<DOC>
[109 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:27031.wais]
S. Hrg. 109-398
VOLATILITY IN THE NATURAL GAS MARKET:
THE IMPACT OF HIGH NATURAL GAS PRICES
ON AMERICAN CONSUMERS
=======================================================================
HEARING
before the
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
of the
COMMITTEE ON
HOMELAND SECURITY AND
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
FEBRUARY 13, 2006
__________
FIELD HEARING IN ST. PAUL, MINNESOTA
__________
Printed for the use of the Committee on Homeland Security
and Governmental Affairs
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COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia
Michael D. Bopp, Staff Director and Chief Counsel
Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel
Trina D. Tyrer, Chief Clerk
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
NORM COLEMAN, Minnesota, Chairman
TED STEVENS, Alaska CARL LEVIN, Michigan
TOM COBURN, Oklahoma DANIEL K. AKAKA, Hawaii
LINCOLN D. CHAFEE, Rhode Island THOMAS R. CARPER, Delaware
ROBERT F. BENNETT, Utah MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia MARK PRYOR, Arkansas
Raymond V. Shepherd, III, Staff Director and Chief Counsel
Leland B. Erickson, Counsel
Jay Jennings, Senior Investigator
Elise J. Bean, Minority Staff Director and Chief Counsel
Mary D. Robertson, Chief Clerk
C O N T E N T S
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Opening statements:
Page
Senator Coleman.............................................. 1
WITNESSES
Monday, February 13, 2006
Lucille Olson, St. Paul, Minnesota............................... 6
Deidre Jackson, St. Paul, Minnesota.............................. 7
LaRaye Osborne, Vice President, Environment, Health and Safety,
Cargill, Incorporated.......................................... 8
Kathleen O'Brien, Vice President for University Services,
University of Minnesota........................................ 11
LeRoy Koppendrayer, Chairman, Minnesota Public Utilities
Commission..................................................... 18
Edward A. Garvey, Deputy Commissioner for Energy and
Telecommunications, Minnesota Department of Commerce........... 20
James Wells, Managing Director, Energy Team, Government
Accountability Office.......................................... 29
Susan J. Court, Director, Office of Market Oversight and
Investigations, Federal Energy Regulatory Commission,
accompanied by Stephen J. Harvey, Deputy Director, Office of
Market Oversight and Investigations, FERC...................... 31
Alphabetical List of Witnesses
Court, Susan J.:
Testimony.................................................... 31
Prepared statement........................................... 116
Garvey, Edward A.
Testimony.................................................... 20
Prepared statement with attachments.......................... 68
Jackson, Deidre:
Testimony.................................................... 7
Prepared statement........................................... 44
Koppendrayer, LeRoy:
Testimony.................................................... 18
Prepared statement with attachments.......................... 51
O'Brien, Kathleen:
Testimony.................................................... 11
Prepared statement........................................... 48
Olson, Lucille:
Testimony.................................................... 6
Prepared statement........................................... 43
Osborne, LaRaye:
Testimony.................................................... 8
Prepared statement........................................... 45
Wells, James:
Testimony.................................................... 29
Prepared statement........................................... 90
EXHIBITS
1. GNatural Gas Costs Around The World.......................... 123
2. GHenry Hub Spot Price Volatility--Natural Gas Prices Have
Been Increasing Since 2002..................................... 124
3. GProduction Has Not Responded Strongly to Increased Drilling. 125
4. GEnergy Market Oversight and Enforcement: Accomplishments and
Proposal For Enhanced Penalty Authority, prepared by the Staff
of the Federal Energy Regulatory Commission, Department of
Energy, March 2005............................................. 126
5. GStatement for the Record of Lori Cooper, St. Paul, Minnesota 155
6. GStatement for the Record of The Honorable Nora Brownell,
Commissioner, Federal Energy Regulatory Commission, Department
of Energy...................................................... 156
7. GStatement for the Record of Joseph A. Carrabba, President
and Chief Operating Officer, Cleveland-Cliffs, Inc............. 160
8. GLetter from Edward A. Garvey, Deputy Commissioner, Minnesota
Department of Commerce, to the Permanent Subcommittee on
Investigations, regarding spot market purchasing practices of
Minnesota's regulated natural gas utilities.................... 164
VOLATILITY IN THE NATURAL GAS MARKET:
THE IMPACT OF HIGH NATURAL GAS
PRICES ON AMERICAN CONSUMERS
----------
MONDAY, FEBRUARY 13, 2006
U.S. Senate,
Permanent Subcommittee on Investigations,
Committee on Homeland Security and
Governmental Affairs.
Washington, DC.
The Subcommittee met, pursuant to notice, at 8:30 a.m., at
the James J. Hill Reference Library, 80 West 4th Street, St.
Paul, Minnesota, Hon. Norm Coleman, Chairman of the
Subcommittee, presiding.
Present: Senator Coleman.
Staff Present: Leland Erickson, Counsel, Andy Burmeister,
Luke Friedrich, Bill Huepenbecker, Carl Kuhl, Shain Bestick,
David Bowell, Tom Steward, Gary Wertish (Senator Dayton).
OPENING STATEMENT OF SENATOR COLEMAN
Senator Coleman. This hearing of the Permanent Subcommittee
on Investigations is called to order. I'm going to welcome
everybody here. Mother Nature has provided a nice setting for
us today, it's cold outside, and we had a relatively mild
winter, but we can't escape it forever and we're seeing it a
little bit today and we'll see it later in the week.
Let me note that Senator Dayton had intended to be here, in
fact I spoke to him last week, he was very much looking forward
to being part of this conversation. I believe he got stuck in
DC, never made it back, there was a big snowstorm there, so
we'll have this hearing today without him. I know his staff
member, Gary Wertish, is around. Gary, thank you, and please
let Senator Dayton know I appreciate the opportunity to work
with him and we will follow up with what comes out of this
hearing.
Let me thank everybody, by the way, for attending today's
hearing. We've all seen the news reports about spiking prices
of natural gas over the last few months. These spiking prices
have put businesses in jeopardy and burdened families with
significantly higher heating bills. The tragedy is that many of
the folks who are suffering most in our community are the most
vulnerable, and today hopefully we'll put a human face on the
impact of high energy costs.
Take the story, for instance, of Lori Cooper, who cannot be
with us today. She's a working professional, wife and mother of
a 21-month-old baby. We were supposed to have the hearing on
Friday but because of scheduling conflicts in Washington, we
were stuck in Washington on Friday, we had to reschedule and
she couldn't make it today, but she told us her story. She
lives in St. Paul, struggling to make ends meet. Things got
even worse when Mrs. Cooper's husband lost his job and was
diagnosed with cancer, had to scrape by on her salary alone.
Even though they received an energy assistance grant from the
government, paying off the heating expenses has became a great
difficulty. For instance, paying last year's winter heating
bills took months and months and, according to Mrs. Cooper,
``it took us all summer to pay it off.'' Finally they got
caught up on last year's energy bill but then they got hit by
this year's heating bill, which was significantly higher, 37
percent higher. And for the Cooper family, a 37 percent hike is
a huge problem and it clearly put them in serious financial
jeopardy.\1\
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\1\ Exhibit No. 5 appears in the Appendix on page 155.
---------------------------------------------------------------------------
Unfortunately, stories like the Cooper family are all too
common. Again, while Mrs. Cooper could not attend this hearing
and detailed her story in written testimony, two other
Minnesotans will join us today to share their stories about how
price hikes in natural gas have real consequences on our
citizens.
Deidre Jackson is a single mother, a working professional,
a college student, I think she does it all, and has three
wonderful kids. Her heating bill was increased over 100 percent
this December versus last December.
Lucille Olson--Ms. Olson, thank you for being with us. She
is a senior trying to live with the high cost of health
insurance and prescription drugs and paying a heating bill that
represents 30 percent of her monthly income. When we were
chatting a little while ago she said, this is not just about
seniors, I think she was referencing Mrs. Jackson and others,
saying this is about everybody, we're all impacted by this.
One of my hopes is to take the testimony of folks like Ms.
Jackson and Ms. Olson and bring that back to Washington so my
colleagues understand the personal effect and put a human face
on this issue.
Since November I've asked the Permanent Subcommittee on
Investigations, which I Chair, to examine price manipulation in
the natural gas market. For decades the price of natural gas
ranged from $2.30 to $2.50 per million BTUs, British thermal
units. Since 2000, prices of natural gas have generally
fluctuated between $2 and $10 per million BTU. Energy market
projections estimate record high natural gas prices this
winter. We're seeing a bit of that. In December the NYMEX,
which regulates natural gas as a commodity, trading, natural
gas futures closed above $14 per million BTU. Later on I'll
have a chart on which you can see the steady rise in the price,
the cost of natural gas.
As prices have increased in recent years we have all heard
stories and allegations of price manipulation. We've heard
concern that suppliers are withholding gas supplies from the
market. To be fair, it is clear that the natural gas supply has
been limited by other circumstances. For instance, Hurricanes
Rita and Katrina caused more than a dozen natural gas
processing plants to go off-line and damaged gas pipelines.
This is particularly significant because about 20 percent of
all the natural gas produced in the United States comes from
the Gulf of Mexico. At the same time, oil industry profits have
nearly tripled over the 3 years to $87 billion last year. In
the first 9 months of 2005, the five largest oil companies made
$84 billion in profits. Just last week Exxon Mobile Corp.
reported that its 2005 earnings totaled $36 billion, which is
the largest annual profit ever for a U.S. company, according to
the Washington Post. The company's annual profit was up 43
percent from the year before. So we're seeing rising prices,
we're seeing record profits by oil, the oil industry, and I
have concern, I know that folks are concerned about paying
double what they were paying last year in heating bills.
As part of my concerns for market manipulation, I sent
Chairman letters to five of the top producers of natural gas
asking for information regarding their operations, profits, and
capital expenditures to increase domestic supply. In addition,
the Subcommittee has had multiple briefings with
representatives from each of these companies. At this point
it's important to note that some of the market factors that
have contributed to high and volatile natural gas prices in
recent years, we see them, we see the increase in demand
combined with declining supply, and this contributes to rising
natural gas prices.
Second, the Nation's ability to increase imports has been
limited, which has also contributed to high gas prices, and
we'll talk about that later in the hearing today. Market
manipulation may also be contributing to this problem. As a
result of my concern on that issue, I've asked the Subcommittee
to look into it. I've also asked the GAO to examine market
manipulation, and their results should be available in the
spring, so we're not going to get to the bottom of this today,
the issue is still out there. It is of concern, and we continue
to be involved in reviewing the impact of market manipulation.
Bottom line is, given the impact that higher prices are
having on Minnesotans and businesses, I will continue to look
at this issue. I think the key is to do what we can to ensure
that natural gas prices are fair and appropriate.
Mrs. Cooper's story and the stories we will hear from Mrs.
Jackson and Mrs. Olson show that increased costs take a toll on
the American families, businesses and the economy at large. In
Minnesota, natural gas is used to heat most homes and,
therefore, rising costs have directly affected most families.
The Department of Energy found that for 1999, 2000 and 2004,
residential heating prices rose an astounding 73 percent.
Prices should skyrocket even further, according to Department
of Energy forecasts, which projected that residential
households are expected to pay 41 percent more on average for
natural gas this winter. CenterPoint Energy, the largest
provider of natural gas in Minnesota, said that last year's
average customer spent $720 to heat their homes during the
months of November through March. This year officials at
CenterPoint indicated that the same customer could spend $1,070
by the time that winter is over. A quick calculation on my part
is it's almost a 50 percent, 40-something percent increase.
Again we've so far benefited from a mild winter, but Minnesota
winter is subject to change about every 10 minutes, and we're
seeing that this week.
I am concerned when families have to spend more money on
the heating bill and thus have to choose between paying for
heat, medicine, food, clothing, and the problem is not limited
to families. Natural gas prices paid by Minnesota's
manufacturers have increased nearly 150 percent since 1999.
It's a serious drag on our economy and hamstrings our
businesses trying to compete with countries where energy costs
are far less. In fact, the United States pays significantly
higher prices for natural gas than anywhere else in the world.
Even countries that produce no natural gas, like Japan, have
lower natural gas prices than the United States of America.
In response to concerns about the effect of high energy
costs, I continue to be a supporter of the Low Income Home
Energy Assistance Program, otherwise known as LIHEAP. This
program helps families struggling to pay their heating bills.
Most recently I cosponsored a motion in November to include
$2.92 billion in additional funding for LIHEAP. Unfortunately
this increase, this effort did not lead to an increase in
funding. As a result, I worked with Senators Snow and Collins
and demanded a firm commitment from the Senate leadership to
provide $2 billion in additional funding for LIHEAP, but we're
actually working on finalizing that right now. We had a bill
last week that would have added a billion dollars up front, and
we actually tried to what we call hotline that bill; in other
words, we've got a bill, it's been approved by leadership,
we've moved 2007 money to 2006 so we have the money this year,
and we worry about the extra billion for next year but we get
the money right away, and I think--I have to turn to staff--but
it's about $30 million for increases just for Minnesota, so
it's a significant increase, but we need it. It's not really--
it's making sure that we can make ends meet.
In light of the home energy crisis that families face, a
couple other things we can do. I'm coauthor of the Home Energy
Savings Incentive Act of 2005. This is really providing
legislation which provides tax breaks for homeowners making
energy upgrades. Upgrades may include simple items such as
using energy efficient light bulbs and weather stripping, or
more substantial items such as purchasing an energy efficient
furnace or windows. Residents can receive up to $5,000 in tax
credits that will immediate reduce heating bills resulting from
energy efficient upgrades. I will tell you I went through my
house and changed all the light bulbs. My wife is not sure that
we get the same amount of light, but I think we do, and it's
certainly more efficient. These efficiency upgrades are just
one part of the solution to our Nation's problem.
Another part of the solution is a necessary commitment to
conservation and use of alternative fuels. And I'm proud to
represent Minnesota, a State that really leads the Nation in
renewable fuels like ethanol, biodiesel, wind, energy derived
from livestock waste. Minnesota's work in renewable fuels makes
good sense because those homegrown, clean-burning fuels provide
cleaner air and water, promote greater energy independence,
lower our fuel costs and foster economic development through
jobs. The production and use of renewable fuels will always be
a top priority of mine, but it's really a top priority of
Minnesota, it's what we're good at. And the good news is the
President mentioned the need for renewable fuels in the State
of the Union, and my colleagues in Washington get it. Now we'll
be doing some hearings in the next couple weeks, Senator
Domenici, Chairman of the Energy Committee--I just spoke with
him last week--is going to be doing hearings on renewables, and
so we're going beyond the energy bill. We're going to have, I
think, a whole new phase of opportunities for renewables.
This morning we're going to focus on the recent price
increases of natural gas and the effect they have on American
consumers. As I mentioned earlier, we'll have the pleasure of
hearing from two Minnesotans, Deidre Jackson and Lucille Olson,
who will describe the effects of high prices on their lives. I
look forward to hearing their experiences and I want to thank
them for attending.
In addition, I look forward to hearing from Cargill,
headquartered right here in Minnesota, to understand how high
natural gas prices affect their business. Similarly the
University of Minnesota is going to discuss how the University
is dealing with high energy costs and what effects prices have
on the school's educational mission.
The bottom line is that we either pay as consumers directly
or indirectly. We pay directly for our bill; we'll pay
indirectly for the significant increases companies like Cargill
have and that it impacts us, or the University of Minnesota. I
presume there are choices being made between heating a
classroom and what you do with tuition or other things, and
you've got to heat the classroom, and as a result we get hit
one way or another.
I look forward to hearing from the Minnesota Department of
Commerce and the Minnesota Public Utilities Commission with
respect to any recent trends that are affecting residents
during this winter heating season, as well as any
recommendations that each agency may have.
Last, I'm eager to hear from the Federal Energy Regulatory
Commission with respect to the factors that are driving up
today's prices, their oversight in monitoring natural gas
prices and what the Commission is doing to ensure that prices
are just and reasonable.
And, finally, the Government Accountability Office is going
to talk about their analysis of the factors affecting prices,
including whether price manipulation is contributing to higher
prices, as well as what additional steps we can take to ensure
that prices are determined in a competitive and informed
marketplace.
I look forward to hearing from all our panelists this
morning. I know that we will learn a great deal today. I should
note, one other item, this hearing, as I said before, was
originally scheduled on Friday. Because of the Senate's
schedule, it votes, Senate had votes that day, we continued it
to today, so I do appreciate everyone for their flexibility in
adjusting their schedules to be available today.
I would like to now welcome our first panel of witnesses to
today's hearing. We will hear this morning from Lucille Olson
and Deidre Jackson, both residents of St. Paul. Additionally we
will hear from LaRaye Osborne, the Vice President of Cargill
based here in Minneapolis, as well as Kathleen O'Brien, Vice
President of the University Services at the University of
Minnesota. I appreciate your attendance at today's hearing and
look forward to hearing about the impact higher natural gas
prices is having on families and businesses.
I would like to note that for the record we had anticipated
additional witnesses on this panel but again, because of the
rescheduling from last Friday, two of our witnesses were unable
to rearrange their schedule. I'm sorry they were not able to
make it this morning but I would like to include their
statements in the record. I'm including the statement of Lori
Cooper, resident of St. Paul,\1\ and Joseph Carrabba, the
President and Chief Operating Officer for Cleveland-Cliffs of
Cleveland, Ohio.\2\
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\1\ The prepared statement of Ms. Cooper appears as Exhibit 5 in
the Appendix on page 155.
\2\ The prepared statement of Mr. Carrabba appears as Exhibit 7 in
the Appendix on page 160.
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Before we begin, pursuant to Rule 6, all witnesses before
the Subcommittee are required to be sworn in. At this time I
would ask you to please stand and raise your right hand. Do you
swear the testimony you're about to give before this
Subcommittee is the truth, the whole truth, and nothing but the
truth, so help you, God?
(Witnesses respond to oath affirmatively.)
Senator Coleman. Ms. Olson, we'll kind of go from this
order. We'll start with you and then we'll go to Ms. Jackson,
Ms. Osborne and then finish with Ms. O'Brien.
After we've heard all the testimony, I anticipate that I
will have questions for the panel, and your full testimony will
be entered into the record. I would like you to limit your oral
testimony, if you can, to 5 minutes. I don't know if we have a
clock here, but someone is going to have to keep track of time.
My staff will give me the high sign, and that's what this big
gavel is for, so we'll start with Ms. Olson.
TESTIMONY OF LUCILLE OLSON\3\
Ms. Olson. Good morning, Senator Coleman. My name is
Lucille Olson. At 75 years of age I am like many seniors who
are widowed and trying to live on fixed income with high costs
for health insurance and prescription drugs. My expenses for
the most basic needs are rising far faster than my income, and
my heating costs are no exception.
---------------------------------------------------------------------------
\3\ The prepared statement of Ms. Olson appears in the Appendix on
page 43.
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I married my husband, Ken, in 1959. We purchased our home
the following year. I have lived there ever since. Our home was
built in the early 1920s. Kenny was a Teamster with Murphy
Motor Freight Lines, and I worked for White Manufacturing when
we married. After our daughter was born I decided to quit my
job and care for my family. Several years ago the copper water
pipes in our home started leaking and we were told they needed
to be replaced. Ken and I took out a $50,000 home equity loan
and used the money to replace our water pipes and remodel our
home. After that Ken went blind from macular degeneration, and
I cared for him. Following a series of other health-related
problems Ken passed away last October. When Ken died, I lost
his pension and social security income, which had been $1,772
per month. I am now trying to live on my social security, which
is $1,022 a month.
I have a number of prescriptions that my doctor has
prescribed for several health problems I have. If I had no
insurance, my prescriptions would cost me $877 a month. My
health insurance under Medicare is $104 per month, and I am
required to make copays on my prescriptions, which range from
$6 to $25. My total copays can run as high as $101 per month,
so before I even buy food, make a mortgage payment and my home
equity loan, or pay my heating bill, I have already spent about
20 percent of my monthly income on my health needs.
Last December my heating bill for the month was $274, and
in December it was $366. That is a 34 percent increase and
represents over 30 percent of my monthly income. The $366 bill
does not include what I would have to pay if I were not
receiving energy assistance through Low Income Home Energy
Assistance Program.
Things have gotten so bad for me financially that I am
getting a reverse mortgage on my home so I can pay my bills. I
would prefer to leave my home to my daughter but there is not
any option for me. If you have any questions, I would be
pleased to answer them.
Senator Coleman. Ms. Olson, thank you. Thank you for your
courage coming today.
Ms. Olson. Thank you.
Senator Coleman. It's very important and it will have an
impact.
Ms. Olson. Thank you very much.
Senator Coleman. Ms. Jackson.
TESTIMONY OF DEIDRE JACKSON\1\
Ms. Jackson. Good morning, Senator Coleman, my name is
Deidre Jackson. I'm a single mother and a working professional
and also a college student. Each is really a full-time
profession and I am trying to juggle all three. I am like so
many other single mothers who struggle to raise their children,
work and attend school. I am sure you know raising children
properly is very expensive, and I am no exception in that I
want the best that I can provide for my children. I have three
children, ages 14, 8 and 6. I work full-time for the Minnesota
Department of Human Services as a health care claims
specialist. In my position I'm responsible for processing
health care claims for the medical assistance program. I also
attend the Metropolitan State University where I'm studying
business administration.
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\1\ The prepared statement of Ms. Jackson appears in the Appendix
on page 44.
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I bought my home on the east side of St. Paul in February
1998. It is an older home which was built in 1910. In the fall
of 1999 the Lead Program came and replaced windows in my home,
and also in the fall of 1999 the Weatherization Program came
and did some weatherization to my home, which included
insulation and weather stripping and some other things they
added to the windows and the other areas of my home that were
losing heat. Even with the improvements to my home's
insulation, my heating bill keeps going up. In December 2004 my
heating bill was $309. This December it was $649. My bill has
increased over 100 percent in spite of the energy efficient
improvements that I have made to my home.
I am already receiving energy assistance through the energy
assistance program, and my bill would be much higher without
the assistance. My December bill does not include over $2,000
that I owe Xcel Energy for past heating bills. I expect that I
will have to use most of my income tax refund to pay my heating
bill. I would like to do other things with my income tax
refund, like pay for my children's education where they attend
school and continue my education, which this is having an
impact on because I'm deciding if I should continue on in
college or if I should get a second job and pay for the costs
of keeping my home up, which is mostly the heating bill. Other
than replacing my furnace, I do not know what more I can do to
try and save money on my heating bill. I have asked EnergyCents
to come and do another energy audit of my home, which is
scheduled for February 22, I believe.
These increasing gas prices are really putting a squeeze on
my family, and I would like any help that you can provide to
help us with this at this time. Thank you, Mr. Coleman.
Senator Coleman. Thank you, Ms. Jackson, and, Ms. Olson,
thanks for putting a very personal face on the real impacts of
the choices that a mom has to make and the impact it has on
families. It's important and very helpful to me and, hopefully,
to my colleagues.
Ms. Osborne.
TESTIMONY OF LaRAYE OSBORNE,\1\ VICE PRESIDENT, ENVIRONMENT,
HEALTH AND SAFETY, CARGILL, INCORPORATED
Ms. Osborne. Chairman Coleman, my name is LaRaye Osborne,
and I'm the Vice President of Environment, Health and Safety
for Cargill, and we are headquartered in Wayzata, Minnesota.
Cargill is an international provider of food, agricultural and
risk management products and services.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Osborne appears in the Appendix
on page 45.
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We appreciate the opportunity to offer our thoughts on
natural gas prices and the impact they've had on Cargill's
operations, and we appreciate the diversity of the panel that
you have before us. Thank you.
My testimony will focus on three areas: First, our energy
requirements; second, our efforts to conserve energy and reduce
our reliance on natural gas; and, third, suggestions for
additional lines of inquiry that the Subcommittee might want to
proceed with.
First, allow me to give a picture of Cargill's energy
consumption. We consume about 65 million MMBTUs of natural gas
globally, approximately 50 percent of which is consumed in our
U.S. operations. Of the nearly 60 countries in which we
operate, North America is the highest cost gas region in the
world, with current prices hovering around $8.50 per MMBTU.
For this fiscal year, Cargill budgeted more than $1 billion
for energy purchases necessary to run our global operations.
Unfortunately, skyrocketing natural gas prices have negatively
affected our performance against that budget. In the United
States we've seen a 38 percent increase in natural gas costs
for the first 6 months of this fiscal year compared to the
first 6 months of the last fiscal year, and that amounts to
approximately $32 million in additional costs for natural gas
for our U.S. operations.
Increased natural gas costs have ripple effects throughout
our energy portfolio however. Natural gas is used to generate
electricity. In fact, the last 15 moderate-to-large-sized
electrical power plants built in the United States are gas-
fired generators. Consequently, at least in part as a result of
increased natural gas costs, our global energy electrical use
costs have increased 15 percent for the first 6 months of the
fiscal year compared to last year. As more and more natural gas
is burned for electricity production we believe that gas prices
will continue to increase for all consumers and that
electricity prices will follow suit.
Now let me describe our strategy for addressing these
costs. First, we set very aggressive energy conservation goals
for the company. In 2000 we set a goal to improve our energy
efficiency by 10 percent by the end of our fiscal year 2005. We
achieved that goal and we've set a new goal to improve energy
efficiency by yet another 10 percent by 2010. To support these
goals, $100 million, in addition to usual business unit capital
allocations, was made available for energy projects last fiscal
year, and that money was spent very quickly. Achieving these
goals is also supported by quarterly reporting of performance
against goals and the sharing of best practices across our
global operations. In fact, as we faced unprecedented increases
in energy costs early this winter season, our chairman and CEO
communicated directly with all U.S. based employees about the
need and opportunity for energy conservation at work, but also
what they could do to assist in managing their energy prices at
home.
The second aspect of our strategy relates to the use of
renewables. Currently 6 percent of our energy needs come from
renewable resources, or roughly twice industry average. We
established a goal of increasing that percentage to 10 percent
by the end of year 2010. In the United States we have several
examples of renewable energy resources being substituted for
natural gas use. Each of our beef processing plants has placed
covers over wastewater treatment lagoons. These covers capture
naturally occurring methane. This methane is then conditioned
and used in the processing plant boilers, displacing 21 percent
of the aggregate natural gas demand for these locations. In
addition, several of our oilseeds processing locations have
implemented similar projects, but they capture methane from the
landfills in the communities in which they operate, methane
that would otherwise escape into the atmosphere or be burned in
flaring systems that have no energy benefit. Finally, at our
operating locations we have developed and permitted the
capacity to switch from natural gas to biobased energy sources
like soybean oil or the animal fats that we produce. The
ability to optimize our energy dollars by switching to animal
fat and oils during these periods of peak natural gas pricing
saved Cargill more than $1 million in this fiscal year alone,
and we're only about 7 months into that fiscal year.
The third aspect of our strategy relates to committing
significant resources to switch fuels to those that are in more
abundant supply and at lower cost and to cogeneration. I'll
provide two examples.
Our wet corn milling plant in Blair, Nebraska represents
the largest single corporate capital investment in that State.
Cargill has invested more than a billion dollars in the plant
over the last 13 years and employs more than 460 individuals.
The plant produces high fructose corn syrup, ethanol, animal
feed and biobased plastics from the corn grown by local
farmers. Corn wet milling requires thermal energy to break down
the corn supplied by the farmers into its component parts. Our
existing boiler operates on natural gas. As those costs
continue to rise, the competitiveness of this plant is
threatened. Consequently, we recently decided to convert from
gas to coal as the primary fuel. The new boiler will utilize
the latest emissions control technology and provide us with an
affordable and safe source of thermal energy for the long term.
We also work hard to maximize cogeneration through the use
of combined heat and power systems. These systems at industrial
and commercial locations give the most bang for our energy
buck, generating both steam and power from the same fuel. On a
global basis we cogenerate 7 percent of our total electrical
demand, and in some locations we export power back to the grid.
While these systems are a proven technology, a majority of such
systems operate outside of the United States, and for Cargill,
cogeneration applications are some of our greatest
opportunities to improve energy efficiency, reduce the
environmental impact of our energy use and enrich our
communities.
I'll finish my testimony by responding to the
Subcommittee's request for Cargill's perspectives on addressing
the high cost of natural gas, and I'll touch on the supply side
issue first.
As the Permanent Subcommittee is aware, there are many
opportunities under discussion for increasing gas supply,
including the development of additional terminals and
distribution infrastructure for imported liquefied natural gas
and expanded exploration and drilling for natural gas along the
Outer Continental Shelf. Each possibility that has been subject
to public discussion has pros and cons, and Cargill is focusing
on managing its own energy demands optimally and is not taking
a position on these difficult issues of public policy. We trust
that Congress, which has the broadest national perspective,
will appropriately balance all of the issues and interests in
determining how to address supply issues.
We do, however, encourage Congress to consider means for
facilitating use of renewable fuels and cogeneration. The
flexibility to use renewable fuels as an alternative gas during
peak price periods usually requires changes to air emission
permits. These permits are usually issued by individual State
or regional authorities under the umbrella of the Federal Clean
Air Act. Our experience is that the technology for timely fuel
switching exists and its positive impact on air emissions has
been demonstrated. Consequently, we would encourage the Federal
Government to partner with State and regional environmental
authorities to streamline the process by which these flexible
permit features are authorized. Cargill also believes that
Congress has a role to play in encouraging greater use of
cogeneration applications to improve the energy efficiency of
the economy overall. Opportunities include creating incentives
for public utilities and transmission system operators to
purchase and introduce into the grid that excess electrical
energy that's generated by these investments. There's also
opportunity for accelerated depreciation for cogeneration
equipment investments and for equipment converted from natural
gas use to other energy alternatives.
With that, Senator Coleman, I'll close my remarks, and
thank you once again for inviting us to this hearing.
Senator Coleman. Thank you, Ms. Osborne, very helpful.
Ms. O'Brien.
TESTIMONY OF KATHLEEN O'BRIEN,\1\ VICE PRESIDENT FOR UNIVERSITY
SERVICES, UNIVERSITY OF MINNESOTA
Ms. O'Brien. Thank you, Senator Coleman. Good morning and
thank you for the opportunity to be present today. I'm Kathleen
O'Brien, Vice President for University Services at the
University of Minnesota. I'm responsible for the nonacademic
campus operations, including utilities, on the Twin Cities
campus and four campuses and research centers of the University
across the State.
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\1\ The prepared statement of Ms. O'Brien appears in the Appendix
on page 48.
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To give you some context, the University of Minnesota has
more than 800 buildings, encompassing 28.5 million square feet,
more than downtown Minneapolis and St. Paul combined. The
Univesity of Minnesota is large, old and complex, with every
type of building from classrooms and offices to athletic
venues, research labs, clinics, animal barns and greenhouses.
The University manages its utility operations to maximize
our performance on these three principles; reliability,
environmental stewardship, risk and cost control. I would like
to briefly address how the University is working on each of
these principles and then respond more specifically to the
challenges the University faces with the volatility of natural
gas prices.
Reliability. We are a 365 24/7 operation. We are
responsible to make sure the daily teaching continues to our
student enrollment of over 60,000, that critical and central
research of over $500 million annually is protected and
secured, and the life critical care at the University-Fairview
Hospital and Clinics is maintained. In short, we cannot fail.
To this point we have made significant utility infrastructure
investments, are updating our utility master plan, and are at
work with our energy provider partners to secure and maintain
reliable service.
With regard to environmental stewardship, the University
achieves environmental stewardship through energy conservation,
efficiency in production, and the use of alternative energy
sources. The University has conducted ongoing energy
conservation programs for many decades. These efforts have
ranged from installing high-efficiency fluorescent lighting
systems, such as you did in your home, to a campus-wide
conservation program aimed at changing behavior patterns, to
the installation of direct digital controls that allow
equipment to be controlled from a central campus site. The
University has made significant investments to utilize more
efficient boilers that have reduced the amount of fuel we need
in order to heat the campus. In tandem with our energy
conservation efforts, since 1994 the University has been able
to reduce the number of BTUs per gross square foot required to
heat the campus by over 20 percent. The University is working
very hard to utilize alternative energy sources to meet utility
needs. In the late 1990s, when the University renovated its
major steam plant in southeast Minneapolis, it installed a
Circulating Fluidized Bed boiler that is capable of burning
multiple fuel types. After 4 years of work, this spring we
anticipate approval of a major permit amendment that will allow
us to burn oat hulls, the residual from Cheerios, a biofuel
that is currently priced substantially lower than current
natural gas prices.
Last spring the University of Minnesota-Morris campus
completed a wind turbine that is now producing wind energy.
This turbine is reducing the cost to the campus for electricity
overall and the amount of fossil fuel-based energy. Also at our
Morris campus an initiative is underway to establish a biomass
gasification system that will focus on using corn stoves as the
primary fuel source to provide up to 75 percent of the heating
and cooling loads for the campus from alternative energy. It is
intended to reduce the use of natural gas and fuel oil as the
campus energy source.
As a University system, we have an overall utility budget
of $150 million. On the Twin Cities campus for heat and
electricity alone we are budgeting nearly $90 million to
purchase and deliver these utilities for our next fiscal year.
The Twin Cities campus generates its own steam heat through two
plants for close to 22 million square feet of building space.
Annual steam production is enough to heat and cool 55,000
average homes, or the equivalent of the city of St. Cloud.
Your concerns regarding natural gas prices are especially
important to the Twin Cities campus, as it is currently
required by permit to produce 70 percent of its steam plant
BTUs through the burning of natural gas. Therefore, we have
been significantly impacted by both the overall increased costs
for natural gas and the great volatility in the markets. As
recently as June 2003, the University purchased natural gas for
$3.12 per million BTUs. Contrast this with projections this
winter that went as high as $15 dollars per million BTUs.
For the current fiscal year, the Twin Cities plant has
spent $12.3 million to purchase natural gas. Because of the
great volatility in pricing, it was difficult to project our
actual final costs. For a point of reference, if the Twin
Cities campus needed to pay $1 more per million BTU for all of
its natural gas usage for a complete year, it would cost an
additional $2 million. Because of the efforts by the University
to conserve energy and buy smarter, we have limited our
expected cost increase next fiscal year to $4 million, roughly
a 1 percent increase in tuition.
How are we buying smarter? The University has developed a
team to monitor the energy market and to contract for natural
gas purchases in the future in order to lower our expected
costs and to increase price certainty for our planning and
budgeting purposes.
I've spoken this morning about the University's operations
and management of our principles; reliability, environmental
stewardship and cost controls. The University also has an
extensive research initiative sponsored by President Bruininks
on renewable energy and the environment, and you might want to
hear from those researchers at sometime in the future.
Thank you for your interest in this critical issue and its
impact on our State, its university and our communities.
Senator Coleman. Thank you very much, Ms. O'Brien.
To the entire panel, by the way, from the personal touch to
Cargill, I think we almost got a primer on various forms of
energy and energy opportunities, and listening to you, Ms.
O'Brien, I think we're also hearing about the future.
If we look at Exhibit 2,\1\ the chart that talks about
Henry Hub spot price volatility, really reflects probably what
you talked about. Going back, if you look from 1995, look at
around 2000, you're looking at around $2 per million BTUs cost
of natural gas, and what you see, and there are a couple of
spikes, one of them is Katrina--I think you can see that--and a
couple of other spikes. But what you notice is even with the
spikes in coming down, even coming down it's still rising, so
it's not settling to where it was. It spikes up, then drops a
little lower, spikes up, then drops down a little lower than
before it spikes up, and the concern clearly is, and we're
going to hear others talk about rising demand without rising
capacity, rising production, and so we can anticipate that. And
so to me it's very heartening just to listen to some of the
things that are going on in terms of renewables.
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\1\ Exhibit No. 2 appears in the Appendix on page 124.
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Out of curiosity, you talked about the Morris campus
producing wind energy, I think a 1.65 MW turbine, is a large
turbine. One of the concerns that I have about wind energy is
its capacity, can it really make an impact. Can you give me a
sense of what wind energy does at the Morris campus, how
helpful that is?
Ms. O'Brien. The wind turbine at the Morris campus provides
about 60 percent of the electricity needed on the Morris campus
today, so it has had a very significant impact on that campus.
Senator Coleman. And I think sometimes we underestimate the
impacts of that. That's a good object lesson to say that in
this facility the impact is significant. I would also note, Ms.
O'Brien, as we look to the future, as we look to the call from
Cargill and others to be looking at renewables--and Congress
will be doing that, my colleagues get it--but the University of
Minnesota has a unique role to play with, because of where we
are with renewables in this State, and I would anticipate that
the governor has talked about centers of excellence in terms of
dealing with Ford and some of the auto industries looking at
renewables, and I take it that the University would be ready,
willing, and able to play a major role in that?
Ms. O'Brien. Absolutely.
Senator Coleman. Ms. Osborne, as I said before, on various
forms of energy and energy opportunities, Cargill is almost a
primer. You talked about methane and getting energy out of
ethanol, you talked about gas to coal, cogeneration, biofuels,
etc. It's interesting, I had a chance to visit a dairy
operation, Haubenschild operation up in Princeton, Minnesota,
and they capture methane gas and use it to produce energy and
that's one little operation, but I take it you're looking at
that.
Ms. Osborne. We've done it at all of our beef processing
plants. In addition, we're trying to roll that opportunity out
to people in our value chain, our customers, who provide
products to our locations globally. It's simple technology.
Senator Coleman. What about the cost efficiency, one of the
challenges with renewables is in order to use wind production
you need the tax credits to really make it economically viable.
I'm wondering, as the cost of oil goes to $50, $60, and $70 a
barrel, does that have an impact on the cost efficiency of some
of these alternative fuels you're looking at?
Ms. Osborne. Sure it does. I talked about our ability to
switch fuels to, from natural gas to soybean oil when natural
gas prices spike up, and in making the decision to make those
switches we do look at the economics of the two fuel sources.
In a lot of the renewable work that we're doing we have some
advantage because the renewable feed stock hitchhikes into our
plants with the stuff that we actually process. So we have a
soybean or, excuse me, a sunflower plant in the Ukraine, for
example, we're burning the hulls while we're processing the
seeds. So we have a bit of an economic advantage in that sense,
we don't have to transport the stuff in. We don't have to buy
it.
Senator Coleman. One of the things that I've seen in my
travels around the State looking at ethanol operations, we're
seeing in southern Minnesota, I think in Albert Lea and some
other areas, you have ethanol operations and then you have some
of the byproduct of that now used to convert to energy, which
again in the past may not have been cost efficient. But if we
could, actually one of the other charts, if you could put
Exhibit 1\1\ up there--that's what I'm looking for--you also
mentioned about the cost in the United States, I think you said
the North American market, the costs are the highest in the
world. One of the things that we find--and this may not be your
expertise--that I find frustrating is in this chart we have
costs being $13, almost $14 per BTUs for natural gas in the
United States, and places like Japan, which don't have any
natural gas production, significantly less than half of that.
Do you have any--and I'm not an economist--but as you look at
the cost of natural gas in the world, can you give me kind of
Cargill's overview of what you see impacting that?
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\1\ Exhibit No. 1 appears in the Appendix on page 123.
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Ms. Osborne. I wish I could, I'm not an economist either.
I'm a lawyer who manages environment, health, and safety, so I
really am not competent in the financial issue.
Senator Coleman. I'm not going to push you, we'll have some
others to talk a little bit about that. I'm going to come back
perhaps to both Ms. Osborne and Ms. O'Brien--but, first, Ms.
Jackson. Ms. Olson, as I said, thanks for being here. I really
think it's important.
Ms. Olson, as I listened to you talk, I've got one of those
homes that was built in the early 1920s, great old homes, but
they cost to heat.
Ms. Olson. Yes.
Senator Coleman. So I listened just to your personal story
and I know that's a challenge. As I listened to what you
talked, you talked about 20 percent of costs for health, 30
percent heat, so you're talking about 50 percent of your income
is gone before you deal with food or anything else?
Ms. Olson. Yes, it is.
Senator Coleman. You've got 50 percent of your income going
to keeping warm and taking care of your health?
Ms. Olson. That's right. I try to keep the thermostat down
but I just can't, I can't take the cold. So I try to keep it
down as much as I can, so I try to save, but it doesn't seem
that it makes any difference.
Senator Coleman. And, Ms. Jackson, you talked about some
choices that you may have to make, which I find, I know it must
be difficult. You're a student, you want to advance in the
future, and now you're talking about whether you're going to
have to give that up in order to just take care of your family.
Both of you take advantage of the LIHEAP Program, is that
correct? Low Income Heating Assistance Program?
Ms. Olson. Yes.
Ms. Jackson. Yes.
Senator Coleman. Could you tell me how you became aware of
that, how you accessed that program?
Ms. Olson. Are you talking to me?
Senator Coleman. Both--either of you. Ms. Olson first, then
Ms. Jackson. Because I would like others who may not, who are
in the same position, I would like to get some information to
them about how they can, there's help available, and I just
want to figure out how you knew there was help available, and
how you connected with that help.
Ms. Olson. Well, I tried several times, several years ago
to try to get some help, because it was large then, but it
never was as large as it is now. And my husband then at the
time, or both of us, our income was $2,100 a month and--but my
health care for myself was $609 a month, because I do take a
lot of prescription drugs prescribed by my doctor. But they
didn't take that into consideration. They had their guidelines
and they didn't take into consideration that my husband was
getting $775 a month pension from Central States, he was a
truck driver. So you take $775, that was our total premium for
U-Care. We were living on approximately $1,300, and it was very
hard. Then I got some help from Catherine, and I talked to her
and I talked to a reporter.
Senator Coleman. Catherine being?
Ms. Olson. I don't know what Catherine's last name is.
Senator Coleman. Working with what group?
Ms. Olson. Oh, through Energy----
Senator Coleman. OK.
Ms. Olson [continuing]. Resource. And so then they sent me
out an application this year and when I took it in there, and
because I didn't know--my husband was in the hospital then and
I was still getting his $775 plus his social security, but my
income was $400, my social security was $433 a month, and I
didn't really know what to do. I called up to see if I could
get some help, and they said I had too many assets. And to me,
I don't know where the assets come, but I did have a policy on
my husband, a life insurance policy, and when he passed away
that was an asset. I had a few thousand dollars left of that.
But I did take my forms down, had them filled out, and they
helped me a lot, and then I had people that I talked to, and I
don't know what I would do without the help of Energy Resource,
because what the bills are now, I couldn't afford it. I would
have to give up something. But I did get on it, and I was
hoping that more people, elderly people, they don't know that
there's help out there. Most of the time they're turned down at
first, but a squeaking door gets attention.
Senator Coleman. You've got to stay at it. Ms. Jackson, who
did you connect with to get some help?
Ms. Jackson. I'm from Minnesota, so I'm very aware of the
help that Minnesota offers. So I knew where to go, I knew that
there was an energy assistance program for people that needed
assistance. I just knew, but it's very informal. They're on the
Internet, I know the energy assistance is, and they also sent
me an application this year because I was an applicant last
year.
Senator Coleman. I'm trying to get--is it Catherine Fair?
Ms. Jackson. Yes.
Senator Coleman. That's what I wanted to make sure, it's
Catherine. Ramsey Action, Ramsey Community Action Program is
for those--I just wanted to make sure this is RAP. When I was
mayor I worked with these folks a lot and they're very good. My
point being is that there are programs out there.
Ms. Jackson. Yes.
Senator Coleman. Ramsey County, through the county
themself, or the Ramsey County Action Program, and they were
the ones who helped you kind of work through the process,
figure out to get what you're entitled to, and I take it you
found that help to be positive?
Ms. Olson. Wonderful.
Senator Coleman. Ms. Jackson.
Ms. Jackson. Yes. Ms. Fair from the RAP program, she also
has called Xcel Energy for myself to explain to them my
situation so that they would not cut me off. She did this
around the end of September because the Cold Weather Rule was
not in effect at that time. So she has been very helpful.
Senator Coleman. Catherine, by the way I see her in the
audience. Catherine, you're with Ramsey County Action Program?
So if folks have questions afterwards, they can talk to her.
As I understand the community action program, they
administer the LIHEAP program throughout the State. So we get
the Federal money, we get it to the State, but then it's
administered at the local level. Thank you.
If I can just come back to Ms. O'Brien and Ms. Osborne,
just a little bit about where we go in the future with
renewables and what some of the opportunities are. Ms. Osborne,
you talked about a concern about a permitting process. Could
you amplify that a little bit?
Ms. Osborne. Yes, I can. Several years ago when natural gas
prices started to spike we decided it made some sense to look
at some of our locations that produce soybean oil or produce
animal tallow as a byproduct to see if those were suitable
substitutes for natural gas burning, and we worked with local
authorities to determine permitting requirements. We completed
the necessary air emission tests, and we were able to get
permits to introduce those fuels on a flexible basis when the
economics of natural gas dictated it. Perhaps we were lucky in
that the States that we were working with at the time were
ready for that kind of innovative thinking, but we're not
seeing that occurring consistently across the Nation, and we
think that this is an opportunity for the Federal Government to
take some initiative and examine the Federal Clean Air Act and
introduce more flexible measures that will encourage State and
regional authorities to step up and be courageous on these
sorts of opportunities.
Senator Coleman. And what I'm hearing you saying is if we
can do those things to prevent less barriers to moving into
renewables it would be helpful.
Ms. Osborne. Yes, very much.
Senator Coleman. Ms. O'Brien, I know you're not a
scientist, but could you talk a little bit about where you see
us going with renewables, what type of things that the U is
looking at? Where is the cutting edge of technology and what
can Minnesota add to it?
Ms. O'Brien. Senator Coleman, I would like to start out by
reinforcing the point that Ms. Osborne just made. It took us 3
years to secure the permit we expect in the next month for oat
hulls. Right now the PCA will grant a permit for wood and allow
us to burn many different kinds of wood, but for biofuels, we
need to seek a permit for an individual type of biofuel. That's
a lengthy process, and one that makes us less competitive in
the marketplace in other States or other nations in terms of
the use of biofuels, so I believe that this is a point that is
a very germane point to address.
Senator Coleman. I appreciate that, and I appreciate your
reiterating that, and particularly the way you phrase it, a
lengthy permitting process making us less competitive. It's not
just educational institutions, but for businesses, and for
America itself, so I appreciate that point and I will
certainly--I am very sensitive to it. Please continue.
Ms. O'Brien. With regard to, and I'll just speak briefly to
the President's initiative on renewable energy and the
environment. In the College of Biological Sciences, the
Institute of Technology, scientists are working together with
the private sector to really determine what fuel sources,
biofuel sources we have in Minnesota and how we might utilize
them, whether it's wind or biofuels in western Minnesota and
how we might actually transport those to the large population
centers. And as Ms. Osborne said, she wasn't a lawyer (sic),
I'm not a scientist, so I won't go any further than that. I'm a
historian.
Senator Coleman. Well, folks, historians in 20 years will
look back on the cutting edge. I just think there's great
opportunity. I've worked with the U, I worked with President
Bruininks on these issues, and Minnesota is in a unique place.
I think now we have the largest number of farmer-owned ethanol
coops in the nation. We're on the cutting edge of soybean
biodiesel technology, we're on the cutting edge now of coal
gasification, one of the first States looking at the creation
of a new coal gasification operation in northern Minnesota,
which will cut down on emissions and generate greater energy
out of a resource which we have in this Nation, I think a 250-
year supply. Wind energy, I think we pride ourself of being the
Saudi Arabia of wind in southwest Minnesota. So I think there's
great opportunity, and I know the U is really positioned to
help us take advantage of that, and I simply want to express my
thanks to you for that.
This panel has been very helpful. Again for the personal
stories I want to say thanks. For others out there, if you're
listening, check out the Community Action Programs, in Ramsey
County it's Ramsey Action. I think there are 38 such programs
like that around the State, they're very important. And to all
the panelists I want to say thank you.
With that we will now have our second panel. It's my
pleasure to welcome Leroy Koppendrayer, Chairman of the
Minnesota Public Utilities Commission, and Edward Garvey,
Deputy Commissioner of Energy and Telecommunications, Minnesota
Department of Commerce.
Gentlemen, I appreciate your attendance at today's hearing
and look forward to hearing your testimony, and particularly
interested to hear about any recent trends or issues that may
negatively affect Minnesotans during this winter's heating
season. I would also like to explore your recommendations and
solutions you may have with respect to the energy crisis and
the administration of the LIHEAP program.
As you're aware, witnesses before this Subcommittee are
required to be sworn. I would ask you to please stand and raise
your right hand. Do you swear the testimony you're about to
give before this Subcommittee is the truth, the whole truth,
and nothing but the truth, so help you, God?
(Witnesses respond to oath affirmatively.)
Senator Coleman. Thank you, gentlemen. Mr. Koppendrayer,
we'll have you go first, followed by Mr. Garvey. After the
testimony we'll turn to questions. Your written testimony will
be presented into the record in its entirety. I would like you
to limit your oral testimony to 5 minutes, and with that you
may begin.
TESTIMONY OF LeROY KOPPENDRAYER,\1\ CHAIRMAN, MINNESOTA PUBLIC
UTILITIES COMMISSION
Mr. Koppendrayer. Thank you, Senator Coleman. On behalf of
the other four Public Utilities Commissioners, also on their
behalf, I want to thank you for holding this hearing. And we,
as the commission, put together, as you've said, a statement
that's in the record. I'll go through and just pick some
highlights from that to probably discuss orally and stimulate
some questions, if you have those, perhaps.
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\1\ The prepared statement of Mr. Koppendrayer with attachments
appears in the Appendix on page 51.
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One of the issues that has already been talked about, the
use of natural gas for electric energy, is one of the main
concerns that concerns us as a commission, and I know that it
also concerns commissioners across the country because it's
being talked about at regional and national meetings such as
NARUC.
I've noted that natural gas will soon pass nuclear energy
as a base load energy. I personally think that's regrettable to
see natural gas as a, which is used for all the other uses that
we've just heard stated in the previous panel, to be--surpass
nuclear energy as a base load. And I appreciate, Senator
Coleman, your efforts in the Senate to help us resolve the
nuclear waste issue so that form of energy can go forward. We
appreciate that.
The Public Utilities Commission, one of the primary tools
that we use for ensuring all natural gas rate payers are paying
a fair price is an annual review of local distribution
companies, gas purchasing practices known as the Annual
Automatic Adjustment process, and in that we require a monthly
summary of the rate mechanism used to recover fuel costs, a
reconciliation of monthly rate mechanisms with the actual cost
of gas purchased, a report on fuel procurement policies,
including a summary of actions taken to minimize costs, and an
annual auditor's report and an annual estimate of future fuel
costs. Included in that, the purchasing practices of the fuel
companies which we audit, are the tools that they have is the
spot market, buying on the spot market, withdrawal of gas put
into storage during the summer, index price supplies and fixed
price markets.
We also have in the recent years encouraged hedging. Of
course, hedging is trying to bet against the weather and the
market and do a better job than buying all fixed costs or spot
price gas. While we encourage companies to do that, and that
can levelize some of those peaks that you show on that graph,
and mitigate some of the peak prices to the consumer, it also--
hedging has a cost. If you bet wrong and you have a warm
January, you're going to see that there's cost to the hedging.
And on the Commission we've been cognizant of that and want to
allow companies to pass those costs through as well; otherwise,
you can't have the good side and not pay some price for when it
doesn't go your way.
Another important tool that the Commission uses to protect
the consumer is the Minnesota's Cold Weather Rule. The Cold
Weather Rule is what you were alluding to earlier, and that is
no one can be disconnected between October 15 and April 15. If
a customer is subject to disconnect, the utility must provide
the customer with a Cold Weather Rule packet explaining
protections available and the sources of financial
weatherization assistance. If the utility and the consumer
reach a mutual agreement on a payment plan, the process is
over; if not, the utility customer can appeal to the Public
Utilities Commission, and during the appeal the customer is
provided heat until a decision is made. All household income
requirements are based on total household income and all
persons residing in the household, excluding amounts received
from energy assistance. The total household income must be less
than 50 percent of the State median income.
And you asked earlier about who informs people. One of the
things that the Public Utilities Commission requires is that
utilities are required to send the Cold Weather Rule
applications to each residential customer at the onset of the
heating season, which would be in late summer, early fall.
They're required to put in their billing a flyer telling folks
about the Cold Weather Rule. And you alluded in your questions
to CenterPoint Energy being one of the largest providers of
heating fuel. CenterPoint Energy, as you are aware, we had,
last winter, over a thousand customers that were not
reconnected as of December 15. CenterPoint Energy has since
revised their system of notifying customers. It has this past
fall and this winter, we believe, according to the reports that
we've gotten and the lack of complaints that we've gotten, has
done a far better job in notifying customers what their rights
are under the Cold Weather Rule.
Part of the problem that we became aware of was that
customers obviously are responsible for their heating bill, but
they were not responsible to pay their entire heating bill
before they were reconnected. What they were responsible for
was to be, enter into a payment plan with the utility, and that
payment plan, it's important to note, also in Minnesota, that
payment plan cannot exceed 10 percent of their income. So even
if there's an amount owed in arrears, when they enter into a
payment plan for this coming heating season, and the heating
season that we're in, that payment plan doesn't exceed 10
percent of their income.
We also, in the Public Utilities Commission, encourage
conservation, which is handled through Mr. Garvey's,
Commissioner Garvey's department, and we have entered into
agreements with all of the companies on distributed generation
connection, so that if they're using other types of generation,
biofuels, wind, etc., we have agreements with the companies as
to how those people using alternative renewable fuels would be
treated in their interconnection policy, how the metering will
be handled, and we just finished the last hearing this week, as
a matter of fact, on the last company to enter into an
agreement for distributed generation, so we encourage
conservation and renewable energy use.
I would note that if you get the handout that we put
together, Minnesota is first in its commitment to new wind.
Minnesota is first in its biggest commitment to new biomass. We
have the strongest commitment to renewables outside of electric
restructuring, and Minnesota ranks first. We were second in
renewable, in the renewable markets. We have the second largest
wind farm in the United States, and the most renewables as a
share of total electric sales were third only to Massachusetts
and Connecticut, and with that I'll conclude my comments.
Senator Coleman. Thank you, Mr. Koppendrayer. Mr. Garvey.
TESTIMONY OF EDWARD A. GARVEY,\1\ DEPUTY COMMISSIONER FOR
ENERGY AND TELECOMMUNICATIONS, MINNESOTA DEPARTMENT OF COMMERCE
Mr. Garvey. Mr. Chairman, Members of the Subcommittee, I
appreciate the opportunity to discuss with you the issues
surrounding the recent volatility and historic highs in natural
gas prices and their effects on Minnesota consumers. I want to
extend my sincere thanks on behalf of Governor Pawlenty and
Commissioner Wilson to you, Senator Coleman, for your
aggressive and continuing leadership in these kinds of issues,
especially securing additional LIHEAP funding. That kind of
funding is very important to Minnesota. It provides direct help
to those who are adversely affected by the high heating costs
that we are confronted with today.
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\1\ The prepared statement of Mr. Garvey with attachments appears
in the Appendix on page 68.
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The Department of Commerce serves four primary roles that
are of interest to the Subcommittee today. First, we're the
State's chief policy developer and advocate. We provide also
regulatory oversight and staffing for the Public Utilities
Commission, we are the State's energy office, which implements
the Weatherization Program, and we are the administrator of the
LIHEAP program.
Walking very quickly through some of those issues, Mr.
Chairman. The Department of Commerce closely monitors natural
gas prices and supply because of its roll as an advocate for
all natural gas consumers and the broad public interest in
matters before the Public Utilities Commission. After the
devastating events of Hurricanes Katrina and Rita, many
consumers were aptly concerned with how much natural gas would
cost them and if there would be enough gas available to get
through the winter. In November 2005, Minnesota customers were
paying an average of $12.02 per Mcf. Based on this increase in
price, the Department projected that the average heating bills
would be 70 percent higher than last winter. Luckily Mother
Nature has been kind to us this winter. Last month was the
warmest January since 1846 in the Twin Cities and the warmest
on record for International Falls and Duluth. As a result of
the lower demand and the recovering delivery capacity in
Louisiana, February natural gas prices in Minnesota are on
average $9.38 per Mcf, or $3 less. Based on price predictions
last fall, this appears to be very good news for Minnesota
consumers. However, it is important to keep in mind that the
heating season is not over, as you've already noticed, and as
this week's weather will indicate. Even with mild weather to
date and $9.38 gas, average heating bills in January are still
expected to be 30 percent higher than they were last year.
Responding to the historically high natural gas prices,
last November Governor Pawlenty announced his Heating Security
Initiative aimed as assisting customers most impacted by the
high natural gas prices. There are three components to this
initiative. First was to expand the Cold Weather Rule in order
to basically assure that no low income customer would be shut
off this winter by their utility. Six major utilities in this
State have joined in this agreement.
The second portion of the initiative was to provide greater
heating financial assistance to those in need. Governor
Pawlenty has infused the LIHEAP program with $13 million of
State funds. This is the largest contribution of State money to
the program in our history. That additional funding will allow
the Department of Commerce to serve an additional 26,789
households. In addition, because of the higher energy costs,
the Department of Commerce has increased the average assistance
amount households receive by 25 percent over last winter, so
that, on average, each household receives at least $500. That's
above an average of $400 last year.
The third component rounding out the Governor's Heating
Security Initiative is lowering utility bills through energy
conservation. Through the State's Energy Conservation
Improvement Program--CIP, as we refer it to--the Department of
Commerce has approved natural gas utility proposals to spend an
additional $2.1 million this year on energy conservation on top
of the $14 million that they are already expending. This, of
course, is an effort that I think you, Senator Coleman, pays a
lot of attention to, to your credit, through your Home Energy
Savings Incentive Act of 2005.
The fourth component, of course, of the Governor's Heating
Security Initiative is to lead by example, and through an
executive order he has ordered a 10 percent reduction of energy
consumption at the State's buildings.
The Department of Commerce reviews the regulated natural
gas utilities' charges to assure that they charge their
customers the same price that the utilities pay to gas
producers for the gas that they buy. Utilities only make profit
on the cost of operating their business. Normally these
business operations costs account for approximately 10 percent
of a customer's bill, which means the natural gas cost is 90
percent of that bill. Since the price of natural gas itself is
such a large portion of the customer's bill, we, working with
the Public Utilities Commission, are constantly reviewing
natural gas prices charged to Minnesota consumers by the State-
regulated natural gas utilities.
The Department's analysis is geared towards ensuring that
the utility is charging reasonable prices to its consumers. If
the Department finds an exception, it provides its analysis to
the Public Utilities Commission and recommends that the
Commission uses statutory authority, as Chairman Koppendrayer
has already indicated, to prevent unreasonable or imprudent
costs from being charged to customers.
Let me turn very quickly to the administration of the
LIHEAP program and Weatherization. To date, total State and
Federal LIHEAP funds available in Minnesota equal $101 million.
These funds are used to direct heating assistance, additional
funds in crisis situations, and furnace repair or replacement
for low income households. With this funding, it is projected
that the Department will serve 145,800 Minnesota households
with primary heating assistance. That's significantly up from
last year when we served 117,689 households.
The Weatherization Program provides assistance and informs,
as you've already heard from Deidre Jackson, the ability of a
household to come in and provide energy conservation steps.
Last year the total budget of that program, including State and
Federal funds, was $14 million, with $13 million of it spent
directly for homes, and we were able to provide assistance to
4,000 homes that were weatherized at an average cost of
slightly over $3,000.
To conclude, Mr. Chairman, high natural gas prices appear
to be here to stay, at least for the foreseeable future. We at
the Department of Commerce, working with the Public Utilities
Commission, and with you and with the natural gas utilities,
are diligent in using the tools at their disposal to provide
consumers with reasonable priced natural gas service. Congress
has already taken some steps on this issue with the passage of
the Federal Energy Policy Act of 2005. Also the President's
recent State of the Union address called for further energy
efficiency and innovation. We applaud these actions and are
ready to help achieve our common goals.
Let me make a couple recommendations that I have before I
conclude. First and foremost, the importance of a hearing like
this and the showing of Federal vigilance and congressional
vigilance and the Subcommittee's vigilance and, most
importantly, your vigilance, Mr. Chairman, to protect consumers
from market manipulation is very important. It is a national
issue, gas prices are set at a national level, and without your
oversight we at the States level are handcuffed.
Assuring adequate LIHEAP funding, you have been
aggressively working with that. We are very pleased to be
helping you do that, and very proud of your work on that.
Third, promoting aggressive energy conservation acts,
you've already taken a leadership role in that area. I think
continuing that and working with your colleagues in any way
that you can to increase those efforts is important.
And I think the fourth component, and you've already heard
testimony on that, is promoting the development and use of
renewable energies, particularly ethanol and biodiesel, and
perhaps some of those fuel switching options that you've heard
is very important because natural gas is priced shadowing
petroleum and a fuel switching for petroleum.
So, Mr. Chairman, those are the final thoughts that I have.
I hope I did that in the time to allow you enough time for
questions.
Senator Coleman. Thank you very much, Mr. Garvey.
Mr. Garvey, looking at the data that you've provided us, if
you're looking from the year 2000 through 2005, in 2000 there
were 110,000 households served by LIHEAP, 2004-05, 117,000. All
of a sudden this year it's 145,000. That's one of the largest
increases in quite a while. Do you have any explanation for why
there is such a significant increase in the number of
households needing LIHEAP this year?
Mr. Garvey. Mr. Chairman, the number of households who are
eligible for the Low Income Heating Assistance Program roughly
stays approximately the same at about 400,000 households. The
reason those numbers, as you've indicated, move is our ability
to provide assistance to them, which is directly related to the
amount of funding available. The reason we are able to fund and
provide assistance this year more than we've done in past years
is because of the funding that you've been able to secure to
fund the LIHEAP program, as well as the infusion of Governor
Pawlenty's $13 million.
Senator Coleman. So the needs are out there, it's really
just a question of whether the dollars can match the needs?
Mr. Garvey. Correct.
Senator Coleman. Mr. Koppendrayer, I think good news by the
way, you mentioned earlier in your testimony, you talked about
using natural gas for electricity, natural gas surpassing
nuclear in terms of providing for energy. I believe this year
for the first time, as of a couple weeks ago there were at
least five new permits nationally that have been applied for
for nuclear, and I think that number may even have doubled by
now, so I think one of the things that you're seeing is, and we
saw, certainly the last couple years, operations, including
Excel right in St. Paul, going from coal to natural gas, but
what I think the good news is--and that was all done since
environmental reasons certainly hit at the center of that--but
I think a lot of that was done before we saw these huge spikes
in prices, but the good news is is that there are, for the
first time, I believe, a number of new nuclear operations. We
still have the waste issue which is out there, but in addition
to that there's also some folks looking at some new technology
down the road that will limit that. Can you comment at all on
that issue?
Mr. Koppendrayer. Well, I think the short answer is we know
what to do with the waste, we know where to put the waste, we
just have to get the votes eventually to get the job done. The
new nuclear technology, of course, it includes recycling the
fuels that we have. It should not be considered a waste and put
in a geological repository and then blown up and left there.
It's a resource. And finally now we are starting to recognize
that's a resource. And in the recycling processes that are
being worked on now, the actinides are going to be left with
the uranium so that you don't get a pure plutonium, weapons-
grade plutonium. So the proliferation of nuclear weapons is not
a concern under the new process. And under the new process the
hundred-million-year half life could be brought down to 500
years, and of course it needs a whole lot less storage space
for the waste that's left over.
Senator Coleman. I know we're looking a little bit into the
future here, but that future is very real. Even my colleagues
get it. Can you give an estimate about how far down the road?
Are we talking 20 years, 30 years, or 15 years before we can
move to a situation where, in fact, that what is seen now as
waste really becomes a recyclable material that could produce
more energy?
Mr. Koppendrayer. The latest that I've seen in the trade
journals and meetings I've been at is it's 15 years that we're
looking at, probably 15 years.
Senator Coleman. And having a 16-year-old daughter, that 16
years is----
Mr. Koppendrayer. Went quick.
Senator Coleman. A blink of the eye, I can tell you.
Mr. Koppendrayer. But in other technology that we shouldn't
fail to mention that you've been a huge part of in Minnesota
that's coming, and the Public Utilities Commission approved $10
million towards the IGCC, the integrated combined cycle coal
gasification. You know that coal is the largest energy resource
that the United States has, and the key will be to using it in
an environmental friendly way as we can, and that is the huge
next step that we're going to be taking.
Senator Coleman. What's interesting about that is that a
few years when we forwarded the Minnesota project and we had a
loan guarantee in the energy bill, I think that was the only
coal gasification of the next generation. I believe in last
year's energy bill there were at least five coal gasification
projects nationwide and even more, so there are a number of
folks seeing what we've seen, but the good news is that I
believe we've been out in front in Minnesota on that technology
and are moving forward.
Let me ask you another question about spot markets. You
talked about buying in the spot market. Isn't that one of the
problems that we're facing, that consumers face, that when
folks buy on the spot market they're subject to these spikes in
prices?
Mr. Koppendrayer. Sure it is, but there's a phrase that I
like to use. When you're trying to contract for enough gas and
you're trying to hit the market right, and you're trying to do
that based on the weather, you use what we've come to call
random variables. You take all of these variables, you pick
from them and choose from them, and then you try to forecast
next year what's the weather going to be, and based on that
weather forecast how much fuel am I going to need, and a
forecast, well, you and I have both watched weather forecasts.
They're better every year but never perfect, and you can never
anticipate a year ahead, 6 months ahead, 3 months ahead where
that next spike is going to be in cold weather, and that's what
hits us really hard when you don't have enough on fixed
contract and you have to buy on the spot market.
Senator Coleman. But most of Minnesota's natural gas is
bought on the spot market, is that correct? It's not?
Mr. Koppendrayer. No, not most of it. Most of it is through
contracts.
Senator Coleman. OK.
Mr. Koppendrayer. And spot market is kept as minimal as
possible. But if you overcontract you're going to end up with
gas purchases that you don't need and you're going to pay the
price for that.
Senator Coleman. Mr. Garvey, what do you say to Minnesotans
who say that the folks out there are ripping us off, the cold
weather and prices are being gouged, they're going through the
roof, how do you respond to that?
Mr. Garvey. Mr. Chairman, thank you for that question. The
Minnesota utilities pass through to retail customers the
wholesale price that they pay. We at the Department of Commerce
make sure that they do that, that they don't make a penny more
on the retail cost than their wholesale charge. Working with
the Public Utilities Commission, we're very confident that is
exactly how that works.
The question then becomes the fairness and appropriateness
of that wholesale market price, and that's where Subcommittee
hearings like this and your vigilance and examination of the
wholesale marketplace is so important. We look at it. While we
don't see manipulation from our perspective, we have a very
narrow State perspective. We don't see the national
marketplace. What I now can say to that person, because of
Subcommittee hearings like this and because of examinations
that are going on by Members of Congress and our Federal
agencies, that they will make sure that those kinds of things
are not happening.
Senator Coleman. And we'll hear, right after you, FERC and
the GAO will talk a little bit about that. One of the things
you mentioned in your testimony, you talked about natural gas
prices kind of shadow some of the oil prices, and this whole
discussion of renewables says that if we can lessen dependence
on oil, Middle East oil, oil generally, that will have a
beneficial impact, even though natural gas is mostly
domestically produced. You see, though, the headlines scream
out about gas companies making huge, huge, huge profits, and
some of that profit, I presume, is generated from things that
happen in local gas stations right here in our community. Could
you respond, kind of shifting a little away from natural gas to
just the overall cost of the gas, has the Department looked at
the issue of price gouging when it comes to other energy
products, gasoline particularly?
Mr. Garvey. Mr. Chairman, thank you for that question. The
three energy sources: (1) Electricity, the Department of
Commerce and the Public Utilities Commission has extensive
regulatory review and authority over. (2) Natural gas energy
providers we have extensive regulatory review over. We have
little authority over the wholesale market of natural gas. (3)
When you move to petroleum, we have no regulatory oversight of
either the retail or the wholesale marketplace. Having said
that, the retail and the wholesale marketplace for petroleum is
aggressively examined by our States' attorney generals and
those folks.
And, the other thing you need to know, sir, in Minnesota we
always have, as a rule, some of the cheapest gasoline prices in
the country. I mean you drive around today, it's $2.07. And the
reason for that is that we have a very competitive retail
marketplace. We get most of our petroleum from Canada, we have
several very important local refiners, we have low gas taxes,
and we have ethanol and biodiesel mandates. When you put those
components together, gasoline is still expensive, but it's
relatively cheaper here than it is across the country.
Senator Coleman. We talked about--let me shift gears a
little bit--dealing with the Cold Weather Rule. There was an
action, and you made some references, Mr. Koppendrayer, I think
it was CenterPoint Energy. I believe that there was a concern
about willful and repeated violations of the Cold Weather Rule.
Is it your testimony today that those concerns have been taken
care of?
Mr. Koppendrayer. Mr. Chairman, as I mentioned, that was
last winter, and the complaints this winter are at a bear
minimum.
Senator Coleman. Can you tell us what happened and why it
happened?
Mr. Koppendrayer. Well, that's as varied as the people that
were affected, and there were a lot of people affected, as to
what they were told and what they weren't told. As I mentioned
earlier, everybody gets a flyer and everybody gets the rules as
to what apply to them. The difference comes in when they call
the company, for example, and say, I can't pay my bill and I
want to be reconnected, what transponds between, as far as an
oral conversation, and for the most part what came to the
surface was the main part of the problem was that the company's
representatives were telling the consumer that you have to pay,
you are responsible for your full bill, and that was true, they
were responsible for the entire bill. However, what didn't
immediately follow, or was not picked up by the consumer, is in
a payment plan you don't have to pay more than 10 percent of
your income, so here is a payment plan, and that wasn't clearly
explained to the consumers and there was a lot of confusion and
a lot of people weren't hooked up because they thought they had
to pay their entire bill before they could enter into that
agreement, which wasn't true.
And I understand that the Attorney General's Office, who
pursued this, and to enforce the rules that we have, entered
into a settlement with CenterPoint Energy for last year's
issues. But I have to say again, that hasn't been repeated this
year. And the other companies, we've all learned from that and
we've clarified the rules and we've clarified when it's
supposed to be sent, and other companies have learned from
that. We've clarified it for all the companies.
Senator Coleman. To both gentlemen--what's the single
biggest complaint that Commerce gets, Mr. Garvey, and what the
PUC gets from consumers regarding energy and energy costs? What
are folks worried about right now?
Mr. Koppendrayer. I got an e-mail from a former school
superintendent just the other day and what he said was, look,
in 2000 I paid this, in 2001 I paid this, and now in 2005 I'm
90 percent higher than in 2000. And it's not, the consumer out
there doesn't understand, or hasn't had the opportunity to
completely be informed of what Commissioner Garvey just said,
the companies here are passing, the distribution company is
passing through the wholesale cost of gas and not profiting
from that cost of gas, they're only profiting from the
distribution end of it. That's not understood.
As a matter of fact, I've never seen before this morning a
map like that. I'm going to get a copy of that, if I might, and
ask a lot of questions about why the United States is $13 and
Japan is $5, and Japan doesn't have natural gas and we do.
Senator Coleman. That's a question that a lot of my
colleagues asked and the next panel will touch on it, I hope.
Mr. Garvey, what about you, what are people complaining about?
Mr. Garvey. Mr. Chairman, the biggest complaints sort of
fall under the general rubric of the cost of their bills. And
if I may, Mr. Chairman, even though much of the winter season
is behind us--Punxsutawney Phil saw his shadow, so we're
supposed to still have 6 to 8 more weeks. More LIHEAP funding
will allow for us to provide greater assistance to a larger
number of families. Even the assistance that we can give, even
the increase of $500, is still significantly less than 50
percent of their total bill. We would be allowed to not only
serve more families but raise that amount. We would be able to
provide additional assistance to those homes, those homeowners
whose furnace blows out and has a crisis. We could provide
greater weatherization.
I want to just make sure we enforce what I think you
already know. Just because we're into mid-February, don't let
folks say we don't need to and let this issue go by, because
it's still very important. And just because spring is around
the corner, those bills will still be due. You've heard
testimony that they roll through the summer into next fall.
Senator Coleman. And I can assure you that we will be
moving very aggressively. And winter is not over. We're seeing
that this week, we'll see it next week, and coming from
Minnesota, winter may not be over in March, going into April. I
think even when we talk about mild winters, people forget that
it's, so if it's a mild winter, instead of being minus 10, it's
15 or 20 degrees. Well, you've still got to get another 45
degrees of heat into your house at prices that are a 100
percent higher than they were 5 years ago, double what they
were a year ago, 40 percent, whatever it is. For folks on fixed
and limited income, that's a big jump. I mean that's a big
hurdle to overcome. So I think even when we talk mild winter,
we forget the impact here. You've still got to get up to 60 or
65 degrees or you're not going to be healthy. So I am very
hopeful that when we get back we'll at least fill some of the
needs for this year, and there should be hopefully another
billion dollars that we'll be getting through the Committee.
I want to thank you for your testimony, and please tell
that to the Governor, too. Mr. Garvey, you laid out, in a way
it's a pretty simple but pretty basic formula; you've got to do
oversight, you've got to provide funding for LIHEAP. We forget
conservation. For folks who are listening, conservation,
conversation, conservation. Whether you're Cargill or U of M or
a single mom, there are things we can do in conservation, or
State offices. It makes a difference. And then renewables,
which the good news is that we will have another energy bill,
and my colleagues are getting that renewable is going be a big
part of it.
I tout the story of Brazil, fifth largest country in the
world, half the population of Latin America. At the end of
2005, I think they were not dependent on any foreign oil. Sixty
percent of the new cars in Brazil run on flex fuel engines,
they can run on 100 percent ethanol or gasoline, and the
technology--is it expensive? The largest car manufacturer in
Brazil this year I think is General Motors. So it's technology
we have that can go a long way, so I think we're moving forward
in the right direction.
I appreciate your testimony. Mr. Koppendrayer.
Mr. Koppendrayer. If I might, Commissioner Brownell from
FERC was here on Friday and left her testimony with me and then
I gave it to your aide. I don't know if there is somebody from
FERC here this morning, but her testimony is here.
Senator Coleman. I appreciate that, and we're going to--
clearly, FERC, for those who are listening, they play a role in
the wholesale level, and so they have to do their job, their
role is absolutely critical, and so we'll hear a little bit of
that today. I think it's important for folks who are local to
understand here that the companies are really, they're passing
through, they make a certain set profit but they're not making
massive windfall profits that, I think, are people looking at
their own bills and they see these huge profits and they
wonder, am I getting ripped off and what are we doing about it.
We'll talk a little bit about the wholesale prices with the
next panel.
Gentlemen, thank you very much for your testimony.
I would like to welcome our final witnesses to today's
hearings: James Wells, Managing Director of the Energy Team of
the Government Accountability Office in Washington, DC, and
Susan J. Court, the Director of the Office of Market Oversight
Investigations at the Federal Energy Regulatory Commission,
FERC, who will be accompanied by Steven J. Harvey, the Deputy
Director of FERC's Office of Market Oversight and
Investigations. So again we are thrilled to have you here.
As Commissioner Koppendrayer noted, we anticipated having
FERC Commissioner Nora Mead Brownell testify, but because of
the last minute rescheduling of the hearing Ms. Brownell was
unable to arrange her schedule. I'm sorry that she won't be
with us but we'll include her full testimony in the record as
Exhibit No. 6.\1\
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\1\ Exhibit No. 6 appears in the Appendix on page 156.
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But certainly, representatives from FERC are here. I
appreciate your presence. I look forward to looking at this
issue of monitoring any evidence of price manipulation as well
as explore some long-term solutions to the energy crisis.
As you've seen, witnesses before this Subcommittee,
pursuant to Rule 6, have to be sworn. I would ask you to please
stand and raise your right hand. Do you swear the testimony
you're about to give before this Subcommittee is the truth, the
whole truth, and nothing but the truth, so help you, God.
(Witnesses respond to oath affirmatively.)
Senator Coleman. Mr. Wells, we'll have you go first
followed by Ms. Court. Then after we have the testimony we'll
open it up to questions, and your written testimony will be
presented into the record in its entirety, so if we can stay
within the 5-minute rule, that would be very helpful.
TESTIMONY OF JAMES WELLS,\1\ MANAGING DIRECTOR, ENERGY TEAM,
GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Wells. Thank you, Senator Coleman. We are pleased to be
here today to discuss natural gas prices. Accompanying me today
is my colleague, Jon Ludwigson, he's our GAO energy expert, and
hopefully he'll take all of the hard questions for me.
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\1\ The prepared statement of Mr. Wells appears in the Appendix on
page 90.
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As you know, in early December 2005 wholesale gas prices
topped $15, more than double the prices seen last summer, and
seven times the prices common throughout the 1990s. I want to
refer to the chart.\2\ You see 20 years worth of natural gas
prices. Look at it in terms of the first decade, 10 years, the
most recent 10 years, and then we're going to talk, when we get
to our conclusions, about what the next 10 years is going to
look like.
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\2\ The chart referred appears in the Appendix on page 98.
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For the 2006 winter heating season, the residential
household heating with natural gas will pay at least $260, 35
percent more on average this winter than last winter. Mr.
Chairman, consumers in your Midwest here are expected to
witness even greater increases, paying 41 percent more than
last winter. You have the distinction of being the one part of
the country, the highest part in the entire Nation.
You've asked GAO to discuss three questions: Why natural
gas prices are so high, the impact on the consumers, and what
is the Federal Government's role.
Demand has clearly expanded faster than supply. Since 1999
wholesale gas prices have clearly trended steadily upward, as
you referred to earlier. They bounce up, they rocket up in
price and float back down like a feather, but they're still
higher than where they started. You can see the peaks in late
2005 here, there's two twin peaks there as two hurricanes
smashed into the Gulf Coast where we have major gas production
facilities. 90 percent of that production that you see there in
the Gulf Coast was taken off-line. Mr. Chairman, it's still not
totally recovered, and daily production levels will still not
be back to normal before the hurricane until sometime this
summer, so we today are still feeling the impact of the two
hurricanes.
On the supply side, our U.S. gas industry has been
producing at near capacity, and our ability to increase imports
has reached its limit currently, given available
infrastructure. There's no more magic bullet to bring more gas
in because we don't have anywhere to bring it in. Tight
supplies have set the stage for extreme price spikes. Clearly I
will tell you today that everyone will say the easy answer is
it's all about supply and demand, but clearly there are many
other factors that you've heard about today that will continue
to affect wholesale prices such as market manipulation.
Although you gave us an investigation charge and we're
continuing with that, we have not found any market manipulation
to date. We continue to look at the futures trading in natural
gas and for signs of market manipulation, and we plan to report
to you and your Subcommittee the results of that work later
this summer.
For the individual consumer sitting behind me here in this
room, how much their gas bill will rise today will depend on
large measure on how much of their supply is purchased, as
you've heard, from the wholesale spot markets. By buying in the
spot market when prices are rising, it clearly is expensive.
Some of the largest natural gas utilities in at least three
States expect to buy at least 70 percent of their gas this
winter at spot market prices. Mr. Chairman, we'll continue our
investigation, but we understand that Minnesota does buy a
tremendous amount on the spot market. The utility clearly has
and will continue to pass these prices on to their customers.
For others, gas utilities and consumers that use a process
call hedging, that's buying gas at fixed prices in long-term
contracts, or storing the gas that they purchased when prices
are relatively low to be used during times when prices are
high, may this winter be able to see their price rise at a
little less degree than if they were buying on the spot market.
While hedging may not guarantee the lowest price, it clearly
does allow consumers to have greater price stability. Our
preliminary work shows that natural gas utilities in more than
half of the States have hedged at least 50 percent of their
supplies for this winter. Mr. Chairman, we did analyze the
market back in 2002, and our results at that time indicated
that the marketplace was hedging about 20 percent across the
country, so the trend is upwards.
I think you have to ask questions of the public utilities
that are administering their programs how conservative they've
been and whether they're using some of the newer, sophisticated
techniques to help ensure that the consumers have the best
price advantage of natural gas.
As we've clearly heard today, unfortunately the impact of
these high gas prices have clearly meant hardships. The lower
income residents may not be able to absorb the price increases,
and they are clearly having difficulty paying their bills, as
we've heard today. Mr. Chairman, I hope we get a chance to have
questions talking about LIHEAP where we can talk more about it
because I think it is an extremely important program.
Industrial consumers, like Cargill Company that you've
heard today, the chemical, the fertilizer manufacturers, are
not able to compete with foreign companies that have access to
gas at lower prices, a dollar and 60 cents out of Trinidad, and
therefore may reduce operations or close U.S. plants. We are
clearly moving some of our industry and jobs overseas.
I want to turn a minute to the Federal Government's role.
Clearly two Federal agencies, Susan here on my right from FERC,
and Commodities Futures Trading Corporation, they do play key
roles in trying to keep the level playing field with
competitive prices in an informed marketplace.
FERC is responsible for ensuring that prices are determined
competitively at the wholesale level. We need to hold FERC
accountable, and clearly they've been doing a lot of aggressive
things that they have not necessarily done in the past. One
example, one company agreed to pay a settlement of over $1.6
billion in California relating to some of the heating season in
2002. Clearly the industry is being put on notice that they
can't perform badly in the marketplace that has the impact that
we saw in California in 2002.
Similarly, the CFTC is responsible for ensuring that fraud,
manipulation and abusive practices do not occur. They have
prosecuted 46 energy companies or individuals and have assessed
penalties over $300 million. They're not alone. There is still
the Securities Exchange Commission, the Federal Trade
Commission, the Department of Justice, these are all the
Federal regulatory agencies that are supposed to be looking out
for wrongdoings, and I think hearings like this are another
example where we can hold these Federal regulatory agencies
responsible.
Mr. Chairman, I'm going to stop here and just say there's
no doubt that we can't live without natural gas. In the near
term there may be relatively little that folks can do to avoid
the pain, although there are things that they can do, and I do
hope to address some of those in the questions.
The stage is set for the future price spikes. We haven't
changed the fundamentals of the marketplace; future price
spikes will continue, people will still have trouble affording
natural gas tomorrow and in the future. The key industries may
be lost, along with jobs they bring, particularly here in
Minnesota relating to some of the fertilizer industries.
Meeting the future demand for this energy source, changing this
less-than-desirable scenario will be a challenge for the
consumers, for the utilities, and the U.S. Congress. Holding
this hearing is another step in keeping informed and seeking
the best possible solutions. Mr. Chairman, I thank you and
welcome your questions.
Senator Coleman. Thank you for your testimony, Mr. Wells.
Ms. Court.
TESTIMONY OF SUSAN J. COURT DIRECTOR, OFFICE OF MARKET
OVERSIGHT AND INVESTIGATIONS, FEDERAL ENERGY REGULATORY
COMMISSION
Ms. Court. Good morning, Mr. Chairman. My name is Susan
Court, and I am the Director of the Office of Market Oversight
and Enforcement Investigations at the Federal Energy Regulatory
Commission. I am accompanied this morning by my deputy, Steven
Harvey. We appear today as Commission staff witnesses speaking
with the approval of the Chairman of the Commission. The views
we express are our own and not necessarily those of the
Commission or any individual commissioner.
We thank you very much for this invitation to discuss the
natural gas market and recent price trends. The Commission
takes very seriously the high natural gas prices, and I hope
that we will be able to answer your questions regarding what
has driven current prices and what the Commission is doing to
monitor them to ensure that they are not the result of
manipulation or the abuse of market power. My written testimony
covers the six issues that were identified in your letter of
invitation, so I'm just going to highlight some points at this
time.
First, you asked what factors have contributed to high and
volatile natural gas prices in recent years. There are three
factors in particular. First, the balance between supply and
demand for natural gas in North America has been tightening
throughout the decade. Production has slightly increased or
even declined while the economy has increased demand. The gas
bubble prevalent in the late 1980s and early 1990s started to
shrink at the end of the last century.
Second, the summer of 2005 was abnormally hot, the hottest
on record according to the National Climatic Data Center. With
the addition of natural gas-fired generation to the electric
system over the past decade, increased electric demand drove
increases in natural gas demand. Generation from natural gas,
for example, increased by 20 percent for June and July of last
year compared to the year before.
Third, the price of oil rose 21 percent from $9.40 an MMBTU
in early April to over $11.40 just before the hurricane struck.
Although the relationship between oil products and gas prices
differs across the country depending on how easily fuels can be
switched, oil and gas prices have been loosely related for many
years. As a result, increasing oil prices last summer put
upward pressure on gas prices above and beyond the effects of
the increased electric demand.
You've also asked what effect the hurricanes have had. As
you and other witnesses have pointed out, the hurricanes had
and still have significant effects on the entire natural gas
industry in the Gulf Coast, which accounts for about 20 percent
of the United States supply. Overall, about 10 Bcf of
production from the Gulf of Mexico and Louisiana was shut in,
representing almost one-fifth of the U.S. average daily
production. That number is fortunately now down to about 2.5
Bcf. Since the hurricanes, prices have risen and fallen based
on weather. Given the strains on U.S. domestic natural gas
supplies represented by the hurricanes, as others have pointed
out, including yourself, Senator, we have been very fortunate
to have experienced a milder-than-normal winter. Nonetheless,
the longer term tightness between supply and demand exacerbated
by increased electric demand is likely to reassert itself with
more normal weather. As a result, current futures prices for
natural gas suggest that prices are likely to rise from current
levels into the summer, though they are likely to remain below
the crisis levels seen after the hurricanes.
Next you asked what is FERC doing to respond to high
natural gas prices, especially with respect to its enforcement
responsibilities. As an initial matter, as you may know, and I
need to point out here, the commission has very limited
jurisdiction over gas as a commodity, over wholesale sales of
natural gas, due to the Natural Gas Decontrol Act of 1989.
That said, starting in the fall of last year we have
encouraged conservation, as did other Federal and State
agencies. For our part we made a concerted effort to distribute
information on the State of the natural gas market. We have,
for example, on our web page a feature called ``Gas Basics,''
and we brought copies of the latest edition with us. We did
this to help consumers understand what is happening so that
they can make informed decisions.
More to the point, the Commission is committed to assuring
that the high natural gas prices caused by the loss of supply
from Hurricanes Katrina and Rita do not go higher still because
of market manipulation. We have done this in several ways. The
Commission actively monitors natural gas markets to determine
whether price movements are the result of market manipulation
or market fundamentals. Our market oversight and enforcement
staff is continually reviewing market activity for any possible
manipulation that might also affect prices. In close
coordination with enforcement staff, market oversight staff
performs a detailed review of natural gas prices and market
activity on a daily basis with the intent of identifying areas
of possible manipulation. If we identify price anomalies that
are not explained by market fundamentals, my office is
authorized by the Commission, to begin an investigation.
Furthermore, to assist our monitoring effort, the
Commission has entered into a Memorandum of Understanding with
the CFC to assure the smooth flow of information between the
two agencies. The Commission also acted quickly to exercise the
new anti-manipulation authorities in the Energy Policy Act. On
January 19, the Commission issued rules to prevent market
manipulation by any entity, not just companies traditionally
subject to Commission jurisdiction, with respect to
jurisdictional natural gas and electric sales and
transportation. The new rules, in conjunction with the new
civil penalty authority in the Energy Policy Act, will provide
a strong deterrent to market manipulation. Under our new civil
penalty authority, the Commission can impose a penalty up to $1
million per day for a violation of the Commission's anti-
manipulation rules.
You've also asked finally whether or not there is any extra
authority we would need. The Commission at this time has not
articulated any additional authorities that we need. We have
many new responsibilities under EPAct of 2005, but we would
surely welcome the opportunity to be asked again once we have a
better understanding of how our new responsibilities are
playing out. Thank you very much.
Senator Coleman. Thank you very much, Ms. Court. Some of my
colleagues question whether we're doing enough to vigorously
monitor market manipulation. Your testimony today is that
you're involved in a continuous review of market manipulation
and that it is quite vigorous; is that a fair representation of
what you've just stated?
Ms. Court. Yes, sir, it is.
Senator Coleman. Let me back up. First, that chart over
there,\1\ we're looking at cost of natural gas in the United
States; natural gas being something that we have domestic
production, and you have places like Japan that don't have
domestic production and it's less than half, Trinidad a dollar
sixty. Can someone explain that chart to me? Why is there a
wide gap, why does the United States have the highest natural
gas prices in the world?
---------------------------------------------------------------------------
\1\ Exhibit No. 1 appears in the Appendix on page 123.
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Ms. Court. I would like to just note to start with, the
chart is dated October 26, and the United States is listed at
$13.90. Of course, that was right at the time of the hurricane.
Currently they're running between $8 and $9, so I think that's
probably a fairer statement of natural gas prices vis-a-vis the
world natural gas prices, because of the date of this
particular chart. That said--and I'll let others comment on
this as well as perhaps the situation with Japan. Japan, of
course, relies on LNG as it doesn't have any domestic
production. It is my understanding that Japan has their LNG
committed under long-term contracts so that they were able to
lock in a price at an earlier time.
A couple weeks ago, Senator, I was able to participate in a
conference in Paris sponsored by the International Energy
Agency and the International Gas Union. The concern for all of
the nations represented, and there were at least 30 nations
represented at that conference, was the higher natural gas
prices. Those countries were especially concerned because so
much of their natural gas comes from countries like Russia, gas
from other countries where there's production but where the
production is owned by the governments themselves. So I think
it is a fair statement, Senator, that every country is
concerned, industrialized countries in particular, about higher
natural gas prices.
We are now in a global market for natural gas, there's no
question about it. Currently 84 percent of our natural gas
consumption comes from domestic supplies, but we anticipate
that is going to change in the near future. As a consequence,
the Commission, with the support of Congress, with EPAct, has
now some very important responsibilities and authority to
ensure that we can site LNG terminals throughout our country in
order to take advantage of supplies from other countries as our
domestic supplies decrease. And we've stated in our testimony,
for example, some of the steps that FERC has taken, again with
some support of EPAct and Congress, with respect to LNG
supplies.
We lost, by the way, several LNG shipments this winter to
Europe. Spain will pay whatever price they need to pay in order
to get the gas coming in to Spain. Likewise, in the UK, there
is an LNG facility downstream from London at the Grain Island,
and the UK also took LNG shipments away from the United States
this past winter because they were willing to pay a price
higher than Henry Hub. Basically it's Henry Hub plus a dollar
that they were willing to pay to get those LNG. Now I think
that things are probably going to balance out more as we get
more LNG facilities in the United States and the liquefaction
facilities elsewhere in the world improve. Right now the ratio
is a little bit off. There is fewer liquefaction facilities
than there are gasification facilities, and as that balances
out I think the United States is going to be fairly well-poised
to be able to receive LNG shipments.
Senator Coleman. And I understand Japan, by the way, but
I'm now looking at a place like China that has an insatiable
appetite for energy, and still the price is lower. Ms. Court,
perhaps you could give a primer to folks in the--I studied this
stuff a little bit, and it's still hard for me to kind of
understand the layout, why, even if it's $8 to $10, still
double, a hundred percent, a hundred and fifty percent, some
other areas that have, again I use China now as an example. Can
you give me a one, two, three? Mr. Wells, do you want to weigh
in as to why in this country prices are still so high?
The other observation is this: Natural gas, though it may
be a global market--petroleum is a global market. We're
impacted by what happens with Middle East oil, Venezuelan oil,
etc. Natural gas is still principally domestic. I mean we have,
as you say, 85 percent, and I'm going to touch upon the LNG,
because I think Mr. Wells made the comment about supply, ``we
can't bring it in,'' I want to talk about that. But can you
give me one more shot, one more time to explain to the folks
sitting back there who aren't experts in this and don't work
for FERC, why prices in the United States are significantly
higher, U.S. and Canada, than just about anywhere else in the
world?
Mr. Harvey. Senator, if I could give it a shot----
Senator Coleman. Mr. Harvey.
Mr. Harvey [continuing]. I would be glad to. Part of it is
what we've seen is not just high prices this last winter in the
United States, but a lot of volatility in prices. That's not
surprising. We've seen a lot of volatility in weather after the
hurricanes took out a great deal of productive capacity. We had
abnormally warm Novembers and Januaries. And these prices have
come down significantly from the levels that are on this
particular map at this point, and actually in the last week or
two, down into the mid $7 range at Henry Hub. That's likely,
and that is, in fact, likely to be characteristic of natural
gas markets in the United States at this point, given the
dependencies and the relative tightness of supply and demand.
These different markets behave in different ways, and as
Ms. Court pointed out, during the course of the winter, the
winter was extremely cold in northern Europe, and as a result
prices went very high in northern Europe. Now the markets don't
function exactly the same way that ours do necessarily, and so
these prices for, in effect, spot gas, function a little bit
differently. The spot market dominates the United States, and
we talked about that a little bit, and the volatility that
exposes our customers to. Spot markets don't dominate in many
of these countries. They are longer-term contracts. Many of
these contracts were written up in times that we can see in
this graph that were earlier in that process.
So, for example, the United Kingdom has a much larger, and
really all of Europe has a much larger, long-term relationship.
Much of their LNG then is also purchased by large State
companies who tend to buy based on oil prices as opposed to any
particular spot market within their country. We buy only based
on the spot market in our country for spot purchases. As a
consequence, January was the lowest LNG delivery month in the
United States since, I believe, April 2003, and that's fine.
We've got plenty of gas right now because of the warm January.
It was a reasonable economic response.
As I look at a couple of other places, though, within the
last month we know, or a month and a half, I guess, we know
that the relationship of Russian supplies of natural gas
heading into Europe have changed and, in fact, the Ukrainian
gas price became a very material international political issue
when the Russians began to change that price based on
contractual issues between those countries that I won't pretend
to understand, but that price has come up significantly and is
likely to come up significantly again, mainly based again on
oil prices, which tend to be the benchmark there.
Many of the other countries referred to there are producing
areas, Trinidad. Trinidad, in fact, was the source of much of
the LNG that was delivered in January in the United States.
Many of the Middle Eastern countries. China is interesting,
it's a strongly emerging economy, many, many energy demands,
but China, unlike the United States, has focused very strongly
on their growth in electricity on coal, and this begins to
raise various climate issues, given the aggressive coal plans
that they have, and not a lot of clarity about exactly what
environmental controls will be there.
So I don't know if that helps, but it gives you a sense
that these are very different markets in very different
positions across the world. Having said that, obviously it's
important for us to figure out how to get the most cost-
effective energy we can to remain competitive.
Senator Coleman. One of the comments Ms. Court made that's
been referenced here a number of times is the relationship
between oil and gas, and that as prices rise in one there's
somewhat of a mirror. What I'm trying to understand there is
the kind of market forces to me seem so different between oil
and gas, again one being clearly international, the other not.
Where oil prices are skyrocketing for a range of reasons and we
see this mirroring, is there a potential there for market
manipulation and how do you oversee that? How do you stop that
from happening?
Mr. Harvey. What we've seen historically is sort of a loose
relationship with oil, and it differs again locationally, as
was in Ms. Court's testimony. The one thing, for example in New
York, where we have a lot of oil product prices, we can see it
fairly clearly. The lower grade of oil tends to be a floor on
prices for natural gas delivered into New York. And at this
point actually today, when we have extraordinarily high levels
of natural gas storage inventories in place today, the spot
price is still in a $7 to $8 kind of range mainly, I think,
because of that oil price, because of oil prices now in the low
$60s after some drops last week.
The amount of fuel switching capability differs radically
across the country. In New York there actually is a fair amount
of fuel switching capability in some heating applications and
in some electric generation applications. It's still not very
large, and we are entering again, in the very short term, a
period where we're going to have and where we do have a lot of
gas compared to the demand. January was an extraordinary month
in terms of history, where it looked more like an April than it
looked like a January typically, and it has put us in a very
different position in terms of supply and demand balances. But
that price has not moved down through the oil level yet. It's
not completely clear. We don't have great statistics on how
much fuel switching capability is there, but one of the things
we will be watching is, to the extent gas inventories remain
high or get higher, at some point that relationship needs to
break, because it just doesn't make sense. There's just not
enough oil demand to kind of keep it from there, and that's one
of the kinds of things that we do look for and we look at in
our daily oversight activities within the Commission is when
those relationships seem to need to change, they need to
change.
Now because of the activity of different participants in
the market, it's not just immediate supply and demand; it's
people's worries about the future, it's their considerations of
other things that get folded in there. So there isn't an exact
time or place. But, again, it's the kind of thing that you can
look for that trend, you can kind of examine that. If things
don't happen the way we would expect them at some point we can
begin to investigate in more detail. That is an example of one
of those cases where we are watching for that.
Senator Coleman. I am one of those who have difficulty
understanding the relationship between oil, it just doesn't
seem to be that logical, and the concern I have, and I know Mr.
Wells said it's something the GAO is continuing to look at. We
talked about market manipulation and gas as a commodity. At
what point where do you draw the line between the legitimate
impact of people's fears versus using those fears to gouge,
price gouge? That's the average citizen, that's what they look
at. They say we've had a hurricane--gas is, using gasoline, all
of a sudden it's $5 a gallon in Georgia. At what point, when is
fear a legitimate factor and when is fear used as a market
manipulation, price-gouging factor? Where is the line drawn and
how do you, who identifies that? Who deals with that? Ms.
Court.
Ms. Court. Well, Senator, as far as natural gas is
concerned, it is the responsibility of the FERC to monitor the
market drivers to see whether or not, in fact, particular high
prices are understandable from market basics, or whether or not
they might be reflecting some type of manipulation or behavior
on the part of market participants. And so with respect to
natural gas prices, that is our responsibility, that is FERC's
responsibility.
Of course, oil prices are deregulated, have been since
1981, and so there are other Federal agencies that may be
looking at that, or State agencies, perhaps under antitrust
laws, for example. The U.S. Department of Justice and the FTC
are charged with that type of responsibility. And then in
natural gas futures, as you mentioned, Mr. Wells mentioned, the
CFC is responsible for that. So there are a lot of watch dogs
out there, both at the Federal level, including, of course, the
U.S. Department of Justice Antitrust Division, and also on the
State level, to watch for that type of bad behavior in the
marketplace.
Senator Coleman. Mr. Wells, thank you for your response--
but you made the comment about tight supply and ``we can't
bring it in.'' Can you talk about why we can't and what
recommendations you have to change that?
Mr. Wells. OK. We currently are operating with
approximately four port facilities that have the capability to
handle the LNG tanker imports of which we are bringing in, 3
percent of our usage right now is LNG. These facilities are
basically operating in excess of 90 percent capacity. I know
there's a permitting process, an application process underway.
The record is showing at least 14 applications for the future
in terms of development, but these facilities are not built
yet. There's a lot of NIMBY activity in terms of not in my
backyard. There's concern about the safety of LNG that needs to
be factually assessed and make determinations, but right now,
even when we talk about proposals to bring natural gas out of
the North Slope, we're talking about issues, even if we brought
it here, where would it go. Infrastructure needs are a high
priority that needs to be assessed in terms of its capability
to bring it on line fairly quickly. This stuff doesn't come on
line in less than a year, so the verdict is still out.
I do want to mention just quickly, there is clearly a fear
premium that exists in the oil marketplace. I think if you look
at the last 10 years of natural gas, the price volatility that
exists lends itself to believe that there's no reason to think
there's not a fear premium that exists in the marketplace in
natural gas. I think clearly the Federal Government in the last
five or 6 years is just now beginning to realize that they need
to gear up to look at market oversight and monitoring, and we
hope that the regulatory agencies are putting the necessary
resources in place to determine whether or not the marketplace
is operating fairly.
Unfortunately as an auditor, as an investigator, the
verdict is still out because we haven't seen any results yet. I
know there's restrictions in terms of discussion about what is
ongoing, but until some of this information becomes public, we
don't know for sure yet whether, in fact, we do have due
diligence in watching the marketplace.
Senator Coleman. Let me just follow up. You mentioned the
gas reserves in the North Slope. There was an article in the
New York Times recently that talked about that. I think there
are some lawsuits going on, competing proposals, one building a
pipeline from the North Slope to Alberta to Chicago, another is
to expand current LNG facilities, and my staff has looked into
that, we've talked to the oil company folks. Has GAO at all
looked at this issue?
Mr. Wells. Senator Coleman, we work for the Congress, we
have not been asked to look at this. We know there is an
antitrust lawsuit that has been filed. So we don't have
anything to report on the status of that.
Senator Coleman. You mentioned, you touched upon, and you
said maybe we can pursue the question about what can folks do
to limit the pain. Can you respond to that? Can you provide
some advise, some direction?
Mr. Wells. Absolutely. I want to touch a minute on the
consumers and the utilities and even the Federal Government.
The consumer can do things, like we've heard today. They have
consumer choice in many States where they can actually seek a
different supplier of natural gas. In a competitive marketplace
they can look for a supplier that's doing a better job of
delivering gas at a lower price. Individual consumers can work
with the utilities on budget plans to spread out their payments
as opposed to getting the big spikes in the winter. Clearly,
take action, lower thermostats. There are things that, I know
Ms. Jackson mentioned it today, she is one of the smart
consumers that asked for an energy audit. Surprisingly, many
consumers don't even realize that for free they can have
someone come into their home and assist them in identifying
where they can identify the most advantageous expenditure of a
resource to save energy. Clearly education in terms of LIHEAP.
You touched on it. How did these people, how did the consumers
even realize that they were eligible. There's a lot of things
that can be done for the consumer once they become informed,
and I think the Federal Government also has the responsibility
to keep the consumers informed about what's out there.
I think to the utilities GAO would say we need to look at
their storage practices, maybe their storage policy. They need
to look at the fixed price contract buying that they're doing,
derivatives, hedging, how do you manage risk. There's a lot of
sophistication in today's marketplace. Unfortunately, we see a
lot of utilities and State commissions that haven't necessarily
come up to speed on some of the sophistication techniques that
may exist in the marketplace to assist the consumers, so we
would encourage them to work on that.
Even at the Federal Government level, clearly we need to
make some decisions and we need to take action. It's been said
many times, but we need to diversify. We've talked a little bit
about fuel switching, it's beginning to occur. We've heard even
some of the electric generation from natural gas, using natural
gas and switching over to coal in the future. We need to
diversify. Unfortunately, we need it all. We need to modernize,
technology, R&D. I think we need a better partnership between
the Federal Government and the utilities and the States and the
industry. We need to get everybody in the room and start
talking about solutions. Leadership, and I think that's where
the Federal Government can provide some leadership to send the
right signals so that we can move forward into the 21st Century
and meet our energy demands.
Senator Coleman. That's very helpful, Mr. Wells, thank you.
Ms. Court, can I turn to you and from your vantage point--
you're dealing with the wholesale, the big picture stuff.
Ms. Court. Right.
Senator Coleman. Where else do you think we have to go to
give consumers a better sense of confidence that their concerns
about market manipulation are being addressed?
Ms. Court. Well, I think that it will, it behooves us to
keep them informed, to make sure that as we go through the
investigations and, of course, as Mr. Wells indicated, an
ongoing investigation by its very nature has to be kept
nonpublic, but I think it helps the consumer to know that the
people that they are counting on, the Federal Government, and
also the State government, are on top of the matter, and that
we should publicize the results of these investigations on a
regular basis. We have done that, by the way, Senator.
Last March, for example, the FERC submitted a report to
Congress even before we had our EPAct authority which has
expanded our authority so much where we listed all the various
investigations and the results of those investigations and the
nature of those investigations, and the dollar penalties or
disgorgement of profits that we were able to get on behalf of
the consumers. So I think that will help. I think that that
will be an assistance to the consumer and to the customers,
natural gas customers.
Senator Coleman. That's very helpful. I would hope that,
one, you continue to remain committed to vigorous oversight,
it's critically important, and I would like for the purposes of
this record for you to submit to us any documentation or other
things you have that will help us get out the message that this
is what's being done and this is how we're doing it.
Ms. Court. We would be more than happy to do that, Senator.
Senator Coleman. That would be very helpful. I want to
thank everyone for their participation. I'm going to keep the
record open for 7 days, there may be some follow-up, additional
questions. I hope this has been helpful from the personal
perspective of how individuals are affected. We didn't get into
details, Mr. Wells, you talked about fertilizer. But, for an
agriculture-focused State, this is important to Minnesota. The
cost of the fertilizer has gone through the roof and it has a
direct impact on farmers' abilities to take care of themselves
and families, and some of the competitive challenges of losing
those operations, so there are a lot of questions that are
still out there, but we need vigorous oversight. We're going to
continue to work with GAO and waiting for, I think, the
discussion about market manipulation and trading futures and
things like that, which will come out in two thousand and----
Mr. Wells. Early this summer.
Senator Coleman. Oh, this summer.
Mr. Wells. And also I want to say that I'm actually flying
to Japan next week, we're doing some work related to terrorist
activity and security of LNG, and that will be high on my list
to ask questions about how they can sell gas at----
Senator Coleman. Let me ask you one last question before we
finish. We did make changes this year in the energy bill that
dealt with the ``not in my backyard'' with respect to LNG. Have
you had a chance to look at those, Mr. Wells? Are they
sufficient or are there additional things we need to do?
Mr. Ludwigson. My understanding is that those provisions
are still being phased in the FERC oversight of the licensing
process.
Ms. Court. Actually, Senator, the tools that Congress gave
us in EPAct I think will go a long way. We're pretty confident
that they're going to help us a lot. For example, the EPAct
made FERC the lead agency for all of the Federal authorizations
that are required. You've also given us exclusive jurisdiction,
for example, over LNG. That was a major issue, for example,
with some of the coastal States and, in fact, one large lawsuit
was dropped right after EPAct was enacted. So I think we've
pretty much put everything in place. We have rules now
implementing every one of the EPAct responsibilities that
Congress gave us to facilitate the siting of LNG facilities,
and also some of those provisions go to our infrastructure
generally, not just with LNG, but with our interstate grid.
One of the things with respect to the interstate grid, one
of the advantages that we have vis-a-vis other countries is
that we have the most sophisticated interstate natural gas grid
in the world, and so that even though other countries right now
may have a lower wellhead price, or they may even be able to
get some LNG shipments, one of the advantages that we have is
that once the gas gets to our country, we do have a grid that
will be able to disperse it throughout the country.
Senator Coleman. Well, let's make sure we keep that grid
safe. I want to thank you all. The hearing will be kept open
for 7 days. With that, this hearing is now adjourned.
(Whereupon, at 10:48 a.m., the Subcommittee was adjourned.)
A P P E N D I X
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