economic 
disruptions this winter, it hints at a more aggressive effort 
to manage prices. Such efforts would have the potential to 
further destroy incentives to invest in these industries and 
would likely create an even more severe shortage next year and 
beyond.
    The wonder and unfortunate reality of modern capital 
markets is, the market allocates capital to where it is most 
useful, measured by the market's willingness to pay for the 
product. If you shield the consumer from these costs, you will 
likely destroy the incentives to create the products, and 
without question, if you prevent shareholders from receiving 
those profits either through additional regulation or taxation, 
you will further undermine the market's willingness to invest 
and thus will create even tighter capacity constraints for the 
future.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Steven Strongin follows:]

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    Mr. Barton. Thank you.
    The Chair is going to start the questioning period. We are 
expecting a floor vote around 12:30, which is in about 10 
minutes. When that vote occurs, if it occurs, if Mr. Bryant 
wants to ask his questions, we will certainly do that; and then 
we will take a brief lunch break and a personal convenience 
break for the witnesses, try to get back here by approximately 
1 p.m. And then do the rest of the questions for this panel. 
And then we will go to the second panel.
    So the Chair is going to recognize himself for 10 minutes 
for the first round of questioning.
    Secretary Moniz, we have here several of the energy acts 
that have been authorized by the Congress over the last years, 
and one of those is the Energy Policy Conservation Act that has 
the Strategic Petroleum Reserve. I am sure you have got a copy 
of the act, or one of your staff has a copy of the act.
    Can you show me where in the act it says that you can use 
the Strategic Petroleum Reserve to affect supply and prices?
    Mr. Moniz. Again, the motivation for this time exchange is 
not to manipulate prices. The issue is, as Mr. Strongin just 
said, to provide the opportunity for refineries in the next 
months to operate near capacity, to increase stocks, including 
distillate.
    Mr. Barton. Let me read from the Department of Energy press 
release. It is dated September 22, 2000, statement of Energy 
Secretary Bill Richardson, ``The intended result of this 
exchange is simple: To increase oil supply.'' That is the 
Secretary of Energy.
    This is the President's statement. The President of the 
United States, the Honorable William Clinton, September 23, 
2000, on the South Lawn; and he says, ``The underlying cause of 
low inventories is the high price of crude oil. The overriding 
purpose for our action is to increase supply and help consumers 
make it through the cold winter.''
    And that is noble. Nobody is opposed to that in principle.
    The President says, if you look at it, the reason that 
prices got so high is that the supply has gotten so low, and 
what we are trying to do is even out supply and price. He goes 
on later, ``All I can tell you is, I think this is a prudent 
thing to do, to increase stocks for the winter and to try to 
make sure that it has a moderating effect on prices, but 
basically to deal with the supply issue.''
    This is the President of the United States. This is the 
Secretary of Energy. Not one of those gentlemen in their public 
statements has said they are trying to put more oil into the 
Strategic Petroleum Reserve through some kind of a swap next 
year.
    So, once again, where does it give you the authority to use 
the SPR to affect supply and prices?
    Mr. Moniz. If I may just read an additional statement----
    Mr. Barton. You are going to get a formal question on that 
in a letter from me later in the day.
    Mr. Moniz. But also the press release that you referred to 
says, ``The temporary infusion of 30 million barrels of oil 
into the market will likely add an additional 3 to 5 million 
barrels of heating oil this winter.'' It goes on about 
refineries.
    It also adds, ``As has been the case in earlier exchanges, 
the response to our solicitation will reflect the needs of the 
market. Awards will be made on the best deal for consumers, the 
taxpayer, the management needs of the SPR.''
    So in EPCA--and we do have people who can answer more 
precisely the question, but EPCA provides the authority to add 
oil to the SPR through exchange. This is an exchange. It is a 
process that will play out over this year, essentially. It will 
result in more oil for the SPR.
    It is countercyclical, as are other actions that have been 
taken, like the RIK program; and very importantly--and the 
timing is very important. Mr. Markey referred to his rule for 
45 days. The timing is very important in the sense that this is 
the time to get the product out from SPR, to reach the refiners 
in November and to produce heating oil product for the winter 
season; and in doing so, in fact, our what we believe is a 
conservative estimate of the amount of heating oil needed will 
have a substantial impact in addressing the current inventory 
shortfall.
    Mr. Barton. I understand that, but again, my understanding 
of the act is that it, in some sections, explicitly prohibits 
against trying to manipulate the market for supply and-demand 
purposes; and even in the section that the General Counsel's 
office was quoting yesterday as a justification, there is a 
subparagraph that suggests you need to minimize supply and 
price impact.
    And, you know, I am going to look forward to seeing all the 
legal beagles in DOE burn the midnight oil to try to come up 
with something in the act that says you can use it to affect 
supply and price.
    We are not opposed to trying to put more home heating oil 
in the Northeast--at least I am not, and I don't think anybody 
on the subcommittee is. Congressman Markey and I worked 
together to put into the Reauthorization Act that is now 
pending in the Senate a specific provision to create a home 
heating oil reserve in the Northeast and to change the trigger 
for using that reserve so it wouldn't require a national 
emergency to use it.
    So I think that I am on record as saying that I don't even 
oppose that.
    I am opposed to turning the Strategic Petroleum Reserve 
into a short-term market manipulative tool, and that, to me, 
appears to be what the Department of Energy is attempting to 
do.
    Let me ask you another question. Let's assume that this 
swap that has now become such a darling is, in fact, legal. I 
have my questions, but I will assume that it is. My definition 
of the swap is you give me something, I give you something 
simultaneously.
    Has the Department of Energy ever used this swap provision 
in the past to give something now to get something back later?
    Mr. Moniz. Yes. Again, for example, this is very similar in 
terms of principle with the RIK program.
    Mr. Barton. No, I am not asking similar in principle. I am 
asking specifically, have you released oil from the Strategic 
Petroleum Reserve on a short-term basis with the expectation 
that on a longer-term basis you are going to get more oil back?
    Mr. Moniz. First--well, yes. Let me give you two examples. 
Again, in the RIK, first of all, there is the issue of the 
schedules of return having been renegotiated.
    Mr. Barton. I am not asking about the royalty-in-kind 
program. That is specifically enumerated in the act. I 
understand royalty-in-kind.
    Mr. Moniz. No. 2, just earlier this year when we had the 
problem with two refineries being unable to get product because 
the dock collapsed, we did an exchange to service those 
companies and keep product running.
    Mr. Barton. That was because there was a specific accident, 
though. There is no specific accident in this pending case. You 
have got 30 million barrels of oil in the Reserve, and you are 
going to put it up for bid Monday, with the expectation that 
bidders are going to come in and offer to give you more oil 
back sometime between next August and next November, as I 
understand it.
    Mr. Moniz. Correct.
    Mr. Barton. Has that ever been done before? The answer is 
no, it has never been done before.
    Mr. Moniz. Well, I would argue that it is the same as has 
been done with----
    Mr. Barton. No, not the same as has been done. Has it ever 
been done before?
    Mr. Moniz. The same as has been done.
    Mr. Barton. As has been done.
    Mr. Moniz. The same----
    Mr. Barton. Now, the current administration is saying it 
depends on the definition of ``is'' or ``has''.
    Mr. Moniz. No, I am sorry. Excuse me. I will be very--it is 
the same that was done this year in response to that dock 
collapse. Oil was supplied. Oil was subsequently returned.
    Mr. Barton. So we had a dock collapse last week and that 
caused the President of the United States and the Secretary of 
Energy to say we are going do release 30 millions barrels of 
oil?
    Mr. Moniz. No, sir.
    Mr. Barton. So it is not the same.
    Mr. Moniz. I am sorry. The procedures were the same. The 
issue now here is that there is a use of the authority for 
exchange to fill the Reserve. It is being done to observe the 
market forces, and it is being done in this countercyclical way 
which will, in fact, minimize impact.
    Mr. Barton. Okay. So you will supply the--when I put this 
in writing, we will get the documentation and the incidents and 
all of that that you referred to?
    Mr. Moniz. Yes, sir. Certainly.
    Mr. Barton. Let me ask you another question. These 
contracts that are going to be let, if they are let, what 
happens next August if the market--the futures market right now 
is wrong; prices are higher, not lower?
    Mr. Moniz. My understanding is that there is a contract to 
return a certain amount of oil.
    Mr. Barton. Is that your understanding?
    Unidentified Woman. Yes, that is the understanding.
    Mr. Barton. Now, I was told yesterday that there was a 
renegotiation provision in the contract that if they guessed 
wrong, the Department is going to be very willing to reopen 
those contracts for renegotiation. Is that true or not true?
    Mr. Moniz. I don't believe so, but I can ask Mr. Shages. 
May I?
    Mr. Barton. Sure. He is the man who told me what I just 
repeated to you. He is a credible person.
    Mr. Shages. Yes, my name is John Shages. I am the Director 
of Policy and Finance for the Strategic Petroleum Reserve.
    The contracts will be set for a specific time and for a 
specific amount of oil. Whatever amount is agreed to that they 
will give back to us, that is the amount they must give back to 
us.
    Mr. Barton. So, what you told me yesterday about 
renegotiating if there was a difference in the market, that is 
not true today?
    Mr. Shages. The administration will be willing to do that, 
but it doesn't have to do that. They are contractually bound to 
deliver a specific amount of oil back.
    Mr. Barton. But the administration would be willing to do 
that. So there is some provision--if this great swap idea in 
practice turns out to be wrong in terms of the way the market 
is going, then your expectation is that there will be a 
renegotiation?
    Mr. Shages. Well, let me put it this way. I am a civil 
servant, I will be----
    Mr. Barton. I understand that, and I would much rather ask 
my questions to the Secretary, but you are an honest man and we 
will get a straight answer.
    Mr. Shages. I will be willing to do the renegotiation.
    Mr. Barton. You will?
    Mr. Shages. I will because it will be for the best 
interests of the Strategic Petroleum Reserve and the American 
people.
    Mr. Barton. So the reality, Mr. Secretary--thank you, sir--
is as I thought it was. If markets go down, you will get more 
oil and everybody will be happy, but if markets tighten up and 
go up, you will just renegotiate and you won't get any more oil 
or you will keep deferring it? Is that a fair assessment?
    Mr. Moniz. Well, I think, first of all, again, as Mr. 
Shages said, there is a contractual requirement. As he also 
said, clearly anytime, in any transaction, there can be a 
renegotiation. If there is a renegotiation, it will be to 
advance the interests of the public.
    Mr. Barton. Are there any restrictions in these pending 
contracts as to how the oil can be used?
    Mr. Moniz. No, sir.
    Mr. Barton. There is no----
    Mr. Moniz. Just a second. Except they will be used for 
domestic product.
    Mr. Barton. So the restriction is----
    Mr. Moniz. And the mix in terms of heating oil----
    Mr. Barton. Is there a restriction that it has to be 
refined?
    Mr. Moniz. It can go into inventory and buildup inventory 
stocks.
    Mr. Barton. My understanding is that this is crude oil.
    Mr. Moniz. Correct.
    Mr. Barton. And that whoever gets the bid has to take 
possession of it.
    Mr. Moniz. Takes possession of it.
    Mr. Barton. They can't leave it in the SPR?
    Mr. Moniz. Correct.
    Mr. Barton. But once they take possession, there are no 
restrictions on what they use it for?
    Mr. Moniz. Correct.
    Mr. Barton. So there is no guarantee that it is going to go 
into home heating oil?
    Mr. Moniz. I think the logic here is that the market will 
dictate.
    Mr. Barton. We hope. Hope springs eternal.
    Mr. Moniz. Because, again, the market is operating on its 
price structures, and this will presumably stimulate refineries 
that typically in October or November are running at a lower 
capacity to run----
    Mr. Barton. Presumably, hopefully and prayerfully, but 
there is no requirement.
    Mr. Moniz. It is being left--it is a market--in the end, it 
is a market activity.
    Mr. Barton. Okay. I am going to have to move on here.
    Mr. Moniz. Which is the principle.
    Mr. Barton. One more thing. Is there any restriction on who 
can bid for the oil? Could Saddam Hussein send his agent and 
bid for oil in this auction on Monday?
    Mr. Moniz. No, I don't believe so.
    Mr. Barton. So foreign nationals cannot bid, or just Saddam 
Hussein cannot bid?
    Mr. Moniz. There is not a restriction to only American 
companies, but Saddam Hussein could not bid for it.
    Mr. Barton. Why could he not bid? You just don't like him 
or what?
    Mr. Moniz. It is our policy, right.
    Mr. Barton. It is a policy; you would not accept a bid?
    Mr. Moniz. Right.
    Mr. Barton. Okay. I was told yesterday that there were no 
restrictions on who could bid. Now, at was an informal 
briefing. I would certainly hope that Saddam Hussein could not 
bid, so I would support that policy.
    Mr. Moniz. Again, this would be an unlikely market result 
in any case.
    Mr. Barton. I understand.
    All right. Now, Mr. Mazur, I want to ask you a question on 
the charts. I want to put the charts back up that the EIA had 
about the inventory situation, the blue charts that had fuel 
oil stock inventories and crude oil inventories.
    My question is, since about a year and a half ago, looks 
like that inventories have been consistently below normal 
ranges but they do track the normal trends, and it looks to me 
like an analysis of that could be that the market has just 
fundamentally changed and the oil industry has decided to keep 
less in inventory because they are below the normal ranges, 
they are moving up and down, both for distillate stocks and for 
crude oil inventory stocks. Has EIA done any analysis of 
whether the fundamentals have changed in inventory control, or 
do you think that that is purely a reflection of higher oil 
prices and the people that own the inventory don't want to keep 
that much capital tied up in inventory?
    Mr. Mazur. We have not done a formal analysis of whether 
there has been an incredible shift in regime of inventory 
behavior for the oil industry from last year to this year. In 
part, though, it seems more likely that high prices and 
economic factors explain a lot of what is going on here, and we 
do have tight markets; there is a tendency not to hold 
inventories when we have seen backwardation in the markets.
    Mr. Barton. Is it at least academically----
    Mr. Mazur. Backwardation means today's prices are going to 
be higher than future prices.
    Mr. Barton. [continuing] plausible that we may have a 
fundamental shift in inventory control management and that we 
are going to have lower inventory levels regardless of what we 
do on the supply side?
    Mr. Mazur. There are some industry analysts who say that is 
possible, but it is a very hard story to tell in that it just 
occurred last June.
    Mr. Barton. Okay. I am going to turn the chair to 
Congressman Bryant, and if no other member shows up after your 
questions, recess the hearing until approximately 1 o'clock 
p.m. Okay?
    Mr. Bryant [presiding]. I promise I will only take 10 
minutes.
    I want to express my appreciation to this panel. I 
apologize to you for leaving. I wanted to hear all of your 
testimony. I had to go vote, as we are doing an exchange here 
in the chair so we can vote on this passage of a bill. So I 
apologize to you if I cover some of the territory that the 
chairman did, because again I missed his questioning.
    If I could just follow up on a point that the chairman was 
making on that chart. And, Mr. Strongin, you are from Goldman 
Sachs; do you have an opinion on this issue of the inventory 
controls?
    Mr. Strongin. The inventory controls, yes.
    Mr. Bryant. Because that almost--to me it is almost a 
parallel track here.
    Mr. Strongin. It is very much a parallel track in a 
straightforward way. It simply reflects the fact that when you 
refine oil, you get both gasoline and heating oil, which means 
you build inventories of gasoline in the winter because demand 
is down, and you build inventories of heating oil in the summer 
when you are trying to produce the gasoline for people to use. 
And so that is just the normal seasonal patterns.
    As to the rest of the question, actually there is very good 
evidence there hasn't been any change in the way inventories 
are handled. If you take a look at the kinds of pricing models 
that we use to forecast, which are basically forecasting a 
price off of inventory projections, the market is right in line 
with those models, which really indicates that there is no real 
change in the behavior pattern of inventories. And, in fact, 
the real challenge that we face is the normal seasonal increase 
in demand from today to the middle of winter is about 3 million 
barrels a day of consumption. That represents a need to draw 
about 250 million barrels, depending on the weather, to 350 
million barrels of oil out of inventory, heating oil. It is 
sort of not there, and that is why you are seeing prices go up, 
because it is trying to deal with that particular problem.
    Mr. Bryant. I think I did miss part of your testimony. Did 
you in your testimony indicate why it is not there?
    Mr. Strongin. It is not there because we currently have a 
global demand for oil that is higher than it has ever been, and 
we lack both the production capacity and the refining capacity 
to meet that demand. This is not a subtle problem. It is a 
simple, fundamental lack of capacity.
    Mr. Bryant. And you are saying that there is a production 
problem, but if there was not a production problem----
    Mr. Strongin. You would have a refining problem.
    Mr. Bryant. [continuing] you would have a refining problem?
    Mr.  Strongin. Right. And the real question, I think from a 
policy standpoint, is why is there so little flex in the 
reserve capacity in the system as a whole? And I largely 
attribute that to the fact that the return on capital in the 
industry has been so low. You know, you do not have a shortage 
of semiconductors. You do not have a national semiconductor 
policy, and the reason is returns on equity in those industries 
are 20 to 40 percent. When you look at the energy industry, you 
have a return on equity of 12 percent. If you look at the 
refining and marketing part of the business, which is where 
that Reserve capacity is held, you have a return on equity of 
less than 5 percent, in a modern marketplace.
    Mr. Bryant. In your opinion, why is the return on capital 
so low?
    Mr. Strongin. In many cases, probably the single largest 
factor, though there are a number of them, if you look at the 
last 20 years of the oil industry, you have a progressive set 
of new environmental regulations put on. Each of those 
environmental regulations forced refiners to upgrade their 
facilities. They also incrementally expanded capacity even 
though there was no real demand for it. That progressively 
eroded the returns on the industry. You also, by and large, 
have seen governmental action take place to cutoff the tops of 
the earning cycle; things like windfall profits taxes. The 
combination of that has meant when you look across the whole 
cycle, the return on capital in the industry is simply low.
    Mr. Bryant. How would you view--a little off the subject 
but we initially alluded to it, I think, a little bit in the 
opening statements. From your industry, how would you view 
issues like the drawdown from the Strategic Reserve that is 
currently being discussed, 30 million barrels?
    Mr. Strongin. I guess there are sort of two responses to 
that. One is the simple physical reaction, divorced from the 
politics and market precedent issues, which is that it 
represents about the necessary oil to run the U.S. refinery 
system at max through winter. As such, it modestly reduces the 
probability of stocking out of heating oil in the Northeast 
this winter. That would be economically disruptive. So as a 
pure physical action, it represents a reasonable action and it 
probably is about the largest size action that can be 
reasonably undertaken.
    From a broader economic issue of the precedent and notion 
of further price management, when you have an industry that has 
capacity constraints because of a lack of profitability, and 
you do things that hurt that profitability and manage those 
prices, you are continuing on an environment where the 
investment environment is going to be poor. What that may lead 
to is even worse problems next year and the year beyond.
    You see a very similar pattern in the natural gas industry, 
which has been subject to the same kinds of regulations. So 
that as a local action, I think it is reasonable. More 
globally, out of context, it raises worrisome questions about 
whether, in fact, the return on capital in this industry will 
be allowed to be high enough to generate the necessary 
investment to provide the necessary infrastructure and energy 
to drive a global economy forward.
    Today when you look at the Goldman Sachs global economic 
forecast or any of our peers', one of the key constraints on 
global and U.S. growth is available energy. If you continue to 
underinvest in that sector, you will continue to put a 
constraint on growth globally.
    So one has to be very careful when one begins to play with 
short-term economic incentives that one hasn't created long-run 
economic incentives that are actually quite counterproductive. 
I think that is really the central issue here, and that has to 
be taken in the broader context of other actions toward the 
industry; issues that you will hear later on about willingness 
to produce pipelines for natural gas, the environmental 
regulations that surround refining, the environmental issues 
that surround where and when and how you can drill; and the 
secondary issues of how companies are taxed and treated when 
they invest outside the country.
    Mr. Bryant. I haven't forgotten about the rest of the panel 
here.
    Mr. Moniz.
    Mr. Moniz. May I comment?
    Mr. Bryant. Yes, because I wanted to ask you some 
questions, too.
    Mr. Moniz. Please. I would just like to comment that 
certainly much of what has been said we certainly agree with. 
The issue of, for example, the competition for capital is a 
very important issue that we certainly recognize. I also would 
like to reemphasize what was said that--well, I guess between 
the two of us, that the exchange going on right now is timed in 
both scale and schedule to meet a real need in terms of the 
refineries operating in this period--in other words, the 
Novemberish kind of time period--to produce the product that we 
are talking about. But I would like to reemphasize that this is 
not an issue of--I think to use your words earlier--an 
aggressive attempt to manipulate prices. This is a focused 
exchange activity addressing a real problem, and that is how it 
will be carried out.
    The market will determine how it goes in detail, and we, in 
fact, plan to certainly keep trying to address this question 
and try to understand what a government role would be in 
addressing the issue of capital competition in the private 
sector. As has been said, returns on some of the new economy 
investments, for example, right now certainly is much, much 
larger and we need to address it for our infrastructure 
questions.
    Mr. Bryant. So could we lie to rest this issue that we hear 
so often in politics today about big bad oil gouging this 
country? I mean, can we lay that issue to rest? That is not 
happening from what I hear?
    Mr. Strongin. I mean, the economics of that are startling 
simple. I mean, if you take a look at the integrated major 
companies, which is in essence big bad oil, to use your phrase, 
today's market value of those companies is approximately $1.01 
for every $1 they have invested. In that context, that is 
hardly a market value or an ability to generate returns that is 
going to attract new dollars. So the notion that somehow that 
industry has been able to accumulate wealth in some radical 
fashion is clearly, you know, belayed by the numbers.
    Mr. Moniz. I would just add, however, that I think there 
are many factors involved in the price volatility we have seen 
and those factors have not been certainly all untangled.
    Mr. Bryant. Okay. Let me follow up on that, Mr. Moniz. In 
1996, the Department of Justice opened an antitrust 
investigation into the rising gasoline prices, coincidentally 
the last time we had a Presidential election. What was the 
outcome of DOJ's investigation and was a report actually issued 
on the high price of gasoline?
    Mr. Moniz. May I defer that, Mr. Chairman, to the 
economists here who may have a better answer?
    You have no answer? We will have to get back to you, Mr. 
Chairman.
    Mr. Bryant. Okay.
    Mr. Moniz. Fine. I am sorry. We will have to get back to 
you on that, and the Department of Justice will presumably have 
to respond.
    [The following was received for the record:]

    The Department of Energy has not been able to locate any record of 
a U.S. Department of Justice investigation of gasoline prices during 
1996. However, the Department of Energy prepared a 45-day report 
entitled An Analysis of Gasoline Markets Spring 1996 which was released 
in June 1996. This report is available from the Energy Information 
Administration at www.eia.doe.gov/oil__gas/petroleum. The report found 
that--
        ``. . . the gasoline price increases experienced by consumers 
        in early 1996 resulted from a confluence of factors, but that 
        crude oil price increases and normal seasonal gasoline price 
        increases accounted for most of the change. Unusual factors in 
        gasoline markets also played a role, and include: a late-winter 
        cold spell causing refiners to focus on distillate instead of 
        gasoline longer than usual; lower-than-normal gasoline stocks; 
        continuing high gasoline demand and high refinery capacity 
        utilization; and persistent expectations that both crude oil 
        and gasoline prices would fall several months in the future, 
        which discourage production in excess of demand to build 
        stocks.''

    Mr. Bryant. I understood also in reading additional 
material, that nothing ever resulted from this DOJ 
investigation in terms of charges being filed. And I also 
understand that DOE did a 45-day investigation.
    Mr. Moniz. In 1996, are you referring to?
    Mr. Bryant. In 1996.
    Mr. Moniz. Again, I would have to respond for the record.
    Mr. Bryant. Okay.
    [The following was received for the record:]

    I believe my earlier response to your question concerning 
the 1996 Department of Justice investigation described DOE's 
``45-day'' report from that year.

    Mr. Bryant. Well, let me have another follow-up. Oil 
companies have been investigated dozens of times in the last 20 
years and are again under investigation. Has the government 
ever found any evidence of wrongdoing during these last 20 
years?
    Mr. Moniz. I apologize. This is not my area of expertise 
and so, again, I can certainly get you an answer quickly.
    [The following was received for the record:]

    A large number of firms in a variety of businesses are part of the 
oil industry because of their involvement in producing, or refining 
crude oil or delivering and marketing petroleum products. These 
businesses are subject to the state and federal laws and regulations 
affecting any business, as well as some which are specific to their 
segment of the business. Oil industry firms, like other firms, are 
subject to laws covering:

 mergers and competitive practices
 taxes
 leases or payments for federal resources
 shipping safety and standards
 environmental operations
 product quality
 worker safety and health
    A number of federal agencies (including the Department of Justice, 
Federal Trade Commission, Department of the Treasury, Department of 
Interior, Department of Transportation, Environmental Protection 
Agency, and Department of Labor) are involved in enforcing these laws 
and would be the appropriate sources of information about specific 
types of investigations. No central record is kept of the 
investigations initiated against the industry or of the number of these 
investigations which resulted in enforcement actions. Since 1981, the 
Department of Energy (DOE) has not had any regulatory authority over 
the oil industry although DOE has been responsible for collecting 
nearly $5 billion from firms required to make restitution for pricing 
violations during the period of price controls in the 1970's. These 
funds have been distributed to parties who were overcharged during the 
1970's.

    Mr. Bryant. One other question. In this issue of the 
drawdown, there was a memo that I had a copy of awhile ago and 
it is from, I believe, Secretary Summers where it mentions he 
and Mr. Greenspan object. The chairman read this in his 
statement, that Chairman Greenspan and I, and this is Mr. 
Summers speaking, the chairman and I believe that using this 
Strategic Petroleum Reserve at this time, as proposed by DOE, 
would be a major and substantial policy mistake. Even DOE 
suggests its impact on heating oil prices would be quite small. 
Moreover, it would set a new and ill-advised precedent, and the 
claim that the exchange is nothing more than a policy of 
technical SPR management would simply not be credible in the 
current environment. If you are inclined--this is to the 
President--if you are inclined to authorize SPR change, I would 
like to speak with you before you make your decision.
    He goes on to say that there are alternatives available 
involving the SPR that are focused and targeted on the home 
heating issue. Could you tell us what some of those 
alternatives are?
    Mr. Moniz. Yes. May I first comment just on the issue of 
the memo?
    Mr. Bryant. Yes.
    Mr. Moniz. I won't comment in detail on the memo from the 
Secretary to the President. I would just emphasize that that 
was, of course, a period of interagency discussion. In the 
chronology I noted in my oral testimony, this was going on for 
some time. That memo, I would just note, I believe was written 
in the context of a possible significantly larger exchange than 
was finally decided upon by the President; and indeed Secretary 
Richardson, of course, also wrote a memo to the President which 
analyzed the policy reasons in favor of doing this.
    Mr. Bryant. I will agree they were talking about twice the 
amount they are talking about now, but I don't think the issue 
with these folks was over the amount. It was actually the 
policy of dipping into it.
    Mr. Moniz. There were several issues, clearly, but again 
the Secretary, who was the Secretary of Energy and obviously 
has a key role in this, wrote a memo as well that gave a 
compelling case for reasons why. The President obviously 
evaluated all of these inputs and made a decision to go 
forward.
    Mr. Bryant. Do you have a copy of Secretary Richardson's 
memo?
    Mr. Moniz. No, I do not.
    Mr. Bryant. Could you furnish this committee with a copy of 
that?
    Mr. Moniz. That would be a up to the President, sir. It is 
a privileged communication to the President.
    Mr. Bryant. Would you ask him if he would furnish us with a 
copy?
    Mr. Moniz. We will ask him.
    Mr. Bryant. Thank you.
    Commissioner, if I might ask you, back on the issue of 
natural gas pipelines, do you recall building more natural gas 
pipelines to the Northeast would take some of the pressure off 
of heating oil in situations like the one that occurred this 
past January and February?
    Mr. Hoecker. Well, natural gas has, contributed to the 
northeastern market, to a greater degree recently than it has 
in past times. We have authorized 6,000 miles of additional 
pipeline capacity nationally and a good portion of that is 
going to the Northeast. I do think that the Northeast is going 
to require additional capacity, but our experience recently, 
after having authorized some major pipeline additions to that 
part of the country, is that the proponents of those new 
facilities have not found the market to be there yet, and are 
not building them to the original design capacity that we 
approved.
    So I think that additional supplies are going to be needed. 
I think it would take some pressure off in that market, but in 
many ways natural gas hasn't penetrated parts of the energy 
market like residential heating, for example, to the degree 
that it has in other parts of the country.
    Mr. Bryant. Thank you. Very quickly, before I close my 
question, does anyone have any quick comments to any of the 
questions I asked? Okay. Thank you.
    I noticed Mr. Shimkus has arrived, and I would yield the 
gentleman the appropriate time to question this panel.
    Mr. Shimkus. Thank you, Mr. Chairman.
    I would like to start with Mr. Moniz on trying just to get 
clarification on the swap. I understand that 30 million barrels 
come out, possibly 30 million-plus will come in months to 
come--April for generalities, whenever--unless there is an 
emergency. That is defined in the agreement? What I am trying 
to get at, what happens if there is a--if the price skyrockets? 
I think I tried to cover this yesterday when we met. What 
happens if the price per barrel is $60 per barrel when the swap 
is to be completed?
    Mr. Moniz. Again, bids will come in tomorrow, presumably, 
from companies. They will propose an arrangement, including how 
much oil they would return for the oil they take out, with 
appropriate specification of the oil quality, and they can also 
bid for sweet or sour crudes, for example. Then they would be 
required contractually to restore--to provide the oil in return 
on a schedule between August and November of next year; and 
that would be a contract.
    Now, as we discussed earlier, there is always in any 
transaction an opportunity to request a renegotiation of some 
terms. That is not ruled out. But if that occurs, then that 
renegotiation will take place so as to maximize the public's 
benefit.
    Mr. Shimkus. Okay. That is what I would hope that would 
happen. I mean, if the intent--because the legislation that you 
are using is legislation to attempt to fill the SPRO; am I 
correct? I mean, that is----
    Mr. Moniz. Yes, its----
    Mr. Shimkus. That is the real legalism behind this, is 
terminology to help fill the SPRO, not really in your own 
terminology's effect on price or supply?
    Mr. Moniz. It is a countercyclical use of an exchange to, 
in fact, provide more oil to the Reserve.
    Mr. Shimkus. And it is also----
    Mr. Moniz. And, of course, to meet a near-term potential 
crises with heating oil.
    Mr. Shimkus. And the capacity is a billion barrels, 
correct? I mean, that is a possibility?
    Mr. Moniz. Seven hundred million, roughly.
    Mr. Shimkus. Is there a goal to have?
    Mr. Moniz. Well, we have a number of programs adding oil. 
Again, as we said earlier, first of all, in 1996 and 1997, 
largely through direction to reduce the deficit, 28 million 
barrels came out of the Reserve. We are now refilling 28 
million barrels through the Royalty in Kind program, with again 
an exchange of schedule negotiated to help conditions.
    Mr. Shimkus. Right. But we didn't really refill it when 
petroleum barrels were $18 or less, or did we?
    Mr. Moniz. I am sorry? What is the question, please?
    Mr. Shimkus. You know, we had low petroleum prices last 
year. When were the contractual arrangements made to refill the 
SPRO? Was it made at the ebb of the low prices or was it made 
afterwards?
    Mr. Moniz. I am sorry. Are you referring to the RIK 
program?
    Mr. Shimkus. I am talking about refilling of the SPRO.
    Mr. Moniz. We have not had any appropriations to fill the 
SPRO in many, many years.
    Mr. Shimkus. Has there been a request to fill the SPRO?
    Mr. Moniz. No, not in recent years. The mechanisms have 
been used like the Royalty in Kind but no appropriations adding 
back 28 million barrels, and now this will also add some 
additional volume.
    Mr. Shimkus. Okay. Let me move to Chairman Hoecker for a 
second, because I want to address the natural gas issue and 
highlight most of the heating of--and we predict natural gas 
prices will go up this winter.
    Mr. Hoecker. Yes.
    Mr. Shimkus. So, since the vast majority of heating in the 
Midwest is natural gas, folks who use that heating method are 
going to pay higher prices.
    Mr. Hoecker. That is right.
    Mr. Shimkus. There is nothing that can be done through our 
Energy Department to alleviate the needs of the most poor and, 
taking Mr. Moniz' statement, those who are going to have to 
make choices between food and heat in the Midwest?
    Mr. Hoecker. Well, sir, as I said in my opening statement, 
the FERC has focused on improving and making more efficient the 
pipeline infrastructure that we regulate. When it comes to 
providing low-income weatherization, LIHEAP, other assistance 
to people who could be suffering from these high prices, when 
it comes to ensuring that LDCs engage in prudent purchasing 
practices and that natural gas rates are stabilized so that 
perhaps the peak pricing is distributed over the whole year, 
those are areas that either the Department of Energy and the 
administration or State regulators have under their direct 
authority.
    Mr. Shimkus. But we do not have a strategic natural gas 
reserve to mitigate emergencies of higher prices?
    Mr. Hoecker. What we have is a very competitive and well-
working market. We have working gas storage that has increased 
substantially in recent years, and as I believe DOE's charts 
have shown, that the fill rate is behind a good many previous 
years but it is in sort of the broad band of past practice.
    Mr. Shimkus. Right, but the answer is there is----
    Mr. Hoecker. There is no----
    Mr. Shimkus. As natural gas prices go up, there is really 
no immediate ability to do what was being done for those in the 
Northeast? I mean, there is no strategic natural gas reserve 
that you can release and swap out?
    Mr. Hoecker. Exactly.
    Mr. Shimkus. And I thank you for this. I read the 1998 
DOE--your last publication, because I have always been focused 
on this broad portfolio which many of you have mentioned, which 
is what we need. So I am going to just through a quick perusal, 
since I just received it--in fact, I stole it from the 
chairman.
    Mr. Moniz. We will provide you a copy.
    Mr. Shimkus. I know you would. Page 36, there is a--and I 
will just quote it. On July 10, 2000, President Clinton 
directed Secretary of Energy Bill Richardson to establish a 
home heating oil reserve in the Northeast. DOE has completed 
the process of obtaining 2 million barrels of home heating oil 
to store at interim facilities in the Northeast. If that is 
true, if that is correct, are these being used to supplement 
the additional projected 5 million that may go on the market to 
ease this crunch?
    Mr. Moniz. Well, these are certainly separate actions. The 
2 million barrel reserve will, of course, need to have a 
trigger mechanism for release in terms of some emergency 
situation. The--let's call it 5 million barrels, there have 
been lower and higher projections made--will go out into the 
market in a certain sense in the normal way from those who 
acquire the oil, who borrow the oil.
    Mr. Shimkus. So we have this 2 million--I mean, this is 2 
million barrels.
    Mr. Moniz. Right.
    Mr. Shimkus. Of home heating crude oil.
    Mr. Moniz. Right.
    Mr. Shimkus. That is available?
    Mr. Moniz. No, home heating oil.
    Mr. Shimkus. Home heating oil, excuse me. That is available 
but it is not releasable?
    Mr. Moniz. No, it is releasable, but under conditions.
    Mr. Shimkus. But we are not----
    Mr. Moniz. The Congress is still evaluating the triggering 
mechanisms.
    Mr. Shimkus. As we are the triggering mechanism for the 
SPRO. I mean, we are evaluating it right now. I mean, that is 
part of our process is trying to figure out if the release of 
the SPRO is done appropriately or not.
    Mr. Moniz. Yeah, as part of the EPCA discussion, the 
heating oil reserve trigger is explicitly being discussed.
    Mr. Shimkus. I would think that it would have been a much 
easier process for the administration to come before us and, if 
we have these 2 million barrels, to at least say we have got 
these, we set it up for heating oil emergencies, we think this 
is a heating oil emergency, let's use these first and help us 
expedite the trigger mechanism, than to go through this what 
some would think is a questionable procedure that is going to 
take 30 million barrels out with the possible refining for home 
heating oil of 5 million. I mean, we don't know for sure.
    Mr. Moniz. And diesel and other products, right.
    Mr. Shimkus. Right, but the crisis is in home heating oil.
    Mr. Moniz. We are very concerned about a possible crisis in 
heating oil, right. But again the 2 million barrels is a 
reserve being formed right now as opposed--which----
    Mr. Shimkus. The statement says you have it.
    Mr. Moniz. Well, it is being filled right now. It is about 
half filled right now. It will be completely filled very 
shortly.
    Mr. Shimkus. All right. So we have 1 million barrels?
    Mr. Moniz. It will be filled imminently. I mean, the 
contracts were awarded a few weeks ago. It is being filled. And 
again I would remind you that kind of use could be--could more 
reflect the kind of sudden event that took place last winter 
where, for example, in the Northeast without refineries, 
dependent upon transportation, frozen harbors and rivers caused 
a very--an immediate supply problem in terms of shipping.
    Mr. Shimkus. And quickly, I would like on page, I think it 
is 27----
    Mr. Moniz. May I just comment as well on the LIHEAP 
question you asked earlier? Of course, the President also 
announced a $400 million release there.
    Mr. Shimkus. I know the chairman spoke in the press 
conference about that.
    Mr. Moniz. In addition, with your interest in technology, I 
would just mention that being funded for fiscal year 2001, we 
also have a gas power and gas infrastructure initiative that 
will look at things like, for example, improving storage 
technologies for gas.
    Mr. Shimkus. Very similar in the last report, we get a lot 
of charts and graphs about projected future energy use. I think 
when we have this debate over national energy policy, I think 
what we want to see is what is the--what is the administration, 
through the Department of Energy, where do we want--where do we 
want to be? What percentage of our energy portfolio do we want 
to be in natural gas, nuclear power, coal-generated facilities; 
but we never see that, or, you know, my personal favorite, 
renewable fuels. And then we can start addressing policies to 
reach those areas.
    You know, we are engaged in the energy deregulation issue. 
It is a very--pardon my choice of words--very hot debate, 
especially with California and the push for peaker plants in 
Illinois because of the high price spikes of 2 years ago, two 
summers ago, there is an aggressive movement to create peaker 
plants in the State of Illinois because the market works. High 
prices, capital; possible profits to reinvest.
    What that does now, because of EPA rules and the ability to 
make smaller plants that are all built very similar, is that 
that is going to create a greater demand for natural gas. That 
is what is happening, and the price will grow because of that.
    I hear the chairman getting annoyed with my length of time 
so I will yield back my time.
    I want to thank you. I am not trying to be adversarial. The 
national energy structure, as you all know, since I keep 
harping on it, is very, very important to me. I do--as my 
opening statement said, the strategic importance of that is 
critical, I think, to the lives, and you will make the argument 
maybe lives of people being warm. I can make the argument that 
the lives of the natural gas people being warmed in Chicago are 
likewise as important as those in the Northeast, but until we 
get together and get a percentage of where we want to be in the 
future, these are nice, they are cute, they are colorful, but 
they are not--they are not going to help us drive policy, and I 
yield back my time.
    Mr. Moniz. May I comment, Mr. Chairman?
    Mr. Bryant. Please, briefly.
    Mr. Moniz. I would like to emphasize, first of all, of 
course, we would be delighted to come and have a more in-depth 
dialog. We believe this document reflects what is a very 
successful overall energy policy. We need to clearly have some 
issues right now, volatility in these markets. However, on the 
percentage I would like to say that, again, our first 
principle--and I think it is a bipartisan, long-standing first 
principle--is on the market dynamics. So we view our job as 
helping to shape the opportunities, technology developments, 
regulatory structures, et cetera, that will allow the many 
kinds of energy supplies that we need to satisfy all of the 
citizens' needs that you referred to, Mr. Shimkus, optimally.
    So, for example, I think you will find in here many 
successful supply programs. You will find that nuclear power 
last year actually, because of higher capacity factors, had the 
highest contribution to power that it has ever had, and we have 
new technology programs for the future. Through all the areas, 
I would be happy to come by and talk about that.
    Mr. Bryant. Before I recognize the gentleman from Arizona, 
let me just reiterate the memo from the Secretary, particularly 
since reference was made before this committee in terms of what 
was said in the reference--in that memo. This committee would 
certainly appreciate you passing our request for that document 
to be produced to us.
    Mr. Moniz. We will inquire.
    Mr. Bryant. If you would report back in some form to us 
what the response is. We would appreciate that. We would 
certainly like to see that memo.
    [The Department of Energy had not responded at time of 
printing.]
    Mr. Bryant. At this time, the Chair recognizes the 
gentleman from Arizona, Mr. Shadegg.
    Mr. Shadegg. Thank you, Mr. Chairman. I have a number of 
questions. I want to focus Mr.--is it Moniz, is that how you 
pronounce your name?
    Mr. Moniz. Moniz.
    Mr. Shadegg. Moniz. There were some questions raised by 
your testimony and some questions raised by the memorandum for 
the President dated September 13, written by Lawrence Summers. 
I understand my colleague Mr. Bryant has already asked you some 
questions about that, but I feel compelled to ask some more 
questions.
    First of all, in 1996, the President ordered a release of 
12 million barrels from the Strategic Petroleum Reserve because 
of the price spike in gasoline. That happened to be during the 
1996 Presidential campaign and it happened 3 days after Bob 
Dole called for a repeal of the 1993 gas tax increase.
    We are now in the same kind of climate. You came here with 
thoughtful testimony saying this was not political and we are 
in a different situation than we were last summer when the 
administration opposed this release from the Reserve. I think 
sometimes we ought to learn from history.
    The question I have of you is: Can you now, or could you 
supply me in the future, evidence that shows that that release 
resulted in a long-term decrease in the price of gasoline or 
heating oil?
    Mr. Moniz. May I first clarify the 1996 releases? Again 
there was one release--Okay, two in 1996, one in 1997, total 28 
million barrels. Five million barrels was in the February 1995 
fiscal year 1996 budget proposal to the Congress to address a 
SPRO infrastructure need in terms of decommissioning a site.
    Mr. Shadegg. I understand there was a rationale and the 
Congress was involved. My question is----
    Mr. Moniz. The second and third releases were 
congressionally directed to address deficit.
    Mr. Shadegg. In May 1996, the President ordered this 
release. It was, in fact, in advance of the date that Congress 
had authorized.
    Mr. Moniz. The requirement was in fiscal year 1996 and it 
was so done in fiscal year 1996.
    Mr. Shadegg. Now, we could bicker over the dealings. My 
question is: Did that bring about a long-term reduction in 
either the cost of gasoline or heating oil?
    Mr. Moniz. Well, I think clearly no; you know, relatively 
small. I mean, release of that type is not going to have a 
long-term effect.
    Mr. Shadegg. So it did not have a long-term effect?
    Mr. Moniz. It had an effect of, I believe, reducing prices 
for some time.
    Mr. Shadegg. But I think you just said it did not have a 
long-term effect.
    Mr. Moniz. No, correct; but again the motivation was again 
congressional direction for deficit reduction.
    Mr. Shadegg. Let me quote the President. The President said 
he was releasing because, ``a rise in price of gasoline affects 
the take-home pay of working people who have to commute.'' That 
is a direct quote from the President. It doesn't say anything 
about revenue. It doesn't say anything about the needs of the 
Strategic Petroleum Reserve. I am quoting the President of the 
United States in May 1996, and I guess the point that I think 
you have already indicated to me is it did not have any long-
term effect on the price of gasoline.
    Mr. Moniz. I would say no; yes, correct.
    Mr. Shadegg. Let me ask another question. Do you support 
the use of the SPRO for price manipulation purposes?
    Mr. Moniz. No. These exchanges, again, are to, A, increase 
supply of the SPRO and, B, in this case, again, to 
countercyclically address a potential crisis that we have in 
this winter.
    Mr. Shadegg. As a policy matter, you don't support the use 
of the SPRO to price manipulate?
    Mr. Moniz. Correct.
    Mr. Shadegg. Okay. I am glad you turned to the topic of 
exchange because that takes me to the to Lawrence Summers' 
memo. In the Lawrence Summers' memo, he indicates that both he 
and Chairman Greenspan believe that the price reduction which 
might occur as a result of a release of 60 million barrels, 
twice what is in fact being released, they say even this modest 
effect overestimates the probable impact. And then they go on 
to say that one of the ways in which it overestimates the 
impact is the bounce-back in the price when the fuel is 
returned to the Strategic Petroleum Reserve, and that in point 
of fact that may cause a spike in price or an increase in 
price, far offsetting any temporary decrease.
    Do you disagree with that?
    Mr. Moniz. Well, the--first of all, let me just stress that 
I certainly had not seen Mr. Summers' memo.
    Mr. Shadegg. Could I have the staff give Mr. Moniz a copy? 
I can't believe you are here without having even seen the memo. 
It is a short memo.
    Mr. Moniz. Well, it is--I think I--I hear your reading of 
it. Clearly, again, we are in a situation where with very tight 
supplies and inventories right now, as Mr. Mazur said earlier a 
backwardated situation in terms of futures prices, with the oil 
being returned over a several-month period and a few hundred 
thousand barrels a day, we don't--we certainly don't expect 
price spikes. Clearly, we are not--over the program, we are not 
putting oil into the market; that is, over the length of the 
program.
    Mr. Barton. Would the gentleman yield?
    Mr. Shadegg. Certainly.
    Mr. Barton. You know, I told one of your staff, I said he 
is an honest man and you said you are, too, and you are.
    Mr. Moniz. Right.
    Mr. Barton. But how can you say that with a straight face, 
that you are not putting oil in the market? You are putting 30 
million barrels in the market.
    Mr. Moniz. I said over the length of the program. Thirty 
million goes out right now and next year 30-plus million 
barrels will be returned to the SPRO.
    Mr. Barton. It is just not credible, Mr. Secretary. If I 
swapped Babe Ruth for--I don't know, who was a player then--Ty 
Cobb--and I get to use Babe Ruth for the season but I give him 
back next year, I had Babe Ruth. I used him.
    You put 30 million barrels on the market, they are going to 
be--hopefully going to be used.
    Mr. Moniz. Hopefully, absolutely.
    Mr. Barton. They are not just going to sit in some tanker 
offshore Texas or Louisiana.
    Mr. Moniz. We certainly hope so.
    Mr. Barton. So you are putting supply into the market. That 
is a fact. I mean, that is----
    Mr. Moniz. Agreed.
    Mr. Barton. Okay.
    Mr. Moniz. Again, we certainly hope. Over the length of the 
program, it remains--it is simply--it is equally a fact that--
--
    Mr. Shadegg. What is the meaning of ``is''?
    Mr. Barton. Unless you guess wrong on the market, and the 
market is tight next summer and then you will renegotiate.
    Mr. Moniz. If that should occur, it would be with the best 
interest of the public in mind.
    Mr. Barton. So for all intents and purposes, you are 
changing the policy for the use of the SPR to put oil into the 
market when it is politically expedient to affect prices or 
supply, and if the Clinton administration becomes a Gore 
administration you all are going to intend to do that from 
right now. You are changing the use of the SPR.
    Mr. Moniz. First of all, I will not address political 
expediency questions. This is a timed and scaled release to 
meet a very real problem that deals with refinery schedules, 
refinery capacities--we heard that confirmed earlier from the 
private sector--to address a real problem in a way that will, 
in the interval, increase oil in the SPRO. That is what it is.
    Mr. Shadegg. Reclaiming my time. We now have a copy of the 
memo delivered to you. It is a major issue. It has been in the 
press. It is being discussed by everyone, so if you haven't 
seen it before today, I suggest you ought to talk to your 
staff.
    Treasury Secretary Lawrence Summers says point blank in 
this memo dated September 13 that both he and Chairman 
Greenspan believe that using the SPR, as is proposed, would be 
a major policy mistake. I take it that either you disagree with 
those two gentlemen or you think something changed between 
September 13 and today, and I am confused by your testimony as 
to what is the case.
    Mr. Moniz. First, as I said earlier, the memo was certainly 
written at a time when the interagency discussion was also 
evaluating a significantly larger release.
    Mr. Shadegg. As a matter of fact, he talks about a 60 
million barrel release, and he says even a 60 million barrel 
release, twice what you are proposing to release, would produce 
only a reduction of home heating oil of 2.6 cents a gallon by 
January, and he says that is overly optimistic.
    So we can assume that since you aren't releasing 60 million 
barrels, and they say--and they should know, Chairman Greenspan 
and the Secretary of the Treasury--produce a 2.6 percent--I am 
sorry. They are relying on your estimate that that would 
produce a 2.6 cent reduction by January. This is a release of 
half of that amount, so we are talking about a 1.3 cent 
reduction by January. And they go on to say that is an 
overestimate.
    Mr. Moniz. Again, let me answer--let me reemphasize 
something and then make a comment.
    There obviously was an interagency discussion with a 
variety of perspectives being provided to the President, 
including those by the Department of Energy and our Secretary, 
who made what we would argue a compelling case for the policy 
soundness of this move.
    Second, the focus is not on price. As has been said 
earlier, the expectation remains to be seen--as the bids come 
in, the expectation is that this will lead to an additional 
well-timed December heating oil increase of supply of let's say 
5 million barrels. That 5 million barrels would represent a 
very substantial part of what is currently the inventory 
shortfall.
    This is confirmed--this is also argued by others in the 
private sector. Mr. Ting, for example, from Smith Barney. Is it 
Smith Barney? It is Smith Barney, for example. We have it 
somewhere here. I can't find the paper on that.
    And I think we heard earlier that this does have the right 
scale to have the refineries operating at what would be the 
appropriate capacity in this November/December timeframe to 
supply that product.
    Mr. Shadegg. I am absolutely dumbfounded by your testimony, 
and I have to be honest about that. I heard you just tell the 
chairman that you weren't putting oil into the market.
    Mr. Moniz. Excuse me, sir.
    Mr. Shadegg. You disagreed with that.
    Mr. Moniz. Excuse me, sir. I said over the year, and that 
is a fact.
    Mr. Shadegg. Okay. The second thing that I just heard you 
say is the focus of this policy is not price, and yet both the 
President and the Vice President have specifically said that 
the purpose of this policy is price. It is to bring down the 
cost of home heating oil in the northeastern United States. 
That statement is repeated in every journal you pick up, but 
your testimony is it is not price.
    Mr. Moniz. Clearly, sir, the focus is on this supply and 
inventory issue. Clearly, any action ever taken with the SPRO 
or any other supply, any other inventory, a privately held 
inventory is going to have an effect on the market. That is 
clear.
    Mr. Shadegg. So if the President says his goal is to take 
care of the cost of home heating oil, you are telling me on 
behalf of the Department of Energy that is not the goal?
    Mr. Moniz. The purpose is to prevent a supply shortfall. 
Clearly, that has implications in the market; there is no 
question about it.
    Mr. Shadegg. You probably disagree with many points in this 
memo. I am not going to take the time to focus on all of them, 
but in his memo Treasury Secretary Summers, along with Mr. 
Greenspan, say that the impact of the release, then twice what 
is currently being proposed, would be negligible. They say it 
would be lost in the day-to-day price fluctuations. And one of 
the points they make is the fact that U.S. refineries have only 
a limited capacity no matter what the availability of crude 
petroleum.
    We heard this morning testimony that refinery capacity is 
at average 95 percent. Refinery by refinery, it is somewhere 
between 91 and 97 percent, and they make the argument that that 
makes any release, other than its rhetorical value, have no 
meaningful value. I take it you disagree with that as well?
    Mr. Moniz. Our analysis is that clearly while refinery 
capacity today is averaging 95 percent, historically, as one 
goes into October/November those capacities go down. There are 
periods of maintenance, both required and discretionary. Our 
analysis, and I believe supported by many others, including in 
the private sector, is that this should provide incentives for 
the refineries after they finish their turnarounds in October 
to come back in November, as we heard earlier on this panel, to 
operating at closer to full capacity in that time period and 
therefore increase product to the market.
    Mr. Barton. I would yield to the gentleman an additional 4 
minutes. Are you about to wrap up?
    Mr. Shadegg. I would like to conclude with just one 
question about the gentleman's testimony.
    Mr. Barton. This will be the last question.
    Mr. Shadegg. At page 3 of your testimony, you make the 
point that other energy production, natural gas, coal, 
renewables, nuclear, and you say hydropower, had increased in 
the last decade. You acknowledge that domestic oil production 
is the exception and that U.S. production declines are expected 
to flatten out in 2005.
    Two pages further in your testimony, at page 5, you say we 
have increased the production of new sources of oil and gas 
supply through technology advances. You say we are encouraging 
greater private/public partnerships to develop oil resources 
and we also lowered the cost of domestic oil exploration 
through technology advances.
    I read some conflict between the two, and I guess I would 
like you to provide either now or in the future, for my 
information, those technological advances that the 
administration has produced.
    Mr. Moniz. If I may answer, Mr. Chairman, for a few 
minutes, I guess that is a yes.
    First of all, domestic production of oil has been declining 
since 1970. In the last years, the rate of decline has gotten 
smaller, and a major reason for that, compared to 1990-1992, we 
were dropping about 250,000 barrels per day per year in 
production. That has now been nearly halved. A major reason for 
that is the coming on of a lot of the deep water drilling, 
where again the Congress and the administration worked together 
on things like the Royalty Relief Act, for example, which 
helped stimulate that. So the decline is flattening out. 
Expectations, EIA projections are that by 2005 we will have 
flattened out.
    One reason why it is flattening out is technology, deep-
water technologies. All of these, by the way, generally develop 
with industry drilling technologies, 3-D 4-D seismic 
technologies, all of these programs; and we can certainly 
provide you more details.
    Mr. Shadegg. So the ``we'' means industry, not necessarily 
the administration?
    Mr. Moniz. It means the Department of Energy typically, in 
cost-shared--are in deep programs with industry, some 
exclusively, DOE for a while, like using very high-powered 
supercomputers to develop new 3-D and 4-D seismic technology.
    Mr. Shadegg. I appreciate that clarification.
    Mr. Barton. We have one more, Congressman. Can you last 
another 10 minutes? We can give a very brief 5-minute personal 
convenience break, but I do want Congressman Markey to have his 
shot at you.
    Mr. Markey. If you need a drawdown right now.
    Mr. Barton. I will recognize Mr. Markey for 10 minutes. 
This will be the last round of questions for this panel.
    Mr. Markey. Thank you.
    This is a very funny debate. We have got this strategic oil 
reserve. The governments in other countries are meeting to plot 
to take oil off the world market to drive up prices for 
American consumers. Our government has a 570-million-barrel 
Strategic Petroleum Reserve to deal with their governments. The 
Bush campaign says it is a bad idea to use it against these 
OPEC nations who, if they met in the United States, would be a 
per se violation of antitrust law.
    Six or seven companies who control one product can't meet 
and decide that they are going to take a product off the market 
in order to increase price. They would be going to jail. So the 
only weapon we really have is this Strategic Petroleum Reserve.
    Now, the Bush perspective is that we shouldn't use it. But 
if we do not use it, the squirrels will be better prepared for 
this winter in the Northeast than the consumers are going to be 
because there won't be enough oil. When it was released last 
week, the price of oil had went down $6 a barrel. That is good 
for consumers.
    You know, I have been trying to think of other times when 
people wouldn't use their reserves that they had put together. 
Nero wouldn't send out the fire fighters; rather, he just 
fiddled while Rome burned. The Minute Men in Lexington and 
Concord, I suppose they could have stayed in their houses and 
not all taken out their rifles; but good thing they did. We are 
sitting here without a British flag over our heads.
    Here, however, we are told that it really wouldn't make 
much sense to deploy it. Kind of like the fish telling Noah 
they do not need an ark even though the storm is about to 
arrive.
    Here, the oil companies are the fish. They are swimming in 
it; they love it. But for consumers there is going to be a 
severe impact unless our government acts to paradox these OPEC 
governments. It is not private sector; the government decides 
in these countries whether or not energy is going to come our 
way.
    To Mr. Moniz: Has this Republican Congress yet authorized 
under EPCA, the Energy Policy Conservation Act, the 
availability for the President to deploy the Strategic 
Petroleum Reserve?
    Mr. Moniz. We are certainly awaiting the reauthorization of 
EPCA. Of course, the House has done some action.
    Mr. Markey. The House has passed it.
    Mr. Moniz. And the Senate has not. We think it is very 
important to be passed. Again, this time exchange is authorized 
under the Interior act, Interior appropriations bill, but we 
need other authorities that are having real impact which are, 
for example, antitrust issues without oil companies being able 
to work with the International Energy Agency.
    Mr. Markey. So the authority has expired?
    Mr. Moniz. It lapsed in March, and we are very eager to 
have it restored as well as to provide the trigger mechanism 
for the home heating oil reserve.
    Mr. Markey. One of the authorities that would be given to 
you would be to have the ability to engage in exchanges of oil; 
is that right?
    Mr. Moniz. Again, we believe we have continuing authority, 
what--we do have authority continuing to do these time 
exchanges for the purpose of increasing supply. But, clearly, 
having the EPCA reauthorization for the whole suite of 
requirements triggers, et cetera, for both the SPRO and the 
heating oil reserve which is part of it are very important.
    Mr. Markey. I understand that DOE has entered into four 
previous exchanges, using that authority, prior to last week. 
Is it true that three of those four exchanges helped an oil 
company--the May 1996 ARCO exchange, the August 1998--May crude 
change, and the June 2000 CITGO-Conoco exchange.
    Mr. Moniz. We have consistently used management authorities 
of the SPRO to help relieve some possible supply congestions 
including, for example, this year you mentioned the last one.
    Mr. Markey. Did any Republican Members of the Senate 
challenge your ability to be able to do that?
    Mr. Moniz. No, I would say both that and the royalty-in-
kind program have been widely applauded by both sides of the 
aisle.
    Mr. Markey. When the Department announced in August of 2000 
that it was going to do an exchange to set up a 2-million-
barrel Northeast home heating oil reserve, was its authority to 
do so challenged?
    Mr. Moniz. Not generally, no.
    Mr. Markey. It was not.
    Mr. Moniz. Correct.
    Mr. Markey. Did the Republican-controlled Congress back in 
1996 order the Department of Energy to sell oil from the 
Strategic Petroleum Reserve?
    Mr. Moniz. Yes, in the appropriations bills of 1996 and 
1997.
    Mr. Markey. Was it done to meet a severe energy destruction 
or warlike conditions?
    Mr. Moniz. There were no energy issues at all involved.
    Mr. Markey. What was the reason that oil was ordered to be 
sold by the Republican Congress in 1996?
    Mr. Moniz. It was to address the funding issues.
    Mr. Barton. Will the gentleman yield on that?
    Mr. Markey. I will be glad to yield.
    Mr. Barton. Did the administration request such an 
authorization to sell in 1996?
    Mr. Moniz. The administration requested a 5-million-barrel 
sale to address on operational issue involving decommissioning 
of one of the storage sites and the additional 23 million 
barrels were handled through the other----
    Mr. Markey. Now I also recall, Mr. Moniz, that last year 
the Republican leadership introduced a bill to eliminate the 
Department of Energy--just to eliminate it. What would happen 
to the Strategic Petroleum Reserve under that legislation?
    Mr. Moniz. Congress would have to determine its future. 
There have been in the past some calls for eliminating it. But 
clearly we think this is a very important investment in our 
energy and national security.
    Mr. Markey. Under section 401 of that bill which the 
Republican leadership introduced last year abolishing the 
Department of Energy, the United States would be instructed to 
sell parts of the Strategic Petroleum Reserve immediately, 
develop a plan for the rest of the reserves, and sell off all 
of the naval petroleum reserves. Do you think that would be 
sound energy policy?
    Mr. Moniz. No, I do not.
    Mr. Markey. What kind of signal would that send to OPEC if 
that Republican leadership bill passed and we didn't have a 
Strategic Petroleum Reserve and we didn't have any naval 
reserves, and their governments then met to decide to take more 
oil off the world market to drive up our prices domestically?
    Mr. Moniz. We clearly believe that all the producing 
nations should be working on a market basis and to follow the 
steps that you suggested would not encourage that.
    Mr. Markey. Yeah. Well, you know, from your responses it 
seems to me that the Republicans have a rather schizophrenic 
policy regarding the Strategic Petroleum Reserve. They won't 
reauthorize your authorities under the program, but they 
haven't let it lapse either. They do not have a problem with 
oil swaps from the strategic petroleum reserves that help big 
oil companies, but they do have problems with swaps that help 
consumers.
    They view the Strategic Petroleum Reserve as a sacred 
national security asset, but they are willing to sell Strategic 
Petroleum Reserve oil to pay for tax cuts. They attack DOE for 
doing its job to help American consumers, but they 
simultaneously want to get rid of the Department of Energy and 
sell off the petroleum reserve.
    Again, as I said earlier, the biggest problem that I have 
with their perspective is that these huge oil increases will 
ripple through our economy unless we do something about it.
    I remember back in August 1990, Mr. Chairman--and I'll end 
on this.
    Mr. Barton. You are doing fine.
    Mr. Markey. Thank you.
    Back in August 1990 Saddam Hussein invaded Kuwait. The 
price of oil spiked from $16 or $18 a barrel up to the mid-
30's.
    We held a hearing in this room a couple of weeks later in 
August asking the Bush administration whether or not they would 
deploy the strategic petroleum reserves in order to let the 
markets know that we would not allow for exploitation of this 
unusual circumstance. They said that they would not, and we 
went through August, September, October, November, and December 
and into January.
    Now, when the actual conflict began, they deployed a small 
amount of the Strategic Petroleum Reserve, but it was 
immediately apparent that it really wouldn't be needed because 
Saddam Hussein was going to be defeated. However, that 5 to 6 
months to $36-a-barrel oil rippled its way through the entire 
American economy late in 1991 and in 1992, causing this very 
brief recession, with Republicans very oftentimes saying it is 
misinterpreted, and it has been continuous uninterrupted 
prosperity in our country all the way back to the Reagan 
administration.
    But there is this little blip. And the blip is actually 
related to the oil spike up to $36, $37 a barrel.
    So now we come to the year 2000. We have the very same 
circumstance with guaranteed consequences for every other 
industry in the United States dependent upon oil. Either we can 
do something now, which I praise the administration for doing 
in lowering this price right now in the futures marketplace, or 
we would suffer the same consequences, a little mini-recession 
because it would affect every single product made within our 
society.
    So I would hope that we could learn from that experience 
back in 1990-91. I understand from certain regional 
perspectives that it is good for their narrow economies to have 
high prices of energy. But for the macro economy it is not. It 
hurts every other industry to have this discretionary price 
rise because it saps their ability to be able to make 
investments in their core products, their core services. So 
hopefully we will have learned that lesson.
    I am afraid, as we come up to this election, that people 
are playing politics with the American economy once again. But 
I think the American people are wise to what has to happen, and 
as a result, are in the support of the President's deployment.
    I thank you, Mr. Chairman.
    Mr. Barton. Thank you, Mr. Markey.
    We are going to take a break. We have to go vote. I want to 
commend Congressman Markey publicly. When I went to him last 
year about passing the reauthorization bill on the floor for 
the SPR, he was the one that suggested changing the trigger for 
the Northeast fuel oil reserve and putting it in the bill; and 
I think the reason that we have fuel oil going into that 
particular reserve today is because of the good work that you 
did last year.
    I would also like to say that in defense of you and several 
other Members of Congress you all have consistently asked for 
release of the Reserve. You have not changed your policy; the 
people who have changed are the administration. And my 
objection is not based on price, the current price situation.
    My objection is, we are setting a precedent to 
fundamentally change the way we use the Reserve. If we want to 
do that, we ought to have a public policy debate. We ought to 
say, now that we have 570 million barrels, we are in a 
different environment in the marketplace.
    This gentleman pointed out in his testimony that you have 
got about 78 million barrels of refinery capacity, and you 
might have 82 million barrels of demand and you fundamentally 
have to do something. It might well be time to rethink the way 
we use that Strategic Petroleum Reserve. We should have that 
debate. Let the Congress weigh in with the administration and 
the private sector and bring a bill to the floor to do that.
    Mr. Markey. Would the gentleman yield?
    Mr. Barton. Yes.
    Mr. Markey. I would like to begin by praising you. I know, 
get the smelling salts.
    Mr. Barton. I won't take it personally.
    Mr. Markey. You convinced me last year that we should build 
in greater incentives for stripper wells because we can't allow 
those marginal wells to go off line because of their lack of 
need in any particular economy because they are so vital long 
term. And I agreed with you on that, and we built that into the 
legislation which we passed.
    Mr. Barton. And we had a debate, and democracy works.
    Mr. Markey. It did work, and so the bill was a regional 
home heating oil reserve and stripper well incentives which is, 
I think, the way you should look at it from a national 
perspective. That is a good deal for both sides. I would just 
like, however, to add one word of defense for Secretary----
    Mr. Barton. I always like you to help me in my closing 
comments.
    Mr. Markey. Secretary Summers. In fact, I talked to him 
last week, and he said that his analysis of the existing 
marketplace today is different than the one last spring.
    Mr. Barton. Even last week. His analysis is different today 
than when he wrote the memo.
    Mr. Markey. The supply shortages, the looming price spikes 
helped to convince him that, in fact, if it was deployed it 
would work in lowering the price. And the same way that on the 
same day he agreed to intervene into the Euro, to put that up. 
So 1 day the Euro went up and oil prices went down, both times 
the United States using its assets in order to ensure there is 
more stability in the global economy.
    Mr. Barton. Let me reclaim my time.
    I have one final question for the Under Secretary before we 
leave. I am going to send this letter that I have talked about 
to the President, the Secretary of Energy. I will want a fairly 
quick response.
    My assumption is that there has been quite a bit of thought 
gone in before this policy change. What, in your opinion, would 
be a reasonable time for me to give the President, the 
Secretary to respond to the concerns that I have outlined 
today?
    Mr. Moniz. I would be hard pressed to advise you on what 
that time should be. There clearly has been an analysis. I am 
certainly willing to take it up this afternoon with the 
Secretary in terms of what he thinks.
    Mr. Barton. I am thinking about a 1-week response, but if 
you thought--perhaps 2 weeks, but I do want a written response 
while this Congress is still in session. So you might, in your 
conversation with the Secretary, bring that up.
    Mr. Moniz. I will.
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    Mr. Barton. I want to thank all the panelists. We didn't 
ask too many questions of the gentlemen at this end, and I want 
to apologize to Commissioner Matthews. I had a long line of 
questions for you on natural gas, and we will submit those to 
you to put in writing for the record.
    I will thank the Chairman of the FERC for spending all his 
day over here. I know you have a lot going on.
    I thank Mr. Mazur. You are always honest and forthright in 
your testimony, and we appreciate that. We will take a 20-
minute break. The second panel will reconvene at 2 p.m. This 
panel is released.
    [Brief recess.]
    Mr. Stearns [presiding]. The Subcommittee on Energy and 
Power will come to order.
    Well, let me welcome to all of you in the second panel. We 
look forward to your opening statements. If you don't mind, I 
would like to limit them to 5 minutes, and Mr. Lindahl we will 
start with you, left to right.

   STATEMENTS OF GEORGE LINDAHL III, VICE CHAIRMAN, ANADARKO 
PETROLEUM CORPORATION; ROBERT B. EVANS, PRESIDENT, DUKE ENERGY 
GAS TRANSMISSION CORPORATION; JOHN SANTA, CEO OF SANTA ENERGY, 
 ON BEHALF OF THE PETROLEUM MARKETERS ASSOCIATION OF AMERICA; 
  KEVIN MADDEN, VICE PRESIDENT AND GENERAL MANAGER, HOME AND 
BUILDING CONTROL, FEDERAL MARKET, HONEYWELL INTERNATIONAL; AND 
ROGER COOPER, EXECUTIVE VICE PRESIDENT FOR POLICY AND PLANNING, 
                    AMERICAN GAS ASSOCIATION

    Mr. Lindahl. Thank you, Mr. Chairman. It is a pleasure to 
be here today.
    Anadarko is one of the world's largest independent oil and 
gas exploration companies. I will limit my remarks to natural 
gas, since we are not in the heating oil business, but we are 
the fifth largest natural gas producer in the United States.
    And I think we are all in agreement that the potential for 
a shortage of natural gas this winter and beyond is real. It is 
our hope that as you continue your discussions on how to 
relieve the pricing pain that consumers are feeling will emerge 
some well-reasoned, long-term solutions.
    A return to price controls clearly is not the answer. We 
all know that. Price controls have discouraged new investment 
and created shortages. Be assured, as the No. 1 driller in the 
United States today, which Anadarko is, we are doing everything 
we can to ease today's natural gas supply crunch. We and our 
partners are running 81 rigs, as we speak, today. That is about 
8 percent of the total rigs working in the United States.
    Other companies are hard at work too. The industry-wide rig 
count has dramatically increased from a year ago to about 1,000 
rigs, and four out of five are drilling for gas. But as fast as 
we are drilling, it is simply not going to solve the problem we 
have to face this winter. Unfortunately, any solution is more 
long term than that.
    We have a tremendous resources base of natural gas in the 
United States. In fact, estimates for the lower 48 reserves 
show a 60 to 80 year supply of natural gas in the United States 
at current producing rates; but before consumers can get it, we 
have to be able to get at it.
    We face two major obstacles to this. The first is we are 
behind the drilling curve due to low natural gas prices that 
persisted until just recently.
    The second is limited access to public land and excessive 
regulatory restrictions on drilling. I will give you some 
examples of both. The main reason natural gas prices are at $5 
a thousand cubic feet is that when prices fell so low a couple 
of years ago, the industry didn't have sufficient cash-flow to 
drill and increase production. Deliverability fell as demand 
began to rise.
    In fact, natural gas production for the next 2 years is 
forecasted to rise only 1 percent, yet demand is rising by 3 or 
4 percent a year, driven by the increased use of clean burning 
natural gas to generate electricity.
    I think it is obvious that natural gas is becoming the fuel 
of choice. It is clean, efficient, plentiful, reliable, and it 
is homegrown. Yet we have serious concerns whether the domestic 
industry is going to be able to meet the near-term demand even 
with supplies from Canada. Canada is as strapped as we are for 
supply and pipeline capacity.
    Essentially, natural gas is a homegrown fuel. It is 
extremely expensive to transport it as LNG or in ships as 
liquefied natural gas. So we have to find more to replace the 
supply, the good news is that we have the supply resource. We 
just need an energy policy that lets us develop it and bring it 
to market.
    Unfortunately, since the early 1980's, both Republican and 
Democratic administrations have shut us out of some of the most 
prospective places to drill. In those that are still open, we 
have been loaded down with so many costly restrictions that 
exploration production is prohibitively expensive in many 
areas.
    The National Petroleum Council, an industry panel that 
advises the Secretary of Energy estimates that some 10 years' 
supply of natural gas is now off the markets due to banning 
drilling on the East Coast, West Coast and much of the Rocky 
Mountains. We need to stop putting new acreage off limits; but 
equally important, we need to reduce the restrictions on land 
we could be drilling.
    Let me give you one example of my own company's experience 
in this regard. In southwest Wyoming, we are trying to 
redevelop a large gas field that was discovered in 1940. It has 
been producing since 1940. Our company wanted to drill and 
recognized 1,000 new locations to drill gas wells in this old 
field. It is called Wamsutter Field. It took us 5 years to get 
through the environmental impact statement to start drilling in 
field wells, in a known gas field. The permitting step alone 
can take over 1 year.
    We can't start drilling without a cultural clearance. If we 
find a weathered cowbone on location, we are shut down until we 
confirm that it is a cowbone and not an artifact.
    We can't drill during certain winter habitats, during 
breeding or calving season. So really our drilling window in 
this known giant gas field with a thousand locations is 3 to 4 
months a year. There is a lot of gas in this field if we could 
only get approvals to drill.
    The Arctic is another gas resource area, Alaska, where we 
are going to take a long time to develop the resource. A 
hundred trillion cubic feet of gas is known and it is being 
held up to excessive regulatory restrictions. It is estimated 
it could take 7 years and $12 billion to get a pipeline built 
from the North Slope to the lower 48 to bring this known gas 
resource. It is our guess at least half of the time will be 
devoted to regulatory clearance and a pretty good chunk of the 
$12 billion of the price tag.
    We recognize that there are ecologically sensitive areas 
where we need to tread even more lightly then usual, and we are 
doing that. Giving you an example, 5 years ago Anadarko and our 
partner ARCO, now Phillips, found a giant field south of 
Prudhoe Bay called Alpine. It is a 40,000-acre field that we 
have developed the last 5 years, and we have used 100 acres of 
the surface to develop 40,000 acres. So we have used one-
quarter of 1 percent of the surface to develop a giant field.
    So we are very conscious to the environment, and we have 
done a great job and we think we ought to be able to continue 
to drill in Alaska. We are proud of our record. All we are 
asking for is policymaking based on risk-reward analysis as 
opposed to arbitrary bans without appropriate concern for 
economic consequences.
    Again, we appreciate being here and we look forward at 
Anadarko to working with this committee on helping to relieve 
the high gas prices. We think we need a long-term solution; 
near term, we are going to see high prices.
    [The prepared statement of George Lindahl III follows:]

   PREPARED STATEMENT OF GEORGE LINDAHL III, VICE CHAIRMAN, ANADARKO 
                         PETROLEUM CORPORATION

    Thank you, Mr. Chairman, and members of the subcommittee. My name 
is George Lindahl, and I'm Vice Chairman of Anadarko Petroleum 
Corporation, one of the world's largest independent oil and gas 
exploration and production companies. We're based in Houston.
    I appreciate the opportunity to appear before you today.
    Let me preface my remarks by saying that I would like to limit my 
comments to natural gas, if I may. My company is the 5th largest 
natural gas producer in this country, but we're not in the heating oil 
business. I should leave it to heating oil experts to address that 
area.
    I think we're all in agreement that the potential for a shortage of 
natural gas this winter and beyond is very real.
    It is our hope that as you continue your discussions on how to 
relieve the pricing pain that consumers are feeling, there will emerge 
some well-reasoned, long-term solutions.
    A return to price controls clearly is not the answer--we all know 
that. Price controls discourage new investment and create shortages.
    Be assured, as the busiest driller in the country, Anadarko is 
doing everything it can to ease today's supply crunch. We and our 
partners are running 81 drilling rigs right now in the U.S.--about 8 
percent of the total number at work.
    Other companies are hard at work, too. Industry-wide, the rig count 
has dramatically increased from a year ago, to about a thousand rigs. 
Four out of five are drilling for gas.
    But as fast as we're drilling, it's simply not going to solve the 
problem we face this winter. Unfortunately, any solution is more long-
term than that.
    We have a tremendous resource base of natural gas in the United 
States. Estimates put lower 48 reserves between 1200 and 1600 trillion 
cubic feet. But before consumers can get it, we have to be able to get 
at it.
    We face two major obstacles to this. The first is that we're behind 
the drilling curve due the low natural gas prices that persisted until 
just recently.
    The second is limited access to public lands and excessive 
regulatory restrictions on drilling. I'll speak to both.
    The main reason natural gas prices are at $5 per thousand cubic 
feet is that when prices fell so low a couple of years ago, the 
industry didn't have sufficient cash flow to drill and increase 
production. So, natural gas deliverability fell--at the same time 
demand began to rise.
    Production is only rising about 1 percent a year--yet demand is 
rising by 3 or 4 percent a year, driven by increased use of cleaner-
burning natural gas to generate electricity.
    I think it's obvious that natural gas is becoming the fuel of 
choice--it's clean, efficient, plentiful and reliable. Yet, I have 
serious concerns whether the domestic industry is going to be able to 
meet the near-term demand--even with supplies from Canada. Canada is as 
supply and pipeline constrained as we are right now.
    Essentially, natural gas is a home-grown fuel--it's so expensive to 
transport via ship as liquefied natural gas that we can't count on 
imports, as we do with crude oil. So we have to supply our own.
    The good news is that we have the supply resource. We just need an 
energy policy that let's us develop it and bring it to market.
    Unfortunately, since the early 1980s, both Republican and 
Democratic administrations have shut us out of some of the most 
prospective places to drill.
    In those that are still open, we have been loaded down with so many 
costly restrictions that exploration and production is prohibitively 
expensive in many areas.
    The National Petroleum Council--an industry panel that advises the 
Secretary of Energy--estimates that some 213 trillion cubic feet of 
reserves is effectively off limits in the lower 48 and offshore. That's 
a 10-year supply at today's rate of demand.
    We need to stop putting new acreage off limits, but equally 
important, we need to reduce the restrictions on land where we could be 
drilling.
    Let me give you one example of my own company's experience in this 
regard.
    We and several other companies are developing a giant natural gas 
field in southwestern Wyoming. It's called the Greater Wamsutter Field, 
and it was discovered in the mid-40s.
    In the 90s, we wanted to conduct some additional drilling there. It 
took five years to get through the environmental impact statement 
process.
    The permitting step alone can take as long as a year. We can't 
start drilling without a cultural clearance--which we can't collect 
data for when there's snow on the ground.
    And we can't drill during certain winter habitat periods, during 
some breeding or calving seasons.
    So, really, our drilling window there is only three or four months 
out of the year. There is a lot of gas in the Wamsutter Field, if we 
could only get approvals to drill.
    The Arctic is another gas-rich area where it's going to take a long 
time to develop the resources. 100 trillion cubic feet of gas plus is 
being held up due to excess regulatory restrictions.
    It's estimated that it could take seven years and as much as $12 
billion to get a pipeline built from the North Slope to the lower 48. 
It's my guess at least half of that time will be devoted to regulatory 
clearance, and a pretty good chunk of the price tag as well.
    We recognize that there are ecologically sensitive areas where we 
need to tread even more lightly than usual, and we're doing that. 
Anadarko and our partner Phillips, the operator, are developing oil on 
a 40,000-acre tract on Alaska's North Slope from just a 100-acre pad at 
the Alpine Field. That's only one-fourth of one percent of the total 
surface area. We're very proud of that.
    All we're asking for is policymaking based on a risk-reward 
analysis as opposed to arbitrary bans without appropriate concern for 
economic consequences--and that includes prices.
    Again, I appreciate the opportunity to address you today. Anadarko 
looks forward to working with you to help give America the affordable, 
reliable sources of energy it needs.
    Thank you.

    Mr. Stearns. I thank you.
    Mr. Evans.

                  STATEMENT OF ROBERT B. EVANS

    Mr. Evans. Thank you Mr. Chairman. I am here on behalf of 
Duke Energy Gas Transmission Corporation, headquartered in 
Houston, Texas. Our company owns Texas Eastern Transmission 
Corporation, Algonquin Gas Transmission Company, East Tennessee 
Natural Gas, and we are the operating partner for the United 
States portion of the Maritimes & Northeast Pipeline. These 
pipelines serve the eastern United States as well as northeast 
Canada.
    I am here today on behalf of the Interstate National Gas 
Association of America. INGAA is the trade association for the 
interstate natural gas pipeline industry, representing most of 
the major pipelines in the United States, Canada and Mexico. 
INGAA also has a foundation that is composed of our pipeline 
members and many of our pipeline equipment and service 
suppliers.
    Today I would like to address three topics:
    Concerns regarding natural gas prices and deliverability as 
we approach the winter; What steps the pipeline industry has 
taken to assure reliable service; and What policy changes are 
desirable to assure adequate supply and pipeline infrastructure 
in the future.
    There is obviously a great deal of concern about natural 
gas prices, as already mentioned by the panelist on my right. 
The demand for natural gas in the United States is growing 
rapidly. In January 1999, the INGAA Foundation released a study 
that says that gas demand is anticipated to grow to about 30 
trillion cubic feet per year by 2010 from a baseline of 22 Tcf 
in 1988. Much of the growth is being driven by the industrial 
and power generation sectors. Approximately 95 percent of all 
newly installed electric generation is fueled with natural gas. 
As our economy grows and the demand for electricity grows, the 
demand for natural gas will likewise grow. Meanwhile, the 
natural gas supply has not kept up with demand and the reasons 
for that have already been covered.
    Since the implementation in the early 1990's of FERC Order 
636, the role of interstate pipeline has been to transport gas 
owned and marked by others. In recent years, the natural gas 
industry has operated on a regulatory environment that 
increasingly permits markets to decide when and whether 
pipeline projects should be built and how they should be 
priced. As a result of this environment, several new pipelines 
or expansions of existing pipelines have commenced service in 
recent years or soon will commence service.
    Some of the more significant examples are the Maritimes & 
Northeast Pipeline, Portland Natural Gas Transmission System, 
Alliance Pipeline and Northern Border. These projects, which 
have commenced in the last 2 years, have required the 
investment of over $4.9 billion and provide 3.3 Bcf per day of 
additional capacity to move gas from the production areas to 
the markets that need the gas.
    These projects represent the commitment of significant 
resources by the sponsors. To give details of one such project, 
in December 1999, the Maritimes & Northeast Pipeline, a joint 
partnership between Westcoast Energy, Inc., Exxon Mobil 
Corporation, Nova Scotia Power and Duke Energy began delivering 
natural gas from new production around Sable Island in offshore 
eastern Canada. Markets for this project are in eastern Canada 
and in Maine, New Hampshire and down into the Boston area. This 
new 650-mile pipeline connects a supply basin not previously 
attached to the pipeline grid and delivers approximately 400 
MMCf/d per day into the U.S. To fuel homes, factories and 
electric generation plants that, in many cases, are getting 
access to natural gas for the first time.
    With the discovery of additional reserves and 
deliverability offshore east coast, Maritimes is also looking 
at an additional expansion that will probably be announced 
before the end of the year to bring additional gas down into 
the Northeast. Building such a large pipeline project requires 
the resolution of huge engineering, environmental, regulatory 
and economic challenges. We are proud that we are able to meet 
these challenges and bring this project home. It is especially 
gratifying that we were able to work with the local State and 
national regulators and interested parties to overcome problems 
in a timely and effective way.
    We are grateful for the assistance of FERC in addressing 
several of these problems. With respect to this winter, Duke 
Energy believes that we and the industry as a whole are 
prepared to deliver the full contractual firm requirements for 
our customers. In areas such as New England, new pipeline 
capacity has increased deliverability and allows us to serve 
market growth. Last year alone, pipeline capacity into New 
England, including the Maritimes & Northeast Project, increased 
approximately 25 percent.
    Given our success to date, where do we go from here? INGAA 
and Duke Energy believe there is enough natural gas in North 
America to meet the projected increase in consumption to 20 Tcf 
today to 30 Tcf by approximately 2010. However, the market will 
not be able to deliver on the 30 Tcf potential without 
significant investment both in terms of exploration and 
production and in building new pipeline infrastructure.
    Where is all the natural gas going to come from? The United 
States is able to meet about 85 percent of its current demand 
through domestic supplies in the lower 48. Almost all of the 
remaining 15 percent of supply comes from Canada. The Canadians 
have done a good job of developing their natural gas production 
and their transportation markets, but they cannot provide vast 
quantities needed to support the future market needs.
    Although Mexico has significant natural gas reserves as 
well, its economy is growing at such a fast pace that Mexico 
may need to import natural gas from the U.S. In order to keep 
up with its own demand.
    Activities surrounding proposals to build a pipeline to 
bring natural gas to the lower 48 States from Alaska is 
resumed, and hopefully the results will be a construction of a 
pipeline sometime this decade. Supplies of LNG are also 
available, but price will be a factor in making that come 
forth. The National Petroleum Council study has been mentioned, 
so I will pass that over.
    In addition to the gas production, we must have the 
pipeline infrastructure to move the new natural resources to 
market. To fully capture the 30 Tcf market, additional pipeline 
capacity is required. The INGAA Foundation's study on the 30 
Tcf market estimated that our industry will need to invest 
about $2.5 billion per year in infrastructure expansion between 
now and 2010 just to keep up with the market that is growing. 
These new facilities will not be new-peak-day capacity 
pipelines. Rather they will be a mix of facilities necessary to 
attach new wells to existing facilities, some inter-regional 
facilities and even market-area facilities to reflect shifting 
loads.
    The other recommendation that we have got is that a group 
be put together that can study how we can go forward better on 
environmental permits, and this is bringing together several 
groups to work on a task force to obtain a memorandum of 
understanding among the major departments so that environmental 
impact statements can be processed and moved forward in a 
timely fashion and protect the environment at the same time.
    I thank you for inviting me to testify here today and of 
course I will be pleased to answer any questions.
    [The prepared statement of Robert B. Evans follows:]

   PREPARED STATEMENT OF ROBERT B. EVANS, PRESIDENT, DUKE ENERGY GAS 
   TRANSMISSION CORPORATION ON BEHALF OF THE INTERSTATE NATURAL GAS 
                         ASSOCIATION OF AMERICA

    Mr. Chairman and Members of the Committee: I thank you for the 
opportunity to testify today on the natural gas industry. I am Robert 
B. Evans, President of Duke Energy Gas Transmission Corporation, which 
is headquartered in Houston, Texas. Our company owns Texas Eastern 
Transmission Corporation, Algonquin Gas Transmission Company, East 
Tennessee Natural Gas and we are the operating partner of the United 
States portion of the Maritimes & Northeast Pipeline. These pipelines 
serve the eastern United States as well as northeast Canada.
    I am here today on behalf of the Interstate Natural Gas Association 
of America (INGAA). INGAA is the trade association for the interstate 
natural gas pipeline industry, representing most of the major pipelines 
in the United States, Canada and Mexico. INGAA also has a Foundation 
that is composed of our pipeline members and many of our pipeline 
equipment and service suppliers.
    Today, I would like to address three topics:

 Concerns regarding natural gas prices and deliverability as we 
        approach winter,
 What steps the pipeline industry has taken to assure reliable 
        service, and
 What policy changes are desirable to assure adequate supply 
        and pipeline infrastructure in the future.
    There is obviously a great deal of concern about natural gas prices 
as we approach this winter. Natural gas wellhead prices are up 
significantly since this time last year, for reasons that are hardly a 
mystery. Quite simply, demand has risen faster than supply.
    Demand for natural gas in the United States is growing rapidly. In 
January of 1999, the INGAA Foundation released a study that says that 
gas demand is anticipated to grow to about 30 Trillion cubic feet (Tcf) 
per year by 2010, from a baseline of 22 Tcf in 1998. Much of this 
growth is being driven by the industrial and power generation sectors. 
Approximately 95 percent of all newly installed electric generation is 
fueled with natural gas. As our economy grows, and the demand for 
electricity grows, the demand for natural gas will likewise grow.
    Meanwhile, natural gas supply has not kept up with increasing 
demand, causing prices to rise. Total consumption in 1999 increased 
while domestic dry gas production fell for the second year in a row. 
Rising energy prices have spurred drilling over the last year and it is 
expected that over time, supply and demand will come back into balance 
if market forces are allowed to operate.
    Since the implementation in the early 1990's of FERC Order 636, the 
role of interstate pipeline has been to transport gas owned and 
marketed by others. In recent years, the natural gas industry has 
operated in a regulatory environment that increasingly permits markets 
to decide when and whether pipeline projects should be built and how 
they should be priced. As a result of this environment, several new 
pipelines or expansions of existing pipelines have commenced service in 
recent years or will soon commence service. Some of the more 
significant examples have been Maritimes & Northeast Pipeline, Portland 
Natural Gas Transmission System, Alliance Pipeline and Northern Border. 
These projects which have commenced in the last two years have required 
the investment of over $4.9 billion and provide 3.3 Bcf per day of 
additional capacity to move gas from production areas to the markets 
that need the gas.
    These projects represent the commitment of significant resources by 
their sponsors. To give details about one such project, in December 
1999, the Maritimes & Northeast Pipeline, a joint partnership between 
Westcoast Energy, Inc., Exxon Mobil Corporation, NS Power Holdings Inc. 
and Duke Energy, began delivering natural gas from new production 
around Sable Island in offshore eastern Canada. Markets for this 
project are in eastern Canada and in Maine, New Hampshire and down into 
the Boston area. This new, 650 mile pipeline connects a supply basin 
not previously attached to the pipeline grid and delivers approximately 
400 MMCf/d into the U.S. to fuel homes, factories and electric 
generation plants that in many cases are getting access to natural gas 
for the first time.
    Building such a large pipeline project requires the resolution of 
huge engineering, environmental, regulatory and economic challenges. We 
are proud that we were able to meet each challenge and complete this 
important project. It was especially gratifying when we could work with 
local, state and national regulators and interested parties to overcome 
problems in a timely and effective way. For instance, as we were 
constructing the pipeline, we discovered that we did not have enough 
right-of-way in many places to handle our construction efforts and 
heavy equipment as required under OSHA. We brought this fact to the 
attention of FERC and they permitted us to widen our rights-of-way for 
these construction purposes. We are grateful for their assistance in 
addressing this problem in a timely manner.
    With respect to this winter, Duke Energy believes that we, and the 
industry as a whole are prepared to deliver the full contractual firm 
requirements for our customers. In areas such as New England, new 
pipeline capacity has increased deliverability and allows us to serve 
market growth. Last year alone, pipeline capacity into New England--
including the Maritimes & Northeast Project--increased approximately 
25%. In order to manage the rising peak daily and hourly loads, 
companies such as Duke Energy are also adding new information tools 
that will enhance pipeline operation. Improvements on Duke Energy's 
Northeast pipelines for this winter will provide hourly operational 
data for the first time and will greatly improve our pipelines' and our 
customers' ability to adjust operations as demand conditions change.
    Given our success to date, where do we go from here? INGAA and Duke 
Energy believe there is enough natural gas in North America to meet the 
projected increase in consumption--from 22 TCF today to 30 TCF by 
approximately 2010. However, the market will not be able to deliver on 
the 30 Tcf potential without significant investment both in terms of 
exploration and production and in building new pipeline infrastructure.
    Where is all this natural gas going to come from? The United States 
is able to meet about 85 percent of its current demand through domestic 
supplies in the Lower 48. Almost all of the remaining 15 percent of our 
supply comes from Canada. The Canadians have done a good job in 
developing their natural gas production and transportation markets, but 
they alone cannot provide the vast quantities needed to support future 
market needs. Although Mexico has significant natural gas reserves as 
well, its economy is growing at such a fast pace that Mexico may need 
to import natural gas from the U.S. in order to keep up with its own 
demand. Activity surrounding proposals to build a pipeline to bring 
natural gas to the lower 48 states from Alaska is resuming and, 
hopefully, will result in construction of a pipeline sometime in this 
decade. Supplies of liquefied natural gas (LNG) from overseas are 
available, but price will be a factor in determining where and when 
this supply is brought to the North American market.
    Mr. Chairman, the enclosed chart prepared for the National 
Petroleum Council study on natural gas illustrates the point I am 
trying to make. Natural gas is a domestically produced fuel. Yet a 
quick glance at this chart clearly indicates that a great deal of the 
Lower 48 is prohibited to new exploration and production, primarily 
because of environmental concerns. The irony, of course, is that 
natural gas is growing in importance precisely because of its 
environmental benefits for use in generating electricity or fueling 
industrial operations. I urge Congress to review this large-scale 
lockup of natural gas resources with a goal of making more of these 
areas available for drilling.
    In addition to the gas, we must have the pipeline infrastructure to 
move the new natural resources to market. To fully capture a 30 Tcf 
market additional pipeline capacity is required. The INGAA Foundation's 
study on the 30 Tcf market estimated that our industry will need to 
invest about $2.5 billion per year in infrastructure expansion between 
now and 2010 just to keep up with where the market is going. These new 
facilities will not all be new peak day capacity pipelines. Rather they 
will be a mix of facilities necessary to attach new wells to existing 
facilities, some interregional facilities, and even market-area 
facilities to reflect shifting locations of existing loads.
    As you may be aware, it is increasingly difficult to build any type 
of new facility--including pipelines. Getting the support of 
policymakers and the Federal Energy Regulatory Commission is vital to 
our efforts. One major challenge for a pipeline project is the need to 
obtain and coordinate multiple state and federal environmental permits. 
Accordingly, we urge this Administration to convene an interagency task 
force to obtain a memorandum of understanding among the major 
departments and agencies with responsibilities to develop environmental 
impact statements (EIS) for new pipeline projects. The purpose of this 
memorandum of understanding would be to establish a general framework 
for cooperation and participation that will harmonize the processes 
through which the various departments and agencies environmental review 
responsibilities are met and their decision-making authorities are 
exercised in connection with the authorization of interstate natural 
gas pipeline projects. FERC, with the assistance of the Council on 
Environmental Quality (CEQ), would be the lead agency in this process. 
This should expedite the review and preparation of the EIS while 
preserving the environmental review process.
    Mr. Chairman, I thank you for inviting me to testify today and 
would be pleased to answer any questions the members of this 
subcommittee may have.
[GRAPHIC] [TIFF OMITTED] T7634.051

    Mr. Barton. Thank you, Mr. Evans. I apologize for not being 
here when this panel convened, especially to Mr. Lindahl.
    Mr. Allison of Anadarko Petroleum is a good friend of mine; 
I really wanted to hear what you had to say. But I did read 
your testimony.
    We will now hear from Mr. John Santa. It is a great name to 
have, by the way. He is CEO of Santa Energy Group in 
Bridgeport, Connecticut.

                     STATEMENT OF JOHN SANTA

    Mr. Santa. I have got a list, Mr. Chairman, and I am 
checking it twice; don't forget that.
    Thank you, Mr. Chairman and committee members. My name is 
John Santa. I am the CEO of Santa Energy in Bridgeport, 
Connecticut. My company is a regional marketer and distributor 
of petroleum products, natural gas and energy-related products 
throughout southern New England. We maintain nearly 700,000 
barrels of storage, and we supply some 130 dealers in three 
States.
    I am here on behalf of the Petroleum Marketers Association 
of America. PMAA represents heating oil retailers throughout 
the country, as well as distributors of gasoline and heating 
oil. On behalf of those 10,000 fellow dealers across the 
Nation, my family and my associates at Santa Energy, I thank 
you very much for having me here today.
    I am going to mention three things to you. One is some 
tactical thoughts on a situation, some strategic thoughts, and 
finally a couple of suggestions on how we might get somewhere 
on this issue.
    Tactically speaking, we have been in the business of 
supplying people for 60 years. We are going to keep doing it. 
We never let anybody run out of product, and we are not going 
to do it this year either. We have a current supply demand 
imbalance, and I would most respectfully submit to you that 
while it appears to be dramatic, it is not nearly as dramatic 
as the supply demand imbalance we found 18 months ago. Had we 
convened a hearing 18 months ago, we might not have had to have 
this one today.
    Mr. Barton. Say that again.
    Mr. Santa. Had we convened a hearing 18 months ago, we 
might have to have this one today.
    In point of fact, we do not see a crisis today in the 
heating oil business. The situation should be dealt with and we 
will deal with it, but we do not see it as a crisis. The issue 
we have to deal with very specifically from the standpoint of 
being a wholesaler who wants to inventory product and put it 
away for the winter is, there is no carry. The market is 
improperly configured on a forward pricing basis. We will talk 
more about that later. But with no carry, you simply do not buy 
the product. So much for the tactical aspects.
    Strategically speaking, if there is one message that I 
bring to you today than this, let it be these words: It is a 
whole new ball game. Twenty years ago, price discovery in 
America was very, very simple, open the Wall Street Journal, 
looking for Exxon Cargo, New York Harbor, and that was pretty 
much it; and everything was a variation off that.
    Today that doesn't work anymore. Today, it is the Merc. And 
the Merc is a very, very efficient and very, very all-
encompassing price discovery mechanism. It works really, really 
well.
    There are whole new performance mandates in all the 
different sectors of the energy field. On marketers, it is a 
whole different kind of set of suppliers that are coming to 
market with product. End users are getting buffeted with 
constantly moving prices. They didn't have that in the 50's and 
60's. They have them now. They have had them for 20 years, and 
we probably will have them for 20 more, until or unless we 
decide to do something about it.
    But speaking about doing something about it, I would like 
you to know that last year the majority of my customers in all 
divisions--industrial, wholesale, commercial and retail--did 
not have a problem with either price or supply because they 
committed to me. I went to the Merc. I bought the product; I 
bought the derivatives that hedge the price, and they did just 
fine. Just fine. So, on a long-term basis, it is a bit about 
commitment and contracting one with another.
    There was a time back in the pre-Mercantile Exchange world 
that you didn't buy a petroleum product except under contract. 
The idea of buying it without a contract is a new thing since 
1980, and that is a bit of what is bringing about the situation 
right now. There is not significant commitment and linkage 
between users and suppliers or intermediaries and larger 
wholesalers. That is a problem for our situation right now, and 
that is a strategic issue to be addressed.
    So, suggestions: I have a couple of them for you to ponder; 
perhaps we can talk about them later. One is, I think we have 
to do some engineering on our domestic supply and demand side. 
Sitting here and damning the folks that live in an Abu Dhabi or 
the folks who live in Kuwait, that is not going to get us too 
far. That is their country. It is their natural resources; they 
can do with them whatever the heck they want to do with them.
    We have to do what we can do with our stuff. With our 
stuff, we can control demand. In 1980, the average home in New 
England burned 1,600 gallons of heating oil a year; today, the 
average home burns 900 gallons a year. We all did it. The 
government, private sector, home owners, the oil industry. We 
all did it together. We can do it again.
    Second, on the supply side, what can I tell you? We haven't 
built a new refinery in America for 25 years. Those things have 
birthdays just like us every year and you can't really go to 
the world market and say we are serious about not being held up 
by foreign governments when we do not even build our own 
facilities here.
    Finally, consumer information: Our consumers do not 
understand that they can buy both product and price insurance. 
My customers do, but in the general world they don't. We can 
help a lot with that.
    I look forward to working with you on this and having a 
active discussion on that. Thank you for your time.
    [The prepared statement of John Santa follows:]

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    Mr. Barton. Thank you Mr. Santa. That was very informative 
to me, and I appreciate that testimony.
    Now I would like to hear from Mr. Kevin Madden, who is Vice 
President and General Manager of the Federal Government 
Business Unit, Home and Building Controls Division of Honeywell 
International in McLean, Virginia. We welcome you to the 
subcommittee.

                    STATEMENT OF KEVIN MADDEN

    Mr. Madden. Good afternoon, Mr. Chairman and members of the 
committee. I have the distinct pleasure of leading the home and 
building control business units that sells energy-efficient 
products and services strictly to the Federal Government 
market, helping the Federal Government reduce their energy 
consumption by 35 percent by the year 2010.
    I want to thank you, Mr. Chairman, and the members of the 
committee for the opportunity to testify. I hope to expand a 
little the debate with my testimony and encourage the committee 
to focus on energy efficiency as a way to work to solve the 
current energy issues.
    While Honeywell's business is wide-ranging, an amazing 
number of our products and services help manage and reduce 
energy usage. Energy efficiency is an often-ignored participant 
in the energy supply debate, but simply put, helping consumers 
and business and government reduce their oil and gas use will 
lower energy bills and put downward pressure on oil and gas 
prices. Advancing energy efficiency is sound policy that will 
yield economic and environmental benefits for many years to 
come.
    Today's energy efficiency, even while it saves money, 
provides greater comfort, as evidenced in the documents that I 
put in my testimony from the sites that we are currently 
working in, and a better quality of life for all involved.
    The Federal Government can play a critical role in moving 
the economy toward a full application of energy-efficient 
technologies. This does not require a new program or any 
significant new funding. It only requires simple attention to 
regulations, focus on research and development and market 
leadership.
    By the way of example, I would like to highlight three 
examples of Honeywell technologies that impact energy usage, 
and the efficiency can be brought to bear across the 
economy.Let me now turn to the three examples: energy-boosting 
technologies, distributed energy technologies, and the Federal 
Energy Savings Performance Contracting Program.
    I spoke earlier about how energy efficiency technology has 
transcended the stodgy reputation it had in the past. To drive 
home that point, let me lead off with a series of examples that 
are just plain fun--turbochargers for cars. Extensive data from 
Europe in production cars show that turbocharging enables use 
of smaller engines, improves driveability and provides up to 8 
percent improvement in fuel economy.
    Public pressure for fuel economy in Europe has resulted in 
an increased use of turbocharged gasoline engines. As a result, 
the average turbocharged passenger car in Europe is equipped 
with a four-cylinder engine providing higher average fuel 
economy.
    In the United States, where the use of boosting devices 
such as turbochargers has not penetrated the market, the 
average passenger car is approximately six cylinders and 
growing. Especially in the move to larger SUV vehicles, the 
steady increase in vehicle size is making it more difficult for 
auto manufacturers to meet the existing standards.
    Boosting devices such as turbochargers enable the small 
engine to deliver the power of a large engine for passing and 
starting while running at close to the engine sweet spot most 
of the time. This results in significant fuel economy 
improvement.
    In addition, the next-generation boosting devices, such as 
electrically assisted turbochargers and the variable geometry 
supercharger, are currently under development. These 
technologies will double the savings that we are currently 
seeing today in Europe.
    The three engine-boosting technologies described above may 
bring significant fuel economy improvements to the automobile, 
particularly in the highly popular large sports utility 
vehicles.
    We have proposed a technology development program to adapt 
and demonstrate gasoline boosting technologies for U.S. 
applications and to help bring this technology to market, and 
we urge Congress to move forward aggressively with research and 
demonstration programs in this area.
    The next technology I would like to highlight is our 
Parallon75 generator, a 75kw generator capable of supplying 
power to a number of different applications from McDonald's to 
small hospitals, bakeries and farms. The distributed generation 
can reduce the energy consumption and enhance the reliability 
of both the distribution and the transmission of electricity 
grids by creating a more diverse, robust mix of power 
generation closest to the load.
    Most of our current customers want to use our units in 
parallel with a grid to draw power from our microturbines to 
produce low-cost, efficient power and use the grid for backup 
and as a supplement. In the United States, however, our 
customers are facing serious issues when they attempt to 
connect to the respective grids. Utilities are using both 
technical and physical requirements for interconnection, and 
the terms and conditions for interconnection create an uneven 
playing field for our units. Some of our customers have sites 
in numerous States on different utility grids. This leads to a 
mix of standards and requirements for interconnections.
    Mr. Chairman, distributed generation technologies, like our 
Parallon, are inherently attractive economically as long as the 
playing field is level and exists in the industry. They offer 
real choices and solutions to our consumers, lower energy 
costs, reliability and improving the environment. We need your 
help at all levels of the Federal Government to make this 
choice a reality.
    My final example is closest to my heart. It is the business 
unit that I lead. And as I talked earlier, I provided a lot of 
testimony in the packets relative to the Fort Bragg example, 
the Luke Air Force Base example, and also the departure of a 
garrison commander on his way to his promotion to becoming a 
brigadier general. In that sense, the program is working today.
    In terms of Luke Air Force Base, where I came back from 
early this morning, it is already programmed, to date, at a 26 
percent reduction from the program inception. We need to figure 
out a way, as leaders, to recognize and reward that type of 
behavior and accelerate it.
    So, in closing--I want to skip a little bit here, given the 
timing aspects of things, sir, but in closing, with a clear 
focus, Congress and the administration can lead the way and 
accelerate these and other initiatives to help alleviate the 
energy supply issues that we are focused on here today.
    Thank you again, and I will be happy to answer any 
questions you have.
    [The prepared statement of Kevin Madden follows:]

PREPARED STATEMENT OF KEVIN MADDEN, VICE PRESIDENT AND GENERAL MANAGER, 
   HONEYWELL INTERNATIONAL, HOME AND BUILDING CONTROL, FEDERAL MARKET

    Good Morning, Mr. Chairman and members of the Committee. My name is 
Kevin Madden and I currently am Vice President and General Manager of 
the Federal Government Business Unit for Honeywell's Home and Building 
Control business. Honeywell is a US$24-billion diversified technology 
and manufacturing leader, serving customers worldwide with aerospace 
products and services; control technologies for buildings, homes and 
industry; automotive products; power generation systems; specialty 
chemicals; fibers; plastics; and electronic and advanced materials. The 
company is a leading provider of software and solutions, and Internet 
e-hubs including MyPlant.com, MyFacilities.com and MyAircraft.com. 
Honeywell employs approximately 120,000 people in 95 countries and is 
traded on the New York Stock Exchange under the symbol HON, as well as 
on the London, Chicago and Pacific stock exchanges. It is one of the 30 
stocks that make up the Dow Jones Industrial Average and is also a 
component of the Standard & Poor's 500 Index.
    I want to thank you, Mr. Chairman and members of the Committee for 
this opportunity to testify. I hope to expand the debate a little with 
my testimony and encourage you to focus on energy efficiency as you 
work to solve the current issues we as a nation have regarding energy. 
While Honeywell's business is wide-ranging, an amazing number of our 
products and services help manage and reduce energy use. Energy 
efficiency is the often-ignored participant in the energy supply 
debate. Simply put, helping consumers, businesses, and governments 
reduce their oil and gas use will lower energy bills and put downward 
pressure on oil and gas prices. Advancing energy efficiency is sound 
policy that will yield economic and environmental benefits for many 
years. Most importantly, the energy efficiency of today is a far cry 
from that of yesterday. Today's energy efficiency, even while it saves 
money, provides greater comfort, greater productivity, and a better 
quality of life.
    But even as energy efficiency breaks free of its grab-a-sweater, 
depravation reputation, it still fails to reach its full potential--a 
potential that only serves to strengthen our economy, reduce our 
dependence on foreign oil, and provide pressure on oil prices. The 
federal government can play a critical role in moving the economy 
toward full application of energy efficiency technologies. This does 
not require a new program and significant new funding. It only requires 
simple attention to regulations, focus on research and development, and 
market leadership. By way of example, I'd like to highlight three 
examples of Honeywell technologies that impact energy use and 
efficiency and then discuss actions by the federal government that 
would spur application of energy efficiency technology across the 
economy. Let me now turn to the three examples: engine boosting 
technologies, distributed energy technologies, and federal energy 
management.

Boosted Gasoline Engines
    I spoke earlier about how energy efficiency technology has 
transcended its stodgy reputation. To drive home that point, let me 
lead off my series of examples with an energy efficiency technology 
that is just plain fun: turbochargers for cars.
    Current automobile engine boosting technologies, such as 
turbochargers, appropriately applied to gasoline powered cars can 
improve fuel economy by about 8%. State-of-the-art European cars 
realize this fuel economy improvement today. Next generation boosting 
technologies, such as electrically assisted turbochargers and variable 
geometry superchargers, can provide even higher levels of fuel economy, 
potentially up to 14-16%.
    Extensive data from Europe on production cars shows that 
turbocharging enables the use of smaller engines, improves drive-
ability and provides up to 8% improvement in fuel economy. Public 
pressure for fuel economy in Europe has resulted in the increased use 
of turbocharged gasoline engines. As a result, the average turbocharged 
passenger car in Europe is equipped with a four-cylinder engine, 
providing higher average fuel economy. In the United States, where the 
use of boosting devices such as turbochargers has not penetrated the 
passenger car fleet, the average passenger car engine is approximately 
six cylinders and growing. The push by consumers to move into larger 
and larger SUV vehicles, the fastest growing portion of the U.S. 
automotive fleet, is creating a demand for larger engines. But the 
steady increase in vehicle size is making it more difficult for auto 
manufacturers to meet existing standards, making technological 
solutions for fuel economy and emissions essential. Rising fuel prices 
are rapidly bringing the fuel economy issue home to consumers.
    Car engines have a ``sweet spot'' at which they deliver the best 
fuel economy. A typical U.S. sedan needs only a small 4-cylinder engine 
to operate regularly at the ``sweet spot.'' Larger engines, used to 
improve performance during starting and passing and improve safety, 
operate away from the ``sweet spot'' most of the time and compromise 
fuel economy. Boosting devices, such as turbochargers, enable a small 
engine to deliver the power of a large engine for passing and starting, 
while running at or close to the ``sweet spot'' most of the time. This 
results in significant fuel economy improvement.
    Turbocharging technologies currently in use in Europe should be 
adapted and demonstrated for U.S. conditions and emissions requirements 
realizing the full 8% improvement in fuel economy with engine 
downsizing for large SUVs.
    In addition, next generation boosting devices, such as electrically 
assisted turbochargers in which an electric motor/generator is added to 
the turbocharger, are currently under development. This mid-term 
technology, which Honeywell calls the DynaCharger, can eliminate 
``turbo lag'' and enable engine/car manufacturers to electronically 
control the air supply to meet ``air on demand'' requirements. One 
criticism of turbocharging has been a ``sensation of turbo lag'' during 
starting and pulling away from the curb. This has been contrasted by 
the ability of turbochargers to deliver high torque at medium and high 
engine speeds. Electrically assisted turbochargers completely eliminate 
the sensation of ``hesitation'' at low engine speeds while maintaining 
high torque at medium and high speeds. This enables further downsizing 
of the engine as well as electrical power generation using exhaust 
energy that is otherwise wasted.
    The demand for electrical power on passenger cars, to drive various 
accessories continues to increase greatly. This technology, by 
generating electrical power, has the potential to improve fuel economy 
by a further 3%, to a total of 11% improvement.
    Another approach to boosting that Honeywell is developing is the 
Variable Geometry Supercharger. Most gasoline engines are ``throttled'' 
to control the power they deliver to the wheels. When vehicles are 
idling, or operating at steady cruise conditions, they don't need much 
power. Under these conditions engines operate at ``part open throttle'' 
conditions forcing the engine to ``work hard'' to ``breathe.'' In 
today's gasoline engines this breathing work is wasted energy. A 
Variable Geometry Supercharger captures this energy and converts it to 
useful work, improving fuel economy by 6-8%. The supercharger also 
performs the function of a turbocharger by ``boosting'' the engine when 
needed. As in turbocharged engines, this results in an 8% improvement 
in fuel economy due to engine downsizing allowing a total potential 
overall improvement of 14-16%.
    The three engine boosting technologies described above may bring 
significant fuel economy improvements to the automobile and 
particularly to the highly popular, large Sports Utility Vehicles. We 
have proposed a technology development program to adapt and demonstrate 
gasoline-boosting technologies for U.S. applications and help bring 
this technology to the market, and we urge Congress to move forward 
aggressively with research and demonstration programs in this area.

Distributed Generation Technologies
    The next technology I'd like to highlight is our Parallon75 
generator, a 75kw generator capable of supplying power to a number of 
different applications from McDonalds to small hospitals, bakeries and 
farms. Distributed generation--technologies such as our 75kw Parallon 
generator--can reduce energy consumption and enhance the reliability of 
both the distribution and the transmission electricity grids by 
creating a more diverse and robust mix of power generation resources 
close to loads.
    Our facility in Albuquerque is now in full production and we are 
shipping products to customers here in the United States and 
internationally. Most of our current customers in the United States 
want to use our units in parallel with the grid--to draw power from our 
microturbines to produce low cost, efficient power and use the grid for 
backup or as a supplement.
    These United States customers, however, are facing serious issues 
when they attempt to connect units to their respective grids. Utilities 
are using both the technical and physical requirement for 
interconnection and the terms and conditions for interconnection to 
create an uneven playing field for our units. Some of our customers 
have sites in numerous states and on different utility grids, leading 
to a mix of current standards and requirements for interconnection. 
Here are some examples of how this is being done:

 Refusing to connect distributed generation units to the grid.
 Requiring customers to add costly and redundant equipment to 
        our units to assure safety and power quality, even though our 
        units have significant safety and power quality protection 
        equipment already built into them.
 Requiring site-by-site interconnection surveys and tests, 
        costing thousands of dollars each, to connect units to the 
        grid. These take months to complete, even though our units are 
        pre-certified by a national testing laboratory.
 Imposing economic penalties such as exit fees and unfair 
        tariffs.
 Imposing unreasonable terms to interconnect, such as high 
        insurance rates, unreasonable indemnification provisions and 
        unilateral disconnection rights.
    To address these issues, which effectively discriminate against our 
units, two things are necessary in federal legislation.
 Establish a uniform national interconnection standard. IEEE is 
        working this on, but it needs to be driven by a federal entity. 
        Congress is in the best position to advocate a nationwide 
        policy on encouraging DG interconnection, since only Congress 
        can address matters relating to interstate commerce. Our 
        customers and we want to be able to install and operate these 
        units in every state, not just those with interconnection 
        policies for DG.
 Set a requirement for interconnection, which ensures those 
        terms, conditions and costs for interconnection are just, 
        reasonable and non-discriminatory.
    Mr. Chairman, distributed generation technologies, like our 
Parallon, are inherently attractive economically as long as a level 
playing field exists in the industry. They offer real choices and 
solutions to consumers--lower cost energy, reliability and improving 
the environment. We need your help at the federal level to help make 
this choice a reality.
Federal Energy Management
    My final example and the example that I have responsibility for is 
our energy saving performance contract (ESPC) at Ft. Bragg in North 
Carolina. This project demonstrates how the federal government, through 
its own market power, can be a credible example of energy efficiency 
for the rest of the economy.
    Energy Saving Performance Contracts were first authorized in the 
Energy Policy Act of 1992. These are alternative procurement mechanisms 
that allow agencies to procure energy upgrades without up-front 
appropriations. The energy savings that result from the upgrades are 
used to pay, over the term of the contract, for the improvements. This 
program breaks the investment barrier that so often plagues energy 
efficiency, leveraging the savings to drive the project.
    Fort Bragg and its ESPC partners, Honeywell and the Huntsville 
Corps of Engineers, began implementing a comprehensive ESPC program in 
1997. Since that time ten Task Orders totaling $17,000,000 have been 
awarded. They are generating savings in excess of $5,000,000 annually. 
Over the term of this program, Fort Bragg will save over $85,000,000. 
I've included, in an addendum to my testimony, details on the projects 
at Ft. Bragg. In those details you will note the significant energy 
savings achieved, the significant environmental improvement of the 
facility, and descriptions of the types of improvements achieved. I 
urge you to review these details not only because of the success they 
indicate but also call to your attention how replicable this kind of 
program is--these are straight-forward improvements to the facilities.
    But the improvements go beyond energy and dollar savings. At Ft. 
Bragg, the infrastructure improvements have had a lasting affect on 
those residing and working at the installation. The results that have 
been achieved to date and the positive reaction from the people 
involved has created a situation where Fort Bragg personnel are now 
competing to see whose area will move up on the ESPC priority list. 
ESPC is having a profound and positive impact on Fort Bragg making 
significant improvements on the base and in the quality of life 
afforded there.
    ESPC contracts are beginning to gain momentum throughout the DOD 
and the civilian agencies. We just signed contracts at Army Alaska and 
have projects underway with DOE, GSA, and the Air Force. But like so 
many procurement changes and reforms, change comes slowly, as old, 
familiar methods are favored over the new, thus negating the change 
sought by Congress. The Ft. Bragg success, with its significant 
economic, energy and emissions savings, should be ample encouragement 
to the federal government to embrace this change and to lead by 
example. As the world's largest energy consumer (and therefore energy 
waster), the federal government should find ways to accelerate these 
types of activities. Congress should not only support these programs 
but also demand results like those found at Ft. Bragg from every 
installation and civilian agency. Set contracting goals and demand 
reports on progress. Congress and the federal government can be leaders 
in energy efficiency even as they meet strict budgetary restrictions 
and save money for the American taxpayer.
    Mr. Chairman, I appreciate this opportunity to highlight some of 
Honeywell's technologies that can be used throughout the economy to 
drive productivity, enhance comfort and quality of life, and save 
energy and money. I hope the examples I shared demonstrate how the 
federal government can be a leader in the application and deployment of 
energy efficiency technology--both within its own ranks and throughout 
the US economy. With a clear focus, Congress can lead the way and 
accelerate these and other initiatives--and help alleviate the energy 
supply issues that you are focused on today.

                              Addendum A:
         Details on the Ft. Bragg ESPC Contract with Honeywell

    Fort Bragg is utilizing the Army Corps of Engineers 4 State 
Regional ESPC Contract. The initial task order was completed in FY98 
and four more were completed during FY99. As a result, the actual 
savings realized during FY99 reflect only a portion of the total 
savings that will be generated on an annual basis. The total amount of 
energy consumed at Fort Bragg in FY98 was 5,783,816 MBTU. The total 
amount of energy consumed for both FY98 and FY99 was 11,500,831 MBTU. 
The five completed ESPC projects delivered 89,208 MBTU's in energy 
savings during FY99. Table A describes the energy reduction in kWh and 
MBTUs. Task Orders 1, 2, 3, 5, and 6 contributed energy savings in 
FY99. All ten Task Orders will contribute energy savings in FY00 and 
beyond.
    These initial task orders, in conjunction with a rate re-
negotiation with the local utilities which was conducted with Honeywell 
as part of the overall ESPC program, generated $2,267,115 in cost 
savings during FY99. The total cost of energy for FY 98 was 
$33,177,241. The total energy cost for FY 99 was $30,866,573.
    The ten task orders that have been completed to date will generate 
source energy reductions of 227,467 MBTU's per year and 4,513,191 
MBTU's over the term of our contracts. The cost reductions, including 
the new ESPC derived rates, will save Fort Bragg $5,281,920 per year 
and $85,205,612 over the term of the contracts. $82,021,130 of these 
savings are being re-invested in the facilities and infrastructure of 
Fort Bragg.
    The following paragraphs summarize the improvements made at Ft. 
Bragg under each task order. The first task order at Fort Bragg was a 
small lighting project at Simmons Army Air Field (SAAF) which was 
utilized as a bore cleaner to do a check out of the ESPC process. 
Following closely in its footsteps was Task Order number two which was 
a comprehensive project at SAAF. The energy conservation measures 
(ECM's) implemented at SAAF include the following:

 Installed approximately 22,000 linear feet of natural gas 
        pipeline enabling SAAF to be converted to natural gas systems 
        from oil fired systems;
 Installed 26 natural gas fired boilers and retrofitted 2 
        existing boilers to natural gas;
 Replaced the forced induction heating in the hangars with 
        radiant heating;
 Implemented building automation controls and a central 
        monitoring system;
 Installed a comprehensive lighting retrofit
 Incorporated/updated day-lighting in the hangars
 Converted an aging central plant to individual boilers 
        counteracting steam distribution losses along with much more 
        effective hangar heating;
 Replaced an aging and oversized 450-ton centrifugal chiller 
        operating at 2.3kw/ton with a 250-ton chiller operating at 
        .7kw/ton.
 High efficiency motor replacements
    The third task order involved four buildings at the Officer's Club 
complex where a multitude of individual systems that had been added 
throughout the years were combined into a central system.

 Comprehensive HVAC system upgrade
 Heating System improvements
 Control System improvements
 Lighting System retrofit and upgrades
    The fifth and sixth Task Orders are lighting only projects in 207 
buildings in the 82nd Airborne area. These projects focused on lighting 
in order to remedy a lighting problem in the vehicle maintenance 
facilities (VMF's). The VMF's had an average IES lighting level of 15 
versus a minimum standard of 50. Bringing the lighting levels up to 
standards would also increase the energy consumption, negating the 
benefits of ESPC. As a result, a project was designed and implemented 
that encompassed VMF's, barracks and administration buildings. Fort 
Bragg was able to create enough savings in those other buildings to 
bring the VMF's lighting levels up to IES standards while improving the 
lighting quality and level in all of the buildings while also achieving 
our ESPC goals.
    Five additional task orders have now been completed but did not 
generate energy savings during FY99. These projects were implemented in 
32 buildings at the Joint Strategic Operating Command, The NCO and 
Enlisted Clubs, 15 buildings in the Knox Street warehouse area, and 26 
vehicle maintenance facilities in the ``A'' and ``C'' areas. They 
involved electric demand peak shaving, control systems improvements, 
HVAC system improvements, heating system improvements and lighting.
    Table B describes the cost savings achieved in FY99, the total for 
all ten task orders by year beginning in 2000 as well as the total 
savings projected for the life of the program. As a result of the 
initial ten task orders, Fort Bragg will be able to invest over 
$80,000,000 in improvements throughout the Post.
    Numerous environmental benefits have been derived from the 
implementation of these projects. These benefits are summarized in the 
tables below. Table C shows the emission reductions that resulted from 
the ESPC generated energy savings during FY99. Table D shows the annual 
emission reductions that are projected on an annual basis at Fort Bragg 
as a result of the first ten Task Orders that have been completed. The 
source of this information is the Environmental Protection Agency. All 
environmental savings are calculated from the source of the energy 
supply.

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[GRAPHIC] [TIFF OMITTED] T7634.063

                              Addendum B:

   Letter from Garrison Commander William C. David, Colonel, Infantry

Mr. Michael R. Bonsignore
Chairman and Chief Executive Officer
Honeywell Inc.
101 Columbia Road
Morristown, New Jersey 07962

    Dear Mr. Bonsignore:
    As I conclude a 38-month tour as Fort Bragg's Garrison 
Commander, I want to convey my personal thanks to you and the 
entire Honeywell team for making our Energy Savings Performance 
Contract (ESPC) partnership such a tremendous success. Simply 
put, ESPC has been the best and most enduring initiative--by 
far--of the many undertaken during my tour.
    As you are aware, the U.S. Army faces many fiscal 
challenges in this period of constrained resources. From a 
strategic view, those of us in the installation management 
business have been charged by the Army's senior leadership to 
implement more efficient business practices so that funding for 
current readiness and force modernization programs can be 
preserved.
    Fort Bragg is the Army's largest installation by population 
and enjoys a well-deserved reputation as its premiere power 
projection platform. Today's fiscal environment, however, 
affords local commanders with few opportunities for capital 
investment into the base. My own operations and maintenance 
budget, for example, has shrunk from $220M in Fiscal Year 1997 
to about $185M in Fiscal Year 2000. That is why I consider ESPC 
to be an answer to a prayer.
    Through this partnership, we are modernizing facilities and 
improving quality of life in a budget-neutral way. The 
cornerstone of our success at Fort Bragg has been the 
Integrated Solutions Team (IST). The IST process has enabled us 
to identify and prioritize needs in a way that maximizes the 
benefits of our ESPC program.
    The results are compelling. Eighteen projects--worth 
approximately $30M--have either been completed or are in 
progress. We have also leveraged Honeywell's experience in both 
the supply as well as demand sides of our energy program. This 
has allowed us to obtain better energy rates from our suppliers 
and reduce consumption, with the added benefit of reducing 
environmental emissions.
    This partnership has accomplished a great deal in a short 
period of time. I am hopeful that my counterparts at other DoD 
facilities will recognize the power of this program and move 
toward implementation. I appreciate your personal vision and 
commitment in this endeavor. From my perspective, this has 
truly been a ``win-win.''

                                       William C. David    
                                              Colonel, Infantry    
                                                 Garrison Commander

                              Addendum C:

         Press Release on ESPC Contract at Luke Air Force Base

   Innovation and Teamwork: Luke Air Force Base Speeds Toward Energy 
                            Reduction Goals

             Honeywell, AFCESA, AETC join forces with Luke

    PHOENIX, Arizona, August 21, 2000--Luke Air Force Base, 
home to the U.S. Air Force's F-16 training center, is combining 
innovation and teamwork to meet aggressive energy conservation 
goals, boost productivity and enhance the quality of life for 
its on-site personnel and families.
    Located near Phoenix, Luke Air Force Base experts have 
teamed with Honeywell, the Air Force Civil Engineer Support 
Agency (AFCESA) and the Air Force's Air Education and Training 
Command to reduce energy use. The upshot: Luke Air Force Base, 
long a leader in energy conservation, is using its new, 
comprehensive approach to produce better, faster and more cost-
effective results than elsewhere across the Air Force.
    Energy--how it is used, what it costs--is always an 
important matter. But interest in energy reduction increased 
sharply with the Presidential Executive Order 13123, Greening 
the Government Through Efficient Energy Management. Signed in 
1999, the order mandates all federal facilities to reduce 
energy consumption by 30 percent by 2005 (as compared to 1985 
usage) and reach 35 percent by 2010. Reductions in water use 
are also required.

Better, faster, cheaper

    Luke Air Force Base ended 1999 with a 25 percent energy 
reduction, roughly four percentage points ahead of the Air 
Force average. According to Col. Michael Cook of AFCESA, which 
is tasked to help the Air Force meet the federal mandate, Luke 
now appears on track to exceed a 30 percent energy reduction by 
the end of 2000. ``That's a substantial reduction,'' Col. Cook 
said.
    What truly sets Luke apart from the rest of the Air Force, 
Cook said, is Luke's team-based energy conservation program. 
``By pulling in experts from the government and Honeywell and 
by taking a big-picture approach at reducing its overall energy 
use, Luke is finding better, faster, and cheaper ways to save 
energy,'' said Cook.
    In contrast, other bases have employed a project-oriented 
approach, where the base and the contractor focus, for example, 
on specific changes to lighting to reduce energy use, said 
Cook. The project goals may be reached, but the effort is, by 
nature, self-limiting in what it can accomplish.
    The Air Force's overall energy goal is to find cheaper 
sources of power and across-the-board methods to conserve 
energy, Cook said. ``An active teaming approach gives the 
government opportunities to maximize energy conservation,'' he 
added. ``We're urging every base to do its utmost.''

``Team Luke''

    The cross-functional team that stands behind many of Luke's 
energy achievements includes Luke Air Force Base, Honeywell, 
AFCESA and AETC. Nicknamed ``Team Luke,'' the group has 
spearheaded major energy savings efforts that have also yielded 
better working conditions and quality of life improvements for 
the base's on-site military personnel and families. And, 
notably, Team Luke's use of the Integrated Product Team (IPT) 
approach shaved months off of typical project schedules.
    To date, the Air Force awarded Honeywell $9.5 million in 
energy savings performance contracts to upgrade facilities at 
Luke. The first major stage of the energy program took just 
five months to complete. Team Luke upgraded the 874 military 
family housing units, installing new heating and air-
conditioning systems and replacing aging lighting with energy-
efficient fixtures. The team also handled major lighting 
upgrades (including significant daylighting) for eight of 
Luke's large industrial and administrative buildings, including 
two aircraft engine maintenance facilities.
    Team Luke has rolled out the second stage of the program, 
which affects 103 buildings. The improvements, tailored to the 
requirements of each facility, include installation of a new 
energy management control system (EMCS) and measures to improve 
lighting, water conservation and daylighting. A major upgrade 
of one building's heating, ventilation and air-conditioning 
(HVAC) system is also underway. These changes will be completed 
this fall.

Quality of life improvements

    The desert's torrid temperatures often sizzle to 110 
degrees or more. In conditions like this, air conditioning is 
necessary for survival.
    So, Luke's on-site military families welcomed the 
modernization of aging air-conditioning systems (as well as 
heating and lighting upgrades). The base held ``town hall'' 
meetings and formed an advisory committee of on-site military 
families. This committee, representing the interests of the 
entire base of residents, helped shape the improvements in the 
874 homes on the base.

Productivity boost

    The retrofits in the industrial and administrative 
buildings are expected to boost productivity, as well as reduce 
energy use. In the jet engine repair facilities, for example, 
85 new daylighting fixtures and new, longer-life lights and 
ballasts will decrease lighting maintenance requirements--and 
the corresponding disruption of the engines and maintenance 
crew. A new control system turns the lights on and off as 
needed, taking advantage of available natural light. It also 
ensures that the facility meets the recommended lighting 
standards.
    Improvements in the aircraft engine repair facilities 
boosted light levels from 25 to more than 70 foot-candles. ``In 
the engine shops, one of the jet engine mechanics remarked that 
the new lighting was so much better that `it's the difference 
between night and day,' '' according to Lt. Col. Dave Brewer, 
Civil Engineer Squadron Commander. ``After returning from 
leave, another mechanic insisted that something had been done 
to the floor during his absence.''
    Better living conditions and more comfortable work 
environments help increase Luke's mission productivity. ``These 
changes at Luke are contributing to mission effectiveness,'' 
says Garland Scott of AETC. ``We're extremely pleased with the 
results.''

Best of the best

    Over the years, Luke's 56th Civil Engineer Squadron (CES), 
called the Dragonslayers, has earned a reputation for ``best of 
the best'' performance and has built a legacy of civil 
engineering excellence. Luke holds the 1999 Curtin award for 
outstanding Civil Engineer Squadron in the Air Force, in the 
small unit category. In addition to the Curtin award, the 56th 
CES gained command recognition in 1999 with 12 awards within 
AETC.
    The 56th CES Dragonslayers also secured Department of 
Energy (DOE) awards in each of the last three years, including 
awards for water conservation in 1997, alternate fuels in 1998, 
and installation of plate and frame heat exchangers in 1999. 
Significant Luke projects include the construction of a central 
chiller plant to reduce energy consumption by 45 percent, 
saving more than $500,000 a year.

Process improvements

    Honeywell has worked closely with officials from AFCESA, 
AETC and Luke Air Force Base to dramatically streamline and 
accelerate project review and approval processes. Using a 
concept pioneered by the U.S. Air Force, called the Integrated 
Product Team (IPT) Approach, Team Luke has significantly 
decreased overall administration costs, improved quality and 
shortened project schedules.
    These process improvements have been so successful that 
AFCESA is promoting the streamlined approach to bases and 
regions across the nation.

Honeywell performance contract

    Through the Energy Savings Performance Contracting 
procurement process, Honeywell replaces the existing energy 
systems in federal facilities with new equipment and cutting-
edge energy management technology. The replacement systems are 
paid for with the savings reaped from the new, more energy-
efficient systems. Necessary improvements are made to 
infrastructure without spending any new tax dollars.
    ``Honeywell is proud to partner with the U.S. Air Force and 
Luke Air Force Base to boost energy efficiency, improve 
infrastructure and add value to the Team Luke approach,'' says 
Kevin Gilligan, President of Honeywell Home and Building 
Control.
    Luke Air Force Base averages nearly 40,000 sorties and 
trains 800 pilots a year. It is the largest fighter-training 
base in the western world, with more than 200 aircraft, 7,000 
military and reserve men and women, and 1,500 civilian 
employees. Since 1941, Luke Air Force Base has produced more 
than 50,000 pilots for America's most advanced fighters.
    Honeywell Home and Building Control, a US $6-billion unit 
of Honeywell, provides products and services to create 
efficient, safe, comfortable environments. The business unit 
offers controls for heating, ventilation, humidification and 
air-conditioning equipment; security and fire alarm systems; 
home automation systems; energy-efficient lighting controls; 
and building management systems and services.
    Honeywell is a US $24-billion diversified technology and 
manufacturing leader, serving customers worldwide with 
aerospace products and services; control technologies for 
buildings, homes and industry; automotive products; power 
generation systems; specialty chemicals; fibers; plastics; and 
electronic and advanced materials. The company is a leading 
provider of software and solutions, and Internet e-hubs 
including MyPlant.com, MyFacilities.com and MyAircraft.com 
(joint venture with United Technologies and i2 Technologies). 
Honeywell employs approximately 120,000 people in 95 countries 
and is traded on the New York Stock Exchange under the symbol 
HON, as well as on the London, Chicago and Pacific stock 
exchanges. It is one of the 30 stocks that make up the Dow 
Jones Industrial Average and is also a component of the 
Standard & Poor's 500 Index. Additional information on the 
company is available on the Internet at www.honeywell.com.
    This release contains forward-looking statements as defined 
in Section 21E of the Securities Exchange Act of 1934, 
including statements about future business operations, 
financial performance and market conditions. Such forward-
looking statements involve risks and uncertainties inherent in 
business forecasts.

                              Addendum D:

         Summary of Honeywell's Energy Efficiency Capabilities

       Honeywell Energy Efficiency and Environmental Capabilities

    Honeywell is a US $24-billion diversified technology and 
manufacturing leader, serving customers worldwide with 
aerospace products and services; control technologies for 
buildings, homes and industry; automotive products; power 
generation systems; specialty chemicals; fibers; plastics; and 
electronic and advanced materials. Honeywell employs 
approximately 120,000 people in 95 countries.
    While a diversified company, there is a common thread that 
runs through many of the products, solutions and services that 
we offer our customers and that is that they improve energy 
efficiency and offer environmental benefits. This report is 
intended to provide interested readers with a comprehensive 
view of Honeywell's capabilities from this energy efficiency 
and environmental perspective. You may be surprised by the 
range of markets to which we deliver these capabilities and the 
impressive benefits that result as well as the breadth of 
technologies we deploy. Following this overview are specific 
examples from around the world of illustrative projects and 
customer relationships that span the full range of Honeywell's 
energy efficiency and environmental capabilities.

We Bring Energy Efficiency and Environmental Benefits to . . .

Power Generation

    Honeywell brings efficiency and environmental benefits to 
power generation in two major ways. One, we provide 
technologies, services and products that improve the operating 
performance and therefore energy use and related emissions 
output within a range of power production facilities--from 
industrial power users to independent power producers. 
Secondly, we have developed and now manufacture high efficiency 
stand-alone power generation units that can operate either on 
or off an electrical power grid.

Electric Utilities

    Deregulation and privatization in this industry are having 
a major impact on the way plants operate in this historically 
slow-changing industry. This restructuring will require 
utility-generating companies to respond to a dynamic global 
business environment; they will need to increase revenues and 
reduce the cost of a delivered product from aging fossil-fuel-
fired steam power plants. At the same time, they must maintain 
safety and reliability while meeting ever-changing 
environmental regulations.
    As one of its primary markets, Honeywell Industrial 
Automation and Control (IAC) has been providing electric 
utilities with system and product solutions that improve the 
operation of plants through automation and advanced control 
applications. Systems solutions are delivered through the Power 
Generation Center of Excellence. IAC has also helped utilities 
respond to organizational changes by providing support and 
assistance to replace skills lost during these reorganizations 
with the TotalPlant employee development program. Benchmarking 
the organizational process and improving the productivity of 
the plants can be a very important step in the deregulation 
process and is another service available from Honeywell IAC.

Industrial Energy

    Honeywell does not take the traditional view that the power 
house is strictly an allocated cost center. Too often, 
utilities such as steam, electricity, compressed air and 
chilled water are treated as an unavoidable overhead, or an 
allocation rather than a manageable variable cost.
    Honeywell believes that energy is often a hidden and 
neglected variable cost that can be managed and controlled by 
production managers with a direct impact on profitability. 
Controlling these hidden costs can be a major source for 
product cost reduction, profit improvement, and/or a means to 
differentiate your product on price. Honeywell has developed a 
family of solutions to address the needs of regulatory control, 
advanced monitoring, and optimization designed to specifically 
minimize energy costs while maximizing availability and 
reliability. It has been Honeywell's experience that 
implementation of industrial energy management and control 
projects reduce energy expenses from 2 to 6 percent.

Independent Power Producers

    Deregulation is spawning an increasing number of non-
utility power generators whose goal is to provide the lowest-
cost energy. Recent surveys of the industry indicate that the 
instrument and control systems originally installed in these 
plants have not been sufficiently reliable; they do not 
incorporate the advanced design elements necessary to ensure 
the availability or performance expected from these generator 
sets.
    Honeywell's proven reliability and advanced control 
applications provide the ideal suite of solutions that this 
highly competitive industry needs to continue to be 
competitive.

On-Site Power Generation

    Honeywell offers the Parallon TM 75, a compact, 
self-contained unit that uses a microturbine to convert a wide 
variety of gaseous and liquid fuels into electricity for onsite 
power generation, to small and mid-sized businesses. Capable of 
providing energy solutions from 75 to 1 MW, the system is 
designed to operate parallel to the utility grid or as an 
independent source of power for the customer. It helps to 
reduce energy bills, improve power quality and reliability, and 
minimize the risk of power outages.

Power Transmission and Distribution

    Honeywell helps electric utilities reduce their operating 
costs and improve energy savings through its new generation 
METGLAS amorphous metal distribution transformers (AMDTs). 
These transformers can achieve up to 80% lower core loss than 
conventional transformers. When you consider that 10% of all 
electricity generated by utilities today is lost in the 
transmission and distribution process, the potential savings 
through reductions in core loss can be significant.

District Energy Systems

    Honeywell is the only company that can provide a complete 
solution for every part of a District Heating System achieving 
energy savings at each level of operation up to a total of 
approximately 45%, and thereby reducing CO2, 
NOX and SO2 emission. Honeywell's 
approach offers integrated automation of the generation plant, 
integrated control of the heat distribution systems, and local 
user comfort control.

Process Industries

    Substantial amounts of energy and power are utilized in the 
process of manufacturing many of the materials and products 
that consumers and businesses consume each day. Honeywell is a 
world leader in automation solutions for a wide range of 
process industries, including oil and gas, chemicals and 
petrochemicals, pulp and paper, mining, metal and minerals, 
pharmaceuticals and other consumer goods. By providing advanced 
control and information management software and industrial 
automation systems and related field instrumentation and 
control products, Honeywell helps industries optimize their 
manufacturing processes and in so doing, achieve greater energy 
efficiency in the plant operations. As noted above, Honeywell's 
control systems can also be applied within a plant's 
powerhouse, thereby achieving improved energy efficiency in 
both the process and power generation aspects of the industrial 
facility.

Buildings and Residences

    Approximately 45% of the energy consumed worldwide goes to 
power and heat homes and buildings. Honeywell is a global 
leader in control systems and products that can improve the 
operating performance of key systems (heating, cooling, 
lighting and security) within homes or apartment buildings, 
factories, schools, hospitals, airports, commercial buildings, 
and military installations. In fact, Honeywell offers 
comprehensive energy retrofits for all of these kinds of 
facilities, enabling the homeowner, building owner or operator 
to enjoy greater comfort and easier management while also 
achieving energy and thereby cost savings.
    Honeywell also offers ``Performance Contracting'' to many 
of its customers. The concept of performance contracting was 
first conceived in North America in the early 1980s. 
Performance Contracting or Comprehensive Technical Service 
(CTS) is a service that Honeywell's Home and Building Control 
division offers to owners of building complexes, particularly 
to hospitals, industrial plants, schools and universities. 
Working with the customer, Honeywell identifies a range of 
infrastructure improvements that will significantly reduce the 
customer's operating costs. Honeywell then formally guarantees 
that the cost of the improvements will be completely covered by 
energy and operational savings.

The Aerospace Industry

Flight Management Systems (FMS)

    Through the combination of FMS experiences, Honeywell has 
become the world leader in Flight Management Systems. Many of 
Honeywell's FMS products are designed to control for lowest 
fuel burn and to allow the crew to fly the airplane in the most 
cost efficient way, thus reducing the energy consumed and the 
emissions created by the aircraft. FMS products achieve this by 
providing cockpit level control of the airplanes including 
variables such as determining the right altitude to fly and 
predicting arrival times. Honeywell has developed patented 
algorithms for several performance and economy functions that 
offer the flight crew choices impacting environmental issues. 
Along with the efficiency index algorithms and greater 
navigation accuracy, Honeywell has developed self-tuning 
performance capability for optimum efficiency, Autopilot 
Coupled Vertical Navigation for maintaining a desired flight 
profile, and Noise Abatement Departures features.

The Automotive Industry

    Honeywell brings higher fuel economy and helps reduce 
automotive-related emissions through our Garrett TM 
Turbocharger engines and on-board automotive sensors.
    Engines outfitted with Turbochargers give a small engine 
the same horsepower as a much bigger engine and make bigger 
engines more powerful, up to 40% more powerful than it would 
have without the turbocharger. Because a turbocharger delivers 
more air to the engine, combustion of fuel is more complete and 
cleaner, which helps reduce emissions. Fuel economy is 
increased as small, turbocharged engines turn more of the fuel 
energy they consume into power and waste less of it through 
heat loss and friction.
    Honeywell Sensing and Control as a leading supplier of 
active cam, crank, transmission, body systems, and wheel speed 
sensors for applications that require high accuracy, extreme 
temperatures, or specialized packaging to survive rugged 
environments. Our cam and crank position sensors are most often 
used to help customers enhance their system's pollution 
control, fuel efficiency, and ignition timing. Transmission 
speed sensors help automatic transmissions shift smoothly.

Textile and Carpet Industry

    Evergreen Nylon Recycling, our joint venture with DSM 
Chemicals, is the first of its kind in the world. Opened in 
November 1999, the facility will process 200 million pounds of 
normally landfilled carpet into high-quality caprolactam, the 
basic building block chemical used to make nylon. Honeywell's 
Type-6 nylon has inherent properties that allow it to be broken 
down into its base components with the company's proprietary 
recycling process. Competitive types of nylon are more 
difficult to work with and involve more cost and complexity. 
With the new facility fully operational, it is now possible to 
turn your old carpet into the door handle on your next new car 
with no loss of performance or vibrancy of color.

Environmentally Safer Refrigerants

    Honeywell is a leading developer and producer of 
environmentally safer fluorocarbons used to replace ozone-
depleting CFCs (chlorofluorocarbons) and HCFCs 
(hydrochlorofluorocarbons). These products, sold in many 
regions of the world under the Genetron' trade name, 
are used to replace chlorofluorocarbons (CFCs) and 
hydrochlorofluorocarbons (HCFCs) in commercial refrigeration 
(supermarkets, warehouses, grocery stores), stationary 
(residential and commercial) and automotive air conditioning 
and foam insulation for building construction and appliances. 
Genetron' products offer an environmentally 
friendlier alternative for air conditioning in automobiles and 
homes. Genetron' also has a variety of commercial 
applications.

    Mr. Barton. Thank you, Mr. Madden.
    Last but not least, we will hear from Roger Cooper, who is 
the Executive Vice President for Policy and Planning for the 
American Gas Association. We probably should institute a prize 
for the person who testifies last at these hearings because you 
have had to sit here all day long and you deserve a little 
extra recognition for taking it in such good humor.
    So your statement is in the record in its entirety and we 
recognize you for 5 minutes to summarize it.

                    STATEMENT OF ROGER COOPER

    Mr. Cooper. Thank you, Mr. Chairman. The morning was 
educational.
    I am Roger Cooper of the American Gas Association. As you 
know, we represent 189 local natural gas utilities that serve 
customers in all 50 States. I can be brief.
    Mr. Evans and Mr. Lindahl, I basically concur with what 
they have said about the natural gas marketplace. You, Mr. 
Chairman, are very knowledgeable about the natural gas 
industry.
    Let me run through a couple of points. One, the evolution 
of competition, I think, is something we all agree in the 
natural gas industry has been extremely beneficial for 
consumers. Last year, natural gas consumers paid about 20 
percent less on average than they did back in 1985.
    This morning, I would like to focus on how natural gas 
utilities are preparing to ensure reliable service this winter 
and how we are working with our customers.
    It is no secret that most consumers will pay more to heat 
their homes this winter. The average unit cost, according to 
the Department of Energy, Energy Information Administration, 
for residential gas consumers will go up 25 percent higher than 
last year. That is not good news, but there are some good news 
aspects to that.
    Put it in perspective: In 1985, the average American family 
using gas heat had to spend 4.5 percent of their disposal 
income to heat their homes. Last year, it was only 2.3 percent, 
almost cut it in half, 2.3 percent of disposal income to heat 
homes; and Mr. Santa was actually suggesting a similar number, 
I think, in the oil business.
    There have been tremendous efficiencies up and down the 
line--the pipelines, the utilities, tighter homes, more 
efficient appliances. So we have really done a lot for the 
consumer in that area.
    The other point is that about two-thirds of a gas bill is 
not for natural gas. It is for gas service, the safety end of 
the business, maintaining the pipes, delivering the gas. So 
whenever we talk about this increase in price, it is usually 
nationally one-third of the bill.
    An important point, and many people don't know this, is 
that natural gas utilities do not make money on the commodity 
cost of gas. We buy gas and we resell it to customers at 
exactly the same price that we pay for it. That is a 
requirement under State law and regulation in basically every 
State unless there is a customer choice program in there; but 
the utility does not make money on natural gas and, in fact, 
the way utilities make money, the way they earn their allowed 
return, is to transport gas. Essentially, the more gas they 
transport, the better chance they have to earn their allowed 
rate of return. So higher gas prices for utilities--generally 
they are in the same shoes as the consumer. If prices go up, 
demand may go down and their ability to transport gas also 
declines.
    So utilities generally are not too excited about higher 
prices, but we are very much with the rest of the industry as 
to what needs to be done; we need to get that product to our 
customers.
    Now, what about gas supplies for consumers this winter? 
They will be adequate. Our members are in the reliability 
business. Our reliability record is fantastic. People don't 
hear about losing gas heat in the winter. Maybe your furnace 
dies, but the gas company delivers the gas. We will provide 
service to our customers as provided under their contracts. 
Firm customers will get firm service; interruptible customers 
may be interrupted as provided under their contract. And how do 
we do this? We contract for firm pipeline capacity. It is very 
expensive. Pipelines are very expensive. We enter into firm 
contracts. We enter into firm supply contracts on the gas 
commodity side, and we maintain storage and other peaking 
facilities to handle peak demand.
    On natural gas storage, as you may know, the American Gas 
Association collects and releases weekly storage numbers. We 
have been doing that for 6 years. This season, storage has been 
lagging the 5-year average, but we expect to enter the winter 
heating season with adequate storage to meet demand. We expect 
we will probably be around the level we were in 1996-1997 
winter, probably about 2.7 trillion cubic feet in storage, a 
little below the usual fill of 3 trillion cubic feet.
    As to communications with our customers, we are 
communicating with our customers, as you may expect, with bill 
inserts and so on and so forth.
    In conclusion, if I could make just one brief statement, I 
think with all the differences we hear today, there are four 
areas of substantial agreement in this industry. One, the 
restructured market has benefited consumers; two, the North 
American gas resource base is enormous; three, there will be an 
increase in demand that will not be met by the current supply--
we do need to increase supply; we do need to increase 
infrastructure. Fourth is critical, to access the natural gas 
resource base and increase that infrastructure.
    Gas utilities will spend approximately $99 billion over the 
next 20 years on infrastructure improvement.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Roger Cooper follows:]

 PREPARED STATEMENT OF ROGER COOPER, EXECUTIVE VICE PRESIDENT, POLICY 
                 AND PLANNING, AMERICAN GAS ASSOCIATION

    Good morning, Mr. Chairman and members of the committee. I am Roger 
Cooper, Executive Vice President, Policy and Planning, for the American 
Gas Association. I appreciate the opportunity to testify today.
    The American Gas Association (AGA) represents 189 local natural gas 
utilities that serve customers in all 50 states. AGA members deliver 
natural gas to over 50 million homes and businesses in the U.S.
    As distributors of natural gas, our interest in natural gas supply 
is virtually identical to the consumer's interest--we want a reliable 
supply of gas at a reasonable price, preferably produced in the United 
States or North America.
Why are gas prices higher this year?
    The simple answer to that question is that demand for natural gas 
is very strong and supplies are tight. This tightening is reflective of 
low wellhead gas prices during 1998 and 1999; it is not a reflection on 
the gas resource base. Almost all of the natural gas consumed in the 
United States is produced in the U.S. From mid-summer 1998 to early 
1999, the price that producers could get for natural gas was fairly 
low--less than $2 per one thousand cubic feet (Mcf). This contributed 
to a decline in the number of rigs drilling for natural gas.
    The United States currently enjoys a very strong economy. As a 
result demand for all forms of energy has increased. About 40 percent 
of the natural gas consumed in the U.S. is used by factories and other 
industrial customers, so on-going economic growth continues to push 
natural gas demand. Relatively high oil prices have kept many factories 
and electricity generators from switching from natural gas to fuel oil. 
While only 15 percent of the electricity generated in the U.S. comes 
from natural gas, in the future an increasing amount of electricity 
will come from natural gas because it burns cleaner than other fossil 
fuels.
    EIA currently predicts that natural gas prices will moderate in 
mid-2001, due largely to the fact that more rigs are drilling for 
natural gas than at any time in the last 15 years.
What can residential consumers expect this winter?
    While the price of natural gas at the wellhead has more than 
doubled this year, EIA estimated in its most recent Short-term Energy 
Outlook that the average unit cost for residential consumers this 
winter will be 25% higher than last year. Weather, which has been 10 to 
15% warmer than normal for the past three winters, will be an important 
determinant of a residential consumers' total bill for heating.
    Prices for residential natural gas service are regulated by state 
agencies, usually called public service commissions or boards. Some 
states appoint regulators; others elect them. Residential natural gas 
prices are for natural gas service, not just the gas commodity. The 
price of the gas commodity makes up about one-third of the total price 
a residential customer pays, on average. The remainder of the 
customer's bill includes amounts for the transmission and distribution 
of gas, system maintenance, safety and inspection programs, customer 
service, metering, billing and other costs. Due to the increasing 
efficiency and competition in the gas utility industry, consumers have 
seen a steady and significant decline in the transmission and 
distribution component of their bills since the late 1980's. (see 
attached charts).
    Natural gas utilities do not add any profit margin to the price 
they pay for gas. In general, our customers do not pay any more for gas 
than the utilities do. Put another way, the natural gas utility does 
not make money on the commodity cost of gas.
    In fact, utilities can lose sales when gas prices get too high 
because consumers tend to use less gas. We make our regulated rate of 
return by transporting the natural gas to the consumer and maximizing 
the throughput on our pipes.
    Regulatory policies and utility actions also tend to lessen the 
impact of price spikes for natural gas consumers. In many states 
purchased gas costs for gas utilities are averaged over a season or 
even a year and passed on to consumers as an average cost of gas. This 
does not mean that the purchase price for a gas utility's gas supplies 
cannot increase unexpectedly. What it does mean is that a particular 
spike in gas prices for a day or week or even months may be mitigated 
by the averaging of costs over the year, thereby reducing volatility.
    Another positive development for consumers since the energy crises 
of the 70's is the tremendous efficiency improvements in natural gas 
equipment. Improved efficiency has reduced average residential natural 
gas use by over 12% between 1980 and 1997. Appliance efficiency gains 
account for two-thirds of that improvement. Gas furnaces have gone from 
an average 65% efficient to over 80% efficient today. In addition, 
homeowners are consuming less natural gas on average than they did 20 
years ago because new homes are being built more tightly and because 
many homeowners have made their existing residences more energy-
efficient. In 1999, the average household spent only 2.3% percent of 
its income on natural gas, compared to about 4.5% percent in 1985.
Reliability is our top priority. Supplies will be adequate
    Natural gas utilities will be prepared to provide natural gas to 
their customers this winter as contracted. Utilities traditionally plan 
to have enough supply available to meet the demand on the coldest 
winter day and for the duration of the most severe winter season. This 
winter will be no different. Utilities assure reliable service in three 
primary ways:

 Contracting for firm pipeline capacity: in other words we 
        reserve space on the interstate pipelines that transport gas 
        from the producing areas such as Texas, Louisiana and Canada to 
        the consuming areas. We don't fly stand-by--we have a firm 
        reservation.
 Signing firm supply contracts: our contracts with producers 
        and marketers of natural gas are firm and contain severe 
        penalties designed to ensure compliance. The majority of our 
        supplies are purchased under monthly, multi-month or even 
        multi-year contracts. Some prices in these agreements are tied 
        to various indices, while others are fixed.
 Filling storage and peaking inventories: utilities own or 
        lease storage facilities in or near their market area--
        typically in underground reservoirs. We typically fill that 
        storage during the summer and early fall to assure that supply 
        is available for the winter. (Storage gas usually functions as 
        natural hedge against higher winter prices.)
    Not only do natural gas utilities typically include a certain level 
of redundancy in their contracting practices, but some companies also 
maintain LNG (liquified natural gas) and propane-air peaking facilities 
in order to meet peak demand.
    Utilities do not appear to be having any difficulty obtaining 
natural gas, although they are paying more per unit of gas than they 
did last year because supplies are tight.
    National storage figures indicate that although aggregate levels of 
working gas in storage are about 10 % behind the five-year average, 
volumes in storage are currently ahead of the pace of the 1996-97 
winter heating season. (see attached charts). In that year the pre-
winter storage level peaked at 2.725 Trillion cubic feet (Tcf) of 
working gas relative to a potential ``full'' level of 3.294 Tcf. The 
American Gas Association believes that storage levels will be adequate 
again this year.

Interruptible and firm customers
    I have been discussing how utilities prepare to serve their ``firm 
customers''. These typically are residential and commercial customers, 
which together make up about 36% of total U.S. natural gas demand, as 
well as some industrial and electric utility customers. Utilities 
typically purchase natural gas supplies for these customers and also 
deliver it. In addition, utilities supply and transport natural gas to 
industrial and large commercial customers who have alternate fuel 
supplies under what are known as interruptible contracts. About 25% of 
the total gas consumed is subject to interruptible contracts.
    These contracts, which provide significant savings to industrial 
consumers, generally provide that the supply of gas can be interrupted 
if supplies are needed to serve firm customer demand. These customers 
also have the option to switch fuels when it is in their economic 
interest. Interruptible customers are responsible for securing adequate 
supplies of their alternative fuel, such as diesel oil or propane.
    Interruptible contracts have been used in the gas industry for 
decades. They provide obvious economic benefits to industrial 
consumers. They also benefit firm customers because the utility does 
not have to design the size of its infrastructure just to meet those 
two or three really cold days in the winter, thus reducing costs for 
all, while helping ensure reliability.
    So, interruptible contracts exist for two main reasons. They exist 
to meet the needs of industrial customers for low-cost energy that 
allows them to better compete in world markets and they exist to 
benefit all gas customers by lowering their costs.
Impact of customer choice
    I would like to emphasize that the evolution of competition in the 
natural gas industry has been a tremendous benefit to consumers. Until 
this summer, natural gas consumers paid about 20% less on average than 
they did in 1985--making natural gas a terrific value.
    Increasingly, customers make their own arrangements for natural gas 
supply directly with producers and marketers and the gas utility 
provides only transportation and related services. And in many cases, 
large gas consumers bypass the utility and hook-up directly with and 
interstate pipeline.
    The most recent AGA statistics indicate that 87 percent of all gas 
consumed by electric utilities, 91 percent of all industrial gas 
consumed, and 35 percent of commercial gas purchases were purchased 
under a customer choice option. (1998 figures--see attached charts).
    Customer choice programs are also available for about 44% of the 
U.S. households with natural gas.
    Customer choice programs can benefit savvy consumers because 
marketers are able to offer customers more options for buying natural 
gas such as fixed price contracts and can use hedging to mitigate price 
spikes.
    Hedging, or the use of futures and options contracts to manage 
risks related to rising or falling commodity prices, is not always 
available to local gas utilities due to public utility commission 
regulation. Some jurisdictions, such as the state of New York, allow 
utilities to offer fixed price options to their customers.

Communications with our customers
    The American Gas Association and its members have been and will 
continue to communicate with our customers to prepare them for the 
higher bills expected this winter, to assure them that supply will be 
available and to assist them in mitigating the impact of higher prices 
and to manage their bill payments.
    Through the use of newsletters, bill inserts and public service 
announcements utilities are encouraging their customers to:

 Enroll in budget billing programs, spreading their winter cost 
        across the whole year, and.
 Ensure that their appliances are working properly and 
        efficiently and that their homes are energy efficient.
    In addition utilities are publicizing the availability of energy 
assistance programs such as

 LIHEAP--the federal Low Income Home Energy Assistance Program.
 State programs such as locally the Maryland, DC and Virginia 
        energy assistance programs.
 Fuel funds--many utilities have established fuel funds to help 
        families who do not qualify for government assistance or who 
        have used up their benefits. These are funded by shareholder 
        dollars, customer contributions through a check-off on their 
        bills and charitable contributions. For example, the Washington 
        Area Fuel Fund was created by Washington Gas Company and is 
        administered by the Salvation Army.
    Although, as I mentioned earlier, the average American family has 
been spending about 2.3 percent of its income on natural gas heating in 
recent years, low income and fixed income households devote an average 
of 15 percent of their budget to home energy. Obviously, the impact on 
these consumers will be more severe and assistance programs should be 
targeted to these families.
    AGA encourages the members of this committee to contact your 
colleagues on the Appropriations Committee and to urge them to increase 
funding for the Low Income Home Energy Assistance Program this year. 
The current base funding for LIHEAP is $1.1 billion, which is only 
about half the amount that was provided in 1984-85--the last time gas 
prices were this high.

Conclusion
    Finally, the committee has asked for my comments on long term 
energy policies to increase domestic production and to ensure the 
adequate supply and deliverability of natural gas.
    Today, we are in a period of volatility in energy markets 
characterized by increased demand and higher prices. But it is critical 
that the current volatility not mask the widespread agreement about 
fundamental aspects of the natural gas marketplace. These fundamental 
points are central to energy policy-making. They are:

 First, the restructured natural gas market has produced 
        benefits for all classes of consumers;
 Second, the North American natural gas resources base is 
        enormous. Current estimates of the natural gas resource base in 
        the United States often exceed 1,200 Tcf (based on current 
        technology and economics), and are, therefore, equivalent to 
        approximately 65 years of supply at the current level of 
        consumption. (see attached charts). New technologies and 
        changing economics allow us both to discover more gas and add 
        to our existing resource base gas supplies that in earlier 
        years were considered technologically or economically 
        unobtainable.
 Third, there will be an increase in demand for natural gas 
        that cannot be met by our current level of production and 
        imports; and
 Fourth, it is critical that we access the natural gas resource 
        base and develop the necessary infrastructure to meet this 
        growing demand. As recommended by the National Petroleum 
        Council in its December 1999 report we must ``[e]stablish a 
        balanced, long-term approach for responsibly developing the 
        nation's natural gas resource base.'' This includes providing 
        access for exploration and production to areas that are 
        currently off limits to the industry and encouraging the 
        development of the necessary infrastructure to transport 
        natural gas to market.
    These are clearly challenging times for our industry. However, 
through careful planning our nation's natural gas utilities are 
prepared to meet our customers' needs for safe, reliable service this 
winter.
    Thank you for the opportunity to participate in this important 
hearing. I would be pleased to answer questions at the appropriate 
time.

    Mr. Barton. Thank you, Mr. Cooper.
    The Chair is going to recognize himself, let's try 7 
minutes, for questioning. Since we held you all to 5, we will 
cut the questions down and hopefully try to get out of here by 
3 since I have a 3:45 flight to Houston.
    My first question to you, Mr. Lindahl, since you represent 
one of the larger natural gas petroleum companies in the 
country, are you familiar with the proposal to build a natural 
gas pipeline up in Alaska to transmit natural gas to the Lower 
48?
    Mr. Lindahl. Yes, sir, and while you were out I addressed 
that. That is probably a $12 billion project. The gas is known, 
and maybe half the cost is regulation to build the pipeline, so 
anything we can do to cut down the time, the regulation, the 
restrictions, helps. That gas is known. Anadarko is spending a 
lot of money on the North Slope looking for gas, and we would 
like to expedite getting that to the market.
    Mr. Barton. What is the largest impediment to making a 
decision and actually constructing that pipeline? Are there 
environmental impediments in Canada? Are there just 
uncertainties in the financial markets as to financing it in 
the United States? If you could wave a magic wand and 
eliminate, or at least make it possible to handle the No. 1 
impediment, what would that be?
    Mr. Lindahl. It would be environmental permitting and 
regulations to permit the actual pipeline. That one thing can 
cost billions of dollars and take years to do when the gas is 
known, it is there, it is ready to move.
    Mr. Barton. Now, are those U.S. Federal regulations, 
Alaskan State regulations, Canadian provincial regulations or 
Canadian national regulations?
    Mr. Lindahl. I think all of the above. I think the 
environmental and the Federal would be probably the largest 
hurdle to overcome to getting the pipeline permitted.
    Mr. Barton. Okay.
    Is it your opinion that if there was some emphasis and some 
sunlight placed on that issue in the next Congress, that that 
might help? I mean, could we do some things at the 
congressional level, working with whatever new administration 
comes in, that could expedite that?
    Mr. Lindahl. For sure, yes. And again I think if you have 
got 100 trillion cubic feet of proven gas on the North Slope. 
Industry has a stellar record environmentally for producing oil 
the last 25 years. There is no reason not to expedite getting 
that gas to the Lower 48 from Alaska and Canada.
    Mr. Barton. Mr. Evans, I would like to ask you a question 
since you are president of a company, a gas transmission 
company.
    In the old days, the Natural Gas Policy Act days in the 
late 1970's and early 1980's, we considered the natural gas 
market to be kind of an adjunct of the oil market; that there 
was a fairly direct linkage between oil prices and natural gas 
prices. Is that situation the same today or do we now have more 
of a discrete market just for natural gas?
    Mr. Evans. I certainly believe there is a distinct market 
for natural gas and that has been, of course, driven by the 
growth in demand both on the electricity side and the 
industrial side. About half of the wells that are actually 
actively drilling now are searching for natural gas, as opposed 
to searching for oil and finding natural gas as a secondary 
product.
    So, yes, there is definitely a thriving natural gas market 
and, of course, Anadarko is basically in the business as a 
natural gas producer as opposed to seeking oil production.
    Mr. Barton. Mr. Lindahl, Mr. Evans and Mr. Cooper, let's 
assume that oil prices moderate and come back down to $20 to 
$25 a barrel in the next year. I think the futures market in 
the New York Mercantile yesterday or the day before, had a 1-
year price for oil at about $24.50 a barrel. I could be wrong 
on that, but I think that is what it was.
    If that becomes reality, does that mean that natural gas 
prices drop from their levels of 4.50 Mcf, do they go back down 
to 3.50 Mcf, or do you expect natural gas prices to stay 
somewhere in the range that they are today? Mr. Cooper, Mr. 
Evans and Mr. Lindahl?
    Mr. Lindahl. I will start out, just to say that the prices 
have decoupled; and I mentioned earlier that the next 2 years' 
production for gas is going to grow at 1 percent, demand is 
going to grow at 3 to 4 percent. So I think the days of $2 or 
$2.50 gas are gone.
    We have had three abnormally warm winters in the past. If 
we have a normal winter, you are going to see lots of spikes, 
but I think gas is in the $3 to $4 range going forward, and it 
is demand and supply. We are not drilling enough wells to 
replace the supply.
    Mr. Barton. Mr. Evans, do you agree with that?
    Mr. Evans. I expect them maybe to come down a little bit 
more than that, but he certainly is in the business of drilling 
for natural gas.
    I think one thing that could help that in the long term, of 
course, is to open up some of the areas that are locked out 
right now for the producers to explore for natural gas, and if 
that happens then, of course, the infrastructure will be built 
to bring that to market. So I think you would see the prices 
moderate somewhat.
    Mr. Barton. Mr. Cooper?
    Mr. Cooper. If one can walk between those, I generally 
agree with both gentlemen.
    Mr. Barton. Spoken like the representative of a trade 
group.
    Mr. Cooper. No, and I will tell you why.
    One point: On our end of the market, 40 percent of the gas 
market goes to industrial demand, and a large part of that 
market is dual fuel market. They can switch over to oil and do 
switch over to oil as a purely economic decision. So oil is an 
economic substitute for natural gas, and right now one reason 
we see gas prices high is industrial load has not switched over 
to oil. It has stayed on gas.
    So there is a substitute effect----
    Mr. Barton. Right.
    Mr. Cooper. [continuing] separate from any wellhead 
linkage. If you look historically, I agree it is a distinct 
market, but they do tend to still trend together if you look 
back to where we had very low gas prices as a time of very low 
oil prices. So I am not a wellhead expert, but there is some 
interconnection.
    Mr. Barton. Okay. Let's switch to fuel oil and our expert 
here is Mr. Santa, and to a lesser degree, Mr. Madden. Last 
year, with all of the hullabaloo over fuel oil prices in the 
Northeast, what was the average price per gallon that your 
customers paid, if you can recollect that?
    Mr. Santa. About a dollar, Mr. Chairman.
    Mr. Barton. About a dollar?
    Mr. Santa. That is retail, home heating. Industrial--
commercial is around 80 cents; industrial is around 60 cents.
    Mr. Barton. The home retail consumer is who we are most 
politically sensitive to.
    Mr. Santa. I understand. Thank you.
    Mr. Barton. So your people didn't pay this $2 a gallon?
    Mr. Santa. No way, no way. A few of them did. They could 
have a choice. Not everyone with me had a capped price. They 
could buy it that way or take their chances.
    Mr. Barton. Now, if I am in your marketing territory right 
now, and I haven't done anything--I just woke up this morning 
and, by God, I need to get some heating oil----
    Mr. Santa. Give me a call.
    Mr. Barton. There is all kinds of hell breaking loose in 
Washington; I had better get my act together. So I call your 
representative and say, you know, I have got a 300-gallon 
tank--I don't know what the average gallon tank is.
    Mr. Santa. Sure.
    Mr. Barton. Make me a deal. What's the deal you can give me 
right now today if I am an average customer, your marketing 
territory, on home heating oil for this winter?
    Mr. Santa. I can give you a capped price deal or I can give 
you a market price deal, whichever one you would like.
    Mr. Barton. Let's say I don't know, so give me both deals 
and let me decide. Is that proprietary?
    Mr. Santa. It is not really proprietary. It just happens to 
be right now that the market price is slightly higher than the 
capped, but they are both around $1.50.
    Mr. Barton. Let's say I want a capped deal. Generally, what 
is that going to be?
    Mr. Santa. Let's call it--most all my customers right now 
are capped at an average of $1.30. Some are $1.40. Some are 
$1.20. Some are $1.42. Some are $1.12. It depends upon when 
they bought in. If you bought today, it would probably be in 
the $1.40-1.50 range for a cap.
    Mr. Barton. If I say I want a capped deal and you say $1.40 
a gallon, how many gallons do I have to buy and when do I have 
to put money into the deal?
    Mr. Santa. We know what you are going to buy already, 
because we know the size of your home and things like that. We 
know our customers very intimately, and you don't have to put 
anything in the deal. Just sign on to be my customer, and I 
will take good care of you.
    Mr. Barton. Is it a 3-month contract, a 4-month contract?
    Mr. Santa. We usually take people a year at a time.
    Mr. Barton. Okay.
    Mr. Santa. The year usually ends in the summertime. But 
understand something very subtle about that cap, Mr. Chairman, 
and it is that that is the highest it can go. If the price goes 
down, guess what?
    Mr. Barton. You are guaranteeing to me I won't pay more 
than that?
    Mr. Santa. That is right, that is top.
    Mr. Barton. And I might pay a little bit less?
    Mr. Santa. You might pay a lot less. Remember, oil spikes 
down as well as up.
    Mr. Barton. I don't have to put upfront money in right now 
to get a capped deal? I don't have to give you a $200 deposit?
    Mr. Santa. No.
    Mr. Barton. Or something like that?
    Mr. Santa. Some of my colleagues in the business do it that 
way. It is like you want to buy an insurance policy. Because 
that costs me money, I have to go to the Merc, buy a derivative 
which might cost me 2 or 3 cents a gallon. You are going to 
burn 1,000 gallons a year, so that is about $25. So I might 
just say to you, well, Mr. Barton, here is what we will do. You 
pay me $25, and you buy the insurance, and I will sell you the 
oil for this price over here.
    Mr. Barton. Okay.
    Mr. Santa. I wrap it together. I package the deal.
    Mr. Barton. Okay. Now, if I am Fly by-Night Barton and I am 
just coming through Connecticut, you know, escaping the Texas 
Rangers, I don't----
    Mr. Santa. Yes, we have heard of you.
    Mr. Barton. [continuing] I am not real interested in a 
long-term deal; I just want enough for the next month. So I 
don't want a capped deal; I want basically a 1-month deal.
    Mr. Santa. Right.
    Mr. Barton. What would that be today generally? Would it be 
the same $1.40 a gallon or would it be a little less?
    Mr. Santa. It might be a little higher than that. It might 
be a little higher than that.
    Mr. Barton. Because you did a credit check on me and knew 
that I was----
    Mr. Santa. Your reputation preceded you, Mr. Chairman.
    We don't need a credit check. No, but seriously, the way 
that it gets lower with the cap is that I am buying a strip, I 
am buying what you call a Merc strip, which has a rateable 
amount of product over the months. And the reason I have no 
carrier and I can't inventory right now is that the stuff for 
January, February, March, April, May, June, July, it costs less 
than it costs now. Whereas, if I am going out today and I am 
going to see my major wholesaler, I am going to see Gasco and I 
want to buy a barge or cargo of product, well, it is more 
expensive for product material right now.
    So therefore if Fly by-Night Barton is coming through, and 
he just wants a load on the run, great, here you go, that is 
the stuff I just bought today. You get that.
    If you are my good friend and want to stay with me forever, 
at least a year, then I give you the special deal because we 
build relationships.
    Mr. Barton. I understand that.
    The last question, and then I will go to Congressman 
Stearns: This home heating oil reserve in the Northeast that we 
are beginning to put into place, how will that impact the 
marketplace, and are you aware of how it actually will be used 
if it were to be used?
    Mr. Santa. I really don't have a clue and that is not so 
disconcerting to me as the fact that I do not think that you 
have a clue, and that is what really worries me. What are you 
going to do with it? When are you going to bring it out? At 
what price? You are not in my business, so therefore if you 
decide to dump that at 10 or 12 or 15 or 20 cents under market, 
I can't do anything about that. You can afford it; I can't.
    Mr. Barton. Actually, I do have a little of a clue.
    Mr. Santa. So, I mean, we had offered to Secretary 
Richardson an alternative which we thought made a little bit of 
sense, and that was, instead of putting all that stuff into 
storage which you don't know what you are going to do with, why 
don't you nice folks just offer us a tax incentive when we do 
not have a carry, so that we would be encouraged to put stuff 
in storage?
    Well, it is too late for that now. You have pulled the 
trigger. You have got your stuff. It is there. Whatever.
    Mr. Barton. We could look at that, though, next year. That 
is not a crazy thing.
    Mr. Santa. Well, he seems to like it. I don't know. So, 
whatever.
    But I mean we want to work with you. We have a burning need 
to take care of customers; and we do it, we just do it.
    Mr. Barton. Is there--and then I will go to Congressman 
Stearns.
    Is there anybody in a service territory that has some 
market share that is dependent on home heating oil, that is in 
danger of not receiving home heating oil this winter, to your 
knowledge?
    Mr. Santa. You are talking about a reseller like a dealer 
or are you talking an end-user like a customer?
    Mr. Barton. An end-user like a homeowner?
    Mr. Santa. No.
    Mr. Barton. Is there any region that uses home heating oil 
to a significant degree where there is a consensus that 
grandmother might not get home heating oil?
    Mr. Santa. No, no way, Mr. Chairman. We take care----
    Mr. Barton. The EIA information about lower home heating 
oil, or heating oil stocks, they are certainly below the 
average they have been.
    Mr. Santa. Sure.
    Mr. Barton. But there is no one credible that is saying, 
because of that, we can't get heating oil to people that need 
it?
    Mr. Santa. I certainly wouldn't say that, Mr. Chairman, 
absolutely not. Thank you.
    Mr. Barton. Okay.
    Mr. Stearns, for 7 minutes.
    Mr. Stearns. Thank you, Mr. Chairman.
    Mr. Cooper, in your opinion, are financial tools such as 
futures and options contracts a useful tool to protect 
consumers from volatility in natural gas prices? And to the 
best of your knowledge, how many State commissions permit local 
gas utilities to do this? When State commissions permit the use 
of hedging, what is the percentage of gas utilities that take 
advantage of this tool?
    Mr. Cooper. I can't give you answers to all of those 
questions with numbers, but I would be happy to submit them for 
the record.
    But let me give you a sense of what the hedging situation 
is. In some States, you have good hedging programs that are 
programs that give utilities some incentive to enter into a 
hedging deal and look and enter into these agreements. In other 
places, you have hedging that basically is ``Heads you lose, 
tails I win,'' which is, if you make any money from hedging, 
that goes to the customers; if you lose any money, it comes out 
of your shareholders.
    Now, remember I said utilities make no money selling 
natural gas, so you start into this business by saying this is 
not something I can profit from or gain money from, and so 
hedging is about handling risk, and if you are going to do 
something that involves handling risk, you have got to give 
someone the incentive to take that risk.
    So we favor increased use of hedging. To answer your 
question, we favor the increased use of hedging, and I think 
what we are going to see to see this winter is a lot of public 
utility commissions reviewing their hedging policy. A lot of 
them, typically, utility commissions tend to be pretty 
conservative, and they hear ``hedging'' and that sounds wild 
and risky. I think a lot of people in the financial community 
would say the risky thing is not hedging, and it took higher 
gas prices to get a focus on that.
    Mr. Stearns. Do you know the percentage of gas utilities 
that take advantage of this tool?
    Mr. Cooper. It is not allowed in many States, and the 
States where it is allowed, I think most the utilities do take 
advantage of it. But I will check, and if we have those 
figures, I would be happy to submit them for the record.
    Mr. Stearns. In your testimony, you state that there will 
be adequate storage levels for this year. However, EIA 
estimates that the aggregate levels of storage are about 10 
percent behind the 5-year average. Please explain this apparent 
discrepancy.
    Mr. Cooper. I agree with the EIA numbers. Our own numbers 
show we are running about 10 percent below the 5-year average. 
However, that is an average. We project at this point that we 
will have as much gas in storage as we had as we entered the 
1996-1997 winter heating season. That was a pretty cold winter. 
We came out of that heating season with still quite a bit of 
gas in storage.
    As I said earlier, our companies are in the reliability 
business. Their job is to get gas to customers. Because they 
don't make any profit on buying gas, they have no incentive to 
try to not buy enough gas, not supply gas to customers; and in 
repeated conversations with our customers, with our members, we 
believe that as we have in all the past years, we will continue 
to provide enough gas.
    Storage, by the way, is about 3 trillion cubic feet of 
natural gas when it is filled, and this country consumes about 
23 trillion cubic feet a year.
    So it is, in some places, a very important part of the 
market on some cold days; in other places, it is not nearly as 
important. It is one tool that is available to utilities for 
providing for their customers.
    Mr. Stearns. Mr. Santa, you indicate that there are no 
shortages. Is that true?
    Mr. Santa. That is right.
    Mr. Stearns. There are no shortages?
    Mr. Santa. That is correct.
    Mr. Stearns. You said 18 months ago we could have 
identified this problem, and it would have helped us, right?
    Mr. Santa. Yes.
    Mr. Stearns. How could we have identified it?
    Mr. Santa. Right then, Mr. Stearns, the price of product on 
a world scale basis was outrageously low. It was much, much, 
much too low.
    Mr. Stearns. How do you know it might not go lower?
    Mr. Santa. Well, even where it was around at around $10 a 
barrel, give or take----
    Mr. Stearns. It couldn't go lower?
    Mr. Santa. [continuing] it was roughly the equivalent of 
selling Ford Tauruses for $638.
    Mr. Stearns. Are you saying anytime it goes to $10 a 
barrel, that is the breaking point?
    Mr. Santa. When the arrow gets down that low--let's look at 
it this way: At $10 a barrel, the end-users are delighted and 
the producers are in the dumps. At $40 a barrel, the producers 
are real happy and the end-users are in the dumps.
    Mr. Stearns. Right.
    Mr. Santa. Those are the two extremes, and that is just 
about the way it goes.
    You know where we are heading for; $25, $26, $24, $23, $25 
a barrel, plus or minus, is where it is going to be. But the 
thing is, the reason I say about that $10-a-barrel thing, there 
is such a heavy disincentive to stop drilling wells, to stop 
producing product, to stop exploring that you have got to know 
that the next thing that will come is a shortage, because 
demand is not going to go away.
    Mr. Stearns. Do you folks agree with that? Do the rest of 
you agree with that----
    Mr. Lindahl. Yes.
    Mr. Stearns. [continuing] pretty much?
    Mr. Cooper, I think it was you that said that the cost of 
energy consumption is going down in houses?
    Mr. Cooper. Yes.
    Mr. Stearns. Isn't that just because there has been a mild, 
mild winter?
    Mr. Cooper. No, no. It is certainly the warmer winters, but 
comparing 1985 to today, the amount that the American family 
using gas heat spends of their disposable income to heat their 
home, in 1985 it was 4.5 percent of disposal income, today it 
is 2.3 percent. This winter, with the increase in gas prices, 
we are looking at maybe it will be around 3 percent.
    Sure, a warmer winter is one factor, but the major factors 
are just squeezing efficiencies and savings both in appliance 
efficiency and home efficiency, and cost-cutting in the 
pipeline and distribution, and just all up and down the lines 
basically. You know, we often don't talk much about energy 
efficiency, but there have been real savings. In some ways, it 
hurts our members because the average residential home uses a 
lot less gas than they did in prior years. But that is the 
reality.
    Mr. Stearns. Mr. Lindahl, we in Congress sometimes talk 
about alternative sources of energy that can be developed to 
reduce the demand on petroleum. Do you think that is actually a 
real thing, or are we just talking in the wind here?
    Mr. Lindahl. I personally think, in my lifetime, in my 
children's lifetime, you know, natural gas and oil are going to 
be the fuels that provide the majority of the energy. We sure 
ought to be working on renewables and solar, but those things 
take higher prices to develop.
    Mr. Stearns. What about ethanol or--I don't know--coal and 
coming up with a new way?
    Mr. Lindahl. Again, natural gas is U.S., it is efficient, 
it is clean; it is a fuel of the future, and we need to develop 
a national energy policy around natural gas.
    Mr. Stearns. So you don't see any alternative energy in the 
next 50 to 100 years, 50-60 years?
    Mr. Lindahl. The majority will be provided by natural gas 
and oil, with small amounts by renewables and others.
    Mr. Stearns. In the first panel, we were talking about the 
Strategic Petroleum Reserves and what the administration is 
going to do. I don't know if this has been asked, Mr. Chairman, 
but do you think that there should be, long term, a strategic 
gas reserve?
    I mean--they are building something in New England, but I 
mean, should there be a national strategic gas reserve? I 
assume you don't think so.
    Mr. Lindahl. Well, let's put it in context. The strategic 
oil reserve is a 40-day supply.
    Mr. Stearns. Right.
    Mr. Lindahl. We are releasing 36 hours at 30 million, and 
Saudi Arabia has a 200-year supply of oil at current 
production, so you have to keep that in perspective.
    Mr. Stearns. So it is piddly.
    Mr. Lindahl. It is a rounding number in our energy 
consumption, and we lose sight of 36 hours in supply. It is a 
short-term ``too late, too little.''
    Mr. Stearns. It sounds like just psychological then.
    Mr. Lindahl. It is.
    Mr. Stearns. So it would make no sense to do a strategic 
gas reserve then, either?
    Mr. Evans. As far as natural gas storage, the free market 
is working there. There is a tremendous amount of silo/dome 
storage and some reservoir storage that is being developed in 
the United States now. So it is being done by the energy 
industry.
    Mr. Stearns. The private sector.
    Mr. Lindahl. One other comment: I would point out that I 
think in Alaska, with 100 trillion cubic feet of proven gas, we 
have got a strategic gas reserve; we just can't get to it.
    So I think we have one. We need the government to let us 
get that gas down to the Lower 48.
    Mr. Stearns. Mr. Chairman, my last question of Mr. Lindahl 
then is, whether it is offshore or onshore, the environmental 
community has made it very difficult to get to these resources. 
What could we, as Members of Congress, do to break through this 
logjam? Or what concerns should we have to both protect the 
environment, but get at these resources?
    Mr. Lindahl.  I think, you know, today one individual can 
stop us drilling for several years for any reason, and we need 
to change the environmental laws so that we coexist. Many of 
the environmental groups do not want us ever to drill again 
anywhere in the United States, for any reason; and they stop us 
and slow us down, and it is very costly.
    Mr. Stearns. They want us to go back to wood?
    Mr. Lindahl. No, they don't want you hugging the trees, 
touching the trees either. So I mean, that is a real problem. 
We have people who say coexistence can't occur. I mentioned to 
you, in Alaska we developed a 40,000-acre field on 100 acres, 
one-fourth of 1 percent, we found that we can coexist. Our 
record for the environment is stellar as a producer.
    Mr. Stearns. Would you say that is 1,000th of--what is the 
percent of that 40 acres on the 40,000?
    Mr. Lindahl. It is one-quarter of 1 percent of the surface 
acres we used to develop a 40,000-acre field. So we did that 
through horizontal drilling, and through pad drilling and 
developed a giant oil field in Alaska. It is coming on the 
fourth quarter, and next year it will make 88,000 barrels a day 
for new oil for the U.S., but the environmentalists don't want 
us ever drilling a well anywhere in Alaska for any reason.
    Mr. Stearns. Well, I know the chairman and I are certainly 
on your side.
    Thank you, Mr. Chairman, for a good hearing.
    Mr. Evans. Could I add one thing there?
    Mr. Barton. Yes, sir.
    Mr. Evans. In addition to the environmental permitting on 
the drilling, we also need focus on the permitting of 
pipelines. The environmental costs of permitting and building a 
pipeline are probably over 30 percent of the costs associated 
with putting a new pipeline in the ground. That is an area of 
concern.
    Mr. Stearns. And going up?
    Mr. Evans. Yes, absolutely.
    Mr. Barton. Let me ask a question of you, Mr. Madden. You 
didn't get asked a question so I want to ask a question to you 
so you don't go home and feel unloved this afternoon.
    Mr. Madden. Okay. I will be loved.
    Mr. Barton. Do you believe that some of these distributed 
generation devices and legislative vehicles that we have up 
here, if we had that, would--you know, you deal basically with 
the Federal Government and the military, but if we had some of 
that in statute, would that help the average customer, the 
average homeowner, better manage their energy needs?
    Mr. Madden. I believe so. If you take a look at some of the 
sites that we are currently managing like at Fort Bragg, it is 
the fifth or sixth largest city in North Carolina. So, inside 
the fence, we are dealing with 5,000 residential units.
    So absolutely.
    Yesterday, coming from Luke Air Force Base, where in 
essence 55 percent of their utility bill is demand charges, in 
that sense if we could do some distributed generation and do 
some peak shaving, we reduce that cost significantly, 
absolutely.
    Mr. Barton. Well, I want to thank this panel. You have been 
excellent. Not as much political turmoil over your testimony, 
so we didn't quite have the TV cameras and some of the 
political rhetoric that we had this morning, but what you are 
saying is, in some ways, more important because it is real 
world, and it is exactly the kind of information that the 
Congress and the executive branch need to make policy 
decisions.
    The Chair would ask unanimous consent to keep the record 
open for any opening statements of members that were not 
present this morning, and also so that we can submit questions 
for the record to these witnesses and the prior panel. Is there 
an objection to that?
    Well, hearing no objection, that is so ordered also.
    We would also ask unanimous consent to put Secretary of the 
Treasury Summers' memo into the record. I assume that has been 
approved? Do you know? You don't know?
    Well, hearing no objection, that is so ordered also.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T7634.060
    
    [GRAPHIC] [TIFF OMITTED] T7634.061
    
    Mr. Barton. This hearing is adjourned.
    [Whereupon, at 3:10 p.m., the subcommittee was adjourned.]

                                
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