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June 28, 2000, Wednesday

SECTION: CAPITOL HILL HEARING

LENGTH: 27750 words

HEADLINE: HEARING OF THE HOUSE JUDICIARY COMMITTEE

SUBJECT: COMPETITIVE PROGRAMS IN THE OIL INDUSTRY

CHAIRED BY: REPRESENTATIVE HENRY HYDE (R-IL)

LOCATION: 2141 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

TIME: 9:30 AM. EDT DATE: WEDNESDAY, JUNE 28, 2000

WITNESSES:

PANEL I GOV. TOMMY THOMPSON (R-WI);

GOV. GEORGE RYAN (R-IL);

REP. MAC COLLINS (R-GA);

REP. DEBBIE STABENOW (D-MI);

REP. TONY HALL (D-OH);

REP. PETE HOEKSTRA (R-MI);

REP. TOM BARRETT (D-WI);

PANEL II: RICH PARKER, DIRECTOR, BUREAU OF COMPETITION, FEDERAL TRADE COMMISSION;

BOB PERCIASEPE, ASSISTANT ADMINISTRATOR FOR AIR AND RADIATION, ENVIRONMENTAL PROTECTION AGENCY;

MELANIE KENDERDINE, ACTING DIRECTOR, OFFICE OF POLICY, DEPARTMENT OF ENERGY;

MARK MAZUR, DEPARTMENT OF ENERGY;

PANEL III: RED CAVANEY, PRESIDENT, AMERICAN PETROLEUM INSTITUTE;

BOB SLAUGHTER, GENERAL COUNSEL, NATIONAL PETROCHEMICAL AND REFINERS ASSOCIATION;

ERIC VAUGHN, PRESIDENT, RENEWABLE FUELS ASSOCIATION;

BILL ICHORD, VICE PRESIDENT, UNOCAL CORPORATION;

WENONAH HAUTER, DIRECTOR CRITICAL MASS ENERGY AND ENVIRONMENT PROGRAM, PUBLIC CITIZEN;

JANE SNOWDEN, PROGRAM, MEALS ON WHEELS, MADISON WISCONSIN;

BODY:
REP. HENRY HYDE (R-IL): Good morning. The committee will come to order. I regret that the Republicans are having a conference, so have many of our members are at the conference, but because of the time constraints on Governor Ryan and other witnesses we will proceed. And all statements will be made a part of the record.

Today the committee holds a third oversight hearing on "Solutions to Competitive Problems in the Oil Industry." In our earlier hearings we focused on the issues surrounding the organization of petroleum exporting countries and its effort to restrict the supply of crude oil. In our second hearing, we also focused on the issue of zone pricing. I have scheduled this hearing to look at the reasons for the explosion of gasoline prices in the Midwest in recent weeks. Any number of explanations have been advanced for the price increases-- higher crude oil prices as a result of OPEC's tactics, illegal price fixing by domestic oil companies, increased cost of producing reformulated gasoline, a patent held by Unocal, pipeline malfunctions, low inventories of oil, and high taxes. It is not yet clear which of these is the answer. I suspect that several of these factors are at work. What is clear is that consumers need some relief. Consumers in Chicago, Milwaukee and other parts of the Midwest have been paying some of the highest gasoline prices in American history in absolute terms. They cannot continue to pay these prices. The testimony of Ms. Snowden will be particularly pertinent on this point. Her Meals on Wheels program is struggling to keep up its services to seniors in the Madison, Wisconsin area because of these prices. Her situation demonstrates the far-reaching effects of these prices.

I think it's too early to know whether illegal price-fixing is going on. Representative Sensenbrenner (sneezes) -- whenever I mention Representative Sensenbrenner's name I sneeze -- strange reaction. Representative Sensenbrenner and I have asked the Federal Trade Commission to investigate. I've also received a briefing from the FTC, and I'm confident they are on the case and if these practices are going on they will bring the wrong-doers to justice. We all have to understand that an investigation of this type takes time, and we can't expect results in a week or two.

Another issue is the cost of reformulated gasoline. I think this issue is similar to the opening up of Alaska to oil drilling and other environmental issues. Many try to paint these issues as black and white when they're really gray. No one is against the environment. We all want to breathe clean air. We all want to preserve the pristine beauty of Alaska.

The question is, how clean and how pristine and how much are we willing to pay for higher levels of environmental purity? I don't know how much the use of reformulated gasoline contributes to the recent price spite, but everybody seems to agree that at least it has some part. And that illustrates my point-- if we ever want cleaner air, we have to pay for it. At some point, we begin to get diminishing returns, and we begin to exhaust our ability to pay. Every dollar we spend for cleaner air is a dollar that can't be spent for any of the many other wonderful things that we can buy. So we have to make that choice as a society, and I think we can make it more easily if everyone acknowledges and recognizes there are trade-offs involved.

Now let's talk about taxes for a moment. I know everyone wants their road projects, and that always is the objection when we talk about lowering gas taxes. But I'm told gas taxes can make up as much as a third of the cost of a gallon of gas. If that's true, it would seem that road-building could at least bear a short suspension in these taxes until we get some relief as a result of other aspects of the problem.

So I especially want to commend my governor, George Ryan, for his efforts in this area. He will be leaving today's hearing to attend a special session of the Illinois Legislature to discuss a temporary suspension of the state gasoline tax. So there are a lot of aspects to this problem, and it's not clear what we can or should do about it, and that's one of the reasons for this hearing.

I am hopeful our witnesses today can help us figure out why our prices are so high and what we should do about it. I look forward to their testimony, and with that I turn to Mr. Conyers for his statement.

REP. JOHN CONYERS (D-MI): Thank you, Mr. Chairman. Good morning, witnesses. I'm glad to see everyone here. George Ryan is at the table again.

We're here today because the price of gasoline is skyrocketing, particularly in the Midwest. In fact, prices in Detroit are the second highest in the nation at $2.04 a gallon, up $.13 from two weeks ago and $.60 from last year. Not surprisingly, the big oil companies and others have deflected the blame.

The first target, OPEC, which has certainly contributed to the increase by cutting oil production last year, but OPEC is immune from suit because of the Foreign Sovereign Immunities Act, and in any event the administration has cajoled OPEC into increasing daily production a few months ago by 1.7 billion barrels, and last week increased another production by another 700,000 barrels a day.

Those increases didn't help much with the prices, so there must be another reason. Then of course there's always the government. Big Oil says the Environmental Protection Agency's cleaner burning fuel requirements which reduced the amount of dangerous toxins that can be released into our air add over $.20 to the price of each gallon of gas. But the evidence indicates that the regulations add only between somewhere $.05 to $.08 per gallon.

In any event, the oil companies knew well in advance about the regulations and even helped draft them, so who's the next target? In a rare occurrence the oil companies turn on themselves but only on a technical issue. Some say that reformulated gas or clean fuel supply is low because Unocal has a patent on making it and has too high of a licensing fee; the other companies can't afford it. But an independent report shows that the license fee is too small to make a difference.

The fact is that the large oil companies bear apparently the bulk of the responsibility for the gas crisis. Public Citizen has found that oil company profits from the first quarter of the year have gone up a little bit since the same period of last year. How about 473 percent for Texaco? How about 371 percent for Conoco and poor BP Amoco only went up 296 percent?

At our April hearing, we learned of zone pricing, when the big oil companies base wholesale oil prices on the affluence of the purchasers and not on market conditions. There's also been a rash of mergers that this committee that has jurisdiction over antitrust has noted-- Exxon, Mobil, BP Amoco, Arco, BP Amoco, Shell, Texaco-- which have reduced competition at the pump.

Saying that oil companies, the larger ones have nothing to do with the price spike, is like saying Scrooge has nothing to do with the Christmas blues. So not surprisingly there are people in Congress that protect the oil companies from having to appear before us. Now there are four hearings in the House this week alone on the gas crisis, and very, very few have subpoenaed the major oil executives, which I tried to do in this committee hearing. They said, fine, we can't get them.

We have association representatives speaking for the people I really want to get in front of us, and I lament that, and I want it on the record.

We bring administration witnesses to complain about clear air regulations but will not call oil executives to get an explanation on the record about the oil merger, zone pricing, and high prices at the pump. I agree that the Federal Trade Commission is investigating. I think we let them know that we want some vigorous and speedy investigation for potential antitrust violations, and I too await their results.

And then what about the Congress itself, in conclusion? Rather than crafting a national energy policy as we did in 1992, we've approached energy issues of the past four year with no comprehensive plan. For example, we failed to reauthorize the strategic petroleum reserve, and so Congress must develop a plan that includes diplomacy, greater fuel efficiency, and other solutions. And I stand ready to work with my colleagues and the various industries toward these goals.

Thank you.

REP. HYDE: I will take this opportunity to respond to what I detect was a sharp criticism from Mr. Conyers as to our witnesses. As recently as last evening I was accommodating Mr. Conyers to see that witnesses that he wanted or a witness that he wanted was accommodated. Now we have three representatives of major oil companies here-- Mr. Cavaney, Mr. Slaughter and Mr. Ichord. I understand your complaint is that they're from trade associations rather than individual oil companies. I don't see a difference, frankly, but let me tell you how we got to these witnesses. This hearing was originally noticed on June 15, almost two weeks ago. Your staff had been told about it informally before that date. Mr. Conyers' staff was consulted frequently throughout the entire period, and they were told several times that we were going to invite these trade association witnesses.

During all of these conversations we never heard any complaint about this proposed course of action. The first we've heard of this was directly from you in a hearing last Friday, just three business days before the hearing you told us then that you felt trade association witnesses were not adequate and that you wanted executives from several of the major oil companies. We expressed doubts that we could get any of them to come given the lateness of your request. We indicated we would try to get at least one of them.

My staff left the hearing and immediately placed a call to a representative of Exxon Mobil. That representative expressed doubt that the company would be able to come, given the late date, but said he would check. On Monday we let your staff know that Exxon Mobil had declined to come because its CEO is out of the country today. We expressed continuing doubt that any other companies would come at this late date, but also asked them to call any companies they wanted. We told them if the companies agreed to come we would invite them.

We have not heard anything back from you about any efforts you may have made to contact them. So that's a lot of detail to say this-- you waited until too late to make the request. In order to get the kinds of witnesses that you wanted, generally speaking, you have to give them more than three business days notice. Had you let us know earlier of your concerns, we would have worked with you to try to meet them, but when you wait this late in the process it is very hard for us to do it. But if Mr. Cavaney, Mr. Slaughter and Mr. Ichord are unable to answer any questions you may have, we are willing to submit written questions to any oil company executives that you may desire. Who does Mr. Cavaney represent? The American Petroleum Institute. Who does Mr. Slaughter represent? The National Petrochemical and Refiners Association. And who does Mr. Ichord represent? The Unical Corporation.

So we did the best we could, Mr. Conyers.

REP. CONYERS: Well, I thank you. I thank you very much, Mr. Chairman. I'm glad my criticism prompted this kind of careful response. The fact of the matter is, I'm not submitting any questions to any presidents of oil companies. I want them to bring their little selves right before this table like everybody else. I'm sorry that we weren't talking together close enough to get this straightened out. I am sorry if my staff didn't keep me informed, but association spokespersons do not replace the people that are running the gas prices up around here. And I thank you very much.

REP. HYDE: Other members of the committee will withhold any opening statements, and they will be made a part of the record. All right. Mr. Scott. All right, gentlemen.

All right. Our first panel should consist of two governors. We have one here, Governor Ryan of Illinois. Governor Thompson is en route we're told, and so we will accommodate him when he gets here. But Governor Ryan is the governor of my own state, Illinois. He served with the U.S. Army in Korea, came home to get a pharmacy degree from Farris State College, served in the state legislature from 1973 to 1983 including terms as Republican leader and as speaker of the House. He then became lieutenant governor from '83 to '91 he was elected secretary of State in Illinois where he served from '91 to '99. Finally he became governor in 1999.

Next we have Representative Mac Collins of the Third District of Georgia.

He started his own trucking business when he turned 18. He then began his public service as chairman of the Bucks County Commission from '77 to '81. He went on to serve in the Georgia State Senate before being elected to Congress in 1992.

Next, we have Representative Debbie Stabenow of the 8th District of Michigan. She has bachelors and masters degrees from Michigan State University and began her public service in the Edgar County Board of Commissioners from 1974 through '78. She then moved to the state House of Representatives from '79 to '90, and the state Senate from '91 to '94. She was first elected to Congress in 1996.

Next we have Representative Tony Hall of the Third District of Ohio. He's a graduate of Dennison University, began his career in public service in the state House of Representatives from '69 to '72. He then served in the state Senate from '73 to '78 and began his distinguished service in the United States House of Representatives in 1979. Next we have Representative Peter Hoekstra of the 2nd District of Michigan. He's a graduate of Hope College and the University of Michigan Business School. Before coming to Congress, he was an executive with Herman Miller, Inc., a furniture-maker based in Michigan. He was first elected in 1992.

Finally, we have representative Tom Barrett of the 5th District of Wisconsin. He's a graduate of the University of Wisconsin and its law school. He was first elected to the State Assembly in 1984. He was elected to the State Senate in 1989. He was first elected to Congress in 1992.

We look forward to your testimony. We will adhere to our usual practice of not questioning this panel. In addition I understand Governor Thompson, who is here, and Governor Ryan, are under tight time constraints, so you gentlemen can feel free to leave as soon as you've given your statement if you choose. Thank you for being with us today, and I will yield to the gentleman from Wisconsin, Mr. Sensenbrenner to introduce his governor, Governor Thompson.

REP. JAMES SENSENBRENNER (R-WI): Thank you very much, Mr. Chairman. I'm pleased to have the opportunity to introduce the governor of Wisconsin, Tommy Thompson. He is the longest serving governor in Wisconsin's history, having first been elected in 1986. The previous record is seven years, and he would be overwhelmingly reelected if governor was on the ballot this year.

As we're all aware, gasoline prices have sharply jumped throughout the country, but are extraordinarily high in the Milwaukee and Chicago area. When the reformulated gas was first introduced in parts of Wisconsin, elected officials such as Governor Thompson and I had concerns about RFG's potential harm to engines, to public safety and health, cost and the drop in gas mileage, thus increasing pollution.

At the request of Governor Thompson, I introduced legislation with bipartisan support, including Congressman Barrett, to waive the RFG requirement during the winter months. A recent study has shown our early skepticism to be well founded as the EPA's own Blue Ribbon panel released a report recommending the phase-out of MTBE, an additive, because it has been identified as potentially dangerous to drinking water.

Due to health and environmental concerns related to the use of MTBE, most of the Midwest uses ethanol as its oxygenate to meet the RFG mandate. This slowly evaporating blend is difficult and costly to make and has a relatively limited market. In order to provide relief for Wisconsin consumers, Governor Thompson has requested a temporary waiver of the RFG mandate, and I am strongly supportive of his efforts. I also applaud his efforts and will continue to work with him on this very important issue.

I look forward to his testimony today, for I know it will show members of the Judiciary Committee what hardships are throughout the Wisconsin due to the outrageous price of gasoline both inside and outside the RFG mandated areas.

Welcome, Governor.

GOVERNOR THOMPSON: Thank you, Mr. Sensenbrenner, and it's a pleasure and privilege to be introduced by you, and it certainly is a pleasure and privilege to be in front of a fine chairman, Mr. Hyde. I had a privilege to see you last evening, and thank you. And also Congresswoman Tammy Baldwin who is here from Wisconsin and the rest of the members of the committee.

Good morning. I would like to thank all of you for this opportunity to testify today about the high gas prices that are facing drivers in the Midwest and throughout the country as well as what we believe to be the underlying causes of the problem.

This month the people of Wisconsin and Illinois saw something they probably thought would never occur, at least anytime soon-- gas prices over $2 a gallon. It is a threshold once thought unimaginable by motorists, something our grandchildren might experience one day, but certainly not anything we should have to worry about in today's strong economic times. Yet, our consumers are being hit right in the pocketbook by fast-rising gas prices that now threaten the vibrant economy that all of us have worked hard over the last 14 years to build in Wisconsin.

The cost of businesses is through the roof for truck drivers, which is a backbone of commerce in our state. Cab drivers in Milwaukee are raising rates to meet their higher costs. Even personal health care workers are struggling to afford the drive to people's homes to provide care for homebound patients. These are real problems for everyday people caused by a real crisis regarding a staple of everyday life, gasoline.

The debate over the cause of this crisis began in Chicago and Milwaukee but now is raging across the entire country. I believe that is because this problem gets to the foundation, the economic stability of our great nation.

Ladies and gentlemen, this is a problem born of the federal government, not the states, and a problem that must be solved by the federal government. Therefore, I would like to touch on four problems that I believe are driving high gas prices; and therefore, must be resolved in order for prices to drop in the short term and remain stable for the long term.

First and most importantly, the failure to develop a coherent energy policy for this nation; second, this nation's over-reliance on foreign oil; third, the conscious decision not to develop and pursue more domestic oil and energy source in this country; and finally, but importantly, the failed EPA policy mandating the use of reformulated gas in the Midwest.

Ladies and gentlemen, after eight years, there is simply no coherent energy policy by the Clinton-Gore administration, and we're all paying for it. This failure clearly levels and leaves our nation vulnerable to the radical changes in gas prices that we experience now. As a nation, we are far too dependent on foreign oil supplies; in fact, we are importing oil at the highest rate in our country's history.

To put this problem in context, during the Arab oil embargo of 1973, which resulted in long gas lines and gas rationing, America was importing 35 percent of its oil. Today America's importing 56 percent, hitting us high as 62 percent in some months. This over- reliance in foreign oil is exacerbated by our lack of constructive policy for dealing with the OPEC nations. And it's particularly alarming that one of our nation's fastest growing oil suppliers happens to be Iraq. That's right, Saddam Hussein.

Our dependence on foreign oil makes our economy too vulnerable to the whims of the OPEC nations as well as one of our harshest enemies in Iraq. Even this grocer's son from Elroy, Wisconsin can see that that's just not smart. Exacerbating our dependence on foreign oil is our lack of domestic oil production. The administration's overbearing, environmental policies discourage any efforts to develop domestic oil sources needed for our nation's security.

To put this failure in perspective, we have had 36 oil refineries in this country close in the past eight years alone, while our nation has not opened a new oil refinery in more than a quarter of a century. We must allow for more aggressive exploration and development of domestic oil particularly in areas with great potential such as Alaska and our coastal regions. If we don't, we will become more and more at the mercy of Saddam Hussein's oil barons.

A final factor in the high cost of gas particularly in my state is reformulated gas. There's a clear, distinct and measurable tie-in between the EPA mandate of RFG and the higher cost of gas. A study by the Congressional Research Service last week concluded that RFG was responsible for 25 cents a gallon of the price increase; therefore, if Carol Browner would simply give us the waiver for the two months left of this summer, drivers would see at least a quarter of the price of gas immediately.

For the owner of a car with a 15-gallon tank, that's a savings of nearly $4 each and every time she fills up in Wisconsin. That's real money that our families can spend towards our summer vacation and our tourists can spend on fishing gear and cheese.

There are a lot of reasons being given for the increased cost of RFG, including pipeline disruptions, patent disputes and increased refining costs. But the bottom line is that RFG is driving up costs, and the EPA should give Wisconsin and Illinois a temporary waiver. Yet, this administration refused to give us any relief, even though they have granted a waiver to the St. Louis area for similar problems.

What is particularly troubling about the reformulated gas mandate is that we're being asked to clean up pollution that was not created in Wisconsin. That's why I've joined with Republicans from my state in suing EPA for a waiver from the reformulated gasoline requirement. We believe the skyrocketing costs of reformulated gas in Wisconsin suggests that EPA did not adequately consider the costs of the reformulated gas mandate as required by the Clean Air Act.

Ladies and gentlemen, the issue or rising gas prices is not a new one; that's why we're so frustrated in Wisconsin. We first brought our concerns to the administration in late January when prices started to rise. At that time, energy Secretary Richardson told a newspaper that, "The administration was unprepared for the price hikes and was caught napping." Some four months later when prices finally hit the $2 barrier, Secretary Richardson and the president still had no answers. Mr. Richardson told the people of Wisconsin just two weeks ago that he didn't know why gas prices were so high in the Midwest.

Well, it's time to wake up from the nap. While the administration is sweeping at the wheel, consumers are being gored at the pumps. We need real answers, more solutions to this problem from the Clinton-Gore administration. The best that they can do is point fingers and accuse the oil industry of gouging. And I might add quickly, that if there's any evidence of gouging, we fully support the appropriate action being taken against the defenders, but that does not eliminate the core problems mentioned above -- the lack of a cohesive energy policy, inordinate dependence on foreign oil, the need for more domestic oil development in this country and the failed EPA policy regarding reformulated gas.

It's time for decisive action to be taken to solve these problems and stabilize gas prices. The very economic security of our nation is at stake.

I want to thank you all for listening to me and for drawing attention to this wonderful, important issue, Mr. Chairman. The people of Wisconsin really appreciate your leadership and assistance.

REP. HYDE: Thank you, Governor.

Governor Ryan of Illinois.

GOVERNOR RYAN: Thank you very much, Chairman Hyde and Mr. Conyers and ladies and gentlemen of the Judiciary Committee. I am honored to have the opportunity to appear before you and along with my friend, Governor Thompson. I may add, this is the second time that I've sat in this chair within the last week, and I appreciate the opportunity to be here, although you weren't chairman, Mr. Hyde, it was a subcommittee.

I'd like to tell you it's a pleasure to be here, but under the conditions that's just not so. The prices that consumers in Illinois are paying for a gallon of gasoline teeters on the brink of an emergency situation in our state. My mission today on behalf of the people of Illinois is to endorse your call for an investigation of the reasons behind these ridiculously high gas prices and to explain to you what's going on in Illinois.

Right now in my state retail gas prices remain among the highest, and I'm told just a few minutes ago that we are the highest, and the city of Chicago has got the highest gas prices in the nation. In northeastern Illinois, where 80 percent of our residents live and work, pump prices still average a little over $2 a gallon.

The price reductions that we've seen over the last few days haven't lessened the impact that we've seen on families and seniors and businesses since the first of June. Everyday we're confronted by letters, e-mails, faxes and media reports from people who feel that they're prisoners in their own homes because of high gas prices. When it takes $40 or $50 to fill a gas tank, most people decide to conserve gas and stay at home, except for very essential trips. Much more, high gas prices threaten the increase of cost of basic consumer goods that average families and those on fixed income depend upon.

A recent study of the effect on high gas prices indicates that without relief soon the drag on our local economy could total about a billion dollars-- a negative impact that could cause a ripple effect throughout the Midwest. We're already seeing signs of this potential ripple effect.

Because Indiana has temporarily suspended the collection of its 5 percent sales tax on gasoline to lower pump prices, retailers on the Illinois side of the border are losing customers in droves as motorists cross the state line for cheaper gas. In reaction, I've called a special session of the Illinois General Assembly that starts later today for the sole purpose of temporarily suspending our sales tax on gasoline-- a sixth-month suspension that's going to cost the state treasury about $180 million. These are the effects of high gas prices.

I think for a minute I'd like to talk about the causes. In my estimation, we can kind of spread the blame in more than one place. The people of Illinois feel that they've been singled out unfairly, and they're tired of hearing officials of the oil companies and the U.S. Environmental Protection Agency point fingers at each other. I believe that an investigation by the Federal Trade Commission on allegations of collusion and price gouging by the oil companies is necessary because we don't have all the answers we need. The reasons behind these high prices in Illinois and the Midwest need to be uncovered and explained fully to the public so steps can be taken to prevent any drastic increase in the future.

I've asked our attorney general to meet with oil company representatives this week to determine if the state investigation is needed. At the same time, I continue to strongly urge the U.S. EPA to grant immediate relief from high gas prices. As I have done 6 times in the last 13 months, along from my colleagues from the Midwest, Governor Thompson and several other Midwestern governors and the Mayor of Chicago, I am asking the EPA to do two things.

One, I am joining Governor Thompson in his request that the EPA suspend new gasoline production rules that caused the price of gasoline in Illinois to skyrocket on June 1st. Your colleagues on the House Committee on Science report that if these new rules are suspended, the pump price of a gallon of gasoline will drop by 25 to 50 cents in Illinois. Suspension of these new rules would not harm air quality in the Chicago area because oil companies would still be obligated to use the previous production rules that have been in place for years.

I have been disappointed that the EPA has ignored our previous request for suspension of the rules without topic. The EPA's inaction is directly responsible for the problems that we're now addressing.

Secondly, while these new rules are suspended, the EPA should negotiate with us on the creation of a carbon monoxide credit for ethanol as a part of the new production rules for the Chicago area. This credit first proposed months ago by our state EPA would help oil companies reduce the cost of blending gasoline with ethanol which we produce in Illinois. These actions taken together would help ease the situation in Illinois greatly.

So, Mr. Chairman, I want to thank you and the members of this committee for the opportunity to lay out our case. I know that everybody in America is well aware of the problem. And we're especially aware of it in Chicago and Illinois because we have the highest prices of anybody in the United States, and we're certainly concerned about making them lower.

And that's why I've called a special session of the assembly to take the 5 percent sales tax off of gasoline; and hopefully we'll have that done by the Fourth of July, and people will be able to enjoy their weekend and their Fourth of July and their summer vacations.

But my office stands ready to assist you and the Congress, the FTC, the EPA or any other federal agency in your investigation in any action necessary to help reduce the burden of high gas prices on the people of Illinois.

Once again, my thanks to the entire membership of this committee for allowing me to be here today.

REP. HYDE: Thank you, Governor. And thank you, Governor Thompson.

We'll with our thanks let you go. The rest of the panel are all members of the House, and we have a vote on a motion to adjourn. There will be several of those throughout the day I'm told as the Democrats express their dislike of certain legislative processes, and their means of expressing it is to move to adjourn.

So if you want to go vote to adjourn or stay in session, as you choose, we'll resume the hearing as soon as you get back.

(Recess.)

REP. HYDE: The committee will come to order.

Mr. Collins.

REP. MAC COLLINS (R-GA): Thank you, Mr. Chairman. It's an honor to be before your committee here this morning.

Mr. Chairman, when it comes to keeping the cost of gasoline reasonable, it appears that our nation's energy policy is running on empty. You've heard the previous two, and you'll hear further testimony I'm sure, about the history of the rising cost of gasoline and how it varies in different regions of the country and for many purposes that people think the costs have gone up.

You also have heard that when the public outcry finally roused, Secretary of Energy Bill Richardson woke up and admitted that he had been asleep; and he promised that prices would soon decline because of his arm-twisting of the OPEC nations. Of course, we see that he must have twisted the wrong way; the prices have continued to go up rather than down. Today we have an average price around $1.68 a gallon, and it rises to over $2.20 a gallon in different areas of the country.

These skyrocketing prices are being borne on the backs of working families all across this country, families who the principle winners must commute to work, the soccer moms must address the needs of the children as they take them to different events and also in the area of transportation.

You mentioned earlier in my introduction that I had been in the trucking business for a number of years. That's true, but I was also in the retail business for a number of years, and I know how the products that I had to sell at retail were delivered to my stores. I also remember, from being in the trucking business in the middle '70s, what happened when we had a disruption in oil and high fuel prices in the late '70s and how it created a recession, and the cost of goods and inflation skyrocketed.

Mr. Chairman, gasoline and fuel is not a convenience; it's a necessity, as has been outlined, as I just did, about families and commuting to work and transportation. The Congress must do something about it.

What are we going to do? It must look at it both short term and long term. Long term's going to be difficult because of politics, political posturing and bickering. I'm reminded of being in the Ways and Means Committee when I saw the opening of this committee. That disallows us to do anything.

I'm reminded of the president's comment that he's willing to discuss any issue with any member of Congress that he thinks is important to this nation-- a one-way street, one-way telephone. That won't work, Mr. Chairman.

But on the long run, we must look at what we're going to do about our dependency on foreign oil. What are we going to do about the OPEC nations?

You know, folks at home tell me, "What's wrong with these folks? We liberated them, we've helped them, and now they want to strangle us, cut off our supply, increase our costs. Why? What's wrong with these people? Don't they understand what we did for them?"

Then we must look at our environmental issues, regulations and how they affect the cost to individuals, and were they responsible or not. We must look at our Strategic Petroleum Reserve and how we can use and benefit from it. President Bush benefited from it during the Gulf War by releasing some of that supply.

We must look at other modes of transportation, other fuels, what we can do in the tax codes to incentivize people to invest. We must look at opening up more of our areas for drilling. And I get awful confused when I see that the administration doesn't want to open up any more areas, but yet are willing to sell off reserves to Occidental Petroleum just a couple of years ago.

Those are all long-range things that we must work and plan on, Mr. Chairman, but what can we do in the short run?

A lot is said about taxes, and we try to give tax relief in many areas. But again, we hit a log jam when it comes to administration and to those who want to use the tax codes for political purposes rather than what it should be used, and that is sufficient revenues to run this nation. Then when you have more revenues than you need, you need to return them to the folks who's sending them up here.

But we're not going to get anywhere with that either, so what can we do in the short run? I think we need to look at a bill that I'll be introducing today along with several others. It's called the Federal Excise Tax Relief Act. It imposes a moratorium on fuel excise taxes until March 31, 2001; Mr. Chairman, the Congress' price for fuel.

The tax we charge is our price. The oil companies have their price. The states have their price either through sales tax or through gas tax, and then the locals have their price for gasoline. Ours is the federal excise tax. We should put a moratorium on it. The reason I chose and we chose March 31 of 2001, it will get us into a new congress and new administration to where possibly we can draft some long-term energy policy. It also gives us a chance to look at the existing codes as to whether or not all of those taxes need to be restored. 9.3 cents of the current tax was put on for deficit reduction. We have no deficit now. We have people bragging about the trillions of dollars of surplus. I call it positive cash flow because until we can pay our national debt, I don't think we have a surplus.

It holds harmless the revenue shortfall to the highway trust funds by moving the taxes collected somewhere else into there to be able to use general funds for the purpose of making sure that our infrastructure projects keep going. It also calls for the comptroller to report back to Congress within 60 days as to the effect of the moratorium at the pump to make sure that the people of this country receive the relief that Congress grants as a moratorium on the price we charge for gasoline.

Thank you, Mr. Chairman.

REP. HYDE: Thank you, sir.

REP. COLLINS: I must be excused. We have a markup in Ways and Means, if that's fine?

REP. HYDE: Indeed, you may be excused with our thanks.

Representative Stabenow.

REP. DEBBIE STABENOW (D-MI): Thank you, Chairman Hyde and Ranking Member Conyers. And I want to thank my good friend, Congressman Conyers, for his leadership, and we're proud of you in Michigan.

I want to thank both of you for holding this very important hearing on an issue that's the topic of almost every conversation in the Midwest, certainly around the kitchen tables in Michigan. And I want to start by saying that, this is not a Democratic issue, a Republican issue; the people in my state want action now. They want us to come together, and they want the prices to go down.

I'd like to share part of a letter I received from a constituent of mine recently -- one of hundreds -- from Mr. Fransky (sp) of Holland, Michigan.

He wrote me two weeks ago saying, "I'm a retired person living on a fixed income. I also have a serious heart condition which requires me to go to a specialist rather often, and I have to go for many tests. I live in a small town with a small hospital that cannot provide the special care that I require. Consequently, I have to drive to Lansing for all my medical needs, which is a 100-mile round trip." And now this has become an extremely burdensome trip for Mr. Fransky.

Another letter I received from Ms. Henshaw (ph) of Flint, Michigan -- she wrote me last week -- about a 12-cent increase in gas prices overnight, 12 cents overnight.

She says, she drives more than 80 miles each day to drop her children off and go to work; her husband drives 40 miles each day. She writes, that "as a struggling family of four, we have now added another $120 a month to our already tight budget." This means Ms. Henshaw and her family no longer have the money for their family vacation this year.

These are just two stories from literally hundreds of families who've written to me over the past few weeks as gas prices in Michigan have soared out of sight.

Unfortunately, Mr. Chairman, Mr. Fransky and Ms. Henshaw's problems are those of every senior on a fixed income needing medical care, every family traveling with their children, every farmer, every small business person trying to make a living. These are the problems they're facing everyday in Michigan.

While gas prices have been high throughout the country, the problem in the Midwest and in Michigan has been even worse. While the country was paying a little more than $1.50 a gallon, Michigan drivers have been confronted with the outrageous price of more than $2 a gallon-- $2.10, $2.20, $2.30. In just one week, the price of gasoline rose 40 cents a gallon in Michigan.

Differences in state taxes, pipeline problems, EPA requirements of reformulated gas, which Michigan is not required to use, and OPEC's actions do not and cannot account for all of this outrageous price discrepancy. Because the price increase cannot be fully explained by recent events, I joined with several colleagues, including our ranking member, John Conyers, in calling on the Federal Trade Commission to initiate a full federal investigation into whether or not the oil companies are involved in price gouging in Michigan.

I am pleased that the FTC responded quickly to our request and has begun their investigation into why, at a time when oil companies in our country are experiencing record profits, Michigan drivers are paying record gas prices. And I might add that I find it interesting that after only one week of the FTC investigation and a hearing on Friday, prices are magically beginning to go down slightly in Michigan.

Mr. Chairman, my constituents want and deserve answers to this important question, and that's why I'm here. I've also asked the FTC to conduct their investigation within 30 days. In talking to the chairman last week, he said it would be 30 to 45 days. We in Michigan are desperate to have this resolved as quickly as possible. And I've asked that they report to Congress to that we can quickly determine additional steps that we need to take to deal with this crisis.

I also strongly believe that the president must immediately release oil from the Strategic Petroleum Reserve in order to increase the oil supply and bring down gas prices now. And I've asked him to do so. By increasing the supply, we'll do more than simply bring down the gas price; we'll also send an unmistakable signal to oil companies in our country and to OPEC abroad that the United States will not sit by quietly while our constituents pay record gas prices.

Only the president has this authority, and I hope he will begin today, as millions make their plans to celebrate Independence Day, to give our constituents some independence from the rising gas prices. I also believe that the time has come to take immediate action to reduce gas prices by temporarily suspending the federal gas tax for the next 30 days or 60 days while seniors, families, farmers and small business owners can see immediately that they have relief in the coming months as they're taking their possibly only family vacation this summer, or working in the fields as Michigan farmers are, or business people, or those like Mr. Fransky who are going back and forth to the hospital.

In addition, I have long believed that we must have a serious debate in this country about our long-term energy needs, and how we plan to tackle these issues in the new millennium. Unfortunately, Mr. Chairman, Congress is moving in the wrong direction in terms of research and development needed to increase the gas mileage in our cars that our families depend on in their daily lives.

As gas prices were rising 40 cents a week in Michigan, the House of Representatives took the unwise step of cutting by half the Partnership For A New Generation of Vehicles, a joint research effort that I'm very proud of in Michigan and that our auto companies have been taken the lead on along with the federal government. Nearly all the funding for this valuable program goes to national laboratories and universities to undertake this very important ground-breaking research that will make a difference. Unless the federal government is willing to be a true partner in this research, we will have many more hearings about the impact of fuel cost on the daily lives of American families. I truly hope that during this gas crisis, Congress will see its error and quickly correct this misguided vote.

Chairman Hyde and Ranking Member Conyers, let me again thank you for holding this important hearing on this very critical issue that affects every senior, every family, every farmer and every business owner in Michigan. I hope the FTC will act quickly in their investigation into price gouging by oil companies, that the president will immediately release oil from the strategic oil reserves to increase oil supply, and that Congress will temporarily repeal the gas tax so that motorists in Michigan and across the country can get immediate relief from rising gas prices.

We must do all we can to help those in my state of Michigan and in the Midwest who are coping with outrageous prices that they are paying for gas. Thank you very much.

REP. HYDE: Thank you, Representative Stabenow.

Tony Hall from Ohio.

REP. TONY HALL (D-OH): Thank you, Mr. Chairman and Mr. Conyers and members of the committee.

A few weeks ago, my constituents -- motorists in Dayton, Ohio and my district -- were paying about $1.40 a gallon. And now this month, certainly by the early part of the month, the price skyrocketed to more than $2. People of Dayton, my district, are mad. They want answers. They don't believe many of the answers that have been coming out.

In the last few weeks, I've received hundreds of telephone calls, letters, faxes and e-mails. The newspapers are filled with letters to the editor, the radio talk show lines are buzzing, and people are outraged; and they don't understand how this could happen.

I received a telephone call from one Dayton woman who drives 25 miles back and forth to work everyday, and she makes about $7 an hour. Her husband drives 60 miles a day, and he makes $8 an hour. And she said the increase in gasoline costs would probably force her and her family to an emergency food pantry to feed her family.

Here's some facts from a senior citizen from Centerville, Ohio. "With the rising cost of gas, it becomes necessary to prioritize which normal routines we must do; 1) go to the doctor's office for a scheduled visit, 2) go to the grocery store for weekly shopping or 3) attend church on Sunday.

" And they go on to say, "It's getting to the point that we senior citizens can no longer afford to pay for gasoline to do all of these."

And here's an e-mail from a Dayton man. "Gas prices have ruined any plans for a summer vacation. My fuel costs have almost doubled. I'm a single parent. This kind of increase is devastating. This will wreck the local economy. Help."

We've heard a lot of explanations for these price increases, but my constituents, they don't buy it. It's not because of reformulated gasoline; that's not even required in my state. And it's not because of less oil imported in this country. Ohio and other Midwestern states are hit harder than everyone else. And if this was the case, then prices ought to be going up in all the states.

Many of the motorists who call me point out that the prices rise on Thursday before the weekend when motorists often fill up, and then the fall on Monday. Try to tell the people of Ohio that is because of reformulated gasoline or low supplies.

There's a strong suspicion among my constituents that the high price of gasoline is the result of poor planning, price gouging and profiteering by the oil industry. In the last few days following weeks of bad publicity for the oil companies and threats of government investigations, Dayton area gasoline prices have suddenly dropped. And while this is a welcomed relief, it also increases suspicion.

During this hearing, you will take testimony from government officials and oil industry representatives. I urge you to ask tough questions and get to the bottom of this. My constituents and all of the American people are watching, they're looking for answers; they want help. I also hope that the result of this hearing will help us as members of Congress to find short-term solutions to the immediate problem and long-term answers to prevent this kind of price spike in the future.

Thank you, Mr. Chairman.

REP. HYDE: Thank you, sir.

Another procedure vote. The effort is to disrupt and inconvenience everybody until the Republicans get religion and do what the Democrats want. That's what's at stake.

I don't propose to disrupt this hearing to go back and forth like a ping pong ball. I'm going to stay here. You all probably want to go vote. Representative Stabenow is finished, Tony's finished. We just left with poor Pete.

Do you want to say something in a hurry, and then run over and vote or do you want to come back? I'm going to go ahead with the next panel.

REP. PETER HOEKSTRA (R-MI): I'm willing to go with my testimony now, Mr. Chairman.

REP. HYDE: Very well. You're on, Peter Hoekstra.

REP. HOEKSTRA: Poor Pete is on, right?

REP. HYDE: Poor Pete, from Michigan.

REP. HOEKSTRA: Thank you, Mr. Chairman and distinguished members of the committee. Thank you for allowing me this opportunity to talk with you about the high prices that have plagued the Midwest, and especially my home state of Michigan.

As of yesterday, AAA reported that Michigan had the second highest gasoline prices in the nation. This may catch you by a little bit of surprise because consistently the talk has been about Wisconsin and Illinois, but this price increase has hit the state of Michigan, has hit it hard, and the people of Michigan have noticed, even if those in the media and the administration have not.

We're all concerned about the high cost of energy, and especially gasoline. When gas jumps from $1 per gallon to $2 per gallon in a short period of time, it impacts the neediest people the most. My two colleagues, Representative Stabenow and Representative Hall, have pointed that out. Those with the lowest incomes find it the hardest to absorb these increases.

We need to focus on making affordable energy available to all our nation's citizens. This is a complex problem. There are a number of reasons that have been highlighted as to why this may be occurring. Let me focus on one.

First, the EPA and other regulatory organizations have developed a quilt-like patch work of clean air regulations across our nation that has led to oil refiners being required to produce 30 to 40 different formulations of gasoline. Putting on my businessman's cap, I know that trying to reduce such a wide variety of products leads to gross inefficiencies, requiring one formulation of gasoline for Chicago, another for my hometown of Holland and another for Detroit, another for St. Louis, and then another for Ms. Baldwin's district in Wisconsin -- to say nothing about the East Coast or the West Coast -- may not be in the best interest of our consumers or of the environment.

REP. HYDE: Excuse, Mr. Hoekstra.

Mr. Barrett, if you want to go vote, you can come back. We'll put you on when you get back, okay?

Go ahead, Poor Pete.

REP. HOEKSTRA: Thank you, Mr. Chairman.

It seems to me that it might be wiser to set narrower standards for the entire nation, then let the refiners work to meet that standard. This would set competitive forces in motion and result in major economies of scale and production. Second, we also need to look at the impact of the new EPA regulations for reformulated gasoline that went into effect on June 1.

We heard testimony last week from a representative of the oil industry that the new standards for the Chicago and Milwaukee areas greatly contributed to the rapid price increases of the last month. We also heard EPA administrator, Carol Browner, try to refute those claims, but those claims seem to make sense to me. It's probably not the whole problem, but I'm sure that it is a part of the problem.

We need to understand whether the oil industry told the EPA that this was a likely outcome of these new regulations, and if so, whether the EPA acknowledged or responded to those warnings. Did the EPA or the administration underestimate the impact these new regulations would have?

In closing, I'd just like to say that while gasoline prices are the problem of the day, it's important for Congress and the administration to look at our nation's overall energy strategy. We've already started to hear warnings of potential electrical brown-outs around the nation this summer and concerns about the possibility of heating oil shortages and high prices this winter. What we need to do, is we need to develop a policy that encourages development and expansion of U.S. energy supply. The time for action is past due.

Mr. Chairman, thank you for holding this hearing, and thank you for allowing me to testify.

REP. HYDE: Thank you, Mr. Hoekstra.

Our next panel consists of four witnesses from the various government agencies which have jurisdiction over these

First, we have Mr. Rich Parker, the director of the Bureau of Competition at the Federal Trade Commission. He's a graduate of the University of California, Davis and the UCLA Law School. After law school, he clerked for Judge William Burn (sp) of the central district of California. Before coming to the Federal Trade Commission, he was a partner at the Washington Law Firm of O'Melveny and Myers. He took his current position last year.

Next, we have Mr. Bob Perciasepe, the assistant administrator of Air and Radiation at the Environmental Protection Agency. He's a graduate of Cornell University and Syracuse University.

He has a long career in government, serving with the city of Baltimore and the Maryland Department of Environment, ultimately becoming its secretary. He became an assistant administrator at the EPA in 1993.

Next, we have Ms. Melanie Kenderdine, the acting director of the Office of Policy at the Department of Energy. She began her career in public service in the House as chief of staff to then Congressman Bill Richardson. At the Department of Energy, she has served as Secretary Richardson's liaison to the House and his senior policy advisor. She took her current position in April of this year.

Next, we have Mr. Mark Mazur, the acting director of the Energy Information Administration at the Department of Energy. He's a graduate of Michigan State University. He has a Ph.D. from Stanford Business School. Before joining the department, he was a professor at Carnegie Mellon University, a staff member of the Joint Committee on Taxation and an economic aide at the White House. He joined the department in 1997 and appears here today for the purpose of answering questions only rather than testifying.

And so we will open with Mr. Parker. And may I respectfully request that you try to confine your remarks to five minutes. We'll be flexible, but it would help. Thank you.

Mr. Parker.

MR. PARKER: Thank you very much, Mr. Chairman, and members of the committee. I appreciate your inviting the Federal Trade Commission to participate in this important hearing. My written testimony, already being part of the record, I would simply like to make a few brief points that I hope are helpful to the committee.

And the first is I think the most important. This is clearly a serious matter. I've heard a lot of testimony this morning. We've got a lot of calls about people who are suffering from house gas prices, particularly low-income people. That has a particularly bad effect in the Midwest, but ultimately it could affect the economy throughout the whole country. It's a serious matter; we are taking it seriously.

What are we looking for? As you know, we have instituted a formal investigation of this matter. What we are looking for is, in a word, "collusion." The antitrust laws which have served this country so well for 110 years rest on the premise that consumers are best off when firms compete. What we are looking for in antitrust investigation -- and that's what this is, an antitrust law enforcement investigation -- is efforts by people to opt out of the competitive system and to collude.

Subpoenas have gone out. We're sending subpoenas to virtually -- not virtually, all participants in the supply chain and to the affected areas, pipelines, terminals, blend plants, refiners. All of them are getting subpoenas. They're going out in waves, and that process has already started.

At some point in time, a man or a woman or a group of men and women made decisions, business decisions, to raise price, and to raise them hugely. It is the focus of our investigation to find out whether and to what extent there was collusion or signaling or a facilitating practice or any other illegal conduct involved in that decision. That will require, first, a review of documents and will require depositions, sworn testimony from witnesses before we can reach any conclusion.

In candor to the committee and in fairness to those being investigated, I want to make clear that I have no evidence as I sit here today of collusion. I don't know one way or the other. But if there is collusion, I pledge to you and the consumers, that the Congress would expect us to be able to find it.

Let me add one final point, and that is that antitrust is not a quick fix. This is a law enforcement investigation. There is nobody on the Federal Trade Commission who can roll back prices. There is nobody on the Federal Trade Commission who can snap their fingers and make prices go down or stop certain kinds of behavior. What we need is to determine whether there's been collusion, we need evidence of that collusion because we need to be able to prove it in a court of law.

The FTC has tremendous experience in antitrust enforcement in the oil industry. We are bringing that experience to bear, and we're doing it as quickly as we can. Thank you very much.

REP. HYDE: Thank you, Mr. Parker.

Mr. Perciasepe.

MR. PERCIASEPE: Thank you, Mr. Chairman.

My name is Bob Perciasepe from the Environmental Protection Agency, and I'd like to share a couple points. You have my written statement.

First of all, I want the committee to know that EPA shares the concerns about gasoline prices in the Chicago and Milwaukee area.

Consumers deserve to get both clean air and reasonably priced gasoline that is fairly priced for the cost of making it, and they deserve the cleaner air.

When we look around the country -- and I want to try to focus my testimony a little bit on RFG or reformulated gasoline because it's come up several times already in some testimony as the leading cause. So I'd like to look at a chart of prices around the country on Monday. And I used a barrel, but the CG is "conventional gasoline." And we should know that about 70 percent of the gasoline in the United States is conventional gasoline. And that was averaging on Monday $1.65 around the country.

If you look at reformulated gasoline, which is about 30 percent of the gasoline in the United States, and you take out Chicago and Milwaukee and use a volumetric adjustment to the price averages, you'll see that RFG is averaging in the rest of the country about the same price. Now, you could do the algebra a little bit differently -- and these are EPA efforts based on the Energy Information Agency's data -- and the prices would bounce around a little bit. But basically in the mid 1.60's for RFG and conventional gas in the rest of the country.

The only place -- I want to be clear -- RFG is not causing the price rise around the country, and the only area where we see RFG being dramatically different than conventional gasoline -- is in 3.4 percent of the gasoline in the Chicago-Milwaukee RFG market.

This is the chart of the wholesale prices in the Chicago- Milwaukee area before the program started on June 1st. And you can see in the late part of May, the wholesale prices in both of those markets were between $1.35 and $1.45, and then the rapid rise over the course of the first several weeks of June. And then, what is pretty obvious on the chart, a fairly dramatic drop in the wholesale prices to levels below the wholesale prices before the first day that the program was -- the magic day that has been brought up several times, June 1st. I might add that today the wholesale prices this morning in both of those markets dropped again-- Chicago another penny and Milwaukee another, I want to say 3 cents.

In fact, conventional gasoline wholesale prices in Chicago and reformulated gasoline wholesale prices in Chicago are virtually identical. In fact, RFG is about .05 cents cheaper on average wholesale this morning in Chicago than conventional gasoline.

These are facts. This is not fingerpointing. This is not trying to shift the argument; these are facts.

When we got requests for waivers -- and I know I'm going to get a lot of questions about waivers -- we took this seriously. Contrary to what you've heard, we take requests for waivers seriously, and we actually have issued one in St. Louis. We work with our colleagues at the Department of Energy to go out and see if there's an adequate supply of gasoline, what is going on out here. And this is where we get involved more than we normally do when we get a waiver request.

And when we go out and we looked, we found adequate supply, tight like it is everywhere else in the country, but an adequate supply of RFG. And it is this differential in our minds that adequate supply, big price hike; that's why the secretary and the administrator have asked the FTC to take their look at it. That is not our job to make that kind of a determination.

I want to make a couple other points about the clean burning gasoline program because I think somebody needs to speak for it here.

The RFG program was mandated by Congress. And everybody said it's EPA's policy, EPA's regulations. We're in favor of it; it gives big environmental benefits, and I'll explain that in just one second. But the specific cities were even selected by Congress in the 1990 Clean Air Act amendments. It would require an act of Congress to change which cities have RFG. Others can opt in, and they have, but the ones that are required are required by law.

RFG is providing large public health benefits in the United States. On a national level, about 105,000 tons of smog-forming pollutants, like organic compounds and nitrogen oxides, and very importantly, 24,000 tons of toxics. Because one of the other responsibilities of the reformulated gasoline program is to reduce the toxic emissions out of the tailpipes of the car. And I would say in Milwaukee the toxic emissions from the cars in Milwaukee are affecting the citizens in Milwaukee, not some other location.

So we see no complete explanation as to why these prices have gone up. We see that there's a precipitous drop in wholesale prices. The cost of producing RFG -- the actual cost of producing it, and we've estimated it many times, incrementally over time -- is somewhere between 4 and 8 cents. In a tight market, maybe the marginal costs might be a few more pennies, but that's the range we're talking about, even when you're using ethanol. Those estimates include using ethanol, and we recognize that there's a small, incremental cost of about a penny or so and maybe another penny on the margin.

The last point I would make is that this program didn't magically appear on June 1st. This program was enacted by Congress in 1990. We did a regulatory negotiation with states and the industry back in the early '90s. The regulations were enacted in 1994, actually the end of '93. The first phase took effect in 1995, and the second phase took effect this year.

All of this has been known for five years. In fact, we had an implementation committee, a federal advisory committee group, advising us on implementation issues over the last several years. So I want to point out that there's been quite a bit of time leading up to this point. I think the wholesale prices currently speak for themselves as to whether RFG is a part of this cost problem. We admit that there is an incremental cost, but it's in line with the environmental benefits you get.

And I'll stop there. I appreciate the indulgence, Mr. Chairman.

REP. HYDE: No. You have a very complicated aspect of the problem, and you've explained it well, and I appreciate that.

Ms. Kenderdine.

MS. KENDERDINE: Thank you, Mr. Chairman and members of the committee, for this opportunity to discuss the administration's energy policy and current problems with gasoline markets.

I'd like to associate myself with the concerns expressed by all the witnesses here about the high price of gasoline, particularly in the Midwest, and the impacts of these high gasoline prices on consumers and businesses.

The fundamental importance of energy to the nation's economic and environmental health has warranted investments by the Clinton-Gore administration in a set of policies and a portfolio of technologies to produce more energy, use energy more efficiently, reduce its impacts on the environment and develop alternative sources of supply.

The administration's first principle on energy policy is reliance on market forces as the best means of informing supply and demand and getting the most for the American consumer. Our commitment to this principle has contributed to longest period of sustained economic growth in modern times.

The reliance on free markets as a cornerstone of our energy and oil policy is a bipartisan view that has been expressed since 1975 when the Congress and the executive systematically removed the federal government's authority to control oil prices or allocate oil supply. Generally, with the exception of emergency authority, we have taken the government out of the oil equation and committed us to the free market principles of supply and demand. It is in this context that I would like to discuss briefly the current problems in the gasoline market and the major features of the Clinton-Gore energy policy.

By the third quarter of this year, there will be 3.5 million more barrels of oil on the market than there were in March of this year. OPEC has increased production twice-- 1.7 million barrels in March and 700,000 barrels per day on June 21st. DOE's EIA reports that by the end of the third quarter supply will match demand based on these increases; but there's an additional problem in that we need to rebuild the inventory, and that is one of the reasons why you're seeing high prices for gasoline. We have depleted inventory.

Production has still, however, been outpaced by near historic demand levels and the need to rebuild stocks for the winter heating season. Oil prices remain high and refinery inventories are low. These are the fundamental reasons for high gasoline prices.

It is in this context that we have been reviewing the gasoline supply situation, particularly in the Midwest. I would note that the DOE performs gasoline supply assessments to inform EPA's waiver process for cleaner gasoline. DOE does not perform any specific price analysis.

The situation in the Milwaukee Chicago area where gasoline prices are the highest in the nation is affected by the overall high price of crude but also by these factors.

Higher regional demand than the national average, although I've just been told this morning that demand there is now reclining.

Low inventories in the region. Inventory starting the summer driving season were 13 to 15 percent lower than inventories last year.

Some distribution problems with pipelines in refineries. We've had problems with the Explorer Pipeline and the Wolverine Pipeline. We had a Primcor (sp) refinery go down, so there have been significant supply and distribution problems.

High regional refinery utilization rates. Utilization rates nationwide, EIA reported on Monday, are 96 percent; in PADD II they're at 99 percent. So refineries are running full out.

And in RFG formulation, as Mr. Perciasepe described, specifically to the Milwaukee-Chicago area, that is more difficult to produce. That's an RFG formulation using ethanol.

These supply issues will affect the price of RFG-2 and conventional gasoline, but the degree to which they contribute to price spikes is unknown. Because the supplies in the area are tight but adequate, because of differential between RFG-2 and conventional gasoline was so large -- I think it was up to 48 cents differential at one point -- and because DOE was not convinced that the factors I just listed were sufficient to explain this differential, DOE and EPA referred this matter to the FTC, the appropriate agency to review specific pricing issues. It is my understanding that the FTC will issue an interim report on this matter in July.

Let me now summarize the administration's energy policy. Through policy choices and investments, the administration seeks to address four major challenges-- maintaining America's energy security in global markets; harnessing the forces of competition in restructured energy markets; mitigating the environmental impacts of energy use; and ensuring a diverse, reliable and affordable set of energy sources for the future.

While I discuss each of these challenges in detail in my written testimony, I would like to focus briefly on the first one, maintaining our national energy security.

To address this challenge and reduce net imports -- the difference between the amount of oil imported and the amount of oil consumed -- the administration has supported or proposed measures to do the following.

Spur domestic oil and gas production.

Address the generally high U.S. oil production costs relative to other regions of the world. We have very mature fields, and they cost more to produce, generally speaking, than in other oil-producing regions worldwide.

Ensure that we are not overly reliant on imports from a single region of the world.

Encourage the world to develop its oil resources and increase world productive capacity.

Increase the size of the Strategic Petroleum Reserve. We have developed a plan to put 28 million barrels back into the Strategic Petroleum Reserve-- a sale of 28 million barrels. That was directed by Congress in '96 and '97, I believe, for budget balancing purposes.

Provide tax incentives for the expensing of geological and geophysical costs and delay rental payments which will assist both oil and gas.

Provide deep-water royalty relief. That has been a widely successful program. I believe it has increased oil produced in deep water Gulf by about 279 percent since it was passed in 1995.

Simplify royalty collection on public land. And promote the creation of a guaranteed loan program for small, domestic oil and gas producers.

We can also reduce net imports by focusing on the demand side of the oil equation. Over 60 percent of our oil is used in the transportation sector. Increasing the average fuel efficiency of America's automobiles by just 3 miles per gallon would save us over 1 million barrels of oil per day. This is why we have invested heavily in research and development for more fuel efficient cars. Our PNGB program which was mentioned earlier has a goal of developing an 80- mile per gallon prototype automobile by 2004.

The Clinton-Gore administration is proud of its record on energy policy. We remain concerned about high gasoline prices and are doing everything we can to address this issue within the authorities given to us by the Congress.

Secretary Richardson has called on the Congress to work with us in a bipartisan fashion to pass legislation to enhance our national energy security, including extension of the Energy Policy and Conservation Act, which expired on March 31st, and is the organic statute authorizing the use of the Strategic Petroleum Reserve; establishment of a regional home heating oil reserve; additional tax incentives for domestic oil and gas production; renewable energy and increased energy efficiency; comprehensive electricity restructuring legislation, which we have had up on the Hill for I believe two or three years now; replenishment of emergency light-heat funds -- we had to use the light-heat funds in the home heating oil problems in the northeast this last winter, and we need to put that money back in before the next winter; funding of energy R&D to reduce demand; increase domestic supply and produce cleaner energy; and develop alternative sources of energy.

I noted earlier the value of increased fuel efficiency, and as Congresswoman Stabenow mentioned, urge the members to reconsider the recent House vote to cut $126 million from the Partnership for New Generation Vehicles program. Also, the House voted to cut our fossil energy program by $45 million. Private public partnerships in fossil energy R&D have increased production and extended the life of mature U.S. oilfields. We urge the House to support replacement of this serious cut.

We also urge the Congress to expeditiously pass the administration's energy proposals. If we're going to meet the nation's energy needs in the 21st century, we have neither the time nor the energy to waste.

Thank you, Mr. Chairman.

REP. HYDE: Thank you, Ms. Kenderdine.

I would announce that what is pending now is a motion to table the motion that was reconsidered about going to House Resolution 539, the rule on Medicare. We expect there will be a vote very shortly to adjourn again. So I just want to keep everyone posted as to what's going on, so you're not bewildered by the constant buzzing of the bells.

REP. JOHN CONYERS (D-MI): Mr. Chairman?

REP. HYDE: Yes, sir?

REP. CONYERS: The Democrats are only trying to get their version of the health care bill before the Congress. That's what all this is about, so that everybody will be fully advised.

REP. HYDE: Oh, I understand. Now, there's one party that's the majority and another party is the minority, and they're very unhappy that they're the minority. And they have a way of disrupting the majority. So that's fine. I'm just going to stay here, and the gentleman may do what he wishes.

But it's question time, and I yield to you, Mr. Conyers.

Oh, I'm sorry. Mr. Barrett, forgive me. Tom, you're very patient, so you're on.

REP. THOMAS BARRETT (D-WI): Thank you, Mr. Chairman, for allowing me to testify. And a special thanks to Mr. Conyers as well for helping me become a witness before this team panel today.

This is obviously a significant and important issue, and it's one that I've received hundreds, if not thousands, of calls and letters on from people in my district. And I knew it was serious when I was in the doctor's office in the men's room in a stall, and I came out and a man was waiting there for me asking me about the gas prices of Southeastern Wisconsin. That's when you know that an issue hits home.

Although rising gas prices are affecting an increasing number of communities across the country, unexplained price hikes have been plaguing Southeastern Wisconsin and Illinois since the middle of May. The cost of gas rose from an average of $1.48 cents a gallon in early May to $1.69 cents a gallon on May 12th and to over $2.00 by the middle of June.

In response to these escalating costs, I joined other Wisconsin lawmakers in demanding answers and requesting assistance from the federal agencies. At our request, the Environmental Protection Agency and the Department of Energy went to Milwaukee and Chicago on June 12th to investigate gasoline supply issues for our region. In addition, members of the Wisconsin congressional delegation asked the Department of Justice and the Federal Trade Commission to investigate the oil industry's role in a sudden price hike. And I know you did that as well, Mr. Chairman, and I thank you for that. And as everyone here is aware, this investigation is currently underway. In addition, the entire Wisconsin delegation also joined with me in asking the Department of Transportation to investigate the status of the Explorer pipeline which has not operated at full capacity since March 10th because of a rupture.

Because of this intolerable price differential between RFG and conventional gasoline affecting the Milwaukee area, I also joined other members of the congressional delegation in twice asking EPA for a temporary waiver from the RFG program until prices could be stabilized. I requested this waiver in hopes of bringing price relief to consumers in Southeastern Wisconsin.

As you know, Mr. Chairman, the cost of producing RFG Phase 2 with ethanol, the oxygenate of choice in Milwaukee and Chicago, was estimated by the EPA to be only about 5 to 8 cents more per gallon than conventional gasoline. The DOE estimates were only slightly higher. Given these estimates, it is unclear how the oil companies and others can point to the Phase 2 requirements as the primary factor in the price differential between RFG and a conventional gas, especially when the wholesale price differential in Milwaukee yesterday was 8 cents per gallon, while in Chicago RFG was actually cheaper at the wholesale level than conventional gasoline.

Moreover, oil companies' assertions that Phase 2 is so costly because of the refining difficulties associated with ethanol blended RFG are troublesome in light of the fact that the industry has had seven years to prepare for the implementation of the program.

During this period, the industry participated in a formal regulatory negotiation process with EPA and was also a part of the agency's implementation assessment in 1999. I went over the notes of the minutes of those meetings last night, and never did the industry identify production issues that would warrant such high costs during those meetings.

But the most amazing fact before the committee today pertains to the timing of the FTC investigation and the drop in wholesale prices of ethanol gasoline. The graph over there, which I think maybe was already shown to you this morning, illustrates this.

On June 15th, EPA Administrator Browner and DOE Secretary Richardson wrote to FTC Chairman Pitofsky requesting a full and expedited investigation into the pricing of reformulated gas by the oil companies in Milwaukee and Chicago. On June 15th, the average wholesale RFG price per gallon was $1.58. By today, it has dropped nearly 40 cents to $1.18. The wholesale price differential between RFG and conventional gas is now 8 cents in Southeastern Wisconsin.

We can debate until the cows come home whether the investigation by the FTC led to the drop in this or whether, as the industry claims, this drop would have occurred regardless. The fact of the matter, however, is that since the FTC has launched its investigation the wholesale price of reformulated gasoline has dropped markedly in the Chicago and Milwaukee areas.

Unfortunately, we're not out of the woods yet though because the significant wholesale price reduction which occurred without any changes to the RFG program has yet to be felt fully at the pump. Average retail RFG prices are down, but only slightly; thus, motorists in Southeastern Wisconsin and Illinois are still paying an unfair price for gas. I think the most important question of the day is when will the oil companies pass these price reductions on to our consumers? For everyone's sake, I hope the answer is today.

Mr. Chairman, I thank you again for all the work that you have done on this issue and for the opportunity to present this testimony. I look forward to the day when we can no longer deal with this issue, but until this problem is resolved I think we can leave no stone unturned in trying to get to the bottom of it. Thank you very much.

REP. HYDE: Thank you very much, Mr. Barrett.

Mr. Scott, do you have questions? If so, you're recognized for five minutes.

REP. ROBERT SCOTT (D-VA): Thank you, Mr. Chairman. I'd like to first ask a question about this chart.

Is this chart the cost of gas, and on June 1st, the RFG cost or is it RFG all the way through?

MR. PERCIASEPE: These are wholesale prices reported at the terminals in Chicago and Milwaukee of RFG.

REP. SCOTT: RFG gasoline?

MR. PERCIASEPE: Yes.

REP. SCOTT: And did I understand your testimony to be that the RFG gas is actually cheaper now wholesale than regular gas?

MR. PERCIASEPE: This morning's prices in Chicago -- and these are averages of a number of companies who sell RFG at the terminals, and some would be a little higher, some would be lower. But the average price of RFG this morning, reported by the oil price information system, is $1.17.16. And the wholesale price for conventional gasoline, again, on average this morning was $1.17.2. Probably you'd just say they're the same. But they're .05 cents cheaper. That's in Chicago.

REP. SCOTT: Well, certainly they're close enough so that you can't blame a 40 cent in a week increase on RFG gasoline.

MR. PERCIASEPE: Well, our view is that RFG gasoline, it is not free, it does have a cost; but it no way could explain the size of the price increases we have seen. And, of course, there's been no change in it, no waivers granted or any of these other things, in the last 12 or 13 days. So that leads us to that conclusion, which is what we analyzed even before the program started.

REP. SCOTT: Has the EPA considered a national standard for gas and not a regional?

MR. PERCIASEPE: As far as EPA regulations are concerned, there's only one out there, and that's being implemented now; and that is the Reformulated Gasoline Program. Some states have low-vapor pressure gasolines like Atlanta and Detroit.

We certainly are, by policy, in favor of national gasoline programs. We enacted a program for low sulfur fuel that would be implemented in 2004, phased in over three years, as a national program with some flexibilities for small refiners over that period of time.

The RFG program, however, it would be illegal for EPA to try to make it a national program because Congress specified the 10 cities that have to use it and limited the number of people who could opt into it. In fact, we lost in court trying to get more people.

REP. SCOTT: Is there any value to a national standard?

MR. PERCIASEPE: Yes.

REP. SCOTT: I mean, would it be cheaper to produce?

MR. PERCIASEPE: That I don't know. We haven't analyzed what would happen if you did this on a national level. When we look at doing gasoline regulations, we certainly would be biased at EPA toward national programs to avoid some of the issues of the fungibility of gasoline.

REP. SCOTT: Thank you.

Mr. Parker, can you get a 40-cent a gallon increase in one week without collusion?

MR. PARKER: There could be -- I would prefer not to speculate on what --

REP. SCOTT: Okay. I know you have an ongoing investigation.

MR. PARKER: -- and we're trying to find out what would happen. But I would tell you that we received a letter from the chairman and from Mr. Sensenbrenner. We did an informal look at this issue and discovered that, no, I couldn't explain that much of an increase from any forces of which I was aware, which then will give us justification to go forward.

REP. SCOTT: If there's an antitrust violation, the perpetrators of that violation would be subject to what kind of damages?

MR. PARKER: If it was an out-and-out smoke-filled room cartel -- and note, I'm not saying I have any evidence like that -- I would refer it to criminal prosecution and set that aside. The remedies we could get would be a cease and desist order that would prevent these practices currently and going forward. Furthermore, in some cases where we can find an overcharge and find a value, we can ask for the money back.

REP. HYDE: The gentleman's time has expired.

Mr. Parker, if I may, I'd like to clarify one item in your written testimony. As I understand it, you've already sent subpoenas out to a number of participants in the gasoline market in the Midwest; is that correct?

MR. PARKER: Yes. I would add that we're sending to a lot of entities; some of them won't get theirs until later. We're doing it in stages. These have to be carefully drafted to make sure we ask for the right documents.

But, yes, that process has started, and some have gone out.

REP. HYDE: This is a question that I get asked a lot, and there's no answer to it, but I'll ask it of you. You have no idea how long this process will take?

MR. PARKER: I do not.

REP. HYDE: Some of our members have cited the coincidence of a drop in the wholesale price of gasoline coincident with the taking up the investigation by the Federal Trade Commission. And that, of course, is a happy prospect that something that simple could result in such a profound reaction. And that may well be, and I hope it is.

But could it not be true that the sudden drop in the wholesale cost of gasoline be a reaction to OPEC's increasing the supply and other factors having to do with the high cost of transition to reformulated gas and those sort of things coming together and justifying a drop rather than a fear of criminal prosecution?

I mean, there are many factors, and we shouldn't be leaping to any until you get well along in your investigation; is that correct?

MR. PARKER: I absolutely agree with what you just said, absolutely.

REP. HYDE: Mr. Perciasepe, I think the EPA takes the position that it's only about 5 cents to 8 cents a gallon more to produce ethanol-based reformulated gasoline; is that correct?

MR. PERCIASEPE: That's correct, on average.

REP. HYDE: But the ultimate price is going to be set by supply and demand. And therefore, isn't there a fairly small market for ethanol-based RFG?

MR. PERCIASEPE: Did you say small market, Mr. Chairman?

REP. HYDE: Yes, ethanol. I'm talking about ethanol.

Oh, by the way, that's a motion to adjourn. I want to keep everyone advised of the progress of Congress today. (Laughter.) REP. CONYERS: Well, you're not making any of the votes; we're all aware.

REP. HYDE: Well, I set my priorities. We invite people to come to a hearing on a very important subject of national interest. Now we could either continue to do that, or we could run back and forth to jump through the hoops of those whose noses are out of joint because they didn't get their way on the rule. I choose to stay here, and so do you, I'm happy to say. And Mr. Delahunt, and Mr. Scott. I'm proud of all of you.

REP. CONYERS: We commend you for staying, Mr. Chairman. I was bragging about it.

REP. HYDE: Well, I solicit your commendation. (Laughter.)

REP. CONYERS: You got it.

REP. HYDE: That's close to condemnation.

MR. PERCIASEPE: Does that come off my time?

REP. HYDE: Off your time, yes.

MR. PERCIASEPE: Mr. Chairman, let me answer your question as best I can.

The Congress when they put together the Reformulated Gasoline Program in 1990 also specified in the law that 2 percent by weight of the reformulated gasoline should include oxygen. And there are two what are called oxygenates of choice in the United States today, and we don't specify to anybody which one they use, nor did Congress-- ethanol, which is an alcohol, and MTBE, Methyl Tertiary-Butyl Ether, which is obviously an ether. Both of them have oxygen content.

REP. HYDE: But ethanol is hard to transport, and it evaporates; and the other stuff poisons the ground. So we're in a dilemma, aren't we?

MR. PERCIASEPE: Well, you asked about whether there's a smaller amount.

About 85 percent of the RFG in the United States is -- rough, it fluctuates -- is made with MTBE and about 15 percent is made with ethanol, by my reckoning. So the answer to your question there is, obviously, less RFG in the country with ethanol. But I might add that there are other RFG markets in the country that are using ethanol RFG in addition to Chicago and Milwaukee, although not exclusively, and that is St. Louis and Louisville.

REP. HYDE: Now, I've read that oxygenates don't do that much to make the gasoline burn any cleaner. I'd read where Chevron can manufacture a gasoline product that is every bit of good as the RFG.

What do you make of those arguments? In other words, isn't your program unnecessarily driving the cost up?

MR. PERCIASEPE: I would say Congress' program, but I'll keep going.

The oxygenates have two pretty important roles in clean burning gasoline. One is the reduction of carbon monoxide. And there's a lot of debate about the newer cars and whether they have an effect on them or not. But the bottom line is, the fleet on the road today, with a mixture of vehicles in it, gets a significant improvement in carbon monoxide performance when oxygenates are in the gasoline. About a decade from now, that will be much less as the new cars come on line from the tier two program.

The other very important role of oxygenates is that they dilute some of the other more toxic components of gasoline commonly called aromatics, things like benzine or xylene and tylene (ph) and things of that nature.

And so the reformulated gasoline program that Congress enacted and that EPA is implementing with the oil industry is one that is also designed to reduce toxic emissions from automobiles as well as some of the more traditional air pollutants we look at.

It is possible to achieve some of those performance goals with other recipes of gasoline. I do not know how much that would cost, and cost seems to be a big issue for a lot of people. That was something that I would, obviously, want to analyze before I say it. But from a chemical perspective of how you make gasoline, as best we know, you can meet some of these performance standards with very little oxygenate, but there's a cost involved.

REP. HYDE: Ms. Kenderdine, do you support the notion that it's environmentally irresponsible to allow drilling for additional oil in Alaska?

MS. KENDERDINE: In Alaska, sir, additional oil? No. The administration and the Interior Department has supported additional drilling in the National Petroleum Reserve Alaska. I believe that has begun, and the Department of Energy weighed in with comments on that and did support that. The administration also supported the lifting of the ban of the export on Alaskan North Slope oil. The reason for that, the ban on the export of oil was creating an artificial market between Alaska and California, and it's a declining field. And it was thought that lifting the ban on the export of oil would prolong the life of the North Slope field. The administration does oppose the opening up of ANWR.

REP. HYDE: It opposes the opening up of ANWR?

MS. KENDERDINE: Right.

REP. HYDE: And why is that?

MS. KENDERDINE: The administration feels very strongly that there are certain pristine ecosystems that we should just preserve and not drill on. I would go back to a statistic that I cited earlier in my oral testimony, that if you increase the average fuel efficiency of vehicles by 3 miles per gallon, you save a million barrels of oil per day. That's probably what you would be producing in ANWR if you started developing it now by the Year 2015.

So we would prefer, in the instance of ANWR, to focus on other areas -- Deep Water Gulf, which we have strongly supported, both technologies and policies that have enabled us to drill in the Deep Water Gulf of Mexico -- but also focus on demand-side technologies where you would increase fuel efficiency of automobiles and have the same effect.

REP. HYDE: You support a more efficient internal combustion engine rather than an absent one; is that correct?

MS. KENDERDINE: Yes, sir, although we're developing technologies that are alternative to internal combustion engines, yes. But you're not going to see that for a while.

REP. HYDE: Does the administration oppose even a temporary suspension of federal gas taxes? And do you know the position of the administration on the present gas tax structure and whether the administration would support a temporary suspension of those taxes?

MS. KENDERDINE: I understand that there is concern both within the administration and on Capitol Hill about the suspension of a gas tax. The federal tax is about 18.4 cents, I believe. The state taxes on gasoline are, generally speaking, higher. Although they vary from state to state, I think they're around 22 (cents), 23 cents per gallon. And the concerns are in the areas of, one, ensuring that consumers actually received a benefit of lifting the gasoline tax. There's no guarantee if you lifted a tax that one dime of savings would actually go to a consumer. So we have a concern about that.

And also, I think there's significant concern about how lifting the gasoline tax would affect the Highway Trust Fund state by state and what it would do to highways, bridges and projects that are underway.

REP. HYDE: I just have one more question.

Aren't we more dependent on foreign oil today than we were eight years ago? And doesn't that pose a national security problem?

MS. KENDERDINE: We've become more dependent on foreign oil since probably '88-89, and there's been a dramatic increase in net imports. Net imports are not only imports of oil from other places, but they reflect the difference between increased consumption and imports of oil. So at the same time our imports have increased, our demand has increased dramatically as well.

As I mentioned earlier, U.S. oilfields are very mature producing fields --

REP. HYDE: The world demand has been increasing, the Asian economic recovery; and as Third World countries become more development, it all comes out of the world reserves, doesn't it?

MS. KENDERDINE: Absolutely. I think that certainly at the department we're taking a serious look at world reserve capacity. When you get in situations where the supply and demand of oil worldwide is out of kilter as it has been -- and that's a direct result of OPEC policies, where in '96-97 they increased production, misread the Asian recession, flooded the market with oil, that brought us $10 and $12- oil. So in response to that -- an over-response to that -- they then took oil off the market.

So the excess capacity issues become very important when you see that kind of volatility in world oil prices in price per barrel. And there is not a lot of excess capacity in the world. That's not to say there aren't a lot of reserves in the world; there are huge amounts of oil reserves in the world, but the ability to produce it is limited; and I think that deserves a very serious review.

REP. HYDE: Well, I couldn't agree with you more, and I'm very pleased to hear you say that. It just seems to me, what we desperately need is a recognition of the fact that we aren't producing enough to keep up with the demand -- with the need really -- and we need a reconciliation between the environmental forces, who have a very important and legitimate role to play, and the producing forces, who have a very important and legitimate role to play; and somehow the tension has to be resolved so we can produce more and not be so dependent on the sources that are well beyond our control, at least now.

It would seem to me, an energy policy that encourages that reconciliation is very desirable.

MS. KENDERDINE: Probably in about three weeks, DOE is organizing a conference in Spain -- World Oil -- and it is a data conference. I went to the OPEC nations with the secretary -- we went twice -- and had many discussions. As the secretary was saying, these are our supply needs, illustrating what our view of world data -- EIA went on all of these trips -- was on supply and demand, both in the United States and worldwide; and there was significant disagreement on baseline supply and demand data. There is a disagreement worldwide, and so we want to focus on that and try to get some more agreement on standardized data so that we can more accurately and efficiently read market.

And so that's the first step in an effort to try and deal with some of the volatility that we've seen in the last couple of years.

REP. HYDE: Thank you very much.

Mr. Conyers.

REP. CONYERS: Thank you, Chairman Hyde.

Following on one of the chairman's questions, can someone explain to me very briefly just what the run-out picture is for gas and oil for all of us on planet earth? Because that's what's in back of us. We're getting shorter of oil here, our foreign needs keep going up and consumption goes up here and worldwide.

What is the doomsday scenario on this?

MS. KENDERDINE: Why don't I start with some of the general thoughts on that, and then turn to Mr. Mazur who's our data person.

Probably for the next 20 to 30 years, fossil fuels are going to be the primary source of energy, both for transportation and power generation. There's no doomsday scenario there, although we have significant concerns about a global climate change that is a result of fossil fuel use. But we don't anticipate that the overall mix of power generation or fuel sources will change dramatically over the next 20 to 30 years, not without significant policy incentives to do so.

And the concern that I'd express is not about running out of oil. There's abundant oil, abundant coal, abundant natural gas in the world for the foreseeable future. There are environmental concerns about its use. There's also concern about the ability to produce it and deliver it, so that requires huge capital investments. And so that's where the 30-year profile is where we need to be looking at how to accomplish that.

REP. CONYERS: But the capital investment keeps increasing as it gets more difficult to obtain. I mean, the fields are getting more remote.

MS. KENDERDINE: Oil is a very technology-driven industry, and this is what we invest in to increase our domestic production. 3-D seismic technology, which we developed with industry and the Department of Energy National Laboratories, has dramatically increased the success of exploration. There are much fewer dry hole drills. So while oil might be harder to find, it's cheaper to find because of technology advancements, so there's a trade off there.

REP. HYDE: Mr. Mazur, anything briefly to add?

MR. MAZUR: Yes, just a couple points.

The U.S. Geological Survey recently released new estimates of worldwide oil reserves, and they turned out to be substantially larger than the reserves that other people have estimated. And the difficult part when you take these reserves is to figure out what future production's going to look like, how long these fields are going to be in production and what types of technology are going to be developed over the next number of years to get the resources out of those fields.

Jay Higgs (sp), the former administrator of EIA, gave a presentation about a month or two ago at a geological conference on this point, and basically estimated that worldwide production would be peaking in about 20 or so years, which is longer.

REP. CONYERS: Yeah, we've got to the 30-40 year mark, but my friends beyond that -- I guess you don't want to break to this committee that eventually we're going to be forced, whatever civilization is left on earth, into some huge changes from the fuel methods we use now, right?

MR. MAZUR: Yes, right.

REP. CONYERS: Okay. But we don't want to talk about them too much today because we're working on the price spikes. So I'll research that.

Let me get to a couple of other different kinds of questions. One is the extent of the mergers in the oil industry and what they mean. And then I want to get into zone pricing, where Chicago can get one rate for gasoline per gallon and Detroit gets another.

Mr. Parker, would you start us off?

MR. PARKER: In terms of the mergers, in the Midwest I do not believe that any of the recent mergers have caused an increase in concentration. Exxon and Mobile did not overlap in the Midwest. There were issue in the BP-Amoco, and we did get divestitures and brought some new entrants into parts of Ohio and a few other states in that area of a new entrance. So I do not believe that there has been an increase in concentration in the Midwest, and I think we've taken some very strong steps to try to prevent that nationally, which I think we have accomplished.

Zone pricing is an issue that we have looked at very much in the past. It was the basis for the divestiture of virtually all the gas stations of Exxon and Mobile between here and the Canadian border in the course of that investigation because we felt there was a barrier to entry. How it fits into these Midwest gas prices, I don't know one way or the other.

REP. CONYERS: Well, I didn't expect you to disagree with the problem of mergers since FTC or antitrust had something to do with allowing them in the first place --

MR. PARKER: Yes, sir, we did.

REP. CONYERS: -- so I should have threw that question away.

Now, zone pricing. Let's talk about that. What's the rationale for it anyway?

MR. PARKER: The company's rationale has to do with simply maximizing their profits and finding ways in which they can achieve the returns for their shareholders that they seek to achieve. Without collusion, it is very difficult to find that to be an antitrust violation; however, as I said, in a merger context I think it does make it more difficult for new companies to enter the market.

REP. CONYERS: Well, it raises eyebrows, even though it may not run right smack into the antitrust laws. It might come around to Section 2 of Robinson-Patman (sp) maybe. But we're just talking generally; we can't come down to that today.

The whole idea, as you put zone pricing, is what raises the heckles here. I mean, they're merely raising the prices.

Which are the top gasoline companies that have raised prices during this period that's brought us all into the room? Who are the biggest raisers?

MR. PERCIASEPE: We are looking at wholesale prices. We're looking at terminal prices and trying to figure out when and where the prices came. But I don't have that information until I see the actual pricing data. I believe that the energy agencies have it on an aggregate basis. I can't track it to the extent I'd like until I get some subpoena data back and see who raised price, and when, and who was involved, and what were the facts and circumstances intended upon those decisions.

REP. CONYERS: Well, let me give you three that are public-- Texaco, 473 percent from one period to the other; Conoco, 371 percent; BP-Amoco, 296 percent.

Now you're the government experts here. We're going to have the oil company association people defending these figures. You've got to tell me -- I mean, I hope you can give me some clue as to why I shouldn't be startled about this. I mean, prices are going up and profits are going up.

Is that back to Economics 101 or what? I mean, is there something I'm missing here or is there some hidden rationale?

MR. PARKER: Can I speak to that?

The way the antitrust laws and the other laws in the United States are set up is that somebody engaging opportunistically -- finding an opportunity to raise price through the roof -- is not an violation of the antitrust laws.

REP. CONYERS: No, that's just the good old capitalist system working.

MR. PARKER: As reprehensible as that is, one would hope they'd pay a price in the marketplace, but that's not an antitrust violation. If they do that, and that's facilitated by collusion, then you have a rather massive violation of the antitrust laws, and that's what we're looking for.

REP. CONYERS: Well, that's very helpful because what you're saying is, as long as you don't collude and you keep it right on the market, you can raise it as high as you want.

REP. BILL DELAHUNT (D-MA): Would the gentleman yield?

REP. CONYERS: Yes, sir.

REP. DELAHUNT: Why doesn't competition work in the free market? If the one company keeps elevating into the stratosphere the cost of their product, why don't competitors offer the same product cheaper and acquire market share?

MR. PARKER: Well, that may be what's happening with the downturn in prices already; I don't know. But economic theory would tell you that if prices are up, in a competitive market those prices will soon be bid away. If, however, that mechanism is polluted by collusion, that may not happen; and that's what we're looking at.

REP. DELAHUNT: Would the gentleman yield?

REP. CONYERS: Surely.

REP. DELAHUNT: I thank the gentleman, because I just wanted to follow the line of questioning that he had propounded to Mr. Parker.

When he raised the issue of zone pricing, I would suggest that one could draw the inference, one could accept a presumption of collusion. When you conduct an investigation, and you're trying to establish collusion, how do you proceed, through interviews, through subpoenas? Do you seek direct evidence? Or I would suggest that circumstantial evidence in most cases is better evidence in terms of collusion.

Because, again, the question just posed by Mr. Hyde and Mr. Conyers, it becomes apparent, in terms of common sense, that the most reasonable inference over a period of time is some sort of unstated, silent acceptance that I would suggest is tantamount to conclusion.

MR. PARKER: All right. Let's do a hypothetical. You've got a gas station on one corner, a gas station on another corner. The first fellow goes up from $1.50 to $2 a gallon.

The other guy across the street says, "Whoa, that is a good deal. I can get $2 a gallon, and there's not another gas station for 20 miles; I'm going to $2." That is legal as far as I can tell.

Now, how would you investigate that? Well, you would subpoena all the documents to determine whether there was an e-mail going back and forth saying, "Why don't you be the price leader, and I'll follow?" That's an antitrust violation.

REP. DELAHUNT: And maybe we should revisit our antitrust laws. But I would suggest that it is rather clear, particularly in a zone -- and I presume a zone is a substantial regional geographical area?

MR. PARKER: Zones, in my experience, in big cities can be a square mile maybe.

REP. DELAHUNT: A square mile. Okay. But I guess what I'm suggesting is, in terms of an investigative approach to determine collusion, an examination of circumstantial evidence over an extended period of time -- not just simply on a day-by-day basis, but over an extended period of time -- really speaks for itself.

REP. HYDE: The gentleman's time has expired. And I am going to plead with my members to forego any further questioning because we have six witnesses left, and it is noon. And I know Tammy wants to question. If it's imperative of this panel, then we will entertain it, surely. But I just want to let you know we have six more witnesses. We're having distractions on the floor, and I'd like to get through with this hearing.

Ms. Baldwin.

REP. TAMMY BALDWIN (D-WI): Thank you, Mr. Chairman, I will try to be brief, and I would ask the witnesses to also keep the chairman's remarks in mind.

I wanted to pursue that last point that Mr. Delahunt was making. I understand the issue of a corner gas station watching the activities of the one across the corner as signaling, what we usually refer to it as, and it is illegal type of behavior.

Is there any way in which that type of behavior becomes a violation of any antitrust law if there is, not necessarily CEO to CEO discussions, but a policy within the integrated organization that says, as soon as the gas station across the corner raises their prices, you must keep up.

Are there activities that are illegal?

MR. PARKER: That policy probably would not be illegal. But let me give you an example quickly.

If you look back to the airlines case that happened six or seven years ago that the DOJ got relief in, there the airlines were having advanced price announcements. There they were saying, on the computer reservation system a week from today, on San Francisco to L.A., I'm going to go up by 10 percent. That would go into effect in a week, and then they'd wait and see if everybody else joined. And that was found to be a signaling.

But an immediate price increase where you just put up a sign in my first hypothetical, where they say we're going from $1.50 to $2, and the other man and woman simply follows that, is not an antitrust violation under current law. You'd have to find some plus factor. You'd have to get the waitress from the local diner saying those guys were in here talking about prices an awful long time before that happened or find an e-mail or something like that.

REP. BALDWIN: Mr. Perciasepe, I missed part of your testimony due to votes on the floor, but I understand you were making some comparisons recently about the cost to make reformulated gas going down considerably.

I represent an area that is about 50 miles outside of the Milwaukee non-attainment area. We saw tremendous spikes in prices that paralleled the reformulated gas, even though my constituents rely on conventional gas supplies. I'm wondering why there wasn't a price break in the area that I represent. And I wonder if you could repeat what you had said about recent costs for the Phase 2 requirements?

MR. PERCIASEPE: I'll try to be brief in keeping with the chairman's remarks, and you can look at our written testimony. But I was just trying to summarize the facts of the wholesale prices which is where there would be any effect of RFG, and noting that in the last 13 days the wholesale price of RFG in both Chicago and Milwaukee has dropped around 40 cents. The wholesale price of conventional gasoline in Milwaukee has also dropped about 25 cents over that same time period. And so now, the wholesale price of conventional gasoline and wholesale price of RFG at terminals in Milwaukee are within 7.5 cents or so of each other.

So, again, just like RFG prices have dropped at the wholesale level, so have conventional gasoline --

REP. BALDWIN: We were not seeing that type of difference though at the pump when there was a larger differential between the two, and I'm wondering if you can explain that?

MR. PERCIASEPE: Well, the differential wholesale -- and again, that's what I'm looking at where there is effect -- 13 days ago or 12 days ago was around 19 cents at the wholesale level between RFG and conventional gas in Milwaukee.

MS. KENDERDINE: If I could just add, in the Midwest conventional gasoline in general has been running about 16-17 cents higher than in the rest of the country on the average. So I had listed several factors that were affecting the Midwestern market in prices -- I think you were out of the room -- and that's also affected conventional gasoline prices as well. So you have a conventional gas price hike as well there.

MR. PERCIASEPE: But both of them have come down in the last week.

REP. SENSENBRENNER: The chair will use his prerogative to recognize himself for some questions.

Mr. Parker, two weeks ago, the Milwaukee Journal Sentinel ran a story that indicated that the price of ethanol had increased about $60 per hundred gallons since the 1st of May, which translates into a 6 cent per gallon increase in the price of the type of reformulated gas that's used in the Chicago-Milwaukee market.

I have one quick question of you. And that is, is the FTC going to be looking into the ethanol industry, which is a significant component of this type of reformulated gas, as well as the petroleum industry?

MR. PARKER: Yes.

REP. SENSENBRENNER: Now, to Ms. Kenderdine and Mr. Perciasepe. The increase in the price of ethanol doesn't surprise me because the demand has gone up because this new type of reformulated gas sold in Chicago and Milwaukee uses a significantly greater amount of ethanol than RFG-1 which was sold before June 1st or effectively the first part of May.

We all know that the other additive that the EPA allows to be used in reformulated gas is something called MTBE, which I think everybody agrees now is bad stuff and that it contaminates the ground water and has all kinds of other unhealthy consequences.

Since we're going to be shifting away from MTBE additive gas RFG to ethanol additive to RFG, the price of ethanol is probably going to go up still further as a result of the significantly increased demand. And my fear is, is that the other areas that are required to use RFG are going to experience the same price spike when that happens that Chicago and Milwaukee experienced between the first of May and about the present time.

Has either the EPA or the Department of Energy been able to make an estimate as to the impact on prices when MTBE is replaced by ethanol in these other areas, and if so, how much is it?

MR. PERCIASEPE: We are in agreement with what you just said in terms of MTBE, and we had a blue ribbon panel that suggested that we ought to phase it down. And we have sent legislative principles as an administration to the Congress.

And there was an important element to our principles that I'd like to just outline, and it was designed to try to deal with the issue that you just brought up.

And that is, our recommendations were, give us the authority to phase down or out MTBE; make sure we don't backslide on the air quality benefits; and remove the oxygenate requirement that Congress put in the law so that there's more flexibility on how to meet the clean air goals.

And then separate from RFG and the 10 specific cities that have been identified in the Clean Air Act, create a national renewable fuels requirement that would grow over a 10-year period and be able to work in a more orderly fashion than trying to rapidly do it in the existing 10 areas.

This would start with the existing use of ethanol and renewable fuels and grow over a 10-year period. But part of the design of those principles, which are currently in debate in some of the committees of jurisdiction, was designed to find a formula for a "least cost" approach to making that kind of national transition and preserve the other goals that Congress had.

REP. SENSENBRENNER: But you haven't answered my question. And that is, what kind of price spike is going to be caused when MTBE is replaced by ethanol in the other non-attainment areas that are required to use RFG-2? I have a feeling that my constituents and that of the chairman's and Representative Baldwin have been the guinea pigs where the EPA significantly goofed because they didn't look at market impact on the ethanol market as well as on the petroleum market since this type of gas that you've required us to use is only about 3.5 percent of the total gasoline that is consumed in the entire country. So we end up not getting the economics of scale, and we end up having to pay for the bump in the price of ethanol as a result of the huge increase in the demand that going to RFG has resulted in.

MR. PERCIASEPE: We would agree that it would be more efficient to have a national program. Congress prohibited EPA from having a national RFG program and specified the 10 cities that were required to have RFG. We've even tried to get other cities to opt in, and they have, and we've been turned back on some of them in the court.

So if Congress gave us more flexibility, as we have asked for, we could deal with the issue you're bringing up. But tertiary to that is, we do not believe that the RFG cost is causing these price spikes as you have alluded to.

REP. SENSENBRENNER: But Mr. Perciasepe, the brochure that you issued as in EPA in November said that RFG-2 would cost a penny a gallon more than RFG-1 did. You were wrong on that. By your own estimates, it's now 6 to 8 cents, and now we have this spike in the ethanol market which is another 6 cents, and we've got the Unocal patent infringement decision where the damages have been set by the court at 5.75 cents. So if it was 1 cent -- I've added this up and you're talking about 18 cents right there just with things that I identified.

Now, is the EPA going to put its feet in concrete and keep on going full speed ahead when the economic models that you have used have been so far off, much to the detriment of the consumers and a significant part of the country?

MR. PERCIASEPE: Your numbers are wrong. The cost of producing the RFG is not 1 penny, it is 4 to 8 cents. You have to add it on top of what the cost of producing RFG-1 was, then the incremental cost of RFG-2, and then an incremental cost of ethanol. At the top end of that range is about 8 cents. On the margin when it could be another couple of pennies. But that is the cost estimate; it's not based just on EPA economic models; it's based on work done by consultants that are widely used by the oil industry and refining industry; it's based on the Oakridge National Lab estimates and excellence of others.

REP. SENSENBRENNER: May I respectfully submit that there must be a screw loose in your calculator because the liquidated damages in the Unocal judgment that was affirmed by the Court of Appeals is 5.75 cents a gallon. And the Milwaukee Journal Sentinel article says that the cost of the ethanol is 6 cents a gallon. So now we're talking about 12.75 cents right there, and we haven't gotten into the increased cost of refining and the fact that we're only dealing with 3.5 cents in the national market.

My fear is that, given the fact that the EPA and the Department of Energy were so wrong, is that when ethanol replaces MTBE in places like St. Louis and in the northeast corridor and down in Texas, we're going to see price spikes there like Chicago and Milwaukee have experienced, and then we're also going to see another price spike in Chicago and Milwaukee because we've got to buy ethanol from the same sources that these other areas will.

MR. PERCIASEPE: First of all, let me repeat myself. We are not calling in our legislative principles to replace MTBE with ethanol in the RFG areas. I want to be really clear about that. That is not what we're suggesting should happen to, in part, deal with the issue that you're bringing up. And anybody who says that that's what we're asking for is wrong; you can look it up.

The second thing I want to point out is, today the conventional gasoline in Chicago is selling for exactly the same price as the reformulated gasoline with ethanol in it at the wholesale level, $1.17 a gallon. If you want to say, well, ethanol in RFG is making the gasoline cheaper than RFG. When we look at the rest of the country, including markets that have ethanol in it, like St. Louis and Louisville, we also don't see that kind of price. So you're looking at a temporary situation, other than reformulated gasoline costs, that's causing the phenomenon.

REP. SENSENBRENNER: First, I've gotten a tap on the shoulder, and I would invite you to try to make that argument before an auditorium full of consumers in Wisconsin and Illinois. I don't think it would get very far. And now I'll yield back the balance of my time.

REP. HYDE: Now, reminding the remainder of our panel that we have six more witnesses, and it is 12:15, Mr. Delahunt says he has one little question to ask. And so for the purposes of asking a little question, Mr. Delahunt.

REP. DELAHUNT: Thank you, Mr. Chairman. And it will be a little question.

It's my understanding that this month, as compared to about a year ago, the price of gasoline at the pump went up about 70 cents. I presume that the demand over the course of that year went up, but it went up marginally. And there's a lot of talk, obviously, about OPEC policies and the impact on the American market. And I presume the demand in Europe is relatively constant, maybe increasing marginally. Clearly, Europe relies significantly on the OPEC nations much as we do.

What is the European experience in terms of a price increase? Any member of the panel I would welcome.

MS. KENDERDINE: The price of oil is the world price of oil.

REP. DELAHUNT: Well, what do they experience at the pump? Do they experience the same kind -- if anyone knows?

MS. KENDERDINE: No, they've experienced gasoline price increases just as they experience heating oil price increases as we did the previous winter.

REP. DELAHUNT: Proportionately.

MS. KENDERDINE: I don't know the proportion. We worked a lot with the EIA countries when we went to meet with OPEC and non-OPEC producing nations in March and February. But the impact felt by consumers in Europe is relatively less than here because let's say it's $4 a gallon -- just as an example, not an actual figure -- in Italy, and the price per gallon goes up 20 cents; that's a lot different than here where the price goes up 20 cents a gallon. But the taxes on their gasoline are much greater.

REP. DELAHUNT: I understand that.

MS. KENDERDINE: So the consumers were not as upset in Europe as they are here.

REP. DELAHUNT: But the increases were proportionate in Europe as they were here?

MS. KENDERDINE: It's a world price, although the price of gasoline is affected by not just the price of oil; it's affected by the cost to refine and the cost to distribute. And our refineries nationwide are running at 96 percent utilization right now. In the Midwest they're running at 99 percent. So those are extremely high utilization rates. That affects the price.

REP. HYDE: The gentleman from Pennsylvania, Mr. Gekas.

REP. GEORGE GEKAS (R-PA): Yes, thank you, Mr. Chairman.

In the little example that Mr. Parker was discussing with the other members about one corner gas dealer at $1.50 and the other at $2, and the penchant was you thought that the $1.50 would raise to $2 because the market was there and the profitability was there, et cetera.

I've had discussions with constituents who readily understand it when gas stations across the street from each other have the same price, and they believe that that's collusion and something is amidst. I even had questions when one was 7 cents more than the other, "Why are they charging 7 cents more?" I said, "Why don't you just go to the other one?" But that wasn't satisfying because they want to know why the price differentiation-- hard to explain.

Is one of the explanations that a gas that sticks to a lower price in the face of a higher price across the street is going to have such demand that they might run out of supply? Is that one of the experiences that we've learned in the cataloging of these situations?

MR. PARKER: I took my family to Williamsburg a while ago, and we pulled off the freeway somewhere around Fredericksburg and went into a Sheetz (ph) station, which is an independent station, and the price there was 10 cents a gallon less than I think it was a Shell station or a Mobile station across the street. I couldn't understand why anybody went to Mobile. I went to Sheets.

But what I understand the situation to be based on by my experience in the oil industry is that the big brands have created an aura of quality through their advertising and speed paths and other kinds of things, that they demand that much more in the marketplace than would an independent.

It's just as a result of marketing or as a result of perhaps their additive or their speed paths or something, but the big companies, it is absolutely true, do regularly command a higher price in the market.

REP. GEKAS: I understand that. I'm just asking, in anecdotal evidence over the years, is there any voracity to the notion that a gas dealer who has consistently lower prices would run out of supply, would find that there's no more gas for the next three days, that type of thing?

MR. PARKER: In California, for example, one of the problems they have there is exactly that, that there's not enough supply for the independents. In other parts of the country that's probably not a problem.

REP. GEKAS: In your statement -- this is tough for me to understand -- you say that, "Refiners responded to the crude price increases caused by this crude shortage by themselves cutting gasoline production and using inventories." That's on page 4 in the first paragraph.

That's puzzling to me. Are you saying that the refiners cut production when the OPEC prices, for instance, are up to $32 per gallon? Is that what happens? Why would they cut production? Are they gambling that the price will come down, and they'll be able then to fill inventories with the lower price?

MR. PARKER: I think we're just referring to publicly available reports as to what happened, but the whys and wherefores, I just don't know what the strategy involved --

REP. GEKAS: You don't know that?

MR. PARKER: At this point, I do not, but these people have well thought out reasons for doing things. I just don't know what they are.

MS. KENDERDINE: Could I comment on that, sir?

The refineries right now, as I said, nationwide they're at 96 percent utilization and in the Midwest they're at 99 percent. But what's happening is the market is backward-dated, which means that the current price is significantly higher than the futures price. So it's not a matter of production, they are producing at capacity; it's a matter of not wanting to hold inventory because they're fearful if they hold inventory, they'll lose money on the future price because the future price will be lower. So there's less incentive with these (backward-dated ?) market conditions to hold the inventory, which is a problem as well, because we're not building stocks for, say, home heating oil season.

REP. HYDE: The gentlelady from Texas.

REP. SHEILA JACKSON-LEE (D-TX): I thank the chairman very much. I appreciate the testimony of these witnesses. I happen to be from Texas, and we face high gasoline taxes as well. I also happened to have practiced oil and gas law for about 10 years in the state of Texas, and frankly I have seen strip-a-well litigation, take-or-pay curtailment and I was wondering whether FERC should have been here as well with respect to this issue.

I listed to the testimony of the previous panel -- governor of Wisconsin -- strongly attack the administration for no domestic energy policy. Living in the state of Texas, I can assure you Democrats and Republicans alike who have been president over the last 20 years have had no domestic energy policy. One of the strongest signs of that was the Persian Gulf War, where we went to battle to protect foreign fields of oil.

So I am in a dilemma as to which direction we go. I am considering the wisdom of supporting a repeal of the federal gasoline tax, but as well, I think we are long overdue from real incentives to our domestic oil production. That is something that we have failed to activate.

What I'd like to do is to pose questions, and I would appreciate sort of quick and pointed answers because I'm trying to build a pyramid here. And I'd like to begin with the assistant administrator from the EPA, Mr. Perciasepe. Because I heard the administrator this morning, Carol Browner, testify that it was in 1990 that we gave notice to oil companies of the ethanol requirement, and it is now 2000.

Briefly, is the utilization of that cleaner gasoline so complex and so difficult that it could not have been managed without the so- called blame on that process now as the cause for higher fuel?

MR. PERCIASEPE: Congress laid out the two-step process for the clean-burning gasoline, or RFG, in the 1990 Clean Air Act amendments, and they also mandated that 2 percent of that RFG be made up with oxygen, therefore an oxygenate. The two oxygenates that are in use and were known at that time were MTBE, Methyl Tertiary-Butyl Ether and ethanol. So clearly, there was an intent of Congress to improve domestic -- REP. JACKSON-LEE: Remember, my time is short. Can you just get to the complexity of why that -- is it so complicated?

MR. PERCIASEPE: Ethanol has been used in RFG since the first phase which took effect in 1995. The second phase took effect this year. The requirements for the second phase of RFG have been known since December of 1993 when the rulemaking pursuant to Congress' direction was completed.

REP. JACKSON-LEE: So any efforts to get to the point where we are today could have been acted upon from 1993? There was no surprise attack; is that my understanding?

MR. PERCIASEPE: I don't see that there was any surprise.

In fact, if somebody could help me and put that chart back up over there. I know you all are going to stare at me when I do this, and this will take very quickly.

I beg somebody's indulgence to put that chart that's easily available here. Thank you very much.

You can see here, the wholesale prices in Chicago-Milwaukee dropped in the last 13 days to below what they were at the beginning of the program. Whatever was done -- and not to say what was done and what the cause was -- for whatever reason, we still don't know why that couldn't have been done in April.

REP. JACKSON-LEE: I appreciate it because we're trying to be problem solvers, and I apologize for rushing.

Mr. Parker on the FTC, I am understanding testimony has already been offered that we're at lower cost per barrel. I can't understand the jump from the lower cost at this point to sort of the high cost at the pump.

Will your investigation look to see whether the oil companies can cover their expenses reasonably -- because we expect that that is part of their duty too -- and not have prices the way they are? Where will your investigation take us?

And I do have a question for the representative from the DOE, so I'm hoping that he can answer quickly. Thank you.

MR. PARKER: We will subpoena all kinds of pricing records and look at exactly that topic. I don't see how you could address the question without considering what you just mentioned, and we most certainly will.

REP. JACKSON-LEE: Let me ask the administrator from the Department of Energy. Coming from Texas, we know that we have a project on the books, the Longhorn Pipeline, that would help greatly areas west of Austin out toward El Paso. We realize that there are some EPA considerations; but as the DOE has a responsibility, I want to balance EPA responsibilities with, of course, getting cheaper oil prices to citizens in Texas who are desperately in need.

What has been your provision on moving along the DOT and the EPA to in a timely manner to do their jobs with respect to getting their reports out so we can move this project along? I don't want to deny those who are raising concerns, but it seems a little bit beyond reason --

REP. HYDE: The gentlelady's time --

REP. JACKSON-LEE: -- that we have not moved this issue along.

I'd ask the gentleman for an additional one minute, so that the administrator, Ms. Kenderdine can answer the question. This is an important issue for us, and I'd like to have the question answered.

MS. KENDERDINE: I understand that the Longhorn Pipeline is an issue that is being worked. The concern is whether you do a full- blown EIS or an environmental assessment. That is a decision that is being worked with EPA and the Council on Environmental Quality at the White House. The Department of Energy doesn't have a specific position on the pipeline. I would say generically that we are very concerned about product supply, and any effort that gets additional product to the market, certainly in these market conditions, would be welcomed, provided that it complies with the requisite, environmental requirements.

And I understand there's a state of California report saying that this pipeline would be an additional 100,000 barrels of oil to California --

REP. JACKSON-LEE: Beating their clean air standard.

MS. KENDERDINE: Yes. We are not deeply involved in whatever negotiations are going on on this pipeline; that's an EPA and DOT and CEQ (sp) issue.

REP. JACKSON-LEE: Well, let me just say that they may be making the decisions, but the DOE should certainly be in the drivers seat of moving it along. And I frankly think, as I am asking the other parties here to answer questions about air quality and competitiveness, I think the DOE needs to do its job too with respect to pushing this matter to some resolution.

MS. KENDERDINE: I'll let the driver at DOE know that.

REP. JACKSON-LEE: I appreciate it very much. Thank you.

I may have some additional documentation I'd like to put in the record, Mr. Chairman, but not at this time. But I'd ask unanimous consent to have my statement for this hearing put in the record.

REP. HYDE: Without objection.

REP. JACKSON-LEE: Thank you.

REP. HYDE: The gentleman from North Carolina.

REP. HOWARD COBLE (R-NC): I thank the chairman. And I'll be brief, Mr. Chairman.

Mr. Parker, my friend from Massachusetts discussed secret collusion with you. I propose to be no expert on proving secret collusion or silent collusion, but as I understand it, when silent collusion is alleged, the law requires some plus factors. Give us a sense of what plus factors might be in the gasoline situation.

MR. PARKER: Just speaking generally, you have price increases and coordination that follow trade association meetings, that follow times at which the companies have gotten together. That would be a classic way. That's why when you look at this, you look for opportunities that these companies have had to talk to each other. I'm not speaking just about this industry; I'm speaking in general in a price-fixing investigation. But the opportunity to collude followed by price increases is most certainly a plus factor that any court would recognize and trial lawyer would know about.

REP. COBLE: During our comings and goings to and from the floor, I got in on the tail end of this from the first panel, but I think one of the governors indicated that a waiver had been extended to the St. Louis area as opposed to Milwaukee and Chicago. Elaborate on that, if you will, or anybody who can elaborate on it.

MR. PERCIASEPE: Yes. St. Louis, when there was a break in the Explorer pipeline -- which is a pipeline that goes from the Houston area all the way up through Chicago -- there were shortages and run- outs in terminals in St. Louis. In other words, there was very quickly going to be no gasoline to be delivered at all to the filling stations. And it's important to note that St. Louis gets about 70 percent of its gasoline off of this pipeline, whereas Chicago and Milwaukee get 10 to 17 percent of their gasoline off of this pipeline. So we granted a delay in the start of the program in the St. Louis area, not an interruption in it, which has its own ramifications, but a delay in the start to allow that to happen.

Now, in Chicago and Milwaukee when we went out -- and the Department of Energy assisted in this -- to look to see if there was that kind of situation in the terminals, we found tight supply but adequate supply to meet the demand, and all contracts were being met. And, obviously, Chicago-Milwaukee have a more diverse source, including refineries, in the area.

REP. COBLE: Mr. Chairman, my red light has not illuminated, and I yield back my time.

REP. HYDE: Thank you very much.

Mr. Scott of Virginia.

REP. SCOTT: Thank you, Mr. Chairman.

Ms. Kenderdine, you spent most of your time talking about oil. I'd appreciate it if you could tell us after the hearing what we're doing in terms of research and solar wind, geothermal, natural gas and other alternatives forms of energy to reduce our demand on oil, and what we need to do legislatively to help you in those areas. And don't answer now, please.

I appreciate the chairman's indulgence.

REP. HYDE: Thank you very much, Mr. Scott.

The gentleman from Texas, Mr. Smith.

REP. LAMAR SMITH (R-TX): Thank you, Mr. Chairman.

Mr. Chairman, my constituents and others across the country have been hit by the highest gasoline prices in history. I believe it is due in large part to the administration's lack of a comprehensive energy policy. Domestic oil production has plummeted 17 percent since 1992. The United States now imports over half of its petroleum products. We've become dependent on foreign oil, and as the administration has discovered, are subject to the whims of oil sheiks half way around the world. The most powerful nation on earth watches as our Energy secretary begs foreign oil producers to increase their output.

Our best defense against being held hostage by the world oil cartel is an energy policy that increases domestic production. Our nation's oil and gas industry is battered by foreign oil, high taxes and over-regulation. Oil production is less today than in 1986. We need policies that will increase our domestic production not humiliate America around the world.

Congress should pass, and the president should support, a marginal well tax credit that will keep wells on line when prices drop, tax relief provisions such as percentage depletion expansion, delay rental payments that are deductible as business expenses and the deduction of geological and geophysical expenses as well. Many of these provisions were included in last year's tax reform legislation which the president vetoed.

We must develop a national energy policy that will reduce dependence on foreign oil and stabilize prices. It would be nice to have the administration's help or motorists might pick a new service station attendant.

Mr. Chairman, I have a question. My first question is for Ms. Kenderdine. And the question is this.

What substantive policies is the administration willing to support that will stabilize prices and increase production? And I'd like, if you would, to be very specific about what results you think will occur because of these policies that you might support. And you're welcome also to address the specific suggestions I made as far as changes in policy as well.

MS. KENDERDINE: I'd like to start with that.

The president announced on, I believe, March 18th, that he did support delay rental, expensing of geological and geophysical costs and expensing of delay rental payments.

There has been a great deal of discussion about a marginal well tax credit. The secretary of Energy has actually pushed, and I think he's made that clear in many hearings that he has pushed within the administration for a marginal well tax credit.

REP. SMITH: Is the administration going to support those tax credits?

MS. KENDERDINE: Within the administration there are as many equities on energy issues as there are in the Congress, and the Treasury Department has equities in that, and environmental agencies have equities in all these things and the Interior Department does as well. And that is a difficult process when you are considering losses of revenue and the effectiveness of a marginal well tax credit. We continue to discuss it. We have met at the White House on a marginal well tax credit many, many times, and we are working that as hard as we can. Our requirements are that it needs to be cost effective and not hurt the Treasury. So those are the issues that we're dealing with.

I understand the value of preserving a marginal well resource, and the model that we are looking at is a marginal well tax credit that would essentially kick in right above the shut-in cost because what we want to do is keep these wells from being shut in.

REP. SMITH: So far, the only thing I've heard that you say you support is the deduction of geological and geophysical expenses; is that correct?

MS. KENDERDINE: No I said delay rental payment as well.

REP. SMITH: As well? And what about percentage depletion?

MS. KENDERDINE: Percentage depletion we have not been working on, although I believe that we supported percentage depletion for small producers in 1997 I believe it was.

REP. SMITH: And do you think just these couple items the administration supports -- not counting the items that you're discussing -- is really going to have a substantive impact on stabilizing prices and increasing production?

MS. KENDERDINE: Sir, the administration's supported deep water royalty relief legislation in 1995. I worked that and spent a great deal of time on that at the Department of Energy. In the last five years, that piece of legislation, now statute alone, increased oil production in Deep Water Gulf by 279 percent. Within the export ban on ANS oil, that has resulted in increased production on the Alaskan North Slope.

We privatized the Elk Hills Petroleum --

REP. SMITH: My time is up. I appreciate your answer. My point is that all that the administration has done so far has resulted in our importing more than half our oil and in the highest gas prices in history, so I don't think the administration is doing enough.

MS. KENDERDINE: The increase in import trends has been in existence since the late '80s, and our fields are mature. We're trying to reverse that trend.

REP. SMITH: I trust you're not satisfied with what we're seeing today; is that correct?

MS. KENDERDINE: No. And EIA projections show the decline in domestic production leveling off by 2005. That is largely a result of technological advancements which I have not discussed with you. But we invest a great deal of money at DOE in improving oil and gas production technology. As you know, sir, if you're from Texas, oil and gas production technology is an intensive business, and we spend a great deal of time investing in that.

REP. HYDE: The gentleman's time has expired.

Mr. Chabot, the gentleman from Ohio.

REP. STEVE CHABOT (R-OH): Thank you, Mr. Chairman.

I've been to quite a few hearings on this whole issue of late, and I've carefully listened to the chain of events that supposedly led us to this place. For example, OPEC production cuts, alleged illegal price fixing by domestic oil companies, the increased cost of reformulated gas, pipeline breaks and fires, exorbitant federal gasoline taxes that are 18 cents on every gallon of gas that U.S. citizens buy, just to name a few. But one can't help but wonder how can all this possibly happen at once if someone isn't asleep at the switch?

Bill Richardson, the Clinton administration's Energy's secretary, himself said that the administration was "caught napping." And I'm a little tired of all the rhetoric and the smoke and mirrors by this administration trying to deflect the blame and not really have a true accountability to the American people and what the American people are going through, particularly in my area of the country. I'm from Cincinnati, Ohio, and the Midwest, Illinois and Ohio and other states are having one heck of a time, and people are paying absolutely exorbitant prices at the pump.

First, how can Joe Lockhart, the president's spokesman, make comments like, "We are in the busy summer season.

Prices may go up a bit," when they're up something like 50 cents a gallon since just last Fourth of July?

I find particularly curious the fact that the oil refineries had to physically draw down all their old gasoline from massive storage tanks in order to begin refilling them with the reformulated gas -- or RFG as the lingo that's used up here -- causing an inevitable supply shortage. And this was done in May and June.

Who made that decision? My question to the EPA is, why did the EPA make the new reformulated gas requirements go into effect right before the busiest driving season of the year, in May or June? I mean, who was the genius who made that call?

And then there's the vice president, and just looking at some of the things that Al Gore has said. Just last week he said, "I am now, as I have always been, on the side of the consumers who are in a situation like this, and they need somebody willing to fight back."

Now this is the same guy who had said -- he's long advocated higher gas prices as a way to keep Americans out of their cars. For example, in his book, Earth in the Balance, Mr. Gore said, "One of the logical first steps in changing our policies in a manner consistent with a more responsible approach to the environment is higher fuel taxes." That's what the vice president said.

He also is on the jacket of a book written by Paul and Ann Ehrlich, Population Explosion. In that book there's a quote that says, "The United States could start by gradually imposing a higher gasoline tax, hiking it by 1 or 2 cents per month until gasoline cost $2.50 or $3 per gallon comparable to prices in Europe and Japan."

That was said in the book. And Vice President Gore on the jacket of that book, in promoting the book is quoted as saying, "The time for action is due and past due. The Ehrlichs have written the prescription." So he's clearly stating that he believes the way we keep Americans out of their cars is to continue to raise the gas prices.

And I think there is some accountability due here from this administration, and I'd be pleased to have any of the members who are here on the panel this morning please respond to anything that I've indicated here.

MR. PERCIASEPE: I'm Bob Perciasepe from EPA. I'll try to hit a couple of the points that you directed at the EPA in terms of this program.

First of all, in terms of the start-up time of the program; it was mandated by Congress in 1990 to start for the summer season in 2000. The reformulated gasoline program is a summer fuel that is designed to reduce emissions of Ozone forming chemicals from automobiles in the summer months.

REP. SMITH: Was that recommended by the EPA, the Environmental Protection Agency?

MR. PERCIASEPE: This was a bill that was passed by Congress and signed by --

REP. SMITH: It was recommended by the EPA; is that correct?

MR. PERCIASEPE: By President Bush. EPA I'm sure was involved.

REP. SMITH: President Clinton is in charge of the EPA right now, I believe; is that correct?

MR. PERCIASEPE: Right. And we're implementing Congress' program.

Let me answer the other question on the timing. Again, this is something that as been known since 1990. It is something that we had a regulatory negotiation process with the oil industry and the states to put in place back in 1994.

Let me say something quickly about the tanks. Based on that work that was done with the industry, there was a decision made to have the tanks turn over earlier in the spring to avoid any problems on a specific date. And one of the things that the program has is that the tanks turn over in early May and late April. We do inspections to go out and make sure that the tanks have turned over. And most of the tanks in the Chicago-Milwaukee area are turned over by May 1st. So by May 1st, long before this started, the turnover you mentioned in terms of the summer to winter gasoline had occurred. There were two tanks I think that had to take longer to the end of May.

Again, this tank turnover has been going on for a long time. The RFG program in the first phase started in '95, and tank turnover had to take place at that time too. And there might be a difference in the amount of the turnover, but there was a lead time provided for it to occur, and when we went out and looked at that in May, it had occurred. So it was obviously a new turnover process, but there was nothing noted in our inspections of unusual from years in the past.

REP. HYDE: The gentleman's time has expired, and all time has expired for this panel. And I want to thank you. Each one of you have made a substantial contribution to our understanding of this complicated problem, and I am grateful to you for your contribution. Thank you.

The next panel consists of six witnesses from industry and other organizations who will provide us with a variety of perspectives.

First, we have Mr. Red Cavaney, the president of the American Petroleum Institute. He is a graduate of the University of Southern California and served three tours of duty as a naval officer in Vietnam. Before coming to API, he was a banker, a White House aide, the CEO of a yacht manufacturer and head of the American Paper Institute and the American Plastics Council. He took his current position in 1997.

Next, we have Mr. Bob Slaughter, general counsel of the National Petrochemical and Refiners Association. He is a graduate of Yale College and Georgetown Law School. Before taking his current position, he worked as an aide to Congressman Bob Krueger. He has also worked at Pacific Resources, the National Gas Supply Association and Amoco. He took his current position in 1999.

Next, we have Mr. Eric Vaughn, president of the Renewable Fuels Association. He is a graduate of Alfred University and Syracuse University. Before taking his current position, he served in the House and in several positions at the White House. He took his current position in 1985.

Next, we have Mr. Bill Ichord, a vice president with Unocal Corp. He is a graduate of Denison University and Washington University Law School. Before taking his current position, he worked at the U.S. Department of Energy. He also served as antitrust counsel to the Senate Judiciary Committee, and he took his present position in 1988.

Next, we have Ms. Wenonah Hauter, the director of the Critical Mass Energy and Environmental Program for Public Citizens. She's a graduate of the University of Maryland. Before taking her current position, she worked on poverty and aging issues in rural Virginia and at the Union of Concerned Scientists. She took her current position in 1997.

And I will turn to Ms. Baldwin to introduce our next witness.

REP. BALDWIN: Thank you, Mr. Chairman, for allowing me to introduce my constituent, Jane Snowden.

Jane is a resident of Stoughton, Wisconsin and is director of the Meals on Wheels Program in Madison, Wisconsin. Jane's expertise and caring for the homebound are evident. She has been with Meals on Wheels for 17 years and has been the director for the past 8 years. She has also served on the Board of the Meals on Wheels Association of America. Jane's testimony of the situation back home will bring a human face to the crisis that we will investigate today.

I thank her very much for agreeing to testify, and I might add that her program has touched my family personally. We're very grateful for its existence.

Thank you, Mr. Chairman.

REP. HYDE: Thank you, Ms. Baldwin.

And we'll start with Mr. Cavaney with the hope that you can hold your remarks to five minutes. The full statement that you have prepared will be made a part of the record. And thank you, and you go first.

MR. RED CAVANEY: I'm Red Cavaney, president and CEO of the American Petroleum Institute, the national trade association representing all sectors of the U.S. oil and natural gas industry. Thank you for this opportunity to present the views of API's members on gasoline prices, competition and other matters. Our members understand their customers' concern over recent high gasoline prices. They work hard to ensure consumers have a readily available and affordable fuel supply, and the historical record attest to their success in that regard.

Over the past decade, gasoline has been more affordable than ever. Adjusted for inflation, 1998 prices were the lowest ever. In 1999, they were the second lowest. Prices have been low because companies have competed hard to reduce their costs and because supplies have been plentiful. But, as everyone knows, gasoline prices in 2000 have increased not to record levels, but far above where they were 12 to 18 months ago; and in the Midwest they are above the higher national level for four reasons.

First, world crude oil prices have sharply risen-- the result of decisions by OPEC and other foreign producers to remove millions of barrels per day of crude oil off world markets while demand was increasing. Since crude oil accounts for about 60 percent of the cost of gasoline, excluding taxes, an increase in crude oil prices directly impact prices at the pump. Over the past two months, the cost of crude oil has risen 35 percent.

Second, inventories have been lower than usual. With crude prices high, companies have built inventories more slowly. And prior to June 1, companies were clearing storage tank of winter time fuel to accommodate the new, cleaner-burning gasoline when some shortfalls were experienced in the Midwest due to pipelines and other problems. Imports into the region are critical because Midwest refineries make less than 85 percent of the gasoline that is consumed in the region.

Third, demand for gasoline has been increasing as it usually does during the beginning of the driving season. According to the Department of Energy Information Administration, "Gasoline demand in the Midwest seems to be growing more strongly in 2000 than it has for the past couple of years in the region."

Fourth, the new, difficult-to-make, cleaner-burning gasoline, which was introduced on June 1st, cost more to manufacture everywhere with special problems that have developed in the Midwest where ethanol is our customer's preferred oxygenate. Refiners weren't able to make quite as much of the special base fuel as quickly as needed, tightening supplies, which in turn pushed up prices. Other factors have also played a rule, including the Unocal patent infringement case that has created uncertainty and risk for many companies making or importing cleaner-burning reformulated gasoline.

For all these reasons, today's gasoline supplies haven't been enough to meet the demand at the record low prices that consumers enjoyed not too long ago; that's why prices rose. The same conclusion was reached by two government reports that were issued last week; the Congressional Research Service Report and the DOE's Energy Information Administration's latest report of June 20th.

The price increases have been painful, but supplies have been well allocated. Moreover, the higher prices are providing an incentive for companies to get every single gallon of gasoline to market that they can. Refiners' supply in the Midwest are running all out, as you have heard, and added supplies are beginning to exert downward pressure on prices. In fact, spot market prices for the Chicago market started falling back on June 7th, less than a week after the new gasoline was introduced, and they have since fallen by 30 percent. I note that this date, June 7th, was before anybody called for any FTC investigation. Prices at the consumer level typically fall on such reduction at varying intervals, depending on how much of the higher price product is still in the system and other factors. Already pump prices are starting to head downward.

Gasoline is much like any other commodity product, although it differs in one very important aspect. When a drought reduces the corn harvest or a freeze cuts citrus production, prices go up. When corn gets expensive, people can switch to potatoes or another product where supplies are more plentiful and prices lower. For gasoline, substitutes are not readily available, so consumers feel stressed. Yet, the system ultimately works to their advantage. Over the longer term, gasoline prices have traditionally trended downward.

The current situation underscores our need to revisit our national energy policy, and we would offer at least four critical areas to call for attention.

First, greater access to government lands is needed to find and develop more domestic oil and natural gas resources and cut our reliance on foreign oil which now fulfills 55 percent of U.S. needs.

Second, we also need more access to foreign oil supplies. A wider range of foreign oil supply sources clearly benefits U.S. consumers, but current government policies -- specifically, unilateral sanctions -- have placed some of those sources off limits to the U.S.

Third, coordinated implementation of the environmental rules impacting consumers and the industry are also needed. Government can reduce the potential for market volatility by making environmental regulations more reasonable and workable through a more studied and realistic view of the impact of proposed regulations. Improved legislation would give companies more flexibility to adjust to problems that may have temporary impacts on supply and price.

REP. HYDE: Mr. Cavaney, are you coming to your conclusion?

MR. CAVANEY: Yes.

REP. HYDE: Okay, thank you.

MR. CAVANEY: And fourth, expedited permitting on building and modernizing of facilities for the manufacture and delivery of gasoline diesel fuel, natural gas and heating oil are very, very important.

U.S. oil and natural gas companies know how to make and delivery gasoline, and they strive to be as efficient as possible. With a more effective energy policy still fully protecting the environment, our members could even better serve the consumer, and the risk of market volatility would be reduced. Thank you.

REP. HYDE: Thank you, Mr. Cavaney.

Mr. Slaughter.

MR. BOB SLAUGHTER: Mr. Chairman and members of the committee, let me first thank you for your invitation to appear this afternoon. My name is Bob Slaughter, and I serve as general counsel of the National Petroleum, Petrochemical and Refiners Association, which represents almost all U.S. refiners.

NPRA agrees that many of the problems we are now experiencing are due to readily understandable factors-- the increased cost of crude or raw material, a new grade of environmental gasoline, regional supply disruptions and low inventories of crude and refined product.

Experts seem to agree with that assessment -- the Congressional Research Service, the National Petroleum Council -- the joint industry-government advisory body -- and Cambridge Energy Research Associates, headed by Daniel Yurgan (sp), the author of The Prize -- in a recently issued report, Gasoline and the American People. They all speak of the impact of these factors on gasoline supply and cost. I recommend those studies to the committee's attention.

The refining industry has been coping with difficult times. According to the previously mentioned National Petroleum Council report, the refining industry's return on invested capital over the past 10 years averaged 4 percent, roughly the passbook savings rate at the local bank. During much of the same period, refiners were called upon to invest about $22 billion in environmentally-related expenditures, including the RFG program. An earlier NPC study determined that those expenditures were likely to exceed the book value of the entire refining industry.

As a result, the industry has been going through a period of great change. Roughly one-third of the industry's assets have changed ownership in the past five years. Some refineries have been sold, a few more than once; and others have been merged into new companies or they have become part of joint ventures often under the operating control of a different company than before. Some refineries have closed their doors. The outlook for the next 10 years is for continued difficulties.

The first chart I brought with me today is the Regulatory Blizzard Chart. It is a time chart of environmental initiatives which are certain to confront refiners in the next 10 years. These initiatives are largely uncoordinated; and if history is any guide, their impact on energy supplies will be ignored or downplayed. They are also extremely expensive.

The Gasoline Sulfur Reduction Program will cost the refining industry $8 billion according to the NPC report. Diesel sulfur reduction, if done in conformity with EPA's proposal, will cost around $10 billion. And the cost of responding to MTBE-related problems may take the combined total above $20 billion, and this for just three of the programs on this chart.

The refining industry is committed to providing cleaner, more environmentally-acceptable products to consumers such as RFG-2. Experience teaches, and the NPC study confirms that refiners will continue to invest to provide petroleum products to consumers. Also, the NPC study predicts that supply disruptions will occur more frequently as we implement environmentally-driven fuel specification changes. In English, this means that situations like the recent one in the Midwest will occur more often in the future.

The refining system is already stretched to the breaking point in producing and distributing a multitude of products, some seasonal, some not. A major eastern pipeline company has specifications for 38 different types of gasoline shipped on its lines.

The second chart I have with me shows the geographic distribution in the eastern United States of the 10 different summer gasolines, which one of our member companies, Citgo, has to produce to meet varying environmental requirements. We're talking about a balkanization of the gasoline market here.

So we know that new environmental fuel requirements are certain and that they will increase the stresses on our refining system, which are already apparent. We can respond to this situation in one of two ways.

We could act as if product improvements are free, continue to disregard the impact of huge new costs on an increasingly challenged industry and claim malfeasance when supply disruptions occur. We could even suggest unrealistic solutions which could actually drive up fuel prices but which may have political popularity.

Or instead of that, we can work together cooperatively to balance environmental standards and the need to maintain adequate supplies of petroleum products. We can set reasonable goals to achieve these ends in the form of performance standards and give the industry enough time to meet them. We can sequence new environmental programs to avoid unnecessary overlaps and try to perceive situations that might lead to supply and price disruptions which are harmful to both refiners and consumers.

NPRA hopes that we learn from the mistakes of the present and the past and take the second path. We can begin with EPA's proposal for diesel sulfur reduction, which is fantastically expensive and may reduce highway diesel supply by up to 30 percent.

Congress, the administration and industry stakeholders should work together to fashion energy policies for the future. Protecting America's supply of highway diesel, which is our premium commercial fuel, is an excellent place to start.

I look forward to answering your questions, and I thank you again for the invitation.

REP. HYDE: Thank you, Mr. Slaughter.

Mr. Vaughn.

MR. ERIC VAUGHN: Mr. Chairman, members of the committee, Mr. Conyers, I want to thank you for the opportunity to be here today. My name is Eric Vaughn. I'm the president and chief executive office of the Renewable Fuels Association. We're the national trade association for the domestic ethanol industry. We represent over 250 companies involved in the production and development of the renewable alternative energy industry-- 62 companies that manufacture ethanol. We have capacities today of about 1.8 billion gallons.

Not to use the multi-moment of my time on a commercial message, but since 1990 and the pass of the Clean Air Act amendments that required the addition of oxygenated fuels in both carbon monoxide winter time program areas and summer time reformulated gasoline areas, the domestic ethanol industry has more than doubled in size.

Our industry took your challenge, your law and the EPA regulations very seriously. We've invested in these facilities and placed them in states all across the country. The largest point of investment has come to farmer-owned cooperatives. Some 600,00 farmers today own ethanol facilities. Some 31 of them have invested over $3.5 billion to put 900 million gallons of new capacity on line.

I do bring this up for a reason though, because the current supply situation of ethanol in the United States today is that we have in the upper Midwest a 48-day supply of ethanol available for sale and market all across the country. By contrast, the oil industry is operating on something that they refer to as just-in-time supply distribution and delivery, ranging between two and three days of supply-- a very tight supply situation.

People with a lot more knowledge and information than I and the previous panels and in this one can explain to you why and how disruptions can occur, but the consumer in the marketplace all across the country is asking questions, "How do the gasoline prices run up so quickly, and then now that they've fallen back so quickly, why aren't we seeing those reflected at the pump?"

I was just in Detroit trying to answer those very same questions. It's an interesting observation I have to offer to you, specifically because Mr. Conyers is sitting here, in that in reformulated gasoline circles, Detroit's not in the game. Detroit is not an RFG city. Detroit does not require the use of the blending of ethanol. In fact, in the state of Michigan, some 4.3 billion gallons of gasoline is produced and marketed; 27.5 millions gallons of ethanol are going to be sold there this year, 27.5 million gallons.

Mr. Conyers, we're not driving your price up. Neither is federal RFG. In fact, the gasoline that went out of there last week exceeded the gasoline prices of Chicago RFG.

Let's look at some numbers though. Chicago reformulated gasoline with ethanol since June of 1999 is up 106 percent. Chicago conventional gasoline in the same time frame is up 127 percent. MTBE prices -- and there's very little that sold in that part of the country -- is up over 138 percent. And ethanol -- yes, we're up too is up some 18 percent. Ethanol prices are up, a grand total on a blend basis of 1.8 cents a gallon.

A member of this committee -- who has left, and I'd like to talk to him about it later -- refer to the fact that ethanol prices are up 6 cents in the state of Wisconsin. What he should have continued with is, on a blend basis that's one-sixth of 1 cent they're up in this part of this country. If you used his similar analogy of 100 gallons of gasoline and the prices that they're up, gasoline is up $64 in that same time frame.

The ethanol industry has worked extremely hard to provide a renewable fuel, a clean, alternative octane source; and that's with this amendment is that Congress passed. But I must admit, I thought that the EPA was derisively describing as Congress' role in this program as the clean octane amendment; the objective was to reduce dangerous aromatic fractions. And if oxygenates are not added, the aromatic fraction will rise-- the exact opposite of what Congress wanted to occur.

Today in Chicago and today in the upper Midwest -- today's, this morning's prices -- the conventional unleaded gasoline wholesale price is $1.19, and the lowest available is $1.16 at the wholesale level. The reformulated gasoline program with ethanol in Chicago this morning, $1.17, and the cheapest price you can find in that market is $1.12.

Ethanol did not drive those prices up. I'm sorry to say, ethanol didn't drive them down, but I think your committee, Mr. Chairman, the Federal Trade Commission investigation and lots of public pressure coming from members of this committee and members of Congress has helped to shed some light on an incredibly tight supply mismanagement situation.

I thank you for the opportunity to be here, and I look forward to your questions.

REP. HYDE: We have a vote on the floor now that is on the rule, which is an important vote, not a procedural vote, one we will have to attend. There may be one or two procedural votes following that; I'm not sure.

In any event -- and your patience has been sublime -- we will recess until the final vote, and this should be a cluster; and then we'll return promptly. And again, my abiding thanks for your patience.

We stand in recess until after the last vote in this cluster.

(Recess.)

(End of morning session. Afternoon session to follow.)

END

LOAD-DATE: July 1, 2000

Document 4 of 18.


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