<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:71501.wais]
NATIONAL ENERGY POLICY
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY AND AIR QUALITY
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 28, 2001
__________
Serial No. 107-11
__________
Printed for the use of the Committee on Energy and Commerce
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71-501CC WASHINGTON : 2001
__________
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house
------------------------------
COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma BART GORDON, Tennessee
RICHARD BURR, North Carolina PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia BART STUPAK, Michigan
BARBARA CUBIN, Wyoming ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois TOM SAWYER, Ohio
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi TED STRICKLAND, Ohio
VITO FOSSELLA, New York DIANA DeGETTE, Colorado
ROY BLUNT, Missouri THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia BILL LUTHER, Minnesota
ED BRYANT, Tennessee LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Energy and Air Quality
JOE BARTON, Texas, Chairman
CHRISTOPHER COX, California RICK BOUCHER, Virginia
STEVE LARGENT, Oklahoma RALPH M. HALL, Texas
Vice Chairman TOM SAWYER, Ohio
RICHARD BURR, North Carolina ALBERT R. WYNN, Maryland
ED WHITFIELD, Kentucky MICHAEL F. DOYLE, Pennsylvania
GREG GANSKE, Iowa CHRISTOPHER JOHN, Louisiana
CHARLIE NORWOOD, Georgia HENRY A. WAXMAN, California
JOHN SHIMKUS, Illinois EDWARD J. MARKEY, Massachusetts
HEATHER WILSON, New Mexico BART GORDON, Tennessee
JOHN SHADEGG, Arizona BOBBY L. RUSH, Illinois
CHARLES ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi TED STRICKLAND, Ohio
VITO FOSSELLA, New York THOMAS M. BARRETT, Wisconsin
ROY BLUNT, Missouri BILL LUTHER, Minnesota
ED BRYANT, Tennessee JOHN D. DINGELL, Michigan
GEORGE RADANOVICH, California (Ex Officio)
MARY BONO, California
GREG WALDEN, Oregon
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Campbell, Elizabeth, Director, Natural Gas Division, Energy
Information Administration................................. 58
Gill, Jas, Vice President, Manufacturing, Cytec Industries,
Inc........................................................ 106
Hebert, Hon. Curt, Jr., Chairman, Federal Energy Regulatory
Commission................................................. 23
Hendrix, Walker, Council, Kansas Citizens' Utility Ratepayer
Board...................................................... 94
Hilliard, Jack, General Manager, Florence Utility, on behalf
of American Public Gas Association......................... 98
Jordan, Jerry, Chairman, Jordan Energy, Inc., on behalf of
Independent Petroleum Association of America............... 70
Littlefair, Andrew J., President, Pickens Fuel Corp., on
behalf of Natural Gas Vehicle Coalition.................... 82
Luxbacher, Roberta A., Vice President-Americas, Exxon Mobil
Gas Marketing Co., on behalf of Natural Gas Supply
Association................................................ 91
Reiten, Richard G., President and CEO, NW Natural, on behalf
of American Gas Association................................ 76
Silva, Patricio, Project Attorney, Natural Resources Defense
Council.................................................... 110
Wadlington, Cuba, Jr., President and CEO, Williams Gas
Pipeline, on behalf of Interstate Natural Gas Association
of America................................................. 66
Material submitted for the record by:
American Chemistry Council, prepared statement of............ 128
Smith, Terry, Chairman, California Independent Petroleum
Association, prepared statement of......................... 130
(iii)
NATIONAL ENERGY POLICY
----------
WEDNESDAY, FEBRUARY 28, 2001
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Energy and Air Quality,
Washington, DC.
The subcommittee met, pursuant to notice, at 1 p.m. in room
2123, Rayburn House Office Building, Hon. Joe Barton (chairman)
presiding.
Members present: Representatives Barton, Largent, Burr,
Whitfield, Norwood, Shimkus, Wilson, Pickering, Blunt, Bryant,
Radanovich, Bono, Walden, Tauzin (ex officio), Boucher, Sawyer,
Wynn, Doyle, John, Waxman, Markey, Gordon, Rush, McCarthy,
Barrett, and Luther.
Staff present: Miriam Erickson, majority counsel; Karine
Alemian, professional staff; Peter Kielty, legislative clerk;
Andy Black, policy coordinator; Sue Sheridan, minority counsel;
Rick Kessler, minority counsel; Ray Kent, minority professional
staff.
Mr. Barton. If everyone could take their seats, we will get
started. We want to maintain the tradition of starting on time
or starting as close to on time as is physically possible.
Congressman Boucher is on his way, and he will be here
shortly. We obviously have enough members to begin our opening
statements.
I want to welcome our new Chairman of the FERC to our first
in a series of hearings on national energy policy. Today we are
going to focus on one of the commodities that is going to be
important in that policy, which is natural gas. We are going to
look at all fuel sources with the purpose of identifying both
production capability and what the demand for the particular
fuel source is, and look at any legislative or regulatory
changes that need to be made in order to explore, produce,
distribute and use the specific energy sources under
consideration at this specific hearing.
Last night, in the State of the Union, the President said,
``We have a serious energy problem that demands a national
energy policy.'' I couldn't agree with the President more.
Those of you that watched it on television and those of you
that were fortunate to perhaps be in the chamber would have
seen that I was the first person on his or her feet when the
President said that.
At today's hearing, we are going to look at natural gas.
Future hearings, working with our minority, which we will
announce very soon, we will cover coal, nuclear energy, crude
oil and petroleum products, hydroelectric and other renewable
energy sources, conservation and energy efficiency.
Next week, we are going to have a hearing devoted
specifically to Members of Congress who have concerns about our
energy policy to come and testify before this subcommittee. We
are going to have a panel next week on Tuesday that focuses on
the situation in the electricity market in California and
energy policy generally around the country. Members that wish
to testify are being notified today by a dear colleague, and of
course, we will do as many member panels as are necessary to
give every member an opportunity to testify next week.
With regard to today's hearing, natural gas is our cleanest
burning fuel source. For a long time, it has been the fuel of
choice for residential heating, and in the last 10 years, new
electric power generations. Recently, however, the market has
been pinched by greatly increasing demand. The downturn in
wellhead prices in the late 1990's discouraged some companies
from producing and exploring for natural gas. That has led to a
reduced growth rate in natural gas production. Because of that,
we do import natural gas today in the United States, primarily
from Canada, but to some extent, overseas from our L&G sources.
It is time to take a look at rebalancing supply and demand
in an environmentally responsible manner in natural gas
markets. It is also time to make sure that natural gas can get
where it is needed, which means that we need to focus on the
transmission infrastructure. A healthy region cannot complain
about high natural gas prices, yet obstruct establishment of
additional pipeline capacity. We must also do our part to
reauthorize pipeline safety law in a responsible fashion.
I am pleased today to welcome Chairman Curt Hebert to the
subcommittee for the first time in his new capacity as
permanent Chairman of the Federal Energy Regulatory Commission.
And I want to take a point of personal privilege to let
everyone know, in no uncertain terms, that I fully support
Chairman Hebert being the permanent Chairman of the FERC. I
look forward to working with him in the years ahead to craft a
comprehensive national energy policy. And I am very confident
that with his ability and the Commissioners that are there and
the new Commissioners that the President's going to appoint
very soon, once they are confirmed by the Senate, this
subcommittee and your commission is going to have a very
cooperative working relationship.
So I don't want there to be any concern about whether I
support Chairman Hebert being Chairman Hebert. He has got my
total, unqualified support. This is going to be a very busy
time for you and your commission, but I know that you are up to
the task.
I am also pleased on the next panel, a small panel of 10
experts, which we have had to extend the table--you will notice
our table is I think a little bit longer than it normally is to
get each of you. Congressman Boucher and I have decided to do
as many hearings as we can where we have one panel so that all
members have a chance to ask questions and that people that are
on the second or third panel end up having to speak only to me
and Congressman Boucher. So we are going to try to do as many
hearings as we can with one panel, except when we have
administrative officials like Chairman Hebert.
We are going to work in this subcommittee with other
committees to hopefully craft a comprehensive energy policy for
this country. We are going to focus today on natural gas. We
know that for the near term it is the environmentally
responsible fuel of choice, and as such, we need to give it
serious consideration.
Mr. Boucher is not here yet. We will go to Mr. Doyle for an
opening statement, and we will go to Mr. Bryant.
Mr. Doyle. Thank you, Mr. Chairman. I want to thank you for
convening this hearing to examine a wide range of factors
impacting natural gas markets, and to further determine the
role of natural gas in a comprehensive, national energy policy.
This hearing should prove to be a valuable source of
information as we move forward in fashioning a national energy
policy that is mindful of all energy sectors, assures reliable
and affordable service, encourages conservation, and maximizes
new technology opportunities.
As we are all aware, natural gas prices have risen sharply
during the past year following a 15-year period of adequate
supply and demand. Natural gas prices have risen dramatically
at the wellhead over the last year, which has translated into
drastic increases in heating bills for residential customers.
And just as prices have increased, so has demand. This demand
for natural gas has been attributed to a robust economy coupled
with an environment that supports the growth of natural gas-
fired electricity generation. If these dynamics sound familiar
to the subcommittee's previous dialog on electricity markets,
that is because we are facing some of the fundamentally same
challenges involving generation, transmission, and
distribution.
A strong demand for natural gas is not a new-found
discovery but a trend that we have been aware of for some time.
In the testimony we will hear today, numerous studies will be
highlighted that project U.S. gas consumption is expected to
increase by 40 percent by the year 2020. We also should not
ignore the fact that currently more than half of the present
U.S. oil supply is imported, and without natural gas
production, our oil import volume would be much larger.
We should also be mindful of the fact that numerous
scientists, as well as the Presidential Committee of Advisors
on Science and Technology, have noted natural gas will remain a
principal energy source well into the next century. This, in
part, is attributable to the increasing demand for clean fuels
and reduced emissions.
Mr. Chairman, while I am very much concerned about matters
involving increased drilling, adequate storage and pipeline
safety, I want to emphasize the importance of expanding options
in terms of recoverable resources. I am particularly interested
in heightening efforts in the field of methane hydrates, and
was pleased to have my bill, The Methane hydrate Research and
Development Act, signed into law last year.
If I could tell you only one thing about the importance of
research, identification, assessment, exploration, and
development of methane hydrate resources, it would be this: If
only 1 percent of the methane hydrate resource could be made
recoverable, the United States could more than double its
domestic natural gas resource base. And when a new abundant
resource is found that meets a growing demand with a greater
level of efficiency, consumers will not only have a greater
selection of options but more affordable costs as well.
In addition to potential as an abundant and affordable
energy source for consumers, methane hydrate deposits also
represent a challenge to conventional oil and gas extraction.
Hydrates influence physical properties of ocean sediments,
particularly, it strengthens stability. Characterizing hydrate
formation and breakdown is critical for the safety of deep
offshore drilling and other deep sea operations.
While I strongly believe that methane hydrate should play a
strong role in our long-term energy policy, we must be quick to
act in responding to our short-term energy needs. I have been a
strong proponent of LIHEAP and have lent my support to recent
efforts to obtain supplemental funding and increase what will
be appropriated in response to the overwhelming demand for
assistance.
But we must find ways to enhance these types of efforts,
and we must act quickly. Just like my fellow members of the
subcommittee, my constituents and small business owners are
struggling in dealing with the rising costs of natural gas. One
resident has seen her gas bill reach $600 for 2 months, up from
$89 a month last year. And one small business owner's recent
gas bill topped $5,000, an amount more than doubled the cost of
last year's bill.
It is my sincere hope that today's discussion will assist
us in our efforts to not only move through this period of price
volatility but also in making sound, long-term decisions that
will foster a national energy policy that places great import
on affordable supplies.
Thank you, Mr. Chairman, and I yield back.
Mr. Barton. We thank the gentleman from Pennsylvania.
We want to just make an editorial comment. The ranking
member and the chairman's opening statements are 5 minutes, and
all other members, according to the rules, are 3 minutes. Now,
we are going to be very generous, but we have got a lot of
hearings to do this spring, and we hope that most of our
opening statements can be within the general constraints of the
rules.
The gentleman from Tennessee, Mr. Bryant, is recognized for
an opening statement.
Mr. Bryant. Mr. Chairman, I have an opening statement, but
I would point out that Mr. Pickering, my friend from
Mississippi, arrived before I did, if that makes any
difference.
Mr. Barton. I happen to notice you before I noticed him.
Mr. Bryant. I understand that.
Mr. Barton. We will recognize Mr. Bryant, and then our next
one will be Mr. Pickering on the Republican side.
Mr. Bryant. Thank you, Mr. Chairman. I will try to get
through this speech in 3 minutes, although, for some of us in
the southern region, it is awfully difficult to----
Mr. Barton. I understand.
Mr. Bryant. [continuing] talk fast.
I have been listening to my friend from Pittsburgh's
opening statement. I realize probably most of our opening
statements are going to sound an awful lot alike. And you are
probably sitting out there saying, ``Well, they always do, and
so why don't you move on?'' But I do want to give my statement
and indicate my appreciation for the chairman for holding this
very important hearing.
Likewise, in Tennessee, there has been--including me, my
bill has increased dramatically over a comparable time last
year. And a number of constituents that I have, have called and
written us about bills that have tripled and quadrupled. And
unfortunately, a lot of folks don't make the money that we make
in Washington, and they have more difficulty--much more
difficulty--making those payments. Even though they may be
smaller in size, but it is still three or four times what they
are used to making. So this is a very critical issue.
I have a more complete statement that I will give to the
record--I will hand it in after my comments--but I did want to
add a couple of other statements.
I think we have to begin to recognize that in this country
we cannot have our cake and eat it at the same time. And we
have to, I think, go toward a more balanced approach to the
issue of energy. I am very optimistic that this committee,
through hearings like this, will be of assistance to those in
the Administration whose task it is to develop a national
energy policy, and I hope we can play a part of that.
And a part of that policy has to include, at a minimum,
relief on our pipeline situation. I know that was a part of the
reason--along with several others that you will hear all about
today--but that was part of the reason we had a smaller supply
to bump up against this large demand that we had. We have to
look at our policy, our policies, the Federal policies on
Federal pipelines, the environmental issues there. Obviously,
where I come from, the property rights issues are very big down
there. All these come into play when you are talking about
pipelines. But we have to have more pipelines out there to get
this gas out to the distributors.
Other issues we have to look at are exploration, finding
additional sources in this country and in the northern part, in
Alaska, offshore, again, in a balanced approach that will
protect the environment. But I am afraid, as we face issues
like we faced in California with electricity, that we don't
overreact, and we don't move too quickly, but yet we take a
balanced approach and, again, be aware of issues of the
environment and protecting property rights, but yet, knowing
that we have a surging demand for power in this country that
for the foreseeable I don't think is going to stop.
And it is up to Congress I think to set the lead in this,
and I know our good chairman from Texas is going to do that.
And again, I thank you for doing that and would, again, ask
unanimous consent to put my full statement in.
Mr. Barton. Without objection, so ordered.
Mr. Bryant. Thank you.
[The prepared statement of Hon. Ed Bryant follows:]
Prepared Statement of Hon. Ed Bryant, a Representative in Congress from
the State of Tennessee
Mr. Chairman, I would like to commend you for holding a hearing on
the drastic increases in the consumer cost of natural gas. Let me begin
by saying, I was shocked at how much gas prices have risen when I
received my utility bill at my home in Henderson, TN. Over the winter,
I have heard from many of my constituents in Tennessee wanting answers
as to why their utility bills had tripled, and in some cases,
quadrupled without warning. In the real world, families have to stick
to a budget. Real families can't dip into a surplus, they have to plan
ahead. These huge increases in gas prices have put real families in a
bind, and I hope this hearing will lead to some solutions.
Most experts agree that our nation is in the midst of a natural gas
shortage. The travesty is that our natural gas supply is plentiful, but
because of stifling federal regulations, we are unable to develop our
nation's resources.
Federal regulations that have hindered construction of new gas-
fired power plants need to be relaxed. Our nation is consuming more
power than we are able to produce. We should explore opening up 8% of
the barren, frozen tundra in the Arctic National Wildlife Refuge (ANWR)
in northeast Alaska and off-shore areas in the Pacific Ocean and Gulf
of Mexico to environmentally responsible oil and gas development. Also,
without new pipelines, we cannot distribute gas across the nation,
which would affect prices. I support streamlining the regulatory
process for pipeline approval, so that we can meet our energy needs. We
must take advantage of our nation's resources to control our own
destiny in the ever-changing global market.
As our society becomes more technologically advanced, we are
requiring more energy than ever before and as we move away from oil and
coal power, demand for natural gas will continue to increase. The good
news is that natural gas-fired generation has a number of benefits.
Among them is the fact that gas-fired plants can be constructed faster
than other power facilities, an advantage in this time of power
shortages. Additionally, gas plants have environmental advantages
because they produce fewer emissions of both pollutants and greenhouse
gases. If Congress can provide adequate incentives and enough
attractive prospective territory to foster a high level of drilling
activity then we should have a much increased gas supply as a result.
I hope that today's hearing will help to direct this body towards
developing a coherent national energy policy that will ensure our
natural gas supply meets the current and growing demand.
Mr. Barton. The gentleman from Virginia, Mr. Boucher, is
recognized for an opening statement.
Mr. Boucher. Thank you very much, Mr. Chairman. I want to
commend you for scheduling today's hearing on natural gas
policy. Under the chairman's procedure, today's hearing will be
the first in a series of hearings our subcommittee will conduct
on our nation's policies with respect to its major energy
sources. And I want to commend Chairman Barton for this useful
approach at a time when the need for a national energy strategy
focusing on our domestic resources stands in stark relief.
Over the course of the last year, the price for natural gas
has doubled, resulting in sharp increases in residential
consumer bills. The sustained higher prices for gas and the
extreme spot market spikes we have experienced during the last
year seem all the more dramatic because of the unusually low
price for natural gas in the preceding years. Accordingly, I
believe this is a timely hearing. Many of our constituents are
asking both for assistance and for explanations.
The effect of high natural gas prices is not confined to
residential heating bills. As a major fuel source for
electricity generation and the production of commercial
fertilizer, it is clear that consumers across the Nation may
also be paying for increased gas costs whenever they turn on
the lights or purchase food at the grocery store.
The data produced to this date, by the Energy Information
Administration and by others, seems to indicate that for the
most part the cause of these increases is mainly a case of
demand growing faster than supply. Exploration and development
of gas fields has been increasing steadily since 1995; however,
beginning in 1999, the number of new wells has declined as low
prices discouraged investment in exploration and development.
Fortunately, the data also suggests that the market is
responding properly, and exploration and new development
activity has been on the rise over the past year as a result of
the high price that gas is now commanding.
Nevertheless, I think it is appropriate that we examine
various approaches that our committee may undertake to aid in
increasing the supply of natural gas. Since the deregulation of
price controls and allocations, the tools at the disposal of
this committee primarily relate to the construction and
reliability of pipeline transportation of natural gas from the
wellhead to the consumer.
While it appears that the Federal Energy Regulatory
Commission is using its authority under Section 7[c] of the
Natural Gas Act to permit new pipeline facilities in an
expeditious manner, I look forward to learning whether there
are ways to improve on this process without compromising either
public participation or necessary environmental protections. I
am also interested in learning more about the various proposals
to make Alaskan natural gas available to the rest of the
nation, whether under authority of the Natural Gas Act or the
Alaska Natural Gas Transportation Act.
Finally, the price increases in California related to a
pipeline explosion that took place last August indicate that
the pipeline safety and supply reliability are inextricably
linked. And so I hope we will hear from witnesses now and at
future hearings about how our pipeline safety laws and
regulations can help guard against supply disruptions. We will
review these matters carefully so that we can ascertain what,
if any, changes to these acts are necessary and appropriate.
Perhaps even more important to this inquiry is the question
of natural gas demand. This committee has primary jurisdiction
over our nation's energy conservation statutes and programs,
and a comprehensive review of our conservation policies is
therefore warranted. While DOE efficiency standards for a
number of consumer appliances have undoubtedly served to reduce
the demand for gas by affecting electricity demand, we should
ask if there is more that needs to be done to promote
conservation, particularly in the commercial and in the
industrial sectors. Is the Federal Government doing its part to
limit demand for natural gas and gas-fired electricity at its
own facilities? Are we offering the right incentives to
encourage the use of more energy- efficient products? These are
just some of the questions we may want to consider as this
hearing and our future consideration develops.
Many of our energy and environmental policies over the last
few years have encouraged the construction of natural gas-fired
electricity generation. This may be fine, and there is no doubt
that combined-cycle, natural gas power plants enjoy a number of
natural, economic advantages that have contributed to their
growth and expanded use. But at the same time that we have
encouraged increased reliance on natural gas for electricity
production, we have also put in a place a range of policies
that have had the effect of discouraging the use of other
fuels, particularly coal. The result is an unbalanced energy
portfolio and an economy that may be too dependent on too few
fuel sources.
We need to find ways to conserve electricity and the demand
for gas while encouraging the environmentally sound and
efficient production of energy from coal and the general
expansion of our national portfolio of energy sources.
Mr. Chairman, as I have said before, this subcommittee has
a long tradition of bipartisanship. In part, I think that is
due to the character of the people who have served here. But it
is also because energy issues are often more regional in nature
than they are partisan. And so one of the challenges that I
think we are going to face in this Congress, Mr. Chairman, may
lie in bridging the gaps between the producer and consumer
regions of the Nation more than in bridging gaps between people
on the two sides of this aisle.
As I continue to work with you and other members of the
subcommittee in examining our energy policies, and perhaps in
considering legislation, I look forward to working with you to
ensure that we put in place balanced energy policies that serve
the national interest.
Thank you, and I yield back.
Mr. Barton. Thank the gentleman from Virginia. We now would
welcome an opening statement from the gentleman from
Mississippi, Mr. Pickering.
Mr. Pickering. Mr. Chairman, thank you. And I, too, want to
join you in welcoming the permanent chairman of FERC, a good
Mississippian, Curt Hebert. And I look forward to working with
you as we address comprehensive energy solutions for our
country.
And Mr. Chairman, I can think of no better place to start
with than natural gas, as we all see across the country the
high prices of natural gas are causing severe suffering among
our residents, and in agriculture, and particular in my State,
poultry producers. And then with the coming planting season, we
know that the input cost to fertilizer is going to be extremely
high. So we are concerned across the board as to how the energy
situation is going to affect our overall economy and our
people. I look forward to hearing the solutions.
I believe, though, that if we look at the problem we face
now, the old saying, ``We have met the enemy, and the enemy is
us.'' We have locked up, locked away, shut down, shut out our
fuel sources, our natural gas reserves, either on the coast, in
the Gulf of Mexico, in Alaska, and we need to find a way to
unlock our reserves of our energy sources so that we can
increase our own independence and our own supply and bring the
prices down. We need to find a way to bring common sense to
environmental regulations and permitting and pipeline safety.
I look forward to meeting all those objectives with you and
working with you, Mr. Chairman, as we go forth.
Mr. Barton. Thank the gentleman from Mississippi. The
gentleman from Ohio, Mr. Sawyer, is recognized for an opening
statement.
Mr. Sawyer. You caught me by surprise, Mr. Chairman.
I would like to just take a moment to thank you and Mr.
Boucher for this series of hearings that we begin today and to
welcome Chairman Hebert and our other panelists who will be
with us today. I have a longer opening statement. I would like
to associate myself with the remarks that were made both by
you, Mr. Chairman and by our ranking member. They are
thoughtful, and they go to the depth of some of the problems
that we face.
I would only reemphasize the importance of recognizing the
linkage between natural gas and electricity. It is a growing
linkage and one that in many ways should point us toward an
understanding that it is sometimes easier to move natural gas
by wire than it is by pipeline, and more efficient as well. The
whole set of issues that surround infrastructure in natural gas
is every bit as important as the one that surrounds
electricity. The question of siting and timely development of
the ability to move energy from one place to another is
critical and at the heart of a complex solution of a
multidimensional problem.
With that, Mr. Chairman, I yield back the balance of my
time.
[The prepared statement of Hon. Tom Sawyer follows:]
Prepared Statement of Hon. Tom Sawyer, a Representative in Congress
from the State of Ohio
I commend the Chairman for having this hearing on natural gas as
the first in a series to address a national energy strategy. There are
many recommendations that Congress should carefully consider,
including: expanding LIHEAP; expanding natural gas infrastructure;
development of new natural gas technologies; increasing energy
efficiency; and, assuring adequate supplies of natural gas.
I am confident that we will hear from the many witnesses today
about the uncertain supply and increased demand for natural gas. Yet, I
do not think that the issue at hand is simply a supply and demand
problem.
When prices increased earlier in 2000 to $3.00 per unit (MMBtu),
this supposedly gave producers enough incentive to open the wells. I
have been informed that the cost of getting natural gas out of the
wells is $2.85 per unit. Any additional costs are associated
transmission. While there has been more exploration, it is not clear
why the prices continued to rise to nearly $10 per MMBtu by December.
Were the additional costs of transmission so great that the price
of natural gas increased three times over? What will it take to improve
the conditions of old lines, and conduct new infrastructure
development? Or is this price--which does not seem reflective of the
cost usually associated with natural gas--reflect something other than
transmission? Was there some other inefficiency in the market causing
this unnatural increase in price?
The long-term projection for stable natural gas prices ranges from
$3.00 to $3.50 per unit. I am interested to hear from our witnesses
today how the fifteen cent to sixty-five cent cost of transmission over
production has been formulated. It is not clear to me how these
projected prices can be reconciled with the prices we saw in the later
part of 2000. I look forward to the testimony and thank our witnesses
for addressing this very important issue.
Mr. Barton. Thanks to the gentleman from Ohio. The
gentleman from Kentucky, Mr. Whitfield, is recognized for an
opening statement.
Mr. Whitfield. Mr. Chairman, thank you very much. All of us
are excited about the series of hearings as we explore the
possibilities of putting together a national energy policy
which has been lacking in our country for some time. It is
fitting that our first hearing does focus on natural gas,
particularly since throughout the country, residential,
commercial and industrial users have all been reeling from the
high prices of natural gas. And I have received this stack of
bills from my district from people whose rates have increased
anywhere from 200 or 300 percent in 1 month. And I haven't had
any issue in recent time that I have received so much
correspondence about.
I was reading Beth Campbell's testimony, as well as others,
and she went through a number of reasons why natural gas prices
have increased, and there are many reasons for it. One that she
mentioned was the passage of the Clean Air Act Amendments of
1990 and subsequent regulations affecting air quality
standards. And we know also that the previous administration
did have a bias, in my view, for natural gas. I think it is
important that we also, as we form this policy, recognize that
coal is our most abundant resource--nuclear fuel is providing
20 percent of all electricity produced in our country--and that
our policy must include using all of our resources, and do it
in an equitable way.
So I look forward to this hearing and the others, and I
yield back the balance of my time.
Mr. Barton. We thank the gentleman from Kentucky, and hope
we give enough financial resources to you and your personal
life that you can help pay those bills. I am sure they would
appreciate it. If you just send the check back when you answer
the correspondence, that will help in your reelection effort in
the next election cycle.
We would like to hear from the gentleman from Minnesota,
Mr. Luther, for an opening statement.
Mr. Luther. Thank you, Mr. Chairman. I will be very brief.
Coming from Minnesota, I can assure you I share the
concerns of many here about the impact of natural gas prices on
family budgets in our State. I want to thank you, Mr. Chairman,
for holding this hearing, and I assume subsequent hearings,
looking into this issue and particularly looking at real, long-
term, responsible solutions to this whole energy issue and
particularly the natural gas price issue that is plaguing us at
the current time.
I am particularly pleased that you have included a broad
range of interests in the hearings, including a representative
from FERC and from a consumer interest. I think it is key that
we have that kind of a balanced view of the entire issue. And I
thank you and look forward to the testimony, Mr. Chairman.
Mr. Barton. Thanks to the gentleman from Minnesota.
Gentleman from Illinois, Mr. Shimkus, for an opening statement.
Mr. Shimkus. Thank you, Mr. Chairman. I would like my
official statement to be put in the record.
Mr. Barton. Without objection.
Mr. Shimkus. And, obviously, we are talking basic
economics, a supply and demand equation. The last
administration did have a fuel of choice, and that was natural
gas. And the demand has outstripped our available supply, and
prices have skyrocketed. It is not rocket science. I think what
we have to do when we debate a national energy policy is have a
wide availability of fuels. Let the market decide the most
efficient use of those fuels. I don't just tend to agree that
using natural gas and the transmission system is the most
efficient use. I think the market will decide that. And when
the market can decide it, then we will have lower prices across
the board for all our energy needs and not really directed or
manipulated by legislators here.
My farmers are about ready to go into the field too, and we
know the natural gas role in fertilizers. And there is a price
to be paid for no national energy policy. And we are paying it
right now, and hopefully we will rectify that in the weeks
ahead.
With that, Mr. Chairman, I yield back my time.
[The prepared statement of Hon. John Shimkus follows:]
Prepared Statement of Hon. John Shimkus, a Representative in Congress
from the State of Illinois
Good morning, Mr. Chairman and to all whom have shown up this
morning. I am looking forward to this hearing today.
The Midwest has been hit particularly hard by high natural gas
prices this winter. In some parts of Illinois, consumers are paying
$1.00 per therm. The cold winter that the Midwest experienced did not
helps matters at all. The State of Illinois and the natural gas
utilities have taken numerous steps to help consumers pay their gas
bills, but none of these steps address the long term problem of supply.
One of the main reasons for Illinois' high natural gas prices was
the focus on power generating and peaker plants to meet above-load
demand. We have drawn down stocks of natural gas that have been used as
the heating fuel of choice in the Midwest, and as a result doubled the
price.
We should all be worried that a majority of power plants that are
currently on the drawing board are powered by natural gas. When our
country starts to rely too heavily on one particular fuel source, we
run the risk of supply shortages and price spikes. This is what we are
seeing now. We have become too reliant on one or two forms of fuel.
The high natural gas prices are also causing overseen problems in
rural areas. Natural gas is used to make fertilizer for our nation's
farmers. These high prices have led to a shutdown of U.S. nitrogen
plants, raising uncertainties over the price and supply of nitrogen
fertilizer this coming spring. Natural gas accounts for 60-70% of the
total cost of nitrogen. So this has been a double hit on farmers. They
are paying higher prices to heat their homes, like everyone else, then
they are also paying higher prices for their fertilizers.
I happen to think that our nation should not rely only on just one
energy source such as natural gas, coal, nuclear or renewables to
generate power, but all of these sources. It is the smart thing to do
over the long haul. Just like any good retirement portfolio, our energy
industry should be diversified. Fuel diversity will lead to less supply
problems and more stable prices for consumers.
Again, thank you for having this hearing today Chairman Barton. I
yield back the balance of my time.
Mr. Barton. Thanks to the gentleman. Gentleman from
Louisiana, Mr. John, is recognized for an opening statement.
Mr. John. Thank you, Mr. Chairman. You caught me in the
wrong chair here. Thank you very much for having this----
Mr. Barton. If the gentleman will suspend. I am having a
finger pointed at me by the lady from the show-me State.
Mr. John. And I yield, Mr. Chairman.
Mr. Barton. I want the record to show that my staff said
Mr. John arrived before Ms. McCarthy. But if in fact Ms.
McCarthy arrived first, we will certainly let the gentlelady
from Missouri go before the gentleman from Louisiana.
Mr. John. I will yield.
Mr. Barton. Does that make you happier?
Ms. McCarthy. Well, it is not the first time that it has
occurred, Mr. Chairman, but I am delighted that Mr. John will
honor that.
Thank you, Mr. Chairman. May I proceed?
Mr. Barton. You may proceed, for 3 minutes, though.
Ms. McCarthy. Yes, sir.
I have it down to one little page. I want to thank you, and
I also want to thank Ranking Member Boucher for this series of
hearings and welcome the permanent chairman of FERC being with
us today.
I have been working on national energy policy issues since
1976 when I first became a State legislator, and I hope--while
natural gas is important to all of our districts right now, I
hope we on this subcommittee will be able to formulate a long-
term view that includes renewed efforts on conservation, seeing
how we can at the Federal level provide incentives for
developing fuel efficiency, and taking advantage of
technological advances that are already occurring on
alternative fuel resources. I would like to see this
subcommittee also take a good look at developing alternative
indigenous resources for national security purposes as well as
environmental ones.
And this subcommittee, thanks to your leadership, Mr.
Chairman, did pursue an issue that Mr. Shimkus and I introduced
and passed on biodiesel fuel, which is helping our communities.
And Mr. Doyle referenced his methane hydrate success. There are
others out there, and we need to be pursuing them and taking a
good look at how we can help them and develop them. And last, I
think any national policy should address reducing our carbon
emissions so that we can address the scientific concerns with
regard to global climate change.
So I look forward to working with you. I am glad that we
are going to have a series of hearings. I hope that we will
take a long-term view, broad view, and also a view that will
rise above politics so that we can, indeed, put a national
energy policy in place that continues the economic
opportunities in this country and allows us to expand them.
Thank you, Mr. Chairman.
Mr. Barton. Thank the gentlelady from Missouri, and profuse
apologies for going out of order. If you are on time next time,
you will go before I go.
We will give you the honor of making the opening opening
statement.
The gentlelady from California, Congresswoman Bono, for an
opening statement.
Ms. Bono. Thank you, Mr. Chairman. I am very happy to be
sitting on this subcommittee, and today is my first day back,
as you know. And thank you for your help in putting me on this
subcommittee. I, like all Californians, have a grave interest
in this issue and where we are. And as I just heard my
colleague before me talk about global warming, I have got a
bigger issue. And that is, in Palm Springs when it gets to be
128 degrees in the summer. This is a serious issue. And it is
not about quality of life, it is about life and death for these
people. The threat of rolling blackouts in California is a real
one, and I have been assured by many in the energy industry
that it is guaranteed that we will be having these blackouts. I
don't know how my people are going to survive this; I do not
know for the life of me--128 degrees. If you have ever felt it,
it is seriously like stepping into an oven. And I hope you all
come out to Palm Springs, but August wouldn't be the best month
for you to come out and visit us.
But you know, I am also hearing people talking about supply
and demand and the problem we are having in transmission in the
gas pipelines. These issues are only coupled in California by
the problems we are having with deregulation and the flaws in,
perhaps, fed deregulation. So I care deeply, and I also thank
the chairman for the time he spent in California with all of us
in trying to begin to tackle this issue. And I thank Chairman
Hebert for the time earlier with the California delegation as
well.
But I am a little frustrated by my colleagues. And I mean
that with all utmost respect. But how people can say that this
crisis came without any forewarning, amazes me. I have a
brother who is a geologist who is an independent producer, and
for 10 years or 20 years he has been screaming that this crisis
is going to be here. And here we are. And, again, in
California, it is life and death. And I, again, want to say
that I am anxious to hear your testimony and thank you for your
being here today.
And with that, I yield back.
Mr. Barton. Thank the gentlelady. Now we go to the very
polite gentleman from Louisiana, Mr. John, for an opening
statement.
Mr. John. Thank you, Mr. Chairman. Thank you for holding
this hearing. And I want to also welcome Chairman Hebert. I
heard you were from Mississippi, but with a name like Hebert, I
guarantee you, roots are in Louisiana somewhere. So welcome and
good luck.
As we embark on what the President called a national energy
policy debate, I think that natural gas is part of the equation
that cannot be left out. And I believe that Americans, in a lot
of ways, are addicted to energy, whether it is gasoline,
electricity and all of the things that go with that, such as
recharging our cell phones and other things as we enter and
embark upon an electronic economy. It is just going to get
worse.
The gentleman from Illinois, Mr. Shimkus, talked about it
as a simple question of supply and demand. Well, I have a
different twist on it--well, not a different twist, but
something to say about it from the demand side. I believe we
are not going backwards. I think that demand is going to
continue to increase, and there is certainty in that. I believe
that is where we will go; that is the avenue we will take. On
the supply side, I don't think it is as certain. I think that
we have a lot of questions to answer. We have a lot of soul
searching to do as we look at some of the problems we have.
You know, I have said this so many times to my constituents
back home in Louisiana. It makes me a little nervous to know
that only 2 years ago we had cheap natural gas, we had 70 cents
a gallon gasoline, $10 a barrel oil, and look at the situation
we are in today. I have also stated that I believe strongly
that America, being the most powerful country militarily,
technologically, and economically in the history of mankind,
has a vulnerability, and it is energy. And I think it is that
serious.
And I think that the embarkment that we are going to start
in a national energy policy is as critical as any issue that we
will debate in the next coming years. It is just coming to
light now because of the situation in California and because of
gasoline prices. We had the coldest winter in some years in
Louisiana. We actually had three freezes. So it was cold in
Louisiana this year.
Mr. Barton. Wisconsin has got great sympathy that you had 3
days of freezing.
Mr. John. For us guys, it is cold, Mr. Chairman. For us
guys, it is cold.
But I believe that it is time to stop demonizing the
domestic producers. They are part of the solution to the supply
problems. Too many times they have been looked at as being part
of the problem, but of course, I think it is going to become
apparently clear that they are going to be part of the solution
to any sustained economic growth as we open the doors of a new
economy that is going to be driven by electricity and fuel.
I also am anxious to hear a lot of the comments from some
of my colleagues. I have my good friend down in the audience
that represents Louisiana Chemical Association, Dan Borne, who
knows all about what high natural gas prices mean to Louisiana
industry. We talked a little bit about how other industries are
going to be affected and the trickle down effect. Well, I can
tell you that 40 percent of the U.S. ammonia is produced in
Louisiana. Ninety percent of the cost of ammonia is natural
gas. Ammonia makes fertilizer. Fertilizer feeds our fields for
our farmers. The farmers will feel this effect not only in the
price of diesel fuel to run their tractors but in the cost of
production.
So I am very excited about embarking on a national energy
policy, and it is something that I believe is very, very
important to the national security of this country. So with
that, I have a written statement that I would like to put in
the record.
Mr. Barton. Without objection, so ordered.
[The prepared statement of Hon. Chris John follows:]
Prepared Statement of Hon. Chris John, a Representative in Congress
from the State of Louisiana
Mr. Chairman, I want to thank you for calling this hearing today on
natural gas issues. In deference to the numerous witnesses who are
patiently waiting to testify I will be brief with my remarks. However,
I would like to comment on a couple of the natural gas issues that I
believe are critical in developing a comprehensive national energy
policy.
First, if we want continued economic expansion of our new high-tech
economy, demand side solutions cannot alone help our nation meet its
energy needs. For too long, many Americans have taken for granted that
the fuel that heats their homes, runs their cars, and recharges their
cell phones is the end product of an expensive and complex process
which begins with extraction of gas, oil, coal or uranium. Any
comprehensive energy policy must look at supply-side issues and I am
happy that we have witnesses represented today who will talk about
access issues which have constrained our domestic producers from
developing our nation's resources base.
The single greatest factor in this winter's high natural gas prices
has been a lack of domestic supply to meet growing demand. This comes
as no surprise to those of us who represent oil and gas producing
congressional districts. Two years ago when our domestic producers were
being crushed by historically low oil prices, and massive job losses
were taking place in our communities, the silence was deafening from
the rest of the nation. As long as gasoline prices and energy prices
were low nobody cared about the fact that our independents and major
producers of oil and gas were cutting jobs, cutting back on new
investment, and abandoning marginally producing wells. Well, Mr.
Chairman, we reap the seeds we sow.
While the number of production rigs has doubled in the past two
years, the effects of low prices have not ended. Over 400 jobs have
been lost in my congressional district in the last few months as oil
and gas companies continue to cut costs and streamline their business
operations in preparation of receding prices when this new production
comes online.
Natural gas is a commodity and the best way to prevent huge swings
in price is to ensure that there is an adequate, stable supply base. It
is time to stop demonizing our producers and recognize that they are a
central part of any comprehensive solutions we may develop. Moreover,
if we want to meet growing demand, we must address some of the access
issues that prevent development of America's natural resource base.
Surely members from states tied up in moratoria do not believe their
lands are more important or valuable than those of states who are not
covered by these restrictions. It is unwise and short-sighted to have a
few states bearing a disproportionate load for the entire nation--
especially when we are talking about the development of federal, not
state, lands.
We must also make sure that the right incentives exist to maximize
our domestic supply base. This should include tax incentives for
marginal and stripper wells to keep them in production, an extension of
the Section 29 nonconventional fuels tax credit to encourage production
of natural gas from tight rock formations and other sources, and
royalty relief in federal waters where appropriate.
While most access and tax policy issues are beyond the Jurisdiction
of the Energy and Commerce Committee, I believe it is important for
this Committee to recognize their importance in a comprehensive
national energy policy.
Mr. Chairman, let me conclude by thanking you for inviting a
representative of the Louisiana Chemical Association to testify today.
Sustained high natural gas prices have affected many industries, but
few more so than Louisiana's ammonia industry, which accounts for 40%
of the U.S. production of ammonia. Natural gas makes up 90% of the
costs of producing ammonia and as a result of high prices, several
companies have been forced to shut down all or part of their ammonia
production units. Most of the ammonia produced in Louisiana is used to
make fertilizer, so the effect of high natural gas prices will soon
trickle down to our nation's farmers--who are already struggling with
low prices. Mr. Jas Gill knows my district well having spent time in
the community of Lake Charles working for the Olin Corporation. I would
like to welcome him to the subcommittee and appreciate his testimony
here today.
Mr. Chairman, thank you again for convening this important hearing
and I look forward to working with you to craft a comprehensive
national energy policy.
Mr. Barton. The vice chairman, the distinguished gentleman
from Oklahoma, is recognized for an opening statement.
Mr. Largent. Thank you, Mr. Chairman. Today's hearing on
natural gas issues is of particular interest to me. My home
State of Oklahoma is a large producer of natural gas;
nevertheless, my constituents are not immune from having to pay
high natural gas bills. In fact, the No. 1 complaint that I
hear in my office from folks back home is what am I going to do
to lower their natural gas bills?
I want to recognize one of our witnesses today who is on
the second panel, Mr. Cuba Wadlington. Mr. Wadlington is the
president and CEO of Williams Gas Pipeline located in Tulsa.
And Cuba, we welcome you to the subcommittee.
Mr. Chairman, the U.S. is a country rich in both energy
resources and the technology to develop them. Unfortunately,
the policies of our own Government are preventing much needed
development of these resources from occurring. For those of you
who follow British history, you may recall the popular
expression, ``Taking coal to Newcastle.'' Newcastle was a
center of English coal production. The phrase was coined to
indicate the absurdity of taking a product to a place that had
plenty of it.
But that is exactly what happened in the late forties when
the British government nationalized the coal industry.
Shortages and rationing resulted, and taking coal to Newcastle
became a grim reality. Similarly, the United States today with
its vast supplies of oil, natural gas, timber, and other
natural resources is suffering shortages and high prices
because of restrictions imposed by our own Government.
I read with interest the testimony of one of our witnesses
today, Mr. Patrick Silva, from the Natural Resources Defense
Council. It is the NRDC's position that we can solve our
natural gas supply problems by maximizing the benefits of
building energy-efficient buildings and manufacturing energy-
efficient heating and water heating equipment. I agree that it
will help alleviate some demand problems, but it is not the
silver bullet.
The NRDC apparently would like us to believe that if we
maximize existing natural gas supplies, we can continue to be
energy self-sufficient. I infer from that sentiment that the
NRDC opposes any exploration or production of potential natural
gas deposits, particularly if they happen to be in areas that
the NRDC deems to be environmentally sensitive.
Mr. Chairman, you know all too well that our domestic oil
and natural gas industry has suffered job losses in the tens of
thousands over the last decade. I am afraid that until the oil
and natural gas worker becomes himself an endangered species,
the environmental community will continue to bite the hand that
feeds our energy requirements. My goal is for this subcommittee
to develop a comprehensive, common sense, environmentally
sound, long-term energy policy. Otherwise, I fear that the next
popular expression will be, ``Taking oil and gas to Tulsa.''
Thank you, Mr. Chairman.
Mr. Barton. Thanks to the gentleman from Oklahoma. We now
welcome from the balmy badger State, Mr. Barrett of Wisconsin
for an opening statement.
Mr. Barrett. Thank you very much, Mr. Chairman. I was
getting choked up listening to Mr. John talked about the three
freezing days.
Thank you also for holding this important hearing, and
thanks to the witnesses for being here today to discuss natural
gas and the nation's overall energy policy.
Soaring natural gas costs, along with the high price of
crude oil and other fuels, have put this country's energy
policies under the microscope, and rightly so. I am hopeful
that this afternoon's hearing will point to some sound
solutions for meeting this country's long-term energy needs.
To date, I am afraid that some have been looking too hard
in the wrong place for solutions. Although gas production on
some public lands is certainly needed, expanding production in
the country's most environmentally sensitive areas for a
limited amount of gas or oil is not sound public policy nor is
it what the majority of American people want.
Any truly effective energy policy must include meaningful
demand management incentives and significant infrastructure
improvements, as well as initiatives to ensure an adequate
energy supply. The crisis in California, in particular,
suggests that we must work with the States to ensure a
diversified fuels portfolio that includes coal, hydroelectric,
and renewable sources in addition to natural gas.
Of utmost concern to me are the ways in which energy policy
and the fuels market impact the nation's consumers. Major
utilities in my home State of Wisconsin are seeking retail rate
increases upwards of $72 million to offset the rising costs of
natural gas. Residential prices for natural gas, as everyone
here knows, have already doubled this year. And while
everybody's pocketbooks are affected, many low- income
families, many moderate-income families and seniors living on
fixed incomes have been truly overwhelmed by their gas bills
this winter in Wisconsin.
An energy assistant program director in my State recently
reported that thousands of households are confronting heating
bills that are higher than their monthly incomes. Faced with
heating costs that range from nearly $200 to almost $700 a
month, seniors and working families are being forced to make
unacceptable choices, like cutting spending on groceries,
medical prescriptions, and other necessities in order to pay
their heating bills. I realize that this is a complicated
issue, but we certainly have to do what we can to work
together.
And again, I thank the chairman for holding these hearings
and hope that we can help the people in this country because
they deserve the help. And I would yield back the balance of my
time.
Mr. Barton. We thank the gentleman from Wisconsin. We
recognize the gentlelady from New Mexico, Congresswoman Wilson,
for an opening statement.
Ms. Wilson. Thank you, Mr. Chairman. I think, probably, our
perspective on energy policy will depend, as the ranking member
said, a lot on regional perspective. And as a New Mexican, we
are an energy-producing State. We produce coal and gas and oil
and uranium--at least, we used to produce uranium. We still
have the uranium. We have plenty of public lands, more than
almost any other State, except Nevada and Alaska. We sell
wholesale power to States like California, and we are on the
same grid as California, which certainly send chills through a
lot of New Mexico's spines. And we have two Department of
Energy national laboratories, where some advance research on
energy supply and efficiency is done.
But like my colleague from Oklahoma, I also have
constituents who are facing high energy bills, high natural gas
bills, fears about what being on the same grid as California is
going to do. And let us face it, while we are starting off
these hearings talking about natural gas, all of these issues
are interrelated, because one of the reasons that gas prices
are high is because of the increase in demand for electricity
as produced by natural gas power plants. And so energy policy,
as a whole, we are going to have to tackle. And we need--for
the first time in a decade, I think we have the opportunity to
craft a national energy policy.
That policy must produce dependence on foreign oil and
foreign sources of energy. It must allow for responsible
exploration and increased supply of energy as the American
economy grows. And it must demand, and probably put in statute,
interagency coordination on matters affecting American energy
supply and also curbs to demand.
In this country, the EPA and the Department of Agriculture
and the Department of the Interior can all make decisions
unilaterally that affect American energy supply without having
to take into consideration its effects on the economy or our
energy policy. We need to put in statute a mechanism to make
that not possible to do anymore, so that agencies cannot
protect their vested interest without looking at what it will
do to the entire economy and to the supply of energy.
It certainly was made very clear in our hearing last year
on hydro licensing and the way so much water goes down
spillways in this country just because it is so hard to license
a hydro dam. So we have a shortage of energy in California
which depends on hydro power. We have hundreds, if not
thousands, of dams that are regulated by States that have no
turbines on them. And the reason they don't have any turbines
and that electricity is going down the spillway is because it
is such a hassle to be licensed to put a turbine, because as
soon as you put a turbine on a dam, it becomes federally
regulated. And the Federal Government can order you after 7 or
8 or 9 or 10 or 12 years to breach that dam, even if it has
been there for hundreds and hundreds of years.
California made terrible mistakes in how it did
deregulation, and there will be good lessons for us to learn
there. But there are also lessons to learn in research and
development. We lose more electricity in the transmission of
power from New Mexico to California than is consumed by the
entire State of New Mexico. Think of that for a moment and how
that would make a difference to rolling power outages in the
State of California. So whether it is the efficiency of the
light bulb or the pilot light, which in this beginning of the
21st century should probably be much more efficient than they
are, I think there is advantages to investing in research and
development as part of a comprehensive energy policy.
And finally, I will say what others have said before me,
but we really need to do this, and that is to rethink nuclear
energy as a country. I have seen some things said publicly and
some stories in major newspapers and television in the last
several months that I thought I would never see, that tell me
that people really are perhaps now willing to rethink the role
of nuclear energy in reducing America's reliance on foreign
oil. And I look forward to that challenge.
Thank you, Mr. Chairman.
Mr. Barton. Thanks to the gentlelady. I think that is the
longest opening statement you have ever made. You have probably
been associating with Mr. Markey a little bit too much.
Ms. Wilson. Mr. Chairman, it would have been funnier if I--
--
Mr. Barton. It was eloquent. Actually, I thought it was
well done, so I am not being critical. We appreciate the
thought you put into that.
The gentleman from Tennessee, Mr. Gordon, is recognized for
an opening statement.
Mr. Gordon. Thank you, Mr. Chairman. This is an important
hearing. I think it is time to get on with it.
Mr. Barton. I do love Bart Gordon of Tennessee.
The gentleman from Georgia, Mr. Healthcare, Congressman
Norwood.
Mr. Norwood. Thank you very much, Mr. Chairman. I have this
tremendous opening statement, and I know you are dying to hear
it. However, I would like to just submit it for the record, and
in summary, conclude by saying I do, as all of us do,
appreciate your interest in a national energy policy. I am
delighted that our new President is interested in a national
energy policy. And I heard one of our colleagues earlier say I
hope we can keep politics out of it. I think politics has gone
a long way to get us into the mess we are today.
The people of the 10th District of Georgia want me to come
to these hearings and learn. They want to know why their gas
bills are so high. They want to know why their gasoline bills
are so high. And I think at the end of the day we are going to
determine that all Americans want all the energy they possibly
can use at a low cost. However, there are some Americans who
want to use candlelight energy and be warmed by a nice fire.
And we are going to have to go through that, and that may
involve some politics. But at the end of the day, the American
people, I believe the majority of the American people, want you
and President Bush to develop a sound, sensible energy policy
for this nation so we won't have the terrible things that are
happening in California happen in the rest of our States.
So I thank you, Mr. Chairman, for this hearing.
Mr. Barton. Well, the EPA has determined by regulation that
candlelight is a point source pollutant and subject to various
regulations, so that probably won't be very viable as an
alternative.
Seeing no other members present--oh, in the nick of time,
the gentleman from Massachusetts is recognized for a 3-minute
opening statement.
Mr. Markey. Thank you. I appreciate it. It is more
interesting this way. I remember back in 1978 when we were
debating the bill which would decontrol the price of natural
gas, and it was going to come down to a two or three vote
margin in the House. For all of you out there nodding your
head, you have been gainfully employed for a long period of
time. Congratulations.
But it was a close voting. Tip O'Neill came to me out on
the House floor. He knew I was on this committee. And I really
felt that in the Senate version they had taken out too much
money for conservation and too much money for rapid transit. So
I wasn't really convinced it was a perfect bill. And Tip put
his arm on me, and he said, ``Eddie, I need your vote.'' I
said, ``Tip, I can't be with you.'' He said, ``Eddie, I need
your vote. We can't have President Carter be defeated on
this.'' I said, ``The bill isn't quite good enough. If only it
was better. When the bill is better, I will be with you.'' He
said, ``Eddie, I need your vote.'' I said, ``Tip, on this one,
you are not right.'' He said, ``Eddie, when I am right, I don't
need you.''
``Let me think about that,'' I said.
So as the years went by and I reflected upon the wisdom of
the great man, I realized that he was right, that I should have
voted for that bill, which I didn't at the time. And in fact,
in my last conversation with him, which was right before NAFTA,
I reminded him of that conversation 15 years before, and I told
him that I would vote for NAFTA because my President wanted it,
and it was close. And whenever it is close, you should give it
to the President in your party. So I did that.
But with different--excuse me?
Mr. Barton. Remember that when it is close, your President
will get your vote.
Mr. Markey. I didn't say my chairman. I did not say my
chairman.
My chairman is different, although, if you are, okay, I am
more than willing.
We have had new breakthroughs in natural gas. Sable Island
off of the coast of Nova Scotia makes it possible for us in New
England, for the first time, to be at the front end of the
pipeline. There is only 3 million people who live in Quebec. We
are their customers. So that is good news for us, and it is
going to lead to a very rapid conversion of the New England
economy to one which is very much based upon natural gas, as
Sister Carita taught us in the sixth grade at the Immaculate
Conception Grammar School, from our friends, the Canadians, the
longest unprotected border in the world.
And so, for us it is good news in natural gas. Something
that we were told was in short supply back in 1978, it turns
out is abundant; it is plentiful. In fact, so abundant that it
could be used for New England in the future.
In addition, the natural gas resources down in Trinidad
could also be tapped if other ports--as Boston does it in my
district, in Everett, Massachusetts, where there is an L&G
facility--could be constructed along the East and the Gulf
Coast. I think we could largely solve our energy problems if
other parts of the East and Gulf Coast were willing to build
L&G ports, liquefied natural gas where the gas is frozen
biogenically and then transported by cargo ships up into the
heavily populated areas of our country.
So we in Boston, in my district, we are one of the few
areas that have this right now. But I think that given the fact
that Trinidad has this supply, that BP is in control of it and
quite optimistic about its long-term abundance, then I think we
should move in that direction as well. In other words, as long
as we are creative and working together, and not automatically
saying that we should go to the pristine areas of Alaska in
order to drill before we have exhausted other more pragmatic
and consensus areas, then I think we can work together.
It would be quite unfortunate if we went to an uneconomic
area for drilling in the heart of the Arctic Refuge before we
went to the places where I think we can all agree and work
together to build a common pulse.
And I think you for holding this hearing, Mr. Chairman, and
I yield back the balance of my time.
Mr. Barton. We thank the gentleman. We tell that story in
Texas as a Sam-Rayburn-talking-to-Lyndon-Johnson-when-he-was-a-
young-con gressman story. I have heard that before but not from
the Tip O'Neill-Ed Markey version.
Mr. Markey. Well, Tip O'Neill tells it as James Michael
Curly telling it to him.
And John McCormick telling the story to Sam Rayburn.
Mr. Barton. Right. It is probably part of the Texas-Boston,
the Austin-Boston axis.
We promised to introduce no bill to drill under Boston
Common from this subcommittee. You have my word on that.
The gentleman from California, Mr. Radanovich, is
recognized for an opening statement.
Mr. Radanovich. Thank you, Mr. Chairman. I have no opening
statement, just looking forward to the testimony. Thank you.
Mr. Barton. Seeing no other members present--whoops, Mr.
Waxman has just arrived. Does Mr. Waxman wish to make an
opening statement? Okay.
And the full committee chairman, Mr. Tauzin, you wish to
make an opening statement?
Chairman Tauzin. Not on the record.
Mr. Barton. Then the chair would ask unanimous consent that
all members not present have unanimous consent to put their
opening statements in the record. Hearing no objections, so
ordered. Mr. Walden has presented his statement. He will be
back shortly.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Greg Walden, a Representative in Congress
from the State of Oregon
Mr. Chairman, I'm from a hydro rich area of the United States where
70% of our energy comes from our abundant hydro resources. It is the
most inexpensive energy there is, and it is renewable. However, we in
the Northwest region are having a drought, and that coupled with
current energy markets in the West is having a devastating effect on
Oregon's economy and the rest of the Northwest.
In a year like this when we are projecting merely 59% of normal
water levels and we are shipping power to our neighbors to the south we
have found that power diversity is becoming critical. Because 70% of
our electricity comes from hydro, some 30% comes from coal, nuclear and
natural gas fired generation. This puts us in a very critical situation
this summer.
I am happy to say that we are looking at a number of new projects
in Oregon that will be gas fired. Most of these plants will be located
in my district because a large natural gas pipeline goes right down the
center. They are an important part of meeting our region's growing
needs. I also know that by state statute we have a CO<INF>2</INF>
mitigation fund that will keep these plants from leaving a very large
footprint on our environment.
But our situation at this moment in the Northwest is dire.
Increases in the price to heat homes has created an impossible
situation for those families of lower incomes. They cannot afford two,
three, or four times their normal heating bill. In addition, we have
some farmers that grow specialty crops for dry goods that can't dry
their crops because current gas prices add to much to their costs.
Here is what I hope to learn from this hearing. I want to know
about gas supply. Do we have adequate supplies to meet the ever
increasing demand? If our gas supplies are enough, do we have the means
to get it out? Are there laws in the way? If there are, what can we do
on the federal level to rectify the situation? And, do we have the
capacity in our pipeline infrastructure to deliver the natural gas to
its final destination?
The Northwest is meeting increasing demand by diversifying its
energy sources. I hope that this hearing will enlighten all of us on
how we can allow that to happen.
With that Mr. Chairman, I'm anxious to hear what the panels have to
say and yield back the remainder of my time.
______
Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee
on Energy and Commerce
Mr. Chairman: I would like to commend you for holding this first of
a series of hearings on a comprehensive national energy policy. I think
it is fitting that we begin with natural gas. We need to increase the
supply of natural gas and get more of it to consumers.
Natural gas is currently the fuel of choice for new electric power
generation. The experience in California has awoken the rest of the
country to the fact that electricity is something we cannot take for
granted.
Natural gas is environmentally friendly. When burned, it emits far
fewer pollutants than other fossil fuels.
Natural gas is abundant, if we can get to it. About 85% of our
current consumption is produced domestically. The remainder largely
comes from Canada.
High natural gas prices can have a ripple effect through our
Nation's economy. A good example is what we experienced this past
winter in my home state of Louisiana. You see, in addition to
electricity production and heating, natural gas is used as a feedstock
to produce chemicals, which in turn are used for all sorts of products.
One such chemical is anhydrous ammonia. Companies in Louisiana produce
about 40% of our nations anhydrous ammonia. This chemical is used to
produce an infinite number of commercial products, as our witness Mr.
Gill will testify to today. One important use of anhydrous ammonia is
to make nitrogen fertilizer, which is critical for crop yield,
particularly corn.
CF Industries is a farmer-owned cooperative that operates a world
scale nitrogen fertilizer plant in my district. CF supplies about \1/3\
of all the nitrogen fertilizer needs for farmers in the U.S. When gas
prices soared this past December, CF had to shut down over half of its
production in Louisiana because it could not cover its cash production
costs. Natural gas, as it turns out, is by far the primary cost
component in producing anhydrous ammonia, and in turn nitrogen
fertilizer. This directly affects our Nation's farmers and the goods we
all take for granted.
Making choices to open and close manufacturing plants based on the
supply of natural gas is no way to run a business. The market will
return natural gas prices to reasonable levels if we let it. This means
examining old policies in light of modern technologies, and pursuing
new policies that will allow supplies to better keep pace with demand.
The situation of companies in Louisiana demonstrates the need for a
comprehensive hemispheric energy policy. Our country cannot afford to
put strategic industries like these out of business.
I look forward to hearing the testimony of our witnesses today.
______
Prepared Statement of Hon. Ralph M. Hall, a Representative in Congress
from the State of Texas
Mr. Chairman and Members of the Committee: I thank you for
scheduling this hearing on natural gas policy--the first of what I
expect to be many hearings on the development of a comprehensive
national energy policy.
Natural gas is a clean, relatively abundant and domestic fuel that
this country is banking on to meet much of our incremental energy needs
in the 21st century. However, while government policy has had the
effect of promoting the use of natural gas, the policies affecting the
development of natural gas resources and the delivery of gas from where
it is found to where it is consumed are profoundly weak and backward.
If the industry is to meet the projected demand--some say an
increase of up to 35 trillion cubic feet in twenty years from the
current levels of 22 trillion cubic feet today--it can't be business as
usual from this point forward.
The investment that needs to be made in this industry is huge--$150
billion for transmission and distribution alone. And that doesn't even
count the additional billions needed upstream by the exploration and
production sector. And it's not just investment that's needed.
If you come to my part of East Texas you will not have to go far to
meet someone who used to be in the oil business. He or she may be a
former production company executive, deckhand or roughneck. They're not
in the business now because the infrastructure to support exploration
and production has almost been wiped out. Low oil prices did that. And
these folks have learned their lesson. Most of them have found jobs at
places like Wal-Mart where the pay is least steady, and they're
probably not coming back until they have confidence that this
government cares enough about the price of crude oil and natural gas to
enact policies to stabilize prices.
The brain drain in the petroleum industry has been unbelievable.
The confidence to enter the business is not there. The best example I
know of is at the University of Texas at Austin. There are so few
students in the petroleum engineering program, and the demand for them
now is so great, that I'm told at least one company is already hiring
students in their junior year and paying them a salary. And I thought
only athletes turned pro in school.
Mr. Chairman, we won't get that 35 trillion we need if we don't
open up some public lands for exploration and production; if we don't
streamline the FERC permitting process for new pipeline construction;
if we don't enact some tax provisions to create sufficient incentives
for producers to drill and produce gas in mature horizons where the
yields from even new wells continues to decline.
And we can't count on the Canadians or the Mexicans to meet our
incremental needs for the future. They have their own ideas about how
they want to use their gas, and it probably doesn't include us as much
as we might wish. We have to build the confidence of our people back in
order to build the infrastructure to deliver the natural gas that this
country needs.
If the best and the brightest of our young people continue to see
that the oil and gas business is a losing proposition, we won't get
that 32 trillion. And the impact on the nation--in terms of jobs
elsewhere not created or lost--will affect the economic wellbeing of
this country.
Thank you Mr. Chairman. I yield back the balance of my time.
Mr. Barton. We now would like to welcome the Chairman of
the Federal Energy Regulatory Commission, the Honorable Mr.
Hebert from Mississippi. Your statement is in the record in its
entirety, and we recognize you for such time as you make
consume to elaborate on that statement. Chairman Hebert.
STATEMENT OF HON. CURT HEBERT, JR., CHAIRMAN, FEDERAL ENERGY
REGULATORY COMMISSION
Mr. Hebert. Thank you, Chairman Barton. It is good to be
here. Let me open by telling all of you it is certainly my
honor to be here. I certainly want to apologize to the members,
Congressman Bono, Congressman Radanovich and Waxman, who heard
me earlier today in a meeting we had with the California
members who were concerned what is going on there. But I am
pleased to be invited on this, and I appreciate your
leadership, Mr. Chairman, on this issue.
I don't think there is anything more important to America
right now than energy policy. In my testimony today, I would
like to make three basic points. First, the Commission's
primary role in the natural gas industry is to ensure that
adequate pipeline infrastructure is available to serve the
growing demand for natural gas at just and reasonable rates.
Since the Natural Gas Wellhead Decontrol Act of 1989, the
Commission has had no jurisdiction to regulate the prices
charged by natural gas producers at the wellhead. The
Commission retains only limited jurisdiction over certain sales
for resale in interstate commerce. The Commission's primary
natural gas jurisdiction is, one, to authorize the construction
of interstate pipeline transmission in storage facilities; two,
set the rates, terms and conditions of service for interstate
transportation and storage of natural gas.
Second, while the recent increases in natural gas prices
are a matter of serious concern, natural gas deregulation has
been an extremely successful long-term policy. And the
fundamental structure of natural gas markets remain sound.
Beginning in 1984, competition in the natural gas industry has
led to 15 years of prices that were lower than anyone
anticipated in America. In fact, the low prices lasted for so
long that it was easy to forget the inherent tendency of energy
markets toward boom and bust cycles.
The deregulation of wellhead prices, together with the
Commission's Open Access Transportation Program, has produced a
robust, flexible, and responsive natural gas market. Already
producers have responded to higher prices with increased
drilling. Although, there is inevitably a time lag between
increased drilling and a supply response, the increase in gas
supplies hopefully will, over the next several years, help
moderate the recent price increases. Increasingly too,
customers are adjusting.
For example, we hear of electric generators actively
reconsidering their exclusive reliance on natural gas for new
plants. Several members mentioned exactly that concern today
and how diversity and changes in fuels is important. Everyone
has a role to play in helping drive demand and supply back
together in better balance. I will not make any predictions
about what prices will be in the future, but I firmly believe
at this point that allowing the competitive wellhead market to
work continues to be the best way to obtain adequate gas
supplies at the lowest, reasonable prices for America.
Third, the Commission, we can help mitigate price increases
by exercising its jurisdiction over the certification of new
pipeline projects to ensure that newly developed supplies can
reach the market quickly and where needed. Adequate natural gas
pipeline transmission and storage capacity is critical to
support the continued functioning of the competitive market for
the gas commodity. As new gas supplies are developed in
response to the continued growth in natural gas consumption and
increased prices, new pipeline facilities will be necessary to
allow those supplies to reach the market. I pledge my continued
support of the construction of new pipeline infrastructure to
meet these critical needs. And I will do everything I can to
ensure that the commission processes certificate applications
for proposed pipeline projects as quickly as possible.
For example, in response to the present situation in
California, the Commission is responding as quickly as possible
to any applications to construct new capacity. In the last 7
months, the Commission has issued certificates for three
projects with total capacity of almost 119,000 MCF a day of
capacity that could benefit the West. Several more certificate
applications are pending, and the Commission is committed to
moving quickly on these projects as well. The Commission is
prepared to adopt additional procedures for expedition if they
will help to alleviate the present emergency. Of course, any
actions the Commission takes, Mr. Chairman, to expedite new
capacity for gas to serve California and the West can only be
effective if there is available local capacity to deliver gas
downstream of the interstate pipeline.
The availability of sufficient, local take-away capacity,
however, is a matter that is within the control of the States,
not the FERC. For example, it appears that the intrastate gas
transportation network in Southern California is constrained,
and this, to some extent, may have affected gas prices in that
area, which are among the highest in the nation. I urge the
State of California, and its leadership, to expedite its
consideration of proposals to relieve those constraints and
provide relief to California consumers. The Commission will
cooperate with the States in order to ensure that new
facilities subject to State jurisdiction are properly
integrated in the interstate grid.
Aside from the current situation in California, there is
also a critical need to provide transportation for newly
developed gas supplies to reach all U.S. markets. One major
potential new source of gas is in the arctic regions, including
the north slope of Alaska. The Commission conditionally
approved the Alaskan Natural Gas Transportation System in the
late 1970's pursuant to the Alaskan Natural Gas Transportation
Act. The U.S. portion of the ANGTS comprises three segments
which were issued a conditional certificate by the Commission
in December 1977. Originally, the ANGTS was scheduled to be
completed by January 1, 1983. However, to date, only the
eastern leg and a portion of the western leg have been
constructed and placed in operation.
I strongly support the construction of a natural gas
pipeline from the north slope of Alaska to the lower 48 States.
If constructed, an Alaskan pipeline would provide unprecedented
economic energy security and environmental benefits to the
United States by bringing a very large supply of additional gas
to the domestic market. I am fully committed to acting on any
request for the construction of pipeline infrastructure to
deliver this gas to the North American consumers. I well
understand that the ongoing development of Canadian and Alaskan
natural gas supplies is critical to U.S. national and energy
security.
In conclusion, I assure you I recognize, Mr. Chairman, the
critical importance to your constituents and the constituents
of all the members of this committee of having an adequate
natural gas transportation infrastructure. And we at the
Commission will do our part to ensure that new pipelines can be
built to support a growing industry, and that natural gas
transportation supports flexible, innovative markets.
I am confident that States and other Federal agencies will
also do their parts to put in place local infrastructure and to
mitigate short-term hardships. To me, Mr. Chairman, the
mitigation can be done most efficiently up front before the
process begins. I am also eager to engage in a team effort with
executive agencies that will also play a major and coordinated
role in the environmental review of any proposals. It is
critical that any regulatory overlap be minimized, and that all
agencies work together in a coordinated and efficient manner.
Mr. Chairman, the people of America need a one-stop shop to
facilitate their energy needs. I emphasize that the
Commission's Open Access Program for natural gas transportation
has resulted in a vibrant, transparent, liquid competitive
market for natural gas. It is critical that we continue to
develop the same type of competitive, comparable markets for
electric energy and transmission as well, and do so as
expeditiously as possible.
Mr. Chairman, those are my opening remarks. I do have with
me General Counsel for the FERC, Kevin Madden to my left, who
is here to make sure, since we are a quasi-judicial agency, I
don't step out of the bounds on cases pending before us. Thank
you.
[The prepared statement of Hon. Curt Hebert, Jr. follows:]
Prepared Statement of Hon. Curt Hebert, Jr., Chairman, Federal Energy
Regulatory Commission
Mr. Chairman and Members of the Subcommittee: Good Afternoon. I am
Curt Hebert, Jr., Chairman of the Federal Energy Regulatory Commission
(Commission). I am pleased to be invited to this hearing on natural gas
issues and the role of natural gas in national energy policy.
In my testimony today, I would like to make three basic points.
First, the Commission's statutory role in natural gas markets focuses
principally on transportation, not commodity prices. The Natural Gas
Wellhead Decontrol Act of 1989 completed the deregulation of the prices
producers charge for gas sold at the wellhead in 1993. As a result, the
Commission has no direct authority to regulate the prices charged by
natural gas producers. The Commission retains only limited jurisdiction
over certain sales for resale in interstate commerce. The Commission's
primary natural gas jurisdiction is to: (1) authorize the construction
of interstate pipeline transmission and storage facilities; and, (2)
set the rates, terms, and conditions of service for interstate
transportation and storage of natural gas. In short, our central role
in the natural gas industry is to ensure that adequate pipeline
infrastructure is available to serve the growing demand for natural gas
at just and reasonable rates, terms and conditions of service, and
without undue discrimination.
Second, since wellhead decontrol and the Commission's open access
transportation program, there has been a well-functioning, competitive
market for the sale of the natural gas commodity. From the mid-1980s
until this winter's heating season, competition among natural gas
producers and others has resulted in readily available supplies at
prices lower than during gas price regulation. This winter prices have
risen because of an imbalance between supply and demand, due to a
number of factors discussed later. However, the current high prices
should provide the necessary market signal to producers to increase
production. Already there are reports that producers have significantly
increased drilling activity. Although there is a time lag between
increased drilling and a supply response, the increase in gas supplies
hopefully will, over the next several years, help moderate the recent
price increases. As reported on Monday of this week, the futures
contract price has dropped by about 50 percent, from almost $10 an
MMBtu (million Btu) earlier this winter to about $5 an MMBtu (Gas
Daily, ``Bid week prices coast narrowly into weekend'' February 26,
2001). While this is probably due to warmer weather and recent
decreases in storage withdrawals, these are clear signs of a well-
functioning market. I will not make any predictions about what prices
will be in the future, but I firmly believe that allowing the
competitive wellhead market to work is the best way to obtain adequate
gas supplies at the lowest reasonable price.
Third, notwithstanding the fundamentally sound nature of the
natural gas market, the Commission can help mitigate price increases by
exercising its jurisdiction over the certification of new pipeline
projects to ensure that newly developed supplies can reach the market.
One of my top priorities as Chairman is to ensure that needed energy
infrastructure is built. If increased gas supply is to help bring
prices down, there must be adequate transportation facilities to move
newly developed gas supplies to delivery markets. Also, current
bottlenecks limiting the transportation of natural gas to areas where
demand is highest must be eliminated. I will do everything in my power
to ensure that the Commission quickly processes certificate
applications for new pipeline projects that will meet these needs. To
that end, Commission staff is looking at creative ways to expedite the
processing of applications for new pipeline capacity to serve critical
areas of the country. However, to the extent transportation bottlenecks
are within state jurisdiction, the states must similarly undertake to
improve their infrastructure. I assure you I recognize the critical
importance to your constituents, and to our country, of having an
adequate natural gas transportation infrastructure.
I will now turn to the specifics of these matters in greater
detail.
i. the federal energy regulatory commission's role in natural gas
markets
The Commission's role in the natural gas industry is largely
defined by the Natural Gas Act of 1938. This Act gives the Commission
authority to grant permission to construct new interstate natural gas
pipelines and related facilities, such as storage and compression. It
also authorizes the Commission to set the rates and terms of service
for the resale and transportation of natural gas in interstate
commerce. Regulation of retail sales and local distribution of natural
gas is a matter under State control, as is the production and gathering
of natural gas. Controls on the wellhead price of natural gas, which
the Commission previously regulated pursuant to a 1954 Supreme Court
decision, were gradually phased out by the Congress. This started with
the Natural Gas Policy Act of 1978, and culminated in the Natural Gas
Wellhead Decontrol Act of 1989, which lifted all remaining wellhead
price controls as of January 1, 1993. The Commission still retains
jurisdiction over certain sales for resale in interstate commerce, but
that jurisdiction now accounts for only a portion of the overall
natural gas market. However, that jurisdiction is limited to sales for
resale by interstate pipelines, intrastate pipelines, local
distribution companies and their affiliates, unless the sales are from
their own production or from sources where we have a free trade
agreement such as Canada and Mexico. In 1993, the Commission authorized
these sales to be made at negotiated, that is, market-based rates.
Although the Commission, in limited circumstances, could amend the
authorizations to provide for some other pricing method, I do not
believe that this would provide effective relief to consumers, as
sellers would find ways to move their supply to unregulated sales.
Price controls on FERC jurisdictional resales would merely distort the
market in the same way they prompted the industry to shift supplies
from the interstate market to the intrastate market before the NGPA.
The Commission also authorizes natural gas pipeline siting and
construction if found to be in the public convenience and necessity
under section 7 of the Natural Gas Act. Consideration of factors under
the National Environmental Policy Act (NEPA), other appropriate
statutes, and landowner interests must be taken into account before
approving a natural gas pipeline project. In addition to its
certificate jurisdiction, the Commission has authority, delegated by
the Secretary of Energy, over the siting and construction of facilities
for the import or export of natural gas under Section 3 of the Natural
Gas Act, as well as authority under Executive Order No. 1045 to issue
Presidential Permits for such facilities if they are located at an
international border.
ii. competitive natural gas commodity markets
The oil embargo of the mid-1970s, coupled with heavy-handed price
regulation by the Commission (then the Federal Power Commission), led
to shortages and supply curtailments of natural gas in the interstate
gas market in those years. In response to these critical supply
shortages, Congress passed the Natural Gas Policy Act of 1978, which
began the decontrol of natural gas commodity prices.
In 1985, the Commission required open-access, non-discriminatory
transportation of non-pipeline natural gas across the U.S. natural gas
pipeline grid. In 1989, the Congress enacted the Natural Gas Wellhead
Decontrol Act of 1989, which ended all remaining wellhead price
controls as of January 1, 1993. In 1992, the Commission took further
steps to ensure a well-functioning natural gas market by requiring
interstate natural gas pipelines to unbundle, or separate, their
transportation service from their own sales service. That removed the
opportunity for pipelines to discriminate in favor of their own
``merchant'' business by providing a higher quality transportation
service as part of their bundled transportation and sales service.
Subsequently, pipelines exited the natural gas sales business
completely and transferred their sales contracts to their marketing
affiliates.
The Commission also established a program to permit holders of
transportation capacity to resell their unused pipeline capacity
rights, called ``capacity release,'' creating a valuable and efficient
secondary transportation market. Since then, the Commission has been
monitoring the gas transportation and storage of natural gas to ensure
the most efficient and effective natural gas delivery infrastructure
for consumers. Last year, the Commission, in Order No. 637, revised its
open access transportation regulations relating, among other things, to
scheduling procedures, capacity segmentation, and pipeline penalties.
When these changes are fully implemented, they should give shippers
added flexibility to make more efficient use the existing pipeline
grid.
As a result of the pro-competitive policies pursued by both the
Congress and the Commission, the natural gas commodity market is truly
competitive. There are about 8,000 producers operating over 300,000
wells in the United States. In addition, the North American natural gas
markets have been integrated, thus permitting an increasing
contribution of Canadian gas to meet U.S. market growth, as well as
U.S. gas sales to Mexico, increasing markets for U.S. producers.
Natural gas buyers in general are no longer limited to buying from one
pipeline. Instead, they have a wide range of supply options and various
transportation and storage options. In addition, an active financial
market has developed to allow buyers and sellers to hedge against price
volatility, depending on their tolerance of risk.
Although different sources quote different numbers, no one disputes
that this competition has produced substantial consumer benefits. In
addition, reserve prospects for natural gas appear to be very
promising. Estimates range from 1,200 trillion cubic feet (Tcf) to
1,700 Tcf, the equivalent of a 55-75 year supply at current and
projected requirements. Pro-competitive policies, technological
innovation, especially in discovery and drilling techniques,
environmental policies, and low prices have led to increased demand for
this clean-burning fuel, especially in the electric generation area.
Unfortunately, the other side of this bright picture is that spot
wellhead prices for natural gas have roughly tripled since 1999, when
natural gas was routinely traded in the $2.50-3.00 per MMBtu range.
While the price increase has focused a lot of attention on the natural
gas industry by lawmakers and regulators, I believe the market itself
has responded, without any need for new laws or new regulations.
Producers of natural gas have already undertaken efforts to increase
the supply of natural gas, and the number of active natural gas rigs
has more than doubled in the past year and a half. While there is
usually a lag bringing this new production on line, the increase in new
drilling should help balance supply and demand.
In sum, the operation of the interstate natural gas market appears
sound, as evidenced by the dramatic increase in drilling activity in
response to market signals.
iii. why are natural gas prices so high this winter?
As explained above, natural gas is now a commodity that is sold in
an open market where the laws of supply and demand determine the price.
Weather, economic growth and the price for other fuels are all factors
that affect the demand for gas. This winter several factors converged
at once to produce very high spot natural gas prices.
Demand for natural gas has increased in all sectors over the last
decade due to economic growth. In addition, a significant number of new
electric generators has come on-line in the last few years that are
fueled by natural gas. While these generators produce power in an
environmentally friendly way using clean-burning natural gas, they are
creating a year-round demand for a commodity that has traditionally
been used more in the winter than in the summer. Increased use of gas
by electric generators has also affected overall demand in the winter.
Weather is also a factor that affects the demand for natural gas.
After much warmer than normal winters in many areas of the country for
several years, temperatures in November and December of this past year
either were below, or well below, normal in all but five states. This
significantly increased the demand for natural gas, as well as other
heating fuels, such as propane and fuel oil.
Although the demand for natural gas has grown in recent years, the
supply has somewhat lagged behind this demand. After the prices for
natural gas and oil collapsed in 1998, producers invested less capital
in the exploration and production of natural gas. In January of 1998,
there were over 633 drilling rigs in operation. By April of 1999, after
a sustained period of low gas prices, the rig count dropped to 362.
While there are plentiful reserves in the ground, maintaining adequate
deliverable gas supplies requires a steady drilling program. The
reduction in gas drilling reduced supply. This trend was reversed in
late 1999. Although there were 905 active drilling rigs on February 16
of this year, historical experience shows there is a time lag (between
three months to eighteen months or more) between increased drilling and
a significant supply response.
Finally, while spot prices have spiked to $20 per MMBtu, or even
higher in some areas of the country this winter, it is important to
understand that local distribution companies and end-users need not,
and generally do not, buy all their gas on the spot market. Today's
competitive market provides gas purchasers a number of options for
achieving greater price stability than is available on the spot market.
Gas purchasers can, for example: (1) enter into long-term supply
contracts; (2) purchase gas during cheaper, off-peak periods and place
it in storage for use during peak periods; (3) forward contract using
gas futures; and, (4) purchase financial hedging instruments. Through
such strategies, gas purchasers can keep their overall gas costs
substantially below spot market levels. For example, in January of this
year, when spot market prices at New York City gates rose above $18 per
MMBtu, the overall gas costs of the two major New York local
distribution companies, Con Edison and Brooklyn Union, were in the $8
to $10 per MMBtu range.
iv. pipeline construction
Adequate natural gas pipeline transmission and storage capacity is
critical to support the continued functioning of the competitive market
for the gas commodity. If that market is to ensure an adequate supply
of natural gas at the lowest reasonable cost, all gas sellers must be
able to reasonably reach the highest-bidding gas buyers, and all gas
buyers must be able to reach the lowest selling producers. For this to
continue to occur, it is clear that additional pipeline capacity must
be built. As new gas supplies are developed in response to the
continued growth in natural gas consumption and increased prices, new
pipeline facilities will be necessary to allow those supplies to reach
the market.
I pledge my continued support for the construction of new pipeline
infrastructure to meet these critical needs, and I will do everything I
can to ensure that the Commission processes certificate applications
for proposed pipeline projects as quickly as possible.
For example, in response to the present situation in California,
the Commission is responding as quickly as possible to any applications
to construct new capacity. We are also encouraging applicants to work
closely with staff at the earliest stages of project development to
expedite the certification process. Early staff involvement may include
getting a head start on meetings with stakeholders and the preparation
of environmental documents. For the appropriate projects, this may
significantly speed the certification process.
In the last seven months, the Commission has issued certificates
for three projects, with total capacity of almost 119,000 Mcf/d of
capacity, that could benefit the West. Several more certificate
applications are pending and the Commission is committed to moving
quickly on these projects, too. The Commission is prepared to adopt
additional procedures for expedition if they will help to alleviate the
present emergency. The Commission is actively pursuing ways to expedite
the approval of infrastructure needed to serve California and the West,
including raising the current dollar limit on automatic authorizations.
This will allow pipelines to construct needed facilities automatically,
as long as they comply with environmental regulations.
Of course, any actions the Commission takes to expedite new
capacity for gas to serve California and the West can only be effective
if there is available local capacity to deliver gas downstream of the
interstate pipeline. The availability of sufficient local take-away
capacity, however, is a matter that is within the control of states.
For example, it appears that the intrastate gas transportation network
in southern California is constrained and this may, to some extent,
have affected gas prices in that area, which are among the highest in
the nation. I urge the State of California to expedite its
consideration of proposals to eliminate those constraints and provide
relief to California consumers. Pipelines should coordinate their
efforts with local distribution companies, public utilities and state
officials. The Commission will cooperate with the states in order to
ensure that new facilities subject to state jurisdiction are properly
integrated with the interstate grid.
Aside from the current situation in California, there is also a
critical need to provide transportation for newly developed gas
supplies to reach all U.S. markets. For example, the Energy Information
Administration (EIA) projects a significant increase in imports of
natural gas to the United States from Canada. Delivering that gas to
U.S. markets will require increased pipeline capacity.
Another major potential new source of gas is from the Arctic
regions, including the North Slope of Alaska. I strongly support the
construction of a natural gas pipeline from the North Slope of Alaska
to the lower-48 states. If constructed, an Alaska pipeline would
provide unprecedented economic, energy security, and environmental
benefits to the United States by bringing a very large supply of
additional gas to the domestic market. It has been estimated that there
are at least 26 trillion cubic feet of natural gas in the North Slope
of Alaska, which would be a very significant addition to our Nation's
energy supply. I am fully committed to acting on requests for the
construction of pipeline infrastructure to deliver this gas to North
American consumers. I well understand that the ongoing development of
Canadian and Alaskan natural gas supplies is critical to our nation's
energy needs and security.
Aside from the above described certificate proceeding, there is
currently no application on file with the Commission concerning an
Alaska natural gas pipeline. However, under the direction of Chairman
Hoecker, the Commission's staff prepared a report reviewing the history
of proceedings under the Alaska Natural Gas Transportation Act (ANGTA),
including the statutes and relevant orders. I have not yet an
opportunity to review that report in detail. As I have already
emphasized, my main goal is to ensure the construction of needed
pipeline infrastructure to allow new gas supplies to reach market.
v. conclusion
The recent increases in natural gas prices are a matter of serious
concern for gas customers and indeed for the nation as a whole.
Nonetheless, natural gas deregulation has been an extremely successful
long-term policy and the fundamental structure of natural gas markets
remains sound. Beginning in 1984, competition in the natural gas
industry has led to fifteen years of prices that were lower than anyone
anticipated. In fact, the low prices lasted for so long that it was
easy to forget the inherent tendency of energy markets towards boom and
bust cycles. The nation's competitive policy has also produced a
robust, flexible and responsive natural gas market. Already, producers
have responded to higher prices with increased drilling. Increasingly,
too, customers are adjusting. For example, we hear of electric
generators actively reconsidering their exclusive reliance on natural
gas for new plants. Everyone has a role to play in helping driving
demand and supply back into better balance. We at the Commission will
do our part to ensure that new pipelines can be built to support a
growing industry and that natural gas transportation supports flexible,
innovative markets. I am confident that states and other federal
agencies will also do their parts to put in place needed infrastructure
and to mitigate short-term hardships.
Thank you. I will be happy to answer any questions you may have.
Mr. Barton. Well, we thank the Chairman for his
participation, and we thank you for bringing your General
Counsel.
The Chair would recognize the full committee chairman, the
gentleman from Louisiana, Mr. Tauzin, for 5 minutes for
whatever purpose he desires.
Chairman Tauzin. Thank you, Mr. Chairman. I wanted to join
you, Mr. Chairman, first, in the strong support for Chairman
Hebert's position as Chairman of the FERC. I hope the
administration confirms that as a permanent chairmanship, not
just because he's not only fully competent and qualified but
because he is an Hebert, because his father comes from Algiers,
Louisiana, right near my district.
More importantly, Chairman Hebert, the focus of today's
hearing on natural gas is critical. I am not sure most people
know, but I know you know this, that Louisiana is one of the
highest per capita users of natural gas in the country, by and
large a consumer State as much as a producer State. That in
this year of high natural gas prices, CF Industries--former-
owned co-op, produces one-third of the nitrogen fertilizer that
is critical to the farm community this year--had to shut down
half of its production because of the high cost of natural gas.
So we have not only a home consumer heating issue, a home
consumer electric issue, we now have huge impacts on jobs and
the production of fertilizer that is going to be critical to
economic recovery as we enter the planting season.
What are your predictions about the supply of natural gas
to plants like CF Industries? Are these high prices going to be
sustained, you think, through the spring or do you think we see
some hope of moderation in the near future?
Mr. Hebert. Mr. Chairman, it is my thought that you are
going to see some moderation. I don't think there is any
question that, specifically in certain regions, there are tight
supplies.
For instance, we just got a press release on El Paso. I
have got it around here somewhere. But they are talking about
the fact that you have 14.4 Bcf that was bid on, total bids
that were placed, when actually there is 1.22 Bcf available. So
you see what is chasing what, and you see where we can be on
our supply situation. Many of the pipes are running full. There
are many things that we can do at the FERC.
As you know, in the past 3\1/2\ that I have been at the
FERC, I have talked to you and numerous other members--my good
friend Congressman Pickering and the Chair himself, and
Congressman Largent, as well as Congressman Sawyer, about my
concerns about pipelines, and how, in fact, that we need to be
careful and we need to be forecasting 5 and 10 and 15 years out
forward. Congressman Markey, his situation up in the Northeast
as well, we are looking at an increase of somewhere even close
to as much as 80 percent that they are going to need out by the
year 2015, and this is serious. I think it is serious in the
Southeast, I think it is serious in the Northwest and in the
West, and I think it is serious in New England.
Chairman Tauzin. A couple of quick questions. One, do you
need any more legislation to move the Alaskan Natural Gas
Pipeline or are current authorities good enough for the
Commission to move it forward?
Mr. Hebert. How did I know you were going to ask me that
question? The statute was passed at a very different time in
America. It was passed at a very different time on
environmental issues; it was passed at a very different time on
pricing issues. There are lots of questions as to whether there
more to be done there. I certainly can't answer that for you. I
will tell you that the times are very different. Certainly, we
have the potential of getting a filing under the statute, and
certainly we have a potential of getting filings outside the
statute.
Chairman Tauzin. Let me make it easier.
Mr. Hebert. I will tell you, we will act on those filings
as expeditiously as we can, as soon as we can. I do think it is
important that we sure ourselves up domestically.
Chairman Tauzin. Yes, I was going to suggest that if you
could comment to the committee in writing as to what, if any,
legal changes need to be made to the structure of the authority
if in fact those are needed, and how this committee might
assist you in moving that project.
Mr. Hebert. Mr. Chairman, if I might add, or ask you, would
it be all right if I speak to the clarifications that come up
that you might address as opposed to me making those
clarifications for you?
Chairman Tauzin. Oh, I understand.
Mr. Hebert. I get a little uncomfortable doing that, but I
will be glad to give you clarification.
Chairman Tauzin. I fully understand. If you can simply
point to the areas where this is doubt or confusion or perhaps
the need for clarification.
Second, you can't order an electric natural gas driven
turbine anymore in this country without being on a 2-year
waiting list. Natural gas has become such a fuel of choice for
electric generation, primarily I assume because of a number of
reasons, but most of all environmental concerns with clean air.
Are we anywhere, in our projections, near satisfying the
demands of the next 5 and 10 years in natural gas with current
levels of production or are we going to have to rely upon more
and more natural gas coming in from Canada, the Caribbean and
other available sources in our Hemisphere?
Mr. Barton. The gentleman can answer the question, and it
will have to be the chairman's last question.
Mr. Hebert. I don't even think it is debatable. I think it
is clear that especially if you start looking at 5 and 10 years
out that we need additional supply, period, without exception.
Chairman Tauzin. Thank you, Mr. Chairman.
Mr. Barton. Did you conclude your answer?
Mr. Hebert. I was trying to be short. I know you prefer it
that way.
Mr. Barton. I was stunned. I mean, an Hebert talking to a
Tauzin.
Mr. Hebert. And I talk fast too.
Mr. Barton. And you have got 15-second answers--unheard of.
Chairman Tauzin. If he had been a Beaudraux, we would be
here all day.
Mr. Barton. The Chair now recognizes the distinguished
ranking member, Mr. Boucher, for 5 minutes of questions.
Mr. Boucher. Thank you very much, Mr. Chairman. Mr. Hebert,
welcome to the committee today. The unfortunate situation in
California has generated some commentary and suggestions from
some sources that transmission companies that also have their
own gas to sell have discriminated in favor of their own
product and against that of a competitor, either by withholding
transmission in order to increase the price in a way that
favored the owner of the transmission company or by allocating
transmission so as to discriminate in favor of the gas that the
transmission company owns. And I would like to spend just a few
minutes with you this afternoon gaining an understanding of the
legal structure in which these kinds of concerns are addressed,
and asking also for your view of what the right public policy
is in terms of how these matters might be handled.
First of all, can we agree that under existing Federal law
it is illegal for a company that owns transmission and also has
its own gas to sell to discriminate in the award of
transmission in favor of its own product to the injury of its
competitor who is also seeking to sell gas? Is that illegal
under current law?
Mr. Hebert. Yes, it is.
Mr. Boucher. And there would be no need, therefore, to
augment the statute in any way to further address that
particular practice; would that be your view?
Mr. Hebert. I think that is fairly clear.
Mr. Boucher. Let me give you another situation. Let us
suppose that the company owns transmission and also has its own
gas to sell. And instead of simply favoring its own product in
terms of the award of transmission, what it does is withhold
the transmission for the product of its competitor; it
constrains transmission. And the effect of doing that is to
increase the price of its own product, and it is doing that for
that purpose. But, of course, it is injuring the consumer
because the price is going up for the end product, and at the
same time it may be injuring competitors who are not able to
get their gas into the transmission stream. Now, would that
practice, in your view, be illegal under current law or is some
augmentation of the statute necessary to address that?
Mr. Hebert. Well, you are right in that we regulate it and
it is tightly done so, but as far as it being illegal under the
law, no.
Mr. Boucher. Do you think that should be illegal under
Federal law?
Mr. Hebert. I guess that would depend on whether or not you
believe we are doing an adequate job.
Mr. Boucher. Well, let me ask the question this way: Do you
believe that you have adequate statutory authority to address
the practice?
Mr. Hebert. I do believe that. Yes, sir, I do.
Mr. Boucher. And do you think that you have been addressing
the practice adequately using those authorities?
Mr. Hebert. I think we have.
Mr. Boucher. Is that a position that is universally held or
is there some controversy about whether or not you have been
doing that adequately?
Mr. Hebert. If there is some controversy--I am assuming you
may be speaking of one of my colleagues--I am uncertain----
Mr. Boucher. Well, I am actually not, but you want to tell
me about----
Mr. Hebert. No. I am uncertain as to if one of them may
disagree with that.
Mr. Boucher. Okay. Generally, though, there is an agreement
that you are doing an adequate job in policing that practice,
and you are not asking for additional statutory authority with
respect to it?
Mr. Hebert. Right.
Mr. Boucher. Let me ask you about permitting of new
transmission lines. And my simple question is this: To what
extent does the increase in price to the consumer of gas that
would be occasioned by the cost of building new transmission
capacity influence your decision about whether or not to permit
that construction at the outset? Is that part of your----
Mr. Hebert. I want to make certain I understand the
question.
Mr. Boucher. Is it part of your analysis, in other words,
to examine whether or not a result of new transmission being
constructed will be an increase in price to the end user?
Mr. Hebert. We look at the need, and then certainly we have
to look at the environmental side of it. But as to the price on
the front end, it is not something that we in a regulated sense
look at, no.
Mr. Boucher. And so if there were appearances before your
agency by people who said, ``Don't build this transmission line
because there is already adequate capacity, and by simply
duplicating existing capacity there will be an ultimate
increase in price,'' you would not take that into consideration
in determining whether or not to permit the line?
Mr. Hebert. I think you may be getting into the question of
need, and certainly we look into the question of need. It is
one of the criteria necessary----
Mr. Boucher. So you would address that from the standpoint
of need rather than from price solely?
Mr. Hebert. Correct.
Mr. Boucher. Okay. Mr. Chairman, this has been very
informative. Mr. Hebert, thank you. And I believe my time has
expired.
Mr. Barton. The Chair would recognize himself for 5
minutes. I am going to go through a series of questions, try to
do it fairly quickly. You can elaborate in writing, but we want
to try to get some things on the record while we can. Do you
feel that in terms of pipeline siting authority any new
legislation or clarification is needed by this subcommittee and
full committee?
Mr. Hebert. Not on pipeline siting, where you are trying to
remove any and all obstacles at the FERC level. I would like an
opportunity to go through that with a little finer comb and
respond to it.
Mr. Barton. Okay. What about the issue of L&G terminals
being built in the United States and importing liquified
natural gas? Are there any Federal issues there that we need to
clarify in terms of legislation, or do you feel the existing
statutes are adequate if we set as a policy goal an increase in
L&G terminal capacity in this country?
Mr. Hebert. Yes. The siting is the real question. I mean,
we have State issues but nothing on the Federal side other than
the siting itself.
Mr. Barton. In terms of any projections--and of course we
have a witness on the next panel from EIA--does your agency
independently do any projections of pipeline capacity that
would be necessary to meet expected increase in demand for
natural gas throughout this country?
Mr. Hebert. No, none at all.
Mr. Barton. So that is purely--you respond, you react when
a proposal to build a new pipeline is presented, but you don't
try to project the capacity requirement?
Mr. Hebert. Right. We let the market influence that, then
when the filing comes before us, we take the filing into
consideration. And then all the relevant information will come
in from the filing party and intervening parties.
Mr. Barton. Okay. From California, there has been a concern
addressed to members of a committee that held an informal
series of meetings last week that the transmission charge that
certain pipelines are charging at the border of California
drives the overall price upwards to $50 in MCF. They claim that
it is not a commodity charge; that it is an actual transmission
charge that is resulting in the $50 MCF price, and it is an
issue that is right at the border between California and
surrounding States. Is the FERC aware of such concerns? And if
so, do you have any active investigation underway?
Mr. Hebert. Yes, Mr. Chairman, I am aware of it. We do have
a filing before us. We have several filings before us
pertaining to California. I have instructed the staff to get
those up and out as soon as possible and hopefully no later
than the end of this spring. Now, acting expeditiously, I would
love to speak on the issue with you, but since it is a pending
matter I have got to be very----
Mr. Barton. Based on Federal law, the wellhead price, the
commodity price for natural gas, is unregulated, and the FERC
doesn't have any authority. But under existing law, the FERC
still has authority over the transmission charge in interstate
commerce; is that correct?
Mr. Hebert. Correct.
Mr. Barton. So if, in fact, there was a finding that the
transmission charge was unjust and unreasonable, the FERC could
step in and set a ceiling on that, a rule on that; is that
correct?
Mr. Hebert. We do have jurisdiction over those transmission
rates.
Mr. Barton. Okay. I think I have several other questions,
but I have got the main ones on the record. So I am going to
yield back some of my time. And we would recognize Mr. Sawyer
for 5 minutes, or Mr. Doyle. Mr. Doyle was ahead of Mr. Sawyer.
Five minutes.
Mr. Doyle. Thank you, Mr. Chairman. I just have two
questions. Chairman, you have highlighted the distinct
jurisdictions that FERC and the Office of Pipeline Safety have.
Is this structure of dual oversight working effectively, and if
not, what adjustments could be made?
Mr. Hebert. Yes. I want to make certain you do know now
Pipeline Safety is through the Department of Transportation. I
know you know that. We do everything we can to facilitate
concerns of consumers when it comes to safety because it is a
big issue when we look at siting pipelines. But the pipeline
safety itself goes strictly through the Department of
Transportation and not us.
Mr. Doyle. Thank you. One other question. You are of the
mind, from your testimony that I have read, that what has
happened with prices, that despite the increase in prices, you
feel we have a well functioning market existing in natural gas.
And that, if anything, that what we should be doing is
accelerating the certification of new pipeline projects. Do you
think that pipeline construction should take primacy amongst
all the other efforts? Is that what you think the top priority
is?
Mr. Hebert. I never--I would never use the word
``primacy.'' I think several people--I know Congressman John
used it; I heard Congressman Sawyer use it. I think ``balance''
is the appropriate word. And I think when we get out of
balance, looking at the need versus the environmental and the
landowners, I think that is when we get in trouble. I do think
in certain areas of the United States, we have been out of
balance for the last couple of years. We have got to find that
adequate supply. We have to be able to have the infrastructure
to not only transport it, but then deliver it, transporting it
being me, delivering it actually being the State side.
So I don't want to say that supply is any more important
than the environment, but it is as important as the price you
are willing to pay. In other words, if you get out of balance
and you say you are not going to site, be it pipelines, or
electric transmission, or generating facilities, then you know
you are going to pay a higher price because in fact you are
going to have scarcity. So in that sense, when you find
scarcity, I do believe it is important to make building
infrastructure a priority, but the laws are pretty clear that
you still got to give an abundant amount of attention to
environmental and landowner concerns.
Mr. Doyle. Thank you. Mr. Chairman, I yield back.
Mr. Barton. Thanks to the gentleman. We recognize the
gentleman from Mississippi for 5 minutes for questions.
Mr. Pickering. Mr. Chairman, in my opening comments and in
your opening comments, you talked about Alaska and the reserves
that we have available to us if we only had the pipeline to
transport it to the 48 lower States. In the Gulf of Mexico on
the eastern side of the Gulf there are significant reserves at
the Destin Dome and other reserves in the eastern part of the
Gulf of Mexico. What is necessary to see those reserves
unlocked, and what is the potential or what is the size or the
scope of those reserves to your knowledge?
Mr. Hebert. I don't know the size of the reserves. I will
provide that for you. But I will tell you, when it comes to
markets--and we look around the entire United States when it
comes to exploration and production--what we tend to do at the
FERC is let the market make that decision. We don't like to
make a decision as to where it should come from because, quite
frankly, with the opportunity to transport, you can almost take
it from anywhere and put it anywhere absent problems of siting.
So we would let the market require that.
I will tell you, quite frankly, when we start moving into
metropolitan areas where we are seeing some of the need now to
deliver some of this supply, it is very difficult. But as far
as the supply itself and how we move it and when we move it, we
let the market determine that. But as far as what the reserves
are themselves, I will get back with you on that and give you
that information.
Mr. Pickering. Does the FERC have any relevant permitting
to pipelines that would take the natural gas from offshore,
say, to Pascagoula, Mississippi or Mobile, Alabama, or
refining, and then from there to distribution?
Mr. Hebert. We have had several cases in the last few
years, Congressman Pickering, on exactly how that should be
treated. It gets into the issue of gathering. If it is
transportation of a product, yes, we do. If it is gathering of
that product, no, we don't.
Mr. Pickering. Is the FERC currently involved in any of the
attempts to produce the Destin Dome or any of the other
reserves in the Eastern Gulf?
Mr. Hebert. Well, we have been involved in the Destin
Pipeline. Other than that, I don't know if we have any
involvement at this time. If so, I am unaware of it.
Mr. Pickering. One other quick series of questions. As you
know, last year we had extensive discussions, and the
subcommittee marked up an electricity restructuring initiative
which focused primarily on incentives for transmission and
reliability and those types of efforts, the linkage between
natural gas and going back to electricity. What can you see in
those efforts that we can do as we put together a comprehensive
energy bill that would give us greater reliability,
transmission capacity as we look at natural gas or other
electricity-producing opportunities?
Mr. Hebert. I think anything that you can do that would
move the Federal Government and local and State agencies toward
a spirit of cooperation and working together, try to create
that one-stop shopping. I think the thing that is most
difficult for the industry, which in the end means it is very
difficult for the American public because they can't get that
adequate supply to them in time, is the fact that they have to
go with so many people with their fingers in the pie, so many
regulators, so many agencies, so many associations.
If there were a way to understand that we must have one
vision together, understanding that, quite frankly, my
considerations are very different than EPA's and they are
required to be under the law. But let us see if we can't figure
out some way to cooperate, somehow have an understanding
together so we can expedite these processes.Any clarification
you can give there legislatively, I think would be great.
As you know, one of the things that I have continued to
talk about, and actually I was pleased to hear several members
in here talk about, is the incentives--how do you incent the
industry? I mean, I think any direction you could give in that
indication would be wonderful. Quite frankly, if we see a need,
be it in the West, be it in the Northeast, be it in the
Southeast, and we don't see that need being met, what would be
wrong with us giving the proper signal on the transportation
end, and maybe even providing another 200 basis points to get
someone interested in providing that opportunity?
Because the point I don't think could have been made better
than was made by Congressman Bono. And that is, the last thing
we want is for the lights to go out to some extent to where it
is not quality of life but it is, in fact, life. So we must get
about the business of that, and I would be glad to work with
you and the committee to any extent possible to provide that.
Mr. Barton. The gentleman's time has expired.
Mr. Pickering. Thank you, Mr. Chairman.
Mr. Barton. The gentleman from Ohio, Mr. Sawyer, is
recognized for 5 minutes for questions.
Mr. Sawyer. Thank you very much, Mr. Chairman. Thanks also
for the comments in response to Mr. Pickering. His question
goes very much at the kind of concern that I have in both
natural gas and electricity around the question of capital
formation in order to do the kind of investment that it is
going to require in order to provide the delivery and
reliability of service that we are talking about in both energy
arenas.
It seems to me that given particularly the long lead time
necessary for that kind of infrastructure investment, that we
face a particularly important standard of analysis in trying to
forecast both the availability of supply, the demand, and the
prices that surround that. It is central to capital formation.
What can you tell me in terms of how those forecasts are
developed, and more to the point, how accurate they have been
in recent years in terms of anticipating those several
dimensions of supply and demand?
Mr. Hebert. I think typically over the last few years, most
people have challenged numbers that showed the demand to the
extent that we have seen. But I think what we have learned is
that--I think it was Congressman John that said we had an
addiction to energy.
Mr. Sawyer. Yes.
Mr. Hebert. We certainly appear to have that. How many TVs
do we have in our homes, how many telephones and computers and
alarm clocks?
Mr. Sawyer. Who would ever have anticipated that computer
consumption of electricity and the size that that has achieved
in just the last 5 years?
Mr. Hebert. So I tend to believe most of the numbers. If
you are asking me when the numbers come in and the numbers
appear to be a little high, what is our skepticism now, because
of comments made earlier, I would rather have additional
capacity than be low on capacity. So it is my point now that we
must aim high. And as tough and as difficult as that is to do,
the last thing we want to do is hear stories like we just heard
in Palm Springs.
Mr. Sawyer. As a matter of decisionmaking, I couldn't agree
with you more. My question, though, is how did the performance,
the forecasting performance, over the last 5 years compare to
the reality that played itself out? If you don't have those
numbers, I completely understand.
Mr. Hebert. I will provide for the record what I can find
for you on that.
I just don't have anything off the top of my head. I think
if you look in some regions--you look in Pennsylvania, it looks
like, evidently, the numbers they depended on were pretty good.
If you look at the Southeast, they look in pretty good shape
too. If you look in the West, I don't think they could have
anticipated a lower than average rainfall, the lower than
average snowpack combined with the increase in demand.
Mr. Sawyer. Has the analysis been sufficient, adequate, to
the work that you have to do as a regulator?
Mr. Hebert. I think it has.
Mr. Sawyer. Thank you, Mr. Chairman. I yield back.
Mr. Barton. Thanks to the gentleman from Ohio. We would now
go to Mr. Bryant from Tennessee for 5 minutes for questions.
Mr. Bryant. Thank you, Mr. Chairman. Mr. Chairman, I think
we all agree that the domestic natural gas consumption is
expected to increase at a faster rate than production over the
next number of days, and that FERC regulates the construction
of new natural gas pipelines pursuant to acts of Congress.
Among other things, FERC considers environmental impact
statements pursuant to the National Environmental Policy Act,
Endangered Species Act, Fish and Wildlife Coordination Act, The
Coastal Zone Management Act, as well as others, including an
increasing amount of landowner protests. In addition, pipelines
must comply with numerous State permits and procedures.
Now, critics have claimed that the lack of interagency
coordination, duplicative requirements and conflicts between
Federal and State agencies make the pipeline construction
process increasingly difficult. FERC has attempted to alleviate
this problem by reviewing its own internal procedures. It is
also beginning to establish a collaborative process for
construction applications. Could you tell me briefly what that
is?
Mr. Hebert. Well, Congressman Bryant, we are still working
on the collaborative process; we have got to do a little
massaging there. But I will tell you, when it comes to the
cooperative spirit of trying to get everyone working together,
I think that is moving in the right direction. I was speaking
to the Natural Gas Council yesterday. We just got everyone
together in the same room trying to resolve some difficulties,
understanding we have got to provide some opportunities here. I
think it is serving us well, and I think we have got to do more
of it.
I will tell you that when it comes to certificating a
pipeline and moving forward with that project, what slows us
down--we can make the decision on need generally in about 5 or
6 months. What slows us down is the environmental part of that,
and that is why we do it later. So what we are trying to do is
we are trying to get these parties together before they file.
And if we get them together before they file, then they come
together with one route. It makes it so much easier on us
because one of the great things--and you pointed out all the
agencies we have to work with.
One of the things that really slows us down, and almost
doubles the amount of time you have to spend at FERC, is when
you change a routing process. So if we can get that cleared up
on the front end, it certainly helps us. I think what we have
done with landowners last year is a wonderful thing too. Now we
are requiring notice--three days after they get a docketed
number--to landowners. So landowners are going to be aware.
The thing I have tried to tell the industry is, even though
I am a lawyer, I think it is a bad idea to send a lawyer with a
bunch of papers in his hand knocking on the door, talking about
you as a landowner and how we are about to take your land. So
let us send some people with some people skills understanding
that people, quite frankly, are real sympathetic and non-
understanding sometimes about--or they are not sympathetic and
not understanding about losing their property and being
compensated for it.
But there has been improvement through this cooperative
spirit. I pulled some numbers, and it looked like 10 years ago,
it was taking--I think the numbers came actually from 1990. It
was taking us around 400 days in most circumstances to get
these certificates out. We have almost cut that in half; we are
down around 200. It was like 383, and now I think the number
was like 194 or something like that. So that in fact is
helping.
Mr. Bryant. I have talked a lot, and others have
mentioned--you emphasized in your statement the need for
pipeline--streamlining that process. Another issue you address,
and we have ignored it so far, is the storage capacity issue.
Can you just briefly tell us what that situation is as we head
into a hot summer?
Mr. Hebert. Again, the storage capacity, depending on what
region you are looking at, could obviously be different. I
think it may have been Congressman Largent who talked about the
rupture with El Paso and what happened there. You had the
storage drawn down there because, quite frankly, they were
drawing down to help California out to keep California on its
feet while you were dealing with the ruptured pipeline. So it
depends on what region you are talking about. Most
circumstances, the storage levels were down.
Another indication in California was not so much only that
you had these units running and that they are gas-fired units,
but you have got these gas-fired units, whereas they might have
at one time run at 25 and 30 percent of capacity because, quite
frankly, they are older units--around 40 years old in some
circumstances--they are running them at 75 and 85 percent of
the time, so it is taking up much more energy. Especially if
you look at the West as a whole, they haven't had any new
generation to come online even though you have seen more
natural gas being used because of demand. You have had some QF
units come on, but other than that, you have not had a new
generation to speak of.
Mr. Bryant. Is there a----
Mr. Hebert. So when it comes to the storage, that storage
is being drawn down pretty heavily.
Mr. Bryant. My question was, Is there a replenishing effort
going on, or will there be? Can you guess?
Mr. Hebert. Well, we have----
Mr. Barton. This will have to be the last question.
Mr. Hebert. We are about to enter into a shoulder period,
so that replenishing period is about to start. It should start
within, I would guess, the next couple of weeks, I would hope,
depending on the weather. But we will know more about that
about half-way through the spring to see exactly how much we
can replenish.
Mr. Bryant. Thank you, Mr. Chairman.
Mr. Hebert. And I will report back to you on that.
Mr. Barton. Thanks to the gentleman from Tennessee. I want
the record to show that if Congresswoman McCarthy was here, it
would be her turn to ask questions.
But since she is not here, we would go to the gentleman
from Louisiana, Mr. John, for 5 minutes.
Mr. John. Are you sure, Mr. Chairman? Thank you. I have a
very brief question that I asked to the panel in last week's
hearing. And it deals with the big controversy over in
California with FERC's role and the controversy of what is
happening in California as it relates to the transmission grid
that California is trying to take control over in exchange of
bailing out some of their utilities.
Could you maybe comment on where we are as far as that
whole issue goes? Because I feel that there are some
ramifications further down the road.
Mr. Hebert. We issued an order December 15, and in that
order we gave certain instruction to California telling them
what they needed to do, even to the extent of their board, on
the ISO board. We have certainly seen them move in different
directions there. Now, it looks as if California may in fact be
trying for the State to purchase their transmission. If that
transmission is acquired by the State, it is my belief that we
see a filing by the State of California as to that
circumstance, and we will deal with it as expeditiously as
possible. I will give them an up or down answer on that as
expeditiously as possible.
Let me tell you where my concern lies. I think when we are
looking at remedies for California, or the West as a whole,
because I don't think we can any longer just talk about
California; I do think we have to talk about the West as a
whole. To me, there are almost two things that you always need
to look at on any remedy: Is it increasing supply or is it
decreasing demand? And if the remedy is not doing one of those
two things, then I think you have to ask yourself, in fact,
what is it doing?
And beyond that, we issued an Order 2000, which set up our
regional transmission organizations which I believe are going
to be the framework that is going to make our electric grid
work, and it is going to make it work reasonably well. We need
for Order 2000 to be followed. We need for there to be a
regional transmission organization in the West. I think we have
to be careful when it comes to single-State operators of these
transmission systems, and we have to do what is in the best
interest of the region when the region depends on one another.
I don't think it is any secret that they do depend on one
another in the West. So we will have to look at that carefully,
but we will have to make sure that it follows Order 2000 and it
is moving toward a regional transmission organization as well
as the----
Mr. John. You may be wondering why a gentleman from
Louisiana would be so interested in what happens in California.
I think the gentlelady from California would agree with me that
if California were a country, it would be the fifth or sixth or
seventh largest economy in the world. So I believe that even
though we live hundreds of miles away, I think California is
important to our country as a whole, and what happens over
there should be of concern from New York, all the way across
our land.
Getting back to the grid real quick, if the Governor of
California, and the legislature and all the authorities are
successful in taking over the transmission grid, would it or
would it not, in effect, result in your not having regulatory
authority over that grid because now it would be, in effect,
state-owned?
Mr. Barton. Would the gentleman yield on that?
Mr. John. Yes.
Mr. Barton. To add to that question, isn't it also true,
before they could do that, the FERC would have to approve it?
Mr. Hebert. That is true. We would have to approve it;
there is no question about that.
Mr. John. That is the heart of my question.
Mr. Hebert. Your contingency is based on our approval.
Mr. John. Right.
Mr. Hebert. So it is hard for me to consider the
contingency based on that. I am not certain whether or not we
would approve it.
Mr. Barton. I think the gentleman's question is, assuming
that it became reality--forget how we get there, but it became
reality--is it not true that a State that owned its
transmission grid would not be FERC jurisdictional?
Mr. John. And then that is really the bottom line. You
would obviously have that consideration raised in your
deliberation as to whether to approve it. But if it were to
happen.
Mr. Hebert. Let me answer both questions. Only if we
approve----
Mr. Barton. I am trying to help clarify the gentleman from
Louisiana's question.
Mr. Hebert. I think the issue--and I understand the issue
is does the State own it, do they not. But the issue in the end
is going to be do we approve it or not. So I am not certain
anything else matters. But let me say this: It is fundamentally
important, I believe, if we are going to have an energy system
that works, that we move toward comparability and open access.
And you have got to do what it takes to get there. And that is
why you have got to move toward these regional transmission
organizations.
Mr. John. Okay.
Mr. Barton. Well, I want the chairman to know--and we may
do a specific hearing on this. But if and when we do, I have
great concern that a State entity is not subject to some--a
State-owned entity is not subject to some jurisdiction. And
normally, within a State, the State would have jurisdiction
over the municipality or something like that. But if the State
owns the grid in that State, they are subject to no
jurisdictional authority. And that is of concern to the chair.
Mr. John. That is correct.
Mr. Hebert. I understand your question. And our bootstrap
in California right now, our legal bootstrap, is the ISO
itself. I want to be very careful--I am not trying to avoid
you; I would love to answer your question. But I have only got
two colleagues, and if I have someone raise a point that I have
already decided on an issue that is going to end up in front of
me, I am very concerned about that.
Mr. Barton. Help is on the way.
Mr. Hebert. I know. I know, and I appreciate that.
Mr. Barton. You have got two more people coming.
Mr. Hebert. So the last thing I want to do with the crisis
in the Northwest and in the West is to take myself out of the
picture so decisions cannot be made. So I want to be careful
about this. We will have to approve that transaction.
Mr. John. I know my time is up, but I still would like, it
seems to me, a very simple answer, that if you do approve it,
regardless of how you get there, would it, in fact, no longer
be under your regulatory power? And I understand that there
would be a lot of legal maneuvering to get to that decision,
but forget about that.
Mr. Hebert. The problem is, I think where you are coming
down is, are they a public utility or not. And if the State
owns it----
Mr. John. Maybe so.
Mr. Hebert. [continuing] they may not be a public utility.
But I don't want to make that decision for you, but I will say
this. Absent them being a public utility, there are still
provisions under the Federal Power Act that bootstrap us in.
Mr. Barton. And the gentleman's time has expired.
Mr. John. Thank you, Mr. Chairman. We are going to go to
Mr. Whitfield from Kentucky for 5 minutes.
Mr. Hebert. We lawyers always find a way in if we want in.
Mr. Whitfield. Thank you, Mr. Chairman. I noticed in your
testimony you are talking about responding as quickly as
possible to any applications to construct new capacity relating
to California. Are there new applications specifically related
to the situation in California? I notice that you say right now
you have three--you have issued certificates for three projects
in the last 7 months. Are there others in the pipeline now?
Mr. Hebert. Yes, sir. We have five pending, but it is my
understanding that we are going to have more before us very
soon.
Mr. Whitfield. And these three projects that you refer to,
where are they located in your testimony?
Mr. Hebert. I would have to provide you with that because I
don't know that off of the top of my head.
Mr. Whitfield. Okay. You also talk in here about raising
the current dollar limit on automatic authorizations. What is
the dollar limit on that now?
Mr. Hebert. We had talked about moving it. We had had
several occasions. I want to make sure--30 million is where we
are talking about moving it to, but currently it is at 15.
Mr. Whitfield. Fifteen? And you are thinking about moving
it to 30? And would that require a vote of the commissioners?
Mr. Hebert. I would have to get the agreement of my
colleagues, yes.
Mr. Whitfield. Okay. And that is something that you all
will be considering, I take it?
Mr. Hebert. I hope quickly. I understand help is on the way
also.
Mr. Whitfield. What is the significance of having an
automatic authorization compared to the regular process?
Mr. Hebert. Well, it just--you know, the process is so much
quicker. If they have the automatic authorization, we would be
able to get it--I mean, they are going to have certain
compliances they are going to have to make, but other than
that, we can move them through the door quickly. I don't know
what--as far as when we start them. Yes, I mean, they have got
their NEPA requirements. But for that, they are automatic.
Mr. Whitfield. Okay. But they still have NEPA and other
environmental requirements. And also, you made the comment that
it appears that the Intrastate Gas Transportation Network in
Southern California is constrained. And I was just wondering
what do you mean by that?
Mr. Hebert. Well, what happens, when we have an interstate
pipeline, and we bring it--let us say we bring it at the
border, and they have got a intrastate, strictly a State line,
if that State line cannot handle the capacity that we make
available to them, it doesn't matter how much capacity we make
available because they cannot deliver to the end user.
Mr. Whitfield. And that is the situation in California
right now.
Mr. Hebert. We understand that may be.
Mr. Whitfield. Okay. Now, it is my understanding that there
is very little natural gas used in New England. Is it your
understanding that that is caused by unreasonably strict
environmental regulations, landowner protests, uncooperative
State agencies, or what is the answer to that?
Mr. Hebert. Well, they have been dependent for a very long
time on fuel oil, as you know. That has been their resource
that they have decided to use. We have attempted to get
additional pipelines in there, and we have done some of that.
We are always trying to do more. As you know, if you would
bring more natural gas, it would do two things for you. One, it
would clean up the environment; two, it would give you a choice
of fuels. If you have got a choice of fuels, you are going to
lower the demand; therefore, lower the price. So we think that
is a good idea.
Mr. Whitfield. All right. Mr. Chairman, I yield back the
balance of my time.
Mr. Barton. We thank the gentleman from Kentucky. I would
recognize the gentleman from Massachusetts for 5 minutes for
questions.
Mr. Markey. Thank you, Mr. Chairman, very much. Mr.
Chairman, there are 26 trillion cubic feet of gas up in Prudhoe
Bay Field area. Why hasn't that pipeline been built by the
industry to bring it down in to the lower 48? They were
approved to build the pipeline in 1982. The EIS was finished.
The Government finished its job; it is all done. There is only,
according to this, only 1 trillion cubic feet of gas in the
Arctic Refuge, and yet they are making a big deal out of going
into the Arctic Refuge, but they have had permission to bring
down the 26 trillion cubic feet from Prudhoe Bay for 18 years.
Why haven't they done it?
Mr. Hebert. Well, I think primarily that kind of goes back
to my opening remarks where I talked about how we go through
boom and bust cycles, and then, in fact, when we see it swing
back, we see the E&P pick back up. Same thing, pipelines as
well. When it comes to delivering that product, if the price is
at such a point based on the cost it takes to build and
transport the infrastructure, it doesn't get done.
Mr. Markey. But I am saying, they could have built it right
along the oil pipeline. It is already constructed. Has it been
a 19-year bad cycle of natural gas? That is not the way I view
the natural gas market.
Mr. Hebert. Well, prices have been pretty low for a
substantially long period of time.
Mr. Markey. So would it be your opinion that it is unlikely
that we will ever see that pipeline come down from Alaska,
given our past 19 years where they haven't built it. See,
ordinarily, we are told, well, the Government, they are
inefficient. But here, we finished the whole process, the EIS,
everything. Said build, and in 19 years they haven't build. And
yet, we are being told we have to go to the rest of the Alaska
which is pristine wilderness and allow them to start over there
as well with their footprint.
Mr. Hebert. Yes. This is one of the conversations I
continue to have with people to make them understand why the
incentives and the price signals are important.
Mr. Markey. No. That is rhetorical question. I am making a
rhetorical point that we should never permit them to go to the
Arctic Refuge until they have done the Prudhoe Bay because if
they can't make Prudhoe Bay cost effective, how in the world
are they going to make the Arctic Refuge cost effective? You
know, they have had 19 years in an already approved pipeline
route, and they haven't done that. So that is the only point.
And there is only a fraction of the energy over there. So I am
just making a rhetorical point. I understand your price signal
point.
Mr. Hebert. No, no. If I may answer because I respectfully
don't agree with it, because I think there is a way to
transport at an economical cost and give the right incentives
price signals to the industry to do exactly that.
Mr. Markey. But the industry vehemently disagrees with you
for 19 years.
Mr. Hebert. Oh, I don't disagree that they have not wanted
to do it for some period of time because of price signals.
Mr. Markey. Yes. Nineteen years, 19 years of bad price
signals. What are good price signals?
How high does the price of natural gas in America have to
go before they have an incentive to build the pipeline down
from 26 trillion feet of cubic----
Mr. Hebert. I won't debate it with you, but I will just say
that I think the economics have changed on that model.
Mr. Markey. Well, I am saying, let us hope they first do
that, though. Let us come in for that before they ask for the
refuge. Do you understand my point? They should first get the
approval and start the construction on that before they do the
refuge; don't you agree with that?
Mr. Hebert. I hear your point.
Mr. Markey. I hear your point. Yes, thank you.
Now, let us go to New England. You say there is a pipeline
constraint in California. Are there pipeline constraints in New
England?
Mr. Hebert. I mean, we have got some congestion problems as
far as a constraint on capacity, comparable bottlenecks.
Mr. Markey. If California a 10 on a scale of 10, what do
you think the pipeline constraints for New England are? Just so
we get a little bit of a preview of coming attractions.
Mr. Hebert. You are trying to get me in trouble.
Mr. Markey. Comparably.
Mr. Hebert. I don't think it is comparable at this point to
what you have seen in California.
Mr. Markey. So maybe a 5 on a scale of 10 or a 2? Where
would you put it?
Mr. Hebert. I would say less.
Mr. Markey. Less than that. Okay, good. Thank you. Less
than five or less than two?
Mr. Hebert. How about four?
Mr. Markey. Four is a good answer. Okay? I am not too
worried. I know that FERC is also considering whether or not to
impose an $8.75 per kilowatt month installed capacity of the I-
cap charge in New England; Massachusetts delegation, Maine,
Senator Reed from Rhode Island, just about everyone in New
England on utility commissions----
Mr. Hebert. That is pending, and I have received your
communications. And I am very much--we are on top of it.
Mr. Markey. I appreciate that very much. And I appreciate
the consideration that you have given to it thus far. Let me
see if I have got another question.
Mr. Barton. The gentleman's time has expired, but we will
give him 1 more minute if he's got a burning question.
Mr. Markey. Again, just to focus in on this a little bit
more. Sable Island has about 6 trillion cubic feet. They have
just make another strike in an adjoining field very recently,
another 1 trillion feet. The Canadians just announced that last
week. If New England and the Northeast fills the pipeline
capacity to bring that natural gas in, are you optimistic about
our ability to be able to have a reliable source of energy for
the next generation?
Mr. Hebert. We have got proposals that are going to deliver
that gas. But I will tell you that I am optimistic if we can
have it delivered, but as you know, it is very complex and
difficult bringing those type structures and facilities into
metropolitan areas, but we are going to work through that as
expeditiously as possible. But I would ask for great
coordination, and I would guarantee mind with State and local
representatives of associations and agencies.
Mr. Markey. We have already got 400 million cubic feet a
day. Are you confident that we can expand that capacity in the
next couple of years?
Mr. Hebert. I hope so.
Mr. Barton. With Congressman Markey's support, it will be
easier, won't it?
Mr. Hebert. It will be easier. It is kind of like a tap on
the shoulder.
Mr. Markey. Thank you, sir.
Mr. Barton. I would be happy to engage in a discussion with
my colleague from Massachusetts about some of those questions
he asked on the Alaskan natural gas pipeline. I didn't want to
infringe on the right of the Chairman of the Commission, but
there are some answers out there.
Mr. Markey. He probably wouldn't have minded.
Mr. Barton. The gentlelady from California is recognized
for 5 minutes.
Ms. Bono. Thank you, Mr. Chairman. I am sorry that my
colleague, Congressman John, has left. He said he doesn't know
why he is concerned with the price of energy in California, but
it is clear he wants to retire to California, and it is
probably to my district. So I am glad that he does care. But I
also enjoyed his questioning. I was writing the same question
for myself to ask you and was disappointed when he got to it
first.
But I appreciate how definitely you have avoided answering
the question about the Governor's proposal to buy the
transmission line, and I understand why. But you have done a
good job of not answering that question.
My question is more about cost plus price controls. And I
know we are hearing this a lot with, of course, electricity.
And I don't want to sound like I am advocating for or against
this proposal, but I think that we are clearly seeing support
in California delegation for this, and I am concerned that it
is a proposal that is going to perhaps help us short term but
hurt us down the road. And I would like to know your views on
cost plus price controls.
Mr. Hebert. Let me give you this caveat up front, if I may.
I do have an open mind, although, I have to be careful about
saying I have an open mind, because I was in a conversation
with someone in the media 1 day, and we talked and talked and
talked, and I said, ``I will consider; I haven't seen it proved
to me.'' And we were talking about the price cap issue. I said,
``Well, if you have got to talk me into it, you have got to
convince me there won't be short-term harm as well as long-term
harm, because that is in fact what we have seen.'' But I said,
``Other than that, I will consider it.'' And then the headlines
of the ``San Francisco Chronicle'' was that Hebert to Consider
Price Caps. I want you to know I do have an open mind when it
comes to cost plus.
The difficulty is this: We are in an energy age of how
quickly can you get it done. I have got great cases from 1993
forward right now at the FERC. I don't think California can
wait 8 years to solve this problem; as a matter of fact, I know
you can't. There are other difficulties in that there is public
power, quite frankly, that I don't have any jurisdiction over.
There is an added question, in fact, that I am not sure how I
determine the cost basis of some of these marketers. I am not
sure what the cost basis is of a computer and an algorithm and
a telephone. Also, the tracking of the energy is very
difficult. It is very difficult because it changes hands so
many times.
Now, there are things that we are going to do, and that
this is why Order 2000 and the RTO process is important.
Because we have not been certain to date what we need to do
with market monitoring and how we need to monitor the market
entirely. Is it a broad view? Is it a narrow view? I can tell
you that we have limited resources, and I want you to know we
have been committed to California and the Northwest to such an
extent that we have got a backlog of 2,000 cases right now that
I have had to put special attorneys on to try to deal with
those cases because, quite frankly, those people deserve their
day in court too, and we have got to move them forward. So we
have got limited resources.
We have got a study coming up which is going to tell us
what more we need to do with market monitoring, because we know
we don't have that right. The RTOs--we had the vision in Order
2000 to know that we didn't have the resources, so the RTOs are
going to do their market monitoring as well. So it is important
that we look at it in that sense.
That is a long answer to your question, but it is a very
long process, and my point is, I don't think you have a long
time.
Ms. Bono. Right. I am hearing from everybody that blackouts
are guaranteed this summer. And I am hoping that my
constituents recognize that. And nobody has addressed this
issue, and perhaps you are not the right person to. But in my
district there was a neighborhood without power for an entire
weekend. And SCE didn't want to get out because they couldn't
afford to get the people out on overtime to restore the power
to these people. And perhaps this isn't your question, but I
hope somebody somewhere along the line starts asking, what
would happen in the event of a catastrophe?
I understand Seattle just had an earthquake a little bit
ago of 6.4. That is what I heard. So maybe I will be
embarrassed and find out it wasn't true, and hopefully it
wasn't. But I am curious to know too what the contingency plans
are here should there be disruption in the transmission. Are we
thinking about that? How are we going to be able to react and
resupply the gas or the electricity, whatever it might be? Are
we thinking at all about worst-case scenarios?
Mr. Hebert. Well, my guess is that I am probably not the
answer. I think that is probably something a little closer to
FEMA than it would be to me. But I will tell you, while being
chairman of the State commission, one of the things I did was
to ensure that each and every utility that operated within that
State had emergency plans in how to deal with exactly that.
They had them file them with us. I think most States are doing
that. I think FEMA is probably involved in that, although, I
don't know that. But that would be a very difficult situation,
and we certainly do need to have a grasp on that.
And it would be my hope that the transmission companies
themselves have that. But certainly, if we set these regional
transmission organizations up, they are going to have that type
plan. That is going to be something that they, quite frankly,
cannot live without, because they are going to make their
living off throughput. They are going to make their living off
volume. They are going to make their living off reliability and
performance. And that is why they are so important.
But I will commit to you this in California and the
Northwest as a whole: We are trying to squeeze every megawatt
that we can out of that system. We will do anything and
everything we can. We are looking for ideas. We are looking for
people to bring it to us. That will help, but all we can do is
remove regulatory obstacles, regulatory impediments. It still
doesn't solve the supply problem. That can't come from us; it
has to come from someone else. But when it comes to delivering
that supply, we can certainly help there. But I will do
anything and everything I can. We are looking for ideas; we
invite that. But I assure you, if we get a filing, it will
happen sooner rather than later. And if I agree with it or
don't agree with it, it will come out.
Mr. Barton. The gentlelady's time has expired.
Ms. Bono. Thank you.
Mr. Barton. The gentleman from Maryland, Mr. Wynn, is
recognized for 5 minutes.
Mr. Wynn. Thank you, Mr. Chairman. Mr. Hebert, I was
initially going to ask you about the administrative barriers to
pipeline construction that have been commented upon today, but
then after listening to Mr. Markey's question and your response
about the impact of price signals, it seemed to me that I ought
to ask I guess a more basic question. What is the greater
impediment, administrative obstacles, for unprofitable price
signals?
Mr. Hebert. Well, I think right now what you have is you
have very good price signals. Price signals are good. At a time
when prices are very low, you kind of have the opposite, but
now you don't have that.
Mr. Wynn. Okay. Now, I think you also said that because it
is somewhat cyclical, the natural gas that Congressman Markey
referred to, people just didn't move on it, notwithstanding
that, apparently, the administrative barriers have been
overcome, the lack of, I guess, a long-term profitability
picture inhibited the construction. Is that a fair assessment?
Mr. Hebert. Yes. I think the price signals were not there
at that point. I don't think they thought they could deliver it
and not only add value to the system but probably to their
shareholders.
Mr. Wynn. Is it your opinion that the current price signals
are sufficient to move that natural gas to stimulate the
construction of that pipeline?
Mr. Hebert. I can't answer that. I will let the market
answer that. But I will tell you, I have to believe that the
price signals are very good. And I will tell you, from the time
that I spent with the investment community in New York, they
are excited about the opportunity.
Mr. Wynn. Well, it seems to me it is difficult for us to
develop an energy policy if we don't really know what the
factors or forces are that are going to determine whether or
not existing and approved pipelines get constructed in a timely
manner given the build-out time. I mean, how do we develop an
energy policy? And you can say you can't comment on that. If
not you, who?
Mr. Hebert. I am not sure I understand what you are asking.
Do you want me to comment on why the pipelines work or don't
work or----
Mr. Wynn. Well, I want you to basically extend--and the
chairman indicated there are answers, and I would love to hear
them--why approved pipelines from substantial quantities of
natural gas have not been constructed to bring that gas on
line.
Mr. Barton. Would the chairman of the Commission yield?
Mr. Hebert. Oh, absolutely.
Mr. Barton. One possible answer might be that the delivered
cost to the expected market has got to be equal or lower than
the delivered cost of existing supplies that are already
serving that market. And in the case of Alaska, when you add
the build-out, the actual capital costs to construct a natural
gas-only pipeline, then you have to liquify it if you take it
down to Valdez. You have got to figure the cost of the tankers
to terminal. Then once you get it in lower 48, you have got to
figure the delivered cost to Chicago or wherever the expected
market is.
The bottom-line cost is--the numbers I remember--you were
showing natural gas delivered come in around $9 to $10 in MCF
at the time the market was delivering at $3 to $4. So it was
non-economic. On the other hand, if it looks like natural gas
prices in lower 48 are always going to be the $4 to $5 to $6 in
MCF before delivery, just at the wellhead, that same project
then becomes economic if there is an expectancy that the market
is going to stay at that level. That is one possible answer to
the question.
Mr. Hebert. And if you want to make sure and deliver that
supply----
Mr. Wynn. I wanted to thank the chairman, first, for the
answer. Then I was going to follow up with a series of
questions.
Mr. Barton. I would be happy to.
Mr. Hebert. The chairman can, obviously, get into areas
that I can't get into. I can't say, should you take it to a
boat and move it, should you have a longer pipeline, should you
go east, should you go west, north or south. I can't answer
those things. We look for them to bring us the filings, and we
will look at those filings, and we will move forward on them.
But I will tell you, I think it is a bottom-line decision of,
do you think it is important to sure yourself up domestically
or not knowing, in fact, that the signals are there that you
need more pipes.
Mr. Wynn. Okay. If I could jump in----
Mr. Hebert. And that is not always upstream; it could be
downstream.
Mr. Wynn. Okay. If I could just jump in then. You say that
the price signals are favorable now, and that is the dominant
factor. Would you say--and I guess I followed in on Kevin
Tauzin's line of questioning. Do we need legislation to address
these administrative obstacles, or is it really determined by
the market as opposed to this other stuff we have been hearing
about?
Mr. Hebert. Again, I would like to stand by my earlier
statement in that I would rather not talk about obstacles. I
would rather--and I will copy you on it as well--what the
clarifications and questions might be as to differences in the
time the statute was taken into effect and today. It is quite
different.
Mr. Wynn. If I can pursue a couple of things about these
administrative obstacles. There was a notation that they are
duplicative requirements. What are those?
Mr. Hebert. I am sorry?
Mr. Wynn. Are there duplication requirements? Are there
duplicative requirements?
Mr. Hebert. Oh, yes, there are many agencies involved in
this process, if that is your question--who is going to take
the lead role, who is going to cooperate.
Mr. Wynn. Well, the duplication, what is necessary to
eliminate the duplication with all these agencies involved?
Mr. Hebert. Again, I would have to give you clarification
on that after this, and I will do that.
Mr. Wynn. Okay. Similarly, the conflict between the Federal
agencies and the State agencies, how is that likely to be
resolved or how should that be resolved?
I mean, that is the million dollar question. We just try to
work together cooperatively and try to share information and do
as much work up front as possible and move forward.
And I know this is dangerous territory. But if we are
serious about developing a national energy policy, does the
Federal Government have to become more dominant in this
process, or should we pull back, for that matter, and defer
more to the States? I am trying to get at which approach gives
us a better energy policy that moves this pipeline construction
process along quicker.
Mr. Hebert. There are two parts to that answer. One is, I
think it is always best if the Federal Government, or any
government, can be less prescriptive as opposed to more
prescriptive. Okay? And I think their role has to be to try to
remove obstacles and impediments to facilitate efficiencies and
speed of getting things done, while at the same time
understanding that we have obligations to two things that are
very important: landowners and the environment.
The other part of that question is, if you look at natural
gas, we certainly have siting authority on natural gas
pipelines. We do not have siting authority for electric
transmission lines.
Mr. Wynn. All right. Thank you, Mr. Chairman. I yield back
the balance of my time.
Mr. Largent. The gentleman's time has expired. I am going
to yield myself 5 minutes as it is my turn to ask questions.
Your last statement is exactly where I want to go.
Mr. Hebert. I knew I shouldn't have said that.
Mr. Largent. Yes. FERC does have the power or authority of
eminent domain in siting natural gas pipelines; is that
correct?
Mr. Hebert. That is correct.
Mr. Largent. And do you think they should have that
authority?
Mr. Hebert. Absolutely.
Mr. Largent. And do you think they should also have that
authority for siting electric transmission lines?
Mr. Hebert. Here I go. Once upon a time when I was chairman
of the Mississippi Commission, I took very strong positions
that in fact States should retain that authority. I was
chairman of the Mississippi Commission, and quite frankly we
had not moved toward competition at that point. I was the only
one actually on the commission that was trying to move quickly
in that direction.
Now that I am at the FERC--not that I have Potomac fever--I
think you just have to answer the basic question, is
electricity going to be an interstate commodity or is it not?
And if it is, you have to treat it like one. I do think it is
important that we give as much deference to States as possible
so that they understand that they are in the mix and they are
involved.
I do think, again, that is where the regional transmission
organizations can play a role because they can work through
this together. You could have representatives from each State
trying to figure out where they go with this planning, and that
way, one State, perhaps, could not veto a line going through
that is going to benefit all, because the one thing we are
learning through this entire process is, as goes Mississippi,
so goes Oregon. And so we are all in this big boat together,
and we are going to sink or swim together. So for that reason,
I have to say it is probably time to move forward, as much as I
hate it.
Mr. Largent. Well, I want to work with you on that, and see
if we can't come up with a common sense, middle ground on----
Mr. Hebert. You and I have had great discussions on that.
Mr. Largent. Yes. Let me go back to an issue that was
raised by Congressman Boucher in his questioning because, in my
mind anyway, he left the impression that this gaming the system
by the use of the transportation and natural gas is taking
place where somebody owns both production and--or gathering and
transportation, and they are rigging the system to favor
themselves to increase prices. Is that, in fact, taking place,
to your knowledge?
Mr. Hebert. We have a pending case, so I have to be
careful. I do want to make a clarification, because I may have
confused you a little bit, and I want to think about how I
answered Congressman Boucher. I think he may have been talking
about prices, and I was talking about rates. We do have
jurisdiction over the rates, but as you know, sometimes it is
rolled in, so the price itself, we may not have full
jurisdiction over it.
Mr. Largent. Okay. Well, let me ask the question this way:
If that were occurring--in other words, if somebody was gaming
the system to benefit themselves or to increase prices in the
natural gas arena, what tools does FERC have to address that
type of abuse? Do you have tools available, and what are they?
Mr. Hebert. We do have tools to address that. As a matter
of fact, one of the things that we are doing to check in to see
exactly what has happened and what is the conduct in the United
States right now, is we have got an affiliate conference coming
up on March 15. We are going to gather exactly that type
information and see what the conduct is. I will have more
information for you at that point; I do not have it right now.
But I will tell you, when you see these numbers like I
talked about with El Paso, the number of bids that came in for
the available capacity, then at the same time you look, and you
see pipes running full, it doesn't lend you to believing that,
but that is not to say that it has not or could not occur.
Mr. Largent. Okay. Well, go to the tools that the FERC has
access to addressing that type of market abuse if, in fact it
happened. What could FERC step in and do if they found a
company or entity guilty of that?
Mr. Hebert. I mean, through Section 311, we have got
discouragement penalties, so we could certainly do that. But it
would take a finding of that type behavior.
Mr. Largent. This will be my last question. Do you have the
power to order divestiture of the transmission?
Mr. Hebert. It is questionable.
Mr. Largent. Okay.
Mr. Hebert. I hate to give you that answer, but I will get
you more information on it, but it is questionable.
Mr. Largent. Okay.
Mr. Hebert. I am just not comfortable giving you a yes or
no on it.
Mr. Largent. Well, thank you, Mr. Chairman. It is good to
be able to call you Mr. Chairman. We are glad you are in the
position you are in. Thank you.
Mr. Hebert. Thank you.
Mr. Largent. And I yield back my time and recognize
Congressman Rush from Illinois for 5 minutes.
Mr. Rush. Thank you, Mr. Chairman. Chairman Hebert, I
certainly appreciate your time and your patience here. But I
want to go back to something that you stated earlier in your
testimony, that aside from natural gas markets, reactions to
warmer weather and decreased storage withdrawals, lower futures
prices indicate the beginning of the end of this winter's
crisis. And, of course, this crisis, we seem to be moving away
from the crisis now, but my question is, will the increase in
drilling be enough to overcome low winter storage combined with
summer gas-fired generation by next winter? Are we going to
have the same issues next winter that we had this winter?
Mr. Hebert. I think that is a great question, getting
prepared for next winter. I will tell you that I think what is
being projected at this point is going to prepare us better for
next winter. That is not to say that we will not have problems
next winter. I still think there is much work to do. And that
is why I continue to take the position that we need to expedite
any and all filings that come before us and move as quickly as
possible, and work cooperatively with all the Federal and State
and local agencies.
Mr. Rush. You also discussed FERC's commitment to maintain
an adequate gas network. And I must say that in Chicago we have
been fortunate that we benefit from the remnants of tremendous
industrial infrastructure. How important were delivery issues
over this past winter? And second, would you share with us the
extent to which the current infrastructure is adequate or not
adequate in the Midwest?
Mr. Hebert. I can't speak to take away capacity. I can
speak to the interstate pipelines. And you are right, you are
very fortunate where you are. You have a literal spaghetti bowl
of pipelines there. I think you have got about five pipelines
coming through there, so you are fortunate. I think you are in
good shape on your interstate pipelines. There are other
opportunities, which, certainly, every choice you get gives you
better and more options. I know you understand that. As far as
the take-away, I cannot answer. There is always more that the
States could be doing.
Mr. Rush. Well, although we have this tremendous
infrastructure in place, our prices--and this might not be a
question that you can address--but our prices increased at the
same rate that other regions' cost of heating oil increased.
And I just want to know, if we have got the infrastructures in
place, there was no residual benefit to the customers.
Mr. Hebert. Well, I think there was, but I think you didn't
get to see some of it because some of what you are getting and
much of what you are getting actually is gas we don't regulate;
it is Canadian gas. So you are seeing it come down. But the
good news for you is you did not have any firm transportation
interrupted. So you didn't have any firm customers interrupted.
Mr. Rush. Thank you, Mr. Chairman. I yield back.
Mr. Largent. The gentleman yields back, and we recognize
the gentleman from Georgia, Mr. Norwood.
Mr. Norwood. I have got two very simple questions. One, I
think that a farmer from Georgia might ask you, and one maybe a
fisherman from New England might ask you. So feed me back the
answers so I can go home and explain it. Can you see that chart
over there?
Mr. Hebert. Yes.
Mr. Norwood. The part I would like for you to look at is
just from late 1999 until today. That is a rather amazing spike
in my view. And my guess is that either demand increased
greatly over the last 12 months or supply went down. Something
strange had to happen to spike that like that. I would just
like to know your opinion as to what really has happened in the
last 12 months that has increased this cost so dramatically
over the last 20 years. Did demand really go up that much in
the last 12 months?
Mr. Hebert. Primarily, what you see right there is the
electric generation, the influence of the electric generation.
Not everyone saw that price. And I know you see that, but
certainly not everyone saw that price.
Mr. Norwood. Well, my farmer did. So now take it from
there. Are you saying by electric generation, demand went up
then? Is that what has happened?
Mr. Hebert. Well, there is no question there is increased
demand.
Mr. Norwood. And it caused that big a spike in the last 12
months?
Mr. Hebert. At the wellhead.
Mr. Norwood. Now, was that demand or is that a decreased
supply? It has to be one or the other, doesn't it?
Mr. Hebert. Yes. I mean, EIA, certainly I guess since they
put it together, they can give you the information on how they
came to that conclusion. But certainly, it is either demand or
supply; there is no doubt about that.
Mr. Norwood. That is right. Now which is it? Who knows
that? If you don't know, tell me----
Mr. Hebert. I am hoping EIA knows it.
Mr. Norwood. Give me your best guess.
Mr. Hebert. No, let me--you had a lot of different factors.
And actually, we issued a report on this period. Not only did
you have increased demand, you had a situation where you had
colder than normal weather over the last few years.
Mr. Norwood. Well, that is demand.
Mr. Hebert. Well, but you had hydro facilities, quite
frankly, that didn't have the ability to run like they could in
higher rainfall and higher snowpack years.
Mr. Norwood. That is demand.
Mr. Hebert. So you had these electric generators running at
levels, as I said earlier, whereas, normally they may have been
running at 25 and 30 percent; here they are running at 80 and
85 percent. And they are much older, very inefficient units.
Mr. Norwood. So if we get some nice rain and hydropower
comes back into play, that is going to come back down?
Mr. Hebert. There is no question it would have helped.
Mr. Norwood. Do you think it will bring it half-way down or
all the way down?
Mr. Hebert. I couldn't answer that. It would have helped a
lot in the West.
Mr. Norwood. So your basic answer then seems to be that it
is both; that the demand went up for various reasons, and our
ability to supply other forms of fuel went down. But our
ability to supply natural gas sort of stayed the same.
Mr. Hebert. It is a combination of those factors, but it is
also a combination of--when you ask why is your demand where it
is and why is your supply where it is, you are just seeing the
balance swing back where your E&P is picking up again, where
you are going to be in a supply situation. Quite frankly, it is
going to help you here. At the same time, if you look at the
demand, you have got a situation where supply is chasing
demand, especially in some regions, especially in the West with
no end in sight, which is pushing the volatility up.
Mr. Norwood. Well, quickly, can we increase supply?
Mr. Hebert. You better increase supply or decrease demand.
And I don't see any way----
Mr. Norwood. Can we increase supply?
Mr. Hebert. Absolutely, you can.
Mr. Norwood. We have the ability?
Mr. Hebert. Yes.
Mr. Norwood. Politically we can do that.
Mr. Hebert. I can't answer that.
Mr. Norwood. That is the interesting question. My next
question is actually for Mr. Markey. Had he been given 30
minutes, I know he would have asked this, so I will try to help
him out. Besides, I have a friend or two in New England. And it
has sort of been asked, but we didn't exactly get the answer.
Is it true that in New England there is a lack of natural gas?
Mr. Hebert. Not now, but there was. They have remedied some
of that. Certainly, they could use more natural gas. And if
they want to change fuels, they are going to have much more
natural gas.
Mr. Norwood. Well, how long has it been that they have been
short of natural gas, 2 years, 5 years?
Mr. Hebert. Well, they had a problem delivering it, was
their problem. They are solving some of that. We had the
Maritimes----
Mr. Norwood. Well, that is sort of where I am getting at.
You said you had attempted to bring pipelines into New England.
Is that what you mean by they had a hard time delivering it;
there wasn't enough pipelines?
Mr. Hebert. You are trying to get me in trouble when I
leave here, aren't you?
Mr. Norwood. No, sir; I am not. Give me the same 30 seconds
Markey had, a little longer.
Mr. Largent. You have already had it.
Mr. Hebert. I think it is two things. One, it was the
deliverability. Now, they have got the new source of supply
from Sable, which is obviously helping them.
Mr. Norwood. So it wasn't environmental problems,
environmental regulations or uncooperative State agencies up
there, or landowner protests? None of that affected it?
Mr. Hebert. In individual cases that was present.
Mr. Norwood. Sorry, that red light is on. Thank you, sir.
Mr. Largent. The gentleman's time has expired. I recognize
the gentleman from Missouri for 5 minutes.
Mr. Blunt. Thank you, Mr. Hebert, Mr. Chairman. In the
reverberations of all this through the economy, I want to ask
just a question or two about propane. As a derivative, those
propane prices, which Southwest Missouri where I live, a lot of
people don't have access to natural gas pipelines, so they use
that derivative. There have been some suggestions that greater
storage capacity, tax incentives for storage capacities and
things like that would keep some alternatives that you can
stockpile a little more effectively out there. Do you have any
thoughts on that or want to talk about propane just a little
bit?
Mr. Hebert. We don't regulate propane but for the
transportation of it, and that is very small. But I will tell
you this: To me, it is not necessarily and issue of propane; it
is an issue of diversification of fuels. I think that is
important. And I don't care if you are talking about new
technologies, if you are talking about renewables, if you are
talking about nuclear clean coal; I think it is all important.
And many people in the gas industry even right now will tell
you that it is important that we, for strategic reasons and
defense purposes, have diversification of fuels, and that we
are very sympathetic to that and understand where we go with an
imbalance.
Mr. Blunt. Well, there may be some--that may be a case
where just simply some tax policies on the depreciating storage
facilities or something a little faster would allow that
alternative to be out there and set aside in a way that creates
some balance in the market, and balance in the market is very
much part of this problem I would think.
Mr. Hebert. I think anything you can do to, one, remove
obstacles, and two, to give incentives on the front end is much
better than having consumers complain about lights being off,
stuck in elevators, and paying three and four times their
normal bills. I don't doubt that at all, and I totally agree.
Mr. Blunt. Thank you, Mr. Chairman.
Mr. Largent [presiding]. The gentleman yields back. The
gentleman from Oregon is recognized for 5 minutes, Mr. Walden.
Mr. Walden. Thank you, Mr. Chairman. I apologize for not
being able to be here sooner. We were having a delegation
meeting from Oregon, talking about the hydro problem and the
energy crisis affecting the region with our Governor.
I was wondering if you could give me a little better idea.
You mentioned about the hydro system contributing to the demand
side of this equation in terms of price at the wellhead. I am
curious since our region's 70 percent hydro, our supply, what
you are seeing out there. I know we have got 60 percent average
snowpack right now that may contribute down the line. But I
thought we had stayed pretty constant in our power production,
and in fact had exceeded the biological opinion to be able to
shove power into California when they were in their greatest
need.
Mr. Hebert. Well, part of the problems you have got is you
are drawing down on this, and you are going to have a problem
on your water for this next summer. Now, I know you know that.
That is probably one of the things that you talked about today.
Mr. Walden. Yes.
Mr. Hebert. I think there were some glitches on the
hydropower systems as far as the amount of energy they were
producing, what was being drawn down, where it was being sent.
When you do that, you are going to experience some volatility
on the natural gas prices.
Mr. Walden. Okay. You may have already covered this, but
have you gotten into the need for additional transmission
capability of the pipelines and what you see there?
Mr. Hebert. Absolutely. And I want you to know, this is not
my chart. I know I am being asked about it, but I think someone
else is going to testify about this chart. I think that is why
it is up there. I might would have turned it around had I known
some of this was coming back.
Mr. Walden. Could you speak to pipeline capacity----
Mr. Hebert. Sure.
Mr. Walden. [continuing] and what needs to be done, and how
soon it needs to happen? I had a meeting this morning with some
folks who were saying they were able to look at 10-year
contracts for nearly double what they have got running through
their line now. And I am curious: What is it we can do to help
facilitate making sure the delivery system works? And if I can
get back to you at some point on hydro relicensing and hydro
system and power line capacity too.
Mr. Hebert. Right. And I will be glad to meet with you
privately too. I am always willing to do that. But I will tell
you, as I have told some others earlier, especially in the
Northwest, you have had a lot of different reasons that have
made it difficult to get new pipes out there. A lot of people
want to just primarily blame it on environmental, landowner. I
think that is some of it. I think you have had what some may
call an imbalance. You haven't sited any new generation, other
than some QFs, out there to speak of, especially in the West.
But there is also the situation that hydropower has been
such an influential factor out there. And quite frankly, when
you have a lot of rain and you have a lot of snow, it keeps
those gas prices down pretty good out there, so it makes it a
little tougher and a little less reasonable for some of these
people to bring their market out there. So I think some of
this, whereas, yes, it is doing some damage right now, I think
it is sending some price signals to some people who are going
to be ready to get about the business of doing something out
there.
Mr. Walden. And I know you have heard this elsewhere, but I
am hearing it from my farmers like my friend from Iowa is
hearing as well, about the price of fertilizer going through
the roof too when it comes to gas prices. So to the extent that
you have got solutions for us as to how we get more gas out
there and get that price down, we certainly welcome--I know you
have got some of that in your testimony.
Mr. Hebert. And the one thing I have continued to tell the
committee, and I would tell you as well, there is only so much
we can do. If I get a filing, I can get a interstate pipeline
to you. And one thing I cannot do is anything about your
intrastate pipelines with the take-away capacity. I can
transport it to you; I cannot deliver it.
Mr. Walden. One of the issues that keeps coming up is the
need to have a better working relationship among the Federal
agencies----
Mr. Hebert. No question.
Mr. Walden. [continuing] when it comes to these siting
issues. And especially out in the West where so much of our
land is Federal owned, or managed, or some of us might say
mismanaged on occasion. But it seems like these agencies
approach it in a sequential order. And you just get finished
with one, and then you have got to start on the next one, on
all these siting issues. And I know you know this for
pipelines, but it is certainly going to hit us. If we could put
generation capacity on in Wyoming and Montana, but there isn't
the capacity on the electrical grid to ship it to where it
needs to go, we are going to have to string more lines.
Mr. Hebert. Absolutely.
Mr. Walden. Can you describe for me how the Administration
is approaching that?
Mr. Hebert. I cannot tell you how the Administration is
approaching it. As you know, we are quasi judicial, and we have
to be very careful in our conversations with the
Administration. Because much of this has to do with pending
actions, especially in the Northwest. But I will tell you, we
are trying to remove any and all obstacles, impediments that we
can.
If you have an idea, if there is an incentive, if there is
a reason to provide some incentive to get an interstate
transmission system up, we want to work with you on that. We do
think Order 2000 is fundamentally important, that you have a
regional system that works. We are going to try to squeeze
every megawatt--like I was telling Congressman Bono a little
earlier--out of the system.
Mr. Walden. Good. Because the great conflict that will
arise immediately is the snowpack at 60 percent, the reservoirs
are down. We drained them lower to provide power under Federal
order, to ship power to California. We are not going to see
those reservoirs come back up. And we have got all the
environmental species issues, going to clobber us this summer.
Thank you, Mr. Chairman.
Mr. Largent. The gentleman's time expired. Chairman Hebert,
we appreciate your indulgence. Thanks for joining us here. We
look forward to working with you in the months to come. And
there have been some questions that you have agreed to respond
to.
Mr. Hebert. I will take care of those.
Mr. Largent. We would ask that you do that expeditiously.
Mr. Hebert. Absolutely.
Mr. Largent. We thank you, and excuse you, and call our
next panel.
Mr. Hebert. Thank you.
Mr. Barton. Well, ladies and gentlemen, welcome. I want to
apologize in advance for putting 10 of you on one panel. Mr.
Boucher and I had tried to think of a way to make sure that
there were members here to hear your testimony, and we have
adopted a one-panel rule, except when we have a Federal cabinet
level appointee. And you have seen with Chairman Hebert, the
opening statements took about an hour, his statement took about
10 minutes, and then we took 1\1/2\ hours to question him. So I
do apologize for asking you to go through this.
But the good news for having you all in one panel, we have
got 5 or 10 members who are actually here, and if we split you
into two panels, those of you unlucky enough to be on the third
panel, you would be stuck with Mr. Boucher and myself. So we do
get greater participation by doing it this way.
We are going to start with Ms. Campbell. We will give you 6
minutes, then we will go through, give everyone else 6 minutes.
Then we will come back and do questions. And I do ask you try
to stay within your 6-minute limit because with 10 people, 6
times 10 is 60. That is an hour of just pure listening to you
give your opening statements.
Having said that, this is the meat and potatoes of this
hearing. The focus of the hearing is on the natural gas
industry today, supply demand, regulatory system. And the
answers and your testimony that you give is going to have a
significant impact on the policy recommendations that we make
on a bipartisan basis to the President on a comprehensive
national energy policy.
So with that, we will start with Ms. Campbell, who is the
director of the Natural Gas Division of the Energy Information
Administration. Your testimony is in the record in its
entirety. We now recognize you for 6 minutes to elaborate on
it. Welcome to the subcommittee.
STATEMENTS OF ELIZABETH CAMPBELL, DIRECTOR, NATURAL GAS
DIVISION, ENERGY INFORMATION ADMINISTRATION; CUBA WADLINGTON,
JR., PRESIDENT AND CEO, WILLIAMS GAS PIPELINE, ON BEHALF OF
INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA; JERRY JORDAN,
CHAIRMAN, JORDAN ENERGY, INC., ON BEHALF OF INDEPENDENT
PETROLEUM ASSOCIATION OF AMERICA; RICHARD G. REITEN, PRESIDENT
AND CEO, NW NATURAL, ON BEHALF OF AMERICAN GAS ASSOCIATION;
ANDREW J. LITTLEFAIR, PRESIDENT, PICKENS FUEL CORP., ON BEHALF
OF NATURAL GAS VEHICLE COALITION; ROBERTA A. LUXBACHER, VICE
PRESIDENT-AMERICAS, EXXON MOBIL GAS MARKETING CO., ON BEHALF OF
NATURAL GAS SUPPLY ASSOCIATION; WALKER HENDRIX, COUNCIL, KANSAS
CITIZENS' UTILITY RATEPAYER BOARD; JACK HILLIARD, GENERAL
MANAGER, FLORENCE UTILITY, ON BEHALF OF AMERICAN PUBLIC GAS
ASSOCIATION; JAS GILL, VICE PRESIDENT, MANUFACTURING, CYTEC
INDUSTRIES, INC., AND PATRICIO SILVA, PROJECT ATTORNEY, NATURAL
RESOURCES DEFENSE COUNCIL
Ms. Campbell. Thank you, Mr. Chairman, members of the
committee. I appreciate the opportunity to appear before you
today.
The Energy Information Administration, EIA, is an
autonomous statistical and analytical agency within the
Department of Energy. We do not take positions on policy
issues, but we do produce data and analysis that are meant to
help policymakers as well as the public. Our views do not
represent those of the Department or the Administration.
The committee has requested information about recent prices
for natural gas, EIA's projections for natural gas supplies,
and what the Nation might do to assure adequate supplies in the
future. Our surveys, short-term energy outlook containing
quarterly projections for the next two calendar years, and
annual energy outlook providing projections to 2020 are the
basis of today's testimony.
Natural gas prices are measured in several ways. There are
spot market prices for immediate sales, long-term contract
prices, and futures market prices. There are also price
measurements made at different points in the supply system, at
the wellhead or at the city gate, and at different geographic
market locations and also for different consumer groups. Our
home bills reflect the price of the gas commodity purchased by
local utilities or marketers in a mix of spot and long-term
contracts, charges for shipment to the city gate by interstate
and intrastate pricelines, storage charges, and charges for
local distribution company services.
At the beginning of the supply chain is the wellhead price,
the figure over there. During 1998 and 1999, wellhead gas
prices hovered around $2 per 1,000 cubic feet. Spot gas prices
in the supply region, generally the Henry Hub area, which are
usually slightly higher than the composite wellhead prices
comprised of spot and longer-term sales prices, began rising
this summer. Spot prices were above $5 per 1,000 cubic feet in
the fall more than double the average spot price a year
earlier, all prices in nominal dollars. Later, spot prices
reached as high as $10.53 on December 29 of last year. Since
that point, spot prices have fallen and were below $6 during
the last 10 days. Some regional markets, most notably
California, have experienced particularly high prices this
year.
The sustained high national prices are due to a number of
factors. First is the strong demand for natural gas.
Preliminary data for 2000 indicate that U.S. natural gas
consumption reached a record 22.7 trillion cubic feet, passing
the previous high in 1972. The high levels of demand are
related to the strong economy in 2000 and the return of cold
winter weather in late 2000. Production of natural gas also
rose last year to approximately 19.1 trillion cubic feet. The
gap between consumption and production was closed by record
levels of gas imports primarily from Canada. Production appears
to have increased throughout 2000 as a result of successful
drilling and well completion.
Strong demand for gas in summer 2000 meant that smaller
quantities were injected into storage for use during this
winter's peak demand. Following strong heating season demand
recently, data as of February 16th indicate that national
storage levels are 33 percent below the 5-year average and
storage in the West region is 56 percent below its 5-year
average. While end-of-season storage will be at or near a
record low, there were concerns in December and January when
the temperatures had been coldest that working gas storage
would be depleted by the end of the heating season. This fear
contributed to the price spikes at that time.
Regional storage and pipeline capacity are also part of the
explanation for prices seen across the nation. Storage and
pipeline capacity nationally have been adequate to meet most
peak-day demands during recent winters. However, the California
market and the Northeast region are examples of areas where in
recent years concern about supplies or deliveries led to price
competition. By contrast, production increases in Rocky
Mountain States during recent years have resulted in
constraints for gas existing in the region. This has resulted
in that region having the lowest average natural gas spot
prices in the Nation.
Turning to the future. EIA projects that this winter, the
November through end of March period, wellhead natural gas
prices will average about $6.10 per 1,000 cubic feet, more than
two and a half times the price of the previous winter. Assuming
normal winter and continued low storage levels, the annual
average wellhead price for the year 2001 is projected to be
about $5 per 1,000 cubic feet. In 2002, we expect the storage
situation to improve somewhat leading to a decrease in the
price to $4.50. Domestic natural gas production for 2001 and
2002 is expected to rise in response to the high rates of
drilling the past year.
Mr. Barton. Ms. Campbell, could you try to summarize in the
next 55 seconds.
Ms. Campbell. Yes.
Mr. Barton. I know it is hard to ask you to do this within
6 minutes.
Ms. Campbell. All right. In the outlook for 2020, natural
gas consumption is expected to increase to reach almost 35
trillion cubic feet, and consumption increases are expected in
all sectors, but the most rapid growth is expected for
electricity generation. Domestic natural gas production is
expected to increase to 29 trillion cubic feet in 2020 with the
gap being closed with increases in import. And EIA does not
propose or advocate any particular policies or programs.
Our testimony notes a number of areas that have changed in
the last 15 years which have contributed to increases in demand
or changed the supply situation. We also note that the
assumptions that were used underlying the forecasts are a
continuation of current policy and regulation. And that is made
because of EIA's requirement to be policy neutral, but that we
have also assumed continuing technology improvements and
substantial increases in investments.
[The prepared statement of Elizabeth Campbell follows:]
Prepared Statement of Beth Campbell, Energy Information Administration,
Department of Energy
Mr. Chairman and Members of the Committee: I appreciate the
opportunity to appear before you today to discuss current and future
natural gas prices and supplies in the United States.
The Energy Information Administration (EIA) is an autonomous
statistical and analytical agency within the Department of Energy. We
are charged with providing objective, timely, and relevant data,
analysis, and projections for the use of the Department of Energy,
other government agencies, the U.S. Congress, and the public. We do not
take positions on policy issues, but we do produce data and analysis
reports that are meant to help policy makers determine energy policy.
Because we have an element of statutory independence with respect to
the analyses that we publish, our views are strictly those of EIA. We
do not speak for the Department, nor for any particular point of view
with respect to energy policy, and our views should not be construed as
representing those of the Department or the Administration.
The Committee has requested information about:
<bullet> Recent high and fluctuating prices for natural gas
<bullet> EIA's projections for natural gas supplies in the future
<bullet> What the Nation might do to assure adequate supplies in the
future.
Each month EIA prepares information about natural gas supply,
consumption, and prices derived from a variety of respondents and data
sources. It also updates its Short-Term Energy Outlook, which contains
quarterly projections through the next two calendar years, taking into
account the latest developments in energy markets. The Annual Energy
Outlook provides projections and analysis of natural gas consumption,
supply, and prices through 2020. The projections in this testimony are
from the Short-Term Energy Outlook February 2001 (STEO) and from the
Annual Energy Outlook 2001 (AEO2001), published by EIA in December
2000. These projections are not meant to be exact predictions of the
future, but represent a likely energy future, given technological and
demographic trends, current laws and regulations, and consumer behavior
as derived from known data. These EIA products are the basis of the
information provided today.
Recent Natural Gas Prices
Natural gas prices are measured in several ways. There are spot
market prices for immediate sales, long-term contract prices, and
futures market prices. There are also price measurements made at
different points in the supply system--for example, at the wellhead or
the citygate--and at different market locations throughout the United
States including the Gulf Coast, the U.S.-Canadian border, or the
Northeast. Prices are also measured for different end-user groups--
residential, commercial, or industrial consumers and electric
utilities. Our home bills reflect the price of the gas commodity
purchased by local utilities or marketers in a mix of spot and long-
term contracts, charges for shipment to the citygate by interstate and
intrastate pipelines, storage charges, and charges for local
distribution company services.
At the beginning of the supply chain, however, is the wellhead
price. During 1998 and 1999 wellhead gas prices hovered around $2 per
thousand cubic feet. Spot gas prices in the supply region, which are
usually slightly higher than the composite wellhead price comprised of
spot and longer-term sales prices, were generally below $3 per thousand
cubic feet. Preliminary data for last summer indicate that overall
wellhead prices were above $3.60 per thousand cubic feet (Figure 1) and
spot prices averaged more than $4 per thousand cubic feet. Spot prices
remained above $5 per thousand cubic feet in the fall. This was more
than double the average spot price a year earlier, all prices in
nominal dollars. In late November, gas spot prices (as measured at the
Henry Hub in southern Louisiana--a major pipeline interconnection and
transshipment point) moved past $6 per thousand cubic feet, reaching as
high as $10.53 on December 29, 2000. Since that point spot wellhead
prices have fallen and were below $6 throughout the week of February
19, 2001. In addition to higher prices nationally, some regional
markets have experienced particularly high prices. California has
experienced the highest of the regional prices.
The sustained high national prices are due to a number of factors.
The first of these is the strong demand for natural gas throughout
2000. Preliminary data for 2000 indicate that U.S. natural gas
consumption reached a record 22.7 trillion cubic feet (Tcf), passing
the previous high of 22.1 Tcf in 1972. The year-to-year increase in
consumption from 1999 to 2000 was almost 1 Tcf. The high levels of
demand the past year are related to the strong economy in 2000 and the
return of cold winter weather in late 2000.
The industrial sector accounts for about 40 percent of U.S. natural
gas demand, followed by the residential, electric utility, and
commercial sectors. Natural gas consumption peaks in the winter due to
residential and commercial space heating demand. Electric generator
demand, however, peaks in the summer when gas-fueled generators are in
greatest use. Another contributing factor for high prices of natural
gas has been the high price of crude oil. Some industrial consumers and
power generators are able to switch between natural gas and distillate
fuel oil or residual fuel oil. The rise in natural gas prices has
usually followed the rise in crude oil prices.
Production of natural gas also rose last year but was more modest
than the consumption increase. Preliminary data indicate that the year-
to-year increase, about 0.5 Tcf, resulted in production of
approximately 19.1 Tcf. The gap between consumption and production in
2000 was closed by record levels of gas imports, primarily from Canada.
Production appears to have increased throughout 2000 as the result of
successful drilling and well completion. Gas drilling rig activity
remains high and should result in increased production in 2001 and
2002.
Strong demand for gas in summer 2000 meant that smaller quantities
of natural gas were injected into storage for use during this winter's
peak demand. At the beginning of the winter heating season on November
1, 2000, natural gas in storage was about 7 percent below the average
5-year level (Figure 2). Data as of February 16, 2001 indicate that
national storage levels are 33 percent below the average 5-year level
and storage in the West region is 56 percent below its average 5-year
level. Nonetheless, it now appears, presuming that withdrawals for the
rest of February and March are average, that U.S. working gas storage
will remain above 500 billion cubic feet at the end of March 2001.
While end-of-season storage will be at or near a record low, there were
concerns early in January 2001, when the temperatures had been coldest,
that working gas storage would be depleted by the end of the heating
season. This fear contributed to the price spikes at that time.
Concerns about storage levels in the West region remain.
Regional storage and pipeline capacity are also part of the
explanation for the regional differences in prices seen across the
nation. Storage and pipeline capacity nationally have generally been
adequate to meet most peak-day demands during recent winters. However,
there are some points on the system where capacity constraint and
bottleneck problems could arise during severe weather periods, if
incremental demand increases beyond local capabilities. The California
market and the Northeast region are examples of areas where concern
about supplies or deliveries led to price competition for available
supplies. By contrast, gas production increases in Rocky Mountain
States during recent years have resulted in constraints for gas exiting
the region. This has resulted in the region having the lowest average
natural gas spot prices in the nation.
Supply problems in California for natural gas-fired electricity
generation have helped to increase natural gas prices and have
frequently caused interruptible customers to be cut off in that State.
The situation in California is characterized by low natural gas
storage, natural gas pipeline bottlenecks, high electricity demand, and
low availability of alternative means of electricity generation, e.g.,
hydropower and nuclear electric power.
The Outlook for Natural Gas
Short-Term Outlook. EIA projects that this winter spot wellhead
natural gas prices will average about $6.10 per thousand cubic feet,
more than two and one half times the price of the previous winter
season (all prices expressed in nominal dollars). Assuming normal
weather and continued low underground storage levels, the annual
average wellhead price in 2001 is projected to be about $5 per thousand
cubic feet (Figure 3). In 2002, we expect the storage situation to
improve, leading to a decrease in the average annual wellhead price to
$4.50 per thousand cubic feet. Domestic natural gas production for 2001
and 2002 is expected to rise as production responds to the high rates
of drilling experienced over the past year. Production is projected to
increase by 5.4 percent in 2001 and 2.5 percent in 2002.
The Outlook for Natural Gas to 2020. AEO2001 provides an integrated
projection of U.S. energy market trends for the next two decades on an
annual basis. Natural gas consumption is expected to increase at an
average rate of 2.3 percent per year. Increases are expected in all
sectors, but the most rapid growth is for electricity generation, where
natural gas use (excluding cogenerators) is projected to grow from 3.8
to 11.3 trillion cubic feet between 1999 and 2020 (Figure 4). Unlike
oil, domestic natural gas production, with its larger and more
accessible resource base, is expected to increase from 18.7 trillion
cubic feet in 1999 to 29.0 trillion cubic feet in 2020 to meet growing
domestic demand. Increased production comes primarily from lower-48
onshore conventional nonassociated sources, although onshore
unconventional production is expected to increase at a faster rate than
other sources. In order to fill the gap between domestic production and
consumption, net natural gas imports are expected to increase from 3.4
trillion cubic feet in 1999 to 5.8 trillion cubic feet in 2020. Net
liquefied natural gas imports are projected to increase from 0.1 to 0.7
trillion cubic feet by 2020; however, most natural gas imports are by
pipeline from Canada. In EIA's reference case, average natural gas
wellhead prices are projected to eventually return to the historical
trend and gradually increase thereafter, driven by natural gas demand
growth, particularly in electric generation, and the natural
progression of the discovery process from larger and more profitable
fields to smaller, more costly ones. Average lower-48 wellhead prices
are forecast to increase at an annual rate of 2.0 percent from 1999
levels. Because of expected improvements in transmission and
distribution efficiencies, average delivered prices are expected to
increase by only 0.5 percent annually.
Electricity consumption overall is projected to grow by 1.8 percent
per year through 2020. Generation from both natural gas and coal is
projected to increase through 2020 to meet growing demand for
electricity and offset the decline in nuclear power expected from
retirements of some existing facilities. Assumptions about electricity
industry restructuring, such as higher cost of capital and shorter
financial life of plants, tend to favor the less capital-intensive and
more efficient natural gas generation technologies. The natural gas
share of total generation is expected to increase from 16 to 36 percent
between 1999 and 2020 but coal is expected to continue to be the
leading fuel for electricity generation.
The Future for Adequate Supplies of Natural Gas
EIA does not propose or advocate any particular policies and
programs. We do note that, in general, there are a wide range of
policies that could alter the energy future described in the AEO2001.
In this section, EIA presents a summary of recent changes in energy
markets, policies, and technologies that affected natural gas
consumption and supply and also summarizes the assumptions used in the
AEO2001 which contribute to the forecast of balanced growth in natural
gas consumption and supply. These provide indications of the kinds of
policies and programs which could contribute to adequate supplies of
natural gas.
Between 1986, when gas consumption had fallen to 16.2 Tcf and the
new peak in gas consumption last year, a number of important changes in
energy markets, policies, and technologies occurred. These included:
<bullet> Deregulation of wellhead prices begun under the Natural Gas
Policy Act of 1978 and accelerated under the Natural Gas
Wellhead Decontrol Act of 1989;
<bullet> Improvements in exploration and production technologies and
reduction in their associated costs, improving the return for
exploration and production efforts;
<bullet> Increased imports from Canada and pipeline investment to
support those movements;
<bullet> Federal Energy Regulatory Commission (FERC) Orders 436 (1985),
636 (1992), and 637 (2000) separating commodity purchases and
transmission services and affecting access to shipping
capacity;
<bullet> Investment in major pipeline construction expansion projects
from 1991 through 2000 adding about 50 billion cubic feet per
day of capacity; and
<bullet> Passage of the Clean Air Act Amendments of 1990 and subsequent
regulations affecting air quality standards for industries and
electricity generators in nonattainment areas.
Assumptions underlying the forecasts for natural gas in the AEO2001
include the following:
<bullet> Continuation of Federal, State, and local laws and regulations
in effect on July 1, 2000. (This assumption is made because of
EIA's requirement to be policy neutral.) This includes policies
regulating access for oil and gas development;
<bullet> Continued improvements in exploration and production
technologies at historical levels to aid in and lower cost for
discovery and development of resources, particularly offshore
deepwater resources and onshore conventional gas;
<bullet> Substantial increases in drilling and pipeline investments and
drilling crews necessary to meet these gas production levels
(e.g., 23,400 gas wells drilled in 2020 instead of the 10,500
in 1999); and
<bullet> Timely permitting decisions and adequate capital to allow
increased pipeline capacity to deliver new supply to expanding
gas markets.
Together these overviews of past changes and assumed future changes
indicate the variety of factors which could influence energy supply and
demand in the future.
Conclusion. In the near term, we expect annual average natural gas
prices to be higher in 2001 than in 2000 but to decline in 2002.
Storage volumes of natural gas are low and replacement of gas in
storage will contribute to strong summer 2001 demand and higher gas
prices that will make storage for next winter costly. Thank you, Mr.
Chairman and members of the Subcommittee. I will be happy to answer any
questions you may have.
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[GRAPHIC] [TIFF OMITTED] T1501.002
Mr. Barton. We want to thank you. I am sure we will have
questions for you.
We want to recognize Mr. Cuba Wadlington. If Steve Largent
were here, he would give you a more formal introduction. But we
welcome you to the subcommittee. Your testimony is in the
record in its entirety, and we would like to recognize you for
6 minutes to elaborate on it.
STATEMENT OF CUBA WADLINGTON, JR.
Mr. Wadlington. Thank you, Mr. Chairman. I am here on
behalf of the Interstate Natural Gas Association of America.
INGA is a trade association that represents the Interstate
Natural Gas Pipeline which transports over 90 percent of the
natural gas that is consumed in the United States.
Natural gas provides 25 percent of the energy consumed in
the United States, including 16 percent for electric
generation. Because of the significant role natural gas is
playing in improving air quality, many experts have called
natural gas the preferred fuel. The natural gas industry is
facing a number of challenges today--high natural gas prices as
a result of lower prices in the past and low supply. At that
time, the red count failed dramatically and segments of the
production services industry went out of business. I would
defer any further comments on that to my producer friends, but
that is one of the huge challenges that we are facing.
Regarding natural gas pipelines, we have experienced no
significant delivery problems this winter, but the interstate
natural gas pipeline system is nearing the critical stage
throughout the country. We seriously need to move forward to
build significant infrastructure in order to meet the current
demands and the future demands for the utilization of natural
gas.
EIA has estimated that natural gas will increase from the
current 22 plus TCF to something in the neighborhood of 30 TCF
as we approach the end of this decade. As a representative of
interstate pipelines, the first goal of any energy policy is to
have an adequate supply of natural gas. Currently, the United
States is able to meet 85 percent of the demand through
domestic supplies in the lower 48, both on and offshore. Almost
all of the remaining 15 percent of supply comes from Canada.
Although Mexico has some significant natural gas reserves as
well, demand for natural gas is growing at such a fast rate
that Mexico will need to import natural gas from the U.S. in
order to keep up.
Liquefied natural gas is projected to remain a small
incremental addition to natural gas supply for the foreseeable
future. We need to look at and develop our resource base if we
hope to meet this demand.
I commend the current Administration for creating an energy
task force under the Vice President Cheney to review actions
that have been, or could be taken, by various Federal
departments and agencies that can effect energy supply and
infrastructure as the Administration review and develop these
recommendations to Congress regarding energy policy.
INGA also strongly supports expedited approval of a natural
gas pipeline to bring natural gas from the north slope of
Alaska to the lower 48 States. While such a pipeline project is
an expensive, multimillion dollar proposition, INGA believes
that the market is ready to support the investment that would
be required to build a new natural gas pipeline.
I also cannot stress enough the importance of building new
pipelines. The current natural gas pipeline infrastructure will
not support a 32 CF market. There simply is not enough
capacity. The INGA Foundation completed a study in 1999 called
Pipeline and Storage Infrastructure Requirements for a 32 CF
U.S. Gas Market. This study estimated that our industry would
need to invest about $34 billion in interstate pipeline and
storage infrastructure development between 1999 and 2010 just
to keep up with the market as it is going. INGA estimates that
it currently takes about 4 years on average to obtain approvals
for a construction of a new natural gas pipeline. INGA can
support a study by FERC on the impediments that delay the
review, certification and construction of interstate natural
gas pipeline projects. This study should consider the approvals
and permits required from other Federal departments and
agencies, as well as from States.
INGA would like for FERC and the Council of Environmental
Quality, with FERC as the lead agency, to form an interagency
task force to develop a memorandum of understanding to expedite
the environmental review in permitting of interstate natural
gas pipelines. This would be an example of the one-window
approach that Chairman Hebert talked about as part of his
testimony.
Finally, INGA supports the R & D efforts between DOE and
the Office of Pipeline Safety to develop improved and new
technologies to better assess any enhanced pipeline safety.
While INGAA member companies have been supporting pipeline
safety research for over 50 years through both the Gas
Technology Institute and the Pipeline Research Committee, we're
pleased that DOE is focusing on research for pipeline safety.
INGAA believes that it is important that DOE coordinate these
efforts with the Office of Pipeline Safety as well as the above
research committees to maximize the bang for the buck of these
new investments in order to bring and enhance new technologies
to the market.
Mr. Chairman, I want to thank you and the other members of
the House Commerce Subcommittee on Energy and Air Quality for
providing INGAA an opportunity to tell you what the Interstate
National Gas Pipeline would like to see in a national energy
policy.
There are a number of other issues and incentives that your
committee should consider as you debate energy policy,
including ways to increase energy efficiency, but please make
no mistake, we need to address both supply and demand and the
infrastructure requirements to get the supply to the markets if
we want to continue to provide consumers with reliable energy
at reasonable prices.
[The prepared statement of Cuba Wadlington, Jr. follows:]
Prepared Statement of Cuba Wadlington, President and CEO, Williams Gas
Pipeline on Behalf of the Interstate Natural Gas Association of America
Mr. Chairman, my name is Cuba Wadlington. I am President and CEO of
Williams Gas Pipeline. I am here today to testify on behalf of the
Interstate Natural Gas Association of America (INGAA). INGAA is the
trade association that represents interstate natural gas pipelines in
the United States, the inter-provincial pipelines in Canada and PEMEX
in Mexico. These pipeline systems transport 90 percent of the natural
gas consumed in the United States.
Williams, through its subsidiaries, connects businesses to energy
and to communications. The company delivers innovative reliable
products and services through its extensive networks of energy
distributing pipelines and high-speed fiber-optic cable. Williams Gas
Pipeline has five interstate natural gas pipelines that deliver natural
gas from coast to coast in every geographic region of the United
States. On any given day, Williams Gas Pipeline delivers to market 17%-
20% of the natural gas that flows in the United States.
Thank you for providing me this opportunity to testify before you
today.Natural gas provides 25 percent of the energy consumed in the
United States, including 16 percent of electricity generation. Because
of the significant role natural gas is playing in improving air
quality, many experts have called it the preferred fuel.
Before discussing the issues we believe are important to the
interstate natural gas pipelines regarding the development of a
national energy policy, I would like to give you some background on the
natural gas industry. Wellhead natural gas prices were, as you know Mr.
Chairman, regulated for many years. We all know that the history of
wellhead price regulation in the U.S. was a dismal one where prices
were held artificially low, causing a significant natural gas shortage
in the mid 70s. Congress enacted the Natural Gas Policy Act in l978.
This law began the process of decontrolling these wellhead prices. Ten
years ago, Congress saw fit to repeal all remaining federal economic
regulation of natural gas production. The Federal Energy Regulatory
Commission (FERC) followed up shortly thereafter with its Order No.
636, which unbundled pipeline transportation services from the natural
gas commodity, and removed pipelines from the gas merchant function.
Interstate pipelines no longer own the natural gas moving through their
systems; rather, they market capacity on their pipelines in much the
same way that airlines sell seats on their aircraft. The rates charged
by interstate pipelines, however, remain regulated by the FERC. In the
years since this restructuring has occurred, interstate pipelines have
become more efficient, reduced their costs and created and offered new
services while significantly increasing the volume of natural gas
transported. On average, the transportation segment represents less
than 16 percent of the price consumers pay for natural gas. In the
current market, this share is even less.
Competition for natural gas works. We are moving more natural gas
today than we ever have before, approximately 23 Trillion cubic feet
per year.
today's natural gas environment
The natural gas industry is facing a number of challenges today.
Higher natural gas prices have occurred as a reaction to the extremely
low petroleum and natural gas prices of a little over a year ago. At
that time, the rig count fell dramatically and segments of the
production services industry went out of business. I will defer to my
producer friends for more comments on this. But this period of higher
natural gas prices has created a climate of concern and calls for re-
regulation by some at both the federal and the state levels.
Regarding natural gas pipelines, we have experienced no significant
delivery problems this winter. We are doing our best to safely and
reliably ensure that our customers continue to enjoy the benefits of
using natural gas to hear their homes and run their businesses. But we
face a number of challenges. We need to continue to develop our
pipeline and storage infrastructure. To do this we will need to have
availability of capital, continued flexibility to meet the challenges
of a changing market and mitigation of impediments to pipeline
construction.
future natural gas demand
The Department of Energy's Energy Information Administration
estimates that use of natural gas will increase from 23 Tcf today to 30
Tcf shortly after 2010 (a 32 percent increase in gas demand). Other
experts forecast a similar growth in gas use.
The largest area of growth is expected in electric generation,
which, as stated above, currently uses natural gas to fuel 16 percent
of electric generation, followed by the industrial sector. The primary
reasons for the large growth in the gas segment of the power generation
market are the relatively low cost of gas-fired generation, the low air
emission characteristics of those facilities, and the reduced timeframe
it takes to permit and build those facilities. Following is a chart
that shows the benefits that accrue from using natural gas in a 300
Megawatt electric power plant.
Comparative Emission Levels From a 300-Megawatt Power Plant
------------------------------------------------------------------------
New Gas-
Existing New Coal Fired
Coal Boiler Boiler Combined-
Cycle
------------------------------------------------------------------------
NO<INF>X</INF> Emissions (lb/MMBtu)......... 0.50 0.18 0.04
SO<INF>2</INF> Emissions (lb/MMBtu)......... 1.20 0.42 0.00058
Particulate Matter (lb/MMBtu).... 0.11 0.04 0.0029
CO<INF>2</INF> Emissions (lb/MMBtu)......... 205 205 125
------------------------------------------------------------------------
energy policy
Mr. Chairman, I thank you for holding these hearing to discuss what
energy policy is needed to assure consumers of an adequate supply of
natural gas at reasonable prices. As a representative of interstate
pipelines, the first goal of any energy policy is to have an adequate
supply of natural gas. Currently, the United States is able to meet
about 85 percent of demand through domestic supplies in the lower 48,
both on and off shore. Almost all of the remaining 15 percent of our
supply comes from Canada. While the Canadians have done an admirable
job in developing their natural gas production and transportation
markets, they alone cannot provide the vast quantities needed to
support future market needs. Although Mexico has some significant
natural gas reserves as well, demand for natural gas is growing at such
a fast rate (approximately 11 percent per year) that Mexico will need
to import natural gas from the U.S. in order to keep up. Some liquefied
natural gas is currently being brought into the United States and some
of INGAA's member companies are looking at developing new LNG import
facilities as an option, but LNG is projected to remain a small
incremental addition to natural gas supply for the foreseeable future.
We need to look at and develop our resource base if we hope to meet
this demand.
Mr. Chairman, I brought the chart behind me in today to illustrate
the point I am trying to make. Natural gas is a domestically produced
fuel, yet a quick glance at this chart from the National Petroleum
Council clearly indicates that a great deal of the Lower 48 is
prohibited from new exploration and production, primarily because of
environmental concerns. The irony, of course, is that natural gas is
growing in importance precisely because of its environmental benefits
for use in generating electricity or fueling industrial operations.
INGAA supports other incentives such as an expansion and extension
of Section 29 tax credits to encourage development of new and unique
energy sources. In 1999 4.87 Trillion cubic feet of our natural gas
came from non-conventional resources resulting from Section 29 credits.
This is 26 percent of the natural gas produced in the lower 48 states.
INGAA also would like to see additional incentives such as expensing of
geological and geophysical expenditures for small producers to stay in
business and help increase our domestic natural gas supply.
There have been other Administration policies that have impacted
the ability of producers to gain access to lands such as the U.S.
Forest Service Roadless initiative which failed to take into account
the impact these regulations could have on energy production,
development and transportation. I commend the current Administration
for creating an energy task force under Vice President Cheney to review
actions that have been or could be taken by various federal departments
and agencies that can affect energy supply and infrastructure as the
Administration reviews and develops recommendations to Congress
regarding energy policy.
INGAA also strongly supports expedited approval of a natural gas
pipeline to bring natural gas from the North Slope of Alaska to the
lower 48 states. While such a pipeline project is an expensive, multi-
billion dollar proposition, INGAA believes that the market is ready to
support the investment that would be required to build a new natural
gas pipeline in Alaska. I remind the Committee that permitting and
construction of this project should begin soon as we expect the
completion of this project to take up to eight years.
I also cannot stress enough the importance of building new
pipelines. The current natural gas pipeline infrastructure will not
support a 30 Tcf market. There simply is not enough capacity. The INGAA
Foundation completed a study in 1999, Pipeline and Storage
Infrastructure Requirements for a 30 Tcf U.S. Gas Market. This study
estimated that our industry would need to invest about $34 billion in
interstate pipeline and storage infrastructure development between 1999
and 2010 just to keep up with where the market is going. Expenditures
for new pipelines and pipeline expansions were $2.2 billion in 1999 and
$2.5 billion in 2000. Two new pipelines were brought on line last
year--the Alliance Pipeline bringing natural gas and natural gas
liquids to the Chicago area from Alberta, Canada, and the Maritimes
Northeast Pipeline bringing natural gas from Sable Island, off the East
Coast of Canada, through Maine and into the Boston area.
The Merrill Lynch map that is behind me, and also enclosed with
this testimony, shows the new proposed projects at FERC as of September
2000. The blue lines are the existing interstate natural gas pipeline
infrastructure while the arrows describe the proposed additions to the
pipeline network.
INGAA estimates that it currently takes about four years, on
average, to obtain approvals for and construction of a new natural gas
pipeline. I want to commend Chairman Hebert and FERC for the work they
have done to expand the use of the blanket certificate process and
permit use of expanded rights-of-way where necessary during pipeline
construction. However, INGAA can support a study by FERC of the
impediments that delay the review, certification and construction of
interstate natural gas pipeline projects. This study should consider
the approvals and permits required from other federal departments and
agencies as well as from the states.
INGAA would like for FERC and the Council on Environmental Quality,
with FERC as the lead agency, to form an interagency task force to
develop a memorandum of understanding to expedite the environmental
review and permitting of interstate natural gas pipelines. This task
force should use NEPA documentation and its scoping process as the
basis of decisions, identify and agree on review and decision timing,
and contain a conflict resolution process.
INGAA supports a study of federal rights-of-way to determine the
feasibility of their use as right-or-way for new pipeline or other
transmission capacity.
Finally, INGAA supports establishment of an R&D effort between DOE
and OPS to develop improved and new technologies to better assess and
enhance pipeline safety. While INGAA's member companies have been
supporting pipeline safety research for over 50 years through both the
Gas Research Institute (now the Gas Technology Institute) and the
Pipeline Research Committee, we are pleased that DOE is focusing on
research for pipeline safety. There may be some valuable research at
the DOE labs that could ultimately be applied to help us inspect and
monitor our pipelines. INGAA believes that it is important that DOE
coordinate its efforts with the Office of Pipeline Safety as well as
the above research committees to maximize the ``bang for the buck'' of
these new investments in order to bring enhanced and new technologies
to market.
Mr. Chairman, I want to thank you and the other Members of the
House Commerce Subcommittee on Energy and Air Quality for providing me
the opportunity to tell you what the interstate natural gas pipelines
would like to see considered in a national energy policy. There are a
number of other issues and incentives that your Committee should
consider as you debate energy policy including ways to increase energy
efficiency. But, please make no mistake; we need to address both sides
of the equation--supply and demand--if we want to continue to provide
consumers with reliable energy at reasonable prices.
Mr. Barton. We want to thank you for your testimony and
your charts on the natural gas pipeline infrastructure in the
country.
Now I want to welcome Mr. Jerry Jordan who is appearing on
behalf of the IPAA, Independent Petroleum Association of
America.
Mr. Paul Gillmor who is a member of the full committee and
a subcommittee chairman says to give his personal well wishes
to you. He served with you briefly in the Ohio, I think the
Ohio Senate, and said that you did all the work and he took all
the credit. So he wanted me to let you know he's delighted that
you're here.
We will put your statement in the record in its entirety
and we would ask you to summarize in 6 minutes.
STATEMENT OF JERRY JORDAN
Mr. Jordan. Thank you, Mr. Chairman, members of the
committee. I am Jerry Jordan, President of Jordan Energy and
Chairman of IPAA. Today, I'm testifying on behalf of IPAA, the
National Stripper Well Association and 32 cooperating State and
regional associations, oil and gas associations. These
associations represent thousands of independent oil and natural
gas producers in the United States. Independents drill 85
percent of the wells drilled in the U.S. and produce 40 percent
of the oil and 65 percent of the gas.
Currently, natural gas prices, as we know, are twice what
they were a year ago and they were even higher in the last 6
months. This testimony is intended to address the causes of
these extraordinarily high natural gas prices and describe what
the industry is doing to address the supply problems which gave
rise to the prices.
Additionally, I will list actions that can and should be
taken by the Federal Government to help alleviate the problem
and encourage increased production, exploration and production
for natural gas. I want to emphasize first that the supply and
demand situation that has caused these high prices was both
foreseeable and predicted, although the severity was
underestimated by most experts. The conditions giving rise to
the market situation were recognized by both industry and
government experts as early as 1999. Early that year, a broad-
based group of industry experts met in the White House with
Cabinet level government officials and warned them of the
severe plight of the producing industry. At that time the focus
was on oil, but the likely impact on natural gas was also
described. At that meeting, we strongly suggested that a high
level interagency task force be created to address the problems
and develop a national energy policy. Fortunately, that has now
been done.
Specific curative actions were also suggested. At that
time, we were specifically and unequivocally told let the
market work and certainly it has.
The issues giving rise to our concerns about the natural
gas market were next described in the study and report of the
National Petroleum Council that was issued in December 1999.
The important conclusion in that report is that the resource
base in North America is adequate to meet the increasing demand
for many decades, but it also found that the industry's ability
to tap that resource effectively was conditioned on one, a
healthy natural gas industry, and two, sound government
policies. We had neither at the time that report was released.
The industry was coming off nearly 2 years of depression,
caused by the ruinously low oil prices of 1998 and 1999. The
oil and natural gas segments of our industry are inherently
intertwined. Consequently, when oil prices plunge, drastic
reductions of exploration budgets were imposed by our producers
because drilling under those conditions made no economic sense.
Gas exploration was adversely affected by the cuts as well.
Meanwhile, as the industry's capabilities were hard hit,
natural gas demand continued to increase at a rate beyond all
earlier predictions. Over 95 percent of new electric power
plants planned and being built across the country will be
powered by natural gas. This trend reflects the Federal
policies of recent years which have discouraged coal, nuclear
and hydro projects. All of these factors combine to create the
natural gas market situation which has triggered the high
prices.
The industry has responded promptly to the improved market
signals. The number of rigs employed in the search for natural
gas has more than doubled in the last year and thousands of new
engineers and other employees are being hired by our service
companies, but recovery will take time because of the
exploration of the process--because of the complexity of the
exploration process, the huge capital needs of the industry and
more importantly, because of the land access impediments
imposed by the Federal agencies.
These two issues, access to capital and access to nonpark
Federal lands are the primary factors which are slowing
recovery. Much of the nation's natural gas reserves underlie
government-controlled land, both on and offshore. Access to
these reserves has been severely restricted, primarily because
of fears of environmental harm. But those fears are largely
based on 30-year-old technology. Using modern, 21st century
methods, these resources can clearly be developed in an
environmentally sound manner--sound and sensitive manner.
IPAA believes that the Federal regulatory process must
identify and recognize the impact of regulatory actions on
energy supplies and future energy decisions. This means that
there must be coordination among the relevant agencies like the
Department of Energy, Department of Interior and the EPA as
issues are considered and decisions are made. A realistic
balance must be struck among the interests and responsibilities
of those agencies.
Finally, the other big impediment to industry recovery is a
shortage of capital, especially for the small and mid-size
producers. The NPC study concludes that capital expenditures
for domestic exploration and production must increase by
approximately $10 billion per year. The Federal role in capital
access is largely an issue of tax reform. For the industry to
meet its future capital needs it will need to increase the use
of outside capital. The tax code is a significant factor in
encouraging investment of that capital. Therefore, the
Administration and Congress need to consider and enact
provisions designed to encourage new production and maintain
existing production.
Congress has in the past considered a mix of reforms that
have had widespread support. They even passed once, but were
part of a veto package. These are needed to increase production
by independent producers because their cash-flow available for
reinvestment in new exploration is limited to their net
production revenues.
In conclusion, it is time for this country to take its
energy supply issues seriously and develop a sound energy
policy that realistically balances our country's competing
interests. Certainly, there is room in such a policy for
effective energy conservation and production of the
environment.
Energy production is an essential component. Independent
producers will be a key factor and the industry stands ready to
accomplish our common goals if policies allow us to do our job.
I want to thank you for allowing me to testify.
[The prepared statement of Jerry Jordan follows:]
Prepared Statement of Jerry Jordan on Behalf of the Independent
Petroleum Association of America and the National Stripper Well
Association \1\
---------------------------------------------------------------------------
\1\ Colorado Oil & Gas Association; East Texas Producers & Royalty
Owners Association; Eastern Kansas Oil & Gas Association; Florida
Independent Petroleum Association ; Illinois Oil & Gas Association;
Independent Oil & Gas Association of New York; Independent Oil & Gas
Association of Pennsylvania; Independent Oil & Gas Association of West
Virginia; Independent Oil Producers Association Tri-State; Independent
Petroleum Association of Mountain States; Independent Petroleum
Association of New Mexico; Indiana Oil & Gas Association; Kansas
Independent Oil & Gas Association; Kentucky Oil & Gas Association;
Louisiana Independent Oil & Gas Association; Michigan Oil & Gas
Association; Mississippi Independent Producers & Royalty Association;
Montana Oil & Gas Association; National Association of Royalty Owners;
Nebraska Independent Oil & Gas Association; New Mexico Oil & Gas
Association; New York State Oil Producers Association; Ohio Oil & Gas
Association; Oklahoma Independent Petroleum Association; Panhandle
Producers & Royalty Owners Association; Pennsylvania Oil & Gas
Association; Permian Basin Petroleum Association; Tennessee Oil & Gas
Association; Texas Alliance of Energy Producers; Texas Independent
Producers and Royalty Owners; and Wyoming Independent Producers
Association.
---------------------------------------------------------------------------
Mr. Chairman, members of the committee, I am Jerry Jordan,
President of Jordan Energy, Inc. of Columbus, Ohio and Chairman of the
Independent Petroleum Association of America (IPAA). Today, I am
testifying on behalf of the IPAA, the National Stripper Well
Association (NSWA), and 32 cooperating state and regional oil and gas
associations. These organizations represent the thousands of
independent petroleum and natural gas producers that drill 85 percent
of the wells drilled in the United States. This is the segment of the
industry that is damaged the most by the lack of a domestic energy
policy that recognizes the importance of our own national resources.
NSWA represents the small business operators in the petroleum and
natural gas industry, producers with ``stripper'' or marginal wells.
These producers are the linchpins to continued development of domestic
petroleum and natural gas resources.
Today's hearing addresses a fundamental issue--what actions are
needed to improve the nation's natural gas supply. This testimony will
focus first on several key factors that influence future energy issues,
second on actions that need to be taken to improve the future domestic
supply.
During the past three decades the United States has become more
dependent on energy and more dependent on foreign energy. While there
have been numerous efforts to define a national energy policy, none
have been successful. Today, the world is operating with its tightest
supply of petroleum and the United States is facing tight natural gas
supplies. Now is the time to clearly address national energy policy and
build the program that is needed to meet future demand.
a nation dependent on fossil fuels
Like it or not, the nation will be dependent on fossil fuels for
the foreseeable future. In particular, petroleum and natural gas
currently account for approximately 65 percent of the nation's energy
supply--and will continue to be the significant energy source. Natural
gas demand, for example, is expected to increase by more than 30
percent over the next decade.
independent producers--the linchpin to future domestic petroleum and
natural gas
It is important to recognize that the domestic oil and natural gas
industry has changed significantly over the last fifteen years. The oil
price crisis of the mid-1980's and policy choices made then triggered
an irreversible shift in the nature of the domestic industry.
Independent producers of both oil and natural gas have grown in their
importance, and that trend will continue. Independent producers produce
40 percent of the oil--60 percent in the lower 48 states onshore--and
produce 65 percent of the natural gas. They are becoming more active in
the offshore, including the deep water areas that have previously been
the province of the large integrated companies. At the same time those
large companies are now mainly focusing their efforts overseas, in
addition to Alaska and the offshore, because they are aiming their
investments to seek new and very large fields. Domestic energy policy
must recognize this reality.
recognizing the role of the market
Future energy policy should rely on market forces to the greatest
degree possible. For natural gas the market is strong and active.
Natural gas supply is essentially North American and overwhelmingly
from two countries that rely on private ownership and the free market--
the United States and Canada. Currently, exploration and development of
natural gas in both countries is being aggressively pursued when the
opportunities are there, and can be accessed. In the United States
drilling rig counts for natural gas are running at rates that are as
high as they have ever been since natural gas drilling was
distinguished from petroleum. The principal constraints are finding the
capital to invest, getting access to the resource base, finding
competent personnel, and obtaining rigs. If the market is allowed to
work, it will continue to draw effort to produce this critical resource
for domestic consumption.
Oil, however, is a different situation. In making decisions
regarding developing domestic petroleum resources, the nature of the
world petroleum market must be recognized. Although the United States
remains the second or third largest producer of petroleum, it is
operating from a mature resource base that makes the cost of production
higher than in competitor nations. More importantly, most other
significant petroleum producing countries rely on their petroleum sales
for their national incomes. For them, petroleum production is not
driven by market decisions. Instead, their policies and their
production is determined by government decisions. Most are members of
OPEC, the Organization of Petroleum Exporting Countries. Several are
countries hostile to the United States like Iraq, Libya, and Iran. Even
those that are generally supportive of the United States, like Saudi
Arabia and Kuwait, are susceptible to unrest from both internal and
external forces.
Thus, the market price for petroleum will be largely framed by
production decisions driven not by the market, but by the politics of
these countries--both by internal issues and global objectives. United
States domestic policy decisions must reflect this reality--looking to
this factor in taking actions that can affect domestic production and
producers. But, more importantly, it must recognize that a healthy
domestic oil production industry is also essential for a healthy
domestic natural gas industry, because they are inherently intertwined.
For example, the failure of the United States to recognize the need
to respond to the low oil prices of 1998-99 resulted in adverse
consequences for both oil and natural gas production. The nation has
lost about 10 percent of its domestic oil production--most of which has
been made up by imports from Iraq. And, in addition, the tight natural
gas supplies this year are partially attributable to the drop in
natural gas drilling in 1998-99 when oil prices were low and capital
budgets for exploration and production of both oil and natural gas were
slashed by producers because drilling under those conditions made no
economic sense.
It is equally important to recognize that while all of these
factors influence the ultimate prices of oil and natural gas, it is the
commodity markets that have the final say. The role of these markets
has emerged from a minor factor in the mid-1980s, when oil and natural
gas trading began, to the dominant force today. While many people want
to point toward OPEC or big oil, the ultimate price maker is the
trading floor of the commodity markets. This has added a new volatility
to oil and natural gas prices. Its impact is still poorly understood
but must be considered.
providing access to essential capital
The nation must avoid making bad policy choices like it has in the
past. For example, because oil and natural gas exploration and
production are capital intensive and high-risk operations that must
compete for capital against more lucrative investment choices, much of
its capital comes from its cash flow. The federal tax code is a key
factor in defining how much capital will be retained. In the late
1970's and early 1980's when oil prices were high and drilling activity
was soaring, the industry was hit by the Windfall Profits Tax that
pulled a net $44 billion from the industry at a time when it could have
been invested in new exploration and production. In addition, in 1986,
when the industry was recovering from the low oil prices of that year,
the Alternative Minimum Tax (AMT) was created. The AMT sapped capital
from the industry when it was desperately needed. From 1986 to 1997
(before the latest price crisis) domestic oil production dropped by 2
million barrels per day--roughly 25 percent of 1986 capacity. Thus,
those tax policies stifled the industry at a time when U.S. energy
demand was increasing significantly.
Instead of such counterproductive tax actions, the Administration
and Congress need to enact provisions designed to (1) encourage new
production, (2) maintain existing production, and (3) put a ``safety
net'' under the most vulnerable domestic production--marginal wells.
Congress has considered a mix of tax reforms that have widespread
support. They include provisions to allow expensing of geological and
geophysical costs and of delay rental payments that encourage new
production, extending the net operating loss timeframe and revising
percentage depletion that assist both new and existing production, and
a countercyclical marginal well tax credit when prices fall to low
levels. All of these are programs that independent producers need
because their revenues are limited to their production
Beyond these immediately needed policy changes, new tax policies
must be developed to encourage renewed exploration and production
needed to meet future demand, particularly for natural gas. In 1999 the
National Petroleum Council released its Natural Gas study projecting
future demand growth for natural gas and identifying the challenges
facing the development of adequate supply. For example, the study
concludes that the wells drilled in the United States must effectively
double in the next fifteen years to meet the demand increase. Capital
expenditures for domestic exploration and production must increase by
approximately $10 billion/year--roughly a third more than today.
Generating this additional capital will be a compelling task for the
industry. As the National Petroleum Council study states:
While much of the required capital will come from reinvested
cash flow, capital from outside the industry is essential to
continued growth. To achieve this level of capital investment,
industry must be able to compete with other investment
opportunities. This poses a challenge to all sectors of the
industry, many of which have historically delivered returns
lower than the average reported for Standard and Poors 500
companies.
In fact, as the past year has shown, capital markets have not shifted
to supporting the energy sector. For the industry to meet future
capital demands--and meet the challenges of supplying the nation's
energy--it will need to increase both its reinvestment of cash flow and
the use of outside capital. The role of the tax code will be
significant in determining whether additional capital will be available
to invest in new exploration and production in order to meet the $10
billion annual target.
providing access to the natural resource base
National energy policy must also recognize the importance accessing
the natural resource base. In 1999 the National Petroleum Council in
transmitting its Natural Gas study concluded:
The estimated natural gas resource base is adequate to meet
this increasing demand for many decades . . . However,
realizing the full potential for natural gas use in the United
States will require focus and action on certain critical
factors.
Much of the nation's natural gas underlies government-controlled land
both offshore and onshore. Policies in these areas have constrained or
prohibited access largely based on fears of environmental harm. But,
these resources can be developed in an environmentally sound and
sensitive manner. The Department of Energy recently released a
comprehensive report, Environmental Benefits of Advanced Oil and Gas
Exploration and Production Technology, demonstrating that the
technology is available. And, it is being employed, when exploration is
allowed.
Without policy changes, the nation may not be able to meet its
needs. Currently, over 75 trillion cubic feet (TCF) of natural gas in
the offshore is off limits to development because of moratoria that are
based on technologies that have been replaced decades ago. The
rationale for these moratoria is outdated and inaccurate; there must be
a reassessment of these decisions in the context of today's technology
and tomorrow's needs.
Even in those offshore areas of the Gulf of Mexico that are open
for development, the federal policies that determine royalties will
also significantly define the extent to which development will occur.
For example, over the past half-decade, Gulf of Mexico development has
soared, partly because of the Deep Water Royalty Relief Act that
specified how royalties would be determined for a set time period. This
allowed producers to plan their investments better. However, the Deep
Water Royalty Relief Act was largely used by large integrated companies
and its specific provisions expired in 2000. Now, as independent
producers are also seeking deep water opportunities, the planning
window is narrow and the policies are less certain. On the Outer
Continental Shelf, marginal properties remain that could be developed
if the royalty policies were right. All of these issues need to be
addressed with the full understanding that independent producers will
be increasingly willing to develop these areas as large integrated
companies look toward the Ultra-deep Water and overseas for the large
fields that they need to find.
Onshore, over 100 TCF of natural gas is under government controlled
land in the Rocky Mountains. An inventory of these resources is
underway. It is an important first step. But, it is equally important
to understand that access to these resources is limited by more than
just moratoria. The constraints differ. Monument and wilderness
designations prohibit access to some areas. Regulations like the Forest
Service roadless policy and prohibitions in the Lewis and Clark
National Forest are equally absolute.
At the same time the permitting process to explore and develop
resources often works to effectively prohibit access. These constraints
range from federal agencies delaying permits while revising
environmental impact statements to habitat management plans overlaying
one another thereby prohibiting activity to unreasonable permit
requirements that prevent production. There is no single solution to
these constraints. What is required is a commitment to assure that
government actions are developed with a full recognition of the
consequences to natural gas and other energy supplies. IPAA believes
that all federal decisions--new regulations, regulatory guidance,
Environmental Impact Statements, federal land management plans--should
identify, at the outset, the implications of the action on energy
supply and these implications should be clear to the decision maker.
Such an approach does not alter the mandates of the underlying law that
is compelling the federal action, but it would likely result in
developing options that would minimize the adverse energy consequences.
there's no short term fix--recovery will take time
Any realistic future energy policy will take time. There is no
simple solution. The popular call for OPEC to ``open the spigots''
failed to recognize that the low oil prices of 1998-99 reduced capital
investment from the upstream industry all over the world. Only Saudi
Arabia had any significant excess production capacity and no one knew
just how much or whether the oil was of a quality that it could be
refined in most refineries. The collateral damage of low oil prices on
the natural gas industry is affecting gas supply today and will until
the industry recovers. The producing industry lost 65,000 jobs in 1998-
99. While about 40 percent of those losses have been recovered, they
are not the same skilled workers. If measured by experience level, the
employment recovery is far below the numbers. Less obvious, but equally
significant, during the low price crisis equipment was cannibalized to
keep operating and support industries were decimated. It will take time
to develop the infrastructure again to build new drilling rigs and
provide the skilled services that are necessary to rejuvenate the
industry.
conclusion
Overall, attracting capital to fund domestic production under these
circumstances will be a continuing challenge. This industry will be
competing against other industries offering higher returns for lower
risks or even against lower cost foreign energy investment options. The
slower the flow of capital, the longer it will take to rebuild and
expand the domestic industry.
Providing access to the resource base will be critical and requires
making some new policy choices with regard to federal land use.
These two issues are the ones that are particularly dependent on
federal actions, and should be the immediate focus of the next Congress
and the next Administration.
It is time for this country to take its energy supply issues
seriously and develop a sound future policy. Certainly, there is room
in such a policy for sound energy conservation measures and protection
of the environment. But, energy production--particularly petroleum and
natural gas--is an essential component that must be included and
addressed at once. Independent producers will be a key factor, and the
industry stands ready to accomplish our goals, if policies reflect that
reality.
Mr. Barton. Thank you, Mr. Jordan.
We now want to hear from Mr. Reiten. Mr. Reiten is
President and CEO of Northwest Natural. He's testifying on
behalf of the American Gas Association. I understand you've got
a meeting with the Governor of Oregon at 4:45, so after you
give your oral statement, whenever you feel you need to leave
to make that appointment, you are welcome to go, but your
testimony is in the record. We would ask you to summarize it in
6 minutes.
STATEMENT OF RICHARD G. REITEN
Mr. Reiten. Thank you, Mr. Chairman for this opportunity.
Northwest Natural is a local gas distribution company in Oregon
and Southwest Washington. I am here and pleased to be here on
behalf of the American Gas Association.
Mr. Barton. Would you suspend--does the gentleman from
Oregon wish to more formally introduce our witness? I meant to
give you that opportunity.
Mr. Walden. Given the time constraints, Mr. Chairman, I
would just like to welcome Mr. Reiten to this Panel and I think
you'll be pleased with his testimony.
Mr. Barton. All right.
Mr. Walden. Thank you, Mr. Chairman.
Mr. Reiten. Thank you, I was expecting some harassment, Mr.
Chairman. It didn't happen.
I'm pleased to be here on behalf of the American Gas
Association to discuss the need for national energy policy and
focus on issues that are important to the natural gas utility
industry. The American Gas Association is made up of local gas
distribution companies delivering every day gas to 56 million
homes across the country.
Why do we need a national energy policy? Events in the
Western States this year, including my own, demonstrate
unmistakably that we cannot take for granted the balance of
energy supply and demand. Across the entire country, consumers
are feeling the impact of natural gas prices caused principally
by an imbalance of supply and demand, brought about by an
unusually cold winter, November and December being the coldest
in the last 50 years. Storage concerns and the California
situation and with all of the discussion, I'd like to point out
that California uses 70 percent of the gas used in the West and
over the 12 months trailing December, they were using 50
percent more gas than the year before for electric generation
and that caused some real concerns nationally about prices and
I think psychologically led to some of the higher prices as
well as the storages and other issues.
With respect to price, let me say first that gas utilities,
local gas utilities do not profit from higher gas prices. We
earn a return of the cost that we incur in providing gas to our
customers. Wellhead gas price increases, which during December
were up more than 400 percent, those revenues were passed on
back to the gas producers. There were no added margins from
higher gas prices for local gas distribution utilities,
although we must deal with the customers.
Demand for energy is growing in this country. We can see
that the prices have been escalating across the board.
Dependence on foreign oil is increasing, now approaching 60
percent. Refining capacity is stressed. We have regional
shortages of refined fuels. We have it in the Northwest. And
energy delivery infrastructure, pipelines and electric
transmission lines are constrained in some areas. All of these
factors lead to tighter supplies of energy and higher prices.
A comprehensive national energy policy can ensure that
these are addressed and certainly, hopefully, all of our public
interests can be balanced in this process.
The White House has formed a National Energy Policy Task
Force, chaired by Vice President Cheney to develop the guiding
principles for an energy policy and to coordinate the various
agencies that are involved in implementing that policy. This is
a critical first step.
Legislation is needed to establish free market solutions,
relying on a diversity of fuels, not just only natural gas to
reduce exposure to price spikes and shortages, but also to
reduce dependence on foreign oil for national security, and to
improve the environmental quality of energy use.
What are the appropriate policies for natural gas? Two
recent studies, the National Petroleum Council study and AGA
Foundation's ``Fueling of the Future'' study set the stage for
a serious consideration of Federal and State policies affecting
natural gas. Both studies project a significant increase in
natural gas demand over the next 20 years, actually a 50
percent increase to 32 trillion cubic feet. Increased use of
natural gas, especially in end use applications can lower oil
imports and reduce overall energy consumption and lower
CO<INF>2</INF> emissions, relieving some strain on the
electricity grid.
Equally important, these studies identify we'll have to
have them for the Nation to capitalize on the opportunity
natural gas presents. As the NGSA and the IPAA witnesses are
pointing out here, vast reserves of natural gas exist within
the borders of the United States, but much of it is not
available for exploration and production.
To meet the demand for natural gas over the next 20 years,
the National Petroleum Council estimates that $150 billion must
be invested in transmission and delivery infrastructure. Two-
thirds of that, approximately $100 billion will be needed in my
sector, the local distribution companies. So we heard from Mr.
Wadlington about $34 billion or more will be needed for
interstate pipelines to make sure we get that natural gas to
the markets where it is needed.
So we need to expedite review and approval of these
facilities and a Federal inter-agency agreement concerning
environmental reviews, such applications could make sure that
appropriate balance between environmental protection and
economic prosperity is achieved.
Lead times can be shortened and efficiencies gained without
threatening the environment. In my State, for instance, it
takes 24 months for clearance and construction permitting,
construction and startup of a $2 billion semiconductor factory.
It takes 42 months to get approval and build a state-of-the-art
gas fired power plant. Now ask me, will both have acceptable
impacts on the environment? It's a process problem for the
energy industry built in over time and a comprehensive national
energy policy can hopefully help fix this problem for us.
Tax incentives make sense to encourage needed expansion of
delivery infrastructure, shorter depreciation schedules for
investment, and infrastructure would help finance needed
construction.
We also need to expand the use of new technologies to
enhance the efficient use of clean fuels such as natural gas.
Federal policy should measure the total efficiency of energy
technology from the source to the field in the use of the
energy. I want to make a strong point here. Fifty percent of
the BTU content is lost in using gas to generate electricity to
do a job such as heating water as compared to using gas
directly to heat that water which is 92 percent efficient.
Mr. Boucher commented earlier about the possibilities. Here
is a real live example. There are 100,000 electric water
heaters in our service territory that can be converted from
electric to gas in homes that have gas furnaces and that
amounts to 400 megawatts of electricity.
Congress should expand and strengthen protections for
consumers and families. The national energy policy should
extend and expand low income home energy assistance program,
the LIHE program and a comprehensive national energy policy can
guarantee the clean, secure, affordable supply of energy that's
needed for economic growth and prosperity.
Mr. Barton. Mr. Reiten, can you summarize?
Mr. Reiten. I'm ready to summarize.
Mr. Barton. Okay.
Mr. Reiten. The members of the American Gas Association
will work with Congress, with consumers and with its partners
in the energy industry to accomplish this goal and I do very
much appreciate the opportunity to comment here.
Mr. Barton. We appreciate that.
Mr. Reiten. Thank you, Mr. Chairman.
Mr. Barton. Feel free to exist whenever you need to meet
with the Governor.
Mr. Reiten. Thank you.
[The prepared statement of Richard G. Reiten follows:]
Prepared Statement of Richard G. Reiten, President & CEO, NW Natural on
Behalf of the American Gas Association
Good afternoon, Chairman Barton and members of the subcommittee. I
am pleased to be here today to present the views of the American Gas
Association on national energy policy legislation and the role of
natural gas.
AGA represents 185 local natural gas distribution companies, which
deliver natural gas to 50 million customers in the United States. NW
Natural is the largest natural gas distributor in the Pacific
Northwest. We are headquartered in Portland, Oregon and serve Western
Oregon and southwestern Washington State.
Ample, reliable energy supply at affordable prices is key to
providing economic and national security for Americans. AGA recognizes
that, while the United States has tremendous energy resources,
America's current energy supply and infrastructure will not, in the
future, sustain our growing economy. Therefore, we need to act now to
meet our country's energy needs for the 21st Century.
Current Market Conditions
Natural gas prices have increased dramatically over the past year.
A year ago the average price for natural gas was less than $2.50 per
thousand cubic feet, currently it is about $5.00 at the Henry Hub.
However, during the heart of the winter heating season, average prices
spiked at over $10. Why has this happened? Three words: supply, demand
and weather. Drilling for natural gas declined in 1998 and 1999 in
response to extremely low prices. Demand for natural gas continued to
grow, causing supply to become tight. Prices began to rise this spring.
Then record cold weather across the country in November and December,
on top of wholesale price increases, created very high gas bills for
residential gas customers. Prices are beginning to moderate, but until
there is a significant increase in production, they are likely to
remain at relatively high levels.
Natural gas utilities do not profit from higher prices. We buy and
resell natural gas to our customers without any price mark-up. However,
we are the face--and the bill--that the customer sees. Until this past
year, customers have been used to steady or declining natural gas
bills. Over the past decade the real price of natural gas has actually
decreased, even as demand increased. This is mostly attributable to
technological breakthroughs that have made it easier and less expensive
to locate, produce and deliver gas--breakthroughs that we believe will
continue into the future.
The sharp increase in natural gas prices over the past year has
commanded the attention of the American people. The reasons for this
increase are well known to the natural gas industry and are perhaps
better addressed by the producer representatives testifying today. They
include the low natural gas prices in 1998 and 1999 that led to a
decline in natural gas drilling coupled with increased demand for
natural gas by all consuming sectors. The record cold weather in
November and December of last year increased residential consumption
and the preference for natural gas for almost all new electric
generation continues to grow demand from that sector. Relatively high
oil prices and the environmental attributes of natural gas coupled with
a strong economy also drove up demand for natural gas in industrial
markets.
Natural Gas Distribution Industry Policy Priorities
Given the current energy situation, it is highly appropriate that
Congress focus on establishing a national energy policy. Two studies--
The National Petroleum Council's 1999 study on Natural Gas and the AGA
Foundation's ``Fueling the Future'' study released in early 2000--set
the stage for a serious consideration of federal and state policies
affecting natural gas. Both of these studies project a significant
increase in the demand for natural gas over the next 20 years under a
favorable policy environment.
But equally important, particularly in light of today's environment
and the need for supply sufficient to meet a growing demand for gas and
electricity, these studies identify what will have to happen for the
nation to capitalize on the opportunity natural gas presents. The
events of this winter dramatically demonstrate that now is the time to
consider and implement many of the recommendations of the ``Fueling the
Future'' study.
``Fueling the Future'' essentially recommends that natural gas be
allowed to compete fairly and freely against other fuels;
<bullet> that access to new supplies of natural gas shall not be unduly
restricted so that natural gas can continue to be delivered at
a reasonable and competitive price;
<bullet> that the natural gas delivery infrastructure maintain its
ability to deliver gas safely and reliably, all the while
expanding to meet growing demand;
<bullet> that new natural gas technologies and markets such as
distributed generation receive support, including federal RD&D
support, to ease the demand on the electric grid;
<bullet> and that RD&D also continue to support technological advances
in the exploration, production, and delivery of natural gas in
order to keep down costs--and keep down the price of gas.
In the wake of this winter's record cold demand, these central
goals seem to take on an even more immediate importance. AGA believes
that the nation's present energy situation--both gas and electric--
underscores the importance of an energy policy that utilizes each fuel
in our national portfolio to its best advantage.
AGA has developed an outline of legislative provisions that we
believe will accommodate and facilitate the development of an expanded
natural gas market, which would benefit the nation through increased
economic and energy efficiency, enhanced energy security and improved
environmental quality. As distributors of natural gas to the consumer,
we have focused on infrastructure expansion and renewal, new end-use
technologies and energy efficiency, and protecting low-income
consumers. Adequate, reasonably priced gas supply is obviously a high
priority for the natural gas utility industry. However, we have not
made any specific recommendations on gas supply issues and generally
support the initiatives proposed today by NGSA and IPAA.
Assistance to Consumers
National energy policy legislation must address the needs of
consumers. Over the long term, consumers will benefit from policies
that assure that energy supplies are available at reasonable prices. We
also need to assure that low-income consumers are able to afford the
energy they need. AGA is a long time supporter of the Low Income Home
Energy Assistance Program. LIHEAP helps consumers pay their energy
bills. It is generally available to households with incomes less than
150% of the poverty level. In recent years, this program has been able
to assist about 4 million households. The typical LIHEAP recipient is
elderly, disabled or a family with young children. The average
recipient's household income is less than $10,000 a year.
This winter, the base program funding was increased by $300 million
to $1.4 billion and releases of emergency funds increased the available
funds to $2.25 billion. However, applications for assistance have
increased by 27 percent over last year according to a survey released
this month by the National Energy Assistance Directors' Association
(NEADA). Even with the increased funding provided by the federal
government this year, the NEADA survey found that funds will not be
sufficient to offset the rapid increases in caseloads resulting from
higher home heating costs this year.
There is an immediate need for a supplemental appropriation for
LIHEAP to assure that moneys are available for the remainder of the
heating season and for possible spikes in electricity prices this
summer. We also urge the subcommittee to raise the authorization level
for the LIHEAP base program to at least $3 billion for FY2002 and
future years and to expand funding for weatherization and state energy
programs, as provided in legislation introduced by Representative
Markey and Senator Bingaman earlier this month.
Many of our small business customers have had difficulty with
rising energy costs as well. We are supportive of legislation
introduced by Senator Kerry to provide low-interest loans to small
businesses adversely affected by high energy bills and we urge the
House to work with the Senate to pass this legislation early this
session.
Infrastructure Renewal and Expansion:
As natural gas demand increases by up to 60% over the next 20
years, the National Petroleum Council estimates that $150 billion must
be invested in transmission and delivery infrastructure. Two thirds of
that, approximately $100 billion, will be needed in the delivery
sector, and $50 billion will be needed for interstate pipelines, to
make sure natural gas can get to markets where it is needed. This
infrastructure includes pipelines, underground storage facilities, peak
shaving plants, and LNG plants.
This level of investment is unprecedented for the natural gas
utility industry. Accomplishing it will present many challenges. Timely
and efficient expansion of the energy infrastructure is, however,
absolutely essential to meeting America's energy needs.
The federal government can facilitate these infrastructure
investments being made in a timely fashion through favorable tax
policy. AGA has proposed that the costs associated with siting and
construction of new gas distribution, storage and transmission
infrastructure be allowed accelerated depreciation over a seven year
period.
A second infrastructure issue that requires federal attention is
the siting of new interstate transmission pipelines and distribution
lines. While most of the distribution lines are subject to state siting
regulations, many larger lines cross federal lands and are subject to
permitting delays due to the lack of interagency coordination. We
concur with INGAA's recommendation that FERC and all other federal
agencies involved in the environmental review of interstate pipeline
applications enter into an interagency agreement to expedite processing
of applications. We would also include deadlines for each agency to
complete its required actions and recommend that such deadlines be
given teeth by requiring that all concerned agencies take action on an
application by a date certain or be deemed to have assented to the
application.
Third, increased federal funding for research and development to
enhance pipeline and distribution reliability and to increase the
operational efficiency of the pipeline and distribution infrastructure
will be critical to our efforts to deliver natural gas to the customer
safely, efficiently and reliably.
New Technologies and Energy Efficiency
We must continue to improve natural gas end-use technologies and to
develop new technologies to provide industrial, commercial and
residential consumers with environmentally friendly gas equipment that
conserves energy and lowers fuel bills. Great strides in efficiency
have already been made. The average homeowner uses 16% less natural gas
than in 1980 due to more efficient gas appliances and better insulated
homes.
Federal energy policies should measure the total efficiency of
energy technologies, from the source of the fuel to the use of the
energy. 50% of the energy benefits are lost in using gas to generate
electricity to do a job, such as heating water, as compared to using
gas to heat the water. Natural gas used directly in homes, industries
and businesses is inherently efficient. Recognizing this inherent
efficiency of the direct use of gas is an example of what we mean by an
energy policy that utilizes each fuel in our national portfolio to its
best advantage.
Federal spending on gas related RD&D should be increased to support
advanced end-use equipment such as fuel cells, microturbines, cooling
and NGVs. As new products are developed, tax incentives are appropriate
to stimulate market acceptance of selected highly efficient and
environmentally beneficial gas technologies.
The federal government can lead by example through funding a
vigorous implementation of the Federal Energy Management Program and
the use of efficient gas technologies to replace outdated, less
environmentally friendly equipment. Legislation establishing a new DOE
grant program to increase energy efficiency in school buildings will
also assist in reducing energy demand and reducing costs to an
important sector.
Finally, AGA recommends that the federal government coordinate its
energy policy development at the highest level. We commend President
Bush for establishing a task force on Energy Policy Development, led by
Vice President Cheney and consisting of the Secretaries of the major
Cabinet agencies concerned with energy, the environment and the
economy. We are hopeful that this task force will not only set the
parameters of a viable long term national energy policy, but will
establish policies and procedures that will assure that all Federal
agencies consider the impact their programs have on the nation's energy
security.
Mr. Chairman, AGA is committed to working to enact a bipartisan,
consensus, market-based national energy strategy that will ensure the
future security, comfort, and economic well being of our nation's
citizens by meeting their energy needs, without sacrificing the quality
of our environment. AGA will work with the Congress and other policy
makers, with consumers and its partners in the energy industry to
accomplish this goal.
Mr. Barton. We now want to welcome Mr. Andrew Littlefair.
I'm not sure how he got on the Panel, it was certainly without
my permission since he is a good friend of mine. The last time
I talked to you, you were heading the Delegate Negotiations for
the Dole Campaign in Texas for State-wide Delegates to the
National Convention in 1996 and my name wasn't on the list.
Mr. Littlefair. So designing an energy policy is going to
be a lot easier, Mr. Chairman.
Mr. Barton. But it is good to have you. It was Texas' loss
when you moved to California. I'm sure you're going to give us
very informed testimony about the possibility of using natural
gas to power a vehicle. So your testimony is in the record in
its entirety and in all sincerity, we do welcome you before the
subcommittee.
STATEMENT OF ANDREW J. LITTLEFAIR
Mr. Littlefair. Thank you, Mr. Chairman, members of the
subcommittee. My name is Andrew Littlefair and I'm President of
Pickens Fuel Corporation. Pickens Fuel owns and operates over
35 natural gas fueling stations in California and Arizona. I
also serve on the boards of both the National and California
Natural Gas Vehicle Coalitions.
Before I begin, I would like to thank you, Mr. Chairman,
for your support of NGVs and your commitment to the causes of
clean air and NG security. You set the example for all of us by
insisting that the best way to reduce our reliance on imported
oil and to promote clean air is through the private sector.
The government needs to set policy priorities, stick to
those priorities and provide the private sector the right
incentives to get the job done. If the economic signals are
right, the private sector will make the correct decisions that
will result in cleaner air and reduce dependence on foreign
oil.
Now let me turn to the role that the natural gas vehicles
can and should play in helping achieve both of these national
priorities. Today, NGVs are one of the most effective ways to
reduce urban air pollution. Vehicles contribute one half or
more of the emissions that cause smog. Although gasoline and
diesel engines have continued to get cleaner, today's NGVs are
substantially cleaner for every criteria of pollutant. In fact,
one natural gas refuse truck in Southern California is the
equivalent to remove 325 vehicles from the road.
Light duty NGVs already are certified to California Super
Ultra Low Emission Vehicle Standard and now may be counted
toward meeting that State's zero emission vehicle requirement
which is electric vehicles. Heavy duty NGVs produced only a
tiny fraction of the particulates and other air toxics produced
by diesel engines and that will continue to be true through
this decade and beyond.
It is in part because of this that the South Coast Air
Quality Management District recently put into place a number of
policies to encourage fleets to switch to cleaner alternatives,
especially natural gas. Now all taxis serving John Wayne
Airport where I live in Orange County, are powered by natural
gas.
In Southern California, no new diesel trash trucks can be
purchased starting in July. All the shuttle vehicles and
parking lot buses of Los Angeles International are moving
toward being 100 percent natural gas. As larger trash hauling
fleets in the four counties all around Los Angeles are
converting to natural gas. I'm sorry, all the larger trash
hauling fleets in the four counties around Los Angeles are
converting to natural gas.
The majority of the larger transit bus fleets in the State
have selected the natural gas path. In fact, at least 30
percent of all transit buses on order in the United States
today are natural gas buses. Significantly, a desperately
needed new power plant in California can now be built because
of the emissions offsets that the developers of the plant have
acquired by agreeing to help Waste Management, Inc. add 120 new
natural gas trash trucks.
Another benefit of NGVs is reduced oil imports and we all
know that problem. That's why it's important to remember that
each NGV displaces 100 percent of the petroleum that vehicle
otherwise would use. NGVs can and should be a significant part
of the solution to oil dependence.
Mr. Chairman and members of the subcommittee, the bottom
line is that the increased use of NGVs simultaneously addresses
our need for clean air and energy security needs.
Unfortunately, the NGV market has grown much slower than
expected. Our No. 1 challenge continues to be what you, Mr.
Chairman, found in 1996 when you headed the Speaker's Task
Force on Natural Gas Vehicles, namely, economics. And because
of the low production numbers NGVs generally cost more than
their gasoline or diesel counterparts. Light duty NGVs, for
example, cost between $3,000 and $5,000 more and heavy duty
NGVs can cost up to $50,000 more.
If the demand for NGVs increase significantly, that
incremental cost would come down. While demand has increased,
it hasn't increased enough. The Energy Policy Act of 1992 is
intended to help stimulate demand. However, the Act covered
only a small segment of the vehicle population and it's filled
with loopholes. As a result, EPAC's effect on the alternative
fuel vehicle market has been much less than anticipated.
Another economic factor is that when customers purchase
NGVs they are not financially rewarded for the societal
benefits that are produced, namely, cleaner air and reduced oil
dependence. There's a market failure here and that's perhaps an
appropriate role of the Federal Government to correct such
failures and make sure that the vehicle buyers and users
receive accurate economic signals. That's why the NGV industry
has supported tax incentives to lower the cost of NGVs for
consumers, especially fleets. In the last Congress, two bills
were introduced to provide tax incentives for alternative fuel
vehicles, Senate Bill 2591 and H.R. 2522 in the House.
We also urge Congress to support the NGV market through
various appropriations. For example, more money is needed for
DOE's Clean Cities Program and grants from the Clean Cities
State Energy Program to co-fund alternative fuel vehicle
incentives.
Another critical area is the appropriations for NGV RD&D.
Because of the Chairman's leadership, 6 years ago DOE and the
NGV industry jointly prepared and endorsed a 5-year NGV RD&D
plan. Unfortunately DOE never adequately funded that plan. This
year DOE and the NGV industry created an RD&D plan for the next
5 years. We urge Congress to ensure that the plan receives
necessary funding.
Mr. Chairman, there's more that can be done and should be
done. My written statement contains a list of those items.
Thank you very much.
[The prepared statement of Andrew J. Littlefair follows:]
Prepared Statement of Andrew J. Littlefair, President, Pickens Fuel
Corp.
introduction
Mr. Chairman and Members of the Committee, my name is Andrew J.
Littlefair. I am the President of Pickens Fuel Corp. (PFC). PFC,
incorporated in 1997, owns and operates over 30 natural gas fueling
stations in Southern California and Arizona. In California, the PFC
network serves an area from San Francisco in the north to Orange County
in the south to Riverside and San Bernardino Counties in the east. In
Arizona, PFC owns four stations in the greater Phoenix area, including
a state-of-the-art liquefied natural gas (LNG) fueling station in
Tempe.
In addition to my position with PFC, I also am a Board Member of
the Natural Gas Vehicle Coalition, the national trade association
dedicated to promoting new markets for natural gas vehicles. I also
serve on the Board of the California Natural Gas Vehicle Coalition, an
organization dedicated to increasing the use of natural gas vehicles in
California.
I appreciate the opportunity to discuss the benefits to America of
increased use of natural gas as a motor vehicle fuel and why it is
critical that government do more to support natural gas and other
alternative transportation fuels.
Natural gas vehicles help achieve the important U.S. policies of
cleaner air and increased energy security. They also represent a
significant new export market for U.S. manufacturers since concern
about urban air quality is now worldwide and U.S. NGV technology is the
best in the world. Finally, investment in the development of NGV
technology and fueling infrastructure serves as a catalyst to improving
the U.S. economy.
While most people are familiar with the benefits of natural gas for
electric power generation, heating homes, and cooking, fewer people are
aware that it also is an excellent fuel for transportation. NGVs today
represent some of the most technologically advanced and cleanest
transportation vehicles in the world. NGVs were the first vehicles
certified under California's demanding low, ultra low, and now super
ultra low emission vehicle standards. Natural gas powered vehicles of
all different makes and models are now available from the majority of
automobile, truck and bus manufactures. For example, Caterpillar,
Cummins, Detroit Diesel and John Deere all offer a line-up of natural
gas engines for heavy-duty vehicles, including transit buses, school
buses, and over-the-road trucks. This is in stark contrast to several
years ago when the only NGVs available were aftermarket conversions.
While the future for natural gas vehicles--in the U.S. and
throughout the world--is bright, much more must be done at the national
level if we are to significantly reduce this country's reliance on
imported oil and capture the environmental benefits of greater NGV use.
Ultimately, only the private sector can bring about the changes
necessary to move the US economy away from its overwhelming reliance on
petroleum motor fuels. If the US is to realize significant reductions
in the amount of petroleum used in the transportation sector, the
private sector must develop the new innovative alternative fueled
vehicles that are needed. The private sector also must invest in the
infrastructure necessary to fuel alternative fuel vehicles.
Government nevertheless must support the evolutionary process of
moving beyond petroleum reliance. Government needs to set the policy
priorities, remain firm in holding to those priorities, and provide the
private sector with the right incentives to move quickly to get the job
done. The Congress needs to expand incentives for all alternative
fuels, including measures that will bring down the cost of acquiring
alternative fuel vehicles and using the fuels. Congress also should
adopt incentives that support the development of alternative fuel
infrastructure so users will have places to fill up their alternative
fuel vehicles.
The NGVC and other alternative fuel industries supported passage of
S. 2591, the Alternative Fuel Tax Incentives Act, during the 106th
Congress, and we are working toward introduction of similar legislation
in the 107th Congress. This bill provides tax incentives to lower the
cost for consumers of owning alternative fuel vehicles. If enacted, the
tax incentives will stimulate market demand for alternative fuel
vehicles (such as NGVs) and will put us on the road to a self-
sustaining market for nonpetroleum fueled vehicles. PFC and the NGVC
urge Congress to act quickly and enact incentive legislation this year.
We also urge the Congress to continue to fund the Department of
Energy's Clean Cities Program, which has been an important catalyst in
developing new markets for alternative fuel vehicles, and to expand
funding for NGV RD&D.
1. The Need to Reduce Our Dependence on Foreign Oil is Greater Than
Ever
Reliance on petroleum imports threatens US economic stability and
energy security. It also continues to distort US foreign and military
policy. The fact that the US imports too much is not new, however.
Reliance on foreign oil was a major impetus for the passage of the
Energy Policy Act (EPAct) of 1992. Despite the passage of that law, the
US today relies even more on oil imports than it did in 1992. Since
EPAct's passage, oil imports have gone from less than 50 percent of
total oil supply to nearly 60 percent of supplies. Reliance on foreign
oil has grown due to two factors. The first is continued decline in
domestic production. Once the world's dominant producer of oil, US oil
production has steadily declined since 1970. The second factor is
continued growth in domestic demand for oil. The US' is now the world's
largest importer and consumer of oil.
Congress should be extremely concerned about our reliance on
foreign oil. Previous supply disruptions and price spikes resulted in
US economic recession. In fact, the recent increase in oil prices is a
major factor in our current economic slowdown. Threats to oil security
also prompted the 1991 Gulf War. Persian Gulf and OPEC member countries
continue to supply an important part of US crude oil and petroleum
imports. The latest EIA figures indicate that in 1999 the US relied on
OPEC members to provide 48 percent of imported crude oil; Persian Gulf
states alone provided 27 percent of total oil imports. EIA's long-term
forecast indicates that, by 2020, OPEC is likely to provide 56 percent
of US crude oil demand and that Persian Gulf exporters will provide 30
percent of total oil imports. OPEC and Persian Gulf exports also make
up a significant component (currently 40 percent) of world oil supply.
OPEC's share of world oil supplies is expected to reach almost 50
percent by 2020, according to EIA's latest forecast.
Persian Gulf exports in particular are of concern since this region
has generally been unstable and continues to be the source of
geopolitical conflicts. The past 12 months alone has seen a number of
troubling developments in the Middle East and Persian Gulf region. A
recent report by the Center for Strategic and International Studies
(``The Geopolitics of Energy into the 21st Century'') says that the
``risk posed by supply interruptions will be greater'' in the next
several decades than it was at the end of the last century. The report
also says that ``military conflict will remain a threat to most energy-
producing regions, particularly the Middle East where almost two-thirds
of the world's oil resources are located'' and that ``at least 10 of
the 14 top oil-exporting counties run the risk of domestic instability
in the near to middle term.''
Iraq continues to be a special source of concern to the stability
of the Middle East. EIA figures indicate that in the recent past Iraqi
oil production has provided as much as four percent of world oil
demand. This is a significant volume of oil and its removal from
international markets at a time when reserve stocks are low could
significantly affect world oil prices. Over the next two decades, the
EIA projects that Iraq will more than double its oil production,
ensuring that it will continue to be an important player in
international oil markets. The curtailment of world oil production by
OPEC members demonstrates the serious consequences of even small
disruptions in the supply of oil to international markets, and proves
that OPEC is capable of acting cohesively to control international oil
markets. OPEC's market power will continue to grow as its share of
world oil production increases. As last year's events have
demonstrated, the economic effect of supply disruptions is not limited
to any one region but rather reverberates across international
commodity markets. Disruptions of oil supplies from the Persian Gulf
and from OPEC members will still result in much higher prices being
paid for oil imports regardless of their country of origin.
An additional concern is the growing demand for oil among developed
and developing nations. It is estimated that demand for oil worldwide
may double as a result of economic expansion and growing vehicle
populations in developing nations, especially China. This increased
demand is expected to place significant upward pressure on world oil
prices. The CSIS report also states that China's increased reliance on
Persian Gulf oil could lead to tensions with the US.
The US reliance on foreign oil has a significant impact on the
economy. Petroleum imports result in fewer dollars spent at home and
more sent overseas. In 2000, petroleum imports accounted for some $90
billion (up from 1999's $59 billion) of the US trade deficit. This
figure does not begin to account for the huge military costs associated
with ensuring secure supplies of foreign oil or the environmental costs
associated with transporting and using oil.
All of these factors point to the inescapable conclusion that it is
in the US' best interest to develop alternative fuel sources for its
economic needs.
2. EPAct's Petroleum Displacement Goals Have Not Been Achieved
The Energy Policy Act of 1992 (EPAct) was intended to create a
viable alternative fuels market. Its goal was to reduce US petroleum
and crude oil imports and increase energy security by promoting
reliance on domestic fuels. In part as a result of that law, today, the
type and number of alternative fuel vehicles being sold, as well as the
number of alternative fuel stations, has grown. The US is the world
leader in the field of alternative fuel vehicles and fueling
infrastructure. The US automakers should be commended for their
impressive array of low-polluting, alternative fuel vehicles.
However, the law has failed to produce a sufficient shift away from
reliance on petroleum motor fuels during the past decade. EPAct set a
national goal of replacing 10 and 30 percent of the petroleum used in
light duty vehicles with non-petroleum alternative fuels by 2000 and
2010, respectively. A report released last year by the US General
Accounting (GAO) indicates that, unfortunately, even after almost eight
years of EPAct implementation, alternative fuel use accounts for a very
small amount of overall motor fuel demand. According to the 1998
figures compiled by the GAO, total alternative fuel use--including the
oxygenated blending stocks for gasoline--accounts for less than 4
percent of all highway gasoline use. This is far short of the EPAct
goal of 10 percent displacement by 2000. The amount of alternative fuel
that is used in alternative fuel vehicles is even less. GAO reported
that alternative fuel use in alternative fuel vehicles displaced only
about 334 million gallons of gasoline or less than 0.3 percent of total
gasoline consumption. The vast majority of the remaining amounts of
non-petroleum fuel used in the country are comprised of MTBE or ethanol
that is added to gasoline to meet the reformulated gasoline
requirements of the Clean Air Act.
If the US is to achieve its energy security goals, it must look to
new programs and new initiatives to encourage greater use of
alternative transportation fuels. Now is the time to act. US automakers
and engine manufacturers currently are offering the most extensive
line-up of alternative fuel vehicles and alternative fuel engines. The
number of AFVs operated in the US could rapidly expand if appropriate
incentives are provided to help offset their initial higher costs.
3. The Transportation Sector: The Key to Energy Security
There are many initiatives underway to expand the use of
alternative fuels in various energy sectors. All of these are
important. However, it is especially critical that alternative fuels
penetrate the transportation market. Since the 1970s, all major energy-
consuming sectors other than transportation have significantly reduced
their dependence on petroleum. Today, the transportation sector remains
almost totally dependent on petroleum motor fuels. The US
transportation sector is responsible for more than two-thirds of all
petroleum consumption and an astonishing 15 percent of world oil
demand. The only way to break free of the reliance on petroleum fuels
is to increase the use of alternative fuels. Efforts to increase fuel
efficiency are laudable and should be pursued. However, increasing
energy efficiency of vehicles will not improve energy security.
Improving fuel efficiency will simply slow-down the current growth in
oil consumption. Fuel efficiency does not provide energy consumers with
alternative options for fueling their vehicles. A gasoline or diesel
vehicle that gets 60 or even 80 miles per gallon is still 100 percent
reliant on petroleum supplies.
Increasing the use of alternative fuels provides consumers with
real options when it comes to supply disruptions or price hikes. Each
NGV displaces 100% of the petroleum that otherwise would be used to
fuel that vehicle. The US cannot wait for the next supply disruption or
price spike to create the necessary fueling infrastructure--those
efforts must begin now. Given the significant amount of energy consumed
by the domestic transportation sector, a strong US market for
alternative fuels would put downward pressure on international oil
prices. In addition, exports of US alternative fuels technologies would
not only bolster our own economy but would further reduce world-wide
dependence on foreign oil, further lessening the market power of
certain oil exporting nations. News of growing international interest
in alternative fuels increases daily. Countries such as China, Chile,
Egypt and Mexico increasingly are looking at alternative fuels to
combat air pollution and reduce oil imports.
4. The Environmental Benefits of Natural Gas Vehicles
Natural gas is one of the cleanest alternative fuels. More
importantly, this technology is readily available today. When compared
to average petroleum vehicles, NGVs reduce exhaust emissions of carbon
monoxide (CO) by 50%, carbon dioxide (CO<INF>2</INF>) by 20%, non-
methane organic gas (NMHC) by 88% and nitrogen oxides (NO<INF>X</INF>)
by 66%, and produce 20% fewer greenhouse gases. NGVs have been
certified to be substantially cleaner than traditionally fueled
vehicles. Several models already meet or exceed California's ultra-low
emissions vehicle (ULEV) and super ultra-low emissions vehicle (SULEV)
standards.
The dedicated natural gas Honda Civic GX, which is produced at
Honda's plant in Ohio, illustrates the excellent environmental
advantages of natural gas vehicles. The Honda GX is the cleanest
internal combustion engine powered vehicle ever commercially produced.
The American Council for an Energy Efficient Economy's ``Green Book'',
which is a consumer environmental guide to cars and trucks, rates the
Honda Civic GX (along with the hybrid Honda Insight) as the ``Greenest
Vehicle of 2001.'' The natural gas Civic is so clean that it now
qualifies in California for credits toward that state's zero-emission
vehicle sales requirement.
Ford, DaimlerChrysler, General Motors and Toyota also produce light
duty natural gas vehicles that are certified to some of the most
demanding emission standards in existence.
Heavy-duty vehicles powered by natural gas also are much cleaner
than comparable diesel vehicles--generally reducing emissions of
particulate matter by 90 percent and nitrogen oxides by more than 50
percent. Natural gas engines also produce significantly less air toxic
emissions. A recent study prepared by Argonne National Laboratory found
that natural gas vehicles reduce emissions of air toxics by 60-70
percent compared to diesel and gasoline powered vehicles. It is
important to note that Argonne's study did not consider diesel
particulate matter emissions, which the U.S. Environmental Protection
Agency classifies as a mobile source air toxic. Including diesel
particulate matter emissions would have substantially increased the
overall air toxic benefits produced by natural gas vehicles since they
emit far fewer particulates than diesel and gasoline powered vehicles.
Regulatory agencies across the country increasingly are looking to
natural gas engines to displace diesel engines as an effective strategy
for reducing pollution. Officials in Southern California, for example,
have decided that natural gas or other alternative fuels should power
most new heavy-duty vehicles because of growing concern about air toxic
and other emissions. In addition, many transit agencies around the
country have decided to exclusively rely on natural gas and other
alternatively fueled buses when purchasing new buses for their fleets.
In fact, the majority of the larger transit agencies in California have
chosen to select the natural gas bus approach.
Proponents of petroleum vehicles have questioned the continued need
for alternative fuel vehicles since the US EPA recently announced plans
to make gasoline and diesel fueled vehicles of all sizes much cleaner.
While there is no question that conventionally fueled vehicles have
gotten cleaner and will continue to do so, additional reductions will
continue to be necessary to offset the increased number of vehicles
that will be added to America's roads and the increased growth in
average vehicle miles traveled (both projected by the U.S. Department
of Transportation). Meanwhile, NGV technology will continue to advance,
and NGVs will continue to get cleaner, thereby maintaining their
environmental advantage over their petroleum counterparts.
In addition, many people believe that eventually the internal
combustion engine will be replaced by fuel cell and hydrogen fueled
vehicles. Natural gas vehicles offer an excellent (and possibly, the
only logical) bridge strategy to this future. Natural gas can be used
to supply the needed energy for fuel cell vehicles. In fact, virtually
all fuel cells in commercial operation today use natural gas to supply
their hydrogen. As fuel cell vehicles enter the market, natural gas
could be converted into hydrogen and delivered into the vehicles at
existing natural gas refueling stations. Therefore, the NGV
infrastructure that is developed today, including the existing
pipelines, fueling stations, and fuel storage systems used for
vehicles, can be used to support the hydrogen future.
More immediately, natural gas vehicles can provide critical
emission reductions today. The recently finalized EPA heavy-duty
emission standards will not be fully implemented until 2010. Those
regulations also are contingent on very controversial provisions
regarding diesel sulfur levels. The petroleum industry has indicated
that they intend to fight the standards, especially the sulfur
reductions for diesel fuel. It is possible that the emission benefits
of the proposed rule will not be available until some time after 2010,
if at all. Natural gas heavy-duty vehicles already meet the particulate
matter levels called for in the proposed rules and are years ahead of
diesel engines in terms of reducing NO<INF>X</INF> and air toxic
emissions. Natural gas vehicles are available now and they can deliver
superior emissions performance with the added advantage of petroleum
displacement.
5. The State of the Natural Gas Vehicle Market
More than 100,000 natural gas vehicles are in use in the U.S.
today. These vehicles are owned and operated by the federal government,
local and state governments, and increasingly private fleets. These
vehicles include passenger cars, light duty trucks, school buses,
transit buses, refuse haulers, and many other types of vehicles. The
majority of the new natural gas vehicles placed in-service today are
produced by original equipment manufacturers (OEMs). Such well-known
companies as Daimler Chrysler, Ford Motor Company, General Motors,
Honda, Toyota, Blue Bird, Thomas Built and Freightliner are
manufacturing these vehicles. Nearly every manufacturer of transit
buses now offers a line-up of natural gas buses. In addition, heavy-
duty natural gas engines are now available from Caterpillar, Cummins,
Detroit Diesel, John Deere and Mack.
While the number of NGVs in-use is still small in terms of the
overall vehicle population, it is growing at an impressive rate. Since
1992, the number of natural gas vehicles in-use has increased four-
fold. More impressive, the total amount of fuel consumed by these
vehicles has increased more than six-fold. Today, natural gas vehicles
displace more than 90 million gallons of gasoline a year, representing
about 27 percent of all alternative fuel that is consumed in
alternative fuel vehicles.
The natural gas vehicle industry has primarily targeted urban
fleets in its effort to grow the market for natural gas vehicles--
including taxicabs, refuse haulers, school and transit buses, airport
shuttles and urban trucks. These types of fleet vehicles have been
targeted because they tend to be high fuel use vehicles and their fuel
consumption and refueling patterns make them the best choice for early
introduction of alternative fuels. Suppliers of natural gas are looking
for customers that will use sufficient amounts of fuel to justify the
capital investment in retail and private fueling. Another advantage of
focusing on high fuel use fleets is that replacing these vehicles with
alternative fuels provides the greatest amount of emission reductions.
The transit bus market is one area that has seen tremendous growth
for natural gas. There are now more than 4,000 natural gas powered
transit buses in service in the US. Major cities like Los Angeles, New
York, Atlanta, and Cleveland are ordering hundreds of new natural gas
buses. Washington, DC just recently announced that it would be
purchasing 100 natural gas buses for its fleet. For the last few years,
natural gas bus orders have approached almost 20 percent of new
nationwide bus orders.
Airports also are increasingly moving to natural gas. Dallas-Fort
Worth, John Wayne (Orange County, CA), Logan (Boston), Los Angeles
International, Denver International, and Baltimore-Washington
International all have or will soon have very large natural gas
programs. Airports are looking to natural gas powered vehicles to
minimize the environmental impact of vehicles that operate at the
airport or service the airport.
Despite this substantial growth and the fact that NGVs are
commercially available, NGV market growth has been far slower than
expected. The primary barrier has been the purchase price of the
vehicles. NGVs generally cost more than their gasoline or diesel
counterparts. Light-duty NGVs for example, generally cost $3,500 to
$5,000 more; heavy-duty NGVs cost from $25,000-$50,000 more. If the
demand for NGVs increased significantly, the economies of scale that
would come from mass production would lower the incremental cost for
NGVs. The Department of Energy estimates that light-duty NGVs would
cost approximately $800 more than comparable gasoline models when mass-
produced.
This was part of the impetus behind the alternative fuel vehicle
provisions of EPAct. EPAct requires federal, state, and fuel provider
fleets to acquire light duty alternative fuel vehicles when they
replace their existing fleet vehicles, and this has resulted in a
significant increase in overall AFVs. These programs, however, only
cover a very small segment of the vehicle population and have major
loopholes. As a result, EPAct's impact on alternative fuel vehicle
purchase and use (and overall petroleum replacement) has been much less
than anticipated.
Another economic factor that has hindered the growth of the NGV
market is that many of the benefits of NGVs are what economists refer
to as ``positive externalities.'' When customers purchase NGVs, they
help reduce overall air pollution, our dependence on foreign oil, our
balance of trade, etc. Unfortunately, while vehicle purchasers must
incur the full cost of buying these vehicles, they are not economically
rewarded for the societal benefits that are produced.
California and a number of other state governments have put in
place incentive programs to help correct this market failure. For
example, since designating diesel exhaust as a toxic contaminant
several years ago, California has moved expeditiously to accelerate the
introduction of heavy-duty alternative fuel vehicles. California has
created incentives for lower-emission vehicles and has funded the
replacement of diesel-powered vehicles with cleaner technologies like
natural gas. California also has encouraged the development of emission
credit trading programs. These programs potentially allow users of
cleaner technologies to receive payments for the emissions reduced by
their vehicles. Mobile-for-stationary emissions trading could be an
especially valuable economic program for purchasers of NGVs. In one
example, a new power plant built in California was able to secure \1/3\
of its NO<INF>X</INF> offsets from a fleet of natural gas refuse trucks
operated by Waste Management. The amount received for the offsets paid
for the incremental price of the trucks. This project has been heralded
for its innovativeness and ability to generate significant emission
reductions.
Another exciting project involving Waste Management will soon
produce liquefied natural gas at a landfill in San Diego, California.
The LNG will be used in Waste Management trucks. Most recently,
California officials have turned their attention to replacing the
state's aging school bus fleet with new, alternative powered buses.
Many of these buses will be natural gas powered.
6. Government's Role in Promoting Increased Use of Natural Gas Vehicles
There are a number of policies and programs that the federal
government could and should put in place to accelerate the growth of
the alternative fuel vehicle industries. Some are refinements of
existing programs; some are new. Many fall within the purview of the
U.S. Department of Energy or Environmental Protection Agency. However,
all require congressional leadership in terms of continued
authorizations and/or appropriations.
Financial Incentives
<bullet> Tax Incentives. Congress should adopt meaningful tax
incentives for the purchase of alternative fuel vehicles, the
use of alternative fuels, and investments in infrastructure.
The NGV industry supported S. 2591, the Alternative Fuels Tax
Incentives Act, introduced in the last Congress by Senators
Hatch, Jeffords, Rockefeller and others. It also supported a
similar bill, H.R. 2522, introduced by Congressmen Camp, Levin
and others in the House of Representatives. These proposals are
market-driven non-regulatory approaches to promoting
alternative fuel vehicles and their use. A credit against
income taxes is provided for individuals and businesses for the
acquisition of alternative fuel vehicles. The amount of the
credit depends on the environmental benefits the vehicle
provides. A credit against income taxes also is provided to
retail sellers nationwide for the sale of alternative motor
fuels.
<bullet> Increase Funding for Local Alternative Fuel Projects. Congress
should provide substantially more funding for the State Energy
Program Grants. This program, which is part of DOE's Clean
Cities initiative, is helping state and local communities
expand their alternative fuel vehicle activities through new
and innovative strategies. It is the single most important
federal program providing financial assistance on a competitive
basis to AFV projects.
<bullet> Support the Green School Bus Program. Recent studies indicate
that children riding on older school buses are exposed to
potentially dangerous levels of emissions. Legislation is
needed to provide school districts with funding to replace
diesel school buses with alternative fuel buses, especially
older school buses that may not meet today's safety standards.
<bullet> Provide More Financial Assistance to State and Local
Government Fleets. Congress should provide state and local
governments matching funds for AFV acquisition for their
fleets, with a higher level of matching for states that commit
to a higher percentage of AFVs in the state's fleet.
Research, Development and Demonstration (RD&D)
<bullet> Expand Funding for Alternative Fuel RD&D. Significant R&D is
still needed on alternative fuel vehicles to (1) improve engine
efficiency, (2) further reduce engine emissions, (3) reduce the
cost and improve the reliability of fueling infrastructures,
and (4) demonstrate alternative fuel systems in new
applications. DOE's programs in this area should be
substantially expanded in line with the new Five-Year NGV RD&D
Plan developed jointly by the NGV industry and DOE.
<bullet> Expand Alternative Fuels as Part of Existing Advanced
Automotive Technology R&D. The use of alternative fuels could
play a very important role in the deployment of advanced
automotive technologies, such as hybrid and fuel cell vehicles.
Existing federal advanced vehicle programs, however, have
focused on liquid (primarily, petroleum-based) fuels for these
vehicles. Congress should provide additional funding for RD&D
on gaseous fuels for advanced technology vehicles.
Environmental and Societal Benefits
<bullet> Accelerate Mobile to Stationary Credit Trading. Congress
should require that EPA move quickly to expand the inclusion of
mobile source offsets in its stationary source permitting
programs and include guidance to the states on how to implement
such programs to ensure that total emission levels are actually
reduced.
<bullet> Ensure that States Receive SIP Credit for AFV Programs.
Congress should encourage EPA and other agencies to ensure that
states receive the full emission benefits of NGVs in their
State Implementation Plans based on best-in-class assumptions,
and that EPA should ensure that it incorporates the latest
information on alternative fuel vehicles into its emission
models.
Market Development
<bullet> Coordinate State, Federal and Municipal Acquisition of AFVs.
Coordinating state, municipal and federal fleet acquisition of
AFVs would produce greater demand and facilitate the
acquisition of AFVs. The placement of federal AFVs also should
be coordinated with covered state fleets. Congress should
direct DOE to undertake such an effort, and all other federal
agencies to participate.
<bullet> Fix the Problems Associated with Federal Procurement of AFVs.
Currently, federal agencies are required to buy alternative
fuel vehicles, but are given no additional funds to cover the
incremental cost of such vehicles. Congress should provide
funding through DOE to cover the incremental cost of AFVs for
the federal fleet. GSA should also be urged to reform its
practice regarding charging federal agencies the full
incremental cost of AFVs in the first year of the vehicle
lease.
<bullet> Build Up International Markets. Developing countries can make
good use of alternative fuel technology to avoid pollution
problems and build sustainable transportation systems. U.S.
firms are in a prime position to license alternative fuel
technology to foreign firms to the mutual benefit of the U.S.
and its trading partners. This increased demand will help
support U.S. manufacturers. Congress should support efforts by
DOE and the Department of Commerce to help U.S. companies
capitalize on these market opportunities.
<bullet> Identify Key Market Segments. Some fleets are much better
suited to use alternative fuels than others, but much of the
detailed data on these markets is not available. For programs
and policies to be most effective, it is necessary to have a
detailed understanding of the key market segments where AFVs
can be most competitive (e.g., transit buses, trash haulers,
school buses, delivery fleets, postal fleets) and produce
significant local benefits such as lower emissions and positive
contribution to the local economy. Congress should support
efforts by DOE and other agencies to develop this important
information.
conclusion
On behalf of Pickens Fuel Corp. and the Natural Gas Vehicle
Coalition, I appreciate the opportunity to provide our views on these
critical issues. It is clear that the US must take steps to lessen its
dependence on foreign oil. Natural gas vehicles can help to
significantly reduce dependence on foreign oil. It also is clear that
America's urban areas must reduce their levels of air pollution.
Natural gas vehicles are the cleanest vehicles commercially available
today. The US currently has the best technology in the world for using
alternative transportation fuels. It is critical for the US to
capitalize on this technological edge and begin to move alternative
fuels into the marketplace. As explained in our written statement,
government incentives continue to be necessary to make this happen.
With government incentives and leadership, the private sector can
greatly expand the market for alternative transportation fuels.
Mr. Barton. Thank you. We do appreciate that and some of
those things we worked on 4 or 5 years ago we're going to
really try to do this year. Timing is everything and the timing
is right to move on some of that, I hope.
We now want to welcome Ms. Roberta Luxbacher who's Vice
President-Americas for Exxon Mobile Gas Marketing. She's
appearing on behalf of the Natural Gas Supply Association and I
think you were in my meeting in Houston.
Ms. Luxbacher. Yes, I was.
Mr. Barton. Last week, where we talked about the
comprehensive energy policy.
Ms. Luxbacher. Yes.
Mr. Barton. So your testimony is in the record in its
entirety and we welcome you before the subcommittee and would
ask that you summarize in 6 minutes, please, ma'am.
STATEMENT OF ROBERTA A. LUXBACHER
Ms. Luxbacher. Thank you, Mr. Chairman. I'm here today
speaking on behalf of the Natural Gas Supply Association which
represents major integrated and independent producers.
Mr. Chairman, the NGSA and all its members are looking
forward to working with your committee and welcome this
opportunity to present our views for developing a national
energy policy.
As you know, natural gas is one of our nation's most robust
and important energy sources. Over a year ago, the National
Petroleum Council estimated recoverable natural gas resources
in the lower 48 States at over 14 trillion cubic feet. At the
current rate of domestic consumption, this is equal to more
than 60 years of gas supply. Producers, of which there are over
8,000 in the United States are individually doing all they can
to economically develop these resources to meet current and
projected demand for natural gas. The number of operating gas
drilling rigs has more than doubled from April 1999 when gas
prices were at a 5-year low. Producers are actively exploring
new frontiers such as Canada, Alaska North Slope, deepwater
Gulf of Mexico and coal bed methane in our Western States. And
we are proactively developing and applying new technology.
However, our country's energy needs cannot be met by the
producers' actions alone. A clear and comprehensive long-term
approach to energy policy is needed. The energy policy
decisions of today must avoid the missteps of the past and
serve the long-term strategic interests of the country. Our
country's economic growth is tightly linked to having reliable
and competitive sources of energy.
As we look at developing a national energy policy, there
are a number of areas of importance to the NGSA producers:
first, access to natural resources that underlie public lands;
second, a balanced regulatory frame; and third, policies that
encourage development of a diverse portfolio of energy
supplies.
Now turning to the first area, access to public lands. The
facts are well known. An estimated 40 percent of undiscovered
natural gas is located on land owned by Federal and State
governments. Access to government land is restricted. Outside
of the Central and Western Gulf of Mexico, producers are
prohibited access to virtually all Federal lands offshore.
About 9 percent of resource bearing lands in the Rockies is
completely off limits and another 32 percent is subject to
significant restrictions. Worst of all, restrictions are
increasing. The previous Administration's Executive Order to
remove 60 million acres from potential development without any
consideration given to possible future energy supplies is a
flaw in the rulemaking process. This ruling further contributes
to the loss of access to Federal lands in eight Western States
where access had already declined 60 percent between 1983 and
2000. The United States is the only major consuming nation that
significantly prevents access to its own energy resources.
Rather than excluding resource-rich lands, the focus should be
on using advanced proven technology and operating practices to
increase supplies in an environmentally responsible manner.
In addition to land access, a balanced regulatory framework
is needed which should be guided by certain core principles:
Primacy of markets. Supply and demand are best managed
through free competitive markets and private sector initiative.
Predictability. Government policy should create a predictable
operating and investment environment for energy suppliers.
Environmental responsibility. Free-market based incentives
provide the best foundation for cost-effective environmental
solutions.
Efficiency. Government policy should encourage the
efficient use of energy by insuring a level playing field for
competing sources of energy. For example, policies that allow
the government to prematurely withdraw lease permits and retain
producer funds obviously undermine supply development. On the
other hand, government policy that encourages market-based
development and use of new technologies to increase supplies
and the use of energy more efficiently and cleanly have a
positive impact.
Finally, the U.S. must have policies that encourage the
development of all economic sources of supply on a level
playing field. Economic energy will in turn help sustain
economic growth, create jobs and protect our national
interests.
Exploration to expand supplies in currently available areas
requires enormous investments with highly uncertain outcomes.
At a minimum, market-based incentives for deep water production
and technology development should be considered as apart of a
national energy policy.
Last, we need support for the development of our frontier
resources. For example, natural gas from Alaska has the
potential, as we've discussed at this hearing, to play a
significant role in meeting our nation's energy demand.
However, Alaska presents huge technical and economic
challenges. We need the support of the Federal Government,
States, Canada, local communities and a host of other parties
all working in concert to achieve success.
In conclusion, let me emphasize that we have major untapped
natural gas resources here at home, resources we can access in
ways that are economic and environmentally sound. To do this
requires a balanced and economically sound energy policy. As
you and your committee work to forge such a policy, Mr.
Chairman, please be assured of the NGSA's strong support and
commitment to work with you toward that end.
Thank you.
[The prepared statement of Roberta A. Luxbacher follows:]
Prepared Statement of Roberta A. Luxbacher on Behalf of the Natural Gas
Supply Association
I am Roberta Luxbacher, Vice President-Americas for ExxonMobil Gas
Marketing Company.
I am here today speaking as Chairperson, on behalf of the Natural
Gas Supply Association, which represents major integrated and
independent producers.
Mr. Chairman, the NGSA and all its members are looking forward to
working with your Committee and we welcome this opportunity to present
our views for developing a national energy policy.
As you know, Mr. Chairman, natural gas is one of our nation's most
robust and important energy sources. Over a year ago, the National
Petroleum Council estimated recoverable natural gas resources in the
Lower-48 states at over 1,400 trillion cubic feet. At the current rate
of domestic consumption this is equal to more than 60 years of gas
supply.
Producers, of which there are over 8000 in the United States, are
individually doing all they can to economically develop these resources
to meet current and projected demand for natural gas.
The number of operating gas drilling rigs has more than doubled
from April of 1999, when gas prices were at a five year low, to over
900 today.
Producers are actively exploring new frontiers such as Canada,
Alaska North Slope, deepwater Gulf of Mexico and coal bed methane in
our western states and we are proactively developing and applying new
technology.
However, our country's energy needs cannot be met by the producers
actions alone.
A clear and comprehensive long-term approach to energy policy is
needed. The energy policy decisions of today must avoid the mis-steps
of the past, and serve the long-term strategic interests of the
country. Our country's economic growth is tightly linked to having
reliable and competitive sources of energy.
As we look at developing a national energy policy there are a
number of areas of importance to the NGSA producers.
<bullet> First, access to natural resources that underlie public lands.
<bullet> Second, a balanced regulatory framework.
<bullet> And third, policies that encourage development of a diverse
portfolio of energy supplies.
Now turning to the first area . . . access to public lands.
The facts are well known:
<bullet> An estimated 40 percent of undiscovered natural gas is located
on land owned by federal and state governments.
<bullet> Access to government land is restricted. Outside of the
central and western Gulf of Mexico, producers are prohibited
access to virtually all federal lands offshore. About 9 percent
of resource-bearing land in the Rockies is completely off
limits, and another 32 percent is subject to significant
restrictions.
<bullet> Worst of all, restrictions are increasing. The previous
Administration's Executive Order to remove 60 million acres
from potential development without any consideration given to
possible future energy supplies is a flaw in the rulemaking
process. This ruling further contributes to the loss of access
to federal lands in eight western states which, for instance,
declined 60 percent between 1983 and 2000.
The United States is the only major consuming nation that
significantly prevents access to its own energy sources. Rather than
excluding resource rich lands the focus should be on using advanced
proven technology and operating practices to increase supplies in an
environmentally responsible manner.
In addition to land access, a balanced regulatory framework is
needed, which should be guided by certain core principles.
<bullet> Primacy of Markets: Supply and demand are best managed through
free competitive markets and private sector initiative.
<bullet> Predictability: Governmental policies should create a
predictable operating and investment environment for energy
suppliers.
<bullet> Environmental Responsibility: Free-market-based incentives
provide the best foundation for costeffective environmental
solutions.
<bullet> Efficiency: Government policies should encourage the efficient
use of energy by insuring a level playing field for competing
sources of energy.
For example policies that allow the government to prematurely
withdraw lease permits and retain producer funds obviously undermine
supply development.
On the other hand government policy that encourages market based
development and use of new technologies to increase supplies, and use
of energy more efficiently and cleanly would have a positive impact.
Finally, the U.S. must have policies that encourage the development
of all economic sources of supply on a level playing field. Economic
energy, will in turn help sustain economic growth, create jobs and
protect our national interest.
Exploration to expand supplies in currently available areas
requires enormous investments with highly uncertain outcomes. At a
minimum market based incentives for deepwater production and technology
development should be considered as a part of national energy policy.
Lastly, we need support for the development of our frontier
resources. For example, natural gas from Alaska has the potential to
play a significant role in meeting our nation's energy demand. However,
Alaska presents huge technical and economic challenges. We need the
support of the Federal Government, states, Canada, local communities
and a host of other parties all working in concert to achieve success.
In conclusion let me emphasize that we have major, untapped natural
gas resources here at home--resources we can access in ways that are
economic and environmentally sound. To do this requires a balanced and
economically sound energy policy.
As you and your Committee work to forge such a policy, Mr.
Chairman, please be assured of the NGSA's strong support and commitment
to work with you toward that end.
Thank you.
Mr. Barton. Thank you very much.
We'd now like to hear from Mr. Walker Hendrix who is
counsel for the Kansas Citizens' Utility Ratepayer Board. He's
representing a consumer viewpoint. Your testimony is in the
record in its entirety. We would welcome you to elaborate for 6
minutes.
STATEMENT OF WALKER HENDRIX
Mr. Hendrix. Thank you. Mr. Chairman, members of the
committee, I'm Walker Hendrix and I'm the Consumer Counsel for
what they call the Citizens Utility Ratepayer Board. And I
represent residential and small business customers and as you
could expect, I've had a few calls this winter with the prices
being what they are.
In my former life, I was also President of the Eastern
Kansas Oil and Gas Association and I've been involved in
natural gas litigation, so I guess I have some familiarity with
property rights.
If we're looking at the winter, this winter's problems, I
think it all ties back to the fact that we've had a number of
mild winters and we've had low prices. And those low prices
have caused at least in my State a certain amount of
complacency with respect to putting into effect conservation
and weatherization programs. And we had those programs in the
late 1970's and the early 1980's. I don't know what caused us
to abandon them, but I suspect the price had something to do
with that. At the same time, drilling and exploration have
declined, I think, as a result of low prices. In my State, one
of the largest producing areas is the Hugotonon Gas Field, one
of the largest in North America. We relied on that field for a
good deal of production. Unfortunately, that field is in
decline. So in order to restore production, we really do have
to find new areas in order to meet the increased demand for
natural gas.
This year, I think the price of natural gas spiked because
there was a perception about storage. I don't think storage was
utilized to the extent that it could be used and I think, in
part, because of the price of flowing gas there really wasn't
any urgency in putting gas into storage and having a physical
hedge against that price.
As you probably understand the way that they price natural
gas, they do it through automatic adjustment clauses, so when
that price spikes up, it's automatically passed through to the
local distribution company. In turn, the local regulatory
bodies pass that through automatic flow mechanisms and the
consumer gets that price directly. It really has no
anticipation of that price. And even if they do have
anticipation of that price, they really take little care with
respect to what they're going to do in an extreme environment
like we've had this past winter. We made public announcements
in the State of Kansas. Unfortunately, those public
announcements started in August and nobody paid too much
attention to it. But I still have people who call me up and say
why didn't you warn us about these prices? And in fact, we
don't have real good price signals with respect to natural gas
and unfortunately, the consumer finds out about it after the
fact and they do not begin to take conservation measures until
that price spikes up.
I guess you have to deal with the demand side. I think we
need to increase conservation and weatherization. We need to
provide better price signals and I think one problem that we
had this winter is fuel switching. Large users who had the
capability of switching fuels did not switch fuels. They had
been lulled into complacency and they did not have alternative
fuels on hand in order to be able to shift. And we got into a
situation at least in Kansas that was somewhat perilous because
we didn't have our larger producers converting to other fuels.
Late in December, they started to do that which eliminated some
of the pressure on the price of gas, but you have to look at
that.
On the supply side, I think one of the things that's going
to be critical is the fact that we're building so much
generation that is fueled by natural gas you could have winter
heating natural gas competing with gas for electric generation
especially if we expand our electric generation with natural
gas. That's going to be a very interesting time. We could very
well see with respect to electric generation where the summer
price is higher than the winter price and that's certainly
going to be a deterrent to putting gas into storage. Because of
the inadequacy of the deliverability that we have in this
country, we cannot simultaneously put gas in storage and also
meet the needs of electric generation.
Pipeline capacity constraints, I think there needs to be an
investigation to determine where those constraints are and we
should alleviate them. So I encourage anyone who is willing to
do an investigation to make a determination with respect to
that issue.
The final issue is that I have deals with hedging. As a
public official in Kansas, we've thought about hedging the
price of gas. The problem with hedging it is that if we hedge
the price too high, we're subject to some criticism because
we've locked in a price that's too high and if the market price
drops below that price, hedging becomes a difficult alternative
in terms of public official response.
With those comments, I conclude. Thank you very much for
your time.
Mr. Barton. Well, the answer is not to hedge it too high.
You know.
Mr. Hendrix. You tell me which price you want to----
Mr. Barton. No, no. That's not my job. If you do it wrong
though, I'm going to comment on it.
[The prepared statement of Walker Hendrix follows:]
Prepared Statement of Walker Hendrix, Consumer Counsel, Kansas
Citizens' Utility Ratepayer Board
My name is Walker Hendrix. I am the Consumer Counsel for the Kansas
Citizens' Utility Ratepayer Board (CURB). My office advocates for the
lowest public utility rates which may be established for residential
and small business customers in Kansas. Like most consumer offices,
CURB has been extremely preoccupied with the concerns of ratepayers
over the spiking price of natural gas during this winter season.
CURB is a long time member of the National Association of State
Utility Consumer Advocates (NASUCA). NASUCA is an organization of 42
state utility consumer advocate offices form 39 states and the District
of Columbia.
i. introduction
This winter has made us aware of our vulnerability to high natural
gas prices. This Committee's desire to explore various issues relating
to natural gas is very timely. For the most part, we, as a nation,
became extremely complacent about our natural gas supply. Mild winters
and relatively low natural gas prices masked any concern which we might
have had about the availability of natural gas.
With low prices and an apparent abundant supply of natural gas,
utility weatherization and conservation programs which had been present
in Kansas during the late 1970's and early 1980's were discontinued.
This lack of conservation effort also coincided with less exploration
and drilling on the part of oil and gas producers. The low prices meant
that we relied on existing sources supply for the natural gas we
needed. Unfortunately, the existing supplies, like the Hugoton Field in
Southwest Kansas were in decline. Additionally, as the economy
prospered, the demand for natural gas rose, and the country committed
to using natural gas for the generation of electricity.
As the commodity markets began to recognize that there was some
shortfall in the storage of natural gas going into the winter heating
season, a colder than normal winter aggravated the prices which were
reflected on the commodity exchanges and drove the indices to record
highs. Because many of the gas purchase contracts used by the industry
provided for automatic escalation based on the NYMEX or related price
indices (e.g., Inside FERC), the higher prices were instantly reflected
in the purchase prices paid by local distribution companies. Also,
because Kansas allows local utilities to flow through the cost of gas
to consumers, the ratepayers experienced dramatic increases in the cost
of natural gas during the winter seasons. Despite the numerous public
announcements which were made about the prospect of rising natural gas
prices this winter, very few consumers took action to reduce their
overall consumption of natural gas.
In the aftermath of this winter's rising natural gas prices, it is
apparent that our national energy policy was not sufficient enough to
permit an organized response to the conditions which existed. Because
of the complexity of the issues related to stabilizing the price of
natural gas, it is not an easy task to develop a comprehensive energy
plan. It is the hope of CURB, however, that the committee will take
careful action in attempting to minimize the impact of spiking prices
on consumers.
The committee must evaluate policy options with the goal of
increased supply and deliverability of natural gas as well as increased
conservation efforts and efficient use of this resource. By minimizing
future supply and demand imbalances, volatility in price can be reduced
and price spikes like those experienced this past winter will hopefully
be avoided.
ii. demand side policy
While it is unavoidable that demand for natural gas will increase
over time, especially given the increase in gas fired electric
generation capacity, the goal of a national energy policy should be to
insure efficient use of our resources, and to maintain incentives and
programs that allow maximum flexibility in times of market constraints.
1. Conservation and Weatherization Incentives. Conservation of
energy, while once a national energy policy priority, has diminished in
stature in the last decade. Where utilities once offered energy
efficiency audits, offered advice on efficient energy use and provided
low interest loans for new furnaces, insulation and windows, as well as
other appliances and lighting, these programs, at the local utility
level, have all but disappeared. Many of the consumers hardest hit by
the spike in natural gas prices this winter live in homes that would
benefit from energy efficiency improvements. We must increase our
efforts to give consumers the ability, and financial support, to
upgrade the energy efficiency of homes and businesses. Conservation and
wise use of our natural gas resources must once again become a national
policy priority.
2. Price Signals. Consumers must receive accurate and timely price
signals. Consumers have shown the ability to react to high prices by
adjusting consumption patterns. There is ample evidence that, in
response to the high gas prices this winter, consumers lowered their
thermostats, closed off unused home space, purchased additional
insulation and updated their furnaces and windows. (There is also this
same type of evidence of consumer reaction to increased electricity
prices in the San Diego, California area) Where we have failed, even
though in Kansas resources were devoted to warning consumers of
impending high natural gas prices, is to get the message through to
consumers before the first big gas bill hits. Much of the conservation
effort was in response to gas bills that were three to seven times
higher than ever before. Consumers need to receive price information
early, so that consumers can act to conserve, rather that having to
react after the first bill comes due.
3. Fuel Switching. One of the lessons learned this past winter is
that many industrial customers and other large natural gas consumers no
longer maintain an alternative fuel supply that can be relied upon as a
backup when natural gas is constrained and prices are high. With
natural gas prices being low for a long period of time, perhaps its was
not economic to maintain a backup supply. However, the lack of fuel
switching ability kept many customers in the market that historically
would have moved to alternative fuels. The flexibility to move to
alternative fuels has the effect of freeing up gas supply in the
market, and minimizing price spikes. The lack of this flexibility was
perhaps a strong contributing factor to the price spike this winter.
Incentives should be provided to insure a reasonable level of fuel
switching ability is maintained by large customers. Maintaining a high
level of fuel switching ability will provide maximum flexibility, at a
national level, in times of crisis.
iii. supply side policy
Low natural gas prices, and warmer than normal winter temperatures
in the last few years have masked the failure of natural gas supply and
deliverability to keep pace with increased demand. While the current
high prices are a potent incentive for exploration companies to get
back in the market, and should have the effect over time of bringing
natural gas supply back in balance with demand, exploration alone,
without the ability to deliver new supplies to market in a timely
manner, is not enough. Effort must be made at a national level to
insure that growth in new gas supplies, and the ability to deliver
these supplies to market is maintained in an even fashion, rather the
in the boom or bust type of cycle that we have experienced recently.
As a long term concern, we should also keep in mind that we are not
far away in time from a point where natural gas fired electric
generation facilities may be competing with traditional winter heating
customers for natural gas supplies and pipeline capacity in the winter
months. Not only must we be concerned with adequate supply and
deliverability for traditional winter heating consumers, we must not
lose sight of the fact that our future energy supply mix will likely
include gas fired generation in the winter months.
1. Increased Exploration and Deliverability. Exploration for new
natural gas supplies must be combined with the ability to deliver any
new discoveries to market in a timely manner. While current high prices
may provide enough incentive to invest in natural gas gathering
facilities and pipeline capacity in the short run, in the long run, a
national policy must be developed that provides an incentive to make
sure exploration, gathering facilities and pipeline capacity keep pace
with demand, even at times when prices are low. Incentives must be
developed that will keep our supply base and deliverability growing in
a consistent and reasonable manner.
2. Pipeline Capacity Constraints. A concerted effort must be made
to evaluate the existing interstate pipeline facilities and determine
whether physical constraints impeded delivery and artificially
increased gas prices to consumers. Where constraints exist, incentives
must be maintained that will insure that expansion is accomplished and
constraints are minimized over time.
3. Storage Capacity. It is clear that, as a nation, we are becoming
more dependant of natural gas storage facilities to meet the winter
peak needs of consumers. Flowing gas is inadequate to meet demand on a
peak day. Effort must be made to increase gas storage facilities as
well insuring that storage is full and ready for winter consumption.
One of the contributing factors in this past winter high prices was the
fact that storage levels were low compared to past levels, and withdraw
of gas from storage was fairly rapid during the November and December
cold snap. This created the perception, whether right or wrong, that
not enough storage gas would be available to meet all of the winter
needs.
iv. financial instruments and hedging
Hedging is an issue which has received much attention in Kansas.
The principle problem which must be addressed is how to fund a plan to
hedge the price of natural gas. Most consumers want the lowest possible
price for natural gas and are unwilling to endorse a plan which would
lock in a price which is higher than the market price. Notwithstanding,
Kansas has set up a pilot program which would permit a minimal
contribution on the part of ratepayers in order to build a pool of
funds to purchase options which would, in turn, attempt to place a
ceiling on price to be paid for natural gas during next winter's
season. With this winter's spiking prices, however, the spreads on the
options and the amount of protection which can be afforded appears to
be extremely limited.
With respect to hedging, there is a good deal of concern that the
price which is obtained will be higher than the cost of natural gas
next winter. A mild winter could conceivably cause the price to decline
below the strike price for the options to be purchased. Should this
scenario unfold, the hedging plan would come under some attack by
causing customers to pay more for natural gas than would have to be
paid in the market. This would be a double whammy because customers
would be picking up the cost of the options as well as paying a higher
price for natural gas. Consumers could obviously provide greater
protection by increasing the amount of money to be spent on options or
futures, but the risk of loss is so great that it does not seem likely
that CURB would support committing large sums to fund a hedging plan in
Kansas.
Hedging is not a practice that allows public officials much
comfort. Although there are an infinite number of approaches, the risk
of losing money does not make the subject readily acceptable. This is
the reason that a pilot project was selected and only a minimal amount
of resources will be used to establish a hedging program in Kansas.
v. conclusion
Perhaps we have been lulled to sleep after so many years of
abundant, inexpensive natural gas supplies. Clearly, this winter was a
wake up call. This is a unique opportunity to consider national energy
policy goals and potential programs that will accomplish those goals.
Prices merely reflect imbalances in supply and demand. The policy goal
of minimizing supply and demand imbalances over the long term can, and
must be accomplished. Maintaining consistent growth in the supply and
deliverability of natural gas accompanied by incentives that encourage
conservation and efficient use, as well as maximum flexibility to
switch between fuels, will insure that supply and demand remain in
balance over time, and that consumers will be protected from the types
of prices we now know can occur when supply and demand are not in
balance.
Thank you for the opportunity to offer this testimony today.
Mr. Barton. We now want to hear from Mr. Jack Hilliard who
is General Manager for the Florence Utility. And he's
testifying on behalf of the American Public Gas Association
which represents about 4.5 million consumers of gas that's
purchased through municipalities.
Your testimony is in the record in its entirety and we
would welcome you to elaborate on that for 6 minutes.
STATEMENT OF JACK HILLIARD
Mr. Hilliard. Thank you, Mr. Chairman. I seem to be the
only one with a dialect here, as a Southerner, so I'll ask
the----
Mr. Barton. Sounds good to me. And Mr. Boucher doesn't have
a problem with it either.
Mr. Hilliard. Well, I'll ask the Northern Congressmen here
to listen slow and I'll ask the Southern Congressmen here to
listen fast. So I'll try to get through this.
Mr. Chairman, my name is Jack Hilliard and I am the General
Manager of Florence Utilities in Florence, Alabama. I'm
appearing on behalf of American Public Gas Association.
Mr. Barton. Put the microphone very closely to you, Mr.
Hilliard.
Mr. Hilliard. Okay, of which Florence is a member. APGA is
a national association of approximately 1,000 publicly owned
local gas distribution companies in the United States serving
as you said 4.6 million natural gas customers.
We thank the chairman and the committee for the opportunity
to allow the public gas perspective to contribute to the
national debate on energy policy. As not-for-profit entities
owned by and directly accountable to our citizens, we have a
consumer perspective. APGA members still buy and resell gas,
whereas many investor owned distributors have stopped doing
this under retail deregulation. As smaller purchasers of energy
commodities and transportation service we know first hand how
market power affects consumers. I know several members of this
subcommittee are very well acquainted with their public gas
systems. I especially want to thank Congressman Norwood, he's
not here right now, of Georgia, for the leadership that he has
provided APGA on tax legislation. He introduced the Municipal
Utility Fairness Act last session which is now included in
Senator Murkowski's comprehensive package announced this week.
APGA joins those calling for a comprehensive energy policy.
We need more natural gas in the long run. In the short run we
have not experienced the natural gas supply crisis. We have had
a natural gas pricing crisis. We think our first step must be
to identify precisely the causes of high natural gas prices
that have threatened our nation's economy. Natural gas is a
linchpin to the nation's energy policy. Congress must assure
Americans that it is fairly priced.
The story is this, last winter we paid a wholesale price
for about $2.50, $2.50 per MMbtu for gas. That price rose
dramatically through the year to $6 on December 1. Then by the
end of December, gas reached $10. By March, the price has
fallen to about 50 percent of that level end of December. We
have never seen anything like this. This is crazy. By
comparison, such a rate of increase would send gasoline prices
at the pump to $5 per gallon.
The record jump in natural gas prices is fueling inflation
and Mr. Greenspan has expressed his concern about the impact on
consumer demand.
In Florence, we paid $1.1 million for our gas supply in
January of 2000. And we paid $5.4 million in January 2001. As a
result, many of our customers are using all of their disposal
income, plus some savings just to pay the heating bill. Just
this week I received a call from an 82-year-old young lady. She
told me she had the choice of either buying food, buying her
prescription medicine or paying her utility bill. One of our
largest industrial customers, a global industry that
manufacturers ceramic tile told us last week that if we could
not get the price of gas down substantially, they were closing
their Alabama manufacturing facility.
Many public gas systems that merely flow through the cost
of natural gas are caught in a cash-flow squeeze. Prices
increased so dramatically this winter that rates did not keep
pace with prices demanded by suppliers. APGA members have
depleted reserves to pay their gas supply bills.
NYMEX and new private exchanges run by mega energy
companies--sorry--even prices broke records, record after
record this past winter. There's been no shortage of natural
gas. There have been no curtailments this winter like there
were electricity blackouts in California. Every firm customer
that wanted to purchase gas could only at exorbitant prices.
Cavalier explanations that this past year's roller coaster
prices for gas were simply the result of operation of laws of
supply and demand are really not credible. The increases in
demand that we have experienced cannot justify the level of
prices that we pay. The question we are asking Congress to
focus on is, will additional supplies of natural gas in the
future prevent the price spikes that we faced this year, this
past year? I know some of you have asked that question earlier.
Congress should use its investigative powers to determine
whether the market allows manipulation by speculators and
today's integrated energy companies.
My testimony specifies some lines of inquiries that focus
on the dramatic increase in the trading of natural gas on
public exchanges like NYMEX and new private exchanges run by
mega energy companies. APGA does not seek to play the
Washington blame game, rather, there are serious questions
about the operation of the natural gas market that should be
asked and answered.
We do not seek to find a bad guy, but desire to prevent
this episode from replaying itself----
Mr. Barton. I hate to cut you off, but you're about a
minute over. Could you summarize in the next 30 seconds,
please, sir.
Mr. Hilliard. Yes sir. As Chairman Barton has recognized,
fuel diversity for electric generation appears to be the only
sound policy for our nation. Our nation is relying almost
exclusively on natural gas to fuel new electric generation
needs. It may very well be that our nation has stumbled into
dependence upon natural gas that is making demand fundamentally
more inelastic so that prices will have a strong tendency to be
excessive for a long time to come.
In conclusion, let me iterate the plain truth. Our
customers, your constituents are angry. They do not understand
why their natural gas costs so much. And frankly, neither do
we. It is our hope that a congressional investigation will
provide the country with some necessary answers that must be
precede the adoption of the new energy policy.
Thank you, Mr. Chairman.
[The prepared statement of Jack Hilliard follows:]
Prepared Statement of Jack Hilliard on Behalf of the American Public
Gas Association
My name is Jack Hilliard, and I am the General Manager of Florence
Utilities in Florence, Alabama. I am appearing on behalf of the
American Public Gas Association (APGA), of which Florence is a member.
APGA is the national association of over 572 municipal and other
publicly-owned local distribution systems in thirty-six states. APGA
members own and operate natural gas distribution systems serving their
communities. They include municipal gas distribution systems, public
utility districts, county districts, and other public agencies that
have natural gas distribution facilities. There are approximately 1,000
publicly-owned local gas distribution companies (``LDCs'') in the
United States, serving more than 4.6 million natural gas customers.
We thank the Chairman and the Committee for the opportunity to
allow the public gas perspective to be heard. We hold some views that
depart from the positions held by the investor-owned LDCs. Publicly-
owned gas systems are not-for-profit retail distribution entities owned
by and directly accountable to the citizens they serve. Also, APGA
members remain in the resale business whereas many investor-owned
distributors have departed the gas acquisition function under retail
deregulation.
executive summary
APGA joins those calling for a sound, comprehensive,
environmentally responsible energy policy. We do not believe that there
is one solution or a silver bullet to relieve the hardship that high
natural gas prices brought to Americans over the last six months. We
believe, however, that Congress can take steps that will increase the
supply and deliverability of natural gas, bring down prices, and ensure
that adequate and reliable supplies reach our customers when needed.
We also believe that the first step Congress should take now is to
investigate the reasons why many Americans are paying natural gas
prices that are 400% higher than what they paid last winter. By
comparison, such a rate of increase would send gasoline prices at the
pump to $5 per gallon. The increases in the price of natural gas this
past year have not been incremental--they have been breathtaking and
historic. Natural gas is the lynchpin to our Nation's energy policy.
Congress must assure Americans that it is fairly priced.
APGA submits that the answers go beyond the simple laws of supply
and demand. Yet, APGA does not seek to play the Washington ``blame
game.'' Rather, there are serious questions about the operation of the
natural gas market that should be asked and answered. We do not seek to
find a ``bad guy,'' but desire to prevent this episode from replaying
itself.
impact of recent natural gas prices
Last week, the Labor Department reported that the record jump in
natural gas prices drove up the cost of living by 0.6% in January; this
seeming revival of inflation sent stocks plummeting. On February 13,
2001, Federal Reserve Chairman Alan Greenspan testified to the Senate
Committee on Banking, Housing, and Urban Affairs that consumer demand
has been depressed by higher energy prices, specifically natural gas.
He said:
The sharp rise in energy costs pressed down on profit margins
still further in the fourth quarter. About a quarter of the
rise in total unit costs of nonfinancial, nonenergy
corporations reflected a rise in energy costs. The 12 percent
rise in natural gas prices last quarter contributed directly,
and indirectly through the effects on the cost of electrical
power generation, about one-fourth of the rise in overall
energy costs for nonfinancial, non-energy corporations;
increases in oil prices accounted for the remainder.
Energy production and consumption is inextricably tied to economic
growth. High natural gas prices are a threat to our Nation's economy
today and may well continue to be in the future. We are increasingly
dependent upon natural gas not only to heat our homes and run our
factories, but also to generate electricity.
The economic impact of excessive natural gas prices is no surprise
to public gas systems that have been buying this excessively priced
gas. In Florence, we paid $1.1 million for natural gas in January 2000
and $5.4 million in January 2001. As a result, many of our customers
are using all of their disposable income, plus some savings, just to
pay the heating bill. Industrial customers that rely on natural gas
have seen huge increases in production costs. One of our largest
customers, a global industry that manufactures ceramic tile, told us
last week that, if we could not get the price of gas down substantially
they were closing their Alabama manufacturing facility. Nearly all of
APGA's members have the same story to tell because gas that cost less
than $2.50 per MMBtu in January 2000 cost $10.00 per MMBtu in January
2001.
It is worth noting that many consumers have not yet seen the full
impact of these higher prices. Many public gas systems have delayed
passing through these costs to cushion the price shock. Many gas
distributors offer level payment plans. Those consumers will see
increasing levelized payments for months to come.
These extraordinary gas prices are harmful to the distribution
business. These higher prices are driving up the rate of uncollectible
accounts because some consumers simply cannot pay their bill.
Consistent with local ``turn off'' policies, thousands of consumers
will be shut off after the weather warms. Some of those customers will
not return. Many public gas systems that merely flow through the cost
of natural gas are caught in a cash flow squeeze. Prices increased so
dramatically this winter that rates did not keep pace with prices
demanded by suppliers. APGA members have depleted reserves to pay their
gas suppliers. Some have taken out costly new lines of credit. Some of
these costs will be passed along to consumers, and some of these costs
will be absorbed, thus draining the ability of the city to respond to
future emergencies.
congress must investigate recent natural gas prices
We have witnessed an increase in demand for natural gas that has
burst the so-called ``gas bubble'' that kept prices low in the 1990s.
We did experience cold weather this winter. This winter's prices should
have been higher than last winter. But natural gas prices began their
historic rise last spring. No one predicted--and no one has justified--
how high prices went this winter. There is reason to question whether
more than the laws of supply and demand have been at work in natural
gas markets. Today, prices for March deliveries have dropped to 50% of
the level of prices in January. This volatility is very suspicious.
Even as prices broke record after record, there has been no
shortage of natural gas. There have been no gas curtailments this
winter like there were electricity blackouts in California. There have
been no natural gas shortages like there were in the 1970s. Every firm
customer that wanted to purchase gas could--only at exorbitant prices.
Cavalier explanations that this past year's roller coaster prices for
gas were simply the result of the operation of the laws of supply and
demand are not credible. The increases in demand that we have
experienced cannot justify the level of prices that we paid. APGA
believes that the absence of any real shortages in the presence of
tremendous price increases suggests a very real possibility of price
manipulation.
In the short run, we have not experienced a natural gas supply
crisis; we have had a natural gas pricing crisis. Without question, we
need more natural gas in the U.S. in the long run. The Energy
Information Administration's (EIA) Annual Energy Outlook 2001 predicts
a 62% increase in the demand for natural gas by the years 2020. The
projected demand for natural gas for electric generation makes the need
for more gas supplies in this period beyond question. The question we
are asking Congress to focus on is: will additional supplies of natural
gas in the future prevent the price spikes that we have faced this past
year? Or will we repeat this pricing crisis that is doing great harm to
our Nation's economy today?
has congress kept its bargain?
When Congress decontrolled the price of natural gas at the
wellhead, the promise was for a competitive market and lower prices.
That appeared to work for a few years, but it is not working today. The
United States is clearly committed to reliance upon competitive markets
to allocate energy supply. Yet, as we believe the past year has
demonstrated, these markets are not perfect. Nor are they typical. The
demand for natural gas is fundamentally inelastic. People who heat
their homes and businesses with a natural gas furnace have no real
substitute for natural gas. Although APGA is not aware of any current
studies, the experience of our members is that industry often does not
maintain an alternative fuel source that can be substituted on the
basis of price. This winter should demonstrate just how price sensitive
industry is today.
Moreover, today we see the near total dependence on natural gas to
serve incremental electric generation demand. This electric demand is
similarly price inelastic. Many new gas-fired plants reduce costs by
not installing alternate fuel capability, and the demand for
electricity is great. It may very well be that our Nation has stumbled
into a dependance upon natural gas that is making demand fundamentally
more inelastic so that prices will have a strong tendency to be
excessive for a long time to come.
We call on Congress to examine the consequences of price decontrol.
If an investigation finds that the market is not protecting the best
interests of consumers and the American economy, Congress must act.
APGA does not advocate reimposition of wellhead price controls at this
time. Rather, other creative ``fixes'' to market distortions should be
implemented once the root causes are discovered. And, certainly, any
illegal conduct associated with these high prices must be punished. The
goal should be to ensure that American natural gas consumers do not
experience another year like this past year.
APGA has already asked the federal agencies responsible for
regulating energy for answers. APGA requested the Department of Energy
(DOE) and Federal Energy Regulatory Commission (FERC) to determine the
reasons gas prices were rising so quickly in June 2000, when natural
gas had only doubled in price. DOE responded that the laws of supply
and demand were at work so that it had a ``reasonable expectation that
prices will moderate over time.'' <SUP>1</SUP> Chairman James Hoecker
told APGA that ``while I expect the market to make appropriate
adjustments over time, the Commission will strive to ensure that
natural gas prices are set by market forces in an open and freely
competitive market.'' <SUP>2</SUP> It is time for Congress to act now.
---------------------------------------------------------------------------
\1\ Letter of Melanie A. Kendadine, Acting Director, Office of
Policy, DOE, to Leslie B. Enoch, President, APGA at p. 2 (July 6,
2000).
\2\ Letter of James Hoecker, Chairman, FERC, to Leslie B. Enoch,
President, APGA at p. (July 18, 2000).
---------------------------------------------------------------------------
We note that H.R. 712, which was referred to the Energy and
Commerce Committee on February 14, 2001, would provide for a study by
the National Academy of Sciences (NAS) to determine the causes of
recent increases in the price of natural gas. APGA is not certain
whether a NAS study, or a Government Accounting Office (GAO) study,
would be the most efficient route. We tend to believe that Congress,
itself, should use its own investigative powers to bring answers as
soon as possible.Market Power Concerns
We in APGA know a thing or two about market power because of who we
are. The typical municipal gas system has two overriding
characteristics: the natural gas that it purchases is delivered to the
community through a single interstate natural gas pipeline, so there is
no competition for that transportation service; and second, the typical
municipal gas system is a smaller volume purchaser that buys most of
its gas in the winter months and resells it to heat homes, hospitals,
and factories. Its buying power is dwarfed by users like electric
generators. We are very susceptible to market power. Therefore, I would
like to make a few comments about how market power is contributing to
the natural gas pricing crisis.
Until approximately fifteen years ago, almost all of the natural
gas in interstate commerce was purchased by interstate pipeline
companies from producers and then resold to distributors and end users
at regulated prices. The Federal Energy Regulatory Commission (FERC)
kicked pipelines out of the sales (or merchant) business in 1993, so
that distributors had to make all of their purchases of natural gas in
a deregulated market. This spurred the development of new natural gas
marketing companies that became dominant middlemen between producers
that owned natural gas assets and distributors, like APGA members, that
sell to ultimate consumers.
At the onset of this new competition, APGA members were greeted by
many new market players offering to sell gas and manage pipeline
capacity from many new entrants that sought to fill the void created by
the federally-mandated departure of interstate pipelines from the
field. Since 1993, though, the number of sellers of natural gas has
declined remarkably. We now see an industry resembling the airline
industry, with a handful of dominant participants that keep merging
with one another. The potential for the abuse of market power is
growing.
These mega-marketing companies now sell most of the natural gas
consumed in the U.S. Their names are Enron, El Paso, Dynegy, Williams,
Reliant, Coral, and Duke. Most of these players are the same companies
that recently have extracted monopoly-type profits for power sold into
California. Further, these entities now have multiple corporate
interests. One affiliate sells gas, another transports it, another
purchases it to generate electricity. This vertical integration may be
generating excessive market power.
In the past two years many public gas systems have been told by
their incumbent marketer that they were no longer interested in the
municipality's business. Serving small towns with gas apparently is not
nearly as profitable as selling huge quantities of gas to electric
generators. Elementary economics tells us that a dwindling number of
sellers will yield higher and higher prices for residents of
communities served by public gas systems. APGA is concerned about this
trend.
And retail deregulation is not the solution. In Ohio, Pennsylvania,
and Maryland, gas marketers have dropped residential consumers this
winter like hot potatoes. APGA's study of Georgia's retail gas
deregulation demonstrates that prices to consumers have not declined,
and most consumers wish deregulation had never been passed by the state
legislature. In fact, if the past year teaches us anything about
regulation, it is that states should go slow on deregulation
initiatives until their consequences are better understood.
areas for investigation
Growing, vertically integrated energy giants are exercising market
power in new and dynamic ways. The methods may not yet be clear but the
proof may be in their profits. Congress should use its investigative
powers to determine whether these entities have engaged in price
manipulation that may have caused Americans to pay excessive prices for
natural gas this past year. This investigation should focus on how
prices for natural gas are established in a deregulated market. APGA
suggests the following lines of inquiries.
1. Natural gas has become one of the ``hottest'' commodities for
traders and speculators. APGA understands that the amount of gas traded
on the New York Mercantile Exchange (NYMEX) is many multiples of the
physical capacity of our Nation's delivery system. There appears to be
a correlation between the amount of activity on NYMEX and price
volatility. Congress should determine whether this activity causes
American consumers to pay excessive prices for gas. NYMEX's own rules
for trading natural gas should be evaluated.
2. NYMEX recently implemented after-hours ``Access Trading.'' APGA
understands that a considerably smaller volume of trading can
significantly move the market on Access Trading than is the case during
NYMEX open trading, causing the next day's market to open at a price
significantly different from the previous day's settlement price. APGA
further understands that this has occurred with some regularity.
Congress should determine whether this trading has contributed to the
excessive increase in natural gas prices that the Nation has
experienced.
3. Natural gas is also traded increasingly on private exchanges.
Enron, Reliant, and others perform billions of dollars of energy
financial transactions each year. The impact of this relatively new
phenomenon on prices paid by consumers is not well understood. APGA is
concerned that the largest sellers of natural gas are increasingly also
making a market for gas sales, and that there is the potential for
manipulation of prices through this means.
4. Much natural gas is priced under daily and monthly indices in
the open market. Many APGA members, for example, purchase their gas at
the so-called ``Index Price.'' The methods used to establish these
indices is an appropriate area for investigation. If there are too few
buyers and sellers, or if buyers and sellers have skewed motivations,
the resulting index will be distorted.
5. For the natural gas business to grow, more reserves must be
developed. APGA understands that producers lost the incentive to
explore for gas when prices were depressed in recent years. Yet, the
modest increase in prices experienced in the beginning of 2000 appeared
to be adequate to throw the throttle wide open on exploration and
production efforts. APGA understands that prices in the range of $3.00
per MMBtu are adequate to stimulate supply efforts.<SUP>3</SUP> So what
accounts for the prices that are multiples of that price level? With
the participation of marketers so pervasive, gas that sells for $10 per
MMBtu does not necessarily return $10 to natural gas producers on whom
we rely to explore and develop new gas reserves. And if producers
retain the full price, the resulting revenue has been much more than
producers could have possibly invested in new exploration, so that some
are using the monies to repurchase stock rather than find new supplies.
Congress should question whether the monies paid by consumers are
funding adequately further exploration and development necessary to
supply the Nation with natural gas in the long run.
---------------------------------------------------------------------------
\3\ Statement for the Record of the APGA Before the U.S. Senate
Committee on Energy and Natural Resources Hearing on the Status of
Natural Gas Markets (Dec. 12, 2000).
---------------------------------------------------------------------------
6. Mega-marketers have affiliates in the electric generation
business. As has been noted widely, our Nation is relying almost
exclusively on natural gas to fuel new electric generation needs. This
dependence appears to be putting quite a bit of upward pressure on
prices paid by all natural gas consumers. To put it bluntly, the
largest sellers of gas are increasingly our major competitors for the
purchase of gas, and they may have relatively little concern for its
price because of the price at which they can sell the resulting gas-
fired electricity. If major purchasers of gas lack an incentive to
obtain the lowest price, the impact on the market is perverse. All
aspects of the use of natural gas for electric generation and the
relationship of marketing affiliates should be better understood.
Finally, Congress must remember that the interstate transportation
of natural gas remains subject to regulation under the Natural Gas Act
for good reason. There is no workable competition for natural gas
transportation services in the vast majority of American markets
because only one interstate pipeline renders the service there. There
are no choices in those markets. Multiple pipeline connections do not
necessarily eliminate pipeline market power either. Although the FERC
has appeared to recognize this economic reality even as it has embraced
so-called light-handed regulation in recent years, its policies are
often harmful to captive shippers. Congress must exercise vigilant
oversight over this agency to ensure that interstate pipelines are not
permitted to exercise their monopoly power.
Congress should be alarmed at the consequences of the great
consolidation of interstate pipeline companies. In the past decade,
more than two dozen independent pipeline companies have been merged
into a handful owned by El Paso Energy, Williams, Enron, and Duke. Some
consumers have invested capital to make a new pipeline connection only
to see its traditional supplier acquire the new pipeline. These issues
could well be the subject of another hearing.
need for a comprehensive energy policy
APGA calls on Congress and the President to enact new energy
legislation that will produce desirable results in the short- and long-
term. We agree with Chairman Barton that all energy options must be
explored. All of the policies and activities must be consistent with
the following overarching goals:
<bullet> Our nation's energy policies should strive to ensure an
affordable, reliable and secure supply of energy.
<bullet> Our nation's energy policies should promote the most efficient
use of an energy source.
<bullet> Our nation's energy policy should rely on a balanced portfolio
of source fuels.
<bullet> Our nation's energy policy should be consistent with sound
environmental practices.
In the short term, Congress should commence an investigation of
recent natural gas prices, as discussed above. As noted, natural gas is
the key to the Nation's energy future, and it must not be subject to
price manipulation. In the course of this review, it may become clear
that public data on the operation of energy markets should be expanded.
The Department of Energy's Energy Information Administration (EIA) may
require additional resources to provide data adequate to monitor the
energy market.
APGA believes that higher energy prices require an increase in
funding for the Low-Income Home Energy Assistance Program (LIHEAP).
APGA concurs with Senate Resolution 26 calling for supplemental
appropriations for LIHEAP, and supports the goal of H.R. 683/S. 352,
the Energy Emergency Response Act of 2001, to increase LIHEAP funding
to $3.4 billion for each of fiscal years 2001 through 2005.
APGA supports legislation that clarifies that long-term, prepaid
purchases of natural gas by public entities can be funded with public
debt. These transactions enhance reliability and yield lower prices for
consumers.
The federal government also can invest in more research and
development for the natural gas industry. Our Nation's energy policy
should provide tax credits for distributed energy resources, including
but not limited to natural gas fuel cells, turbines, microturbines,
reciprocating engines, and natural gas cooling and desiccant systems.
Federal government agencies should review existing rules and standards
periodically to ensure that promising technologies, such as distributed
energy resources that offer diversity of supply and other benefits are
not discouraged from market entry.
Similarly, our Nation's energy policy should increase federal
funding for research, development, and demonstration for sustained and
improved natural gas system reliability and integrity, infrastructure
expansion, and reasonable natural gas prices and rapid
commercialization of new on-site natural-gas equipment advances that
would provide lower emissions, greater North American energy
reliability, and sustain America's leadership in energy technologies.
At the same time, the Congress should commence a new initiative to
encourage energy conservation. Any balanced policy must create correct
financial incentives to enhance energy efficiencies. Along with energy
conservation goes the development of equipment so that demand can be
price-responsive in a timely fashion.
Finally, we must determine the most environmentally sound methods
of increasing energy supplies for our country. These are very difficult
determinations, and APGA sees the debate as just beginning. Although
natural gas burns cleanly, the environmental price to be paid to
produce the next incremental amount may be more than the production of
clean coal, or even nuclear power. The key question may be, however,
assuming environmental hurdles are cleared: what entities will
construct these expensive base load plants? As the franchise-based
utility structure dissolves in the U.S., will other entities step in to
fill that void? To date, there is no evidence that the market will
support the construction of such plants. The less costly natural gas-
fired units are all that we are seeing today.
It is becoming increasingly clear that the single greatest flaw in
current energy plans for the U.S. is the near complete reliance upon
natural gas as the ``fuel of choice'' for electric generation. It
appears to APGA to be folly for our Nation to build new power plants
that can burn only natural gas. We cannot prudently create a giant new
class of consumers whose demand is wholly price inelastic--without
almost guaranteeing increases in gas prices in the market. Fuel
diversity for electric generation appears to be the only sound policy
for our Nation. In addition, we must ensure that there is sufficient
pipeline capacity to prevent capacity constraints in key markets from
causing enormous increases in the price of delivered gas controlled by
marketing companies at state borders and city gates. It is important to
note that we are in the beginning of this expansion of gas-fired
electric generation. Only a fraction of what generation capacity is
planned were operational in 2000. A new energy policy must address all
available sources of energy as well as energy conservation.
In conclusion, let me reiterate the plain truth: our customers--
your constituents--are angry. They do not understand why their natural
gas costs so much. Frankly, neither do we. Nor have the federal
agencies charged with regulating energy provided good answers. It is
our hope that a Congressional investigation will provide the country
with some necessary answers that must precede the adoption of a new
energy policy.
Mr. Barton. Thank you, sir.
We now want to hear from Mr. Jas Gill, who is the Vice
President of Manufacturing for CYTEC Industries in Westwego, is
that right, Louisiana, which happens to be in Congressman
Tauzin's District. Chairman Tauzin's District. My understanding
is that you're a manufacturer that produces fertilizer, is that
correct?
Mr. Gill. Produces ammonia.
Mr. Barton. Ammonia. Produces ammonia. We welcome you.
Chairman Tauzin wanted to be sure that I gave you a personal
welcome on his behalf since he couldn't be here this afternoon.
We put your testimony in the record in its entirety and we
would welcome you for 6 minutes to elaborate on it. And really
be--flip that switch and speak clearly into the microphone.
STATEMENT OF JAS GILL
Mr. Gill. Thank you, Mr. Chairman, and the committee. I
really appreciate the opportunity to be able to talk to you.
I'm here today to be presenting the Louisiana Chemical
Association, an organization of 74 companies that are in the
business of chemistry. At over 100 locations across Louisiana,
we manufacture the building blocks that go into every consumer
product you can imagine. We directly employ some 30,000 men and
women, 24 hours a day, 7 days a week and 365 days a year and
account for another quarter million jobs in the State. I have
served as LCA's Chairman and remain on its Board of Directors.
Louisiana's chemistry business ships over $20 billion worth
of products annually, ranking behind Texas and New Jersey. Over
one third of these shipments are exported and help narrow
America's trade deficit.
We use natural gas, and we use a lot of natural gas. In
fact, the industrial sector accounts for almost 10 percent of
all the natural gas consumed in the United States. We use it as
feedstock, sometimes called raw material, for some of the most
basic building blocks in chemistry, ethylene, and for other
critical production pathways like ammonia.
We also use it to efficiently and in an environmentally
sound manner generate electricity and steam which in turn are
used in the production of caustic soda and chlorine, one of the
world's most versatile, beneficial products of chemistry. When
chlorine is joined with natural gas derivatives, it appears in
everything from contact lenses to prosthetic devices to
computers. Chlorine and caustic soda combine to bleach paper
white and are found in the bleaches used in the homes. For
feedstock and generation purposes, industry of Louisiana uses
nearly 1 trillion cubic feet of natural gas a year and this
does not include the natural gas used in the public utilities
that provide us with huge blocks of electricity.
As I mentioned earlier, natural gas is used as a raw
material or feedstock for consumer product building blocks. In
this context, natural gas is like wheat and flour are to a
bakery shop. If Mr. Tauzin were here, he'd understand that. A
baker makes bagels, bread, rolls and yes, Mardi Gras King Cakes
from his raw materials. From derivatives of natural gas,
industry makes dinnerware, auto parts, furniture, foam
insulation, appliances, pens and pencils, pipe, paints, food
wrap, roofing, house siding, safety glasses, detergents, rocket
fuel, CD-ROMS and just about everything else from drilling mud
conditioners to life saving pharmaceuticals.
And then there's ammonia, one of the most critical products
that comes from natural gas. This portion of my testimony
addresses the concerns of Louisiana Ammonia Producers. This is
a group of seven companies that operate eight facilities in
Louisiana that produce 40 percent of the ammonia consumed in
the United States. Eighty percent of the ammonia is used in the
fertilizer industry to provide food stuff and fiber for the
United States and to the world.
The high demand for natural gas that has led to high
natural gas prices has had devastating impact on the ammonia
industry this winter. One of our processors at the CYTEC plant
makes anhydrous ammonia which itself is a raw material for the
manufacture of several specialty chemical products on the site
I manage. Therefore, I'm very familiar with this segment of the
industry.
When producers purchase natural gas to make ammonia, it is
measured in British Thermal Units or BTUs. As you're aware, the
price of natural gas went from approximately $2 per million
BTUs 1 year ago to around $10 per million BTUs this past
December. In other words, the price of basic raw material more
than quadrupled within a year. Natural gas makes up over 80
percent of the cost of making ammonia and this does not include
the additional costs associated with the purchase of gas for
public power. There simply is no way that these higher costs
could be absorbed or passed along in higher fertilizer prices.
As the direct result of natural gas prices, one Louisiana
ammonia plant closed in the latter part of 2000. In addition,
all but two of the Louisiana eight remaining ammonia facilities
were completely idled for much of December, all of January and
part of February. The two that continue to operate did so at
reduced rates. Future construction plans are also shelved for
the time being.
When our plants reduce production or are shut down
completely, our employees and their families suffer
economically. Beyond this, however, is the problem these
curtailments portend for the nation's farmers who may face
shortages of and high prices for fertilizers. These costs will
invariably reverberate in the American economy and mean high
prices for essential foodstuffs.
Natural gas prices have declined to $5 and $6 and four of
our ammonia producers have resumed partial producer. The two
that have continued producing are now at full capacity. One of
our members continue to be completely shut down.
We have reopened to help meet farmers' spring needs for
fertilizer. However, natural gas is still around three times
the cost of gas prices last year and the future remains
guarded.
While this winter has been a terrible time for the ammonia
industry, we're deeply concerned about what will happen to
natural gas prices during the heat of this summer and the cold
next winter. Already, we're anticipating plants reducing
production with some additional shutdowns during the summer
months.
There's a continuing concern for other chemical sectors as
well. Polyvinyl chloride producers of Louisiana, for example,
have either curtailed production because of high gas prices or
are considering to do so.
Without a reliable and stable supply of natural gas at
reasonable prices, Louisiana's chemical industry cannot stay
globally competitive. This is especially true when foreign
governments subsidize natural gas inputs into their production
processes and are able to export commodities to U.S. price well
below our manufacturing costs.
Mr. Barton. Mr. Gill, you're about a minute over. Could you
try to summarize in the next 30 seconds, please, sir?
Mr. Gill. Yes sir. We ask you to develop an energy policy
that recognizes it is in the nation's interest to place high
priority on natural gas by first, acknowledging the
essentiality of natural gas as a feedstock, raw material, and
building block that is critical to the business of chemistry
and to the American economy.
No. 2, encouraging domestic exploration in previously
untapped areas to enable our competitive market system to work,
thus assuring an abundant supply of natural gas at rational
prices.
Third, and for the longer term, creating Regional Economic
Clusters. These clusters would fully develop and utilize local
and regional natural resource bases so as to protect our local
economies and employment and our national economic,
agricultural and defense interests by leveraging technological
capabilities to assure global competitiveness and the effective
investment of capital.
Thank you very much.
[The prepared statement of Jas Gill follows:]
Prepared Statement of Jas Gill, Vice President, Manufacturing, CYTEC
Industries, Inc.
Mr. Chairman and members, good afternoon, and thank you for the
opportunity to discuss a subject of vital concern to America's national
interest in general and to the Louisiana economy in particular.
My name is Jas Gill. I am the Vice President of Manufacturing for
CYTEC Industries, Inc., located at 10800 River Road in Westwego,
Louisiana.
CYTEC is a specialty chemicals and materials company. Our chemical
complex at Fortier that I manage has more than 550 fulltime employees
working in maintenance, administration and eight different production
units.
I have the privilege of being a constituent of Chairman Tauzin of
Chackbay, Louisiana, and a former constituent of one of your newest
members, Congressman Chris John of Crowley. My testimony will,
therefore, be bi-partisan not only by desire, but by necessity.
I am here today representing the Louisiana Chemical Association, an
organization of 74 companies that are in the business of chemistry. At
over 100 locations across Louisiana, we manufacture the building blocks
that go into every consumer product you can imagine. We directly employ
some 30,000 men and women, 24/7/365, and account for another quarter
million jobs in the state. I have served as LCA's Chairman and remain
on its board of directors.
Louisiana's chemistry business ships over $20 billion worth of
product annually, ranking behind Texas and New Jersey. Over one-third
of these shipments are exported and help narrow America's trade
deficit.
We use natural gas. We use a lot of natural gas.
In fact, Louisiana's industrial sector accounts for almost 10% of
all the natural gas consumed in the United States. We use it as
feedstock, sometimes called a raw material, for some of the most basic
building blocks in chemistry--ethylene, for instance--and for other
critical production pathways like ammonia.
We also use it to efficiently and in an environmentally sound
manner generate electricity and steam which, in turn, are used in the
production of caustic soda and chlorine, one of the world's most
versatile and beneficial products of chemistry. When chlorine is joined
with natural gas derivatives, it appears in everything from contact
lenses to prosthetic devices to computers. Chlorine and caustic soda
combine to bleach paper white and are found in the bleaches used in our
homes.
For feedstock and generation purposes, industry in Louisiana uses
nearly one trillion cubic feet of natural gas a year. And this does not
include the natural gas used by public utilities that provide us with
huge blocks of electricity.
As I mentioned earlier, natural gas is used as a raw material or
feedstock for consumer product building blocks. In this context,
natural gas is like wheat and flour are to a bakery shop. A baker makes
bagels, bread, rolls and, yes, Mardi Gras King Cakes from his raw
materials. From derivatives of natural gas, industry makes dinnerware;
auto parts; furniture; foam insulation; appliances; pens; pencils;
pipe; paints; food wrap; roofing; house siding; safety glass;
detergents; rocket fuel; CD-ROMs; and just about everything else from
drilling mud conditioners to life-saving pharmaceuticals.
And then there is ammonia, one of the most critical products that
comes from natural gas. This portion of my testimony addresses the
concerns of the Louisiana Ammonia Producers. This is a group of seven
companies that operate eight facilities in Louisiana. They produce 40
percent of the ammonia consumed in the United States. Eighty percent of
that ammonia is used for fertilizer that farmers apply to provide food
and fiber to the United States and to the world.
The high demand for natural gas that has led to high natural gas
prices has been devastating to the ammonia industry this winter.
One of our processing plants at CYTEC makes anhydrous ammonia which
in itself is a raw material for the manufacture of several specialty
chemicals produced on the site I manage. Therefore I am very familiar
with this segment of the industry.
When producers purchase natural gas to make ammonia, it is measured
in British Thermal Units, or BTUs. As you are aware, the price of
natural gas went from approximately $2 per million BTU one year ago to
around $10 per million BTU this past December. In other words, the
price of our basic raw material more than quadrupled within a year.
Natural gas makes up over 80 percent of the cost of making ammonia,
and this does not include the additional costs associated with the
purchase of gas or public power for electricity. There was simply no
way that these higher costs could be absorbed or passed along in higher
fertilizer prices.
As a direct result of high natural gas prices, one Louisiana
ammonia plant closed in the latter part of 2000. In addition, all but
two of Louisiana's eight remaining ammonia facilities were completely
idled for much of December, all of January and part of February. The
two that continued to operate did so at reduced production levels.
Future construction plans at these facilities have also been put on
hold.
When our plants reduce production or shut down completely our
employees and their communities suffer economically. Beyond this,
however, is the problem these curtailments portend for our nation's
farmers who may face shortages of . . . and high prices for . . .
fertilizer. These costs will invariably reverberate in the American
economy and mean higher prices for essential foodstuffs.
Natural gas prices have declined to $5 to $6 per million BTU
recently and four of our ammonia producers have resumed partial
production. The two that continued producing are now near full
capacity. One of our members continues to be completely shut down.
We have reopened to help meet farmers' spring needs for fertilizer;
however, natural gas is still around three times the cost of gas prices
last year, and the future remains guarded.
While this winter has been a terrible time for the ammonia
industry, we are deeply concerned about what will happen to natural gas
prices during the heat this summer and the cold next winter. Already,
we are anticipating plants reducing production with some additional
shutdowns during the summer months.
There is continuing concern in other chemical sectors as well.
Polyvinyl chloride producers in Louisiana, for example, have either
curtailed production because of high gas prices or are considering do
so.
Without a reliable and stable supply of natural gas at a reasonable
price, Louisiana's chemical industry cannot stay globally competitive.
This is especially true when foreign governments subsidize natural gas
inputs into their production processes and are able to export
commodities to the US priced well below our manufacturing costs.
We ask you to develop an energy policy that recognizes it is in the
national interest to place a high priority on natural gas by:
First, acknowledging the essentiality of natural gas as a
feedstock, raw material, and building block that is critical to the
business of chemistry and to the American economy; and
Second, encouraging domestic exploration in previously untapped
areas to enable our competitive market system to work, thus assuring an
abundant supply of natural gas at a rational price; and
Third, and for the longer term, creating Regional Economic
Clusters. These clusters would fully develop and utilize local and
regional natural resource bases so as to protect our local economies
and employment and our national economic, agricultural and defense
interests by leveraging technological capabilities to assure global
competitiveness and the effective investment of capital.
Thank you for your attention, and I will answer any questions you
might have at the appropriate time.
Mr. Barton. Thank you, Mr. Gill.
Last, but certainly not least, we want to welcome Mr.
Patricio Silva who is a Project Attorney for the Natural
Resources Defense Council. And we give you the award for
looking the sharpest at 5 o'clock in the afternoon. I don't
know how you do that, but you look like you're fresh and ready
to go. So we put your statement in the record in its entirety
and we welcome you to elaborate on it for 6 minutes.
STATEMENT OF PATRICIO SILVA
Mr. Silva. Mr. Chairman, thank you for the opportunity to
appear today and I'm sure to the benefit of everyone and their
relief as well, I'm going only going to take about two or
three.
I am the Midwest Activities Coordinator for the Natural
Resources Defense Council and my testimony or my remarks will
address the contribution natural gas can make to an
environmentally and economically sound national energy policy.
I'm also the co-author of NRDC's recently released energy
report, ``A Responsible Energy Policy for th 21st Century''
available on our website and attached for the record which
details what we regard as a sensible, sustainable, national
energy strategy.
The Natural Resources Defense Council is a national
nonprofit organization of scientists, lawyers and environmental
specialists dedicated to protecting public health and the
environment. Founded in 1970, NRDC serves more than 400,000
members.
Of the three fossil fuels that dominate the U.S. energy
market, natural gas is by the far the cleanest burning fuel. It
is therefore a key part of NRDC's energy policy--the bridge to
greater reliance on cleaner and renewable forms of energy.
But natural gas is not sufficiently clean to be considered
the long-term answer to America's energy needs. In particular,
exploration and production of natural gas can cause substantial
and irreversible harm to sensitive ecosystems.
Increased energy efficiency in homes and factories not only
would lower consumers' energy bills, it would free up large
amounts of natural gas to help meet the needs of new highly
efficient combined-cycle--combustion and steam turbine--power
plants. Stronger and better-enforced building codes augmented
by tax incentives for constructing buildings that exceed code
requirements would pay a double dividend: lowering heating and
electric bills, and providing for less pollution. For example,
tax incentives for the construction of energy efficient
buildings and for manufacturing energy-efficient heating and
water-heating equipment could save approximately 300 trillion
cubic feet of natural gas over a 50-year period.
It's important to point out that with natural gas that the
issue is less about the need to find new supplies than the need
to develop infrastructure to deliver existing supplies to
market. Development of a safe, comprehensive pipeline
infrastructure is critical. NRDC believes that pipelines should
be constructed and operated in an environmentally sensitive
manner with strong safety measures and oversight whenever
possible along existing routes. For example, plans to construct
an offshore pipeline off the Arctic National Wildlife Refuse
coastal plain should be rejected. Instead, if Prudhoe Bay gas
supplies are needed to serve the markets in the lower 48
States, any Prudhoe Bay natural gas pipeline should follow the
Trans-Alaskan Pipeline System and the Alaska-Canadian Highway
right-of-ways; undergo a thorough, new environment impact
statement review; comply with all U.S. and Canadian
environmental laws and incorporate the best pipeline safety and
environmental measures.
Despite assertions from drilling proponents, it is not
necessary to drill in sensitive areas to meet America's energy
needs. For example, industry is pressing to drill in sensitive
areas of the Outer Continental Shelf, including offshore
Alaska, the eastern Gulf of Mexico and areas where a moratorium
on drilling has been in place for many years. But such drilling
is unnecessary because 70 percent of the nation's estimated
undiscovered economically recoverable Outer Continental Shelf
oil and gas is located outside of these areas.
In particular, the Central and Western Gulf of Mexico
contains some of the largest reserves and there are no
restrictions on exploration or leasing in those areas.
Domestic natural gas has rebounded from its historic lows
in early 1999 as earlier testimony has indicated. Rising
natural gas prices are driving the renewed interest in natural
gas exploration in existing production regions, in Oklahoma,
Texas and Kansas. What we hear from the industry time and again
is that shortages of skilled labor and a reluctance to invest
in new drilling equipment is currently one of the main
constraints on increased natural gas production. This indicates
that access to public land is not necessarily a chief or
principal constraint.
One of the areas of highest concern for NRDC are some of
the--excuse me.
I'd just like to actually wrap up. Natural gas----
Mr. Barton. You're doing real good and you're the last one,
so----
Mr. Silva. Okay, let me go back. Remember, you asked me to
do this.
Mr. Barton. I know. We want a complete record and you've
been a very patient person.
Mr. Silva. Natural gas production on some public lands will
continue to be necessary, but some areas within the Federal
public land system merits special protection. Existing
protections for areas such as the Rocky Mountain Front and wild
National Forest roadless areas should be maintained. Other
unique and irreplaceable areas also merit protection, even
though they are currently open to production.
Most onshore and offshore Federal public land is the
property of all Americans and are managed by the U.S. Forest
Service and the Bureau of Land Management and the Minerals
Management Service. Despite assertions to the contrary, onshore
and offshore Federal public lands being closed, almost 95
percent of Federal public lands in the Rocky Mountains managed
by the Bureau of Land Management are open today to exploration
and production leasing. Similarly, more than 80 percent of
estimated undiscovered economically recoverable offshore gas
resources are open to exploration. Few Federal onshore lands
are off limits to any harmful activity, including oil and gas
leasing and development. Many have already been leased and many
are being developed.
I'll wrap it up right there.
[The prepared statement of Patricio Silva follows:]
Prepared Statement of Patricio Silva, Project Attorney, Natural
Resources Defense Council
key recommendations:
<bullet> Maximize the benefits of existing natural gas supplies by
increasing efficiency: provide tax incentives for the
construction of energy-efficient buildings and for
manufacturing energy-efficient heating and water-heating
equipment.
<bullet> Develop and maintain infrastructure to deliver gas supplies:
adopt a comprehensive pipeline approach ensuring that pipelines
are constructed and operated in an environmentally sensitive
manner, with strong safety oversight, full compliance with all
environmental laws and, whenever possible, along existing
routes.
<bullet> Reject plans to construct an offshore pipeline along the
Arctic National Wildlife Refuge coastal plain.
<bullet> Plan an Alaska gas pipeline if needed to deliver Prudhoe Bay
gas to the lower 48 states that follows the Trans-Alaska
Pipeline System and the Alaska-Canadian Highway right-of-ways;
complies with all U.S. and Canadian environmental laws; has a
thorough, new environmental impact statement; and incorporates
the best pipeline safety and environmental measures.
<bullet> Do not drill in sensitive offshore areas, including the
moratorium areas, off Alaska and in the eastern Gulf of Mexico.
<bullet> Maintain existing protections for sensitive onshore public
lands and extend protection to other special places.
My name is Patricio Silva, and I represent the Natural Resources
Defense Council, where I am the Midwest Activities Coordinator on
energy and air quality matters. Thank you for the opportunity to appear
before you today. My testimony will address the contribution that
natural gas can make to an environmentally and economically sound
national energy policy.
I have been active on national energy policy issues for over seven
years. Recently I have been involved with the siting of natural gas-
fired combined cycle combustion turbines power plants and natural gas
pipeline expansions across the United States. I am also co-author of
NRDC's recently released energy report, ``A Responsible Energy Policy
for the 21st Century,'' available on our website www.nrdc.org and
attached for the record, which details what we regard as a sensible and
sustainable national energy strategy. I hold a bachelor's degree in
government from Colby College and a juris doctor from the University of
Arizona College of Law.
The Natural Resources Defense Council is a national nonprofit
organization of scientists, lawyers, and environmental specialists,
dedicated to protecting public health and the environment. Founded in
1970, NRDC serves more than 400,000 members from offices in New York,
Washington, Los Angeles, and San Francisco.
Of the three fossil fuels that dominate the U.S. energy market,
natural gas is by far the cleanest burning fuel. It is, therefore, a
key part of NRDC's energy policy--the bridge to greater reliance on
cleaner and renewable forms of energy.
managing supply by reducing demand
But natural gas is not sufficiently clean to be considered the
long-term answer to America's energy needs. In particular, exploration
and production of natural gas can cause substantial and irreversible
harm to sensitive ecosystems. Increased energy efficiency in homes and
factories not only would lower consumers' energy bills; it would free
up large amounts of natural gas to help meet the needs of new highly
efficient combined-cycle (combustion and steam turbine) power plants.
Stronger and better-enforced building codes augmented by tax incentives
for constructing buildings that exceed code requirements would pay a
double dividend: lower heating and electric bills, and less pollution.
For example, tax incentives for the construction of energy efficient
buildings and for manufacturing energy-efficient heating and water-
heating equipment could save 300 Tcf of natural gas over 50
years.<SUP>1</SUP>
---------------------------------------------------------------------------
\1\ Interlaboratory Working Group, Scenarios for a Clean Energy
Future (Oak Ridge, Tennessee; Oak Ridge National Laboratory and
Berkeley, California, Berkeley National Laboratory (ORNL/CON-476, LBNL-
44029)) (November 2000). The ``Advanced'' electricity scenario shows
total gas demand increasing from current levels of about 22 Tcf to 26
Tcf in 2010, while total CO<INF>2</INF> emissions are reduced.
---------------------------------------------------------------------------
infrastructure issues
It is important to point out that with natural gas the issue is
less about the need to find new supplies, than the need to develop
infrastructure to deliver these supplies to market.
Increasingly, it is getting the existing gas supplies to the market
that is the biggest challenge. Development of a safe, comprehensive
pipeline infrastructure is critical. NRDC believes that pipelines
should be constructed and operated in an environmentally sensitive
manner, with strong safety measures and oversight, and, whenever
possible, along existing routes. For example, plans to construct an
offshore pipeline off the Arctic National Wildlife Refuge coastal plain
should be rejected. Instead, if Prudhoe Bay gas supplies are needed to
serve markets in the lower 48 states, any Prudhoe Bay natural gas
pipeline should follow the Trans-Alaska Pipeline System and the Alaska-
Canadian Highway right-of-ways; undergo a thorough, new environmental
impact statement; comply with all U.S. and Canadian environmental laws;
and incorporate the best pipeline safety and environmental measures.
existing supply
Despite assertions from drilling proponents, it is not necessary to
drill in sensitive areas to meet America's energy needs. For example,
industry is pressing to drill in sensitive areas of the Outer
Continental Shelf, including offshore Alaska, the eastern Gulf of
Mexico, and areas where a moratorium on drilling has been in place for
many years. But such drilling is unnecessary because 70 percent of the
nation's estimated undiscovered, economically recoverable Outer
Continental Shelf oil and gas is located outside of these areas.
Some have also suggested that natural gas production is a reason to
drill in the Arctic National Wildlife Refuge. In reality, industry
interest in the Artic Refuge is driven by its desire to produce oil,
not gas. The Arctic Refuge is estimated to contain less than 7 Tcf of
natural gas resources; about a three-month supply by the time the
resources could be developed.<SUP>2</SUP> By comparison, the Prudhoe
Bay production area is estimated to contain 32 Tcf to 38 Tcf of natural
gas resources.<SUP>3</SUP> Gas produced in Prudhoe Bay is currently
reinjected because there is no way to transport it to market. If a
natural gas pipeline were built to connect Prudhoe Bay to the lower 48
states it would take at least 30 years before all of the natural gas
could be brought to market.
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\2\ John Schuenemeyer, USGS, Assessment Results, The Oil and Gas
Resource Potential of the Arctic National Wildlife Refuge 1002 Area,
Alaska. USGS Open File Report 98-34 (1999). Chapter RS Table RS14.
\3\ T.J. Glauthier, deputy secretary of energy, testimony before
the Senate Committee on Energy and Natural Resources, September 14,
2000.
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Domestic natural gas exploration has rebounded from historic lows
in early 1999, when 371 natural gas drilling rigs were reported in
service as wellhead prices fell below $2 per Tcf. As wellhead gas
prices recovered, and then doubled, natural gas exploration surged; 840
natural gas drilling rigs were reported in service in November
2000.<SUP>4</SUP> Rising natural gas prices are driving the renewed
interest in natural gas exploration in existing production regions in
Oklahoma, Texas and Kansas.<SUP>5</SUP> Shortages of skilled labor and
reluctance to invest in new drilling equipment currently are limiting
natural gas production, indicating that access to public lands is not a
constraint.
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\4\ Energy Information Administration, Annual Energy Outlook 2001,
DOE/EIA-0383(2001) (December 2000), pp. 30-32.
\5\ Jim Yardley, ``Oil Patch Comes To Life As Natural Gas Prices
Climb,'' New York Times, December 16, 2000 pp. A1, A16. In December
2000 some 1,090 drilling rigs were reported in service, with more than
800 drilling rigs exploring for natural gas, a significant increase
over a year ago when fewer than 400 drilling rigs were reported in
service, but still modest in comparison to the 1970s and 1980s when
more than 4,500 drilling rigs were reported in service.
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Most onshore and offshore federal public lands, the property of all
Americans, are managed by the U.S. Forest Service, the Bureau of Land
Management and the Minerals Management Service.<SUP>6</SUP> Despite oil
industry assertions that onshore and offshore federal public lands are
closed to exploration and production of oil and natural gas, 95 percent
of federal public lands in the Rocky Mountain region managed by the
Bureau of Land Management are open to exploration and production
leasing.<SUP>7</SUP>
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\6\ The Bureau of Land Management is responsible for administering
oil and gas exploration and production leasing on all onshore BLM
lands, while the Mineral Management Service of the Department of
Interior manages oil and gas leasing on the outer continental shelf
surrounding the US coastline. They are separate sections of the
Department of Interior.
\7\ The Rocky Mountain region consists of Colorado, Montana, New
Mexico, Utah and Wyoming--the five Western states that are significant
oil and gas producers.
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Similarly, more than 80 percent of estimated undiscovered,
economically recoverable offshore gas resources are open to
exploration. Few federal onshore lands are off limits to any harmful
activity, including oil and gas leasing and development. Many have
already been leased and developed.
special places at risk in the western united states
The areas of focus for natural gas exploration in the lower 48
states onshore include the Rocky Mountain region, where in addition to
reserves associated with oil deposits, unconventional resources such as
tight sands and coalbed methane are attracting particular attention.
The Bureau of Land Management, as of July 2000, had issued 12,000
drilling permits for coalbed methane exploration in the Wyoming Powder
River Basin to 112 companies, with 6,000 wells drilled and 2,500 in
production. This amount of activity significantly exceeds forecasts for
coalbed methane exploration and production. According to a 1995 BLM
forecast, approximately 5,000 coalbed methane exploration wells would
be drilled; two years ago the forecast jumped to 10,000; and last year,
to 15,000. By mid-1999, the forecast hit 30,000, and, by the spring of
2000, 50,000 to 70,000 wells were projected for the Powder River Basin
on private, state and federal lands.
When widespread oil and gas leasing occurs in the Rockies, the
result is heavy-duty industrialization. Well fields, which can cover
extensive acreage, are accompanied by a dense web of power lines,
pipelines, waste pits, and new or upgraded roads, along with processing
plants and other production facilities. All this activity displaces
deer, antelope and other wildlife species from their native ranges and
has ruined wilderness values on millions of acres. Every year,
visibility is significantly impaired in many places on many days by
emissions from industrial operations. These same emissions have
contributed to acidification of sensitive bodies of water.
Natural gas production on some public lands will continue to be
necessary, but some areas within the federal public lands system merit
special protection. Existing protection for areas such as the Rocky
Mountain Front and wild National Forest roadless areas should be
maintained. Other unique and irreplaceable areas also merit protection,
even though they are currently open to exploration and production.
For example, hidden away in the southwestern part of Wyoming, the
Red Desert boasts a unique and spectacular landscape--one of the most
remarkable in North America. The area has stunning rainbow-colored rock
formations, towering buttes, prehistoric rock art and outstanding wild
lands. It is home to the largest pronghorn antelope herd in the lower
48 states as well as a rare desert elk herd. For centuries, the Red
Desert has been a sacred place of worship for the Shoshone and Ute
tribes and it contains remnants of the Oregon and Mormon Pioneer
trails. Oil wells, pipelines, excessive roads and other industrial
facilities already mar some of the surrounding desert land. In response
to industry applications to lease, the Interior Department recently
committed the BLM to develop a proposal that focuses on protecting the
area's outstanding natural, cultural and aesthetic wonders.
Another example, Utah's fabled red rock country, is one of the last
unspoiled wilderness areas outside of Alaska. Its red-hued massive
cliffs, arches, towers and other rock formations support bighorn sheep,
mountain lion, pronghorn antelope, peregrine falcons, golden eagles and
other wildlife species as well as ancient Native American ruins. Last
year BLM attempted to lease more than 30,000 acres of sensitive,
irreplaceable wild lands in red rock country--bringing them closer to
industrialization and the certain destruction of their wilderness,
wildlife and other values.
Still another special place is the area in and around Vermillion
Basin in northwest Colorado--one of the state's most stunningly
beautiful and isolated regions. Its wild landscape is dotted with
banded cliffs, desert mountains and rugged badlands. The area is
surrounded by oil and gas development that threatens to encroach into
Vermillion Basin. Despite the passage of time, the area looks much as
it did when the Ute Indians' ancestors first hunted and lived there. If
oil and gas development pressures are permitted to intrude further on
the unique de facto preserve, the landscape will be changed forever.
offshore leasing, exploration and development
From Big Sur to the spectacular coast of Maine, to the Florida Keys
and back to Alaska's Bristol Bay, some of America's most important
national coastal treasures have been protected so far from offshore oil
and gas development by Congress and by two presidents--George H.W. Bush
and Bill Clinton.
Large reserves of natural gas are located in the federal waters of
the central and western Gulf of Mexico, which are open to oil and gas
leasing. This area is estimated to contain 60 percent of the
undiscovered economically recoverable oil resources and 80 percent of
the undiscovered economically recoverable gas resources estimated to be
available in the entire United States Outer Continental Shelf (OCS),
according to the Minerals Management Service.<SUP>8</SUP> Thus,
protecting sensitive offshore areas, including the moratorium areas,
offshore Alaska and the eastern Gulf of Mexico still leaves the vast
majority of the nation's Outer Continental Shelf oil and gas available
to the industry.
---------------------------------------------------------------------------
\8\ U.S. Department of the Interior, Minerals Management Service,
Outer Continental Shelf Petroleum Assessment 2000 (2000) p. 5, and Gulf
of Mexico Assessment Update. Assumes mean estimates of undiscovered,
economically recoverable resources at $18/barrel oil, $2.11/Tcf gas.
---------------------------------------------------------------------------
Some argue that natural gas development on the Outer Continental
Shelf should be promoted, including in the moratorium areas, most
notably off the Atlantic and the west coast of Florida. They argue that
the risk of oil spills is negligible, and that environmentally sound
development can take place. Their argument ignores the reality that oil
spills are not the only environmental concern related to OCS
development. Offshore gas development, like oil development, causes
substantial environmental damage. Furthermore, leases for natural gas
exploration also could open the door to oil development.
Beginning in the George H.W. Bush administration and continuing
throughout the 1990s, the Interior Department emphasized the need to
proceed on a consensus basis with OCS activities. NRDC strongly agrees
with this approach and submits that consensus has been clearly
established on the appropriateness of OCS activities in most areas of
the country. This consensus has been reflected in the consistently
broad, bipartisan support for the existing congressional moratoria on
leasing outside the central and western Gulf of Mexico. The moratoria
have been endorsed by an array of elected officials from all levels of
government and diverse political persuasions, from former Gov.
Christine Todd Whitman of New Jersey to Gov. Jeb Bush of Florida and
Gov. Gray Davis of California.
Political support for the moratoria in the affected states stems
from concern over the severe environmental, social, economic and
cultural damage associated with offshore oil and gas development,
including:
Onshore damage: The onshore infrastructure associated with offshore
oil or gas cause significant harm to the coastal zone. For example, OCS
pipelines crossing coastal wetlands in the Gulf of Mexico are estimated
to have destroyed more coastal salt marsh than can be found in the
stretch of land running from New Jersey through Maine.<SUP>9</SUP>
Moreover, the industrial character of offshore oil and gas development
is often at odds with the existing economic base of the affected
coastal communities, many of which rely on tourism, coastal recreation
and fishing.
---------------------------------------------------------------------------
\9\ Boesch and Rabalais, eds., ``The Long-term Effects of Offshore
Oil and Gas Development: An Assessment and a Research Strategy.'' A
Report to NOAA, National Marine Pollution Program Office at 13-11.
---------------------------------------------------------------------------
Oil spills: If offshore areas are leased for gas exploration there
is always the possibility that oil also will be found, creating the
risk of oil spills. According to MMS statistics, some 3 million gallons
of oil spilled from OCS oil and gas operations in 73 incidents between
1980 and 1999.<SUP>10</SUP> Oil is extremely toxic to a wide variety of
marine species, including marine birds, mammals and commercially
important species of fish. In the wake of the devastating Exxon Valdez
oil spill, scientists at the National Marine Fisheries Service's Auke
Bay Lab found that concentrations of polycyclic aromatic hydrocarbons
(PAH)--the most toxic component of oil--as low as 1 part per billion
were toxic to juvenile pink salmon.
---------------------------------------------------------------------------
\10\ MMS, 2000. Gulf of Mexico OCS Oil and Gas Lease Sale 181,
Draft Environmental Impact Statement (DEIS), pp. IV-50.
---------------------------------------------------------------------------
Water pollution: Drilling muds are used to lubricate drill bits,
maintain downhole pressure, and serve other functions. Drill cuttings
are pieces of rock ground by the bit and brought up from the well along
with used mud. Massive amounts of waste muds and cuttings are generated
by drilling operations--an average of 180,000 gallons per
well.<SUP>11</SUP> Most of this waste is dumped untreated into
surrounding waters. Drilling muds contain toxic metals, including
mercury, lead and cadmium. Significant concentrations of these metals
have been observed around drilling sites.<SUP>12</SUP>
---------------------------------------------------------------------------
\11\ MMS, 2000. Gulf of Mexico OCS Oil and Gas Lease Sale 181,
Draft Environmental Impact Statement (DEIS), p. IV-50.
\12\ Id.
---------------------------------------------------------------------------
A second major polluting discharge is ``produced water,'' the water
brought up from a well along with oil and gas. Offshore operations
generate large amounts of produced water. The Minerals Management
Service estimates that each platform discharges hundreds of thousands
of gallons of produced water every day.<SUP>13</SUP> Produced water
typically contains a variety of toxic pollutants, including benzene,
arsenic, lead, naphthalene, zinc and toluene, and can contain varying
amounts of radioactive pollutants. All major field research programs
investigating the fate and effects of produced water discharges have
detected petroleum hydrocarbons, toxic metals and radium in the water
column down-current from the discharge.<SUP>14</SUP>
---------------------------------------------------------------------------
\13\ Id., p. IV-32.
\14\ Id., p. IV-32-33.
---------------------------------------------------------------------------
Air pollution: Drilling an average exploration well generates some
50 tons of nitrogen oxides (NO<INF>X</INF>), 13 tons of carbon
monoxide, 6 tons of sulfur dioxide, and 5 tons of volatile organic
hydrocarbons. Each OCS platform generates more than 50 tons per year of
NO<INF>X</INF>, 11 tons of carbon monoxide, 8 tons of sulfur dioxide
and 38 tons of volatile organic hydrocarbons every year.<SUP>15</SUP>
---------------------------------------------------------------------------
\15\ Id., p. IV-40.
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conclusion
Natural gas is the cleanest burning fossil fuel. NRDC supports
increased utilization of natural gas in high efficiency combined
combustion turbine for the generation of electricity. Energy efficiency
should be the primary source of this incremental natural gas supply to
the power sector. NRDC supports responsible expansion of natural gas
pipeline infrastructure where needed. NRDC opposes, and sees no need
for, natural gas development in sensitive areas.
Mr. Barton. Thank you. You're very conscientious. You hit
it right on the button.
The Chair is going to recognize himself for 5 minutes in
the question period and we are going to hold everybody to 5
minutes, but if you want to ask additional questions, we'll
certainly try to do that.
My first question is a general question. According to EIA
numbers that I have, we are importing about 20 percent of our
natural gas. How many people think that it would be a good
policy to adopt a goal of being self-sufficient in terms of
natural gas production and consumption? In other words, that we
actually produce the natural gas that we consume in this
country?
Who wants to take a shot at that? Ms. Luxbacher?
Ms. Luxbacher. I'll be glad to.
Mr. Barton. Just turn that on.
Ms. Luxbacher. Just turn it on? We're importing, as you
know, natural gas from our neighbor to the north, Canada, so we
have very good relations.
Mr. Barton. And LNG.
Ms. Luxbacher. And then a small bit of LNG that comes
obviously from many places around the world. So directionally,
there's a cost if you say I want to become 100 percent energy
efficient and produce all of our natural gas from here. We in
the base case have a land access issue.
So generally, we would say that's not the goal. The goal
should be to have policies that promote and allow us to produce
economically our resources here in this country and to work
with our neighbors to the north and potentially to the south on
increasing the gas flow back and forth between the two
countries, because Canada now and into the future is going to
be a very viable supply for this country.
Mr. Barton. Mr. Jordan, do you want to----
Mr. Jordan. Yes sir. I believe that we all recognize that
we're now importing over 55 percent of our oil and while I
believe that we have to look at our gas situation as a North
American box, so to speak, so that we're talking about both
Canada and the United States and of course, as well as Alaska,
lower 48 and----
Mr. Barton. That just means the House is going out of
Session.
Mr. Jordan. Thank you. I think it's important that we adopt
long-term policies that encourage getting our supplies mainly
from that North American area. I think that while we obviously
have to have the LNG we have today and I know there's some LNG
projects that are already now on the books and they're being
financed, probably as we speak, I'm sure some of those are
going to be necessary, but I would hate to see the day that our
domestic industry would be saddled for natural gas like we are
for oil, so that I think that it's very important and we're so
far from doing it now, I think it's very important that we
emphasize North America to the extent possible.
Mr. Barton. Without answering the question whether we
should do it as a national policy, if it were adopted as policy
to be self-sufficient in natural gas, could we do it?
Mr. Jordan. I believe that the National Petroleum Council
study shows us that we could do it and I think the industry
studies show that we could do it, but we'd have to have the
right kind of----
Mr. Barton. But we couldn't in oil.
Mr. Jordan. That's right.
Mr. Barton. We just don't have the capability in oil, but
the Panel would agree we do. Whether we should or not is an
open question, but that we could be self-sufficient in natural
gas?
Mr. Jordan. It looks to us like we could. Now there's
better experts than I am.
Mr. Barton. Now on the economics of the Alaska Gas
Pipeline, my guess would be those that support it would want to
do a pipeline that was actually a pipeline all on land and we
didn't have to liquify at Valdez and then transport that. Can
we do a natural gas pipeline from Alaska that is totally--well,
obviously, we can't, be totally on U.S.--we have to go through
Canada at some point in time.
Is the route that was certificated in the 1970's, is that
the most economic route or would we want to look at a different
route that would go more toward the east through a larger part
of Canada?
Who wants to answer that question? Ms. Luxbacher?
Ms. Luxbacher. I'll be glad to answer that. Right now we
have a joint producer group in Alaska looking at that very
question, what is the most economic pipeline that can be built
from the Alaskan North Slope to bring that gas in through
Canada and then into U.S. markets. And not only the most
economic, but along with the least environmental impact, the
goal being to deliver the gas competitively into the
marketplace. And it can come over land. There's two primary
routes, a southern route that goes south through Alaska and
that's the Alaskan Highway route and then there's a northern
route that goes through Beaufort and down through the McKinsey
Valley of Canada.
Mr. Barton. And if you choose a northern route, then we'd
have to do additional legislation or an additional environment
impact statement?
Ms. Luxbacher. It's our understanding at this time that
that would not be necessary. FERC has indicated and I think
Chairman Hebert's comments are they believe they have the
ability and are willing to look at that route also.
Mr. Barton. My time has expired. I've got one more
question. According to EIA, the next 20 years we're going to
need 393 gigawatts of additional generating capacity for
electricity in this country. I think a gigawatt is a thousand
megawatts. Is that right?
So I tried to convert that, gigawatts to megawatt power
plants and I came up that we need, if you assume a 500 megawatt
power plant, we need to build 800, approximately 800 500-
megawatt power plants which is approximately 40 per year. EIA
says that 92 percent of those are going to be fired by natural
gas.
Now EIA may be right. EIA may be wrong, but their base case
is nuclear power is not an option and coal is not an option
because of environmental concerns. But assuming that EIA is
right, do we have the production capacity in this country to
produce enough additional natural gas to fire 40 additional
500-megawatt natural gas combined cycle power plants per year
each year for the next 20 years?
Who wants to answer that question? Mr. Jordan?
Mr. Jordan. I again refer to the National Petroleum
Council's study. I believe that if we had the right kind of
policy--what we've done is we put all our eggs in the natural
gas basket and we've closed the lid of the basket so that we do
not--so that we're not able to access some of the larger areas
that we need to access and it's a multitude of--it's not one
policy or one decision that locks us off from that acreage.
It's a combination of endangered species issues, roadless
policies, monument designations, etcetera. All these decisions
have blocked us off from that. We can't do it we don't make the
right kind of balance. And the thing that I think we have to
change our philosophy on is we can, we sent people to the moon,
etcetera. We're a can do country. We can both produce the gas
that we have and protect the environment to the extent even
further than advocates want to.
Mr. Barton. It just seems that like if EIA is even close
and they're a very conservative agency in their assumptions
that we're sucking up all our natural gas for power generation
and not leaving any for Mr. Littlefair to power his vehicles.
We're not leaving any for Mr. Hilliard to heat his homes and
cook their food and we're not leaving any for Mr. Gill to use
in his ammonia process. I mean we really need to think through
this because that's a lot of electricity and saying that
natural gas is going to fire it all, we have the question, can
we produce it in an environmentally responsible way that Mr.
Silva is concerned about. There's just a lot of issues here.
I'm going to recognize Mr. Boucher for 5 minutes.
Mr. Boucher. Thank you very much, Mr. Chairman. I want to
join with you and simply say a word of welcome to this Panel
and to thank each of you for your patience and for taking the
time to educate this committee. You've done an excellent job
and the material you've presented to us will be extremely
helpful as we evaluate this set of issues.
Ms. Campbell, I want to give you, just if you would,
briefly to recap gas prices as they stand today and according
to current projections, what gas prices will be next year and
perhaps through the year 2005. They're roughly at $5, $6, I
think, at the present time and where do you see those going
over the course of the next 5 years?
Ms. Campbell. The forecast for this year, 2001, is
approximately $5. And then there's a decline that's expected
for the year 2002 to about $4.50. At this point in time we do
have projections for those prices to continue to decline
through the rest of the decade and then to begin to resume a
slight increase over--out to the 2020 time period.
Mr. Boucher. You say a decline over the balance of the
decade. That's some number lower than $4.50.
Ms. Campbell. Yes.
Mr. Boucher. What is the valley that you expect these
prices to achieve?
Ms. Campbell. Actually, the forecast at this time sees some
falling to the $3 range and then resuming.
Mr. Boucher. What year do you expect them to reach the $3
range?
Ms. Campbell. We actually expect it to reach below $3 in
approximately 2004 and then to build again.
Mr. Boucher. Okay, why do they build again?
Ms. Campbell. Well, they build again because in response
partly to the earlier comment by the Chairman, we do have a
very strong forecast for demand and increased electricity
generation. We do expect that is the area in which demand will
grow most and natural gas will, I think, take a market share of
approximately 36 percent by the end of our forecast period,
2020, where it is now something in the order of 16 percent of
electricity generation. So that's a very strong additional
source of demand.
Mr. Boucher. And did the Chairman correctly cite your
statistic when he said that the projection is that 90 percent
of the new electricity generating capacity will be gas-fired?
Is that your conclusion?
Ms. Campbell. Yes, that is correct. However, I should note
that in the year 2020, I'm glad you confirmed the Chairman, in
the year 2020, coal will still be our leading fuel for
electricity generation.
Mr. Boucher. I'm sorry, will you say that again?
Ms. Campbell. Coal will still be our leading fuel for
electricity generation in the year 2020.
Mr. Boucher. And so I guess you would say that the other 10
percent of new generating capacity is fueled by something else.
Is that coal?
Ms. Campbell. Coal has a small increase in its market share
as well and I think there's an expectation of new alternative
renewable resources.
Mr. Boucher. I'm a little bit surprised at your pessimism
with regard to coal as a fuel for new electricity generation.
I personally know of a number of large investor-owned
utilities that are now looking very seriously at coal as the
fuel for new plants that they are planning. There are a number
of independent power producers that are now planning to build
coal-fired facilities and I think you might want to take
another look at that projection because we're going to have a
hearing on that very subject and examine coal as a fuel and I
think you will see there is a considerable body of opinion that
coal is going to be a more substantial fuel for new coal-fired,
new electric-generating plants than perhaps your numbers
suggest.
Well, thank you very much. I appreciate your testimony
today.
Mr. Hilliard, I want to give you an opportunity to talk a
little bit more about the concerns that you have that perhaps
the significant increase in gas prices has not been driven
entirely by the legitimate supply and demand equation. As you
have suggested in your testimony that perhaps there's been some
market manipulation and you've suggested a course of inquiry
for this committee to examine whether or not that manipulation
is taking place and we appreciate that suggestion.
Let me ask you if you have any evidence or examples or if
you want to even talk about hearsay, you know, this is not a
court, you're entitled to do that. You're not under oath.
We would be interested in knowing what you believe may be
happening in the market as a way, perhaps, to enlighten the
inquiry that we could undertake.
Mr. Hilliard. I know that when the AGA, for instance, for
an example, when you see an AGA storage report come out and it
shows us that we have very little gas in storage and if the
weather looks like we're able to put gas into storage, the
market goes up. And if we see the weather turning warm where
we're looking at, maybe some electric generation going on, we
see the market pricing go up. And so those are some of the
things that we see that lead us to believe that there might be
some market manipulation going on. And certainly an increase in
price from what we've seen, $2.50 to $10 is more than,
certainly much, much more than it takes to see the drilling rig
activity going. In fact, we were seeing drilling activity go at
$4 and $5, turn on real strong.
Mr. Boucher. So your evidence is really more anecdotal and
you're just suggesting that perhaps there's a problem. You
don't have any direct allegation of a problem?
Mr. Hilliard. I don't have a direct allegation, but I think
that's something that we need to look at, that Congress needs
to look at to make sure that we're not carrying forward a
problem in the national energy policy. We need to understand
what happened in the marketplace and if there was some
manipulation in the market, we need to fix that before we carry
it forward in a national energy policy.
Mr. Boucher. Thank you, Mr. Hilliard. Thanks, Mr. Chairman.
Mr. Barton. Before we recognize Mr. Bryant, Mr. Jordan, if
you came back out of this hearing and went back to Ohio and
were fired up to drill more natural gas wells, how long would
it take you to get a rig to drill an existing site? If you
called your contractor tomorrow and said, I want a rig, how
long would it take?
Mr. Jordan. Unfortunately, I'm not characteristic. Ohio is
a very small oil and gas patch and we have a fairly good
situation. There aren't very many people drilling and I could
probably get a rig probably within 60 days.
Mr. Barton. In Texas, it's about 6 months right now, 4 to 6
months.
Mr. Jordan. I realize that and I've heard that from our
members. And we've drilled----
Mr. Barton. So I should come to Ohio and rent your rig up
there and then haul it down to Texas because I could get it in
2 weeks.
Mr. Jordan. I wouldn't be surprised. But it varies. It's
very localized and it depends on where your rigs are and I know
how bad it is for people like in Midland and East Texas where
there's a lot of activity and I've heard lots and lots of----
Mr. Barton. And Louisiana.
Mr. Jordan. And Louisiana, that's right.
Mr. Barton. I know Mr. Hilliard is not implying that people
would withhold rigs from the market, but it's very difficult
now because prices were so low, now that they're back up,
people want to drill sites can't get the equipment and I know
one site in Louisiana that somebody's been trying to get
drilled for several years and nobody was interested because of
the economics. Now that the economics are right, they can't get
a rig. So it's kind of a self-defiant purpose.
Mr. Bryant for 5 minutes.
Mr. Bryant. Thank you, Mr. Chairman. I too would like to
follow up with Mr. Hilliard a little bit. I don't think there's
any question that the long-term situation that we're all
talking about today beginning with our Chairman and the first
Panel and all of you agree, well, maybe an exception or so
here, agree that long term, our demand is going to dramatically
increase and I guess how we address that in terms of the
supplies is at issue. But if I might devote a little bit of
time to what Mr. Hilliard mentioned and Mr. Boucher followed up
on, I've had the same type of complaint from some of the
distributors back in my District about this possible
manipulation and I'm just--Mr. Hilliard, your association,
you're president of what association?
Mr. Hilliard. No sir, I'm not the president. I'm just
representing----
Mr. Bryant. Okay, how many members are in that association?
Mr. Hilliard. There's about 572 members of the association.
There's about 1,000 municipal systems in the country.
Mr. Bryant. And these are the people who distribute the gas
to the individual houses?
Mr. Hilliard. Yes, that's right.
Mr. Bryant. During this time we're talking about in
December, January, did anyone actually have a shortage or was
there always gas to purchase?
Mr. Hilliard. I'm not aware of any shortages of firm gas,
of someone who was purchasing gas on a firm basis. I'm not
aware of any shortages of natural gas on that basis if you were
willing to pay the price.
Mr. Bryant. That's what I was told by one of the biggest
purchasers in Tennessee that in times past, when there were
shortages, they literally could not keep the gas flowing
through the pipes. But this time there was gas to be purchased,
but then again you had to pay a premium price for that.
Is anyone here familiar with an example of where there
actually was a shortage that nobody could purchase power?
Mr. Hendrix?
Mr. Hendrix. I think in the latter part of December in the
mid-continent area if you went out and tried to buy gas, it was
very difficult. You might have been able to buy it at $13 an
Mcf. And those were the initial bids that came in at the
beginning of the trading day. If you didn't buy it on those
bids, the price would probably relax itself back down to $10,
but because the people with alternate fuel capabilities weren't
switching at the tail end of December, if we had gone into
January and had the same extreme cold that we had at the tail
end of December, it probably would have had to have been some
curtailments because there just was no gas available in the
mid-continent area or at least in the Kansas City area and
that's based on talking with the LDCs that were out in the
market every day. But it didn't transpire and once the fuel
switching capability did start kicking in, and the weather
moderated in January, we were home free.
Mr. Bryant. I would agree, I think, with Mr. Hilliard and I
don't know--Mr. Boucher is gone, but it's possible that we
might have that as a future, some consideration for future
hearing just to look at that.
I think we all know how the markets work and the mercantile
exchange. Certainly I was told by someone who used to trade in
that commodity that that's what happened in this case. He's
pretty confident--of course, he's not there anymore so I don't
know. Obviously, there are all kinds of other factors that
figure into opinions by people. But certainly, hopefully, just
a one time situation and I know we're here today to talk about
the bigger picture. And I was glad to hear Mr. Boucher. I don't
have coal in my State, in Tennessee, that much, but Mr.
Whitfield next to me stepped out and he always is a defender of
coal. I think again from your calculations, I think the
possibility, the probability of using coal in the future to
help, I think, is perhaps underestimated and I certainly hope
so. I think coal is a very viable product, fuel for future use.
I had a question also, Ms. Campbell, for you, just for my
clarification. I noticed in some of your numbers you had on the
$9 cost percentage on a dollar, the breakdown, like 35 percent
was the cost of the gas. Do you remember those numbers? And 47
percent was the cost of the distributor's tariffs and so forth
and then 18 percent was a long-haul on the dollar.
Ms. Campbell. I think you're referring to material that was
prepared and presented in this brochure?
Mr. Bryant. It could have been. It's in a document like
this in my material.
Ms. Campbell. Yes. We prepared a number of these brochures
early in the fall and have updated them accordingly, trying to
determine exactly what the components of residential consumer
costs are. That may be what you're referring to?
Mr. Bryant. Could you explain to me? Mr. Reiten, I think is
gone, but he said, if I understood correctly, that this was
kind of a pass through for the distributors? I understand local
distributors don't make a lot of money. They recapture some of
their investment, but what is this--are they the ones that are
paying, account for 47 percent of the dollar? What is that 47
cents?
Ms. Campbell. Those charges change over time. We have had
to update the estimates of exactly how much of the residential
consumers bill is accountable for the commodity price versus
the interstate shipping price and how much of it is from the
local distribution companies charges and the taxes and things
of that type.
So it has changed over the course of the last few years and
in the last year, particularly. When we did this looking at the
winter of 1999, of course, the prices of natural gas were quite
low, the commodity cost was very low. And that meant that the
shipping costs and the local distributions costs were much
higher proportion of the total cost for the consumer. But this
has changed this winter. That's what has happened.
Mr. Barton. The gentleman's time is expired. The gentleman
from Oklahoma, Mr. Largent is recognized for 5 minutes.
Mr. Largent. Thank you, Mr. Chairman. Mr. Campbell, I have
a question for you. If we were to turn back the clock to
December 1999 or January 2000, what was the EIA predicting the
gas, the price of gas for February of 2001?
Ms. Campbell. I need to phone a friend. Higher, but not
this high is what they advised me.
Mr. Largent. Give me a range, $3?
Ms. Campbell. Certainly, I would have thought that it would
have been no higher than that, given what we had seen in the
previous winter, this year.
Mr. Largent. Mr. Wadlington, I had a question for you. You
have your chart up here and we appreciate that. I guess I just
need an explanation because it seems as if there's an apparent
conflict here because I'm reading Mr. Silva's testimony and
here he says ``despite oil industry assertions that onshore and
offshore Federal public lands are closed to exploration and
production of oil and natural gas, 95 percent of Federal public
lands in the Rocky Mountain region managed by the Bureau of
Land Management are open to exploration and production
leasing.'' And that Rocky Mountain area is in the footnotes,
consists of Colorado, Montana, New Mexico, Utah and Wyoming.
And yet, your chart kind of leads one to believe that there's
137 trillion cubic feet that is at least restricted, if not
inaccessible because of Federal regulations.
Mr. Wadlington. That is correct. The Rocky Mountains have
significant deposits of natural gas and the National Petroleum
Council has estimated at 137 trillion cubic feet is unavailable
because of restrictions for drilling.
Mr. Largent. So does that mean that you just can't drill
there or you just can't drill there economically because of the
restrictions?
Mr. Wadlington. It means you can't drill there because of
the restrictions. If they remove the restrictions, you could
economically develop the gas.
Mr. Barton. I've been told that in New Mexico in the San
Ducrane Basin the problem is not the drilling permit. The
problem is to build a road to the site to bring the pipe in,
But the Bureau of Land Management won't let them build a road.
So it may be some of this is, Mr. Silva is correct and it's not
off limits for drilling permits, but because of the various
permits on transportation and infrastructure improvement, you
just can't get those. Would that be a possible answer?
Mr. Wadlington. I think it's all of the above, would be the
way to categorize it. You have the inability to drill for
environmental reasons. You have the inability to build roads
for environmental reasons. You have----
Mr. Barton. Because if you can't get to it, it doesn't
matter if you've got the permit to drill.
Mr. Wadlington. Right.
Mr. Largent. Mr. Silva, that would lead me to you to say
wouldn't this statement in your testimony be a little
misleading to say 95 percent is open for drilling, but when in
reality it's open, you can go drill there, but you can't
transport it out of the drilling site or you can't even get
equipment to the drilling site because there's no roads that
are allowed to be built. There's a restriction. As the Chairman
said, you can't even build a road to get the equipment in
there. Wouldn't that be a little bit misleading, this 95
percent figure then?
Mr. Silva. Not in the context of the actual applicable
regulations and what a developer wants to drill in the area has
to apply.
Mr. Largent. Wait, that sounds like a lawyer answer.
Mr. Silva. I'm sorry, I am a lawyer.
Mr. Largent. I've met more lawyers that apologize for being
lawyers, but go ahead.
Mr. Silva. It's that season. First of all, I'd be happy to
provide written detailed explanation from the staff that
specializes in this issue.
Mr. Largent. Thank you.
Mr. Silva. But my understanding with it is that there is
development on many Federal public lands and there are
different sets of regulations for National Forests Service
properties and for Bureau of Land Management. The restrictions
vary depending on which region and what the management plan
status is for oil and natural gas development.
In many cases, there are very few restrictions and I'd just
like to note on the NPC chart there, the footnote actually
specifies that approximately of that, 137 that they--31 Tcf are
closed to development and then a note that 112 are available
with restrictions.
Now I haven't reviewed the NPC natural gas study, but if
they're calling, having to file for a permit, getting it
approved and then the separate road construction permit, if
they're defining this as being restrictions, meaning that they
impede immediate access within a 60 or 90 or 120 day period,
then that statement, I guess, would be accurate, the way they
put it, but if you're actually recognizing that there are, and
this applies also to offshore leasing, most of the permits are
actually handled within about 180 days.
Now whether there are ancillary permits that they have to
go through and I'm totally passing right by State and off the
top of my head, Colorado, Montana, New Mexico have quite
different regulations.
Mr. Barton. I am told and I haven't verified this, but on
Federal lands in the west, you have to get 321 different
permits. That's a number I've been told, 321. Now if that's
even half true, you know, in a technical sense we have a lot of
the sites that are accessible, but in a real sense if you have
to get that many permits and each permit takes so many months,
then they're really not available.
Mr. Largent. This will be my last question too, Mr.
Chairman, but I guess that would lead me to this question, Mr.
Silva, and I'd appreciate you getting back with me on this, two
things. Would you agree and your organization agree with me
that it's permissible to drill, but in reality you can't get a
permit to get to the drilling site, would your organization
agree that that is not accessible gas?
Second of all, would you agree that if you have to get 321
permits before you can drill that that also would be deemed
unaccessible reserves?
Mr. Silva. Just as an aside, I would be fascinated to find
out where the 321 figure comes from because that's--I think
it's quite obvious that if you can't get physical access to a
lease area to get the equipment on there. Now, I do know----
Mr. Largent. So you're saying even you would think that's
not accessible?
Mr. Silva. That would not be accessible. I do know of
regions where there have been leases granted where there
actually--the geography doesn't provide for a road into the
area and they have been forced to helicopter the equipment in
and how they got the gas out or oil or whether or not it was
simply for purposes for drilling an exploratory well to find
the periphery of a particular deposit or for other seismic
research purposes, I'm not aware. But I know there have been a
few examples of those in the literature. But certainly, in both
cases, that's not accessible.
Mr. Largent. Thank you. Thank you, Mr. Chairman.
Mr. Barton. The gentle lady from California is recognized
for 5 minutes.
Ms. Bono. Thank you, Mr. Chairman, and also thank you all
and the Panel for staying so long. My question is for Mr.
Jordan. What would be the impact of cost plus price controls on
the independent producers?
Mr. Jordan. I think we have a history. Any price controls
have a history of basically creating a shortage. We have a
great deal of history that shows us that. That's what
developed. I got to go through the last natural gas situation
back in the 1970's where there really truly was a shortage and
was created by the price controls under the Natural Gas Act
which were later rescinded.
The price controls basically stifle the very thing we have
to have which is more drilling. And what we did when price
controls were taken off back in 1978, but actually price
controls had sort of slipped away even before that, what we did
was we started drilling so many wells that we created what we
called in our industry the so-called gas bubble and that gas
bubble just about killed all of us because we essentially were,
people were going broke all over the country. And I'll show you
a graph here which shows, it's my favorite graph because it
shows that the number of so-called registered and oil operators
in this country, the people that get the permits in Ohio,
Pennsylvania, West Virginia, California, etcetera, fell from
about 13,000 in 1984 to 2,000 in 1999. The reason for this and
I'm always asked why it is, it's mergers, acquisitions,
bankruptcies and obituaries and if our industry is so great and
we're running off with so much money, why have we had this
result? And until that graph showed that increase and we
started to drill again, and we started to improve the number of
wells drilled, this was going to continue and that's what
created this crisis and if we had price controls we would go
right back into this same situation.
Ms. Bono. Second question also for Mr. Jordan. In your
testimony you say that capital markets have not shifted to
supporting the energy sector. In your opinion, what are the
reasons for this when prices for natural gas are at an all time
high?
Mr. Jordan. What I was basically saying was that for small
and medium sized producers capital access still remains a very
difficult situation. I'm not quite sure why. For a long time it
was because the returns in our industry did not measure up to
returns from other investments, especially during the dot com
period. And we basically couldn't get capital. Now I believe
most of the time we drill essentially off our cash-flow. The
problem is that the small and medium size producers don't have
that much cash-flow and they often have a bigger appetite. And
the little guys drill a lot of the wildcats, even when the big
guys do some great geology, they often get the little guys to
go and take the chances, ultimately to drill those wildcat
wells. And those are the people that have the capital formation
problems today, not necessarily the whole industry.
Ms. Bono. Thank you. Are there tax reforms that are
specific to marginal wells and can you explain why marginal
wells operate on a different financial basis than large
producers?
Mr. Jordan. Yes, I can. Is that addressed to me?
Ms. Bono. Yes sir, it is.
Mr. Jordan. I welcome the opportunity. We have a lot of our
reserves for old, marginal, very low producing wells in this
country. They're very low. When prices fall to very low levels,
those wells tend to get plugged or abandoned or essentially
fall into disrepair. If we do not--if we have what I would call
a triggered marginal well tax credit, for instance, and there
are a lot of ways you can do it, which would only apply if the
price of natural gas fell to some relatively low level and it
would essentially move to protect those wells to keep them from
being plugged prematurely because once that old well is
plugged, those reserves that remain and those wells may produce
forever. Ohio has the largest number of--of what we call
stripper gas wells of any place in the Union, so I'm very
familiar with those kind of wells.
We keep them alive by tender loving care, but when times
get as bad as they were about 2 to 3 years ago, we couldn't
even, there are just not enough economic incentives to keep the
wells going. So the reason that the margin well tax credit has
been suggested as a way to keep those wells from being
prematurely plugged is because it's about the only thing we can
do to protect them.
I personally don't like tax gimmicks to do things, but I
think this is a realistic way to protect marginal wells and for
that reason I certainly support the position of our membership
that supports that.
Ms. Bono. Thank you. Thank you, Mr. Chairman.
Mr. Barton. That concludes our questions. I am very tempted
with this many experts and me the only one with Congresswoman
Bono to have at you again, but it's almost 6 o'clock and you
all have planes to catch and dinner to eat.
I do want to challenge you with one thing. We're going to
do a series of energy hearings in this subcommittee in the next
2 months and at the conclusion of that we are going to attempt
to come up with a comprehensive energy strategy in conjunction
with the Senate and the President. So I want you to go back to
your associations and think through the role that natural gas
should play in a comprehensive energy strategy. Some of the
questions that I ask, should we try to become self-sufficient
in natural gas production? Should we make some specific
allocations for end uses? What do we need to do in the capital
market? Are speculators such a large part of the natural gas
futures market that we need to work with the SEC and the
markets to try to put some limits on who plays in those
markets?
On the environmental side, I hope our environmental
community will work with us to look at some tradeoffs here. I
think you can make an argument that the production sector is
some of the most environmentally sensitive folks in the country
and if we can be met halfway by environmental allies, we can
probably come up with a way that both sides feel that they're
in a win-win situation.
Natural gas is in the envious position as far as I know
there's not too many folks that object to increased use of
natural gas because it is an environmentally benign fuel
source. We don't have that situation with coal. We're going to
have to work very hard to bring coal back in a big way. We
certainly don't have that with nuclear power. We're going to
have to work very hard to bring nuclear power in as an option.
We don't have the luxury on the oil side to actually say okay,
we want to become independent. Can't happen. But natural gas is
the one thing that's on the table right now, it's 23 percent of
our energy consumption. The resource base is there. The
environmental issues are much clearer and much easier to work
with, so this is one that short term and long term has a lot of
potential.
So think through some of these issues with your
associations, check with Mr. Boucher and myself, any member of
the subcommittee on either side of the aisle that you feel
comfortable with because in anybody's calculus, this is going
to be a big part of our energy strategy.
With that, I want to thank you. We'll probably have written
questions. We hope that you answer them expeditiously because
the President's Task Force on Energy wants to make its
recommendations to the President within the next 2 months.
This hearing is adjourned.
[Whereupon, at 5:42 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of The American Chemistry Council
The American Chemistry Council \1\ welcomes the subcommittee's
examination of the nation's highly volatile natural gas markets and
hopes this hearing marks the beginning of a much-needed and long
overdue focus on developing a long-range national energy policy.
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\1\ The American Chemistry Council represents the leading companies
engaged in the business of chemistry. Council members apply the science
of chemistry to make innovative products and services that make
people's lives better, healthier and safer. The Council is committed to
improve environmental, health, and safety performance through
Responsible Care, common sense advocacy designed to address major
public policy issues and health and environmental research and product
testing. The business of chemistry is a $460 billion enterprise and a
key element of the nation's economy. It is the nation's largest
exporter, accounting for ten cents of every dollar in US exports.
Chemistry companies invest more in research and development than any
other business sector.
---------------------------------------------------------------------------
The business of chemistry supports energy policies that will
achieve two major goals: ensure environmental protection, now and for
future generations; and provide reliable and affordable energy to all
Americans.
A comprehensive national energy policy is vitally important to the
business of chemistry. Natural gas and other energy inputs are the
lifeblood of our industry. We use natural gas and other energy products
as raw materials that go into thousands of products that make people's
lives better, safer, and healthier and to fuel our operations. In fact,
the business of chemistry converts some $20 billion in energy inputs
into more than $200 billion in products found in every American home,
office, and automobile.
Many of the products we make from natural gas and other energy
inputs help to make the nation more energy-efficient. Insulation
materials and lightweight plastics are two examples of energy-saving
products made from energy raw materials. The business of chemistry will
play a vital role in making America a more responsible energy-using
nation.
Reliable and affordable energy has helped make America's business
of chemistry globally competitive. We are the nation's largest export
industry. Selling into global markets supports nearly one-third of the
one million Americans employed by the business of chemistry.
Unstable markets and rising domestic energy prices are pricing key
segments of the business of chemistry out of world markets. In the span
of one short year, America's business of chemistry balance of payments
(trade surplus) has shrunk by 60 percent and may result in extended
plant shutdowns and layoffs.
Here a few examples of how recent volatility in natural gas and
electricity markets is disrupting operations at chemistry facilities
across the country.
<bullet> A chemical plant in Chicago has recently seen dramatic
increases in natural gas prices. In the year 2000, natural gas
spending was 6.5% of the manufacturing budget and today, with
nearly the same output natural gas, now consumes 20% of the
plant's manufacturing budget. Spending on natural gas has now
overtaken the plant's spending on wages.
<bullet> A small Louisiana electro-chemicals producer eked out a modest
operating profit of about $700,000 dollars in 1999. In 2000,
the producer lost about $500,000. In 2001, if the plant
operates at budgeted rates throughout the year, it will lose at
least $6,000,000. The cause of the mounting operating losses is
rapidly escalating energy costs. The plant's cost of power
increased by 32% in 2000 and is expected to increase by another
40% in 2001, and there is no relief in sight.
<bullet> Because of the exceedingly high cost of electricity in the
Seattle Washington area, local production of liquid nitrogen
and oxygen via an Air Separation Plant was shut down. On some
days the cost of power spiked to more than 35 times the normal
price. Without local production, hospitals and industry in
general are faced with shortages. Oxygen and nitrogen are
products vital to public health and the safe operation of many
industries such as the refining and chemical industries. Many
end users of oxygen and nitrogen in the western United States
who can get industrial gases are faced with surcharges,
distribution fees, and shortages.
<bullet> An elemental phosphorus plant near Pocatello, Idaho, employing
440 employees and many contract workers, scaled back operations
because of high electricity costs. The plant uses four huge
electric arc furnaces to melt rock in extracting phosphorus
during the production process. Approximately 100 employee and
contractor jobs were displaced. Normally the plant's annual
electricity cost is $45 million which translates to $125,000
per day. If the plant were to operate at full production today,
which it cannot afford to do, that electricity cost would be
approximately $750,000 per day or $275 million on an annualized
basis.
<bullet> A composites manufacturer (produces unsaturated polyesters)
experienced utility costs of $513,653 in January 2000. In
January 2001 its costs were $1,067,095. That's an increase of
$554,342. Almost all of this is due to the price of natural
gas. Styrene is the manufacturer's number one raw material--the
USA has gone from being the low-cost supplier to the high-
priced supplier in under 5 months, mainly driven by increases
in natural gas prices. The same company's emulsion plant
experienced a 67% increase in energy cost mainly due to natural
gas. In January 2000, the company paid $305,600 for natural gas
purchases. In January 2001, the bill was $759,6000.
Last year will be remembered as the year the economics of natural
gas fundamentally and dramatically changed. Short-term conditions
(largely weather related) can be blamed for prices quadrupling in the
span of months and gas stocks falling to one-third of historic levels.
The short-term crisis in gas markets has masked the beginning a
long-term structural shift in the economics of natural gas. The Energy
Information Administration projects that demand for natural gas for
generating electricity will triple over the next two decades even as
other uses for gas (residential heating, industrial processing) also
grows.
<bullet> Total natural gas demand is expected to increase from 21.4
trillion cubic feet in 1999 to 34.7 trillion cubic feet in
2020, about 3.2 trillion cubic feet higher than projected in
AE02000.
<bullet> The expected increase in natural gas demand through 2020 is
primarily due to projected rapid growth in demand by electric
generators, which is expected to triple between 1999 and 2020,
excluding cogenerators.
It's easy to understand why power-generators are increasing their
use of gas to make electricity. It is a clean-burning fuel, and gas-
powered electricity generation can be built for far less than other
fuel sources.
Supplies of natural gas are simply not keeping pace with demand.
Stocks are at historic lows. According to a leading investment house,
``. . . for the next 18 months to two years, we believe we're in a $5
MMBtu world simply because the gas industry can't grow output.''
If this forecast comes true, key segments of the business of
chemistry will be forced out of business. According to a report
prepared by Chemical Market Associates, Inc. and Purvin and Gertz,
Inc., ``. . . domestic natural gas prices that remain above $4.00 per
MMBtu will severely damage US-based chemical producers' ability to
participate in world trade . . . Additional plant closures, loss of
direct and indirect sector employment, reduced investment in US
capacity and an increase in imports would dominate the domestic
scene.''
What is happening in domestic gas markets is unique to North
America. Other markets have enjoyed stable energy prices.
The time has come to restore long-term balance to US energy
markets. The American Chemistry Council supports a comprehensive
national energy policy that ensures environmental protection and
promotes a diverse, flexible, and affordable energy supply.
We recommend the following actions:
<bullet> Balance supply and demand for energy products. Natural gas is
a remarkably efficient and clean-burning fuel source. Not
surprisingly, it is in high-demand to heat homes, fuel
factories, and create electricity. Today, there is simply not
enough natural gas to go around. New supplies must be
responsibly developed, and new energy-efficiency incentives are
needed to ease demand growth.
<bullet> Develop all available and viable energy sources. The US needs
a diverse and flexible energy supply base. The nation should
encourage research and investment in clean and efficient coal,
nuclear, and natural gas technology while increasing investment
in non-traditional and renewable energy sources.
<bullet> Encourage the development of efficient power generation.
Government policies should encourage the production of electric
power by high-efficiency methods such as cogeneration. Existing
statutes with this intent, such as the Public Utilities
Regulatory Policies Act, should be maintained through the
transition to competitive utilities markets.
<bullet> Improve energy distribution and transmission channels. Our
energy distribution infrastructure is inadequate to the task at
hand. New intra- and inter-state pipelines for natural gas are
needed. The interstate transmission grid for electricity needs
to be upgraded and expanded.
The business of chemistry will play a vital role in bringing
balance to America's energy markets. We will build on a 25-year record
of achievement by making our manufacturing processes even more energy-
efficient. We will make the nation's energy supply more secure by
expanding our investment in advanced electricity cogeneration
technology. Additionally, we will help the nation become more thrifty
in its energy use by developing next-generation, energy-conserving
materials, such as insulation products and lightweight plastics.
We stand ready to work with the subcommittee to formulate a
comprehensive national energy policy that will insure all Americans
have access to reliable and affordable energy.
______
Prepared Statement of Terry Smith, Chairman, California Independent
Petroleum Association
Mr. Chairman, distinguished members of the committee, thank you for
allowing me to share my thoughts on this issue of critical importance
to California's economic health and well-being.
I am submitting testimony to the committee today on behalf of the
California Independent Petroleum Association--a non-profit trade
association representing over 450 independent producers of oil and
natural gas, service companies, and royalty owners operating in
California. California produces about 40% of the oil it needs, the
remainder comes from Alaska and foreign producers. California is the
fourth largest producing state behind only Louisiana, Texas and Alaska
and has the largest untapped reserve base for oil production in the
lower 48 states. We believe that given the right conditions, we could
produce more.
Today's topic is of critical importance to the members of my
association. For many independent producers in California, electricity
accounts for over 60% the cost of doing business. California oil is
costly to produce because it requires steam injection driven by natural
gas to get it out of the ground. California producers also use a lot of
electricity to pump the oil out of the ground. Environmental rules
prevent them from using crude oil to make electricity so they use
natural gas or electricity fired by natural gas. High natural gas
prices and unreliable supplies of electricity have resulted in making
California crude costly to produce--and are threatening to severely
curtail the amount of oil California produces on an annual basis.
What happened to California's electrical system that has resulted
in the problems we see today? As someone representing large consumers
of electricity, I would offer the following insights.
The problem, in essence, comes down to heavy-handed regulation by
the CPUC, exceptionally stringent environmental siting guidelines and a
low return on investment that kept new power plants from being built in
California during the past twelve years. Over the past ten years, few
people anticipated the strong demand for electricity brought about by a
surging economy and technology infrastructure. California policymakers
thought that other neighboring western states would sell us their
excess power if California couldn't keep up with its own demand. They
didn't anticipate the growth of neighboring states' economies and the
fact that neighboring states might want to keep their power for their
own use.
In 1996, when the California Legislature passed legislation
deregulating California's electrical market, it did so only partially.
Not all of the market was deregulated, just the generation portion.
Utilities like PG&E were required to sell their generation so they
wouldn't be seen as competing with independent power producers or
holding back the new electricity market. In addition, the law imposed a
mandatory rate freeze that has been in effect during the past couple of
years. The rate freeze was intended to allow the utilities to recover,
from businesses and consumers like you and me, all the past costs of
purchasing infrastructure and facilities. This also shielded ratepayers
from the true cost of providing electricity.
This arrangement worked as long as wholesale power costs were lower
than the rates utilities were allowed to collect from customers. But,
when wholesale power costs rose, the utilities tried to get the rate
freeze removed by the California Public Utilities Commission so they
could pass along the true cost of wholesale power to their customers.
Except for a small rate increase, the Governor, Legislature, and the
CPUC have all rejected this appeal thereby forcing the utilities to
continue assuming the price differential of how much they purchase
power for and how much they can recover.
To compound the problem, the new regulatory structure set up by AB
1890--the legislation that created the deregulated market--put a price
cap on what independent power producers could charge for their power
and restricted the ability of these same producers and the utilities to
enter into long term contracts.
Finally, all of these factors converged at the same time natural
gas prices began reaching historically high levels. Higher than
expected demand throughout the west, reduced supplies, and disruptions
on major pipelines serving California all served to drive prices up,
further exacerbating the generators' cost of producing electricity.
All of these trends have manifested themselves into the current
crisis facing the committee today.
Having identified the problem as we see it, where do we go from
here? California's independent producers believe we can be part of the
solution if allowed the proper opportunities. As companies based and
operating in California, we believe we are uniquely situated to
mitigate the strains that are being placed on the supply side of the
energy equation. Given the proper combination of regulatory relief and
incentives, we believe we can increase our levels of both oil and
natural gas production beyond their current levels.
According the California Division of Oil and Gas, California
continues to have some of the largest proved reserves of oil and
natural gas anywhere in the United States. Proved reserves over several
trillion cubic feet (tcf) have been identified along the West Coast of
the United States while over 3 tcf of proved onshore reserves have been
identified to date. With the advent of new, increasingly accurate
technology, new reserves of oil and gas are being found throughout the
state in areas previously thought to be unproductive.
Despite the presence of such substantial reserves and the state's
rapidly growing demand for increased supplies of natural gas, in-state
production in California today accounts for only 10--15% of the state's
total annual natural gas needs. In the past, California production has
accounted for as much 25% of the state's total needs.
Although much this trend can be contributed to some of the same
factors I referenced earlier' stringent environmental laws, high
drilling costs, historically low gas prices throughout the 1990's and
labor shortages--many experts believe a large part of the decline can
be tied directly to the policies of the state's two major utilities:
Pacific Gas and Electric (PG&E) and the Southern California Gas Company
(SoCal Gas).
Existing law provides the utilities with almost exclusive authority
in setting the terms and conditions under which pipeline connections
for new natural gas wells are accommodated. Historically, many
producers have felt that the utilities have used this authority to
stifle California production and limit competition in favor of taking
larger supplies of gas from out of state sources such as Canada, the
Rocky Mountains, and the Southwest.
For the past ten years, independent producers throughout the state
report experiencing delays of six months to a year before receiving
utility approval to install a new pipeline interconnect for newly
completed wells. Overly burdensome and expensive terms of conditions
imposed by the utilities as a condition of new interconnections are now
thought to be the rule rather than the exception. In many cases,
producers have elected to simply abandon new exploratory projects
rather than try to meet the demands being imposed by the utilities.
One of the largest impediments to increasing gas production in
California are the utility's own management policies relative to its
existing pipeline infrastructure. Representatives from PG&E recently
announced that the company would no longer be adding any new metering
systems along its pipeline system in Northern California. If enacted,
the new PG&E policy would require all new wells to be connected through
an existing metering site along the pipeline--requiring, in some cases,
miles and miles of new pipelines to be constructed in order to connect
a remote exploratory well. Given such terms and conditions, most
exploratory projects would become automatically unfeasible. In an
related move, PG&E has also recently embarked on an ambitious plan of
``retiring'' large sections of its pipeline gathering and delivery
systems--further limiting the potential points of interconnection for
new gas wells. Many of the sections being targeted by the utility
continue to remain in operational condition. The companies that will be
hardest by these new policies are in the Northern Sacramento Basin--one
of the most proliferate dry gas fields in the United States and the
source of over one-third of all the natural gas produced in California.
Significant evidence suggests that much of California's long-term
gas needs could be addressed by expanding production and reforming the
regulatory relationship between the independent producers and the
utilities. Suggested reforms that could help accomplish this goal
include:
<bullet> Strengthening the California Natural Gas Policy Act by
establishing mandatory timeframes under which a utility must
respond to a producer's request for a pipeline interconnection.
<bullet> Encouraging new exploration activity by requiring the utility
to install new metering sites, rather than requiring producers
to construct miles of new pipeline for every exploratory well.
<bullet> Allowing producers to expedite the installation of new
interconnects by authorizing them to shoulder costs such as
pipeline construction and labor costs if the utility's
workforce is already overburdened.
<bullet> Facilitating the development of new pipeline gathering
infrastructure that enables more gas to get to market.
<bullet> Requiring the utilities to sell off existing gathering systems
to interested producers and co-ops and to provide the producers
the authority to maintain and service the gathering systems.
By making some of these minor changes that will facilitate the
ability of California producers to get their gas to market, we believe
we can begin to help mitigate at least one element of the problems
driving our state's current crisis.
In closing, independent oil and gas producers are price takers and
have no ability to set the price of crude at the wellhead where we
produce it. Independent oil and natural gas producers are like energy
farmers. We take our commodity out of the ground and sell it for the
market price set by OPEC and other producing countries, usually to an
independent refiner or integrated oil company who then refines it into
products like gasoline. As such, our members are extremely vulnerable
and can be dramatically impacted by any combination of events that
force their costs to suddenly rise. We appreciate the committee's
attention to this extremely serious matter and stand ready to work with
you in finding the proper solutions.