Hearing of the Competition, Foreign Commerce, and Infrastructure Subcommittee of the Senate Commerce, Science, and Transportation Committee
Federal News Service
October 6, 2004 Wednesday
HEADLINE: HEARING OF THE COMPETITION, FOREIGN COMMERCE, AND INFRASTRUCTURE SUBCOMMITTEE OF THE SENATE COMMERCE, SCIENCE, AND TRANSPORTATION COMMITTEE SUBJECT: NATURAL GAS: THE DOMESTIC SUPPLY AND COST FOR THE APPROACHING PEAK WINTER MONTHS
CHAIRED BY: SENATOR GORDON SMITH (R-OR)
WITNESSES PANEL I:
GUY F. CARUSO, ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY;
PANEL II:
PAUL WILKINSON, VICE PRESIDENT, POLICY ANALYSIS, AMERICAN GAS ASSOCIATION;
GARY HUSS, PRESIDENT, NATIONAL ASSOCIATION OF MANUFACTURERS; WENONAH HAUTER, DIRECTOR, CRITICAL MASS ENERGY & ENVIRONMENT PROGRAMS, PUBLIC CITIZEN
LOCATION: 253 RUSSELL SENATE OFFICE BUILDING, WASHINGTON, D.C.
BODY:
SEN. GORDON SMITH (R-OR): I call this subcommittee hearing to order of the Committee on Commerce, Science and Transportation. I want to thank the witnesses who have agreed to testify for the subcommittee today. We're here to discuss the supply and price forecast for natural gas and the impact of continued high prices on residential consumers and industrial customers.
This hearing is timely for several reasons. The demand for natural gas has traditionally followed a seasonal pattern, peaking in the winter heating months. In the northwest, consumers are going into this winter paying significantly more for natural gas than they were just a year ago. Last week, the Oregon Public Utilities Commission approved steep rate increases for three natural gas companies that serve Oregon homes and businesses. These rate increases have been driven by the skyrocketing wholesale cost of natural gas.
The rate increases for residential customers will range from 12 to 18 percent. The business customers of the state's largest gas utility will face increases of almost 20 percent. Needless to say, this will further strain the family budgets of Oregonians, particularly seniors on fixed incomes and low income residents. In addition, the consequences of these increases will be dire for the state's low income energy assistance program, which helped over 54,000 Oregonians last year before running out of money.
The impact on businesses will be no less dire. Today, we will hear from Mr. Gary Huss on behalf of the National Association of Manufacturers about the toll that high gas prices are having on his business and businesses like his that rely on gas for direct heat or as a feedstock. The Industrial Energy Consumers of America estimates that U.S. businesses have paid an extra $90 billion in natural gas costs since June of 2000. Since that time, an estimated 90,000 jobs have been lost in the U.S. chemical manufacturing sector.
With respect to foreign competition, the American Chemistry Council projects that the U.S. chemical industry has lost $50 billion in business to foreign competition. They also claim that, prior to 2000, affordable gas helped make the chemical industry the nation's largest exporter and a low cost producer. Now it is a net importer and a high cost producer largely due to high natural gas prices.
Just today, the Energy Information Agency will be represented here today by Mr. Guy Caruso. It released its projection for the cost of heating fuel this winter. Essentially, regardless of where you live or the type of fuel you use to heat your home, you're going to pay significantly more this winter. Across the nation and across every energy sector, be it natural gas, oil, gasoline or electricity, prices will remain high.
That is another reason why this hearing is so timely. The 108th Congress still has time to pass national energy legislation before we adjourn. We must also pass the FISC/ETI conference report that includes an expansion of the types of renewables that are eligible for the electricity production tax credit and important provisions relating to the proposed Alaska North Slope natural gas pipeline. This pipeline is expected to begin transporting Alaskan gas to the lower 48 states in 2018 with total Alaskan gas production forecast to be 2.7 trillion cubic feet by 2025.
I want to thank my colleagues from Alaska for their tireless efforts to make this pipeline a reality. This pipeline will be an important new domestic source of natural gas in the years ahead. Until the late 1980s, the United States was self sufficient in natural gas. Since that time, production has not kept pace with demand and net imports as a share of consumption tripled between 1989 and 2000. Until now, the gap between supply and demand has been met by imports through pipelines from Canada and Mexico and by imports of liquefied natural gas, LNG, to the existing LNG import terminals.
In the future, LNG will play a much bigger role in meeting import needs. Expansions are planned at existing LNG import terminals and more than 44 LNG import terminals have been proposed in the U.S., British Columbia and Mexico, including 10 along the west coast of the United States. The siting and security issues relating to these import terminals can and must be resolved in order to move forward with this needed infrastructure to meet our energy needs.
I look forward to hearing from our witnesses today and I will first turn to the chairman of the Appropriations Committee, next chairman of this committee, Senator Stevens and then Senator Lautenberg, for their opening statements.
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SEN. SMITH: You're welcome, Senator Stevens. You bet.
SEN. STEVENS: I'm going to FedEx your statements, gentlemen, to my friends up north, there's two who are very anxious to build this pipeline. Thank you very much.
SEN. SMITH: Thank you, sir.
Senator Lautenberg for your opening statement.
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SEN. SMITH: Thank you, Senator. We appreciate your comments and we will turn to our first panel, Mr. Gary Caruso, administrator of the Energy Information Agency Administration and we welcome you, sir.
MR. GUY CARUSO: Thank you.
SEN. SMITH: I said Gary, I'm sorry. It's Guy. I apologize.
MR. CARUSO: Thank you, Mr. Chairman and Senator Lautenberg, for being here this afternoon and allowing me to present the Energy Information Administration's Winter Fuel Outlook which we released this morning, as you noted. And I'd be pleased to submit that full report for the record, if that was desirable.
SEN. SMITH: We will receive it happily.
MR. CARUSO: And I will also go into a little bit of detail about our longer term forecast that Senator Stevens referred to as well and be happy to go into more detail as you desire on that. But in the short run, which is the focus of the Winter Fuels Outlook report, Senator Lautenberg is correct. And that is that we are going to see substantially higher fuel prices this winter based on the outlook that we published this morning. For natural gas, the typical consumer will be paying about 15 percent more this winter than they did last winter.
SEN. SMITH: Fifteen percent?
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SEN. SMITH: Thank you, Guy. It's a very helpful presentation. Just a few questions. How much have heating fuel cost increase since 2000?
MR. CARUSO: Let me-sorry, I'll have to read it off the chart, sorry. The actual cost of natural gas for the typical consumer in 2001-2002 was $600 per household and we're projecting this year about $1,000. So that's a $400 per household increase in just four years.
SEN. SMITH: Substantial. And how much will the average family then spend to heat their homes this winter? Must vary quite a bit from region to region. But --
MR. CARUSO: It does, sir, considerably. We've used in our chart here as a typical household, natural gas household, using natural gas to heat their home, in the Midwest and that's about $1,000. But for example, heating oil, let's say in New Jersey, the average consumer, it will probably be closer to $1,200 because of the higher price of heating oil. And propane is used to a large degree in the Midwest and in the south for heating and that will be almost $1,400 per family for that source of fuel.
It turns out that electricity, which is mainly favored in the southern states for heating, will actually have the smallest increase in price to the consumer this particular winter.
SEN. SMITH: Obviously, natural gas has to be delivered through pipelines unless it's LNG. Are there areas of the country that don't have the pipeline infrastructure and were inadequately-inadequate infrastructure in terms of pipeline and if so, what are those regions and are their prices substantially higher?
MR. CARUSO: Well, the infrastructure issue, including natural gas pipelines, is clearly what is an important part of why we have such a very tight natural gas supply-demand picture in this country. In the Rocky Mountain area, where we expect substantial increases in unconventional gas, there is a need for continuing to build new pipelines to deliver that gas to consumers, particularly on the west coast. There is clearly the need for the Alaskan natural gas pipeline system that Senator Stevens mentioned.
So we have built a lot of new natural gas pipelines in the last decade or so. But the need is to build even more. And New England is another area where there was a substantial build in the last decade or so but remains relatively limited in its access to natural gas because of its long distance from the main producing areas of Texas, Louisiana, Oklahoma and the Gulf of Mexico.
SEN. SMITH: Guy, one of the things I have observed-and this will be my last question, I'll turn it over to Senator Lautenberg for his questions-but one of the things I observed during the last energy crunch for electricity is that lots of natural gas generators were put in. I've got about three of them I can think of within 50 miles of my home in Oregon. What has that done to prices of natural gas? And you know, frankly, it just strikes me as a very inefficient way to create electricity through natural gas as opposed to heating homes directly with natural gas. But it has to have had a tremendous impact in terms of driving these prices up. Is that your understanding?
MR. CARUSO: Well, it's certainly the area within the natural gas demand structure that has grown the fastest in the last 10 years. Most of the new electric power generation has been combined cycle gas turbines and that has been a major factor in the increase in demand and, to that extent, of course, that it has put upward pressures on prices. And it's been pure economics. These combined cycle gas turbines have been-the capital cost has been the lowest per kilowatt hour generated, has been relatively quick to build and they have been relatively small in size so that the risk to the utility-it was a natural and, I think, the correct business decision.
SEN. SMITH: But maybe not any longer if the price of natural gas keeps going up.
MR. CARUSO: Well, that was when the price of the gas was $2.00 or even lower.
SEN. SMITH: What is the percentage of natural gas going to electrical generation?
MR. CARUSO: If you include co-generation, it's in the low 20s. It's about 21 or 22 percent. But I'll certainly get the --
SEN. SMITH: But it's the biggest increase --
MR. CARUSO: Oh, by far, yes.
SEN. SMITH: -- in the use of natural gas.
MR. CARUSO: In the last decade or so, more than 95 percent of new electric generation has been natural gas fired.
SEN. SMITH: Thank you.
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SEN. SMITH: Thank you very much, Senator.
And thank you, Mr. Caruso.
We may have a few other questions we'll submit in writing. But in the interest of time, because I know there are a series of votes scheduled shortly, probably no later than 4:00, I want to hear from our second panel. So we'll call up Mr. Paul Wilkinson, vice president, Policy Analysis of the American Gas Association, Mr. Gary Huss, president of the National Association of Manufacturers and Ms. Wenonah Hauter, director, Critical Mass Energy & Environment Program.
Gary Huss, I understand you may have a plane to catch or time limitation. Shall we take you first?
MR. GARY HUSS: Whatever your preference. It doesn't matter.
SEN. SMITH: Why don't we start with you, just in case you might. We appreciate your traveling here and being part of this.
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SEN. SMITH: Are you saying, Gary, that 13 percent of your profit is lost that you could attribute directly to the price of natural gas?
MR. HUSS: Very easily.
SEN. SMITH: Interesting.
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SEN. SMITH: Thank you, Mr. Huss. It's a very real-life testimony you gave as to what this natural gas cost spike is doing to your company, the jobs you provide. We are very sensitive. We want to be more sensitive to that.
MR. HUSS: Thank you.
SEN. SMITH: Ms. Wenonah Hauter. Am I pronouncing that right?
MS. WENONAH HAUTER: Yes.
SEN. SMITH: Very good. We'll hear from you next.
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SEN. SMITH: Thank you very much.
Mr. Wilkinson.
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SEN. SMITH: We'll keep it open, Senator. Okay. You got to go. Okay, you bet.
Mr. Wilkinson, as I-for the audience and anyone who may be interested in this, LNG, liquid natural gas, that is produced just by cooling the natural gas to condense it?
MR. WILKINSON: That's correct.
SEN. SMITH: And it's warmed and therefore turned back into a gas when utilized.
MR. WILKINSON: That's correct.
SEN. SMITH: Where is most of it produced now?
MR. WILKINSON: There are natural gas fields all over the world. The Mid-East and the former Soviet Union are the two largest sources of reserves.
SEN. SMITH: The LNG condensing factories?
MR. WILKINSON: Excuse me.
SEN. SMITH: The LNG factories that condense --
MR. WILKINSON: The facilities are in the Mid-East, they're in Trinidad and Tobago, they're in Australia and they're even in Norway.
SEN. SMITH: And that process and shipment here can be done at a price much lower than the current natural gas that people utilize through pipelines?
MR. WILKINSON: Yes, as I said, the price spikes that we've seen in three of the past four years, we've seen a $10 spike, a $9 spike and about a $7.50 spike in three of the past four years. Those were the peaks.
SEN. SMITH: Now the reason why --
MR. WILKINSON: Gas can be delivered to this country, estimated at $3.50 to $4 per million BTU.
SEN. SMITH: The reason why we can't get it here literally is there is no places to receive it. There's lots of things on the drawing boards. What's the impediment to building the receiving areas? Is it regarded as incredibly dangerous or environmentally sensitive to the point where people are just opposed?
MR. WILKINSON: I think the primary impediment is a lack of understanding. People fear what they don't understand. Liquefied natural gas has been shipped worldwide for half a century. There have been almost no incidents of significance in that 50-year timeframe. Japan gets virtually 100 percent of its natural gas in the form of LNG. There has never been a significant action in Japan.
SEN. SMITH: Why can't we produce-if it's produced in the Middle East, why can't we produce LNG from our natural gas here?
MR. WILKINSON: LNG is no different than natural gas. We produce natural gas here. We could liquefy it but that wouldn't do us any good.
SEN. SMITH: It wouldn't do us any good because we have the pipeline infrastructure.
MR. WILKINSON: Well, there is an additional cost to LNG. You don't want to liquefy it and then re-gasify it and then put it in your pipeline system. That would just be an added cost.
SEN. SMITH: Exactly. But it is interesting that it can be done in the Middle East and brought here for less than the cost of natural gas in our pipeline.
MR. WILKINSON: That's correct.
SEN. SMITH: It shows you how bizarre, to Ms. Hauter's point, how high these prices have spiked.
MR. WILKINSON: Well, I think it gets more to the point that, as I pointed out, we have huge gas resources in this country. But you cannot drill for gas in many of the places that we have these resources. We have 250 trillion cubic feet in Alaska. We can't do any of that. We can't drill off the east or the west coast. We can't drill in the Eastern Gulf of Mexico. We can't drill in much of the Rocky Mountains.
SEN. SMITH: Would it make sense to do LNG in Alaska as opposed to --
MR. WILKINSON: That has been proposed. In fact, that was proposed 30 years ago when the first pipeline discussions were seriously made 30 years ago. It was determined at that time that the pipeline route was the more economical alternative. I think most people feel that it is more economical to move that gas by pipe. It could be done by LNG, by shipping it. You could ship it by pipe, parallel to the oil pipeline down to Valdez and then liquefy it and send it probably to the west coast of the U.S.
SEN. SMITH: There are hundreds of small LNG storage facilities in this country. They're not receiving, just storing.
Do they have a good safety record?
MR. WILKINSON: They have an exemplary safety record.
SEN. SMITH: Gary, the National Association of Manufacturers estimated how many U.S. manufacturing jobs have been lost due to high cost of natural gas? Do you have any kind of figure like that?
MR. HUSS: No, sir. I don't have that number.
SEN. SMITH: Where are your main foreign competitors located in your industry?
MR. HUSS: It has been the Asian countries. With China growing very much so in today's markets many, manufacturers are going to China, not only to manufacture over there on behalf of China but they are also doing it because of the lower cost. They are probably the largest concern of manufacturing right now.
SEN. SMITH: And how are they getting their natural gas to compete with you?
MR. HUSS: Many of the furnaces over there run off electricity. Natural gas has, I don't know if they-you may be able to answer it better than I. I'm not sure if they have the pipeline infrastructure yet, which is necessary for the natural gas. As far as the heating industry, the heat treating industry, it is not growing as greatly over in China as the manufacturing itself. Heat treating is kind of a sideline, like the plating industry or similar to that, which is not-it's necessary as far as the manufacturing process but usually comes a little bit after the fact, that the manufacturers are there in the first place.
SEN. SMITH: I would assume as their manufacturing energy costs are probably at least a third of your costs. Would that be accurate?
MR. HUSS: I would say closer to 20 to 25 percent.
SEN. SMITH: Twenty or 25 percent. And how does that compare with your competitors in China? Do you have a sense of that?
MR. HUSS: No. That I don't know.
SEN. SMITH: Wenonah, I was the lone Republican who joined with Senator Feinstein in calling for many things you identified in terms of the West Coast energy markets specifically, getting FERC to step up to their authorities that I believe are existing. I am a real free marketer but I felt like the California energy crisis had nothing to do with the free market. It was, at best, a broken market; at worst a rigged market and I fear more rigged than certainly broken.
But I wonder, does Public Citizen think that new supplies don't need to be developed in the coming decades or are you okay with developing more supplies? Because I think that, at least my perception was, part of it was a broken regulatory system in California but also was an increasing demand and a supply that had been choked off from expanding.
MS. HAUTER: Well, I think that we believe before we drastically seek new supplies and do so in very delicate areas where there could be lasting environmental damage that we need to explore all of the avenues for being more energy efficient and that we just haven't done what needs to be done to make our homes more efficient, our office buildings more efficient, simple things like double pane glasses for office buildings. And those things need to be approached very seriously.
Of course, we will always need to find more supplies. But to simply say it's a supply problem, I think, is the easy way out. And I know that since the natural gas market has been deregulated, we were promised lower prices, fewer problems with supply; and instead, we've seen increasing volatility. And when you look at a chart from between 1989 and today, prices have just continued to go up. So I think that we need to look below the surface at some of the underlying causes.
SEN. SMITH: Just for my own recollection, I think the numbers I heard you state in your testimony had to do with the market that existed from the mid-1990s to the year 2000. But the California energy spikes were in 2001, were they not?
MS. HAUTER: Right. The number that I used, the 245 percent, was between '99 and 2001. If you look between '99 and today, it's 155 percent increase in pricing.
SEN. SMITH: Okay. Did consumers benefit, Wenonah, in your view, from the restructured natural gas market in the '90s when prices were stable?
MS. HAUTER: Prices were stable for a while but with the futures trading and the deregulation that occurred in the early '90s, I think that the benefits that were gained have been lost.
SEN. SMITH: Well, we clearly have a very real problem in our country. I think your testimony really does speak to it. On the one hand, we want to grow our economy. We want jobs and those jobs are dependent upon energy first. If you don't have energy, you can't increase your employment, can you, Gary?
MR. HUSS: No, it's very difficult.
SEN. SMITH: And you have to have competitive energy. And so if everybody is clamoring for jobs, clearly we need to do more on both sides of the equation, conservation and production. You just have to. You have to produce more. The question is which one comes first. And that's really what we're debating, I suppose, in Congress.
One, we ought to have an energy bill in this Congress. We don't because there seems to be just a real gridlock of feelings as to which should come through first. One side wants all conservation, the other side wants all production or at least a priority for those.
But that's why we have a democracy. We've got an election coming up and who knows how it will turn out. I come down on the side of we need both. We've got to do both and we can't be shy about it because, if we don't figure out how to conserve more, we are going to continue our dependence upon foreign sources too much and that affects our national security, not just our energy security. But if we're so hamstrung here from utilizing our resources in ways that are renewable, sensitive to the environment, we will forever be dependent upon foreign places. That is bad policy too.
So that is the balance we're weighing. You all have helped us understand more what we're facing. I thank you all. Do any of you have a closing comment you would like to make? If not, we're grateful we got this in before the vote started. I was worried about that but we've done it. We thank you for your time, your testimony and your participation.
We're adjourned.