SPEAKERS CONTENTS INSERTS
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72–701 DTP
2001
2001
ENERGY ISSUES AFFECTING THE
AGRICULTURAL SECTOR OF THE U.S. ECONOMY
HEARINGS
BEFORE THE
SUBCOMMITTEE ON CONSERVATION, CREDIT,
RURAL DEVELOPMENT, AND RESEARCH
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
APRIL 25, and MAY 2, 2001
Serial No. 107–6
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Printed for the use of the Committee on Agriculture
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COMMITTEE ON AGRICULTURE
LARRY COMBEST, Texas, Chairman
JOHN A. BOEHNER, Ohio
Vice Chairman
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
SAXBY CHAMBLISS, Georgia
JERRY MORAN, Kansas
BOB SCHAFFER, Colorado
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
JOHN COOKSEY, Louisiana
GIL GUTKNECHT, Minnesota
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BOB RILEY, Alabama
MICHAEL K. SIMPSON, Idaho
DOUG OSE, California
ROBIN HAYES, North Carolina
ERNIE FLETCHER, Kentucky
CHARLES W. ''CHIP'' PICKERING, Mississippi
TIMOTHY V. JOHNSON, Illinois
TOM OSBORNE, Nebraska
MIKE PENCE, Indiana
DENNIS R. REHBERG, Montana
SAM GRAVES, Missouri
ADAM H. PUTNAM, Florida
MARK R. KENNEDY, Minnesota
CHARLES W. STENHOLM, Texas,
Ranking Minority Member
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
EARL F. HILLIARD, Alabama
TIM HOLDEN, Pennsylvania
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
JOHN ELIAS BALDACCI, Maine
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MARION BERRY, Arkansas
MIKE McINTYRE, North Carolina
BOB ETHERIDGE, North Carolina
LEONARD L. BOSWELL, Iowa
DAVID D. PHELPS, Illinois
KEN LUCAS, Kentucky
MIKE THOMPSON, California
BARON P. HILL, Indiana
JOE BACA, California
RICK LARSEN, Washington
MIKE ROSS, Arkansas
ANÍBAL ACEVEDO-VILÁ, Puerto Rico
RON KIND, Wisconsin
RONNIE SHOWS, Mississippi
Professional Staff
WILLIAM E. O'CONNER, JR., Staff Director
LANCE KOTSCHWAR, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
KEITH WILLIAMS, Communications Director
Subcommittee on Conservation, Credit, Rural Development, and Research
FRANK D. LUCAS, Oklahoma, Chairman
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JERRY MORAN, Kansas
Vice Chairman
JOHN R. THUNE, South Dakota
DOUG OSE, California
TOM OSBORNE, Nebraska
SAM GRAVES, Missouri
ADAM K. PUTNAM, Florida
MARK R. KENNEDY, Minnesota
EARL F. HILLIARD
Ranking Minority Member
JOHN ELIAS BALDACCI, Maine
DAVID D. PHELPS, Illinois
MIKE THOMPSON, California
JOE BACA, California
COLLIN C. PETERSON, Minnesota
EVA M. CLAYTON, North Carolina
RYAN E. WESTON, Subcommittee Staff Director
(ii)
C O N T E N T S
APRIL 25, 2001
Clayton, Hon. Eva M., a Representative in Congress from the State of North Carolina, prepared statement
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Hilliard, Hon. Earl F., a Representative in Congress from the State of Alabama, opening statement
Lucas, Hon. Frank D., a Representative in Congress from the State of Oklahoma, opening statement
Pickering, Hon. Charles W. ''Chip'', a Representative in Congress from the State of Mississippi, prepared statement
Putnam, Hon. Adam H., a Representative in Congress from the State of Florida, prepared statement
Stenholm, Hon. Charles W., a Representative in Congress from the State of Texas, prepared statement
Witnesses
Coffman, Jack T., senior vice-president, power supply, Oklahoma Gas & Electric Company, Oklahoma City, OK
Prepared statement
English, Hon. Glenn, chief executive officer, National Rural Electric Cooperative Association, Arlington, VA
Prepared statement
Felmy, John C., chief economist and director of policy analysis and statistics, American Petroleum Institute, Washington, DC
Prepared statement
Gorham, Michael R., president, National Propane Gas Association, Grand Rapids, MN
Prepared statement
Heck, Ron, vice-president, American Soybean Association, and member, National Biodiesel Board, Perry, IA
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Prepared statement
Horvath, Skip, president, Natural Gas Supply Association, Washington, DC
Prepared statement
Jensen, Lynn, chairman, National Corn Growers Association, Lake Preston, SD
Prepared statement
Jordan, Jerry, chairman, Independent Petroleum Association of America, Columbus, OH
Prepared statement
MAY 2, 2001
Hilliard, Hon. Earl F., a Representative in Congress from the State of Alabama, opening statement
Prepared statement
Lucas, Hon. Frank, a Representative in Congress from the State of Oklahoma, opening statement
Moran, Hon. Jerry, a Representative in Congress from the State of Kansas, prepared statement
Witnesses
Buckley, Glen N., chief economist and director, Agri-Business, CF Industries, Inc., on behalf of the Fertilizer Institute
Prepared statement
Collins, Keith, Chief Economist, U.S. Department of Agriculture
Prepared statement
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Graves, David, president and chief executive officer, National Council of Farmer Cooperatives
Prepared statement
Maze, Dennis, producer, on behalf of the Alabama Farmers Federation
Prepared statement
Rajkovich, David N., partner, Farmington Fresh
Prepared statement
Rodekohr, Mark, Director, Energy Markets and Contingency Information Division, Office of Energy Markets and End Use, Energy Information Administration
Prepared statement
Swenson, Leland, president, National Farmers Union
Prepared statement
Warfield, Ronald W., president, Illinois Farm Bureau; executive board member, American Farm Bureau Federation
Prepared statement
Submitted Material
American Corn Growers Association, statement
United Fresh Fruit & Vegetable Association, statement
''Post Conference Comments of the California Dairy Coalition of Concerned Energy Users'', submitted by Mr. Thompson of California
ENERGY ISSUES AFFECTING THE AGRICULTURAL SECTOR OF THE U.S. ECONOMY
WEDNESDAY, APRIL 25, 2001
House of Representatives,
Subcommittee on Conservation, Credit,
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Rural Development, and Research,
Committee on Agriculture,
Washington, DC
The subcommittee met, pursuant to call, at 2:08 p.m., in room 1300 Longworth House Office Building, Hon. Frank D. Lucas (chairman of the subcommittee) presiding.
Present: Representatives Moran, Thune, Ose, Osborne, Graves, Putnam, Kennedy, Hilliard, Baldacci, Phelps, Thompson, Clayton, Etheridge, and Stenholm (ex officio).
Staff present: Ryan Weston, staff director, Subcommittee on Conservation, Credit, Rural Development, and Research; Callista Gingrich, chief clerk; Anne Simmons, and John Riley.
OPENING STATEMENT OF HON. FRANK D. LUCAS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OKLAHOMA
Mr. LUCAS. This hearing of the Subcommittee on Conservation, Credit, Rural Development, and Research to review energy supply and demand issues affecting the agriculture sector of the U.S. economy will come to order.
I would like to welcome everyone today to this subcommittee's first of two hearings which will provide our members the opportunity to listen to energy producers and users.
Energy and the American economy is a complex and multi-faceted topic. While this subcommittee does not, generally, follow all energy matters, the effect that energy supply and demand has on agricultural and rural communities is a major concern to this subcommittee.
Since agricultural producers have a low return on investment and equity when compared to many sectors of the American economy, volatile swings in energy and other input costs can drastically alter their net revenues. Higher prices for oil, gas, diesel, electricity, natural gas, propane, and fertilizer caught many producers unaware this past year.
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We need to know what led us to this current situation, how future price shocks can be minimized, do renewable fuels play an adequate role in fuel supply, and how can producers better cope with increased input prices. What is the outlook of the U.S. energy supply and demand in 1 year, 5 years, and 10 years?
According to the Congressional Research Service, U.S. refineries today can only meet 85 percent of the domestic demand for refined petroleum products, while a decade ago, they could meet 94 percent of the Nation's product requirement. Furthermore, the United States now imports 52 percent of its oil, up from 47 percent a year ago. So not only are we importing more of our oil, but we are also losing ground on our refining capacity.
For the record, I am not singling out the oil industry. The other energy industries also face unique internal and external challenges. In order for short and long-term energy goals to be realized, any energy legislation that we consider needs to be comprehensive. We do not have all of the answers and are interested in hearing what our witnesses have to say in order to help develop sound policy. New production techniques and sources, infrastructure needs, regulatory compliance, and hedging tools for energy users and producers must be thoroughly discussed and reconciled.
I look forward to today's testimony, and I turn to Ranking Member Hilliard for any comments he may offer.
OPENING STATEMENT OF HON. EARL F. HILLIARD, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ALABAMA
Mr. HILLIARD. Thank you very much. Mr. Chairman, members, and distinguished guests, I am glad to be here on what, for me, is an historical occasion. Of course, this is the first hearing of this subcommittee that has been held since I became the ranking member.
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The topics in the jurisdiction of this subcommittee are very important and especially important to my district. We have had 3 years of drought in Alabama, and during that time, the conservation reserve set-asides were invaluable in feeding the livestock in the State, keeping them alive, and keeping farmers in business.
Since I represent the Alabama Black Belt, which is among the poorest rural areas in the Nation, rural development is a burning issue in my district and State, and I intend to work intensely on that issue. This subcommittee should be of aid to everyone economically and can be of great importance to the Nation.
Today and next week, we are dealing with testimony regarding the energy crisis that is troubling our Nation and which promises to be a problem which will not go away soon. While power outages and rates in the west are getting the publicity, they are affecting others who do not get publicity. The media rarely covers the rural farmers who spend their lives growing our food. The price of fertilizer has multiplied. Heating costs for poultry growers have increased, and since the farmer does not own the chickens, he cannot pass the cost increase on to the consumer. This is only one instance in one industry of the effect of the increase in energy costs.
This sudden leap in energy costs has become a real endangerment to our food supply, and it is our duty to understand its origins and its causes. It is also our duty to do everything within our power to serve our constituents. It is our duty to restore a fair energy pricing structure so that farmers can rely on our national power supply to serve them at a fair cost.
In the light of all of this, I will listen to the testimony given today and next week, and look forward to working with all of you to end this crisis.
Thank you very much, Mr. Chairman.
Mr. LUCAS. Thank you, Mr. Hilliard, and I look forward to the relationship not only that we have had in past years on the full Agriculture Committee, but working together on this subcommittee to face the challenges on behalf of rural America. The Chair would request that other Members submit their opening statements for the record so that the witnesses may begin their testimony and to ensure that we have ample time for questions.
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[The prepared statements of Members follows:]
PREPARED STATEMENT OF HON. CHARLES W. ''CHIP'' PICKERING, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MISSISSIPPI
Mr. Chairman, I deeply appreciate your decision to hold this series of hearings regarding the agriculture energy crisis. We are all very aware that record-low prices have led to tremendous suffering within the agriculture community. Fortunately, Congress has responded to the needs of farm families and has provided the assistance necessary to help farmers keep their heads above water for the time being. However, the agriculture industry is now being further burdened by skyrocketing prices for fuel, fertilizer, and natural gas. It is vital that Congress now look for avenues to provide additional assistance to ensure that American consumers are ensured the continued availability of an abundant and affordable supply of food and fiber.
While much of the agriculture industry has only recently become concerned with rising energy prices, I have been aware of the seriousness of this situation for some time. The first agriculture sector hit by this crisis on a wide scale was the poultry industry, the number one industry in my home State of Mississippi. Poultry producers in Mississippi and throughout the South have been devastated by a harsh winter coupled with astronomically high natural gas and propane prices. These growers depend on natural gas and propane as sources of heat to keep their birds warm during the winter. Throughout most of the industry, energy prices paid by poultry growers have doubled and even tripled. Keep in mind that poultry producers are not eligible for the Federal assistance programs that are available to the majority of other agriculture sectors. In addition, these growers make huge investments and take on enormous debt to keep their operations up to the standards of the integrators with which they contract to grow birds. Therefore, when poultry producers take a hit of this magnitude, it really hurts.
Let me provide you with just one example which is typical of poultry growers in my State. Don James, a constituent of mine in Jones County, MS, spent more on heating bills for just one batch of chickens during the winter of 2001 than he spent during the entire year of 2000. To put this in perspective, Mr. James' total costs for propane in 2000 was $19,000 which allowed him to raise five batches of birds. However, due to high gas prices and an abnormally cold winter, he paid $18,000 in heating costs to raise his first batch of birds alone in 2001. Mr. James is not heating his poultry houses to simply keep his birds comfortable, but to keep them alive so that he is able to make a living for his family. Mr. James' situation reflects similarly the situation faced by every poultry producer in my district. Many of my producers simply do not have the resources to pay these enormous energy bills.
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I want to do everything possible to provide relief to farmers throughout the country, particularly poultry producers, whose livelihoods are being threatened by rising energy costs. I have introduced legislation, the Farm Emergency Energy Act (H.R. 396), that authorizes the Secretary of Agriculture to provide direct relief to farmers who have suffered and will suffer from the impact of high energy costs. My legislation has been endorsed by the National Chicken Council and was recently introduced by Senator Sessions in the Senate. I urge my colleagues to cosponsor this bill so that we can get relief to our farmers as soon as possible.
Mr. Chairman, again, I appreciate the fact that you are bringing attention to the seriousness of the farm energy crisis by holding this hearing. As a result, it is my hope that we see quick congressional action that will help our farmers meet the challenge of skyrocketing energy costs.
PREPARED STATEMENT OF HON. ADAM H. PUTNAM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF FLORIDA
Mr. Chairman, I appreciate the subcommittee holding this hearing today to review the critical situation now facing our Nation's agricultural producers due to the steep increase in fuel costs over the last year. I have a particular interest in the issue as the cost of harvesting and farming operations has severely impacted Florida agriculture producers.
Citrus growers in my district and throughout the State are now experiencing roughly a 44 percent increase in harvesting costs over last year. Grove care including irrigation has risen 60 percent this year, and half of this is a direct result of the increase in the price of ammonium nitrate fertilizer, and the other half is due to the severe drought conditions now facing Florida citrus growers.
In addition, Florida poultry producers have experienced particular hardships due to increased fuel costs. The price of propane used to board chicks has nearly doubled in the last year and has become a major production cost for the boiler industry. Boiler producers cannot sustain these high-energy costs as the average price of propane per gallon has gone from 80 cents per gallon to over 170 cents per gallon.
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I encourage public and private sectors to work together to address this critical situation and develop an energy policy that incorporates he needs of American agricultural producers.
PREPARED STATEMENT OF HON. EVA M. CLAYTON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA
I want to thank Chairman Lucas and Ranking Member Hilliard for calling these important hearings. I am certain that there are some who will wonder why the Committee on Agriculture is holding hearings on the issue of energy. The chairman and ranking member show great wisdom in recognizing that our current energy difficulties span the economic spectrum.
Because of this, there can be no quick fix to our difficulties nor will there be a magic bullet that will solve all of our woes with a single well-placed shot. The problems of specific economic sectors will require solutions that address their particular issues. It is the job of the Agriculture Committee to do what it can to investigate how our energy problems contribute to the woes of farmers and to recommend solutions accordingly.
In recent years, American agriculture has born tremendous difficulties. As commodity prices have fallen to historically low levels and exports have diminished, the fortunes of American farmers have deteriorated as well.
Now, on top of these adversities, the affliction of skyrocketing energy costs is added. Agriculture is an energy intensive industry. Fertilizing fields, heating barns, drawing thousands of gallons of water—all of these require significant amounts of energy. For every dime that our farmers see their energy bills go up, they see their slim profit margins go down.
Natural gas is a critical component in the production of nitrogen based fertilizers. At the beginning of 2000, the average price of natural gas was $2.37 per MMBtu (million British thermal units). At the beginning of 2001, the contract price for the same amount of natural gas was almost $10. Clearly, when there is a 400 percent increase in one of the primary input production costs, farmers will have to absorb that loss.
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In the First Congressional District of North Carolina, the livelihoods of many farmers depend upon turning a profit on their tobacco crops. Curing and drying tobacco after the harvest often requires a great deal of natural gas. For these farmers, the double expense of expensive fertilizer up front and increased heating costs to cure the tobacco later is a heavy load to bear.
Farmers also suffer alongside all Americans in absorbing the effects of spiking petroleum and gasoline costs. Running heavy farm equipment in the field all day requires huge amounts of gasoline or diesel.
Almost a year ago petroleum prices hovered at almost $40 per barrel—an almost astronomic cost compared to the low prices that we enjoyed throughout much of the 1990's. I have watched gratefully as those prices slowly edged downward in recent months to their current level of $28 per barrel.
However, I've been dismayed and confused to see that, in spite of the major reductions in the price of crude oil, few costs appear to have been passed along to consumers. In fact, the cost of a price of gasoline has barely budged. This during a time in which energy companies and petroleum conglomerates are taking in enormous profits. A few recent headlines will suffice to illustrate that not everyone is suffering the high costs of energy. April 25—''Chevron 1Q Earnings Surge Past Estimates.'' April 23 —''Exxon Mobil Tops 1Q Estimates.'' April 11—''Philips Looks to Beat Yearly Estimates.''
My point here is not to deny companies their fair share of profits, but to point out that the rules of a rational and transparent marketplace are supposed to provide benefits for consumers as well as producers and processors. That is clearly not happening in this instance. It is my hope that this Congress and the administration can take action to ensure that consumers alone do not bear the high costs of energy.
I want to again thank the Chair and the ranking member for holding these hearings today. It is imperative that we move forward and seek solutions that provide all parties their due, but which, at their core, focus on the needs of consumers and seek to enable farmers a sustainable livelihood.
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PREPARED STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
I appreciate Chairman Lucas calling this series of hearings on energy supply and demand issues, and I look forward to working with him and Ranking Member Hilliard to ensure that agriculture's unique needs, as well as its role as part of the solution, are part of the national energy policy debate.
Food cannot be produced without energy, and energy cannot be produced without food. The agriculture and energy industries, so essential to our national security, have been hammered by problems in recent years. Working together, however, they can help each other and make our Nation stronger.
Agricultural producers cannot pass along higher costs to the consumer, and in recent years Congress has had to pump billions of dollars into the farm economy to prevent complete disaster.
For years now, the Nation's oil and gas industry has been devastated by low prices, increased production costs and overall uncertainty. Former Senator Lloyd Bentsen once said that when America imported more than half of its crude and petroleum products, it would have reached a peril point. Well, we are now there. It has been more than twenty years since we had a national energy policy in place, and it is past time to develop another one.
As a nation, we must provide incentives to explore and produce the Nation's remaining oil and gas reserves. We must also research and develop all sources of energy including wind, solar, hydroelectric, and other forms of renewable energy. In short, it is time to find new ways to meet our Nation's growing energy needs.
Last year, Congress passed the Biomass Research and Development Act so that the Energy and Agriculture Departments would continue to research and develop agricultural, forestry, and waste materials into energy sources.
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Over the last 20 years, progress has been made in promoting the use of ethanol at the State and Federal levels. Research must be done to expand ethanol production into areas where corn is not readily available, and ways must be found to use animal manure for energy production.
The time is right to promote the use of bio-diesel, a fuel made from surplus vegetable oils, recycled oils and animal fats. This fuel has passed vigorous environmental, health and engine testing. Soybean growers have spent over $25 million of their own money to successfully commercialize this fuel. Fuels such as ethanol and bio-diesel can be and should be a part of a national energy program.
Our Nation's energy policies should be comprehensive and framed to encourage the development and use of many viable fuels. We need a responsible approach that will infuse our energy sector with both efficiency and competition, seeking to protect America against emergencies in the energy market.
The recent rolling blackouts in California may change forever how the public and policy makers think about U.S. energy policy. In the meantime, American agriculture can provide a ready source of raw materials to help meet our Nation's energy needs.
Mr. LUCAS. I would like to invite our first panel to the table. Mr. Lynn Jensen, chairman of the National Corn Growers Association, Lake Preston, SD; and Mr. Ron Heck, vice-president of the American Soybean Association and member of the National Biodiesel Board, Perry IA.
Mr. Jensen, would you please begin when ready.
STATEMENT OF LYNN JENSEN, CHAIRMAN, NATIONAL CORN GROWERS ASSOCIATION, LAKE PRESTON, SD
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Mr. JENSEN. Thank you, Mr. Chairman.
My name is Lynn Jensen, and I am chairman of the National Corn Growers Association. I would like to summarize my statement and ask that my full testimony be included in the record.
We are pleased to appear before you today to provide our views on ethanol and the current energy situation. As you know, our Nation is facing another energy crisis. We read daily press reports about higher gasoline prices. Today, I want to outline our views on how ethanol and other renewable fuels can increase the supply of motor fuel while providing economic opportunity for rural communities.
Ethanol is a major priority for NCGA. Thousands of farmers have invested in cooperatives that now produce 40 percent of the current ethanol production. Dozens more ethanol projects are being developed by farmer investors. Ethanol is simply the biggest value-added success story in agriculture today.
There are two general types of ethanol processing facilities, known as wet mills and dry mills. Most new ethanol production capacity is in the dry mill technology, using farmer coop business structures. Wet mills are corn refineries. They produce starch, ethanol, corn sweeteners, corn oil, corn gluten feed and corn gluten meal. Dry mills use simpler technology to produce ethanol and dried distillers grains, and that is sold as a high quality feed ingredient. So one of the myths, that ethanol production is taking corn and wasting it to produce fuel, is immediately dismissed when you look at the array of products that come out of ethanol plants.
Ethanol production is efficient. The cost of producing ethanol is far below what is predicted. A 1986 report by USDA predicted that the cost of producing ethanol in 1995 would be $2.11 per gallon. Instead, those costs were about $1.15 per gallon. And now, the industry average production cost is between 95 cents and $1.10 per gallon. Mr. Chairman, research is making a difference. Costs are coming down.
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Ethanol facilities are also energy efficient. The UE analysis found that for every 100 BTU's of energy used to produce ethanol, 135 BTU's of ethanol are produced. That is because corn plants are really very efficient solar panels. They myth that it takes more energy to produce a gallon of ethanol than is contained in the ethanol itself is just that, a myth. Last year, ethanol production set a new record of 1.63 billion gallons, using more than 600 million bushels of corn.
Still, we are concerned about the future of the industry and the support for ethanol as part of the administration's energy policy proposals. Certainly, there will be energy legislation in the 107th Congress. Several bills have been introduced and the White House is expected to release the outlines of their energy strategy soon. It is important for rural communities to have new economic opportunities from an expanding ethanol industry.
NCGA established an ethanol task force to develop the legislative strategy. The following six-point plan outlines our legislative goals. (1) Support a renewable fuels content standard in the energy bill.
(2) Support efforts that achieve an orderly elimination of MTBE from the gasoline supply. Eleven States and the city of Chicago have already banned MTBE and 14 more States are considering similar legislation.
(3) The gasoline supply system is under stress and we are committed to greater flexibility for refiners and blenders. However, let me be very clear. Proposals to eliminate the oxygen standard are not part of our flexibility plans. And for the record, Mr. Chairman, let me reiterate our complete opposition to any waiver of the oxygen rate requirement for California or any other jurisdiction.
(4) Ethanol provides economic, environmental, and energy security benefits. We support preferential tax treatment for ethanol; especially, changes in the small ethanol producer tax credit like those contained in H.R. 5279, introduced in the 106th Congress. Congressman Thune has assured me that he intends to reintroduce this legislation in the near future. We also support changes in the Tax Code that will direct all revenue from ethanol blended gasoline that currently goes to deficit reduction into the Highway Trust Fund.
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(5) NCGA maintains a strong commitment to clean air. We strongly supported proposals that recognized the environmental benefits of ethanol. This principle is central to our commitment to the RFG oxygen rate requirement.
(6) We support the newly established CCC program that is part of the USDA biofuels initiative. This program needs to be continued on a long-term basis and should be authorized in the farm bill.
NCGA also supports efforts in Congress to encourage value-added agriculture. As I said in the beginning of my testimony, Mr. Chairman, ethanol is the biggest value-added success we have going. What will be the next ethanol and how are we going to find it? We have a research agenda that is aimed at finding and commercializing the next ethanol and establishing a carbohydrate industry or economy of the future. And we will work with you to make value-added agriculture a reality in the next farm bill.
Finally, Mr. Chairman, the Congress is faced with difficult choices regarding energy and environmental policy. Our approach is to decouple them to pursue a two-track approach. First, we develop a comprehensive energy strategy that includes a renewable fuels requirement that compliments the oxygen rate requirement of the RFG program, and then develop new environmental policy that considers changes in fuel and vehicle technology that is based on sound science. This would provide the ethanol industry the signals needed to attract investment while maintaining the benefits of current law that has provided millions of Americans with cleaner air.
Thank you, Mr. Chairman. That concludes my statement, and I will be happy to answer any questions.
[The prepared statement of Mr. Jensen appears at the conclusion of the hearing.]
Mr. LUCAS. Thank you, Mr. Jensen. Mr. Heck.
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STATEMENT OF RON HECK, VICE-PRESIDENT, AMERICAN SOYBEAN ASSOCIATION; MEMBER, NATIONAL BIODIESEL BOARD, PERRY, IA
Mr. HECK. Thank you for the opportunity to be here this afternoon. I am Ron Heck, a soybean and corn producer from Perry, IA. I am currently serving on the executive committee of the American Soybean Association and as a member of the Board of Directors of the National Biodiesel Board.
The reasons for this hearing are troubling for American agriculture. These are times when the prices for our commodities are at record lows and energy and other input costs are high, with the threat of getting even higher over the next several months.
While in the short term there is little we can do to completely alleviate this situation, ASA believes the development of a comprehensive national energy plan would help avoid these crisis situations in the future. We feel strongly that a national energy plan should include a viable renewable fuels component that includes both biodiesel and ethanol.
As you know, Mr. Chairman, the last 8 to 10 years, U.S. soybean growers have invested in the research, development, and commercialization of biodiesel. Biodiesel is a mono-alkyl ester-based oxygenated fuel. It contains no petroleum but can easily be blended with petroleum. Biodiesel is typically blended at the 20 percent level with diesel or at the 2 percent level or lower. It can be used in compression-ignition diesel engines with no modifications. Biodiesel in its neat or 100 percent pure form is biodegradable and nontoxic and is the first and only alternative fuel to meet the EPA's tier I and tier II health effects testing standards. Biodiesel is renewable and domestically produced from agricultural resources; namely, soybean oil.
Biodiesel has many environmental and operational benefits. However, I would like to highlight the fuel's lubricity benefits. Even at very low blends, biodiesel contributes operational and maintenance benefits to diesel engines, and this is even more significant when using ultra-low sulfur diesel.
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Last May, EPA proposed a reduction in sulfur content of highway diesel fuel of over 95 percent from its current level of 500 parts per million. Biodiesel has no sulfur or aromatics, and tests have documented its ability to increase fuel lubricity significantly when blended with petroleum diesel, even at blends of 1 percent or lower.
Soybean growers began to invest in biodiesel almost a decade ago, not because we wanted our own ethanol, but because soybean protein is highly sought after as a product, leaving soybean oil as a valuable but abundant co-product. Because of a large supply of vegetable oils, we have a surplus of soybean oil, and that depresses the price of the entire bean.
While biodiesel, as a fuel, is relatively new to our country, it is widely accepted and utilized in Europe, where motorists use 250 million gallons annually. Our biodiesel industry leaders have worked closely with the European industry in sharing research, performance data, and consumer information. The European biodiesel industry is strongly supported by government and by agribusiness.
While biodiesel offers environmental, energy security and economic development benefits, it is not yet competitive in the United States on a pure cost comparison. Public support will be necessary to help the industry develop. Our culture and our policies are formed on petroleum products, most of which are imported. I understand, Mr. Chairman, that you are from an oil and gas-producing State, and I certainly do not want to imply that soybean growers are opposed in any way to the use of petroleum products. In fact, agriculture is a major user of petroleum products, and that is the reason for the hearing today. However, I would like to make the challenge that our country needs to have an aggressive energy policy that includes renewable fuels and power generation as well as significant domestic production of both oil and gas.
We are currently working with the administration on the development of a national energy strategy that we hope will include a strong renewable fuels policy. We are also working with the National Corn Growers Association and the ethanol industry on legislation that would establish renewable fuel standard for all motor fuels, requiring a small blend of either ethanol or biodiesel to be incorporated. consumers would notice no difference in their fuel except that their engines would run just a little bit better.
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The current biodiesel market is small but growing rapidly. Approximately 5 million gallons of biodiesel were produced in fiscal year 2000, up from 500,000 the year before. Approximately 20 million will be reduced this year. If only soybean oil were the feed stock that was used, we would reduce our current surplus of soybean oil by one-third, raising soybean prices by as much as 16.5 cents per bushel.
ASA is currently proposing legislation that would provide a partial exemption to the diesel fuel excise tax to diesel fuel suppliers who use low blends of biodiesel. This is a program that by raising the price of soybean oil, would save the Government more than $2 in revenue for every dollar spent. We propose reducing the Highway Trust Fund for the lost expense of the excise tax with funds that would be available from a commodity credit corporation from the increase in soybean prices.
Mr. Chairman, we think the timing is right for these policies and for a strong commitment to homegrown renewable energy.
[The prepared statement of Mr. Heck appears at the conclusion of the hearing.]
Mr. LUCAS. Thank you, Mr. Heck, for those observations about the sixth district of Oklahoma. And those of you familiar with Oklahoma know that in the course of redistricting, there is not many months left for the sixth district, so as we consolidate down to five.
A question that I put to both of you, this committee, of course, has specific responsibility for authorizing agricultural research programs; and in particular, things like biofuels. Are there specific technologies that need more assistance in order to make biofuels more effective and more efficient? Are there things we should be doing as a committee? Either one of you.
Mr. HECK. Mr. Chairman, the soybean growers have invested many, many millions of dollars into researching these issues, and we are satisfied that we have a viable product in many market situations. However, there is a biomass research and development committee, a joint committee of the USDA and the Department of Energy, that I also happen to be on, that is assigned exactly the task of reviewing those issues. And the co-chairman is Mr. Glenn English, who is also here today, and I would say that we had two meetings, with another one scheduled in June, and we will be looking at those issues, and it would be a little early for a report on that, but there will be one forthcoming by the end of the year.
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Mr. JENSEN. I would just like to say, a few of my comments relating to the cost of ethanol production and what the projections were back in 1986 and what they ended up being in 1995, compared to the projection, a lot of it has to do with the type of research that was partially funded by the Government, in terms of bringing down the cost of production, that is bringing it down, continually, farther all the time.
Another area that we are constantly exploring, and I touched a little bit on in my talk, was the new uses for corn, and what else we are seeing out there that can offset different energy needs, things like the polyester industry like PLA in Blair, NE, and those type of projects. So there has been a lot of good success stories in the past in terms of how these types of research have played into bringing down the cost of production and contributing more to energy security. But giving a specific example of what we need for the future today in research, I would be a little off, I am guessing.
Mr. LUCAS. Mr. Heck, you touched on the question about diesel and the EPA standards. And being one of those farmers out there who owns a 1977 year model tractor, it, of course, is a particular concern to me, the proposal about reducing the sulfur levels. Do you think that the refiners out there, from your observations of what is going on, will be able to produce enough highway diesel and off-road diesel under the present environment when the time comes to meet those requirements?
Mr. HECK. Well, they say that they can't, and I have every reason to believe them, but there is another technical problem as well. As you take the sulfur out, you have to put something back in the fuel to restore its lubricity to keep the engines running properly. And there is a limit to how much detergent, which is the additive—there is a limit to how much detergent you can add back in without having the diesel fuel gel up even in summer conditions because, essentially, it is too soapy. Biodiesel solves that problem quite easily, providing better fuel and longer engine life, and that is why we are proposing the low blends as the best alternative use for now of soybean oil.
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Mr. LUCAS. Thank you, Mr. Heck. Mr. Hilliard, any questions?
Mr. HILLIARD. Yes, I do. Thank you very much. Mr. Jensen, you indicate in your testimony that ethanol has been used in 15 percent of the reformulated gasoline produced on an annual basis. Why is this the case?
Mr. JENSEN. In the reformulated gasoline, are you asking, excuse me, that if, currently, about 15 percent of the reformulated gasoline contains ethanol?
Mr. HILLIARD. Yes.
Mr. JENSEN. And the balance of the gasoline in the reformulated gasoline market, the oxygenated used is MTBE. And that is the component, of course, that is showing up in the groundwater and giving us all the problems across the Nation, which has, in essence, led to a greater opportunity to ethanol.
Mr. HILLIARD. Why not 20 percent or 30 percent?
Mr. JENSEN. Right now, I believe it is a cost issue, that the MTBE is cheaper than ethanol. So in the areas where it is logistically cheaper to put, to blend, MTBE in——
Mr. HILLIARD. At today's prices, that is still the case?
Mr. JENSEN. Yes, it is. I am not sure if I understand—the additive is, whether it be ethanol or MTBE, regardless of the price of gasoline at the pump, it is the price of the addictive that would dictate which product would be used.
Mr. HILLIARD. Now, let me ask both of you a question. Are both of you involved with the administration's energy policy working group?
Mr. JENSEN. To a point, we are.
Mr. HILLIARD. Tell me about you and your industry, and we will let him talk.
Mr. JENSEN. I beg your pardon?
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Mr. HILLIARD. Are you involved in your industry?
Mr. JENSEN. I am sorry. You will have to rephrase the question for me.
Mr. HILLIARD. Are you involved with the administration energy policy working group?
Mr. JENSEN. Staff has been consulting with that group and working with the administration on implementing a renewable standard into that program.
Mr. HILLIARD. Are you working actively on an ongoing basis or is this just a policy consideration that you are involved because of your position?
Mr. JENSEN. Our organization is working on it with them on an ongoing basis.
Mr. HILLIARD. OK.
Mr. HECK. We are working through the USDA. Secretary Veneman is on that group and that is where we get our input.
Mr. HILLIARD. Ethanol is generally blended at what percentage rate in most uses?
Mr. JENSEN. Depending on the area of the country, where I am from in the upper Midwest and South Dakota, 10 percent is a very common blend. In the areas in the reformulated gasoline market, I believe it is somewhere around 2.7 percent of the gasoline is blended—or 2.7 percent or 5.7 by volume in the gasoline, 5.7 percent by volume is ethanol.
Mr. HILLIARD. All right. Let me ask this. Are there instances in other parts of the world where it is used at a higher percentage than here in this country?
Mr. JENSEN. I believe there is. I know at different times Brazil has used a 21–22 percent. I couldn't give you exacts around the world, other than yes, there are areas that use a higher blend.
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Mr. HILLIARD. Does that increase their costs?
Mr. JENSEN. I can't give you a good answer on that. I wouldn't now.
Mr. HILLIARD. Well, if I recall, earlier, you said something about the additive, and you mentioned that ethanol was costly and it would run up the price of the total product.
Mr. JENSEN. I don't believe I ever attributed ethanol to increasing the price of the product. In fact, it is quite the opposite.
Mr. HILLIARD. Oh, it is?
Mr. JENSEN. Right now, I alluded—or I talked about in my testimony what has happened to the price of ethanol right now at the plant and what was predicted to be a $2.11 per gallon cost of ethanol actually, in reality, turned out to be only $1.15 in 1995. And we continue to ratchet those costs down as we become more efficient in production and as new research shows us better ways to do things. So right now, current cost of production, runs right around $1 a gallon, which is much cheaper than what people across the Nation are paying for gasoline.
Mr. HILLIARD. My final question is, from time to time, we still hear concerns about the blendability of ethanol. Can you tell me what those concerns are and whether they are valid? And if so, what is being done to address them?
Mr. JENSEN. Blendability concerns—I am trying to think of some. In South Dakota where we have been blending for years, of course, those issues have been addressed and there are no blendability issues. In fact, throughout the upper Midwest, ethanol is widely used in a very preferred fuel. The only blending issues that I can think of that may have been forwarded, I don't believe are valid, are just mainly in the distribution channel.
Mr. HILLIARD. Thank you.
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Mr. LUCAS. Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman, and thank you for calling this hearing. I think it is a very timely one.
I also want to recognize Mr. Jensen, a fellow South Dakotan, who resides in my district, and after reapportionment, will still reside in my district, but has certainly distinguished himself in the area of ethanol and value-added, so I appreciate very much, Lynn, having you here. Lynn comes from eastern South Dakota, I come from western South Dakota, but he is one of the better guys from that part of the country.
So let me just, if I could, follow up on a couple of questions that have sort of surfaced and been raised. But one of the questions has to do with the fact that opponents of ethanol have argued and believe that if a renewable fuel standard is enacted, or if the California RFG waiver is not granted and MTBE is banned, that the ethanol industry will not be able to supply the demand that would be needed. How would you respond to that statement?
Mr. JENSEN. Let me ask, the question, again, are you suggesting that if the waiver is not granted, that the supply won't be met?
Mr. THUNE. Correct. I am saying that is an argument that the opponents of ethanol make.
Mr. JENSEN. Yes. I talked about in my testimony earlier about the added production that has happened over the course of the last several years has been in the form of farmer-owned value-added, which I am an owner of myself. Myself and several thousand in South Dakota, about 1,500 farmers went together for one plant. There are plants right now being proposed all across the upper Midwest. In fact, about a month ago, at a meeting where a lot of ethanol producers were together, over 100 different ethanol plants were in one stage or another, whether early proposal or whether actually breaking ground, and almost all of those were farmer-owned cooperatives. Those facilities are out there waiting for the right signals from Congress that says the market is going to be there.
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And in Mr. Kennedy's district and in your district, Mr. Thune, the potential for growth is phenomenal. And given the right signals and the right tools, agriculture will step up and meet that challenge. I am very excited about my participation as an owner in an ethanol plant and that is how I plan on capturing value. And we can meet those needs simply because the capacity is there. We are using less than 7 percent of our corn crop right now in ethanol production, and we could easily ramp that up.
Mr. THUNE. Let me say, also, just acknowledge, because you mentioned in your testimony, but thank you for your support of the changes that we are trying to make, the small producer tax credit, which is legislation that we will be introducing tomorrow. But you mentioned farmer-owned ethanol plants in South Dakota. It seems that, I think, for a lot of farmers, there is some risk involved in investing in these plants, and you noted this as well. But is it difficult to get investors when so many issues with supply are tied to Government policies?
Mr. JENSEN. Yes, it is. The more secure we are with Government policies, the easier it is to attract investors. There is no doubt about that. And in essence, that becomes a banking issue. The more comfortable the banks are with the stability of the Government ties to ethanol production, the more readily they are to loan members—or loan money to those members to be a part of those cooperatives. So they are as big a component in the risk assessment of Government involvement in ethanol production as the farmers are themselves.
Mr. THUNE. Important, I think, that you all know what we are going to be doing so that people who are in the process of making investments.
Mr. Heck, just one question with respect to the soybean issue. If a renewable fuel standard were enacted, would you still see the need for a biodiesel tax credit?
Mr. HECK. That is very tough to say without seeing the details of the two proposals. And it also depends somewhat on what the goals of the committee might be trying to achieve. As a soybean grower, just the consumption of the soybean oil is our objective, and there might be more than one way that that could be done. As a fuel user, having biodiesel available to use because of the lubricity qualities, that it makes my engine run better and last longer, is a desirable situation however it is achieved.
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Mr. THUNE. I would simply say, again, Mr. Chairman, in conclusions, that I believe very strongly that whatever we do in terms of farm bill policy and everything else, the debate that we are having right now, that value-added development promotion needs to be an integral part of that. And it is, particularly, again, this hearing is timely in light of the fact that in my State, and I am sure many States across the country, we have seen a 30 cents spike in gasoline prices in the last week or two, pointing to the need, again, for an energy strategy in this country that relies more heavily, I think, upon alternative fuel. So thank you, again, for the hearing, and panel, for your testimony.
Mr. LUCAS. Absolutely, and your good work in this effort, Mr. Thune. Mr. Thompson. Mr. Osborne.
Mr. OSBORNE. Thank you, gentlemen, for being here. Thank you for your testimony. It is very interesting to all of us from your part of the country, certainly. I guess I would like to follow up on a question posed by Mr. Thune. You are talking about sufficient quantity to meet the needs of California. Is there a sufficient delivery system, because as you know, the clock is ticking on their situation. I don't know what they have got left, 100 days, 90. I don't know what it is, but they are going to use a lot of arguments out there, and do you feel that an adequate amount of ethanol can be delivered on time?
Mr. JENSEN. I think that is a good question to hear asked, because that is one that does pop up a lot. And we have spent some resources in that area, because it is a very valid concern. And yes, we are very comfortable with the delivery system that is in place right now and what, actually, is coming up. Of course, the most common way right now to get ethanol into California is by barge down the Mississippi, thorough the Panama Canal, and back up into California. MTBE comes into California this way right now, a lot of it does. So we really aren't changing a lot there.
Other areas of delivering ethanol, of course, is through rail. But one of the latest developments is shipping ethanol, and that is pure ethanol in a pipeline with plugs on each end of it. And the experiments that we have had people check into, all indications are that that has been very successful to this point, and we expect that to be more developed all the time.
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Mr. OSBORNE. Do you feel that this information has been adequately communicated to the administration, that the objections of some in California have been met in a way that is clear enough, forceful enough, that people on the national scene understand it?
Mr. JENSEN. Apparently, not. But we are going to continue and try to get people to listen to that message, because it is very important. I guess, if we thought that it was already a clear communicator, we could back off in that area, but according to the questions we are hearing on the Hill, that is definitely something we are going to have to tell that story a little bit better.
Mr. OSBORNE. OK. Just a couple other questions. If it costs about $1 a gallon to produce ethanol, why do you think that ethanol is frequently higher at the pump than regular gasoline?
Mr. JENSEN. I think in any business it appears that the cost of production is not indicative of the selling price or the retail price. And ethanol is spot bid just like gasoline is, and when there is the ability to add to the cost of a product—I guess I look at South Dakota, for instance. Wherever there is a demand for the product, the price is higher. Wherever the demand is neutral, it is priced lower, simply because the incentives are there for it to be priced lower. Right now, I do not know why ethanol is priced higher in some areas of the country than it is in other areas. I can't seem to find a good reason for it.
Mr. OSBORNE. I would share your observation. Every time I drive around my district, I take a look at the pump, and I often ask inside, and sometimes they will say, well, we have got a smaller tank, the demand exceeds the supply. And so I am assuming that as these plants come on line, maybe the price will go down. At least, I would hope so.
A couple questions for Mr. Heck. What is the cost per gallon to produce soybean oil?
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Mr. HECK. At the current time, for a gallon of biodiesel produced from soybean oil, depending on the quantities, it could be from $1.50 to $2 per gallon.
Mr. OSBORNE. OK. And do you think that can be reduced over time? Is it a matter of technology or is that about as far as it is going to go?
Mr. HECK. Well, that is one of those research projects we were talking about a little bit earlier. If you use the entire soy oil product as diesel, as biodiesel, it has to bear the entire cost. The oil industry uses what is known as fractionalization, taking out the most valuable expensive molecules and then burning the residual, which that should drive the price of biodiesel down later as we would develop and take out the more valuable co-products.
Mr. OSBORNE. And one last question. What would you say an optimal blend would be for biodiesel?
Mr. HECK. For lubricity purposes alone, in the low blends, it varies with the quality of the original fuel. Sometimes a blend as low as 0.25 percent can be enough to provide the necessary fuel quality. On other diesel fuels, it requires up to 2 percent blend. Stanodine, the largest diesel fuel injector manufacturer in the country, has gone on record recommending a 2 percent blend as something to consider, because fuel will always meet the quality standards at 2 percent.
Mr. OSBORNE. Thank you, Mr. Chairman.
Mr. LUCAS. The gentleman from Illinois.
Mr. PHELPS. Thank you, Mr. Chairman. Thank you for providing this hearing for some valuable input from you gentlemen, and we appreciate you very much.
Mr. Jensen, and I guess, both, Mr. Heck, my district is home to ADM, I should say. So it is very much important to me to see ethanol enhanced as much as it possibly can. I was looking through your testimony as much as I could. Is there anything you recently have identified, since the fuel prices are what they are, and the energy crisis has been heightened in that respect, from electricity to fuel, natural gas, has that developed your plans to be more aggressive in seeing how ethanol could play a major role, change your goals for the near future or long term, as opposed to the way we were progressing without this height of crisis?
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Mr. JENSEN. I guess from the National Corn Growers' stance, I can't say that it has accelerated our stance. It certainly has created an opportunity, and these are mixed blessing opportunities. As Mr. Heck talked earlier about us being fairly large energy users ourselves, we are looking for opportunities just to push our own product in the market at our own expense. We are looking for ways to be more efficient and drop our energy costs all the way around also. We don't want to introduce something to the market that we feel is detrimental to our own business and we have to use it.
I don't think that it has really accelerated it so much, as it has made very obvious the opportunity and simply allows for timing, for people to—people are much more receptive to the message right now because they understand the importance of energy right now. When fuel is cheap, or energy is cheap, it is very hard to get people interested—and plentiful. Forget cheap, just plentiful, it is hard to get people interested in alternative energy when they have plenty themselves right now. So right now it is simply the timing.
Mr. PHELPS. Do you think we could better the chances and get more attention to its use if we tied national security measures to alternative fuels? Because it seems to me that if we were in some type of, heaven forbid, war situation that was bigger than we like to think, and dependence on the foreign oil that we have could possibly put us in jeopardy, and having alternative fuels that could work in our military resources seem like could strengthen our argument for ethanol use. Wouldn't you think?
Mr. JENSEN. I would think so. We, certainly—energy security and national security are something that we have talked about for years. Once again, we have always seemed to come through. When we have—we don't guard our cornfields with military personnel. And we do look at our overseas oil industry as something we are vitally dependent on. When the crisis happened last time in the early 1980's, we weren't at near the level of dependence that we are today. But we have been lulled into thinking that it a very acceptable percent of our imports of petroleum are at a comfortable level. And until people understand that any small breakup of that has a devastating impact on our prices and availability, then they won't understand how it is a national security issue.
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Mr. PHELPS. Just one last observation, maybe question. I have met with different independent farmer groups throughout my district in the last few months who are interested in forming their own business group in providing ethanol production. They have identified acres to be contracted in a regional designed area that would have the number of bushel for the number of gallons that would need to be produced, providing the market even stays as it is, let alone what might be anticipated to increase. Does your group provide any kind of—are you engaged with any of those groups that may be showing some leadership and some aggressive spirit in organizing in that way?
Mr. JENSEN. As you know, the National Corn Growers is very grassroots oriented, and we have State associations. Of course, the State of Illinois has a very strong association that we work very closely with. And we provide technical help for those that want to form cooperatives, and we are in the process of building a—or putting together a workshop for producers that want to own their own ethanol plants to come together and simply learn how to ask the right questions, is an ethanol plant right for their area, and how to critique the business plan, how to look for the builders, those types of things. So we do work very closely with the State associations and the county organizations through the States to try and facilitate whatever we can in farmer-owned value-added.
Mr. PHELPS. I see my time is up. In the University in Evansville, as a former State representative, we helped fund a demonstration project for ethanol production there that can, hopefully, be duplicated. And so that is where my interest came. Thank you.
Mr. LUCAS. Mr. Kennedy.
Mr. KENNEDY. Yes. Thank you very much for your testimony and thank you for recognizing that Minnesota is a leader on this issue, having already implemented a 10 percent requirement for ethanol, and now we are considering implementing a requirement for biodiesel in the State as well to try to provide some leadership to the country. We are also happy to have 15 ethanol plants in the State of Minnesota, six of them in my district, and I am happy to be supporting Thune's tax credit for small producers. And I do hold out that hope that if we can keep this oxygen rate requirement in California, that we can triple the production of ethanol.
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I am curious, I didn't hear a lot of conversation, Mr. Jensen, in your testimony about E–85 and what potential that can be, and I am always surprised when I go to a number of communities that have ethanol plants and they don't even offer E–85 availability there. What hope should we be able to hold out for an 85 percent ethanol blend and what could it do for our energy needs?
Mr. JENSEN. This is an area of priorities when we look at where are we going to spend our energies as a national association and an organization that represents a very broad base. The 85 markets that we have been involved in, and of course, Minnesota has been a very successful E–85 program and it continues to grow, today, is still probably a pilot program, looking at different—Illinois, in the Chicago region, has an E–85 program also. Right now, the E–10 market and the reformulated gasoline market is, certainly, the largest market that requires little or no infrastructure changes. And that is the reason the major emphasis of the National Corn Growers has been on those two areas versus the 85. It is not that we think that E–85 is not valid or has a future, but we are just looking at what is the most gradual change that people can accept that won't have any type of increased cost to them through an infrastructure change.
Mr. KENNEDY. And I agree with the broader emphasis on E–10, but as we know, there is an education process where we have to get the automobile companies to make E–85 capable cars, which they are beginning to do, and I think we need to encourage our members across the Midwest that are the biggest proponents of ethanol to start doing this testing in a broader scale, as you are saying to be prepared to withstand the arguments, again, once we win the E–10 argument, to move onto the higher levels.
And Mr. Heck, I have gotten a lot of feedback, as well, from truckers and other users on biodiesel. So most of this input came before the Bush administration decided to keep the standards for reduced sulfur, which really make the need for biodiesel that much greater. What efforts are your organization doing to reach out to the users and try to build the support across a number of different constituencies for doing what we are doing in Minnesota at the national level?
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Mr. HECK. We are approaching that on a smaller regional basis through our State organizations. For example, as you pointed out, your State is taking the lead in that. My State, the State of Iowa, is also promoting branded biodiesel. And we are starting at the State level where we know that we can handle the demand and where the audience is the most receptive. Because honestly, a national program would be prohibitively expensive at this point.
Mr. KENNEDY. OK. We are having a big energy debate in this country, and that is good. And part of my frustration is when we are outside of the Agriculture Committee, and the Energy Committees are just broadly talking, we don't seem to be making the headway of raising the consciousness of what ethanol, and biodiesel, and other renewable fuels could be. I read a Wall Street Journal article talking about one of the reasons why we have higher gasoline prices is because MTBE is made out of natural gas, and with natural gas going up, that is going up, and it had a very extensive article. It didn't once mention ethanol. What do we need to do in the Agriculture Committee, outside of the Agriculture Committee, to try to raise the awareness of what ethanol, and biodiesel, and other forms could mean to the energy debate? I will ask both of you that question.
Mr. JENSEN. I wish I knew the answer to that one. Raising awareness through this whole process has been one of the major stumbling blocks—getting people interested. And as I mentioned before, when we are running into potential shortages or price spikes, it has certainly helped get our message into the Department of Energy. And I think as it looks like things are going to happen again this summer, that there is going to be energy spikes and possible shortages, we will just have to keep hammering them, because it seems like that is what gets peoples' attention. Anything less than that, it is too easy to be complacent.
Mr. KENNEDY. Well, and I encourage that, because I think this really is a communications battle ring more than, really, anything else. Thank you.
Mr. HECK. We are working through the USDA and the Secretary of Agriculture, and Vice President Cheney's energy committee, hoping for some results from there. As a committee, whatever you could do for budget provisions to raise the profile to be included would be very helpful to us.
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Mr. KENNEDY. OK. Thank you.
Mr. LUCAS. Mr. Baldacci.
Mr. BALDACCI. Thank you very much, Mr. Chairman, and thank you for holding these very important hearings.
I guess I would like to ask you just, the first question is that I was reading the background material, and it said that the Clinton administration had put forward the biobased products and bioenergy initiative, which was supposed to triple the use of films and products derived from biomass by 2010. And it says that it is an Executive order, and I was wondering, within your administration working group, is that still in effect, or do you know?
Mr. JENSEN. That would be the CCC program, and currently, that is in effect, and I believe it is scheduled to sunset in 2 years.
Mr. HECK. It is in effect and has been strengthened by the biomass energy act, Biomass Research and Development Act, last year, sponsored by Senator Luger. So it has now got bipartisan support and the approval of Congress to continue.
Mr. BALDACCI. So it bodes well 2 years down the road based on that reinforcement. You are talking about the Agricultural Risk Protection Act, where they amended it to include the biomass research that was done in the 2000 Agricultural Risk Protection Act last year.
One other thing that I would like to bring to your attention, I know it is not in your industry, particular, but there is a couple of issues in the northeast that pertain to MTBE, which has been contaminating groundwater all over the northeast, and it is the hope that the renewables, such as ethanol, can play an important role and will continue to grow into the future. Now, in our State, we are trying to ban the MTBE, or at least get its phase-out initiated, and given that potential, that there is a demand that is estimated to exceed 550 million gallons per year. Now, part of the effort to triple this particular area of the renewables was the possibility of developing pilot plans. And I think that what I would like you to consider is the possibility, especially, in our State, where the natural resources and potatoes, which is an element which can be derived for ethanol, be looked at as a possibility along with the biomass in the wood that is unused and to determine whether we would be able to gain any use from that, needing to be disposed anyway, as two venues to look at the opportunity to begin maybe a pilot plant in the northeast, since it is an area where most of the MTBE is situated.
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Mr. JENSEN. I will just comment on that and go on the record, I guess, as saying that we have been strongly behind a diversified ethanol industry, and that includes the biomass industry. We recognize that there are certain areas of the country that are going to have an advantage over biomass ethanol over corn-based ethanol. And we believe that the market is big enough to include all different types of ethanol into that marketplace. And we have worked with the biomass industry to try and include them in the different pilot programs that are out there, and welcome working with the in the future.
Mr. BALDACCI. Thank you very much. I look forward to working with you and your industry to be able to do that.
Mr. Chairman, I don't have any other particular questions at this time, and I would just like to thank you again and thank you for that opportunity to work together to expand the development of this nationally, and I look forward to these hearing results. Thank you.
Mr. LUCAS. Mrs. Clayton.
Mrs. CLAYTON. Thank you, Mr. Chairman, for having the hearings.
And one of the questions I was going to ask, Mr. Thune raised it, and I gather because you are supporting the initiative of small producers of ethanol, does that include the opportunity for biomass as well in the tax credit that Representative Thune has proposed?
Mr. JENSEN. I am not sure if it does or not. We would welcome it. I believe it does and we would welcome that.
Mrs. CLAYTON. I am just following on your response to my colleague when he asked about potatoes. I am aware in my district, as well, there has been considerable research in biotech with the sweet potato and finding it as an additive. And they are particularly encouraged now as they are looking at the whole issue of MTBE to see that as a viable substitute. They are going into this biotech industry, and if we could find an incentive to encourage those people who want to invest in that and to get a cooperative grower, that certainly would help in that area.
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On both of those, corn growers and soybean growers, biotech as well as the opportunity for increasing the utilization of biodiesel, we will be having a farm bill, and obviously, we were talking to a lot of the agriculture sector. What policy issues do you see in not only terms of the innovation of using agriculture to supplement the energy, but also, as farmers, yourselves, we utilize energy, natural gas, gasoline, everything, and certainly, we want to increase the opportunity of using corn, and soybeans, and other biomass, but there ought to be a policy statement or concern about the pricing, control, and opportunity for using these energies, because you are so dependent on that. I know our farmers now are talking about, whether it is peanuts, or whether it is tobacco, or whatever, natural gas is going up and we don't have all of these innovations yet.
We are going to be writing a farm bill, and it seems to me we will miss an opportunity if we only do what we have been doing before; that is, to do it in piecemeal. If we could find how you could stir our thinking to be a little more holistic in this policy, I would appreciate it if you would share with this committee—you don't have to start out now, but I welcome, Mr. Chairman, if we could ask them if they would share back to us what kind of policy statements that we could consider. I know that that would be part of your purview here in this committee. So I want to encourage that. That is the extent of my comments.
Mr. LUCAS. Thank you. The Chair now turns to the ranking member of the full committee, the gentleman from Texas, Mr. Stenholm.
Mr. STENHOLM. Thank you, Mr. Chairman. And I have a statement that I would like included in the appropriate place, the beginning of the hearing today.
Mr. LUCAS. So ordered.
Mr. STENHOLM. I am sorry Mr. Kennedy has left, but the question that he asked the panel a moment ago is a very pertinent one, and my answer is, Mr. Chairman, what you and Mr. Hilliard are doing today is about one of the most positive aspects of answering that question that I have seen in my 22 years here in the United States Congress. I represent the oil patch as well as the cotton patch. And we have been observing now for the last several years, as we saw some very real problems in the oil patch about 2 years ago when oil got down to $8 a barrel, very few people in this room, other than some of the witnesses you will hear from in just a few moments, were concerned about $8 oil, because we, as farmers, were enjoying 50 cents diesel and 70 cents diesel. We came to believe it was an inherent American right.
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And then all of a sudden, just as we can't produce corn for a $1.50 a bushel, you can't produce oil for $8 a barrel. And I make that observation by saying, the last time I checked, you can't produce food and fiber without oil and gas. You cannot produce oil and gas without food and fiber. Therefore, there is a very distinct need for cooperation between our two industries. And today, the hearings, the panels that you have put together, and the testimony that they will be giving, indicate that there is a growing realization that that is true.
In the past, we have had fights between the oil and gas industry and the ethanol industry because of the rightful perception that it was unfair as they were struggling with low oil prices, to have subsidized ethanol competing with them. And you can't argue that that is not factual. But now we are beginning to look as a nation in the President's working group, which I am glad to hear you indicating that you are being not only consulted, but you are an integral part of that working group, because that indicates that this hearing today, and the effort and the testimony today, will not just be the end today. This is the beginning.
Just as this morning, Mr. Jensen, when we were talking in terms of where corn fits in the farm bill and some of the ethanol questions that were asked there, I understand you have quite a lengthy study that answers some of the questions I posed to you this morning regarding California ethanol, why the exemption, why that some in the environmental community do not see the benefit of reducing greenhouse gases by the use of ethanol.
I don't want to put all of this in the record today. I understand cost is not necessary in this, but it is necessary for we, in the Congress, and others working on this, to look at the facts now, to do what we talk about so often in both industries, base our decisions based on good sound science. We have good sound science that indicates that ethanol can play a very significant role in the energy needs of this country. We have got good sound science that shows that we can reduce the amount of oil and gas we have to use in order to produce the food and fiber, and to drive our cars, and to heat and cool our homes, and it is in our best interest to do that.
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I remember Senator Lloyd Bentsen, then-Secretary of the Treasury Lloyd Bentsen of Texas, once observing that we will have—and this was years ago—we will have a major national security problem when we begin importing more than 50 percent of our energy needs. We have come through the 50 percent; we are going through the 60 percent. We are heading for real problems, unless we are able to come together with some workable solutions.
Mr. Chairman, I say the answer to Mr. Kennedy's problem is the beginning today, and I hope that we can take, and I hope that my colleagues who do not reside in the oil patch will read and listen attentively to the oil and gas industry as they discuss their views regarding the energy policy, just as I am glad to have the oil and gas industry in the audience listening to the biodiesel, the ethanol, the biomass, and then hopefully, we can continue to work together to produce the energy that our country needs at a price that will be able to maintain our competitiveness in the international marketplace.
And in the same light, I hope those that continue to advocate the cutting of the budget regarding research and development in the energy patch will begin looking at our whole card and will begin defending this, because it is certainly not anything for any of us to apologize for of suggesting that we should spend some of our taxpayer dollars in the area of research and development, working with private enterprise in order to come up with new and better ways to do that which we are all interested in doing, and that is produce energy efficiently. Drill where we need to drill, do it environmentally safe, and develop all sources of energy.
So Mr. Chairman, I commend you for this hearing. I hope you and Mr. Hilliard will fully continue to move the Agriculture Committee along this line. I know that there will be other committees suggesting that this is not the jurisdiction of the Agriculture Committee. I would hope we would correct them at every instance in saying it is the jurisdiction of the Agriculture Committee and we hope to work with the other committees and with the administration in developing a national energy policy that will be sufficient. Thank you for holding the hearing. I appreciate the indulgence of the committee for allowing me to participate.
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Mr. LUCAS. As always, the gentleman from Texas insights are very outstanding and right to the point. And clearly, that is one of the goals of the ranking member and I, as to grow our jurisdiction, so to speak, having watched the ranking member of the full committee and others in times past practice that artful—the ranking member, I believe, has one more question.
Mr. HILLIARD. Yes. I would like to ask each one of these gentlemen the question pertaining to your industry. What does it cost to produce a gallon of soybean oil, and what will it take to decrease that cost, and what does it take to produce a gallon of ethanol in a 15 percent blend, and what does it—what will it take to reduce that cost?
Mr. HECK. The current price of a gallon of biodiesel made from soybean oil is about $1.50 in large quantities, and 4 years ago, it was $4 a gallon. So it has been headed down. To reduce that cost, we have to take out the most valuable molecules, the co-products, which would require research so that we could do what is done with a barrel of oil. The fuel is the residual that is left over after the valuable molecules have been taken out. At this point, we don't have the research to take out the valuable molecules and make the valuable products from the soybean oil so that we may burn the residual at a lower price. So it takes research, and it takes research money, and it will take Federal research money. That is my request for the budget. And Congressman Stenholm has got it exactly right. We need some of the synergy, some of the similar energies between what has been done with crude oil needs to be done with the bioproducts and that will bring the price of the fuel lower.
Mr. JENSEN. In terms of the ethanol industry, as I mentioned earlier, cost of production seemed to be ranging from the 95 cents to $1.10 at the plant. That seems to be fairly common among the efficient plants across the Nation, depending on their location. In areas of bringing costs down, obviously, we are always looking at plant efficiency, whether it be enzyme efficiency or just different infrastructural changes inside the plant that can make them run better.
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But an area, of course, in the area of research, is we are constantly looking for the other half of the ethanol product, after we are done with corn, and that is the dried distillers grains or what, basically, goes out as the livestock feed. And looking for areas to increase that demand, get the people that are not using those products to better understand how it fits into the rations. Those things drive that demand up and, thus pulling down the cost of the co-product, which is ethanol. So that is one of the areas we are working on and will continue to work on. Simply, to always drive down the cost of ethanol.
Mr. HILLIARD. Thank both of you.
Mr. LUCAS. The Chair and the subcommittee wish to thank the panel for your statements and your answers, your observations. Thank you.
Mr. HECK. Thank you, Mr. Chairman.
Mr. JENSEN. Thank you.
Mr. LUCAS. And now we call upon the second panel to be invited to the table. Mr. Glenn English, chief executive officer, National Rural Electric Cooperative Association, Arlington, VA; Mr. Skip Horvath, president, Natural Gas Supply Association in DC; Mr. John C. Felmy, chief economist and director of policy analysis and statistics at the American Petroleum Institute in DC; Jack T. Coffman, senior vice-president for power supply, Oklahoma Gas & Electric Company, Oklahoma City, OK; Mr. Michael R. Gorham, president, National Propane Gas Association, Grand Rapids, MN; Mr. Jerry Jordan, chairman of the Independent Petroleum Association of America, Columbus, OH.
And while the panel is being seated, I would note that the Chair wrote a letter several weeks ago to Vice President Cheney, observing that we wanted to be, and needed to be, and should be involved in the task force process with the conclusions that they might come up with, and I have received a positive confirming letter back. So I think we are on track.
With that, I turn to the gentleman formerly from Washita County, Oklahoma, Mr. English.
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STATEMENT OF HON. GLENN ENGLISH, CHIEF EXECUTIVE OFFICER, NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION
Mr. ENGLISH. Thank you very much, Mr. Chairman. It is a pleasure to be back in this room, and certainly, before this subcommittee. And never did I imagine that I would be testifying before a Chairman from the Sixth Congressional District of Oklahoma.
Mr. LUCAS. And I only have 57 questions for you.
Mr. ENGLISH. I was afraid of that.
Mr. Chairman, my name is Glenn English. I represent over 900 elective cooperatives in 46 States across this country. We serve in some 83 percent of all the counties in this country, and we also serve 35 million consumers in this Nation. I think most members of this committee are well aware of the fact that we are, actually, owned by the consumers themselves, and our objective is to bring electric power to those consumers in the least costly fashion. So with that, I would simply say that I think it is obvious that our overall objective is to put the consumers first and to make sure that their power supply is safeguarded against volatility, both from the standpoint of supply, cost, and the equality of electric power.
I don't think it is any secret as far as this subcommittee's concern, and certainly, not this Congress, that the electric utility industry is moving toward the same kind of boom bust cycle that we have seen elsewhere in the energy business. Those of us who have been in the oil and gas business and serving those parts of the country are well aware of that and very sensitive to it as Mr. Stenholm pointed out. The electric utility market conditions today, though, in many ways mirror what we saw that existed some 65 to 70 years ago when electric cooperatives were first created; we had similar conditions.
Also, it should be noted, Mr. Chairman, that these kinds of conditions will very likely affect agriculture. It brings one more unknown, one more volatile cost, into the calculation that every farmer, every person living in rural America must make. And these margins are very, very slim, and I certainly don't need to tell this committee that. And obviously, this could in some cases be the straw that broke the camel's back. So it is a difficult situation.
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But the good news is for those areas that are served by electric cooperatives, we have been very successful in keeping this kind of instability out of the situation. And I would refer the members in the testimony that was submitted, a newspaper article from Anza, a little community south of Palms Springs, California. Anza is a community that has their own electric cooperative, provides for their own electric power. In fact, they have their own electric generation across the line in Arizona, and the local newspapers had great fun in pointing out how stable their prices have been, and they have had a plentiful supply of electric power, and haven't had any of the difficulties that have been experienced by many others in the State of California.
However, there are a number of unanswered questions, and certainly, there is a muddy future as far as the electric consumers, and in agriculture, in general. And I would like to touch on those very quickly, Mr. Chairman. One is reserved capacity. We simply do not know today what an adequate reserve capacity is. A few years ago, it was roughly 30 percent. Now that has shrunk to roughly 15 percent, and I am talking about the entire industry across this country.
Transmission capacity. Transmission capacity in this country in terribly inadequate and is a contributor to many of the problems that we are seeing in California and we are going to see in other parts of the country this summer. The Congress is contemplating some changes to try to improve and deal with the situation, but that seems to be geared more toward additional incentives, additional guaranteed profits, which drive up the cost, which I don't think is the right direction to go.
FERC regulation of electric cooperatives. We have had some of the Federal Energy Regulatory Commission who have pointed out, well, we can't do anything in California simply because of the fact that we don't regulate electric cooperatives. Of course, the other part of that is that electric cooperatives, as the members of this committee are well aware, obtain RUS financing to build generation, and that financing can only be provided if the need exists. In other words, if the consumers have the need. So electric cooperatives have very little electric surplus to provide anyone other than their own membership. And that, obviously, would mean a waste of the very limited and valuable resources that exist at the Federal Energy Regulatory Commission, and we would like to see the Federal Energy Regulatory Commission spend a good deal of their time focusing on the issue of market power, a huge problem.
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Retail competition. Pennsylvania is cited as the place where competition is working, where we are seeing great success. I would point out, and we have numerous electric cooperatives in the Commonwealth of Pennsylvania, that we have yet to see the first consumer served by an electric cooperative to be offered the opportunity for competition. They simply haven't had any other choice. So in many ways, this is much like the problems that we faced years ago when nobody wanted to serve many of these people in rural America, and I think that continues to be the case even today.
And there are numerous other problems, such as captive shipping problems. As far as our railroads are concerned, there is virtually no competition there, drives up the cost and problems. So we have many difficulties and challenges that face rural American and the need for electric power.
I am delighted to be here, Mr. Chairman. I would be happy to respond to any questions members of the committee might have.
[The prepared statement of Mr. English appears at the conclusion of the hearing.]
Mr. HORVATH.
STATEMENT OF SKIP HORVATH, PRESIDENT, NATURAL GAS SUPPLY ASSOCIATION, WASHINGTON, DC
Mr. HORVATH. I am happy to be here today, Mr. Chairman. Thank you for inviting me.
We are blessed in this country with a vibrant highly competitive natural gas production industry where 8,000 natural gas producers compete with each other at hubs around the country to sell their wares. Thousands of buyers and sellers meet at these hubs, electronically, to produce a price that pops out every hour or so. These prices are highly transparent, done in an open market, and very much like the stock market, it produces an extremely competitive production process for getting the gas to consumers. We have this Congress to thank for that, because this Congress, in 1989, enacted the Wellhead Decontrol Act, and that unleashed competitive forces on an industry that until then was run and price controlled by another act of this Congress, the Natural Gas Policy Act of 1978. That act did not fare so well, and it produced high prices. The Wellhead Decontrol Act drove prices down. This Congress produced to consumers an over $600 billion savings from that time on, 1989 until now. That was a great job and the best thing the U.S. Congress could have done for this industry and for the farmers community, and indeed, the consumers of the country.
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So if this Congress did such a good job, and we are doing such a good job, why are prices so volatile? The volatile—and by the way, I am used to having to repeat testimony by another panelist. Rarely do I get to repeat testimony by a Congressman, but the Congressman from Texas, in fact, was exactly right. A couple of years ago, natural gas prices were at an all time low, under $2 an MCF or for 1,000 cubic feet. And like any business, any competitive business, when someone doesn't want to buy your product, and no one was for quite a while, that is why prices were low, you disinvest in yourself. And when you disinvest in yourself, you slow down production, you stop looking forward and spending the money you need to produce more of your product because people just aren't buying it.
At the same time, this economy was beginning to—not beginning, but was booming, and all of our customer bases started increasing their demand for our product. So just as we saw the low, things started shooting up. And all of our customer bases, after telling us for a long time they weren't going to grow, suddenly started increasing.
In any competitive market, when demand outstrips supply, the only thing that can happen is price goes up to clear the market, and that is exactly what happened. And that is a good thing. It is good, because what it means is that it draws more competitors into the market to bring about more supply of that commodity, and that is exactly what happened.
In the natural gas industry, we created over 35,000 new jobs last year. We increased the number of drilling rigs by 2 1/2 times, from over 300 to almost 900, and 80 percent of those, 4 out of 5, are looking for natural gas. That means only 1 out of 5 are looking for oil. That is the other commodity we produce. And the top 10 producers increased their investment by 25 percent. That is an awful lot in one year. That is $41 billion in new investment. So the higher—the volatile prices you have seen are good for the country because it is bringing in more producing, more production, and we are beginning to bear fruit.
The Energy Information Administration of DOE reports almost 4 percent of an increase from 1999 to 2000 in natural gas production. They are expecting another 3 percent or so this year. That may not sound like a lot. It is for the following reason. In 1990, we found ourselves having to produce a new 10 percent of natural gas each year because of what is known in our industry as a decline rate. As these wells deplete, the rate at which they deplete is called decline rate, and the 10 percent means that you have to find another 10 percent that was lost in the previous year decline. In 1990, 10 percent, and that is what it was for decades. Today's rate is 23 percent. That means just to produce what we did last year, we have to find 23 percent more production, more wells, to find that 23 percent. And we found that and grew it some by the 2 to 4 percent that the DOE estimates.
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So you see, we have done a lot to—we have done everything we can, in fact, to get as much gas out of the ground as we can, and we will continue to do so because this free market allows that to happen.
Is there anything left for Government to do? Yes, and I presume others on the panel will talk to it more. I will just simply mention it, and that is access to Federal Government lands on which gas exists. Thirty percent of the lands in the country are set aside where we have some restrictions or complete restrictions for access, and we do find that we need access to those lands in order to produce even more gas for the country.
With that I will—I see my time is about up—I will close. Natural gas continues to be a safe, reliable, and efficient fuel source to be used for everything from drying crops to cooling chicken coops for the agricultural community and, indeed, for home use as well. And I simply ask that this congressional committee keep in mind that competition is the best way to maximize the consumption benefits to the agricultural community. And with that, I conclude my testimony and take any questions. Thank you.
[The prepared statement of Mr. Horvath appears at the conclusion of the hearing.]
Mr. LUCAS. Thank you. Mr. Felmy.
STATEMENT OF JOHN C. FELMY, CHIEF ECONOMIST AND DIRECTOR OF POLICY ANALYSIS AND STATISTICS, AMERICAN PETROLEUM INSTITUTE
Mr. FELMY. Thank you, Mr. Chairman. The American Petroleum Institute is pleased to have the opportunity to present a statement on energy supply and demand issues affecting the agriculture sector of the U.S. economy. We also welcome this opportunity to discuss how the current energy situation developed, as well as the energy situation in the United States over the next decade, and how all this points to the need for a new national energy policy for the United States. API is a national trade association representing more than 400 companies engaged in all sectors of the U.S. oil and natural gas industry.
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The events of the past year, heating oil logistical problems in New England, tight gasoline supplies in the Midwest, super heated demand for natural gas, and California electric power disruptions, have forced the Nation, including the agricultural community, to start thinking comprehensively about the energy issues facing our economy. In fact, the farming and ranching community has been especially hard hit by these shocks, as have been most of the non-agricultural rural areas, as the prices of natural gas, diesel fuel, propane, fertilizer, and electricity have soared.
Last year's problems were merely harbingers of what we may expect if our Nation and its leaders do not get serious about looking for long-term solutions to our energy needs. Already this year, we are experiencing a second set of price spikes in gasoline caused by tight markets for gasoline. Unless we realistically address these issues in an effective national energy policy, these shocks may continue with increasing frequency.
The challenge is clear before us. The Department of Energy has recently forecast U.S. energy consumption between 1999 and 2000. While natural gas will rise from 23 percent of consumption to 28 percent in 2020, oil will remain at about its current 40 percent market share. Most recent energy studies confirm this, that even with increasing efficiency and rapid infusion of new technology, we will need to develop more oil.
Thus, we need to focus on our future needs, renewables used in gasoline, such as ethanol, play an important role and will continue to grow significantly well into the future. Of critical importance, however, is to avoid mandates, thereby, giving refineries the flexibility they need to use ethanol in markets and during seasons that make sense.
The current gasoline situation points out the problems we face. Because we have been running the refineries at high rates of output for winter fuels, gasoline production so far this year is 1.7 percent lower than last year. At the same time, this year's gasoline demand is up by 1.6 percent. Also, imports of gasoline are down 7 percent. As a result, the demand being greater than supply and the required inventory reductions to meet the EPA summer gasoline mandates, gasoline inventories are lower than last year's relatively low levels.
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These conditions have resulted in price volatility, especially, in the Midwest. The refineries are now finishing their required maintenance and have increased production of gasoline during the recent 5 weeks. If the system can continue to work smoothly, a significant buildup in gasoline inventories to be ready for the summer driving system is possible.
Another factor that has increased the cost of gasoline is the cost of crude oil. OPEC has reduced its output twice this year already. As a result, crude oil prices have risen since mid-March, and the United States is becoming increasingly dependent on imported foreign oil. In order to ensure reliable and secure sources of oil, we must diversify the sources of our supplies, both domestic and foreign, and increase the volumes of both.
But even if we were to obtain all the oil we need, as difficult and uncertain as that may be, our energy supply would still be under enormous strain. That is because the squeeze between refinery capacity and refinery utilization is growing. As hard as we are working our refineries, we are losing ground to demand. Large investments will be required at, essentially, all domestic refineries and many product terminals. Refinery capacity utilization averaged 92.6 percent in 2000. At peak levels of demand, it topped 95 percent. This compares to average capacity utilization in other industries of 82 percent. Refinery utilization is high because our capacity is below what it was 20 years ago. Recent increases have not kept up with the growth in demand.
Refinery flexibility to meet demand has been increasingly hamstrung by the plethora of new regulations, and this situation seems likely to get only worse, not better. The proliferation of so called boutique fuels is a major factor in today's energy situation.
The Clean Air Act amendments required State implementation plans under which individual metropolitan areas create their own fuels to meet clean air requirements. The attached chart shows that there are 14 different types of gasoline, and with three grades, that means there are 45 different types of gasoline. It also affects our pipelines. They have less flexibility to separate fuel batches and it is very difficult to maintain fuel on-spec and delivered.
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Moreover, the reduced flexibility means that accidents and downtimes for maintenance can have a much more disruptive impact on the flow of supply. While our companies are working hard to supply these required fuels, further proliferation of such specialized fuels will exacerbate the overall situation.
Moreover, Congress has refused to authorize exploration of the small section of the Arctic National Wildlife Refuge, and estimates are that this could yield 5.716 billion barrels of technical recovered oil. We would encourage consideration of that area as an area for exploration.
Let me conclude, after more than 2 decades of inaction, the American public can no longer afford the luxury of not coming to grips with the U.S. energy needs while maintaining a clean environment. We can, as a nation, do both, and we cannot afford to heed these negativists who would tell us otherwise. Meeting U.S. energy needs and protecting the environment are both critical to our Nation's continued economic growth and critical to achieving the future prosperity and wellbeing we all seek.
Thank you, Mr. Chairman. I will be happy to answer questions.
[The prepared statement of Mr. Felmy appears at the conclusion of the hearing.]
Mr. LUCAS. Mr. Coffman.
STATEMENT OF JACK T. COFFMAN, SENIOR VICE-PRESIDENT, POWER SUPPLY, OKLAHOMA GAS & ELECTRIC COMPANY, OKLAHOMA CITY, OK
Mr. COFFMAN. Thank you, Mr. Chairman. I am senior vice-president of Power Supply at Oklahoma Gas & Electric Company, headquartered in Oklahoma City, Oklahoma. We serve over 700,000 retail customers in urban, suburban, and rural settings, both in Oklahoma as well as western Arkansas. We are the largest supplier of electricity in Oklahoma, and our sister company, Enogex, Incorporated, is one of the largest gas gathering and transportation pipeline systems in the country, serving most of Oklahoma, portions of Arkansas, Texas, and Missouri.
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I am extremely proud and honored to testify before Chairman Lucas, who for the past 8 years has represented our constituency very well. The fact that he has convened this important hearing today is emblematic of his leadership in matters pertaining to the agricultural community, both in Oklahoma and in the Nation.
OG&E; is a major provider of electricity and related services in rural America. In Oklahoma, we are the primary provider covering 30,000 square miles of territory in our State, as well as western Arkansas. Most of this area consists of rural counties and we are deeply engrained in the economies and social fabric of those communities. We view ourselves as valued members of those communities that we serve.
As the chairman already appreciates, OG&E; enjoys a very strong and positive working relationship with the cooperatively owned electric utilities in Oklahoma. We have worked together on matters of common interests, concerning industry-related issues and rural issues. And in my opinion, the Oklahoma experience is a model for investor-owned utilities and coops to emulate elsewhere in the country.
Farmers and others living and working in rural America have many needs arising from their particular geographic, social, and economic circumstances. However, what farmers and other rural interest have in common with their non-rural counterparts is a compelling need for stable and affordable energy supplies and prices.
OG&E; strongly believes that the most important thing for this subcommittee to understand in reviewing energy policy, excuse me, as it affects the price and supply of electricity in rural America, is the overarching necessity of securing and maintaining a well diversified basket of energy sources used to generate electricity. A diversity of supply options is key in affordable and reliable electricity.
Two weeks ago, I had a fertilizer manufacturer come to our office and meet with some of our engineering people and myself. We looked at his feed stock, which is natural gas, and he said he can no longer afford that just because not only today's current prices, but his forecast of forward prices, were looking at an integrated gasification process to try and take coal and give him a feed stock so that his fertilizer plant can remain in production and produce competitively priced fertilizer for farmers. So this price effect is not just for electricity, it also affects the farmer through natural gas consumption in other industries that use it as a feed stock.
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I don't want to miss the opportunity to slip in a word about recent California experience. If the Nation has learned anything about recent events, it is that the market for consumers must not be insulated from the real world price signals. We just can't do it. It is a predictable disaster when consumers are disconnected from the true cost of production and their usage is independent from those costs, and I think that is what you are seeing. It is a recipe for high cost restricted supply and a wide range of destructive economic dislocations which serve no social purpose in either the short term nor the long term
In this regard, the subcommittee should think about insulating the rural community from the core economics of electricity markets and the fallacy of that. Clearly, there may be special needs for the community that assistance, and by all means, you should take whatever steps are targeted as necessary to cure those, but over the long term, Government subsidies are not a surrogate for economic decision making based on real world cost of energy or any type.
I would like to summarize some of the dynamics that OG&E; considers to be important in this subcommittee's deliberations. On natural gas, we watched our price of gas climb 400 percent over the last year. We deliver gas to our plants, currently, at about $5 per million BTU's as compared to $1 per million BTU for coal. We think the economics of coal generation are good. We are looking at some future plants, but there are so many uncertainties around the regulations of those, and particularly, with the Clean Air Act, that I think we need some guidance, and those things need to be incorporated in the national energy policy.
How can we reduce that cost or how can we get more plants built which will take gas away as a feed stock? By reducing the regulatory and environmental risks associated with installing a new coal plant. We support efforts in Congress and those in the administration who understand the imperative in making efforts to incorporate this into a balanced responsible energy policy for the future.
In order to maintain stable, affordable electricity to fuel the economy and maintain our global industrial competitiveness, our national policy must make it possible to use coal and base load plants. It is our most abundant fuel. It keeps us with a balanced energy portfolio, and that is what I would recommend for this subcommittee to consider. I will be happy to answer any questions. I appreciate the opportunity to testify before you.
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[The prepared statement of Mr. Coffman appears at the conclusion of the hearing.]
Mr. LUCAS. Thank you. Mr. Gorham.
STATEMENT OF MICHAEL R. GORHAM, PRESIDENT, NATIONAL PROPANE GAS ASSOCIATION, GRAND RAPIDS, MN
Mr. GORHAM. Thank you, Mr. Chairman, for the opportunity to offer testimony here today.
My name is Mike Gorham. I am in the gas distribution business in Minnesota. We have a propane operation in Grand Rapids and natural gas systems in 12 other small communities. We also operate and maintain natural gas pipelines serving ethanol plants. But I am here today as the National Propane Gas Association president.
NPGA has about 3,800 member companies. We serve people in nearly every congressional district in the Nation, including, in fact, 641 member outlets are located in the districts represented by the members of this subcommittee. We understand the concerns expressed about this past winter's fuel prices because rural America and the propane gas industry grew up together. In fact, agriculture users account for almost 8 percent of the propane produced in this Nation. We are confident this relationship will continue.
Today, I would like to talk about three things: (1) How our industries are connected; (2) To address some of the factors affecting fuel prices; and (3) Talk about ways that propane marketers and farmers can work together to deal with today's energy markets.
Propane is extracted from both crude oil and natural gas. When either crude oil or natural gas prices increase, propane is likely to follow. When both crude oil and natural gas prices are low, propane will likely be low. And we have seen both sides of that coin recently. As was testified earlier, it wasn't that long ago that we saw $8 crude and close to $1 natural gas out in the field. Propane prices at that time were low. This last winter, over the last year, crude has hit $35 a barrel and I have actually paid over $10 for natural gas into my systems. Propane prices rose.
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So how do higher propane prices affect propane marketers such as myself? My accounts payable, my accounts receivable costs skyrocket when this happens, and it puts a severe strain on my business operating capital. Since this means going to the bank for most propane companies, if we could have a normal winter demand without the price events of the last winter, we would take it.
What happens in the production end with high natural gas prices? First of all, there is an incentive for increased natural gas production, and that is good. Second, and not so good, there is a decreased incentive to extract propane from the higher priced natural gas. And third, there is another perverse incentive to not burn natural gas as a refinery boiler fuel and burn something else instead. That turns out to be propane sometimes; in fact, a lot times. And the net effect is that there is many thousands of barrels a day of less propane production when we need it the most. And of course, less supply means higher prices.
And then there is weather. Last winter was a cold winter and, of course, the colder the winter, the more consumption and the more cost regardless of energy price. And how cold was it? Last winter was the 14th coldest winter on record in the United States. But the real significance, I think, to consumers is probably the swing, because the winter before last was the warmest in 25 years. So the net effect, and it is really a psychological thing as well as a real event, is consumers would have had much higher fuel bills even without higher fuel costs.
So the factors which combine to drive fuel bills higher this winter are (1) high natural gas prices and their sub-effects of less extraction and more propane use as boiler fuel; and the second one is it was a cold winter. These have a common thread. They are both beyond the control of the retail fuel distributor, or the customer for that matter. So what do we do about it? This is not an acceptable situation going forward.
(1) We need to talk more about fuel supply issues. NPGA sponsored a briefing last fall for farm group associations. We intend to continue that practice where we talk about fuel supply and fuel price issues so that people can plan ahead and anticipate some of this stuff happening. We need to take to hear—there is an article in Neighbors' magazine here. It is published by the Alabama Farmers Federation and it talks about propane and poultry growers in the last winter, and I would ask that this be inserted in the record of this hearing. The article points out, ''Fortunately, some Alabama growers contracted their gas early this year, and for those few, the energy crisis has not been as devastating.'' Price hedging is a practice whose time has come; especially, for those unable to pass on their increased fuel costs to others.
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Concluding, factors affecting prices are beyond control for marketers, propane marketers, and for farmers. We can minimize impact through better communications and by encouraging farmers to take advantage of hedging opportunities that are out there. NPGA and its members are committed to working with Congress and our valued agricultural customers to address these issues. On behalf of the members of the NPGA, I thank you, Mr. Chairman, and the subcommittee members, for giving us this opportunity today, and we will answer any questions you may have.
[The prepared statement of Mr. Gorham appears at the conclusion of the hearing.]
Mr. LUCAS. Thank you. Mr. Jordan.
STATEMENT OF JERRY JORDAN, CHAIRMAN, INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA, COLUMBUS, OH
Mr. JORDAN. Last, but hopefully, not least. Thank you, Mr. Chairman. I, too, appreciate the opportunity to testify.
I am Jerry Jordan, president of Jordan Energy, Inc. of Columbus, OH and chairman of the Independent Petroleum Association of America, IPAA. Today, I am testifying on behalf of IPAA, the National Stripper Well Association, and 32 cooperating State and regional oil and gas associations. Those associations represent thousands of independent oil and natural gas producers in the United States. The independents in this country drill 85 percent of the wells that are drilled, produce 40 percent of the oil and two-thirds of the natural gas in this country.
There are great similarities between the independent producers and the agricultural community. Both are price takers and not price makers. We are both dramatically affected by the action of the commodity markets. For example, when oil prices dropped in 1998–99, domestic producer revenues dropped by $19 billion. My written testimony provides detailed information on the issues designated for this hearing. In my brief time here, I want to focus on a few points.
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First, I want to emphasize that the current supply and demand situation with natural gas, which has brought the high prices, was both foreseeable and predictable, and predicted, although the severity was underestimated. The vision to see it coming was broadly shared by both industry and Government experts. It was documented in the 1999 National Petroleum Council report on natural gas. In addition to the report, I, along with others in a broad based group of industry experts, met in early 1999 with cabinet level Government officials when oil prices were very low. We warned them of the foreseeable consequences of the depression conditions prevailing in our industry and we, specifically, told them of the interaction between the gas industry and the oil prices and the impact that you have between the two.
When our need for a national energy policy and curity of actions were suggested to that group, we were unequivocally told, let the market work. Well, it has been working. Our warnings were based on concerns later described in the NPC report. The report concluded that the natural gas resource base in North America is adequate to meet the increasing demand for many decades, but it also found that our industry's ability to tap that resource base effectively was conditioned on two things, a healthy natural gas industry and sound Government policies. We had neither and we still don't have them.
The industry was coming off two near-depression years caused by the ruinously low oil prices in 1997 through 1999. The oil and natural gas segments of our industry are inherently intertwined. Consequently, when oil prices fell off and reductions of exploration budgets were imposed on our producers because drilling made no sense, gas exploration was adversely affected as well. During the bad times, the industry lost approximately 65,000 skilled workers in that short 2-year period, and existing drilling rigs were cannibalized. Essentially, no new rigs were being built. While it is estimated that we have recovered approximately 40 percent of those workers, their skill levels are often well below what they had prior to that time.
Meanwhile, the industry's capabilities were hit hard. While that was happening, natural gas demand continued to increase at a rate above all earlier predictions. Over 95 percent of new electric power plants planned and being built across the country are powered by natural gas or are planned to be powered by natural gas. The trend reflects the prevailing Federal policies which have been in effect for the last decade which have discouraged new nuclear coal and hydro projects.
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All these factors combined to create the natural gas market situation which has prevailed in the last year. The industry has responded promptly to the improved market conditions. The number of rigs employed in the search for natural gas has increased by 2 1/2 times in the last 2 years and thousands of new engineers are being hired by our service companies, but recovery will take time because of the complexity of the exploration process, the huge capital needs of the industry, and more importantly, because of land access impediments imposed by Federal agencies.
These two issues, capital and access to non-park Federal lands, are the primary factors which will slow recovery. Much of our Nation's natural gas reserves underlie Government controlled land, both on and off shore. Access to these reserves have been severely restricted based, primarily, on fears of environmental harm. But those fears are largely grounded on 30-year old technology. Using modern 21st century methods, these resources can be developed in an environmentally sound and sensitive manner.
IPAA believes that the Federal regulatory process must identify and recognize the impact of the regulatory actions on energy supplies and future energy decisions. This means there must be coordination among the relevant agencies, like the Department of Energy, the Department of Interior, EPA, and the other relevant agencies when these issues are considered and decisions made. A realistic balance must be struck among the interests and responsibilities of these agencies.
We have repeatedly found situations where the Department of Energy has recommended things in the past, and in all administrations, and the other agencies, basically, trumped the advice of the Department of Energy. We need to coordinate these efforts.
The other big impediment to our industry recovery is a shortage of capital. The NPC study estimates conclude that capital expenditures for domestic exploration and production must increase by $10 billion a year. The Federal role in capital access is largely an issue of tax reform. For the industry to meet future capital demand, it needs to increase the use of outside capital. The Tax Code has always been a significant factor in encouraging the investment of capital. Therefore, the administration and Congress need to support and enact provisions designed: (1) to encourage renewed exploration and new production; and (2) to maintain the existing production by putting a safety net under marginal domestic production to prevent premature plugging.
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Congress has considered a number of reforms to help in this effort. Some of them were passed, most of them were passed in 1999, but unfortunately, were part of a larger veto package. These are needed to increase exploration and production by independent producers because their cash flow available for reinvestment is limited to their net production revenues. I know it is easy to ignore these issues while prices are so high, but their lack will extend the period of consumer pain in this situation.
In conclusion, it is time for this industry to take the energy supply issues seriously and develop a sound, coordinated future policy. Certainly, we acknowledge a need for effective energy conservation measures and protection of the environment, but energy production, particularly, oil and natural gas, is an essential component that must be included and addressed at once. Independent producers will be a key factor and the industry stands ready to accomplish our common goals if policies reflect that reality.
Thank you, again, for the opportunity.
[The prepared statement of Mr. Jordan appears at the conclusion of the hearing.]
Mr. LUCAS. Thank you, Mr. Jordan, and I appreciate the whole panel for being so precise and focused in your testimony.
It was alluded to earlier, I represent a slice of western Oklahoma that overlays what is the Anadarko Basin, an area that has been one of the substantial producers of natural gas for at least the last three decades. So I am out there every day in the field in my district, seeing what is going on.
And I guess my first question I would direct to Mr. Horvath and Mr. Jordan. I have watched in the last 30 years, as we came out of the boom of the early 1980's in western Oklahoma, drilling rigs turn to piles of rust and be cannibalized and shipped off for parts. I have watched people who were knowledgeable and experienced in the industry, at all levels of the industry, fade away and go off to do other things. Literally, it appears to me now in my part of western Oklahoma, that whether it is infield drilling or it is new efforts of exploration, that they have everything out of there, out of the junk piles, that will function. They have every warm body that is semi-qualified in the field—I say, semi-qualified in the field and doing everything they can. But there is a huge limit to that situation.
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So from the perspective not only of the American consumer out there, but the farmer or rancher thinking about drying his corn or buying his anhydrous ammonia or what his diesel is going to cost, where are we going to be this year or for the next 2 or 3 years from the perspective of enough natural gas to do what needs to be done?
Mr. JORDAN. Mr. Chairman, in the first place, I completely agree with the picture you have drawn, that you see out there in the Anadarko Basin. I am also going to wave this graph, which I always—I hate to use, but it is absolutely appropriate. It shows that across the country, to drill a well, you have to be what is called a registered operator. In 1984, there were approximately 13,000 registered operators, and in 1999, we had dropped to 2,000. And you wonder what happened? Mergers, combinations, bankruptcies, and obituaries during that period of time. And the conditions you have described are absolutely appropriate.
All we can do is like we have done in the past, because this has always been a boom and bust industry, and we have gone through it before, and we always throw up our hands, but we always get about it, and especially, if the marketplace can work, and we are, basically, not interfered with, we will, in fact, replace those workers. We are working with numerous universities, junior colleges around the country to push technical education in these areas like we had before, like we had 20 years before, and our geotech schools are—more cities are being brought on board, and we are making the effort, and I am confident that we will be able to meet the needs within a reasonable period. Although, it is very difficult because, especially, with the small producers and mid-size producers, because the capital needs for those producers is especially significant.
I have got a good friend who is one of your fellow members, Dave Hobson, from Ohio, and I have talked to him about this. And he says, oh, Jerry, you know that we can't do anything to help the oil and gas producers because you have got high prices and everybody is getting mad at us. And that is true, I understand that. If I were a Congressman, I would probably feel exactly the same way. But you have got to be realistic and you have got to realize if we want people to move faster, we have got to figure out ways to get capital into the industry.
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The big companies can drill—and I don't want to distinguish between big and small. Our organization represents some pretty large independents, but don't represent the majors, typically. But our small producers really need capital, and we need to figure out ways to get that capital, and we are all working on it, and I think we will do the job.
Mr. HORVATH. I think for the majors and larger independents, the people are the problem. You cited the observations are not only correct but are true across the country. Our universities are bereft of petroleum engineers, and geologists, and seismologists, and so forth. And there is an automatic 4-year delay right there, even assuming the market works and kids are attracted to those majors. So we see this as a multi-year situation. This issue is not going away in the near term. But is there enough supply to meet demand? Yes, because we have a competitive market where the prices allow it to clear. For some people that is a problem, but for us, we see that as the solution because that will attract enough people to the industry to moderate prices over time, but it is a multi-year issue.
Mr. LUCAS. Mr. English and Mr. Coffman, where do you see the cost of electricity to my fellow constituents back home in 10-years time, and that is whether they live in Oklahoma City or they live in rural Oklahoma, whether they are in the manufacturing industry or they are running some agricultural facility that requires electricity? Look into your crystal ball, gentlemen.
Mr. COFFMAN. If you will look at attachment A that was with my filed testimony, the center part of the country, not the east coast and not the west coast, is largely based on coal. There is—it ranges from 76 percent of the installed base to about 45 percent, if you look at Texas. And even though it is variable, it is still the overwhelming majority in most of that location. My sense is that we can keep electricity prices reasonable if we have an energy policy that tries to balance between all resources, coal, nuclear, oil, gas. I support what I have heard here today in terms of additional exploration. I think we need that. But coal is a low priced commodity that the utilities can use to generate low cost electricity. To the extent that environmental restrictions preclude us from using that, I think you are going to see prices go up. We are putting in some new higher efficiency gas burning combined cycle units. That will tend to put some damper on prices. But if the fuel going into those plants stays at $5—and that is our prediction for about the next 10 years—then certainly, the energy price, if that is all that is being installed in the country is natural gas fired production, the price is going to go up.
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Mr. ENGLISH. Mr. Chairman, I would agree with that as far as it goes. I think that within question, obviously, fuel is going to be a major ingredient. So there is a balance to be struck as to whether you are going to use natural gas. The more natural gas that is used, given what we have just been told about the likely rate of discovery, the price is going up. It is going to go up dramatically. If you have tighter environmental laws or if we don't invest in technology to provide solutions to the environmental problems that are faced with some of these fuels, the price is going to go up. It is going to go up dramatically. It is going to be more reliance on natural gas. There is going to be less coal that can be used under those circumstances.
So all that comes into play. Nuclear is another issue. The question of whether nuclear becomes a factor—we are still, it is my understanding, using about 20 percent of the generation of electricity in this country still comes from nuclear. The question is whether that will become a greater part of the mix or the solution. So for all of us in the electric utility industry, fuel is, obviously, the common denominator, and there is a big question.
Another issue that I think is far more critical than that, though, and that is the question and the lesson that we are learning out in California. Do you own generation? Because as we have seen, the results are in a tight market, you are going to have those who will take advantage, big time advantage, of the factors of supply and demand. And providing electric power is not going to be based under those conditions on what the cost is. And if you have your own generation, as we are seeing in the city of Los Angeles, which again has its own generation and is able to provide for the needs of the people in that area, or for investor-owned utilities who have retained it, and a lot have not because it became the fad in the 1990's to divest yourself of either getting into the generation business, or getting in the distribution business, or some other kind of business. In some cases, going overseas and investing in generation. And if you don't have generation, you are at the mercy of the market forces, and that is what has happened to PG&E; and Southern California Edison.
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We are very fortunate as far as those areas in the Sixth Congressional District that you are mentioning and those areas which are, generally speaking, the more remote rollers of this country. Most of the electric cooperatives have access to their own generation or generation through TVA or the Power Marketing Administrations. And under those conditions, they are provided for. The example I gave of Anza, why are they able to do it? They have their own generation. And so there is a self-sufficiency.
There is another aspect of this, that this committee, in particular, I think, may be interested in, because we are already seeing this. In fact, I heard it last night from—I had better not say what particular company it was, because I think it may get some people's attention. And what they were, basically, telling me, they are in the electronics business in California. Not just a small electronics manufacturer, but big time. And they said if the kinds of developments that take place, that are forecast, take place in California this summer, they are out of there. They said, when you look at the cost of moving, they are moving out. And they know of several other people in their particular industry they have to have a reliable source of fuel.
So what may become an interesting feature here for the Agriculture Committee is those members who are serving rural America may be the fact that you do have a reliable, dependable, stable generation supply of electric power. If you have that, that may become a major rural development tool in being able to attract some of those who may be falling victim to the problems of California. And it is, certainly, those of us who represent consumer-owned electric cooperatives, whose objective, as I mentioned before, is to provide electric power at the lowest possible cost and making sure you have a reliable, stable supply of that power, we are obviously going to be out trying to sell that to make sure that any of those who become disenchanted with these kinds of difficulties, we would encourage them to look at rural America, look at those areas served by electric cooperatives. And for those of you who might not be interested, we are very proud of the fact that electric cooperatives are growing twice as fast these days as anyone else in the electric utility business. So you might want to consider that, the rural development mix, Mr. Chairman.
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Mr. LUCAS. Thank you, Mr. English. Mr. Hilliard.
Mr. HILLIARD. Thank you very much. Mr. English, the power marketing agencies are of particular importance in providing electrical power to much of the south, including my State of Alabama. What is their status and how do you see that they fit in with the power supply situation?
Mr. ENGLISH. Well, obviously, those that are involved with hydro, in particular, that is the lowest cost, the cleanest power there is available. We have seen from time to time a tax being made on PMA's by others who feel that since that power is, in effect, owned by the Government, the taxpayers, and through the Power Marketing Administration, that there should not be a preference given to those communities that receive that power.
What is often forgotten is the reality that those communities made an investment in many times signing contracts to buy power from those facilities at rates that were higher than what the going rate was for electric power, mainly, because they felt that this was something that they were investing for in the future. I think that we have got to continue to recognize the fact that most of those communities were small towns in rural areas that really didn't have access to power any other way, and I think that that investment, that contract that was made with the Government, should continue to be honored, and particularly, honored even though times are getting tough.
Mr. HILLIARD. Did deregulation cause the energy problem in California? If so, what percentage of the problem?
Mr. ENGLISH. It is a very complicated mix, in my opinion. And this is, everyone has their opinion about what brought it about, but I think the roots go beyond the State law. I think it goes back to the 1992 Energy Act, which I will say that I was a Member here and I voted for it. We were going to bring competition into the arena as far as generation is concerned. And certainly, that was the idea, to bring in the market forces into the whole question of generation. But in this particular case in the State of California, while we opened up the door from a generation point of view for competition, then they overlaid their own State approach, which to a great extent—and let's keep this in mind—that the utilities out there played a big role in designing the State law in California. And some of those who weren't utilities within the State who wanted to sell power in the State of California, played a role in designing that legislation, which required the divesting of generation, the separation of generation from those utilities. And this is what I meant by the lessons that we learned.
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So what you had happen was you had the competition which allowed the market forces to take hold on the wholesale level, and then you applied what many would criticize, and I think with some justification, as being a half and half solution from the standpoint of the State law, in that you had the local consumers being protected. And keep in mind that State legislators and the people of California were promised at that time, your rates are going to go down because of competition. But what, in effect, happened, they went up. In fact, they were so confident, they wrote in the State law that you are required to reduce rates by 10 percent over what they were. Well, that provision in the law hasn't done much good.
So I think there is a whole number of factors that came into play to cause the difficulties in the State of California, not to mention, one of which was, of course, many of the State laws dealing with environmental issues that made it extremely difficult to build generation. It has all so been suggested in the State. In fact, it was written in one press report that even some of the big power companies out there paid people not to build generation in the State of California. I don't know whether that is true or not, but it has been reported in the press out there.
So there is a lot of factors that come into play, a lot of lessons for us to learn. But as I said, the lesson we are taking is that self-sufficiency, the independents, being able to protect consumers, being able to have consumers own their own utility, provide for their own needs is the kind of protection that may make that investment from 65 years ago through the REA Act and carried through by this committee may make that a very wise investment for rural American and bring about the stability and reasonable prices for rural America.
Mr. HILLIARD. How can we decrease the cost of propane? And I think I want to go directly to the gentleman who I had a long conversation with before the hearing.
Mr. GORHAM. That would be me. In the short term, there is not an awful lot we can do. There are, as I mentioned before, we sponsored——
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Mr. HILLIARD. I am sorry. That was the third question. Let me go to the first question. I don't have my glasses on so I skipped over them. Would you tell us, those things that went into the cost of the pricing of propane that had caused it to go up?
Mr. GORHAM. From the propane marketers' perspective— I guess I will start with what I did in my testimony, that propane comes from natural gas and crude oil. So that when you have natural gas that you can see at, for instance, this winter, $10 per MCF, the propane equivalent to that is probably $1.10 or $1.20 a gallon. It doesn't make any—if there is no economic incentive to extract the propane from $1.10 natural gas or $1 natural gas, and sell it for less than that dollar—in fact, you have to have a little bit of a spread there to cover the cost of extraction. So in fact, when natural gas goes up like that, it drives up the supply of propane, and shortly thereafter, the propane prices will move. It is just a matter of—this winter they didn't move right away because there was a lot of propane in storage. So I would say that the raw material cost for propane is what drove propane prices this winter. That probably begs the question of why did natural gas move up.
Mr. HILLIARD. Well, let me ask the question before, because you really have answered the question and I appreciate it. But let me ask you this and make sure I understand what you are saying. You are saying that, really, market forces drove up the price. Would that be a fair statement?
Mr. GORHAM. It would be a fair statement when applied to natural gas, yes. Propane, I really think, was—well, yes, that is a fair statement all the way across.
Mr. HILLIARD. The only way that it can be reduced is to regulate the price then?
Mr. GORHAM. I would say that that is not—if that has the effect of reducing the price, it will do so at the expense of availability. When people, for instance, natural gas—and again, I am saying, this was a natural gas event that drove propane this winter. Now, 3 or 4, 5 years ago, it might have been a crude oil event. We are dependent on both, as I pointed out in the testimony. When you clamp an artificial lid on prices for any reason or with anything in mind, what it does is create a severe disincentive for somebody to produce it. The actual cost of producing the propane this winter would not have been met with a price lower than what we had, and you would have dried up supply.
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What we are looking at is huge changes in demand for natural gas. For instance, last summer we added about 100 billion cubic feet of gas over the summer consumption in power plants. This summer we are going to add 200 billion more. Plants are already under construction. They are going to be built, it is going to consume gas. The next few years there is going to be another 400 BCF of gas—4 BCF, not 400—4 BCF of gas added on. And these demands in a traditionally off season, summertime season, have made a lot of ripples through the chain. And we are seeing the tail end of that in propane.
Mr. HILLIARD. Thank you very much.
Mr. LUCAS. The gentleman's time has expired. Mr. Putnam.
Mr. PUTNAM. Thank you, Mr. Chairman. To build on what you were talking about with more natural gas coming on line, I know in my district we are in the process of constructing several new gas-fired plants. What is the estimated volume of natural gas in the restricted areas in the eastern gulf?
Mr. JORDAN. The NPC study indicated, if you will add these numbers, 40 percent of 346 TCF in the Rockies, 100 percent of 21 TCF off the west coast, 100 percent of 31 TCF off the east coast, and 56 percent of 43 TCF in the eastern gulf. Those are the numbers that the NPC study, which an NPC is both a Government and industry study, and I think it is very sound.
Mr. PUTNAM. Mr. Ose tells me that is 219 TCF. He is a little quicker on math. Now, what impact on lease 181 will the recent move by the Air Force have, if any, on the amount of extractable natural gas?
Mr. JORDAN. I am not qualified to answer that. I don't know what is connected with the Air Force. I know about the Air Force issue, but I have no idea about the reserves that are connected with that issue. I am sorry.
Mr. PUTNAM. OK. All of you discussed the underlying problem of lack of generation capacity, particularly, in California, but also, the lack of refining capacity. And what specific Federal laws are contributing to the disincentive to construct refining capacity, and if someone were to wave a magic wand and make available or make an incentive for refining capacity to expand, how long would it take to bring that on line, and what volume of refining capacity will be necessary for us to meet the Nation's energy needs over the coming decades? Mr. English?
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Mr. ENGLISH. I will take a shot at that. I think you are oversimplifying it a bit in saying what regulation is preventing that. I think we have to be reminded of the fact in the mid–1990's you had a surplus of generation in this country. People weren't building because you had a surplus, you had too much. The projection, the forecast, was for all those that were supposedly knowledgeable in this field, that we were going to continue to have a surplus well into the future, and price was going to go down. Or for those that may have been a little more aware may have said, well, that is going to tighten up. I don't think that anyone in the State of California, certainly, not at the time that the legislation was passed, anticipated that this was going to happen. And unless you become very cynical and assume there is some kind of conspiracy that was involved in what happened out there, and I don't think that that was the case.
What we are seeing are the market forces at play. I think that is the reality. There is no question that California's laws, I think it is well known in the electric utility industry, are not conducive to encouraging the building of generation. We have throughout this country, though, this feeling, not in my backyard. Don't build it in my backyard. You have got a transmission system in this country that is antiquated, that was built for a different time and for different circumstances. It was built for a regulated industry. It is not conducive to moving power around this country. You don't have the equivalent, for instance, of an interstate highway system to be able to move electric. There is a lot of stuff that is going on in there that we are making this transfer from what was a very regulated industry, maintained primarily from the States into a more competitive industry and moving power across the country.
Mr. PUTNAM. But what about refineries, not just——
Mr. FELMY. If I could amplify that, the refinery system has, basically, been under siege for 20 years with layer upon layer of regulation, both at Federal, and State, and local. At the Federal level, we have had to completely streamline refineries and reduce emissions dramatically. We have also had to reformulate both gasoline and diesel fuel several times. With each of these changes, it has been a requirement of a massive investment of $50 to $100 million per refinery. That, basically, has driven any rate of return out of the refineries to where their system for 15 years was returning about 4 percent. It is not a great investment.
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When you combine that with a number of increasing restrictions, such as the new rules on gasoline and sulfur and gasoline and diesel, that makes it not an entirely attractive investment. And finally, with the permitting problems of refineries or any additional industrial facilities, it is just a real daunting challenge.
Now, the Department of Energy estimates, going forward, that by the year 2020, we will consume 6 million barrels a day more petroleum than we do right now, which is about 20. They are estimating that to meet that need, we are going to import 2/3 of that and we are going to have to expand our existing capacity, either by new capacity or increasing utilization, such that you will need about 2 million barrels per day of additional processing capacity.
Mr. PUTNAM. Thank you.
Mr. LUCAS. Mr. Baldacci.
Mr. BALDACCI. I would like to continue along those questions that were raised in regard to refining capacity. Would you explain to me how that oil now is $26 a barrel and change, and the need for additional production of oil is going to help if the oil at $26 a barrel and change is not helping to reduce it because we don't have the refinery capacity? What good is it going to drill anywhere and produce oil anywhere if we don't have the refining capacity to be able to bring it to market?
Mr. FELMY. Well, you are going to need to increase additional supply so that you can bring that price down. We are going to need to diversify our supplies, either domestically or abroad——
Mr. BALDACCI. All right. Well, then let me ask you a question, if you are going to need to do both. Does the oil industry have plans to increase refining capacity at existing refineries or to build new refineries?
Mr. FELMY. At the current point, it is a very daunting process to try to expand existing refineries. We have been subject to a myriad of regulations that are complex, conflicting, and changing——
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Mr. BALDACCI. So they are not going to—excuse me, sir. I only get 5 minutes and I just—so they are not going to do it at existing refineries. Are they going to—do they have any plans to have new refineries?
Mr. FELMY. To my knowledge, with the daunting regulations and permitting problems, we don't have any plans at this time——
Mr. BALDACCI. So would you—what sense of comfort am I going to have if you have more production of oil or gas— let's stay with oil. What sense of comfort am I going to have to the people I represent to allow for more drilling of oil if, in fact, we are not going to have anymore refineries or refinery capacity to bring it to market to have any impact on the prices?
Mr. FELMY. Well, if you were to be able to increase domestic supplies and have some impact on world prices, which, in turn, would affect domestic prices, that would increase, potentially, the margins to refineries and perhaps make it a better investment to be able to build a new refinery.
Mr. BALDACCI. I am not an economist and I am just somebody who has a little family business, among many other family businesses, and we certainly can't figure out what is going on in the industry. But it is just very troubling to me—it seems like no matter how much oil or crude oil that we pile up, it still doesn't do anything in terms of the impact of the prices that are charged to consumers because we don't have the refinery capabilities here. And in your Exxon/Mobil reports profits, it doesn't give any indication that they are planning to do it because of the daunting task that it is in terms of expanding its capacity or adding new refinery capacity to the marketplace.
So the question, I guess, ends up being that if you are not planning to make those investments, and they end up requiring so much in order to do it, by having increased domestic production, whether it is increased domestic production or international production, it doesn't matter only as to which shell it is going to be under. As far as the consumers, the people who we represent and work with every day, they are still going to pay those prices. It is whether they are going to pay it domestically or whether they are going to pay it internationally, and in some cases, domestic and international are the same.
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Mr. FELMY. Well, it doesn't have to be that way, and we would dearly like to see, as an industry—and if you look at the forecast from the Department of Energy, we are going to need additional refinery capacity, but we are going to need help to do it. We are going to need help across the whole range of permitting problems that we face. We are going to need your assistance in terms of being able to streamline some of these regulations, and we are going to need help in terms of having some sense of certainty in terms of the regulations.
If you look at the regulations that have come out affecting the refinery industry, you have had major regulations several times. That is very destabilizing and makes it an unattractive investment. However, if you do produce more crude oil in this country, it will—and worldwide—it will lower prices and improve the rates of return. But we are going to need help to be able to do that.
Mr. BALDACCI. You see—and I appreciate the company line, but I understand, also, that it has been a situation where the production has increased. Today, when I looked at the futures market on crude oil and sweet oil, it was at $26 and change. We almost had an energy crisis when it almost reached $40 a barrel, and it is $14 a barrel less today, but the prices haven't come down. Now, there are people who have a lot less education that have been able to figure out that it is going up by telegraph and coming down by pony express. My suggestion is, as far as I am concerned, I wouldn't allow for anymore production until I saw a plan being put forward in terms of refinery, investment in refinery capacity, or offshore or international refinery capacity to be able to utilize to have an impact in the marketplace so the farmers, the small business people, the people who are working to make ends meet can afford to pay these prices.
Mr. FELMY. Well, I would take exception that production has increased, because if you will remember, OPEC has decreased their quotas twice this year already by 2.5 million barrels——
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Mr. BALDACCI. All I am talking about is—excuse me, sir. All I am talking about is what is the market. This is all market. I look at the stock market page, it gives the commodity futures pricing. That is the market. It says $26 and change. It was almost $40. I am just asking, by the time it gets refined into a consumer's gas tank, or into their home heating oil system, or what have you, it doesn't seem to have any kind of an impact. And from what you are telling me, between regulations, costs, rate of return, the gentleman asked a question and you said it was less than 4 percent rate of return, so dollars weren't going to go into it. To me, it just doesn't bode well for any kind of a drilling policy anywhere, let alone the Arctic National Wildlife Refuge.
Mr. LUCAS. The gentleman's time has expired. Mr. Ose.
Mr. OSE. Thank you, Mr. Chairman. Being the only Californian up here, I don't quite know where to start. I hope God is listening. I think the first place I would like to start is, Mr. English, in your testimony on page 5, you talk about cooperatives, about having cooperatives in California, their wholesale sales in 2001 were expected to be only 2,244 megawatt hours. The question I have is I also think I read in your testimony—do your cooperatives have any generating capacity in California?
Mr. ENGLISH. No.
Mr. OSE. Not in California?
Mr. ENGLISH. None in California
Mr. OSE. So they have to buy it from elsewhere?
Mr. ENGLISH. No.
Mr. OSE. They have generating capacity elsewhere?
Mr. ENGLISH. Outside the State.
Mr. OSE. OK. Do they have excess generating capacity outside the State?
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Mr. ENGLISH. That is what got sold into California in 2001.
Mr. OSE. OK. So you are not talking about a cooperative that operates in the State in California. You are talking about a cooperative that sold power into the State of California?
Mr. ENGLISH. Both.
Mr. OSE. For the 2,244 megawatt hours, did they get a contract price or the market clearing price?
Mr. ENGLISH. They got—this was an order by the Department of Energy that they sell in any excess power that they had. This is all——
Mr. OSE. So they got it at 150?
Mr. ENGLISH. They got less than 150. So it was below what FERC was establishing as the cap.
Mr. OSE. So it was a must sell?
Mr. ENGLISH. It was a must sell, and keep in mind that this was done even though——
Mr. OSE. I have got to go on, Mr. English.
Mr. ENGLISH. OK. Very good.
Mr. OSE. The next question I have is, in terms of excess capacity from the cooperatives, somewhere, somehow, they probably have this. What do they, typically, do with that excess capacity? My question is, do they forward contract to delivery somewhere else or they sell it in the day head market or the spot market?
Mr. ENGLISH. They may. Keep in mind, as I pointed out before, because of any generations built under the rural utility service regulations, you are building for your own needs and only that. So we are not building merchant plants to go out and speculate the market as others do in this industry.
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Mr. OSE. You are constrained by the Internal Revenue code private use requirement or is it a covenant in the loan?
Mr. ENGLISH. It is a covenant in the loan. Now, some generations built beyond that, but by the very nature, you are only constructing what you need because it is for your own use. You are not building to sell to others.
Mr. OSE. All right. This gets right to the heart of what I am trying to figure out. In my rural areas, and I have 8 counties, of which 7 are primarily rural, I have water, I have land, and I have wells and potential wells, together with an infrastructural grid for electricity transmission that crisscrosses, primarily, WAFA's power lines coming out of the north. What I am trying to figure out is whether or not National Rural Electric Cooperative Association has the discretion to go into those areas and provide loans for the purpose of creating power generating facilities.
Mr. ENGLISH. Keep in mind, we don't provide the loans. That is the Government through the Rural Utilities Service might or some other outside groups may provide it. What we are doing is——
Mr. OSE. Let me rephrase my question then. Does the possibility exist that the Rural Utilities Service could do this?
Mr. ENGLISH. Yes, as long as they are in the rural areas. In rural areas, yes. Keep in mind——
Mr. OSE. So there is a definition of a rural area in the code?
Mr. ENGLISH. Exactly. It depends upon the population levels of any communities that might be involved in that kind of activity. I think that is a question in several rural areas that is going to have to be addressed as to how do you deal with providing this kind of assistance. For instance, in the State of California, what you are talking about, and keep in mind we have seen some new cooperatives established in the State that have just been created in the last 3 or 4 years, aggregation cooperatives for the purpose of buying power. The lesson we are learning in California, you also are going to have to own generation as a cooperative in the State of California. It is not a question of us doing it for them. It is a question, are they willing to do it for themselves.
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Mr. OSE. OK. Let me—my time is going to expire.
Mr. ENGLISH. I understand.
Mr. OSE. We are going to have another round. Are we not? All right. Thank you. My question then goes to—we have significant opportunities in California to produce ethanol from rice. Now, the issue is does USDA or whomever have rural development loans—I am trying to get potential answers to solve the problem, whether in whole or in part. I am trying to explore those answers. From your experience, does RUS or USDA have loans that could be used to facilitate rural developers doing that sort of thing?
Mr. ENGLISH. Economic development, business and industry type loans, yes.
Mr. OSE. Changing the carbon and the rice straw, for instance, into ethanol that we could use as an additive?
Mr. ENGLISH. Just recalling from several years ago, it would be my understanding, yes.
Mr. OSE. OK. My time is up, Mr. Chairman.
Mr. LUCAS. Mrs. Clayton.
Mrs. CLAYTON. I live in a rural area. In fact, I get my electricity from a cooperative, and the relationship there is they do not have a self-generated electricity. They contract with a private investor. And apparently, the must sell is the operative method. There are some areas in North Carolina, however—in fact, I have more cooperatives in my district than anyone else in North Carolina. There are some districts, however, who have small generating plants, and in some instances, their costs, because of the small volume, gets to be a burden that they have to bear, but they are doing a wonderful job.
One of my questions, really—Mr. Ose from California had mentioned. He had asked the question I was going to ask about you proposed the solution in the California mix. Now, would the same set of answers you gave him be applicable in a State like North Carolina? Now, we don't have a crisis, but we have the fear, and I am part of that slowing down, that deregulation process. But are you proposing that there are unique solutions in California that co-ops can do because of how they generate their electricity, or is there a general solution that you could be involved in bringing down the costs of electricity and being a part of the supply?
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Mr. ENGLISH. The key is the changes in the law that have taken place. The 1992 Energy Act, obviously, changed the ground rules. In the State of California, the State law changed the ground rules and opened up the door so that it would be possible to do some of this. California, we think, there are a lot of different possibilities.
Mrs. CLAYTON. Now, would his State law allow that?
Mr. ENGLISH. His State law——
Mrs. CLAYTON. My State law doesn't allow it.
Mr. ENGLISH. Your State law does not allow that, so that would be the difference between the two.
Mrs. CLAYTON. I wanted to make that distinction, that we may need to look to see what we can do federally.
Let me go to natural gas, but again, I am so rural, I have propane gas. And if it were not for that, not only would farmers not have it, I wouldn't heat my house, and unfortunately, I use electricity and gas, so when the lights go out because we have a storm, at least I am in the dark, but I am warm by propane gas. But it costs so much. Not only has it gone up for farmers and small business, it has gone up for senior citizens. It is almost unforgivable that these senior citizens who are on fixed incomes, not only dealing with medicine, but they are having to deal with this natural gas. And many of the—what can we do in the Federal Government to help with it? I don't know what we can do about that, but I was just wanting to understand a little bit about how the pricing of natural gas goes, and I need to have you tell me what does the well price—explain how that works to your advantage, but also, to the consumer, particularly, the small consumers, in terms of the gas consumption? Whoever wants to answer it.
Mr. HORVATH. Well, for natural gas, as distinct from gas propane, which Mr. Gorham answered——
Mrs. CLAYTON. No. I am natural gas.
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Mr. HORVATH. You are on natural gas. OK. Again, there are over 8,000 producers. They are price takers as Mr. Jordan said. That means that whatever the market says the market will pay for the gas, that is what people get. So there is no—I mean, there is no—it is like a stock market because thousands of buyers and sellers producing a price——
Mrs. CLAYTON. Well, how does that not work for the advantage of the small consumer, but it works for your larger one. What is the spot market that allows a large commercial to have the advantage that a small——
Mr. HORVATH. I see. Yes.
Mrs. CLAYTON. Help me understand——
Mr. HORVATH. Yes, I do. Larger consumers use the futures market. They can hedge. In a sense, it is a form of insurance on price for the future. And smaller consumers have that opportunity but may not be aware of it. It is an education process.
Mrs. CLAYTON. Will my senior citizens have an opportunity to——
Mr. HORVATH. Absolutely. There are no regulations prohibiting them from doing it. It is a question of getting them educated enough, maybe getting together in groups to do it to take advantage of the market.
Mrs. CLAYTON. Well, propane gas is related to the cost of natural gas. Right? So the distributor of the bottled gas, did you take the advantage of spot marking this, and hedging this, and why is the cost going up?
Mr. JORDAN. Yes. Actually, the spot market is what it is today, and what we try to take advantage of is the futures market. And we, in my small company, both natural gas and propane, we have offered all of our customers in the propane operation for the last 6 years the ability to cap, hedge, block prices, things like that. It is becoming much more commonplace.
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Mrs. CLAYTON. You would give me, as a consumer——
Mr. JORDAN. Anyone of our customers, absolutely.
Mrs. CLAYTON. How would I do that? Would I get last year's prices or this year's prices?
Mr. JORDAN. We send out a notification shortly, and we give you the opportunity to elect market price or a cap at a certain level, and we will fill in what that would be for the year, that we can go out there and buy some kind of price protection on the market. We act as an aggregator for your volumes.
Mrs. CLAYTON. Do farmers know that? Do they take advantage of that, because they cure the tobacco——
Mr. JORDAN. That is what this article talked about in this magazine is that some do, some don't. We need to get the word out.
Mrs. CLAYTON. Thank you, Mr. Chairman.
Mr. LUCAS. Thank you. And if the panel will indulge us, and since we have got you, I guess you will, one more quick round of questions.
Mr. Felmy, talking about the refinery situation, how long has it been since we have had a new major refinery constructed in the United States?
Mr. FELMY. The last major refinery was constructed in 1976.
Mr. LUCAS. Wow, 1976. You mentioned all of the various costs, and rules, and regs that you have to contend with. What kind of refinery construction have we had outside of the United States, in the world? Surely, there is an ongoing program somewhere building these facilities.
Mr. FELMY. There is ongoing refinery construction in many parts of the world, such as Asia, for example, where you see—I don't have the exact numbers in terms of how many or what volumes, but there is continuing activity there because they have strong demand growth in petroleum.
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Mr. LUCAS. So in the present environment, I would assume that it is cheaper to build a refinery offshore somewhere, especially, if you are refining non-domestic crude, process it there, then ship in the finished product, whether it be diesel, or gasoline, or whatever else. Do you have any feel for what the price advantages would be for a modern facility built offshore as far as their cost of refining versus a 30-year old U.S. facility or 40-year old?
Mr. FELMY. Well, it has got to be substantial, because the technology, the catalyst, everything in terms of the equipment has improved dramatically since we built our last refinery in 1976. So it does offer an advantage, but my concern going forward is whether or not we will be able to continue importing that fuel, because as our fuel specifications change, there is less of an indication that foreign refiners will be able to meet those specifications for our domestic consumption.
Mr. LUCAS. Fascinating. Mr. Putnam.
Mr. OSE. Would the gentleman yield?
Mr. LUCAS. Yes.
Mr. OSE. Mr. Horvath, do your members forward contract delivery of gas supply?
Mr. HORVATH. To the member, do the natural gas producers forward contract? For the most part, natural gas producers—and I will let Mr. Jordan speak for——
Mr. OSE. I am just going to go right down the line and ask them the same question.
Mr. HORVATH. All right. Sell into an index market—that means that they say, I am near this hub, whatever that hub produces, the price, whatever gas floats through at the time, that is mine. I will take that price. So it is just——
Mr. OSE. A day ahead rate or day of rate?
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Mr. HORVATH. It is hour of rate.
Mr. OSE. All right. Mr. Felmy, do your members, or the power they need, or the gas they need to break the petroleum, do they forward contract for delivery of that power or that natural gas?
Mr. FELMY. There are forms of financial instruments that they enter into, spot, futures, and so on, depending on the size of the facility, the individual facility, and so on.
Mr. OSE. They layer it to meet their own requirements?
Mr. FELMY. Yes.
Mr. LUCAS. But other than the length of time on the futures contract, basically, we are talking about no more than 6 months then, the time.
Mr. FELMY. It depends on the fuel, whether it is oil or natural gas, but, yes, it depends on the futures contract line.
Mr. OSE. Mr. Coffman, you are a provider?
Mr. COFFMAN. Correct.
Mr. OSE. Do you forward contract for the delivery of natural gas to the company for subsequent distribution to your customers?
Mr. COFFMAN. Well, let me correct something. We are not a distributor of gas. We only consume gas as an electricity producer, so it is a boiler fuel to us.
Mr. OSE. Do you forward contract for your boiler fuel?
Mr. COFFMAN. We go out and bid portions of our fuel supply for anywhere from terms of 6 months to 18 months. We also use the daily market and the monthly, so it is a variety of all three of those, depending on the demand that we forecasted for a particular period of the year.
Mr. OSE. Your objective is to hedge your exposure?
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Mr. COFFMAN. Our objective is to try to find the best mix of fuel pricing to keep our customers' cost low.
Mr. OSE. OK. So you are hedging your anticipated——
Mr. COFFMAN. But we are not—when you use hedging, we are not using financial instruments.
Mr. OSE. I understand. I am just thinking from a delivery standpoint. You are hedging that delivery cost exposure for your customers?
Mr. COFFMAN. We are trying to use the best mix of contracts, whether they be long term, short term, or intermediate term, to get the best price, yes.
Mr. OSE. I see the chairman's time is about up. I yield back. Thank you, sir.
Mr. LUCAS. Mr. Putnam.
Mr. PUTNAM. Thank you, Mr. Chairman. I want to hopscotch back to your refinery line. What percentage of domestic oil is shipped overseas for refinement?
Mr. FELMY. Almost none right now. We have limited exports except to Canada and some limited, depending, to Mexico, I believe. But there is almost none going anywhere else.
Mr. PUTNAM. So virtually, 100 percent of domestic crude is processed in the United States, and your earlier testimony says that we are at 92 percent capacity in our refineries?
Mr. FELMY. That is correct.
Mr. PUTNAM. So if you do expand the supply, we are going to have a capacity problem with the refineries. Correct?
Mr. FELMY. Well, if we expand domestic supplies of crude oil, you are going to have to increase the refinery utilization rate even higher that what it is right now, so yes, that is a constraint that we very much face, and we are going to need more refinery capacity.
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Mr. PUTNAM. Now, Mr. Horvath, did you testify that natural gas providers are price takers?
Mr. HORVATH. Mr. Jordan did and I concur.
Mr. PUTNAM. Now, I am in the citrus business and somebody tells me what they are going to pay, but I get a bill from the gas guy and he tells me what I am going to pay so how does that make you a price taker?
Mr. HORVATH. Because there is a value change for the production and distribution based on natural gas, starting at the production end. We are price takers in the sense that when we sell into these indices, they produce a price at each of these hubs, and there are dozen of these hubs around the country, and whatever price is produced in that hub is what we get. And then a marketer puts together a deal with your or constituents, using the pipeline and distributors to get it there, and that is another part of the value chain. So you, also, at your end, could be considered a price taker, in a sense. But from our end, you are the price maker.
Mr. PUTNAM. Let me ask Mr. Felmy one last thing. I was told some facts from the Department of Energy before we came down here. The spot price of gasoline has fallen from 82.8 cents in January to 78.4 cents in April. At the same time, the retail price has risen from $1.41 to $1.62 in the last 45 days. How do you explain that?
Mr. FELMY. Well, I think if you look at the most recent spot prices for, say, the last 2 weeks—and I am not sure what dates you have for that—those spot prices were for some of the gasoline that I have seen have been trading in the $1.06, $1.07 range, so they have gone up considerably, I think, since that point. The retail price of gasoline has gone up because of the supply and demand factors that I mentioned earlier. Demand is up and production of gasoline is down because we have been producing other winter fuels from the refineries.
Mr. PUTNAM. Now, the EPA has a proposed rule out there to cut sulfur content in diesel by 95 percent. What impact would these type refinery capacities, would that have on the availability of off-road diesel? In other words, are you gong to have to shift your capacity to producing this highway grade diesel, and farmers are then going to have to purchase that because the production is just going to drop off of the off-road, or what are your thoughts on that?
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Mr. FELMY. Well, we just had a study that we are beginning to look at the off-road component of it. It is a complex problem in terms of the high sulfur distillate, whether it be off-road or heating oil. It is clear that from our studies, the sulfur rule could lead to refinery closures and a reduction in supply of the on-road diesel. It is, however, possible that some refiners would not choose to make the investment to make the lower sulfur diesel, and it may continue to produce the higher sulfur distillates. So it is difficult right now without conducting further research to see what the net impact of that would be.
Mr. PUTNAM. Thank you. Thank you, Mr. Chairman.
Mr. LUCAS. Mr. Ose, for his absolute last set of questions on anybody's time.
Mr. OSE. Thank you, Mr. Chairman. Mr. Gorham, you are making propane, so you are getting some petroleum and some natural gas. Do you forward contract for the delivery of your product so that you can turn around and sell it out to your customers?
Mr. GORHAM. Yes, we do. We offer all of our customers propane and natural gas price hedges, and then we back up 100 percent of those with purchases either through financials or physical delivery, we take the best mix.
Mr. OSE. So you match your liabilities with your assets.
Mr. GORHAM. We match 100 percent and then we usually take a little bit of a position besides, because even though people choose—the highest percentage we have ever had——
Mr. OSE. Let me just ask that question. That little bit of percent you leave uncovered, 3 percent, 5 percent, 2 percent?
Mr. GORHAM. We don't leave anything uncovered. We make sure we cover 100 percent of what we sold, and then we may take an additional position based on—because we still have 70 percent of our customers who elect not to take price protection, and I would feel real bad if I hadn't covered them somehow this past winter.
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Mr. OSE. All right.
Mr. GORHAM. So we are on the conservative side.
Mr. OSE. Mr. Jordan, do your members forward contract the production from their wells or forward contract for delivery of the power to run their wells?
Mr. JORDAN. I would say, approximately, somewhere between 25 and 50 percent of the producers that I deal with, that I know about, do involve themselves in trying to cover, trying to insure their prices to some extent. It goes up and down with the market. A lot of people did that a couple of years ago, and of course, the market turned upward, and a lot of people felt pretty bad about it.
Mr. OSE. The reason I bring this up, Mr. Chairman, is in California, we have a situation where the Public Utilities Commission adopted a rule that prevented the retail distribution companies, Pacific Gas & Electric, San Diego Gas & Electric, Southern California Edison, from engaging from long-term forward contract for delivery of supply that they could then turn around and distribute to their customers. The caveat that they put on the provision of those contracts was that it is OK to enter into those contracts, but for a period of 5 years after the fact, the PUC was going to maintain what they called a prudence review clause on the contracts. So the situation that the retailers found themselves in was that for 5 years after the fact, PUC could come back in and order them to make refunds to customers based on their judgment, say, in 2006. That is the equivalent of telling a corn grower, 5 years from now, that the bread making facility overpaid them for his corn and they want their money back.
Now, Mr. English was very astute in his characterization of the California market. I just want to clarify that there are a number of flaws in the market structure in California that contribute to this problem over and above some of these other issues about environmental concerns and what have you. I am sorry, Mr. English, I do want to ask this question. As it relates—and Mr. Jordan, I think you are the one who will answer this, or Mr. Horvath.
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As it relates to farmers who have producing lands, are there constraints on those farmers in terms of being able to have direct access to buyers of their natural gas production, and are those constraints federally imposed?
Mr. HORVATH. No.
Mr. JORDAN. No, they are not. There are no constraints. In fact, both royalty owners and producers have the greatest choices we have ever had in the history of the industry. They can sell their gas, basically, to anybody.
Mr. HORVATH. I concur.
Mr. OSE. Do you agree with that?
Mr. HORVATH. Yes.
Mr. OSE. All right. I just want to make sure I have got all my questions. I want to talk about transmission. Mr. Coffman, in terms of natural gas transmission, California, basically, has two points of entry, one in the south, one in the north, multiple lines coming in. The source of the natural gas for those lines, generally, in the southwest, which would be Oklahoma, Texas, what have you, there is a budding source up in Wyoming. Beyond the existing sources, if we look out 10 or 15 years, what does Congress need to be thinking about in terms of providing transmission facilities for natural gas into the various markets around the country?
Mr. COFFMAN. I would respond, just saying, I don't know if that is a Federal issue or a State issue.
Mr. OSE. It is a Federal issue, because FERC permits the transmission lines.
Mr. COFFMAN. OK. Well, then FERC needs to look at the rate of return allowed for new pipeline construction if it is a pipeline shortage, and from what I have read in the press, anyway, it does appear to me that there is some shortage going into California.
Mr. HORVATH. If I could answer, the rate of return is sufficient. There are, actually, five pipelines going to the cities of California and each of them have a proposal for expansion, so the system is working.
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Mr. OSE. Thank you, Mr. Chairman.
Mr. LUCAS. Thank you, Mr. Ose. And it would appear that before this long summer is over with, a number of Okies may be coming home from California.
With that, I wish to thank the panel for your insights, and without objection, the record of today's hearing will remain open for 10 days for additional material and supplemental written responses from witnesses to any question posed by a member of the panel. This hearing of the Subcommittee on Conservation, Credit, Rural Development, and Research is adjourned. Thank you.
[Whereupon, at 4:56 p.m., the subcommittee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Statement of Glenn English
Chairman Lucas, Members of the subcommittee, for the record, I am Glenn English, CEO of the National Rural Electric Cooperative Association (NRECA), the national association of 900 not-for-profit, consumer-owned electric utilities that provide central station electric service to more than 34 million consumers, most of whom live in the Nation's rural areas.
I commend you, Mr. Chairman, and the Subcommittee for convening this hearing on energy supply and demand issues affecting agriculture. The cost, availability and, increasingly, the quality and reliability of electricity are critical factors that affect the economics and efficiency of agriculture.
The U.S. electric power industry is transitioning towards a competitive environment in the wholesale and retail markets.
What's happening with electricity today, Mr. Chairman, is that the electric industry is very likely to join the boom and bust cycle so prevalent in energy. The market will drive prices and profits up when power is in short supply and down when it isn't. To the extent that electricity prices get pegged to the short-term fluctuation of energy prices such as gas, the problem will be yet worse.
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The last thing the American farmer needs—the farmer who already has to live with commodity prices—is wild fluctuations in the price of electricity. The stability of electric cooperatives—our business model—puts consumers first is derived from our objective to provide for the long-term needs of our owner/consumers. This characteristic should help rural community economic development efforts.
As expected, we are learning things as the transition of the electric power industry takes place. All of what we are learning will ultimately affect agriculture and rural America.
RESTRUCTURING RAISES QUESTIONS ON GENERATION AND TRANSMISSION CAPACITY MARGINS
In the electric business, extra capacity is needed to act as a buffer against unexpected increases in consumer demands and losses of generating supply. Between 1978 and 1992, U.S. electric capacity margins averaged between 25 and 30 percent. Since the 1992 Energy Policy Act that sought to inject competition in the wholesale electricity markets, capacity margins have declined to about 15.6 percent nationwide.
We do not know what the generating capacity margins need to be in a competitive wholesale market.
We do know that current generating capacity margins are not adequate and blackouts and brownouts are likely in several areas of the country this year under normal weather conditions.
(1) In recent years, a tornado in Oklahoma and a tree that contacted a power line in the Pacific Northwest have resulted in multi-state, regional outages.
(2) Non-utility generators and power marketers have been able to use their relatively small positions in the power markets to withhold power until their price demands were met, thus creating previously unheard of levels of price spikes.
Non-utility generators produce power mostly for wholesale markets. Non-utility generation capacity in U.S. markets has increased from about 6 percent of total generation capacity in 1991 to almost 20 percent in 1999.
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RESTRUCTURING SEPARATES POWER PLANTS FROM A UTILITY'S RESPONSIBILITY TO SERVE
And, with the introduction of competition, wholesale power trading has increased substantially. Power marketers buy and sell electricity, but they do not own or operate transmission or distribution facilities. Although over 500 companies are classified as power marketers, actual sales by power marketers are concentrated in approximately 50 companies. With the growth in power marketing companies, the volume of power trades has increased significantly in recent years. In the first quarter of 1995 power marketers traded 1.8 million megawatthours (MWH) of electricity. By the first quarter of 1999, trade by power marketers had increased to over 400 million MWH.
In the aftermath of deregulation of wholesale facilities, no one is responsible any longer for capacity planning. Capacity additions respond to the market and other conditions, and may or may not keep pace with the growth in demand. Thus, uncertainty about power supply is likely to be a more frequent part of many consumers' lives.
California's total current capacity is about 55,000 megawatts (MW) and peak demand in the State was 51,547 MW in 2000.
When ownership of power plants is separated from the utility's responsibility to serve, and the obligation of power plant owners is to maximize profits, market power can be exercised even with a relatively small amount of generating capacity.
Corporate structure is important in the functioning of electric power markets. The ability of holding companies to move money out of regulated utility subsidiaries into non-regulated activities and overseas investments can affect regional power markets and the availability and cost of electricity to consumers as is being evidenced in California.
The regulated electric utility industry provides transparency in utilities' financial transactions; transfers of cash from a utility to a holding company are reported and public. Similarly, transactions of electric cooperatives and the Federal power marketing administrations are public. On the other hand, the entry of power marketers into the Nation's electricity markets results in the removal of a significant percentage of market transparency; key information necessary for the formulation of policy is not available from this segment of the industry.
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CALIFORNIA RAISES THE ISSUE OF APPROPRIATE FEDERAL ROLE
Mr. Chairman, as you know, Congress is currently engaged in a debate about what, if any, Federal response is appropriate in dealing with blackouts and brownouts facing California and the western U.S. this summer. Some Members of Congress believe the Federal Government should impose temporary price caps on wholesale electric power transactions in emergency conditions. Others believe equally strongly that price caps send the wrong signal to the marketplace and at the wrong time. NRECA is not engaging in that debate.
However, the Chairman of the Federal Energy Regulatory Commission (FERC), Curt Hebert, has stated in testimony that FERC cannot make price caps work and cannot prevent price gouging in the west because FERC does not regulate electric cooperatives, municipally owned utilities, and Federal power marketing agencies (PMAs). Scapegoating cooperatives with a ''red herring'' issue to justify Chairman Hebert's unwillingness to deal with the problems in California is wrong. Here is why:
Cooperatives are consumer-owned and consumer-controlled. Electric cooperatives are owned and operated by local electric consumers on a not-for-profit basis and according to their own needs. The idea that cooperatives are engaged in manipulation of electric facilities to create market volatility to profit from price swings is ludicrous!
Cooperatives are not the problem in California or the West. Cooperatives do not have market power in California. No rural electric cooperative in California has electric generation. In 2001, the amount of electric cooperative wholesale sales in California from cooperatives in the western region was only 2,244 megawatthours (MWH). In 2000, the amount of electric cooperatives' wholesale sales was approximately 0.2 percent of the total electricity sales to meet the load need of the California Independent System Operator (California ISO). Generation and transmission electric cooperatives in the western region are generating energy to help meet the needs of their cooperative membership. In total, electric cooperative power generation in the west is between 2 percent and 3 percent of the market.
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FERC and the Secretary of Energy have already exercised authority over cooperatives in an emergency. On December 14, 2000, Arizona Electric Power Cooperative received an emergency order from the DOE Secretary requiring the sale of electricity into California. Because Arizona Electric Power Cooperative is a summer peaking system, it had power available. On December 15 an order established a $150 per MWH breakpoint mechanism for bids involving the California electricity market. Arizona Electric Power Cooperative complied with both orders.
Electric cooperatives can be part of the solution if obstacles are not put in their way. Three generation and transmission cooperatives in the upper Midwest are winter peaking systems, and will have energy available this summer that could be sold into the western market. Forcing cooperatives that are now regulated by the Rural Utilities Service (RUS) to be regulated the second time by FERC if they sell this power to the western market will be an obstacle to those sales.
TRANSMISSION CAPACITY DEBATE: INCENTIVES VS. AT-COST, RISK REDUCTION FOR TRANSMISSION OWNERS
Mr. Chairman, electric transmission lines provide the transportation system to move electricity from the generation sources to concentrated areas of consumers. From there, the distribution system moves the electricity to where the consumer uses it. The transmission systems are unique because they are designed to move electric energy at the speed of light from the generator to the consumer since there is no long-term storage capability. The National Electric Reliability Organization (NERO) (formerly the National Electric Reliability Council (NERC), the Electric Power Research Institute (EPRI) and the Nation's electric cooperatives report that transmission facilities are inadequate to handle the number of transactions that are occurring on it. Other committees of Congress are looking at Federal policies to provide incentives to investors in hopes that they will build additional transmission.
Electric cooperatives believe that the Nation is more likely to get adequate transmission if the interests of consumers are placed first, before the interests of absentee investors. A better proposal for consumers is to eliminate the long-term risk to transmission ownership posed by the possibility of stranded investment through the construction of merchant power plants and distributed generation. Those long-term risks can be eliminated by providing a regional authority like a Regional Transmission Organization (RTO) with the authority to approve transmission facilities and enter them in the regional rate base for the period of their useful life. If those risks are eliminated by assuring transmission investments will be recovered over a period of twenty-five to thirty years, and if financing is available over that period of time as well, transmission will be built and provided at much less cost to consumers.
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RETAIL COMPETITION DOESN'T WORK FOR RURAL AREAS; PUHCA REPEAL COULD COMPOUND THE PROBLEM
Mr. Chairman, some believe that retail electric competition will assure lower electric rates, and Pennsylvania is being cited as an example of where retail competition works. Please note that in rural Pennsylvania, no company is offering to compete for electric consumers. Rural consumers still must provide themselves with electricity through their cooperatives if they are to have it at all.
Congress is considering the repeal of the Public Utilities Holding Company Act (PUHCA). Repeal of PUHCA will provide the large utility companies with the opportunity to diversify and to select those retail markets in which they want to compete according to the targeted return they are seeking in their business plan. Already, some utility companies are shedding themselves of sparsely populated service territories. If PUHCA is repealed, utility companies are likely to shed themselves of all remaining sparsely populated service territories. Consumers in those areas are likely to have no choice in electric service other than to provide themselves with electricity through a cooperative.
Fortunately, electric cooperatives exist today. There are those in Congress who believe that the solution to electricity supply problems in the Nation today can be solved by providing huge incentives to companies of investors. No role is seen for consumer-owned systems. The proposed National Energy Security Act (S. 388 and S. 389) is an example. There is a better way. Congress should put consumers' interests first, and provide incentives to consumer-owned cooperatives in equal measure to incentives to companies of investors. For all consumers in the Nation to benefit, there must be competition between corporate structures, like cooperatives, municipally owned systems, investor-owned-utilities, and independent power providers.
ELECTRIC COOPERATIVES TODAY
What follows is a quick thumbnail sketch of the electric cooperative network today. Electric cooperatives today provide service in 83 percent of the Nation's counties or county-like jurisdictions. Electric cooperatives have built and maintain more than 2 million miles of distribution lines, nearly 50 percent of the distribution lines in the Nation, to serve 11 percent of the population. Electric cooperatives serve an average of 6 consumers per mile of line and derive annual revenues of $8,156 per mile of line. Cooperatives have an average capital investment of $2,446 per consumer.
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By comparison, investor-owned utilities provide service to 35 customers per mile of line, have an average per-customer investment of $2,080, and derive annual revenues of $62,866 per mile of line; municipal utilities serve an average of 39 customers per mile of line, have an average capital investment of $2,053 per customer, and derive annual revenues of $63,988 per mile of line. Electric cooperatives generate 41 percent of the electricity they provide to consumers; the remainder of their electricity supply comes through agreements with investor-owned utilities or through contracts with the Federal power marketing administrations and from public power entities and from marketers and non-utilities.
All segments of the electric utility industry receive some kind of Federal financial assistance. Electric cooperatives utilize loans from the Rural Utilities Service in the Department of Agriculture and receive an annual per-consumer subsidy of $13. Investor-owned utilities receive Federal benefits through the tax code and receive an annual per-consumer subsidy of $41 per consumers. Municipal utilities utilize tax-exempt financing and receive an annual per-consumer subsidy of $65. An attachment explains these figures in more detail. Current figures on relatively new players in the electric utility industry, power marketers, are not available.
The mission of electric cooperatives for more than 60 years has been to provide at-cost, reliable electricity to rural America. Cooperatives have been extraordinarily successful in meeting that business objective and will do so far into the future. Agriculture has been extraordinarily successful in utilizing electricity to become the most efficient food and fiber production industry in the world.
That success is the result of several well thought-out business and policy decisions.
COOPERATIVES ''LIVE IN THE COMMUNITY''
Electric cooperatives are consumer-owned and consumer-governed. As locally autonomous businesses, cooperatives have developed the knowledge and experience to understand and respond to particular service and community needs. Locally elected boards of directors have the flexibility and ability—and the agility—to adjust priorities as consumers' and communities' needs grow and change. Co-ops don't have to wait for a decision from an absentee board of shareholders with no knowledge or concern for a local community to decide on a course of action to meet these needs.
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A significant benefit of consumer ownership is that the dollars spent in the local community stay in the local community. Electric cooperatives provide high-skilled, good-paying jobs that contribute to the vibrancy of the local economy. RUS loans to cooperatives for electric purposes create jobs: for every $1 million in RUS loans, 51 jobs are created, about half in construction and the rest in the supply of goods and services to electric utilities. These are not part-time, minimum wage, make-work jobs: These are jobs for skilled and unskilled workers that pay well and carry benefits for employees.
Electric cooperatives also meet other community needs through their economic and community development activities. These efforts create jobs and opportunity in the community. From 1989–99, four hundred thirty-nine electric cooperative borrowers, through the Rural Economic Development Loan and Grant Program, utilized $131 million in loans and $64 million in grants (to set up revolving loan funds) to leverage other funds of $1.1 billion to create 26,000 jobs, not counting jobs associated with industrial buildings, water and sewer projects or community projects, and not counting rural jobs that were saved. This is but one example of how cooperatives work to improve their communities.
Other activities include the provision of Internet service, emergency radio transmission sites, distance learning and medical link programs and a host of others. A host of ''soft'' activities like having meter readers check on elderly residents and lighting the Little League field also contribute to the quality of life in rural communities.
On the rural electric co-op agenda, the consumer always comes first. Those things that affect the rates, reliability and safety of consumers are uppermost in the mind of every cooperative board of directors.
COOPERATIVE STABILITY IN A VOLATILE MARKETPLACE
Electric cooperatives have invested wisely in infrastructure. Today, cooperatives produce about half of the electricity they need to meet consumer needs. Given today's volatile marketplace, the decisions to invest in long-term supply facilities exhibit remarkable foresight.
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Because of those decisions, many cooperatives are shielded to a greater or lesser degree from that volatility. For example, Anza Electric Co-op in California. I have attached to my written testimony a news story that Members of the Subcommittee will find interesting and revealing.
You know, Mr. Chairman, today's volatility, the mergers and acquisitions, the threats of market power—these are poignantly reminiscent of why cooperatives came into being in the first place more than 60 years ago. It was in response to precisely these market conditions that the Rural Electrification Administration was created in 1935.
In a nutshell, Anza Electric Cooperative, in Anza, California, has not experienced the rolling blackouts and brownouts that have characterized the California electricity market. As the story points out, Anza is part-owner of a generating plant in Benson, Arizona—with other cooperatives—that provides its power.
The bottom line is that Anza is an example of a better way to approach electric service, of what consumers can do through their cooperatives. Again, cooperatives have invested wisely in building generation and transmission facilities to provide their consumers with at-cost electricity for the long term. As a consequence, these self-reliant cooperatives are not experiencing the market volatility we have seen in California, and earlier in the Midwest and in other parts of the country. And, cooperatives are in the process of adding more generation facilities to serve their consumers.
In the next three years, electric cooperatives are contemplating the investment of $4.3 billion in new generation and transmission facilities. I want to emphasize again, Mr. Chairman, that these facilities are being built at the right time and in the right place to serve electric cooperative consumers. These are not plants that will sell into the market; they are designed specifically to meet the electricity needs of electric cooperatives.
Cooperatives have partnered wisely, as well, for example, with the Federal Power Marketing Administrations. When no one else would, cooperatives committed to long-term power supply contracts with the PMAs. Over decades, cooperatives have built up a huge equity investment in the hydroelectric facilities of the Bureau of Reclamation or the U.S. Army Corps of Engineers, for which the PMAs provide management and marketing services.
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Similarly, co-ops have partnered with the PMAs, to finance, build and maintain some 32,000 miles of high-voltage transmission lines that serve the Nation well, particularly in the West, the Upper Midwest, the Southwest.
COOPERATIVES BALANCE ENERGY AND ENVIRONMENTAL CONCERNS
Cooperatives are sensitive to balancing the Nation's energy requirements and environmental concerns. Although cooperatives own and operate only about 5 percent of the Nation's generating facilities, our portion of that generation comprises a disproportionate percentage of the total of the Nation's most advanced, state-of-the-art emissions control technology. These facilities were built in compliance with the Clean Air Act of 1972 as amended and represent an intelligent investment in future energy supply.
Some of that new investment in generation is in renewable energy resources. For example, Great River Energy, in Elk River, Minnesota has installed two megawatts of wind energy, has an additional two megawatts under construction, and announced this week that 21 megawatts will be added in 2002. Cooperatives throughout the country install solar energy for stock watering and other appropriate applications. Many cooperatives offer consumer the opportunity to designate renewable resources as their power supply options. Cooperatives in Alaska and Colorado have been the forefront of experimentation with large-scale fuel cells.
Since many electric cooperative consumers earn their living from the land, by farming, they recognize the importance of protecting and preserving that land and the air and water that surround it.
The House Agriculture Committee and this Subcommittee should be very proud of their leadership roles in seeking other renewable and emissions-control technologies and techniques that will address both energy, environmental and economic concerns.
We are excited about new emissions control techniques that are win-win situations for rural communities, utilities and agriculture, namely renewable biomass for electricity generation and the use of carbon sequestration techniques that provide income for farmers while dealing with carbon dioxide emissions. Congress is currently considering legislation to accelerate research and development to deploy these highly promising technologies, and electric cooperatives are enthusiastically supportive of that legislation.
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Electric cooperatives are the only utilities in the Nation whose distribution and transmission facilities meet uniform Federal engineering standards. The demonstrable effect of this is the high quality of service that is the hallmark of electric cooperatives. Just to illustrate that, Mr. Chairman, let me cite a recent national report that evaluated utility performance in restoring unexpected outages: ''Rural electric cooperatives received the highest combined performance scores—104.77 on the RKS Emergency Response Performance Monitor, compared to 103 for Federal and municipal systems and 94.15 for investor-owned utilities.''
If other electric utilities conformed to the high standards of electric cooperatives, problems associated with the distribution and transmission of electricity would be reduced significantly, and the quality of service would be enhanced significantly.
Cooperatives are in place and provide affordable, reliable power to support one of our Nation's most important industries—agriculture.
COAL TRANSPORTATION IS A CONTINUING CHALLENGE
There are continuing challenges, though. The transportation of fuel is a challenge. Generation of electricity through the use of coal comprises 51 percent of all electricity produced in the Nation. Rural electric cooperatives use coal for 75 percent of their generated electricity. It is vital that these generating facilities have the ability to enter into competitive shipping contracts with rail shippers.
COOPERATIVES ARE IMPORTANT PLAYERS IN SOLVING NATIONAL ELECTRICITY PROBLEMS
Cooperatives are—and should be—important players in solving the Nation's electricity problems. They provide a consumer-friendly yardstick of rates and services against which to measure the rest of the industry.
Consumers like co-ops. They have confidence in co-ops. As co-op members, they have can determine in great measure their own destiny. They know that they will be treated fairly. They know that their interests come first, before those of a big company seeking big profits for absentee owners.
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Electric cooperatives stand ready to help meet the Nation's energy and environmental challenges. These cooperatives are a vital resource for agriculture and for rural communities.
Thank you, Mr. Chairman.
Statement of Lynn Jensen
Thank you Mr. Chairman, my name is Lynn Jensen, and I am the chairman of the National Corn Growers Association (NCGA) representing 30,000 direct members and the more than 300,000 corn farmers throughout the Nation who make check-off payments each year. We are pleased to appear before you today to provide our views on ethanol and the current energy situation. As you know, our Nation is again facing another energy crisis. We read daily press reports about the possibility of higher prices for gasoline this summer and about the poor decisions gasoline marketers made last year that caused price spikes in many areas of the country. Today, I want to spend the majority of my time outlining for you and the members of the subcommittee our views on how ethanol and other renewable fuels can increase the supply of fuel while providing economic opportunity for hundreds of rural communities across the country.
Ethanol continues to be a major focus of NCGA policy and research activities. Thousands of farmers are now invested in cooperatives that produce 40 percent of the 1.6 billion gallons of ethanol made in 2000 from 600 million bushels of corn. Moreover, there are dozens more ethanol projects in various stages of development throughout the Corn Belt that are attracting additional farmer-investors. Ethanol is simply the biggest value-added success story in agriculture today.
BACKGROUND
Ethanol is an alcohol produced primarily from grain using a process almost as old as civilization itself. Today, however, ethanol production has come a long way from the wineries of ancient Greece or the stills of Prohibition. Fuel ethanol is produced on a mass scale utilizing millions of bushels of grain annually in the process. While the fundamentals of ethanol production have remained constant, the process technology has become quite sophisticated. There are now two general types of processing facilities, known as wet mills and dry mills that produce fuel-grade ethanol in the United States.
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Wet mills are also commonly known as corn refineries. These facilities produce starch, ethanol and corn sweeteners, along with corn oil, corn gluten feed and corn gluten meal. Both corn gluten feed and meal are sold into the animal feed market. Dry mills use simpler technology to produce ethanol and distillers dried grains (DDG) that are also sold as a high-quality feed ingredient. So, one of the myths about ethanol production, that it is taking corn and wasting it to produce fuel, is immediately dismissed when you look at the array of products that come out of ethanol plants. Products for both human and animal consumption are co-produced with ethanol. Producing ethanol simply utilizes the relatively low-value starch in the grain while leaving behind vitamins, minerals, fiber, oil and protein to be utilized in higher-value markets.
Ethanol production is becoming more efficient. Modern technology makes it possible to build a state-of-the-art, cost-effective dry mill ethanol plant for about $1.15 per installed gallon of annual production. Most of the new ethanol production capacity is dry mill technology using a farmer coop business structure. However, technological improvements throughout the industry have driven the cost of producing ethanol down dramatically. A 1986 report by the USDA Office of Energy predicted that the cost of producing ethanol in 1995 would be $2.11 per gallon. Instead, those costs were about $1.15 per gallon in 1995, and industry surveys now suggest that the industry average production cost is in the range of $0.95-to-$1.10 per gallon. Therefore, Mr. Chairman, research is making a difference, costs are coming down, and they will continue to come down as long as this Committee and the Congress support expanding energy supplies and finding new uses for corn and other commodities.
Ethanol facilities are not only cost effective; they are energy efficient. A recent study by the Argonne National Laboratory found that for every 100 BTUs of energy used to produce ethanol, 135 BTUs of ethanol are produced. That is because corn plants are really very efficient solar panels that are grown using very efficient agronomic techniques. USDA analysis has found that corn farmers use about half the energy to produce a bushel of corn than they did just 25 years ago. Therefore, the myth that it takes more energy to produce a gallon of ethanol than is contained in the ethanol itself is just that: a myth.
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Because the energy balance for ethanol is positive, 1.35-to–1, that means the greenhouse gas benefits of ethanol are also positive. The Argonne report provides an analysis of ethanol's greenhouse gas emissions compared to gasoline. Using ethanol produces 32 percent fewer emissions of greenhouse gasses than gasoline for the same distance traveled. That is, the analysis considers the difference in the energy density of ethanol compared to gasoline. If engines are optimized to use ethanol, mileage will increase along with greenhouse gas benefits. Ethanol also reduces the emissions of other harmful pollutants like carbon monoxide, and ethanol displaces components of gasoline that produce toxic emissions.
Ethanol is a clean, energy efficient, environmentally friendly fuel that is produced at highly efficient production facilities that create jobs and economic opportunity for rural communities where they are located. Since the introduction of these new dry mill technologies, the additional opportunity for farmer ownership in ethanol cooperatives has increased. That is why we believe that ethanol is a win-win, because it is good for the environment and good for the economy.
Last year, ethanol production set a new record, utilizing more than 600 million bushels of corn, or about 6.5 percent of the crop to produce 1.63 billion gallons of fuel ethanol. Corn demand created by ethanol kept valuable farmland resources in production, adding as much as $3 billion to the income of our corn farmers. While ethanol is an unqualified success today, our members continue to be concerned about the future of the industry and our ability to attract support for ethanol and other renewable fuels as part of the administration's energy policy. That is why NCGA has established an Ethanol Task Force to help develop a strategy that uses market analysis as the basis for sound legislative strategy. We have also established partnerships with other farm organizations that have a similar interest in renewable fuels.
Certainly, there will be energy legislation in the 107th Congress. Several bills have been introduced and the White House is expected to release the outlines of a comprehensive energy strategy in the near future. The very first item on our ethanol/energy agenda for the 107th Congress is to give renewables like ethanol and biodiesel a significant role in the national energy policy. This is critically important for the future of farmers and rural communities because of the new economic opportunities that an expanding renewable energy industry will provide.
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While we strongly support the development of renewable energy across the Nation, we also support working within the current regulatory framework to provide refiners and blenders of gasoline and diesel fuel with the greatest possible flexibility so that supplies of fuel that are critical to the economic health of the Nation continue to expand. These measures would include, but are not limited to regulations that recognize the benefits of reducing carbon monoxide emissions, or the greater flexibility that comes with allowing refiners to use full oxygen averaging in their reformulated gasoline production.
THE CURRENT SITUATION
The 1990 Clean Air Act Amendments established a comprehensive program to clean up the Nation's gasoline supply in an effort to significantly reduce ozone smog and toxic air pollution throughout the country. Specific requirements were established for the most polluted cities under the reformulated gasoline (RFG) program.
The RFG program established both general requirements and performance standards for all gasoline certified and sold as RFG. In addition, anti-dumping requirements prohibit dirty components removed from gasoline to make RFG from being dumped back into conventional gasoline, thereby making the conventional gasoline dirtier. One of the important general requirements of the RFG program is the oxygen requirement. This provision has been the lifeblood for creation and expansion of the ethanol industry. RFG is required to contain 2-percent oxygen by weight on average. Oxygenates like ethanol and methyl tertiary butyl ether (MTBE) provide oxygen for clean burning, and clean octane to replace other components of gasoline that contribute to ozone smog formation and toxic emissions.
Ethanol has only been used in about 15 percent of the RFG produced on an annual basis since the RFG program was implemented in 1995, despite the fact that the ethanol industry is capable of producing enough ethanol to replace virtually all of the MTBE used in the program today. Nonetheless, NCGA has strongly supported the RFG program and the oxygen requirement. That is why we are particularly disturbed when some have suggested that without MTBE, the RFG program with an oxygen requirement is no longer necessary. NCGA does not support piecemeal changes to the RFG program. Such changes would undo the delicate balance achieved by the combination of the general requirements and performance standards resulting in both environmental backsliding in our most polluted cities and economic devastation for rural communities.
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We continue to support maintaining the environmental benefits of the fuel programs affecting every gallon of gasoline consumed in the Unites States today as provided by the general requirements and performance standards of the RFG program and the anti-dumping requirements for conventional gasoline. Additional environmental benefits that may result from using renewable fuels should be supplemental to the benefits already accounted for in these programs.
We also recognize that improvements in both vehicle and fuel technology will continue to reduce emissions from automobiles in the future. Currently some are advancing the argument that clean fuels are possible without using ethanol or other biofuels. While this is certainly not true today, it may be tomorrow. NCGA has done extensive analysis on the use of oxygenates in California gasoline, and we have concluded that completely removing oxygenates from the gasoline pool in California would be detrimental to air quality throughout the State and would likely have a negative impact on gasoline supply. We believe the same is true for the Nation as a whole. The current RFG program, without an oxygen requirement, would not deliver equal environmental benefits and gasoline supply would be significantly smaller. This is a situation that cannot benefit the environment or consumers. For these reasons, NCGA will not support any legislation aimed at changing the RFG program unless it is part of a comprehensive reauthorization of the Clean Air Act fuel programs and related titles.
However, the renewables issue is about much more than clean fuel. It is also about rural development, energy security and the efficient use of our natural resources and the investments of thousands of farmers in value-added agriculture. That is why NCGA supports developing a comprehensive national energy strategy that includes a renewable fuel content standard, and provisions that encourage the development of value-added agricultural industries.
POLICY RECOMMENDATION
NCGA has established an Ethanol Task Force, of which I am a member, in part to develop a legislative strategy on ethanol issues in the 107th Congress. The Task Force has developed a 6-point plan that outlines our legislative goals for ethanol.
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Support a renewable fuels content standard in the energy bill that will likely move through Congress. NCGA has been working with other agriculture groups and the ethanol industry to develop a proposal that would establish a renewable fuel standard of 0.8 percent beginning in 2002 and growing to 1.7 percent by 2011. If all of the requirements were met using ethanol, the standard would require about 2 billion gallons of ethanol in 2002 and slightly more than 5 billion gallons in 2011. These are goals that are easily met by current and planned production capacity.
NCGA supports efforts that achieve an orderly elimination of MTBE from the gasoline supply while preserving adequate gasoline supplies for consumers. Eleven States and the city of Chicago have all recently banned MTBE use within these borders. An additional 14 States are considering similar legislation in their current legislative sessions.
The gasoline supply system is under stress and needs more flexibility in order to maintain adequate supplies at reasonable prices. NCGA is committed to working in the regulatory and legislative arenas to provide flexibility for refiners and blenders under clean air laws. For example, we believe allowing refiners the greatest flexibility to average their oxygen content requirement in RFG would provide significant flexibility for refiners. Full oxygen averaging is allowed under current law and would only require a relatively simple administrative change. We have heard our fuel customers call for flexibility and are willing to work with them. However, let me be very clear: Proposals to eliminate the oxygen standard are not part of our flexibility plans!
Biofuels like ethanol and biodiesel provide energy, economic, environmental and energy security benefits. We believe these products should have assessed tax rates that make them preferred in the market because of these benefits. Ethanol and biodiesel production facilities that are farmer-owned add value to agricultural commodities and economic opportunity in rural America. Tax rates and benefits for these facilities should also be encouraged. We especially support the changes in the Small Ethanol Producer Tax Credit like those contained in H.R. 5279 introduced in the 106th Congress that will make it available to more types of cooperative business structures than is currently the case. Congressman Thune has assured me that he intends to reintroduce this legislation in the near future. In addition, we are also concerned that some States are being penalized with regard to Highway Trust Fund receipts when they use ethanol. To alleviate this problem in part, we support changes in the tax code that will direct all revenue from ethanol-blended gasoline that currently goes to deficit reduction into the Highway Trust Fund.
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While recognizing the need for flexibility, NCGA maintains a strong commitment to the environmental and policy goals of the Clean Air Act Amendments. That is why we have strongly supported proposals that recognize the environmental benefits of ethanol, especially efforts to tighten requirements on aromatic content in gasoline and toxic emissions. This principle is central to our position that changes in the oxygen requirement must be accompanied by other changes in gasoline composition if environmental backsliding is to be avoided.
We support the newly established CCC program that is part of the USDA biofuels initiative. This program could be responsible for the addition of more than 245 million gallons of additional ethanol production this year. And by reducing the cost of that production, the program increases energy supplies at a lower cost while creating additional demand for farm commodities. This limits budget exposure from loan deficiency payments and provides overall savings in government outlays. This program needs to be continued on a long-term basis and should be authorized in the farm bill.
NCGA also supports additional efforts by the Congress and specifically the Agriculture Committee and this Subcommittee, to do more to encourage value-added agriculture. As I said at the opening of my testimony, Mr. Chairman, ethanol is the biggest value-added success we have in agriculture. What will be the next ethanol and how are we going to find it? NCGA has developed a strong and committed research agenda that is aimed at finding and commercializing the next ethanol, but we also need the help of the Federal research establishment if we are going to make these breakthroughs and commercialize these new products and processes. We need more innovation in programs that help farmers invest in the industries of the future, industries based on the carbohydrate economy. NCGA will work with the Members of the Subcommittee to make value-added agriculture a reality in the next farm bill.
Finally, Mr. Chairman, NCGA believes that the Congress is faced with a difficult set of policy choices regarding energy and environmental policy. Our approach is to decouple them legislatively because making energy policy inside the Clean Air Act is politically difficult at best. Rather we support a two-track approach. First, the development of a comprehensive energy strategy that includes a renewable fuels requirement that complements the current oxygen requirement in the RFG program. Then, if necessary, we would support a comprehensive reauthorization of the Clean Air Act where new developments in fuel and vehicle technology can be considered through the critical lens of analysis that our environmental policy demands. Such a course would provide the renewable fuels industry the necessary signals needed to attract additional investment while maintaining the environmental benefits of current law that has provided millions of Americans with cleaner air.
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Mr. Chairman, this concludes my statement. I will now be happy to answer any questions you or the members of the subcommittee may have.
Testimony of Michael R. Gorham
Thank you for this opportunity to present testimony concerning energy supply and demand issues and their effects on the agricultural sector of our economy. I am Michael Gorham, president of Northwest Gas, a small retail propane business located in Grand Rapids, MN. I appear before you today in my capacity as the president of the National Propane Gas Association.
NPGA is the national trade association of the propane gas industry. The membership of NPGA consists of approximately 3,800 companies and includes 40 affiliated State and regional associations representing members in all 50 States. While the single largest group of NPGA members is made up of retail marketers of propane, the membership also includes propane producers, transporters and wholesalers, as well as manufacturers and distributors of associated equipment, containers and appliances.
Our members operate in nearly every one of the 435 congressional districts in the country. In fact, there are approximately 641 retail propane marketers located in the 15 districts represented by members of this subcommittee.
PROPANE PRODUCTION AND CONSUMPTION
Approximately 60 million consumers use propane for agricultural, residential, and industrial heating, cooking and water heating. Propane is also widely uses as a petrochemical feedstock and as a clean-burning alternative engine fuel.
Nearly 19 billion gallons of propane are consumed each year in the United States. More than 90 percent of this volume is produced domestically. Of the relatively small percentage of product that is imported, approximately three-fourths comes from stable sources in Canada.
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PROPANE AND AGRICULTURE
Mr. Chairman, we understand that rural America provides the raw materials for our Nation's economy. Food, fuel, minerals and forest products are all essential commodities that the American economy cannot do without. NPGA members are mindful of this fact because our industry largely grew up in rural America. For nearly a century, propane has played an essential role in the rural economy because it is versatile, portable and clean burning.
Propane's importance to the U.S. rural economy is demonstrated by the fact that over 30 percent of rural households use our product, according to the 1997 Residential Energy Consumption Survey by the Department of Energy. This study also reports that about 20 percent of rural households use propane as their primary heating fuel.
For decades propane has also been the preferred fuel for numerous agricultural applications like crop drying, animal brooding and flame cultivation. Mindful of the importance of agricultural markets, in 1996 our industry established the Propane Education and Research Council, which mandates a minimum level of funding for agricultural-related projects. This self-funded research and development program was created in part to develop cleaner and more efficient fuel use equipment for our Nation's farms and other businesses.
While research and development advances will lower costs in the future, I understand that the concerns recently expressed by many farmers relate to present-day costs. I am also aware that those concerns are even more pronounced in situations where farmers must adhere to contracts that do not allow unforeseen costs, like rising fuel prices, to be passed on to the consumer.
Many members of our association offer price-hedging programs that are designed to address these concerns. In my view, these programs need to be encouraged. Indeed, there is evidence that progress is being made in this regard. I would like to submit for the record a copy of an article that appeared in Neighbors, the Alabama Farmers Federation magazine. It discusses how some poultry farmers managed to insulate themselves from the full effect of rising costs by taking advantage of hedging opportunities.
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FACTORS AFFECTING PRICE AND SUPPLY
Costlier Inputs—Any discussion of propane prices must begin with the understanding that propane is a by-product of crude oil refining and natural gas processing. As such, the wholesale price of propane generally follows the price of crude oil and natural gas. Higher crude and natural gas prices naturally mean higher propane prices.
The committee should note that just over two years ago, the price of crude was a mere $11 per barrel. Last summer, crude prices reached the $35 level. Similarly, natural gas prices increased significantly from 1999 average prices of $2.50 to $3.50 per MCF to as much as $10 per MCF in December 2000. A report issued in February 2001 by the respected international energy consulting firm of Purvin & Gertz, Houston, TX, found that ''natural gas prices in December were more than three times higher than average.''
Production Disincentives—High natural gas prices during this past winter also had a detrimental effect on the supply of propane by creating an incentive not to produce propane. Put another way, higher value natural gas (per BTU) created a market incentive to leave a greater percentage of gas liquids (propane among them) in the gas stream. Some experts have estimated that this practice resulted in a 30 percent to 50 percent reduction in normal gas plant production of propane. Such a significant reduction in production had an adverse effect on the price of our product.
Refinery Fuel Switching—During this same winter period, higher than normal natural gas prices also caused petroleum refiners to switch from natural gas to propane to fuel their own refineries. Refinery use of propane, which otherwise would have been sold to retail propane marketers, had the effect of removing thousands of barrels per day of propane from retail markets. Once again, this drop in the volume of product available for retail markets caused fuel prices to increase.
Lower Inventory Levels—In February 1999, propane stocks were at a surplus level due largely to the mild winter experienced that year. Prices were also at a low level as crude oil prices averaged $11 per barrel. This attracted major purchasers from the petrochemical sector who purchased significant volumes of propane throughout the balance of that year. These large volume purchases, compounded by an end-of-season blast of severe weather, resulted in propane inventories dropping to record low levels in early 2000. By the end of March 2000, U.S. inventories were below the normal range for that time of year. As of August 31, 2000, propane stocks were able to rebuild to an estimated 59.2 million barrels. While this level is near the lower limit of the normal range for that time of year, it still reflected a 5.5 percent decrease from the previous year.
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Colder Weather—Finally, Mr. Chairman, we should also acknowledge the effect that weather had on fuel bills last winter. Prior to the most recent winter heating season, the U.S. experienced some of the warmest winters on record. Three consecutive warmer-than-normal winters gave most energy consumers a break through lower fuel bills. That trend came to an end late last year when most of the Nation experienced normal or cooler-than-normal winter temperatures. According to the National Climate Data Center, the 2000–01 season was the 14th coldest winter in the last 106 years. This stands in stark contrast to the previous 1999–2000 heating season, which was the warmest in 25 years.
We urge the committee to note that these factors have something in common: They are all beyond the control of retail fuel distributors.
FACTORS AFFECTING DISTRIBUTION EFFICIENCY
Mr. Chairman, there are additional factors that affect the ability of retail fuel distributors to reliably serve agricultural users. Some issues involve the government, while others are predominantly private-sector matters. NPGA is committed to working with Congress, Federal agencies and non-governmental organizations to alleviate conditions which contribute to product distribution bottlenecks. We recently constituted a task force made up of producers, transporters and retail distributors. The mission of this task force is to identify realistic, achievable solutions to key distribution impediments. For example,
Enhanced Fuel Storage Capacity—Discussions of Federal energy policy are often polarized by the conservation-versus-production paradigm. In our view, too little attention is given to the vast area in the middle—the distribution infrastructure that takes energy from the point of production to the end user. We believe that consumers would be better served if government provided an incentive to stimulate investment in additional fuel storage capacity.
Federal Hours of Service Regulations—Hours of Service rules restrict, on a daily and weekly basis, the number of hours that drivers may drive and be on-duty. NPGA strongly supports awareness of driver fatigue issues, but reminds Congress that additional flexibility is needed in order to ensure efficient delivery during the peak winter heating season.
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Winter 2000–01 provides an excellent example of how government policymakers already recognize the need for flexibility. Both Federal and State agencies traditionally extend relief from the HOS regulations during periods of bad weather, because challenging driving conditions often accompany the winter heating season. But for the first time, State governments extended relief from the HOS regulations for supply-related reasons. Regulators understood that drivers needed to travel greater distances to obtain supplies for their customers and extended appropriate relief. Federal regulators also played a useful role this past winter by clarifying interstate responsibilities in a timely fashion.
Finally, NPGA encourages DOT to allow flexibility from the rigid weekly maximum driving hours provision. Currently, if a driver exhausts his allowable hours of service early in a week, he may not drive until the beginning of the next work week, which can mean as much as 72 hours of lost time. This is a severe burden to propane marketers during the busy winter heating season. DOT should allow companies to return their drivers to their trucks after having rested them for at least 32 consecutive hours. Such a flexible approach has already been proposed by DOT in the form of a fuel oil pilot program, which NPGA strongly believes should also apply to propane. This approach would allow drivers to stay on the road more consistently, thereby ensuring more stable delivery of propane in the winter.
Jones Act Reform—The Jones Act (Merchant Marine Act of 1920) currently prohibits foreign flagged vessels from transporting cargo between U.S. ports. While we respect the preference for domestic carriers, exceptions should be made in cases where rigid adherence to the Act could result in distribution bottlenecks. The Act currently provides for one-time emergency exemptions, but the process for securing waivers is often cumbersome and invariably untimely. We believe Congress should amend the Jones act to provide a seasonal exemption for propane and other heating fuels.
Pipeline Consistency—By their nature, pipelines are bottlenecks in the system. Throughout most of the winter heating season, product demand exceeds pipeline throughput capacity. When this occurs, pipelines implement product allocation procedures. Shippers are awarded allocation credits based on historic use. Unfortunately, in the opinion of many NPGA members, pipeline allocation policies have been inconsistent and have taken on the appearance of being arbitrary.
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We are working closely with several pipeline companies that serve our industry to ensure that allocation procedures are fair, consistent and publicly accessible. If necessary, we will consider petitioning the involvement of the Federal Energy Regulatory Commission (FERC) to achieve this outcome.
Expedited Rail Shipments—Delays in propane rail shipments have become increasingly problematic. Some shippers have reported a three-fold increase in average shipping times. Whether these delays are the result of recent consolidations in the railroad industry or merely coincidental occurrences is unclear. Nevertheless, NPGA is anxious to begin a dialog with the Federal Railroad Administration and the railroad industry to explore options for encouraging expedited rail shipments during the winter heating season.
Through the deliberations of our infrastructure task force, NPGA is also exploring the feasibility of temporary, rather than the more costly permanent, rail car offloading facilities.
Petrochemical Inventory Disclosure—The petrochemical industry is by far the largest user of LP-gas, consuming 43 percent of the propane produced in the country. Petrochemical companies, which maintain large inventories, are not always the end users of the full volume of product which they have acquired. Instead, decisions are often made to reintroduce product back into the retail marketplace based on market factors (e.g. price). This process of shifting huge volumes from publicly disclosed storage to non-disclosed private storage, and then back again, fosters confusion and uncertainty in the marketplace. We urge Congress to promote greater market stability by requiring public disclosure of petrochemical inventories.
Federal Data Collection—Brisk competition in retail markets creates a strong incentive for marketers to arrange for adequate supplies to serve their customers. The availability of accurate and timely inventory data allows marketers to make informed judgments. We encourage Congress to support the Energy Information Administration's data collection program through the congressional appropriations process.
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HISTORY OF FEDERAL INTERVENTION
From time to time, policy proposals surface which call for increasing the role of the Federal Government in energy markets. History suggests that good intentions often have harmful consequences. Our resistance to enhanced Federal involvement is driven by our experience with past attempts at Federal intervention.
The propane gas industry was the first to be subjected to mandatory price and allocation control measures of the 1970's. It was also the last industry to be deregulated, an event that did not occur until 1980. During the four-year period from 1974 through 1978, 642 retail propane marketers went out of business. In this instance, Federal interference only served to lesson competition and restrict the freedom of consumers to choose an energy provider.
Propane and agriculture are interdependent industries. Both are affected by the supply and demand issues that ultimately determine fuel prices. While neither propane marketers, nor their farm customers can control these issues, there are several areas that are within our reach where we can work together to improve the efficiency of the current fuel distribution system. The members of NPGA are committed to working with Congress and our agricultural customers to address these issues of mutual interest.
On behalf of the members of the National Propane Gas Association, I would like to thank you Mr. Chairman, and the members of the subcommittee for giving us this opportunity to present testimony this afternoon.
Statement of John Felmy
The American Petroleum Institute (API) is pleased to have the opportunity to present a statement on energy supply and demand issues affecting the agricultural sector of the U.S. economy. We also welcome this opportunity to discuss how the current energy situation developed as well as the energy situation in the United States over the next decade—and how all this points to the need for a new national energy policy for the United States. API is a national trade association representing more than 400 companies engaged in all sectors of the U.S. oil and natural gas industry.
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The events of the past year—heating oil logistical problems in New England, tight gasoline supplies in the Midwest, super-heated demand for natural gas and California electric power disruptions—have forced the Nation—including the agricultural community—to start thinking comprehensively about the energy issues facing our country. In fact, the farming and ranching community has been especially hard hit by these shocks—as have most of the Nation's non-agricultural rural areas as the prices of natural gas, diesel fuel, propane, fertilizer and electricity have soared.
Last year's problems were merely harbingers of what we may expect if our Nation and its leaders do not get serious about looking for long-term solutions to our energy needs. Already this year we are experiencing a second set of price spikes in gasoline caused by tight market conditions for gasoline. Unless we realistically address these issues in an effective national energy policy, these shocks may continue with increasing frequency.
We wish to emphasize one important point: American consumers can have reliable and affordable energy supplies and a clean environment. This is not an either-or situation. We are confident that, with the proper changes in the policy arena, we can help keep the Nation supplied with fuel while at the same time continuing to improve our technology for the future—technology that will ensure additional environmental gains. Moreover, we recognize that renewable energy, energy efficiency and cost-effective energy conservation are critical components of an effective national energy policy.
The challenge before us is clear: Department of Energy has recently forecast U.S. energy consumption between 1999 and 2020. While natural gas will rise from 23 percent of consumption in 1999 to 28 percent in 2020, oil will maintain its current 40 percent share. Most recent energy studies agree that this share is likely to continue well into this century—even with strong increases in energy efficiency and a rapid infusion of new technology.
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Thus, we need to focus on our future needs for affordable oil and natural gas. Renewables used in gasoline—such as ethanol—play an important role and will continue to grow significantly well into the future. Independent studies *Estimating Refining Impacts of Revised Oxygenate Requirements for Gasoline*, Oak Ridge National Laboratory Studies for U.S. Department of Energy Office of Policy, May-August 1999. *California Issues - Expanded Use of Ethanol and Alkylates*, California Energy Commission Presentation by Gordon Schremp to the LLNL Workshop in Oakland, CA, April 10-11, 2001;
support a positive outlook for the market growth of ethanol—given the potential phase-out of MTBE—over the next decade without the need for costly mandates that can hamper supplies. Northeast ethanol demand is estimated to exceed 550 million gallons per year given withdrawal of MTBE from the market while annual ethanol demand in California is estimated to reach 670 million gallons. This represents a 75 percent increase in demand for ethanol over current use without the need for ethanol mandates. The reason for such significant potential expansion is that many refiners view ethanol as a valued blendstock and will likely increase its use, taking into account all of ethanol's advantages and disadvantages, including its availability, the supply and distribution system and blending challenges. Of critical importance, however, is to avoid mandates thereby giving refiners the flexibility they need to use ethanol in markets, and during seasons, that make sense.
In addition, we must not mislead the American people that new and dramatically cheaper sources of other renewable fuels are available just around the corner. History has demonstrated otherwise. Dashed hopes have led to the waste of billions of dollars on Government efforts to develop and promote so-called renewable and alternative fuels that turned out to be neither economical nor readily available.
The current gasoline situation points out the problems we face. Because we have been running the refineries at high rates of output for winter fuels, gasoline production so far this year is 1.7 percent lower than last year. At the same time this year's gasoline demand is up 1.6 percent from last year's. Also, imports of gasoline are 7 percent lower than last year. As a result of demand being greater than supply and the required inventory reductions to meet the EPA summer-gasoline mandates, gasoline inventories are lower than last year's relatively low levels. These conditions have resulted in price volatility, especially in the Midwest. The refineries are now finishing their required maintenance and have increased production of gasoline during the recent four weeks. If the system can continue to work smoothly, a significant build up in gasoline inventories to be ready for the summer driving season is possible.
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Another factor that has increased the cost of gasoline is the cost of crude oil. OPEC has reduced its output twice this year already. As a result, crude oil prices have risen since mid-March. The United States is becoming more and more dependent on imported oil. This dependency now amounts to about 57 percent of U.S. oil demand. DOE projects that 64 percent of oil demand will be met by imports in 2020. In order to ensure reliable and secure sources of oil, we must diversify the sources of our supplies, both domestic and foreign, and increase the volumes of both. To do this, we must remove the barriers that currently impede the U.S. oil and natural gas industry's ability to compete on a level playing field both domestically and abroad.
Domestically, access to Federal Government non-park lands has become an acute problem. Clearly, we must maintain access to those potentially oil- and natural gas-rich offshore areas now open to development in the Gulf of Mexico and elsewhere—and provide access to additional offshore areas now off-limits.
The potentially vast oil and gas reserves offshore can be produced cleanly because advances in technology have made offshore operations safer than ever. For the 1980–1999 period, 7.4 billion barrels of oil were produced in the OCS with less than 0.001 percent spilled'a 99.999 percent near perfect record.
Opportunities Abroad
While the United States has strong strategic and economic interests in maintaining a vibrant domestic oil and natural gas industry, we also need a wide diversity of international supplies. Regrettably, the U.S. oil and gas industry's opportunities abroad have been threatened by two U.S. policies. First is the alarming tendency to use unilateral economic sanctions—despite the evidence that they don't work—against oil producing countries as an instrument of foreign policy.
In recent years, unilateral economic sanctions have increasingly become the policy tool of choice in the conduct of U.S. foreign policy. One of the favorite targets of these recent sanctions has been major oil-producing countries. The U.S. currently has sanctions in place against countries comprising over 10 percent of world oil production and 16 percent of estimated remaining oil resources.
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U.S. policymakers face a dilemma. Growing supplies of crude oil will be required to sustain world economic prosperity, and diverse, ample foreign supplies are needed to help ensure our own country's economic growth. The drive to impose unilateral sanctions is an obstacle to both of these objectives.
The second policy is the adverse tax treatment, including exposure to double taxation, of foreign source income of U.S. oil and gas and other multi-national companies. The U.S. international tax regime imposes a substantial economic burden on U.S. multinational companies, and to an even greater degree on U.S. oil and gas companies by exposing them to potential double taxation. That is, the payment of tax on foreign-source income to both the host country and the United States.
In addition, the complexity of the U.S. tax rules imposes significant compliance costs. As a result, U.S. oil and gas companies are forced to forego foreign exploration and development projects based on lower projected after-tax rates of return, or they are preempted in bids for overseas investments by global competition not subject to such complex rules. Congress can help to stem further losses in the global competitive position of the U.S. oil and gas industry by adopting tax measures that allow U.S. oil and gas companies to compete more effectively both at home and in the international marketplace.
INFRASTRUCTURE NEEDS
Even if we obtain all the oil we need—as difficult and uncertain a goal as that may be—our energy supply would still be under an enormous strain. That's because the squeeze between refinery capacity and refinery utilization is growing. As hard as we are working our refineries, we are losing ground to demand. While environmental requirements now in place are giving us the most environmentally sensitive fuels ever manufactured, these requirements have drastically reduced refinery flexibility and further tightened the U.S. supply situation.
In June 2000, the National Petroleum Council issued a report entitled ''U.S. Petroleum Refining—Assuring the Adequacy and Affordability of Cleaner Fuels.'' The study assessed Government policies and actions that would affect product supply and refinery viability. It concluded that the refining and distribution industry would be significantly challenged to meet the increasing domestic light petroleum product demand with the substantial changes in fuel quality specifications recently promulgated and currently being considered. The timing and size of the necessary refinery and distribution investments to reduce sulfur in gasoline and diesel, eliminate MTBE, and make other product specification changes such as reducing toxic emissions from vehicles, are unprecedented in the petroleum industry. Large investments will be required at essentially all domestic refineries and many product terminals.
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Refinery capacity utilization averaged 92.6 percent in 2000. At peak levels of seasonal demand, it topped 95 percent. This compares to an average capacity utilization rate in other industries of 82 percent. Refinery capacity utilization is high because our capacity is below what it was 20 years ago. Recent increases have not kept up with the growth in demand. We are finding it difficult to further expand refining capacity; our access to product imports will likely be limited because tightening U.S. fuel specifications and the proliferation of boutique fuels make it more difficult for foreign producers to meet the U.S. demand for refined products.
Clearly, we need more refinery capacity. Increased regulation of refineries is a major reason refinery capacity has not kept up with demand. In fact, virtually all the investment dollars available in the next several years will be used to comply with new gasoline and diesel regulations, and thus will be unavailable for refinery capacity expansion projects. We haven't built a major new refinery in this country for more than 20 years. And we actually lost a refinery recently when Premcor closed its refinery in Illinois—in large part because of the company's concerns over the large investments required over the next several years to comply with new EPA sulfur regulations for gasoline and diesel fuel.
Refinery flexibility to meet demand has been increasingly hamstrung by the plethora of new regulations—and this situation seems likely to only get worse, not better.
Permitting is a major concern in the downstream sector. Complex, time-consuming and often conflicting permitting requirements at the Federal, State and local levels greatly limit the ability of refiners to increase capacity—and it also inhibits efforts to increase pipeline capacity. The oil pipeline system in the United States was built a few hundred miles at a time to the approximately 200,000 miles that exist today for moving crude oil to refineries and moving refined products to consumers, but the increased demand and proliferation of fuels have resulted in a system that is approaching maximum capacity.
The proliferation of so-called boutique fuels is a major factor in today's energy situation. The Clean Air Act Amendments require State implementation plans under which individual metropolitan areas create their own fuels to meet clean air requirements. The attached chart shows how there are 14 different types of gasoline now in use because of clean air requirements—and each of these gasolines has three different grades, so, in reality, there are 45 different gasolines.
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This balkanization of our fuels network greatly reduces refinery flexibility, because with 45 different gasolines, only several refineries can produce each fuel. Refineries have less flexibility to deal with shortfalls or other problems that may occur. Pipelines also have less flexibility as more separate fuel batches must be maintained on-spec and delivered. Moreover, the reduced flexibility means that accidents and down-time for maintenance can have a much more disruptive impact on the flow of supply. While our companies are working hard to supply these required fuels, further proliferation of such specialized fuels will exacerbate the overall supply problem. To minimize potential adverse effects of further regulation, in addition to considering environmental issues, Government must take into account distribution and supply issues, as well as potential cost issues whenever contemplating new fuel requirements.
NATURAL GAS
If we are to have an effective national energy policy, we must also recognize the steadily growing role of natural gas in meeting our energy needs. This is of particular importance to the agricultural and rural communities because of their heavy reliance on propone to fuel tractors and irrigation engines, to heat buildings, dry crops, cure tobacco and in the breeding of poultry. As a product of both crude oil refining and natural gas processing, propane is affected by anything that affects these processes. Any disruptive influence on these processes often has a direct and equally disruptive effect on domestic propane supply and prices.
Natural gas is a clean, safe, efficient and reliable fuel. The landmark natural gas study issued a year ago by the National Petroleum Council—a DOE advisory committee—projected that producers would have to invest about $658 billion in upstream capital between 1999 and 2015 to meet the growth in gas demand.
The growing demand underscores the urgent need for increased access to potentially gas-rich Government lands. However, most Government lands with the best prospects for new gas discoveries are off limits to development: 100 percent of resources offshore on both coasts; 56 percent of the eastern Gulf of Mexico resources; and 40 percent of the Rocky Mountain region resources. Clearly, we cannot increase our reliance on natural gas, while continuing to prevent development of these potentially vast gas resources within our borders.
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THE NEED FOR ACCESS
The U.S. oil and gas industry does not ask to drill on parklands or in wilderness areas set aside by acts of Congress. Rather, we seek access to areas offshore, in Alaska and in the American West that have been designated as ''multiple-use'' by Congress so that numerous activities can take place there.
Most of these multiple-use areas are simply vast expanses of nondescript Federal lands. However, because they lack the beauty and grandeur of the Grand Canyon or the Grand Tetons does not mean that we treat them with less respect than we do any other lands entrusted to us by the Government, or by private landowners. Most people driving near or hiking in one of these areas would be hard-pressed to locate one of our facilities once the drilling rig is removed. Safety and environmental protection are critical concerns, regardless of the location of drilling, and we strive to return the land to its original condition once drilling and production cease.
Yet, despite our record of sound stewardship, President Clinton used his executive powers under the Antiquities Act to bar oil and gas exploration and other activities on vast regions of Government lands.
For example, the designation of the Grand Staircase-Escalante Monument in Utah in 1996 summarily withdrew promising valid oil and gas leases on State lands without even notice to or consultation with State and local authorities, or affected communities. Likewise, the U.S. Forest Service recently banned our companies from exploring for oil and natural gas on promising Government lands when it published rules to bar road building on nearly 60 million acres in the Forest System that, according to a Department of Energy study, could hold 11 trillion cubic feet of natural gas.
In the lower 48 States, a study by the Cooperating Associations Forum found that Federal lease acreage available for oil and gas exploration and production in eight Western States (California, Colorado, Montana, Nevada, New Mexico, North Dakota, Utah and Wyoming) decreased by more than 60 percent between 1983 and 1997—and that does not count the major land withdrawals, such as Monument designations, since 1997.
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Approximately 205 million acres of Federal lands in these States are under the control of two Federal agencies with broad discretionary powers. The Bureau of Land Management (BLM), whose land management planning authority is derived from the FLPMA of 1976, and the U.S. Forest Service (USFS), whose jurisdiction is derived from the National Forest Management Act, administer these Federal, non-park lands.
Both agencies are required to manage lands they administer under the congressionally mandated concept of multiple use. Yet, BLM and USFS discretionary actions have withdrawn Federal lands from leasing, and long delayed other leasing decisions and project permitting.
Congress has directed the BLM and Forest Service to allocate non-wilderness lands for resource use, identify areas that are available for oil and gas leasing, identify important wildlife habitat areas, and inventory wilderness candidate lands among other uses. Each agency has completed land resource management plans for the lands they administer, including lands that are candidates for wilderness designation. Yet, some lands found unsuitable for wilderness designation are, however, managed as ''wilderness study areas,'' effectively removing approximately 28 million acres inappropriately from consideration for resource development. Further, these agencies often dictate extraordinary lease stipulations as conditions of approval for exploration and production. Stipulations are intended to protect resource values in conjunction with proposed projects, such as exploratory wells, yet many conditions required, such as ''no surface occupancy,'' essentially preclude exploration and production from occurring.
Moreover, Congress has refused to authorize exploration on the small section of the Arctic National Wildlife Refuge (ANWR) that was specifically set aside by law for exploration in 1980. DOE's Energy Information Administration estimates that the ANWR coastal plain contains between 5.7 billion and 16 billion barrels of technically recoverable oil. The coastal plain provides the best prospect in North America for a new giant, Prudhoe Bay-sized oil field.
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As a result of the enormous technological advances of recent years, only an estimated 2,000 acres would be affected by ANWR development—out of the 1.5 million-acre coastal plain and the total ANWR area of 19.8 million acres. Moreover, Prudhoe Bay oil operations, located 60 miles to the west of ANWR, have been underway for nearly a quarter century and have produced more than 10 billion barrels of oil during that time. Prudhoe Bay is among the most environmentally sensitive oil operations in the world. For example, the Central Arctic caribou herd at Prudhoe Bay has grown from 5,000 to 27,000 over the last 25 years. The industry's North Slope record provides overwhelming evidence that ANWR coastal plain development would not be harmful to the Arctic ecology and wildlife.
We have heard, repeatedly, the charge that ANWR represents only 6 months (or some finite amount) of U.S. consumption. There are several analyses that put this erroneous charge in perspective.
The United States consumes 20 million barrels of oil a day. Today, no source supplies more than 8.4 percent (Canada's share in 2000) of U.S. consumption. Prudhoe Bay, which was estimated to hold 9.6 billion barrels when discovered, represented only 261 days supply. But, in reality, it has supplied an average of 9 percent, and as much as 12 percent, of our daily consumption for the last 24 years. ANWR reserves may be in the same ballpark.
If all the oil in Prudhoe were delivered at once, we would have consumed it in 9 months. That, of course, is a physical impossibility and distorts the true value of oil discoveries.
Prudhoe production, though representing only 9 percent of consumption, has allowed the U.S. to avoid importation of 1.6 million barrels per day, keeping $289 billion from flowing out of the United States.
And we know that small changes in supply can have dramatic impacts on price. For example, in March 2000, OPEC increased production by 1.7 million barrels per day (2 percent of world supply) and crude oil prices dropped by $10 a barrel. Thus, a permanent increase in world supply because of ANWR is likely to have a significant impact on world crude oil prices. This price impact is important since for every dollar decline in world prices, the U.S. import bill declines by $4 billion per year.
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Offshore, the OCS has assumed increasing importance to U.S. energy supply over the past half century. The Federal portion of the OCS now supplies 24 percent and 27 percent of the gas produced in the United States. Offshore production promises to play an even more significant role in the future. The Department of Energy forecasts that offshore production will rise to nearly a third of our domestic oil and gas supply within a decade.
Technological revolutions, such as 3-D seismic profiling of promising structures, coupled with astounding computer power and directional drilling techniques which allow numerous reservoirs to be accessed from one drill site have driven down the costs of finding oil and gas. And at the same time these technologies allow development with much less disturbance to the environment. Tremendous advances in our ability to drill and produce in the deep waters of the Gulf have also resulted in vast new reserves being added to our resource base. The Deepwater Royalty Relief Act developed by this Committee, and passed by Congress in 1995, has significantly aided that endeavor. Those in the Federal Government who are most familiar with our industry have lauded our technological advances.
A 1999 DOE report, Environmental Benefits of Advanced Oil and Gas Exploration and Production Technology, stated that, ''innovative E&P; approaches are making a difference to the environment. With advanced technologies, the oil and gas industry can pinpoint resources more accurately, extract them more efficiently and with less surface disturbance, minimize associated wastes, and, ultimately, restore sites to original or better condition''. [The industry] has integrated an environmental ethic into its business and culture and operations [and] has come to recognize that high environmental standards and responsible development are good business.''
However, there is now accumulating evidence that resource depletion is overtaking the effects of technical advances on the cost structure of OCS development. The volume of reserves added per dollar of capital spent in the OCS has been falling steadily since the early 1990's. Because of increased demand, reserves are being depleted at an ever-increasing rate. Because of more efficient extraction technologies, the decline from new gas wells is now estimated to be as high as 40 percent per year.
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This does not suggest the imminent collapse of OCS production, but it does suggest that the drilling and capital expenditures required to replace and augment reserves will become increasingly important. We must increase deepwater development, and provide access to areas presently restricted. Currently, presidential moratoria, and annual Interior appropriations bill riders preclude leasing in most of the Eastern Gulf of Mexico, the entire Atlantic and Pacific Federal OCS, and portions of offshore Alaska.
Moreover, the ''consistency'' provisions of the Coastal Zone Management Act (CZMA), under the guise of due process and consultation, have caused serious duplicative and incredibly costly delays to Federal OCS leasing and production activities that would have no adverse environmental impacts on States' coastal zones. And regulations issued by the National Oceanic and Atmospheric Administration (NOAA) in the last days of the Clinton administration appear to add impediments to environmentally compatible energy development in the OCS, contrary to the balancing of competing interests directed by Congress when it enacted the CZMA. Both the summary withdrawal of multiple use Government lands without stakeholder consultation under the Antiquities Act, and the endless due process used by opponents to block Federal offshore production that does not affect a State's coastal zone are extreme, and must be moderated.
The Nation will soon have a great opportunity to augment its reserves. Federal OCS Lease Sale 181 represents a plan for leasing by the Department of the Interior in the Eastern Gulf of Mexico Planning Area. Scheduled since the mid–1990's, Sale 181 is slated to be conducted in December 2001. The sale area is based on comprehensive environmental reviews, and consultations between former Secretary of the Interior Bruce Babbitt and then-Governors Lawton Chiles of Florida and Fob James of Alabama. As such it is already a middle-ground agreement and the deletion of 120 blocks, as has been proposed in S. 596, would seriously undermine the spirit of the good-faith negotiations that led to it. More important, it would significantly reduce of the amount of energy—natural gas in particular—that Sale 181 is expected to provide.
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Congress in the past several appropriations bills understood the importance of Sale 181 going forward and did not include it in the areas placed off-limits by moratoria. The area available in Sale 181 is estimated by the National Petroleum Council to contain 7.8 trillion cubic feet of natural gas and 1.9 billion barrels of oil. This means that natural gas from the Sale 181 area could satisfy the current electricity needs of Florida's 5.9 million households for the next 13 years. Lastly, the crude oil from the Sale 181 area (most of which is expected to come from the deepwater areas, far removed from the coastline) could fuel 74,000 cars for 20 years.
These resources can be produced cleanly, for advances in technology have made offshore oil and natural gas exploration and production safer than ever. For the 1980–1999 period, 7.4 billion barrels of oil have been produced in the OCS with less than 0.001 percent spilled—a 99.999 percent near perfect record.
We applaud the action taken in the last Congress when it reauthorized the Energy Policy and Conservation Act (EPCA) (Section 604) directing the Departments of the Interior and Energy and the Forest Service to conduct an inventory of the oil and natural gas resources on Federal lands and the restrictions that prevent access to these critical resources. We urge Congress to fully fund this inventory in the FY 2002 appropriations bill so that adequate information will be available on resource availability. This is an important step in bringing about increased development of U.S. oil and gas resources and an important component in any effective national energy policy.
The petroleum industry finds and produces the natural gas, moves it through the Nation's pipelines, processes it, and delivers it to the distributors. U.S. production has been virtually flat for more than a decade, while demand has steadily grown. Imports have also continued to grow to help meet demand.
Again, the growing demand for natural gas points out the need for increased access to potentially gas-rich Government lands.
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However, many Government lands with the best prospects for new gas discoveries are off limits to development: 100 percent of resources offshore on both coasts; 56 percent of the eastern Gulf of Mexico resources; and 40 percent of the Rocky Mountain region resources. Twenty-one trillion cubic feet (Tcf) are estimated to lie in the Federal waters beneath the Pacific, 346 Tcf in the Western States, 43 Tcf in the Eastern Gulf of Mexico, and 31 Tcf beneath the Atlantic OCS. Clearly, we cannot increase our reliance on natural gas, while continuing to prevent development of these potentially vast gas resources within our borders.
Often, getting a lease is not the most significant problem for producers. Difficulties in acquiring permits to drill wells on onshore Government lands and overly restrictive lease stipulations are responsible for limiting natural gas production. These are restrictions, such as ''no surface occupancy'' or seasonal stipulations, that go above and beyond the normal environmental stipulations and can prevent economic development of the lease without commensurate environmental benefit.
Almost half of the untapped natural gas on multiple-use Government lands in the Rockies is in areas either off limits or restricted by this type of stipulation laid down by one Federal agency or another.
This information is important because the facts are often ignored and often distorted by those who do not believe greater access to Government is needed by our industry. In recent testimony before the House Commerce Committee's Subcommittee on Energy and Mineral Resources, for instance, we heard material distortions by witnesses for the Natural Resources Defense Council (NRDC) and for the Wilderness Society.
In particular, the NRDC witness, in her testimony and in the study submitted by the Wilderness Society witness for the record, concluded that only a small percentage of BLM lands in five Western States is off limits to leasing and development.
Those conclusions gloss over the most significant point: the percentage of Government lands available for leasing is a meaningless figure without knowing whether the leases can be developed.
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In many instances, lessees cannot obtain the permits needed to develop leases. In others, development is rendered uneconomic by unnecessarily restrictive operating stipulations. An appropriate analogy would be leasing a car without a starter motor or keys. Or renting a house and being allowed to use only the roof. Would a person really have a car if he or she cannot drive it? And what good would it do anyone to rent a house if it can't be lived in? Similarly, a lease that cannot be developed is a lease in name only.
The NRDC and Wilderness Society witnesses surgically selected certain data, and omitted other significant data to attempt to prove their inaccurate assertions. For example, while the numbers presented by the Wilderness Society do show that only about 3.5 percent of the BLM lands in Wyoming, Utah, New Mexico, Montana, and Colorado is strictly off limits to development, oil and gas resources in those States are not distributed uniformly across BLM lands. Specifically, while the Wilderness Society says only 3.5 percent of BLM lands are off-limits, the NPC study identifies another 3.2 percent that are subject to No Surface Occupancy. The NPC study indicates that this 6.7 percent of BLM lands represents 15 percent of the BLM natural gas resources, which are either off-limits or significantly impinged.
More important, however, is the role of non-standard lease stipulations. The Wilderness Society's data show that seasonal and other non-standard stipulations restrict access to an additional 32 percent of BLM lands. However, this impacts access to 47 percent of the natural gas resources estimated to exist on BLM lands in the Rockies. When all of these restricted and off-limit BLM lands are combined they total 38.7 percent, affecting 62 percent of the natural gas resources.
Further, BLM is not the only Federal land management agency making such restrictions. These witnesses have omitted the U.S. Forest Service, the Bureau of Indian Affairs and the departments of Defense and Energy in their computation of Federal multiple-use lands that are restricted to oil and gas development. In total, the National Petroleum Council estimates that some 137 Tcf of natural gas resources lie beneath Federal land in the Rockies that is either off limits to exploration, or heavily restricted. This is 48 percent of the natural gas on Federal land in the region.
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In addition to this total, a recent Department of Energy study concluded that more than 11 trillion cubic feet (Tcf) of natural gas was summarily placed off limits late last year alone by the USFS ''Roadless'' rule.
But stipulations are not the only impediments to bringing the oil and natural gas to America's consumers. Inadequate agency resources in many BLM offices and required but outdated resource management plans often make it difficult to get drilling permits, seriously delaying viable projects for up to 100 days, or sometimes years. In the Rawlins, Wyoming BLM office, for example, thousands of Applications for Permits to Drill are awaiting action because of manpower shortages. In the Buffalo, Wyoming office, thousands more are not being accepted by BLM because of limitations of the resource management plans (RMP) for the area. This is because the ''Reasonable Foreseeable Development'' (RFD) figures, estimates of future development, failed to recognize the interest in developing coal bed methane. Updating these RMPs and RFDs takes the BLM two or more years to complete thus preventing any further oil and gas activity in that area until the plans are finished.
With natural gas in short supply, it is essential that industry and Government work together to increase production from all areas, including multiple-use Government lands. Ultimately, it is the American consumer who is likely to suffer from a failure to address this critical situation.
The NPC study on natural gas referred to earlier also points out that vast reserves of natural gas in the form of coal bed methane (CBM) lie beneath Federal lands, especially in Wyoming and Montana. However, BLM's inability to grant permits in a timely manner has greatly hindered CBM development, and may contribute to further shortfalls in necessary future gas production. In some instances, we recognize that individual BLM offices may be understaffed and therefore are simply unable to efficiently process permitting requests. We therefore support increased funding for BLM to adequately address these critical permitting backlogs.
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As supply adjusts to greater demand, liquefied natural gas looks to become a more significant source of natural gas. Liquefied natural gas, largely imported from outside North America, requires a complex infrastructure, including specialized terminals and additional pipelines. If this source of supply is to be relied on more heavily, policy-makers will need to ensure that necessary regulatory and permitting decisions are expedited.
Government decision-makers need to address these problems now and shape a fair and effective national energy policy. That's why we at API welcome the energy policy initiatives now underway in both Congress and the administration. However, Americans should understand that it took some 25 years to get into today's energy situation—and the problems we face will not be solved overnight. Moreover, supply cannot be matched to demand without massive capital investment, construction, and turnover in equipment and this requires long lead times and a predictable public policy pathway for the times ahead.
In order to ensure that these adjustments are made as soon as possible with the least amount of disruption, we must start making the necessary policy decisions now. In that effort and beyond, it is absolutely critical that energy be fully represented at the Government decision-making table and that the energy impact of environmental and other decisions be fully considered.
LESSONS LEARNED
We are encouraged about the possibilities for a new era of cooperation between industry, Government and consumers to align our Nation on a path toward energy stability. We should caution, however, that we cannot be successful at forging a workable energy policy if we do not learn from the mistakes we have made in the past.
Price controls, allocation schemes, limitations on natural gas use, and massive subsidies to synthetic fuels are all measures that were tried at one time or another because it was believed that they were sure-fire answers to our problems. All of them failed. They failed because the key premise on which these programs were based—namely that oil and gas were nearing exhaustion and that Government ''guidance'' was desirable to safely transition to new energy sources—is now recognized as having been clearly wrong and to have resulted in enormously expensive mistakes.
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The wrong energy choices made by Government intervention in energy markets increase costs, hurt the Nation in terms of lost economic growth, stifled innovation, limited consumer choice and slowed progress in achieving other societal objectives.
Over the past two decades, we have, fortunately, come to rely increasingly on markets to sort out technologies and fuel choices—and markets have moved us impressively forward. Technology has led us to find more oil and gas in more places and in larger quantities than was ever dreamed imaginable 50 years ago. It has led to increased use of natural gas in a wide variety of ways. And, while no viable substitute for oil in transportation has yet arisen, several competing alternative energy sources are no longer being discussed as just fanciful.
Within the decade, fuel cells are likely to begin replacing the internal combustion engine. This will be a long process because of the slow turnover in vehicle population and related infrastructure. In addition, it appears that, at least initially, vehicle fuel cells will be powered by gasoline. Thus, this vital product will continue to be a significant source of energy for the foreseeable future.
We can continue to prosper and grow in this new century, but only if Government follows a positive and cooperative approach. Government should recognize the vital role that markets play and avoid the intrusiveness that has proven so damaging in the past. It should provide a level playing field on which fuels can compete—and recognize the cost trade-offs that are so essential in a global economy.
A NATIONAL ENERGY POLICY
What is needed from Government decision-makers is a serious effort to address these problems and shape a fair and effective national energy policy. That's why we at API welcome the energy policy initiatives now underway in both Congress and the administration.
A successful national energy policy must be comprehensive in order to be effective. It must seek to ensure enough energy to support economic growth by promoting responsible development of both domestic and foreign resources. It should recognize that sophisticated new technology developed by the oil and natural gas industry greatly reduces adverse impacts on the environment by exploration and production, both onshore and offshore.
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A successful national energy policy will recognize that there is no quick fix to our energy problems. It must reflect the reality that we need to increase supplies of all forms of energy to fully support our growing economy. It is important to encourage responsible use of energy and increase supplies of all fuels, including both fossil fuels and alternative fuels.
A successful national energy policy must be flexible to allow companies to adapt to new energy and environmental challenges. It should recognize that our refinery and delivery infrastructure continues to be stretched to its limit, restraining the industry's capability to meet new energy demands. It should remove unreasonable and complex regulations on cleaner energy production and transportation to accommodate growth and the continued high demand for energy—and to meet seasonal or unexpected requirements.
A successful national energy policy must rely primarily on the private sector working through free markets, and it must recognize the value of diversified energy sources. To that end, it should encourage competitive trade practices and international investment.
Finally, a successful national energy policy must create a predictable operating and investment environment for energy suppliers. Government must work to create a more stable regulatory environment so that producers can invest with the confidence that they will be able to get a fair return on their investment.
After more than two decades of inaction, the American public can no longer afford the luxury of not coming to grips with U.S. energy needs while maintaining a clean environment. We can, as a nation, do both—and we cannot afford to heed those negativists who tell us otherwise. Meeting U.S. energy needs and protecting the environment are both critical to our Nation's continued economic growth—and critical to achieving the future prosperity and wellbeing we all seek.
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We thank you again for this opportunity to discuss these issues with you and we look forward to working with you in the coming months.
Statement of Jack T. Coffman
I am Jack T. Coffman, senior vice-president for Power Supply at Oklahoma Gas & Electric Company (OG&E;) headquartered in Oklahoma City, Oklahoma. OG&E; is a regulated investor owned utility serving over 700,000 retail customers in urban, suburban and rural Oklahoma and western Arkansas, with wholesale customers throughout the region. OG&E; is the largest producer of electricity in Oklahoma. Our sister company, Enogex Inc, is one of the largest natural gas gathering and transmission pipeline systems in the Nation, serving most of Oklahoma, and portions of Arkansas, Texas, and Missouri.
OG&E; is an active participant in rural Oklahoma: I would like to emphasize to the Subcommittee that like so many of the Nation's investor owned utilities, OG&E; is a major provider of electricity and related services in rural America. In Oklahoma, OG&E; is the primary electric provider covering 30,000 square miles in Oklahoma and Western Arkansas. Most of this area consists of rural counties, and we are deeply engrained in the economies and social fabric of those rural communities. We view ourselves as valued members of the rural communities we serve, and OG&E; is extraordinarily committed to the broader welfare of the people we serve there, whether it be as sponsors of a wide range of social activities or to the speed and effectiveness of our corporate response to catastrophic weather events such as the recent tornadoes that threatened all that depended upon electric service in rural Oklahoma.
In this regard I would like the Subcommittee to understand something that is too often not appreciated at all: specifically, that the Nation's investor-owned utilities actually provide about 60 percent of the electricity that is ultimately distributed in rural America, either over their own distribution systems or those owned by others such as the co-ops. We care about rural America on a day to day basis and our presence here today is emblematic of the priority we at OG&E;, and the investor-owned electric utilities as a group, place in continuing and enhancing our service to rural communities.
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I would further want to emphasize to the Subcommittee that, as Chairman Lucas already appreciates, OG&E; enjoys a very strong and positive working relationship with the co-operatively owned electric utilities in Oklahoma. We regularly work together on matters of common interest concerning industry-related issues and rural issues, and in my opinion the Oklahoma experience is a model for investor owned utilities and co-ops to emulate elsewhere in the country. As a member of the rural community, OG&E; very much appreciates the Subcommittee's invitation to provide our views on the important subject matter of today's hearing.
Rural America Needs a Diversified Fuel Supply in Order to Enjoy Stability of Supply and Prices in Electricity Markets: Farmers and others living and working in rural America have many idiosyncratic needs arising from their particular geographic, social and economic circumstances. However, what farmers and other rural interests have in common with their non-rural counterparts is a compelling need for stable and affordable energy supplies and prices. By way of illustration, I would offer the recent experience of fertilizer producers who use natural gas as a feedstock. Due to the run up in natural gas prices fertilizer manufacturers were faced with the more profitable option of diverting their supplies of gas to the fuel market rather than continue their own fertilizer production. In some cases the economics of such a diversion were compelling. However, at some point decreasing fertilizer production will have an impact on the supply and price of fertilizer, which in turn affects total input costs for farmers, and consequently the price of food or the ability of the farmer to remain viable in a market in which food prices are constrained below production costs. The point is that the agricultural and rural sector cannot view its deep and legitimate energy concerns in isolation from the broader integrated market, and this is especially true with regard to electricity.
It certainly is no longer the case virtually anywhere in our country that electricity markets are segregated in terms of their urban, suburban or rural geography. Moreover, the markets for the various fuels for generating electricity are becoming more highly integrated on a national basis as well, though, as evidenced by natural gas prices, they do certainly continue to reflect important regional differences. Electricity is marketed over the Internet, with market participants aggressively searching for the price and supply terms that best match their needs. Consequently, solutions for stable supplies and prices of electricity for rural areas generally parallel those solutions applicable to the market around the country. Having said that, however, it clearly is the case that the impact of energy costs on farmers can make or break their competitiveness and economic viability, and in turn affect the vitality of the rural communities in which farming serves as the critically important economic engine. This reality suggests that ensuring that rural America has effective strategies for securing stable electricity supplies and prices may occupy a higher economic priority than that experienced in non-rural areas of the country.
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OG&E; strongly believes that the most important thing for the Subcommittee to understand in reviewing energy policy as it affects the price and supply of electricity in rural America is the overarching necessity of securing and maintaining a well diversified basket of energy sources used to generate electricity. A diversity of supply options is key to affordable and reliable electricity. Policy makers and regulators should work together to reconcile conflicting energy, environmental, or other public policy goals. They should promote initiatives that capitalize on all of our Nation's abundant natural resources. They should address challenges that limit the development and viability of fuel sources. Finally, they should implement a national energy program that:
Maximizes the diversity of fuels and technology options available for the generation of electricity.
Examines a comprehensive approach to the implementation of environmental regulations in order to reduce compliance costs and regulatory uncertainty. Federal ''New Source Review'' requirements need to be substantially reformed to allow maintenance and repair that is so critical to reliability to be performed without concern over regulatory jeopardy. The prospects of regulating mercury emissions create enormous regulatory uncertainty and financial consequences. And we need to encourage voluntary programs that create incentives for utilities to engage in cost-effective multi-pollutant reductions.
Provides reasonable certainty of recovery of investment in new environmental controls and facilities.
Promotes the development of technologies to improve energy efficiency, to enhance energy conservation, and to increase the environmental performance of fuels in the generation mix.
Places an emphasis on sound science and market-based approaches (e.g., trading programs or results-based approaches), rather than on specific technology or prevention processes, to achieve important environmental or other societal goals.
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Removes barriers to siting electric generating stations, transmission lines, and gas pipelines.
Revamps the process for licensing and relicensing hydropower facilities. Focuses the Nation's tax policy on bringing new and advanced energy technologies, including electricity generation technologies, to the marketplace with reasonable assurance of recovery of investment.
Establishes clearly defined decision making processes that will ensure the timely resolution of conflicting policies among various government agencies.
Allows practical schedules for implementation of environmental requirements.
Now more than ever, a sound national energy policy that promotes stability, affordability, and reliability of electricity requires a diversity of fuels and technology options and the adoption of policies that better achieve low-cost electricity supplies, attainment of environmental goals, and economic prosperity.
ELECTRIC COMPANIES USE A DIVERSE MIX OF FUELS TO GENERATE ELECTRICITY.
America's electricity prices are substantially lower than most of our international competitors, giving our businesses and industries a significant competitive advantage in international markets. Americans have enjoyed low electricity prices, in part, because we rely on a variety of fuels to generate electricity and have taken advantage of America's abundant natural resources. The resulting competition among these fuels generally keeps prices in check in most areas of the country, California perhaps being a most notable recent exception.
The combination of fuel sources used is referred to as the ''generation mix.'' Today, more than half of the Nation's electricity supply is generated from coal. See Attachment A. Nuclear energy produces nearly twenty percent of the supply, while natural gas provides sixteen percent. Hydropower and, to a lesser extent, other renewable resources—such as biomass, geothermal, solar, and wind—provide nearly eleven percent of the supply. Fuel oil provides nearly three percent of the generation mix. At present, OG&E;'s electric generation is the result of our own particular fuel mix of roughly 70 percent coal and 30 percent gas.
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Electric companies consider numerous factors in determining their generation mix. These include the costs to construct a power plant that will utilize a particular fuel, and the degree of risks and uncertainties associated with the use of that fuel. In addition, the price, the availability, and the reliability of different fuel supplies are important factors taken into consideration.
A diverse generation mix helps to protect companies and consumers from contingencies such as fuel unavailability, price fluctuations, and changes in regulatory practices. It also helps ensure stability and reliability in electricity supply. Finally, our reliance upon abundant, North American sources of energy to generate electricity strengthens national security.
The Fuels used to generate electricity: Certain fuels in the electricity generation mix are better suited than others for particular applications. Typically, companies use coal-based, hydropower, nuclear, and, to a lesser extent, natural gas plants to meet ''base load'' electricity demand because these plants are more cost-effective and most efficient when run at full output on a continuous basis. On the other hand, pumped storage hydropower, natural gas, and oil-based units may be stopped and started quickly, making them ideal fuel sources during peak periods—the hours of the day when demand hits its highest levels.
No individual fuel is capable of providing the energy required to meet all of our Nation's electricity demands. Rather, a variety of fuels—as well as increasingly more cost-effective and efficient ways to use and conserve energy—are needed. Indeed, different regions of our country rely upon different generation mixes, depending upon the availability and costs of fuels within those regions. For example, hydropower use is prevalent in the Pacific Northwest, natural gas in the Southwest, and coal in the Midwest. By maintaining these fuels options, consumers are provided with affordable and reliable supplies of electricity.
Here's a look at the fuels in our industry's current generation mix across the Nation:
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Coal is an abundant domestic resource. Recoverable U.S. coal resources total more than 296 billion tons—enough to last over 300 years at current levels of use. Coal is among the cheapest energy options available. Widespread availability, ease of storage and reliable transportation systems make the use of coal common in many areas throughout the U.S.
Nuclear energy uses a secure fuel source (enriched uranium). In the U.S., 31 States have operating nuclear reactors. Nuclear energy offers important environmental benefits, allowing utilities to produce electricity with little or no air emissions, including carbon dioxide (CO2). Use of nuclear energy is especially dominant in the northeastern portion of the U.S.
Natural gas has become the primary fuel used to power new electricity generating plants. Of the fossil fuels, natural gas produces less CO2 than coal or oil and smaller amounts of nitrogen oxide (NOX) and sulfur dioxide (SO2). In addition to electricity generation, natural gas is also used in residential, commercial, and industrial applications. The Southwest region uses the largest percentage of natural gas to generate electricity compared to all other regions of the U.S.
Hydropower and Other Renewables together produce nearly 11 percent of U.S. electricity. Hydropower's operational flexibility—its unique ability to change output quickly—is highly valued. Hydropower also produces no greenhouse gases or other air pollutants. The Pacific Northwest relies on hydroelectric power for a large percentage of its electricity needs.
Using non-hydropower renewable energy sources, such as solar power, wind, geothermal, and biomass, to generate electricity produces minimal environmental impact. Certain renewable resources (wind and solar) represent inexhaustible, though intermittent, supplies of energy. These sources of energy currently supply less than one percent of U.S. electricity.
Oil-based electricity generation offers many advantages as a peaking fuel. Oil's use, though, has declined steadily over the last two decades, decreasing by almost two-thirds since 1978. The Northeast and Alaska use the largest amounts of oil to generate electricity.
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Electricity Infrastructure needs support and enhancement: One of the critical needs facing America on the energy front is not just abundant supplies of fuels but enhancement of the infrastructure used to transport supplies to markets. In the electricity realm, this equates to a very compelling need to build additional transmission facilities that can transport additional volumes of power throughout the region in which it is generated as well as to make available supplies of electricity generated outside of the particular region in which it might be used. While sources of competitively priced electric generation have proliferated in the past 15 years, spurred in no small degree by various Federal and State deregulatory initiatives, there is growing concern that the electric transmission system has not expanded enough to meet all requirements. Within our region of the country, we have the Southwest Power Pool working to identify constraints and develop solutions that would relieve them.
To better understand what is being asked of the transmission system today, one must be a student of history, in particular the location of generation with respect to load served. In the early days of the industry, small generating units, hydro or steam, were located within the city (the load). As cities grew in population, the combination of land prices plus scale economics began to motivate generators to move out of cities into more rural locations (where ample water and land was available). To connect these facilities to the city, transmission lines developed. As reliability planners looked at the system, the interconnection of generators began to grow, driven by the economics of seasonal fluctuations or fuel diversity pitted against the cost of line construction. There have been a few exceptions to this rule of reliability, but not many (i.e., cheap Pacific Northwest hydro power transmitted to southern California; remote large nuclear plants feeding to head center).
Where will the future take us? If the marketplace identifies a low cost source of generation that could be sold into a higher priced market by constructing long-distance transmission lines for a lower overall cost than constructing new generation close to the load, then transmission will likely be built (but maybe not in California).
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Rural America has a large stake in supporting the substantial expansion of our transmission grid in order to maximize competitive opportunities in selecting power suppliers.
Transparency of Price Signals to All Customers is Critical: If the Nation has learned anything about recent events in the California market it is that the consumers must not be insulated from the real world price signals for electricity. Consumers' behavior must be directly influenced by the true cost of electricity. In times of high prices they will automatically take action to conserve electricity use and in times of low energy prices consumers will use more energy to avail themselves of opportunities created thereby. What is a predictable disaster is when consumers are disconnected from the true costs of electricity and their electricity usage is independent from those costs: it is a recipe for high costs, restricted supply and a wide range of destructive economic dislocations which serve no social purpose in either the short or long run.
In this regard, the Subcommittee should eschew calls for insulating the rural community from the core economics of electricity markets. Clearly there are special needs of the rural community that require programmatic assistance, and by all means you should take appropriately targeted steps to do so. But over the long term, governmental subsidization is not a surrogate for economic decision making based on the real world costs of energy of any type. So whether special rural electricity concerns are addressed through official governmental programs such as those administered directly by the Department of Agriculture, or by quasi-governmental agencies such as the Tennessee Valley Authority or the Bonneville Power Administration, the public policy mission of such efforts should be grounded in the reality of the evolving supply and demand dynamics of electricity markets. That is the best public policy for rural America and for America in general.
Forecast on Coal and Natural Gas: As is the case for all utilities, OG&E; constantly evaluates the direction of the energy markets as a critical step in meeting the needs of consumers and in our capital planning. The Subcommittee should be aware that the exercise of prognosticating the direction of energy markets is difficult and imbued with some element of judgment. In making our assessments we consult essentially with a range of market data sources in the private sector and the government as do most other professional players in the market.
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I would like to summarize below several concerns and dynamics that OG&E; considers to be important and informative to the Subcommittee's deliberations.
As an initial matter, we, too, have watched the price of natural gas, which we use as fuel for our plants, climb nearly 400 percent in the span of one year. We forecast that the annual average delivered cost of gas to our generating units will remain close to $5 per MmBtu for the remainder of the decade. We attribute the substantial price correction to America's over-reliance on a single limited fuel source for much of its growth needs. In our region of the country, well over 90 percent of the new generating units under construction are gas fired. This trend has upset the fuels diversity from which America has benefited enormously for the last several decades, and predictably the market has given a clear response to that upset.
As I noted above, the energy/fuels markets are integrated and the gas spike phenomenon has its impacts on other fuels used for electric generation. Of greatest interest for this discussion, the economics of coal fired generation are beginning once again to look increasingly attractive to us and others in the industry despite the high initial capital costs of installing coal fired capacity. Also in response to energy market conditions, coal prices have experienced some upward pressure in recent months due to utilities scrambling to use any alternative available to high priced natural gas and due to mines operating near or at capacity levels. This is especially true in Wyoming's Powder River Basin, which is the source of OG&E;'s low sulfur coal.
OGE's expectation for delivered coal prices is that they will increase over the course of the next several years but likely will stabilize once again but at a higher level and thereafter experience a growth more in line with inflation rates over the next decade. The relative stability of coal prices is due to the large amount of domestic supply (the U.S. is the Saudi Arabia of coal!) and continuing productivity improvements from both the railroads and mines. We and others in the industry perceive that the market is sending a clear signal: Coal is abundant, available, low cost and increasingly clean and can be the fuel of choice for new generation plants. But is it? If you look around the United States, while there has been an uptick in the talk about new coal plants (and announcement of some exciting plans to move in that direction) you do not see a massive cancellation of the planned gas fired generating units, nor are there plans to replace them with new coal plants just yet. If the price of coal is so advantageous in itself, what is the holdup on building new coal plants?
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The reason for this is three-fold:
First and foremost, utilities are afraid of the continuing torrent of ominous environmental legislation that has the potential of rendering any new coal plant project economically non-viable. It is important to appreciate that modern coal units are much different than those built thirty years ago. Progress in control technology and design has lowered the environmental impact of newer units. Nonetheless, the continuous onslaught of new, uncoordinated and expensive environmental initiatives for coal plants increases concerns regarding capital and operating costs to the point of making it difficult to quantify the economics of a new coal plant, and hence complicates making such enormous capital commitments given the uncertainty of recovering the investment plus profit. We cannot emphasize enough the uncertainty that the iterative layering of environmental regulations at both the Federal and State level have injected into the consideration of whether to invest in new coal generation facilities. The uncertainty is enormous and in the face of such uncertainty the decision has generally been to revert to building gas-fired generation, which is cheaper to build but is reliant upon a more expensive fuel—natural gas—and is subject to the price/supply gyrations we have recently experienced in the market.
The upfront capital costs of new coal fired generation are a significant hurdle to any utility. These costs are due in part to engineering challenges associated with burning a solid fuel such as coal and partially to the expensive equipment required to meet the current strict environmental standards. With the passage of time, the technology has become less expensive but its cost is still very significant.
Widespread deregulation initiatives throughout the US have added additional uncertainty in the mind of generation planners. New market rules, market power concerns and uncertainty in future power market prices caused by price caps, provider of last resort requirements et cetera., have made it difficult to forecast income from new coal plants.
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All three of the above factors have served to significantly increase the financial risk of a coal plant project. As in any free market, high risk must be compensated with a high return. Stated differently, most potential power plant developers will not be inclined to build new coal plants until the risk associated with the project becomes more acceptable or the potential economics become more compelling than they appear today.
Making the economics more compelling is not necessarily a good option for the United States. The economic viability and financial attractiveness of a coal plant is dependent on the difference between natural gas prices and coal prices. Assuming as we do that the price of coal will be relatively stable but will not materially decline in the reasonable future, this gas price vs. coal price differential will only tip substantially in coal's favor when natural gas prices rise still higher. Perhaps this might be good for the coal industry, coal-based generation and those who produce natural gas, but this type of aggressive increase in gas prices will have a continued and widespread destructive impact on most of the US economy that is otherwise dependent upon natural gas.
The more favorable option is to reduce the regulatory and environmental risk associated with new and existing coal generating plants. We support the efforts by those in the Congress and the administration who understand this imperative and are making efforts to incorporate it into a balanced, responsible energy policy for the future. I reiterate: if America wants to maintain stable, affordable electricity to fuel the economy and maintain our global industrial competitiveness, our national policy must make it possible for utilities to build new base load generation that utilizes America's most abundant fossil fuel: coal. This will allow the demand for natural gas to become better aligned with the available supply and will enable natural gas prices to return to and stabilize around more rational levels.
OGE believes that the United States can return to an era of inexpensive and abundant energy if we establish a clear, balanced, and stable environmental and energy policy that removes the regulatory risk that has paralyzed the construction of new coal generation. With a diversity of fuels in its future, the free market will determine the most efficient use for natural gas, coal, and all other sources and will do so in a way that will allow all energy consumers, both large and small, access to abundant low cost energy for many years to come. Farmers and others in rural America will benefit as much as, if not more than, virtually any other sector of the economy, in terms of viability and competitiveness, from this kind of energy/environmental public policy.
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On behalf of OG&E;, I want to express my sincere thanks to Chairman Lucas and the Subcommittee for allowing us to appear at this hearing and for your consideration of our views. OG&E; would be pleased to provide any further information you might find helpful in your continuing deliberations on this critically important subject. Our team of experts would be pleased to help in any way.
Statment of R. Skip Horvath
Thank you, Mr. Chairman, for this opportunity to discuss the important role that natural gas plays in agriculture.
I am R. Skip Horvath, President of the Natural Gas Supply Association (NGSA). The Natural Gas Supply Association represents integrated and independent companies that produce and market domestic natural gas. Established in 1965, NGSA encourages the use of natural gas and a regulatory climate that fosters competitive markets.
I would like to address four topics very briefly in my remarks today:
First, the increasing demand for natural gas.
Second, the ways that supply meets potential demand.
Third, what the natural gas producing industry is doing to bring more supplies to market.
Last, I will discuss government policies that raise the cost of natural gas and, in the process, damage our economy.
There has been a fundamental shift in the natural gas market. Natural gas is a clean, safe, efficient and reliable fuel, which is why the market is demanding it for residential, commercial, industrial and electric generation purposes. Farmers have used natural gas for crop drying, and possible future agricultural uses include air conditioning. This increased demand for natural gas, especially as a fuel to generate electricity, is resulting in a paradigm shift in the market. Natural gas traditionally has a seasonal demand pattern based on winter residential and commercial heating demand; now it is also experiencing a strong summer market, as natural gas increasingly becomes the fuel of choice for electric generation.
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The Energy Information Administration (EIA) estimates that natural gas fired generation will increase 4.0 percent from 2000 to 2001, and an additional 6 percent in 2002.
The economy, even now that it has slowed down, has increased energy demand from all groups of customers of the natural gas industry;
A competitive, free marketplace works to everyone's advantage. Free markets have not always been allowed to work for natural gas, and consumers have suffered the consequences. For many years, the Federal Government regulated the price paid to natural gas producers (the ''wellhead'' price). This intervention resulted in artificial shortages, and government officials wisely decided to let competition evolve instead. History has shown that over the long term, customers benefit from a competitive natural gas market through lower prices and reliable service. In 1989 Congress enacted the Natural Gas Wellhead Decontrol Act, which phased out natural gas price controls. During the past 15 years, demand for natural gas has grown while the prices paid for natural gas service declined in real terms from $4.41/MCF in 1984, when the government regulated natural gas prices, to approximately $3.60 MCF in 2000 under competition (2000 dollars; EIA data and publicly available data). This competition provided U.S. consumers a savings of $610 billion over that period.
Similarly, we recognize that we need all of our energy sources—oil, coal, nuclear, hydro, renewables, and natural gas—to fuel America. Allowing these fuels to compete, with the market deciding which one is preferred, removes the possibility of creating artificial markets favoring one fuel source over another.
Today, natural gas is a commodity that is bought and sold in a competitive market where prices reflect supply and demand relationships. The natural gas supply industry is highly competitive with many participants.
There are thousands of natural gas producers.
The five top natural gas producers represented only 20 percent of the U.S. market demand in 2000.
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Almost all (85 percent) of the natural gas consumed in the U.S. is produced in the U.S. Most of the remaining natural gas supplies are transported from neighboring Canada via reliable pipelines.
Natural gas is a commodity. Like other commodities, natural gas is traded in an open market at market hubs. These hubs act as marketplaces where hundreds and even thousands of buyers and sellers of natural gas electronically come together. Natural gas price movements occur as the supply and demand cycles interact. Factors affecting the current natural gas market are:
Weather: Near-normal conditions are likely for the summer of 2001.
Other fuels: A falloff from recent highs in hydroelectric output is expected to bring forth more natural gas use for electricity generation this year;
Storage injections: Because of heavy use of natural gas storage this last winter, average injections are expected to be higher than last year in order to prepare for next winter.
Supply is tight. Because of lag times inherent in matching supply with increased demand, supplies have become tight. According to EIA and publicly available data, the price of natural gas and oil collapsed in 1998 and 1999, resulting in the industry allocating less capital to exploration and production activities. Now that continued strong demand has resulted in the increase in natural gas and oil prices, the industry is able to invest more in production. In fact, the top 10 producers, for example, are investing some $41 million into exploration and production over last year, representing a 25 percent increase. As a result, we are seeing a supply response: EIA estimates that natural gas production has increased 3.7 percent from 1999 to 2000 and forecasts a further increase of 2.7 percent in 2001. Producers continue to do everything they can to bring more natural gas to market.
Tight supply is not a sign of inadequate resources. In 1990 producers had to replace about 10 percent of their natural gas volumes with new wells each year just to bring consumers the same amount of gas they had the year before. Today, this average ''decline rate'' has jumped to 23 percent. That means that producers must find 23 percent more gas each year just to satisfy even a stagnant market. This increasing decline rate occurs because our technological advances are allowing us to find fields that in the past were just too small to be economic, but because of their size they experience sharper decline rates. As a result we must find more and more each year just to produce the same volumes, but doing so does not mean that we have an inadequate supply of natural gas.
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In fact, we have an ample resource base of natural gas to supply the growing market. The National Petroleum Council (NPC) estimates that 2,400 trillion cubic feet (Tcf) of natural gas resources exists in North America. The resource estimate continues to grow as new technologies allow producers to extend the frontiers for development of existing natural gas resources.
But these impressive volumes can only reach consumers if a number of events occur and challenges are met. Much of the Nation's resource base resides on Federal Government lands or beneath Federal Government waters that have drilling restrictions. The National Petroleum Council reports that two of the most promising regions, the Rocky Mountains and the Gulf of Mexico, are largely unavailable due to drilling restrictions. The following natural gas resources are off limits or subject to significant restrictions:
100 percent offshore on both the east and west coasts
56 percent of the eastern Gulf of Mexico
40 percent of the Rocky Mountain region
Access to these resources is critical to meeting the market's expectations, and access can be accomplished while minimizing disturbance to the environment. Producers employ new technology that has vastly improved the exploration and production process since these land restrictions were put in place. In the last 30 years, natural gas producers have made great strides in reducing our impact on the environment:
Using horizontal and directional drilling, we can access resources up to 6 miles away from one drill pad without disturbing the land on its surface;
We use ''postage-stamp'' drilling pads that occupy only 25 percent of the space that was required 30 years ago;
Slim-hole drilling reduces drilling wastes by 75 percent; and
3-D seismic technology has improved the success rate of drilling wells by 200 percent, which means that producers are drilling fewer dry wells.
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All these technological advances add up to the fact that the natural gas producers are good environmental stewards and should be allowed access to the natural resources that exist on Federal lands.
Producers are responding to the market. Today, with tight supply and rising demand, producers are individually responding by working to bring more natural gas to the market.
The number of active natural gas drilling rigs is up nearly 150 percent from April 1999.
Roughly 4 out of 5 of the active U.S. drilling rigs are engaged in drilling for natural gas.
The exploration and production industry gained 20,000 workers in 2000 to obtain the gas. It has added another 13,000 jobs so far this year.
Production is responding and beginning to increase.
However, there will continue to be a lag between the time producers begin to drill and when that gas gets to market. It can take up to several years to bring supply to consumers, depending upon the geographic location and point in the exploration and development cycle at which producers begin the process. There are other factors contributing to the lag time, including:
Wells: If a drilling prospect in a currently producing field already exists, it takes an average of three months to bring that gas to market. If, however, wildcat exploration for new fields is required to locate new sources of natural gas, and depending on the complexities of development, it can take several years for that gas to reach the market.
Workers: To the extent that individual companies had to cut back drilling when prices were depressed, they also had to let go of rig workers; now, rehiring skilled and unskilled workers is part of the gearing-up process, but retraining takes time.
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Safety and Environmental Compliance: Two cornerstones of drilling for natural gas are ensuring that we produce natural gas safely and in compliance with all environmental regulations. Producers are complying with existing regulations and are committed to do so.
We appreciate this opportunity, Mr. Chairman, to inform Americans about these facts. The U.S. Congress made the right decision in 1989 to release competitive forces on the natural gas producing industry. Government intervention, such as price controls, will only harm consumers by creating the very gas shortage we all seek to avoid. One thing the government can do today is allow producers access to certain government lands so we can increase the choices natural gas consumers have for their gas. In short, the best approach when dealing with natural gas supplies is to let the competitive market work to benefit all our citizens.
Statement of Ron Heck
Thank you for the opportunity to be here this afternoon. I am Ron Heck a soybean, corn and pork producer from Perry, Iowa. I am currently serving on the Executive Committee of the American Soybean Association (ASA) and a member of the Board of Directors of the National Biodiesel Board (NBB).
The reasons for this hearing are troubling for American agriculture. These are times when the prices for our commodities are at record lows and energy and other input costs are high with the threat of getting even higher over the next several months. This causes great concern across the countryside and producers are reviewing both options for reducing input costs and opportunities for increasing prices of what we grow.
While in the short term there is little we can do to completely alleviate this situation, ASA believes the development of a comprehensive national energy plan would help avoid these crisis situations in the future. We also feel strongly that a national energy plan should include a viable renewable fuels component that includes both biodiesel and ethanol.
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As you know, Mr. Chairman, for the last 8–10 years U.S. soybean growers have invested in the research, development and commercialization of biodiesel. Biodiesel is a mono-alkyl ester-based oxygenated fuel. It contains no petroleum but can easily be blended with petroleum. Biodiesel is typically blended at the 20 percent level with diesel or at the 2 percent or lower levels. It can be used in compression-ignition, diesel engines with no major modifications. Biodiesel in its neat or pure form is biodegradable and nontoxic, and is the first and only alternative fuel to meet EPA's Tier I and II health effects testing standards. Biodiesel is renewable and domestically produced from agricultural resources, namely soybean oil.
Biodiesel has many environmental and operational benefits. With the chairman's permission, I will include materials regarding the environmental benefits of biodiesel for the record. However, I would like to highlight the fuel's lubricity benefits. Even at very low blends biodiesel contributes operational and maintenance benefits to diesel engines, this is even more significant when using ultra-low sulfur diesel.
Last May, EPA proposed a reduction in sulfur content of highway diesel fuel of over 95 percent from its current level of 500 parts per million. Biodiesel has no sulfur or aromatics and tests have documented its ability to increase fuel lubricity significantly when blended with petroleum diesel fuel even at one percent or lower.
Soybean growers began to invest in biodiesel almost a decade ago not because we wanted ''our own'' ethanol. Instead we were driven by the economics in the soybean industry. Soybeans are widely produced for the protein source in soybean meal. It is the plant protein of choice in the pork and poultry industries, leaving soybean oil as a valuable but abundant co-product. Because of large supplies of vegetable oils in the world market, we have a surplus of soybean oil, which depresses the price of the oil and the whole soybean.
Several years ago, ASA recognized that the traditional means of riding out a depressed market by storing surplus soybean oil until better times was not going to work during this situation. The industry had to do more. It needed to be proactive and aggressive in market development. Soybean growers through our State and national check off programs began investing in the development of new uses of soybean oil. Several of the products are widely accepted in the marketplace, such as soy ink, and others are just receiving acceptance such as biodiesel, solvents, lubricants and other fluids.
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While biodiesel as a fuel is relatively new to our country, it is widely accepted and utilized in Europe, where motorists consume 250 million gallons annually. Our biodiesel industry leaders have worked closely with the European industry by sharing research, performance data and consumer information. The European biodiesel industry is strongly supported by government and by agribusiness. In fact, several U.S. oilseed processors are involved in producing biodiesel in Europe.
While biodiesel offers environmental, energy security, and economic development benefits, it is not yet competitive in the U.S. on a pure cost comparison. Public support will be necessary to help the industry develop. Our culture and policies are focused on petroleum products, most of which are imported. I understand, Mr. Chairman, that you are from an oil and gas producing-state, and I certainly do not want to imply that soybean growers are opposed in anyway to the use of petroleum products. In fact, agriculture is a major user of petroleum-based products, and that is one of the major reasons for the hearing today. However, I would make the challenge that our country needs to have an aggressive energy policy that includes renewable fuels and power generation as well as significant domestic production of both oil and gas.
We are currently working with the administration on the development of a national energy strategy that we hope will include a strong renewable fuels policy. We are also working closely with the National Corn Growers Association (NCGA) and with the ethanol industry on legislation that would establish a renewable standard for all motor fuels. This proposal would require a small percentage of renewable fuels, including ethanol and biodiesel, to be incorporated into motor fuels. The program would be flexible and user friendly with a gradual ramp up of a renewable fuel content requirement. Consumers would not even know the difference in their fuel except for the fact that the fuel will be a bit cleaner and their engines will run a little better.
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While the objectives of the proposal are ambitious, we feel they are achievable and reasonable. Our organization, as well as the National Biodiesel Board, NCGA and the Renewable Fuels Association, believe this goal would help the ethanol industry reach its target of tripling consumption in 10 years and create a significant market for biodiesel.
The current biodiesel market is relatively small, but is growing rapidly. Based on a recent NBB industry survey, approximately five million gallons of biodiesel were produced in fiscal year 2000, up from approximately 500,000 the year before. Approximately 20 million gallons are expected for fiscal year 2001. One hundred million gallons of biodiesel requires 760 million pounds of feedstock including vegetable oils, recycled grease or animal fats. If only soybean oil were the feedstock used, 100 million gallons of biodiesel would reduce the current surplus of 2.1 billion pounds of soy oil by about one-third. Reducing soy oil supplies by this amount would increase the U.S. soy oil price by an estimated 1.5 cents per pound. With 11 pounds of soy oil in a bushel of soybeans, this would raise U.S. soybean prices by as much as 16.5 cents per bushel.
Mr. Chairman, even with low feedstock prices, biodiesel is not yet cost competitive with petroleum diesel. To be so, assistance with market development and tax incentives are needed. ASA is currently considering legislation that would provide a partial exemption to the diesel fuel excise tax to diesel fuel suppliers who use low blends of biodiesel. The amount of the exemption would be three cents for diesel fuel containing two percent biodiesel. This approach is similar to the partial tax exemption for ethanol, which provides a 5.4 percent exemption for gasoline that contains ten percent ethanol. Biodiesel and ethanol are complementary renewable fuels, since they are sold in separate fuel markets.
Of course, one of the first concerns with excise tax exemptions is the lost revenue to the Highway Trust Fund. We are very sensitive to the needs of the highway users. So, we are proposing to reimburse the trust fund with USDA's Commodity Credit Corporation (CCC). The cost to the CCC would be offset at least initially by the savings which increased biodiesel use would realize in the form of reduced outlays under the soybean marketing loan program.
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For example, if 100 million gallons of biodiesel were used under this program, it would be blended at two percent per gallon into five billion gallons of diesel fuel. At a cost of three cents per gallon, the cost of the program would be $150 million.
Earlier in my testimony, I outlined how increasing biodiesel use would reduce soybean oil surpluses. Reduced soybean oil surpluses will result in higher soybean prices, and raising soybean prices in the marketplace would reduce CCC outlays under the soybean marketing loan program. Using a conservative 13 cents per bushel impact on price, the cost savings on this year's estimated 3.0 billion bushel soybean crop would be $390 million. The proposal will save more than two dollars for each dollar it costs.
Mr. Chairman, we think the timing is right for these policies and for a strong commitment to homegrown renewable energy. The initiatives I have outlined will help our Nation's farmers by fostering markets for our surplus commodities, such as vegetable oil, and will promote domestically produced energy. We think they have merit, and we look forward to sharing the details of the proposals with you in the next few weeks.
Thank you for inviting ASA to discuss these timely and important issues with you today. Soybean producers are very concerned with the rising costs of energy and inputs, and we want to work with the Committee to develop long-term solutions to these issues.
I will be happy to answer questions at the appropriate time.
ENERGY ISSUES AFFECTING THE AGRICULTURAL SECTOR OF THE U.S. ECONOMY
WEDNESDAY, MAY 2, 2001
House of Representatives,
Subcommittee on Conservation, Credit,
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Rural Development and Research,
Committee on Agriculture,
Washington, DC.
The subcommittee met, pursuant to call, at 2 p.m., in room 1300, Longworth House Office Building, Hon. Frank D. Lucas (chairman of the subcommittee) presiding.
Present: Representatives Moran, Thune, Graves, Putnam, Kennedy, Hilliard, Phelps, Thompson of California, and Baca.
Also present: Representatives Pombo, Pickering, and Shows.
Staff present: Ryan Weston, subcommittee staff director; Dave Ebersole, Callista Gingrich, chief clerk; Anne Simmons, and John Riley.
OPENING STATEMENT OF HON. FRANK D. LUCAS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OKLAHOMA
Mr. LUCAS. This hearing of the Subcommittee on Conservation, Credit, Rural Development, and Research to review energy supply and demand issues affecting the agriculture sector of the U.S. economy will come to order.
Last week we were able to hear about the benefits of renewable fuels to agricultural producers and how the current energy situation is being viewed through the eyes of those responsible for much of the supply and distribution of energy in the United States. This week we will hear from USDA regarding how energy prices may be affecting farmers' production decisions and we will get a forecast of future energy prices from the Energy Information Administration.
In his speech on Monday, Vice President Cheney explained the administration's energy policy, and I quote, ''* * * will be comprehensive in approach, and long term in outlook. By comprehensive I mean just that—a realistic assessment of where we are, where we need to go, and what it will take. By long term, I mean none of the usual quick fixes, which in the field of energy never fix anything.''
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I feel that the Vice President's statement is extremely prudent. We did not reach this energy imbalance over the course of a few months. It has taken the United States years to reach this point and unfortunately, like it or not, it will take many more years and thoughtful long-term policy to reverse the current situation.
In the 1970's, the United States was primarily faced with an oil shortage. Our witnesses have made it clear that with a steadily increasing demand for all types of energy, we may actually be facing a shortage of oil, natural gas, propane, electricity, and products important to agriculture. If indeed our production capacity is not growing and our refinery capacity is not growing, it is clear that we will not meet a two-thirds increase in demand for natural gas over the next 20 years, nor a 43 percent increase in demand for electricity over the same period. Without action, we will look even more dependent on imported energy.
Energy prices continue to be a timely topic for rural America. It is this committee's job to ensure that rural America helps in energy production and also that rural America has tools available to help deal with energy price volatility.
We have had many organizations request to testify at these hearings, and I would encourage all of you to review the record of this hearing as there will be written statements submitted by numerous groups. I do look forward to today's testimony, and with that I turn to the ranking member, Mr. Hilliard for his opening statement.
OPENING STATEMENT OF HON. EARL F. HILLIARD, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ALABAMA
Mr. HILLIARD. Thank you very much, Mr. Chairman, and to the committee, committee staff, and to all of you in the audience.
Last week we heard testimony from witnesses telling us that the fault for the increase in energy prices was not theirs, saying that they are not ''price-makers'' but ''price-takers.'' However, we are not here to point the fingers of guilt at anyone, but to look at the problems and begin to see ways in which to solve it.
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You are the real ''price-takers.'' Your costs go up, and in at least some cases you cannot pass them along to the consumer so you are stuck with serious losses. Some of the prices you pay seem difficult to understand. We need to look at this very carefully today. It is my hope that we can prevent an escalating crisis in agriculture caused by the energy price increases which threaten our agriculture industry and especially our food supply.
I am especially pleased today that Dennis Maze is here, representing the Alabama Farmer Federation. Mr. Maze is a poultry farmer from our State, and I asked him to come to Washington to tell us the serious problems he and others like him are facing from the cost of propane which is used in the chicken houses he operates.
It is not well known, but when the Great Depression hit the United States in 1929 it had already been a full-blown disaster in Alabama for 2 years. A poor agriculture State in the Deep South, Alabama is an economic area in demand for our Nation, and it will behoove us to pay special attention to Mr. Maze as he will discuss his problems in the hopes that we can prevent it from becoming the problem of all farmers in this Nation.
I am also in a markup on the International Relations Committee, and it is the marking up the State Department budget, and I will have to probably leave frequently to vote. However, I want each one of you to know that nothing is more important to my agenda than the subject of this hearing.
Thank you very much Mr. Chairman. I would like to have this statement inserted in the record.
Mr. LUCAS. So ordered.
[The prepared statement of Mr. Hilliard follows:]
PREPARED STATEMETN OF HON. EARL F. HILLIARD, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ALABAMA
Mr. Chairman, members and distinguished guests, this second hearing in our series on energy should bring out the depth of the crisis created for our farmers by the rapidly increasing prices of energy.
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Last week, we heard all the testifiers tell us that the fault was not theirs, saying that they are not ''price-makers'' but ''price-takers.'' However, we are not here to point the finger of guilt at anyone, but to look at the problem and begin to seek ways in which to solve it.
You are the real ''price-takers.'' Your costs go up and, in at least some cases, you cannot pass them along to the consumers, so you are stuck with serious losses. Some of the prices you pay seem difficult to understand. We need to look at this very carefully today. It is my hope that we can prevent an escalating crises in agriculture, caused by the energy prices, which threatens our agriculture industry, especially our food supply.
I am especially pleased that Dennis Maze is here, representing the Alabama Farmers' Federation. Mr. Maze is a poultry farmer from my State, and I asked him to come up to Washington to tell us of the serious problems he is facing from the costs of propane, which is used to heat the chicken houses he operates. It is not well known, but when the Great Depression hit the United States in 1929, it had already been a full-blown disaster in Alabama for 2 years. A poor agricultural State in the Deep South, Alabama is an economic ''canary in the mine'' for our Nation, and we should listen especially to Mr. Maze as he discusses his problems.
I am also in a mark-up in the International Relations Committee—we are marking up the State Department budget—and I will have to leave intermittently to vote. However, I want you to know that nothing is more important to my agenda than the subject of this hearing.
Mr. LUCAS. The Chair would request that other members submit their opening statements for the record, so that the witnesses may begin their testimony and to ensure that we have ample time for questions.
[The prepared statement of Mr. Moran follows:]
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PREPARED STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF KANSAS
Mr. Chairman, I appreciate the subcommittee scheduling a hearing on this important issue. My district, like many rural areas across the country, has suffered greatly as a result of high energy prices. Agricultural producers in particular have been hit hard as higher diesel and natural gas prices increase fuel, irrigation energy, and fertilizer costs.
Our reliance on foreign oil and dependency on imported fuel has created a crisis for our Nation's farmers. Kansas producers' net income fell 7.7 percent in 2000, down 11 percent from the 5-year average, largely because of the summer drought and dramatic increases in the price of energy. On a nationwide average, energy costs alone caused a 6 percent decrease in farm income.
According to the Kansas Farm Management Association, average cash operating expenses on Kansas farms increased 6.2 percent last year, and the increase was largely related to energy prices. Combined gas, fuel and oil expenses rose $2,551 per farm, a 33 percent increase. Prices for nitrogen fertilizers, a natural gas derivative, were the primary determinant in driving fertilizer costs up more than 10 percent above the 1999 average. Irrigation energy costs for a typical irrigated corn farm in western Kansas were $34,026, approximately one-fourth of the gross revenue generated. This figure represents an increase of almost $18 per acre just to run the irrigation system.
With commodity markets remaining at record lows and energy prices going sky high, last year it cost farmers more to produce grain than they were paid for it. Without emergency assistance from the government, producers would have lost money.
Unfortunately, projections for the 2001 crop year are not optimistic. Given the current status of energy supply and demand, the Department of Agriculture predicts that producers will face a 15 percent decrease in net cash income due to energy and fertilizer costs. Losses will be still greater for irrigators.
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Since I arrived in Congress, I have asked the Clinton administration and my colleagues to develop a national energy policy. As we finally begin to look at legislation regarding national energy policy, it is important to keep in mind the long term needs that exist in the agricultural sector. For years, American farmers have not only provided one of the world's safest food supplies, they have done it at an extremely low cost to consumers. Yet without a comprehensive energy policy to provide some price stability, our family farms will face financial disaster.
Again, Mr. Chairman, I thank you for the opportunity to have this hearing. I look forward to working on behalf of our agriculture producers to stabilize farm income and reduce energy costs.
Mr. LUCAS. I would like to invite our first panel to the table: Dr. Keith Collins, Chief Economist, U.S. Department of Agriculture, Washington, DC and Dr. Mark Rodekohr, Director, Energy Markets and Contingency Information Division, Office of Energy Markets and End Use, Energy Information Administration Washington, DC
Dr. Collins, please begin when you are ready.
STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, U.S. DEPARTMENT OF AGRICULTURE
Mr. COLLINS. Chairman Lucas, Mr. Hilliard, thank you for inviting the Department of Agriculture to participate in this important series of hearings highlighting energy in U.S. agriculture.
I am going to briefly comment on the role of energy in U.S. agriculture, some of the effects of higher energy prices, and some of the energy-related activities we have going on at the Department, starting with two general observations.
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First, agriculture is a relatively intense user of energy. Farm production accounts for less than 1 percent of the Nation's gross domestic product, but direct and indirect energy use in farm production accounts for about 2 percent of all U.S. energy consumption. At the farm level, purchases of direct energy plus fertilizer account for from 15 to 40 percent of the operating expenses for a wide range of commodities.
Second, U.S. agriculture has had an excellent record of improving its energy efficiency over the past 2 decades. Farmers have reduced direct energy use by over 40 percent since the late 1970's, while at the same time farm productivity has soared. As they have periodically over the last 30 years, farmers today are again facing tight energy markets. In general, the farm economy appears to be responding efficiently and in a normal market-oriented way to the increases in energy prices by making adjustments that are helping to bring demand for energy inputs in line with supply.
Individual farmers are facing quite varied situations. All face higher fuel and oil costs. During the month of April, our most recent data shows that farmers paid an average of $1.47 a gallon for diesel. That is about the same they paid in April a year ago, but it was up from $1.13 a gallon in April 1999. For major field crop producers, higher natural gas prices have boosted the costs of drying, irrigation pumping, and especially nitrogen fertilizer. The average price paid by producers for anhydrous ammonia during the month of April was $399 a ton. That compares with $227 a ton a year ago.
In spite of a shutdown in some fertilizer plants during the winter, it appears the nitrogen supplies will generally be adequate this spring, although much more costly than in the past. Horticultural crop producers have seen higher greenhouse heating costs, higher processing and storage costs and higher irrigation and fertilizer costs as well. The animal agriculture, too, has seen costs rising for irrigating and fertilizing forage crops and for heating facilities, an especially acute problem for many poultry producers.
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In the aggregate, farm expenditures for fuel, electricity, fertilizer and pesticides increased an estimated $2.9 billion during 2000, an unusually large increase, although that increase was from a reduced base because spending was down in 1999. For many producers but not all, the higher commodity prices or the supplemental assistance payments offset at least some of these higher production costs in the year 2000 and U.S. net cash farm income actually rose in 2000.
For 2001, it appears that spending on farm energy inputs will increase by between 2 1/2 and $3 billion, an increase similar to last year's level, with higher fertilizer expenses accounting for much of the increase. USDA will release an updated farm income forecast that will take into account these higher energy costs as well as other changes in late May.
Farmers' adjustments to higher energy prices appear greater this year than a year ago. This spring, farmers indicated plans to reduce corn acreage by 4 percent and the acreage of the 15 principal crops by about 3 1/2 million acres or 1.4 percent.
Despite the acreage declines, food supplies this year will be ample, and little impact of higher energy cost is foreseen in retail food prices. The CPI for foods is expected to rise 2 1/2 percent, compared with 2.3 percent last year, both of which are below the overall CPI increases.
Higher energy prices are also highlighting the key role that agriculture can play in meeting the Nation's energy needs. Crops and crop residues offer great potential for conversion to ethanol, biodiesel, biopower, and bioproducts. In 2000, more than 1.6 billion gallons of ethanol were produced, using 600 million bushels of corn, and new capacity is steadily coming on line. Most recent data showed ethanol being produced at an annual rate of 1.73 billion gallons per year.
I want to close by mentioning several USDA efforts related to energy. Secretary of Agriculture Veneman is a member of the President's Energy Policy Development Group, and recommendations from that group are expected later this month. USDA also has a range of programs to improve the economics of energy production from farm materials. Our budget request for fiscal year 2002 proposes an increase to $82 million in discretionary spending for research on biobased products and bioenergy.
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We are also working with other Federal agencies to improve coordination of Government programs through implementation of the Biomass Research and Development Act of 2000, and we are also helping to boost renewable fuel production through our $150 million annual CCC Bioenergy Program and our new pilot program to produce energy from biomass and CRP land.
Our programs are designed to support the efforts of American farmers to help meet the U.S. demand for clean, affordable energy. That completes my comments.
Mr. LUCAS. Thank you, Dr. Collins.
[The prepared statement of Mr. Collins appears at the conclusion of the hearing.]
Mr. LUCAS. Dr. Rodekohr.
STATEMENT OF MARK RODEKOHR, DIRECTOR, ENERGY MARKETS AND CONTINGENCY INFORMATION DIVISION, OFFICE OF ENERGY MARKETS AND END USE, ENERGY INFORMATION ADMINISTRATION
Mr. RODEKOHR. Mr. Chairman and members of the committee, I appreciate the opportunity to appear before you today to discuss the near-term outlook for energy markets in the United States.
The Energy Information Administration is an anonymous statistical analytic agency within the Department of Energy. We are charged with providing objective, timely, and relevant data analysis and projections for the use of the Department of Energy, other Government agencies, the U.S. Congress, and public. We do not take positions on policy issues, but we do produce data and analysis reports that are meant to help policy-makers determine energy policy.
Because we have an element of statutory independence with respect to the analysis that we publish, our views are strictly those of EIA. We do not speak for the Department nor for any particular point of view with respect to energy policy, and our views should not be construed as representing those of the Department or of the administration. However, EIA's baseline projections on energy trends are widely used by Government agencies, private sector, and academia for their own energy analyses.
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Each month EIA updates its short-term energy outlook which contains quarterly projections for the next 2 calendar years, taking into account the latest developments in energy markets. The projections in this testimony are from the short-term energy outlook of April 2001. These projections are not meant to be exact predictions of the future but represent a likely energy future, given technological and demographic trends, current laws and regulations, and consumer behavior as derived from known data. EIA recognizes that the projections of energy markets are highly uncertain, subject to many random events that cannot be foreseen such as weather, political disruptions, strikes, et cetera. Many of these uncertainties are explored through the generation of alternative cases.
I will just turn to the outlook for 2002. Energy markets in the United States today are characterized by high prices for both petroleum and natural gas, due in large part to tight supplies for both fuels. Production and oil production by OPEC in several non-OPEC petroleum-exporting nations have contributed to low oil stocks. Tight natural gas supplies are also contributing to high electricity prices in California, along with high electricity demand relative to capacity, high generation outage rates, and low hydroelectric resources.
Crude oil. At its March 17 meeting, OPEC agreed to reduce production quotas by an additional 1 million barrels per day effective April 1, 2001. This follows an earlier production cut of 1.5 million barrels per day in January that was effective February 1. OPEC has scheduled an extraordinary meeting for June 5 and 6 to review their projection quotas. The monthly average U.S. imported crude oil price for March 2000 is estimated to be $23.88 per barrel.
The average price of imported oil paid by U.S. refiners is currently projected in our base case to remain in the mid- to upper 20's through 2002 as shown in figure 1, in terms of the more commonly quoted price of west Texas intermediate crude oil which is generally about $3 per barrel higher. There is considerable uncertainty about this and average imported prices could again go above the $30-dollar-per-barrel figure.
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EIA's analysis indicates the net effect of the new quotas will be sufficient to support OPEC's desired new price range even though the quotas may be partially offset by continued overproduction. EIA expects that oil stocks, particularly in the United States, will continue to be tight compared to normal levels and will provide enough support to prevent prices from falling significantly, as shown in figure 2.
Moving now to motor gasoline. With crude oil prices remaining at relatively high levels, combined with lower-than-normal stock levels going into the driving season, gasoline prices are expected to be high again this summer. National average gasoline prices increased substantially during the month of April, rising from a $1.44 per gallon on April 2 to $1.62 per gallon on April 23. While prices may moderate in the future as gasoline supplies expand, enough momentum in market prices remains that additional pump price increases may be expected in the coming weeks. Nevertheless, the introduction of additional gasoline supplies in response to today's high prices is likely to bring average prices down somewhat over the course of the summer.
For the summer of 2001 as a whole, the average retail price of regular gasoline will probably be in the range of $1.50 to $1.65 per gallon. This compares to an observed average of $1.53 per gallon last summer. The peak monthly price this summer could rival or even at least exceed last year's peak, which was a monthly average of $1.63 per gallon in June. These prices always vary widely by region due to differences in environmental restrictions and different levels of local taxes. For example, prices on the west coast are typically 10 to 30 cents per gallon above those in the South for those reasons.
Any anticipated supply problems such as those that occurred in the Midwest last year could cause even wider variations in prices for a short period of time, as shown in figure 3.
Stocks of motor gasoline are currently at low levels. As of April 20, U.S. total stocks of motor gasoline were at 194 million barrels compared to 201 million barrels 1 year earlier. We project that stock levels of gasoline will remain tight through the spring and much of the summer. By the end of the summer and throughout next year, we project gasoline stocks will return within the low end of the average range, as shown in figure 4.
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Gasoline stocks are relatively low in all regions of the country. In the Midwest, the motor gasoline stock situation is similar to that which prevailed this time last year, a condition that contributed to dramatic surges in prices for that region. As of April 20, gasoline stocks in the Midwest totaled 46.4 million barrels compared to 47.9 million barrels 1 year earlier. The current high prices are a reflection of this. However, it should be noted that supplies of gasoline can come from other U.S. regions and from abroad as market forces respond to these situations fairly rapidly, as they did do last year.
Our refinery problems can have some significant impacts on prices for gasoline and other products. In the past, damage to refineries from fires or explosion have affected supply enough to contribute noticeably or to exacerbate price runups in California and other areas. Recently, a fire in a Los Angeles refinery owned by Tosco, the largest independent refinery in the United States, closed the coker unit in its 100,000-barrel-per-day Los Angeles Carson refinery. This serves as a reminder that things can and do go wrong in the refining industry. Fortunately, an adjacent plant also owned by Tosco was not damaged, and apparently the damaged unit is not likely to strongly affect gasoline production or prices in California.
Diesel fuel. Diesel fuel oil prices have come down from their recent peak of over $1.60 per gallon seen last fall. Retail prices currently are in the $1.40 per gallon range but are creeping up along with the rise in crude oil prices. It should be noted that off-highway use of diesel fuel oil for farming is exempt from Federal diesel taxes of about 24.4 cents per gallon and most State taxes which average an additional 20 cents per gallon.
Due to the relatively warm weather in the Northeast during the last half of January and parts of February and distillate fuel production that was several hundred thousand barrels per day more than last year's level, stock levels have remained fairly steady over the past several months, although they now they appear to be dipping slightly. Last February for the first time since November 1999, U.S. distillate stocks fell within the normal range.
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With crude oil prices expected to be lower in 2001 than in 2000, diesel fuel prices are likely to remain below $1.50 per gallon through the year 2002, as shown in figure 5.
Distillate fuel stocks are currently at the low end of the average range of the United States as a whole. Therefore, we do not expect to see the same price pressure this driving season as we may experience with motor gasoline. As of April 20, U.S. stocks of distillate fuel oil totaled 102 million barrels compared to 94 million barrels 1 year earlier. We project that stock levels of this fuel will remain within the low end of the average range through the spring and summer, as shown in figure 6.
I am going on a little late here so I am going to move through the rest of this fairly quickly.
Propane. The price of propane is heavily tied to the price of natural gas. Propane prices peaked last January when natural gases were at record highs, but the price has been heading down recently and it should translate into lower prices to end users. However, inventories of propane are currently at the very low level of the average range for the United States and well below the average range for the U.S., resulting in some upward price pressures. Thus, the price of propane in our view is expected to remain relatively high over the next 20 months.
Ethanol. We do not forecast ethanol prices. However, we can make some general observations. Ethanol will continue to benefit from sustained high gasoline prices. The last several months have seen record-high ethanol prices and production rates. Although ethanol prices have been slowly falling from their peak in January, low inventories, 2.5 million barrels at the end of February compared with 4.1 million barrels at the end of February of last year, should prevent a collapse in the market.
Natural gas. Prices began increasing last summer primarily due to low levels of natural gas storage, with spot prices increasing more than $4 per thousand cubic feet since June. During the heating season, the wellhead price of gas is currently estimated to have more than doubled from the price during the previous season, averaging about $5.75 per thousand cubic feet. With the end of the heating season, prices have declined averaging between $4.20 and $4.90 per thousand cubic feet for the spring and summer.
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For 2001 as a whole, the average wellhead price is projected to be between $4.90 and $5.45 per thousand cubic feet compared to an annual average of about $3.62 per thousand cubic feet in 2000. This translates into an expected average cost delivered to industrial, including agricultural users, of between $5.50 and $6 per thousand cubic feet, compared to $4.40 in 2000 and as low as $3 in 1999, as shown in figure 7.
Electricity demand is expected to grow at a rate of about 2.3 percent in 2001 and 2.1 percent in 2002 compared to an estimated growth of 3.6 percent between 1999 and 2000. Nationally, the average residential price of electricity in the United States is projected to increase only slightly from 8.2 cents per kilowatt hour in 2000 to about 8.4 cents per kilowatt hour in 2002, largely due to increased fuel cost, mainly natural gas.
Conclusion. In the near term we expect crude oil and petroleum prices to remain high and possibly move slightly higher average levels through 2001 and 2002. National average retail gasoline prices have moved up sharply since last month. Overall stock levels of both petroleum and natural gas remain tight. Although distillate fuel inventories are in reasonably good shape at this point, gasoline stocks remain tight, about 9 percent below normal as of April 20. The relatively tight stock situation can be expected to increase the volatility in prices relative to this situation that existed as recently as 2 years ago.
Over this period, continuing growth in the U.S. economy is expected to stimulate more energy demand, with fossil fuels remaining the dominant source of energy. As a result, our dependence on foreign sources for petroleum is expected to increase and domestic natural gas production and natural gas imports are expected to grow significantly.
Thank you, Mr. Chairman, members of the committee. I would be happy to answer any questions.
Mr. LUCAS. Thank you.
[The prepared statement of Mr. Rodekohr appears at the conclusion of the hearing.]
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Mr. LUCAS. Dr. Collins, your testimony states that farmers didn't seem to take the increased energy costs into their planting habits last year. Yet this year you believe the planting intentions for some crops are declining. High energy prices and unfortunately low commodity prices were prevalent last year. Why do you believe producers are now making different planting decisions?
Mr. COLLINS. Well, I think one of the main reasons is the increase in nitrogen fertilizer expenses which is quite significant, particularly for crops that are nitrogen-intensive, like corn. That is where we have seen some of the big shifts. If you look at a year ago, farmers were probably paying about 13 or 14 cents a pound for nitrogen. This year they are paying 25, 26 cents a pound for nitrogen, based on our most recent prices. For corn they are using 150 pounds an acre. That is roughly 10 cents or so a bushel increase this year for nitrogen costs. So that is a pretty big hit on net return. So what we have seen is some movement to less nitrogen-intensive crops like cotton and soybeans. I think that is part of the explnation. Producers could shift away from nitrogen intensive to less nitrogen using crops. Last year there was sort of across the board shift, based mostly just on fuel cost diesel costs.
Mr. LUCAS. One more question, Dr. Collins. There was a recent poll, I think by the Wall Street Journal and NBC, that pointed out that Americans were evenly split at 44 percent when asked about what their first priority was, protecting the environment or developing energy. Your testimony, both oral and written, seems to point directly to the fact that it is possible perhaps on one rare occasion to have it both ways, that we can develop our ethanol and our soy-based diesel resources while cutting soil erosion and conserving fuel consumption.
Now, within the jurisdiction of this subcommittee—and you touched on this earlier but I would ask you to expand perhaps—what research needs are out there that would help encourage this effort? What do we need to be doing as a subcommittee as we work through the fall, I suppose is the more direct answer.
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Mr. COLLINS. Well, I think the research needs are extremely important. There are two ways to approach this. One is through programs, and I mentioned the CCC Bioenergy Program, you are familiar with it, and some of the things we have done with CRP land to encourage biomass. If you just look at renewable fuels versus fossil fuel-based energy, generally renewables come in at higher cost. That is why we have things like tax preference. But that cost difference over time has shrunk some, mainly as a result of new technologies.
Ethanol is the great case in point. I think you heard some testimony last week where people were talking about the fact that the operating costs of producing ethanol, not counting amortization of capital or investment, but the operating costs are a dollar a gallon or less. We did a 1998 survey and showed 96 cents a gallon. We also have some work we did back in the early 1980's that showed it was $2.50 a gallon. So there been a tremendous decline. That is a nominal dollar decline.
The real dollar decline is even more dramatic, and that is the result of technology, and that technology and the need for more technology focuses in a number of different areas. One is what people call pretreatment; what you do to the agriculture materials before you convert them into starch, into sugar. And in the second area is the whole conversion process of going from the starch or from cellulosic material into ethanol.
Some of the work we are doing in USDA laboratories is to focus on the development of microorganisms and enzymes that will do that more efficiently. You may have recently seen, I think it was just a couple of weeks ago, our Albany, CA lab announced they had developed a method for producing ethanol that could do it at much lower temperature, and therefore save on the energy costs. So we are focusing on those kinds of things.
Another area is coproducts and coproduct development. You may have seen recently that researchers are working on developing this procedure to derive oil from the fiber of the corn, that is the hull, so-called magic oil which is real low in cholesterol. To the extent you can develop these coproducts, they will add tremendously to the value of the ethanol plant in reducing its operating margin.
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So I think there are a whole range of these things where there is potentially great payoff in research in the coming years.
Mr. LUCAS. Dr. Rodekohr, I believe it was a Reuters news story of a few days ago. An oil company analyst was quoted as saying we could increase our oil supply capacity in this country by 30 percent over the next 10 years but that we would have to spend somewhere in the range of $5 trillion. Number 1, would a 30 percent increase in our oil supply actually meet our demand?
Mr. RODEKOHR. My focus is on the short term, but a 30 percent increase probably would not meet our demand over the next 10 years.
Mr. LUCAS. In looking at the statistics the way you have aligned them based on past history, do you think it is even realistic to believe that it is possible to increase domestic supply by that?
Mr. RODEKOHR. I would be very skeptical, to be quite honest, even though I am not a petroleum engineer. The U.S. domestic production has been declining for years and years, very steadily. It is the most developed oil economy in the world, one of the first ones. I would also question the economic sense of that as well.
Mr. LUCAS. So clearly then, we have to look in several different directions to address our needs then. Thank you.
I turn to the gentleman from Illinois.
Mr. PHELPS. Thank you, Mr. Chairman, and thank you, gentlemen, for sharing with us. Mr. Rodekohr, I understand you have been with the Department of Energy for 20-some years.
Mr. RODEKOHR. That is correct.
Mr. PHELPS. I think you have seen a vast difference—a roller coaster ride through the years of fuel.
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Mr. RODEKOHR. Yes.
Mr. PHELPS. I am curious, and maybe this is in your area or not, just talking about fuel prices. Why would there would be an oil glut of supply in 1999 and then just a few months later be a shortage?
Mr. RODEKOHR. That is a good question.
Mr. PHELPS. I bought gasoline at Evansville, IN at 78 cents a gallon in April 1999.
Mr. RODEKOHR. It is rather—in fact, to be honest with you, it caught us a bit by surprise too. I would say up until 15 years or so before 1999, if you were a betting person and the bet was would OPEC abide by its quotas or come even close to doing it, the answer would be no. And that is one of the reasons you had the very low prices in 1999 is there was a lot of overproduction. But all of a sudden they started to try to abide by some of the quotas they set, and they found out that it sort of worked, and that is why we are in the situation we are in today where there is enough adherence to quotas that they have managed to keep these prices at fairly high levels.
Mr. PHELPS. But the negative impact when it was cheaper and evidently they weren't following their quotas, it had a negative impact on our local domestic stripper wells and other supplies. Do you think that was by design?
Mr. RODEKOHR. No. I don't think—let's put it this way. Some of the people may have thought it through to that extent, but I don't think they could ever act that way. I think what really happened is when they did start to abide by the quotas and prices went up, one of the things they saw very rapidly is their revenues went up. In some of these countries 70 percent of their GDP comes from oil. It had a dramatic impact on the revenue in certain OPEC countries.
Mr. PHELPS. So there was no way the Energy Department at that particular time would know if we are low on stock now to know to anticipate the stock up, that it wasn't going to stay—they were going to start adhering to the quotas and we could have had our supply back up?
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Mr. RODEKOHR. It certainly caught me by surprise. I didn't expect they were going to do it.
Mr. PHELPS. I mean with your 20-some year experience there was no way to gauge that would happen.
Mr. RODEKOHR. I couldn't, and I don't recall any of the analysts that you read about in the paper doing it either.
Mr. PHELPS. I didn't find those either. My interest in the ethanol is huge, and I don't want to get ahead of some of the other testimony that will highlight that. Is there any reason in your opinion that we couldn't enhance greatly the use of ethanol, and still hopefully with the MTBE consideration waiver in a reformulated gas program that makes that happen on a more stable basis if that was enhanced?
Mr. RODEKOHR. I would like to defer to the agriculture person. He has got some more information on that.
Mr. COLLINS. If your question is can we respond to an MTBE phaseout in the States that are now phasing it out in a predictable and sustainable way without creating shortages, I think the answer to that is yes.
Mr. PHELPS. What are the major questions or hesitation from the States to rely on ethanol then?
Mr. COLLINS. I think there are some legitimate ones. I think they look at our production capacity right now, and you know, the most we have ever produced at an annual rate is 1.78 billion gallons a year. That was during the month of February. We are running a hair below that right now. And if you look at just a State like California alone, you are probably talking about another 500 to 600 million gallons of ethanol would be needed to replace MTBE completely. So it is not unreasonable for people in California to wonder if that can happen without a fuel price spike. And there are a number of other States that have called for elimination of MTBE as well, and so nationally you have got something like 4 1/2 to 5 billion gallons of MTBE that is used, and that is certainly way beyond production capacity of ethanol. And so that is the biggest question. And I think the response to that is that MTBE is not going to be phased out immediately over time, it is going to happen over time.
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The Governor of California first announced his Executive order in March 1999, and here we are in the spring of 2001 and very little replacement has taken place so far in California. Had that been continuing all along and continuing at a nice gradual glide path up to the 600 or so million gallons that would be used, there would be less concern, I think. But on the other hand, we also have a lot of production capacity coming on in ethanol, probably at the rate of 200 to 300 million gallons a year right now. There are something like seven new plants under construction right now. There are a whole bunch of others that are about to go under construction, and so I think with time—and the California phaseout deadline is the beginning of 2003—capacity can respond. We still have more than a year and a half to ramp up ethanol production and meet that demand. So I think the capacity issue is a big one.
There are a number of other issues. There is the fact that in reformulated gas you have to refine the gasoline differently when you blend it with ethanol. There are some logistics questions about transportation and so on. So there are other issues that people are concerned about, but I think by and large they can be overcome.
Mr. PHELPS. I know my time is up. I just hope we are better at anticipating the possible use, extended use, better than we have been with the fuel OPEC countries.
Mr. LUCAS. Mr. Kennedy.
Mr. KENNEDY. Thank you very much for being here. Good to see you again, Mr. Collins. We obviously have energy needs. We have a number of alternatives where we can turn as a country to look at those energy needs, whether that be oil, gas, nuclear or biomass.
Is there anyplace that you know of where we can see a good summary of what are the alternative costs of these paths that we can go down and what are the type of investments that we are making as a government in those, whether they be through a lower tax rate or whether they be through extra military in the Middle East or whether they be for just spent rods out of a nuclear plant, to try to harmonize what are all the costs and which really are costing us, the Federal Government, more and which are really costing the consumer more, and what economically is going to be the best path long term to go down? Is there good research or information you can give us on that?
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Mr. COLLINS. Well, let me say from the agriculture side—and Mr. Rodekohr can answer this with respect to the other sources of energy—no, the answer is there is not a real good handle on that. When you consider renewable fuels, which is an area where the Department of Agriculture has spent some time, we have done some research, we have some publications, but we haven't got it all summarized into one document. Part of the difficulty here is that when you talk about the benefits of renewable fuels, a lot of the benefits are nonmarket benefits. They are effects on the environment. They are effects on national security, prosperity of farmers and rural America, and those things that are hard to quantify. I mean it is those things that cause people to want to support renewable fuels.
So you are almost asking me if there is a good cost/benefit analysis done for each of these fuels and the paths that we might go on, and I don't know of one, frankly. I think when you see the Energy Policy Development Group's report when it comes out, it will I think look at all the different sources of energy and talk about some of the strengths and problem areas of each of those, and that will be one source. Perhaps the Department of Energy has done some broader work on this issue.
Mr. RODEKOHR. We do publish projections as to energy costs and supply and demand and imports and so forth. But I have never seen any comprehensive work that tries to go through the entire Federal Government and add up the cost in the manner that you are suggesting. I have seen unfortunately with some data—there was a study many years ago called the Energy Policy Study which attempted to do, I think, some of the things that you are suggesting should be done. However, its use right now would be next to nothing because it was so old at that point in time. So I think you put out a real good challenge on the table. I am not sure anybody's prepared to answer it at this point now.
Mr. KENNEDY. I think those are some of the questions we need to ask as we wrestle with this big issue, and you obviously have a number of supporters for biomass including myself. And I think it gives us a good opportunity, as you talk about, to grow demand for our farmers, to be good for the environment, to create jobs in rural communities, if we were to paint a picture of how much of the energy needs in our country could we realistically meet if the country got wholeheartedly behind biomass in the same way that many of these people in this committee are.
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Mr. COLLINS. Recent estimates are something in the order of 3 to 4 percent of the Nation's energy needs come from renewable sources. Last summer in June, Congress enacted and the President signed into law the Biomass Research and Development Act of 2000. That required Federal agencies to work together to develop a strategic plan for expanding the use of biomass to produce energy.
The agencies have developed a strategic plan. In fact it is on DOE's web site if you want to look at it. And it is basically a set of challenges that have to be met to bring renewable energy to some 9 to 10 percent or so of the national total. There is not an economic justification for that target but along the way there has been interest in figuring out what you would have to do to triple renewable energy use in the United States and bring it from 3 to 4 percent of total energy use to something in the order of 9 to 10 percent. The thinking is that you need something of that magnitude to have a serious effect on making some claims that you are improving national security and energy independence and things like that. So there has been some work in looking at that as a target, the 9 to 10 percent figure.
Mr. KENNEDY. My time is up, but just to wrap up—in an earlier response to a question, we stated we didn't think we could increase production here by 30 percent, and yet the needs are going to grow by more than that in the future. I think looking at these types of increases in biomass is something we need to take a very serious look at and I am certainly supportive of.
Mr. LUCAS. Mr. Thompson.
Mr. THOMPSON of California. Thank you, Mr. Chairman. I have a group in my district, Mr. Chairman, the California Dairy Coalition of Concerned Energy Consumers. They are in not only my district but throughout California. And I would like to ask unanimous consent to have their statement put in the record.
Mr. LUCAS. So ordered.
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[The information appears at the conclusion of the hearing.]
Mr. THOMPSON of Califoria. Thank you very much. And also I guess from Mr. Collins, I am concerned about some short-term issues in California and the energy crisis there and how it is impacting agriculture. By anybody's estimation it is going to be a while before we get our arms around the energy supply issue, but the important point, and I think a lot of folks are missing this, is we are making some headway. We have a number of generators coming on line throughout this summer, and incrementally we are going to get there but we need some short-term help.
We have agricultural producers in my district, specifically in the dairy areas, that are going to see their electric prices triple and quadruple to outstrip their net profits, and this is not only going to affect milk consumers and the dairy producers themselves, but all the way down to the dairy farmer and the guy that supplies the trucks and the hay and everything else. I am just curious as to what type of short-term solutions the Department of Agriculture is proposing and what type of help we can expect.
This is the State that produces 56 percent of all the fruits, vegetables, and nuts, and all of these folks are going to be impacted heavily and we need to make sure that there is some sort of effort on the part of the administration to step in between now and when those final generators come on line to provide that help.
Mr. COLLINS. Well, I am not sure I have a truly satisfying answer to your request. Farmers all across the Nation, not just in California, are being hit by higher energy costs. In some cases there are things that the Department of Agriculture can do. There are farmers in some areas of the country, for example, that have lost irrigation water due to drought. This is at least remotely related to the energy issue because it has reduced hydropower production. And we are working now to ensure that our crop insurance programs and our crop loss programs can provide some assistance to those producers.
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Unfortunately with respect to our lending programs, our emergency loan programs are really not appropriate for higher input costs because they require a 30 percent loss of production. They are based on natural disaster losses but producers would be able to apply for normal operating loans from the Farm Service Agency and that might provide some help.
In addition to that, I think there is every likelihood that there will be some supplemental assistance legislation enacted by Congress this year. Last year—you mentioned dairy in particular—we had a dairy payment program of about $650 million. We paid dairy producers about 65 cents per hundredweight. If we have another similar program this year, we don't know yet what form that is going to take, but another similar such program could provide some assistance as well.
So there are a few things that can be done, but I don't think we can certainly mitigate all the effects that producers are unfortunately going to face.
Mr. THOMPSON of California. I am hoping that whatever action we take is more proactive than reactive, and I am not interested in paying people to take out fruit trees or sell their water. I am interested in promoting good, strong, agricultural practices and have an energy infrastructure that will back that up.
One last question. Right now the FERC is investigating the El Paso Gas Company in regard to allegations that they are involved in some collusion to limit the natural gas transportation as it comes into California, and I am curious to know—and that affects just about every agricultural component of California. And I would be interested to know if there is any interest in or any plans by the Department or any other entity within the administration that you know of to strengthen the oversight in this regard to ensure that this gouging doesn't take place.
Mr. COLLINS. I have no knowledge of any effort at the Department of Agriculture to strengthen oversight over natural gas transmission directly by the Department of Agriculture. We would certainly defer to FERC in that arena. I would say that the energy policy work that the administration has going on has addressed FERC issues, and Secretary Veneman participates in that, so there is at least that linkage to FERC, but largely we have not interacted with FERC on that issue.
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Mr. THOMPSON of California. Thank you. Thank you, Mr. Chairman.
Mr. PUTNAM. [presiding]. Mr. Baca.
Mr. BACA. Thank you very much, Mr. Chairman. I guess as a follow-up to the questions that were asked by Congressman Mike Thompson as it pertains to California, as we look at the energy needs and the effects—and I guess we really didn't get an answer, because we need an answer in reference to the short-term solutions as we look at gouging.
We look at the availability of energy in the area, we look at transmission lines that need to be built, we look at the power plants that are currently being built in California, yet the administration is not taking any immediate action to deal with the problems that are affecting us. Especially as we look at a statement that was said as the prices went up, revenues went up, and this is not about individuals gaining revenue, it is about a service also that we need, and the administration needs to take some kind of action because the cost is going to affect the Nation as well.It is not just affecting California.
Right now as we look at the gouging that has affected us, what is it that can be done not only in the producing of energy, but at the same time look ing at the supply and demands and having an effective amount of energy, that we can look at other alternatives, whether it is biomass, whether it is ethanol, whether it is any other method that we do, but at the same time producing it and being cost effective and not gouging us, and at the same time not affecting other portions of the Nation. We need the administration to take immediate action and not wait. So what is being done? Can anything be done? Are there any recommendations being done?
Mr. COLLINS. I can only respond to that by saying that this is an issue that the President has made one of his highest priorities, I think from his first day in office.
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Mr. BACA. Well, priority means you take action, not wait; and we have not seen any action. The crisis has existed for some time in California. We need him to take immediate action in the Department to make those kinds of recommendations to get solutions.
Mr. COLLINS. Right. I can appreciate that completely. I think that there are a number of things the administration has done. I know the President issued an Executive order to order all Federal agencies to expedite siting and permit reviews for any generation and transmission that was going to be constructed in California, and I know EPA in particular, and the Department of Interior, have done a number of things in that arena, so the order is helping to expedite the construction of needed generation and transmission in California.
With respect to the question of gouging, you know there is fine line between gouging and prices that are needed to generate investment in generation and transmission. And I know that FERC on a couple of occasions has ordered funds to be rebated for what FERC had decided were excessive pricing when wholesale electricity prices soared.
Mr. BACA. Where is the administration—or the administration could take effective action on anyone who is gouging or found to be gouging and do Federal legislation and that could come from the leadership here as well.
Mr. COLLINS. I also think it is a responsibility of FERC as well and I think it is an issue FERC has debated intensively. It is related to the whole issue of price caps, too, on wholesale power, and I think there has been a great concern about gouging. On the other hand, when you have a demand that exceeds supply, there is only one way to bridge that gap. That is to increase the supply or reduce the demand, and one of the ways that happens is through higher prices.
Mr. BACA. Yes, and I also realize that in California Governor Gray Davis has taken immediate action on the problems we inherited because of poor forecasting by the previous administrator who had been there, and that Governor Wilson who had been there at that period of time did not take the initiative. I think that the Governor now has begun to take the initiative not only in having the additional power plants that are being built, but the permitting process being done in that area. But we also need to be involved to not only relieve California but to see how it affects other States as well.
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Mr. PUTNAM. The gentleman from Mississippi.
Mr. SHOWS. Thank you, Mr. Chairman. I was in the State legislature back in Mississippi in the eighties, and I introduced a bill called the gasohol bill. So I have a little history with ethanol and where it goes to, and I am a big believer. But at that time, one of the problems we had was the industry people, and especially highway folks, opposing it; and petroleum people also, because it affected their funding because we are giving tax breaks out of our highway moneys or revenues. And so that was always an element that we had; even though it was a good cause, we had certain factions of our economy.
What I would like to ask you—I mean, to me it seems like we ought to be using this budget surplus, in my opinion, because I think energy cost is the one thing that helps increase our inflation, high interest rates again, just like it did in the days of the oil embargo. To me it looks like we ought to be centering on the budget surpluses to help give tax incentives to help build more ethanol plants and alternative fuels. Not only does it help the country but it cleans the air and puts our farmers to work. But also I think we ought to go back into our oil refineries, our oil and gas production, and look at tax credits for this industry, too, because no one industry is going to solve this problem. It is going to take a multiple effect of different industries to come together to make this solution work.
And do you see anything coming down from the administration as far as any tax credits or tax incentives maybe for ethanol plants, or maybe for enhancing the oil and gas exploration, and especially natural gas in Mississippi which is a big producer?
Mr. COLLINS. I really can't comment specifically. I only could say that economists generally like lower taxes than higher taxes, so we do happen to like tax reduction. Certainly taxes are an issue that the President's group has focused on, although they did start out with the presumption that they wanted to be very careful about what tax preferences would be introduced through their recommendations.
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Ethanol, of course, as you mentioned, does enjoy a fairly sizeable tax preference right now, 53 cents a gallon Federal excise tax exemption which, as you know, probably reduces the Federal Highway Trust Fund to $800 million to $900 million a year.
But I would point out, however, that corn that is used in ethanol certainly increases the price of corn, which probably at this point and over the last several years that loss to the Highway Trust Fund has been far more offset by the savings in marketing loans and LDP costs of farm programs for corn.
The only thing I could mention to you is that the one tax item in agriculture that has certainly been discussed has been the partial excise tax exemption for biodiesel. That is one that I know has some interest but, I have no notion of whether this is going to be coming down the pike or not.
Mr. SHOWS. Thank you. Thank you, Mr. Chairman.
Mr. PUTNAM. If the panelists will indulge, we are going to take a quick recess and get back to you. We are going to go vote. The subcommittee stands in recess.
[Recess.]
Mr. LUCAS. The subcommittee meeting is reconvened. If there are no other questions for this panel, I believe, seeing none—I like this kind of a committee structure—you are dismissed, gentlemen. Thank you for your testimony.
Now, I would like to invite our second panel to work their way to the table. Mr. Ronald W. Warfield, president of the Illinois Farm Bureau, an executive board member of the American Farm Bureau Federation from Bloomington, IL; Mr. Leland H. Swenson, president of the National Farmers Union, Evergreen, CO; Mr. David R. Graves, president and CEO, National Council of Farmer Cooperatives, Washington, DC; David N. Rajkovich, partner in Farmington Fresh, Stockton, CA; Mr. Dennis Maze, a farmer from Maze Farms, Inc., Horton, AL, on behalf of the Alabama Farmers Federation; Mr. Glen N. Buckley, chief economist and director of Agri-Business, CF Industries, Inc., Long Grove, IL, on behalf of the Fertilizer Institute.
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Mr. Warfield, whenever you are ready, you may begin, please.
STATEMENT OF RONALD W. WARFIELD, PRESIDENT, ILLINOIS FARM BUREAU, AND EXECUTIVE BOARD MEMBER, AMERICAN FARM BUREAU FEDERATION, BLOOMINGTON, IL
Mr. WARFIELD. Thank you, Mr. Chairman. My name is Ron Warfield. I am a corn and soybean farmer in Illinois. I am president of the Illinois Farm Bureau and on the executive committee of the American Farm Bureau. I am here to encourage you to take a different view of the energy problems we are facing in America.
For 70 years we have kind of viewed the farm policy as an attempt to ''solve the farm problem'', and certainly farming is a cyclical and volatile industry and always will be, but it is time for Congress to join agriculture leaders around the country who believe that spending for agriculture is more than just income support. It is an investment in our Nation's food security, in economic security, environmental security, and, Mr. Chairman, as we are talking about today, our energy security.
The American Farm Bureau is supportive of a comprehensive energy policy that can solve energy problems for our Nation and create income opportunities for farmers. Let me articulate three basic points.
Energy production is part of the solution to challenges we face in agriculture. Number two, renewable sources of energy have the benefits of being domestically produced, reliable and clean-burning. And, third, we need a long-term energy policy that will provide for reasonable and stable prices and supplies of energy.
Our Nation has never been so energy-dependent. America is struggling to satisfy an urgent and spiraling demand for energy that has begun to outstrip our Nation's productive capacity. The energy supply crisis is critically affecting farmers' bottom line. Certainly farm income is already depressed. As energy costs go up, that cost is transferred directly to a negative on the bottom line.
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But farmers, more than anyone, want to earn their income from the marketplace. And our vision for the future is that of a growing agriculture industry that will depend less on Government payments and more on returns from the marketplace, and we see few better ways to boost demand for what we produce than being able to supply the energy needs of our Nation.
The Nation's energy crisis and the demands for clean air standards might provide the greatest opportunity for U.S. farmers and ranchers to increase net income without direct Government assistance. For example, USDA estimated in 1999 that the increase in net farm income from a 3- to 5-year MTBE phase-out would be $12 billion. Another good example is biodiesel. It is estimated that for every 1 percent of the diesel market captured by biodiesel, demand for soybeans would increase by 250 million bushels, raising the market price by 30 cents.
As Congress formulates a new national energy policy, there is clearly a major role for U.S. agriculture. We grow part of the solution, and I want to emphasize it is a national solution encompassing many crops. Renewable, clean-burning fuels must be part of the energy mix, and there are plenty of farm commodities to be utilized in an ever-expanding production capability for ethanol and biofuels.
The higher the profile ethanol has at our Nation's energy portfolio, the better off farmers, taxpayers and the environment will be. Farm Bureau supports policies that will maximize the use of biofuels. Biodiesel, made from vegetable oils, is poised to be a significant contributor to the U.S. alternative fuel market and has already passed the rigorous health effects testing requirements of the Clean Air Act and is poised for rapid growth. The EPA must not grant waivers to States attempting to opt out of the oxygen requirement in the Clean Air Act. Agriculture has the ability to supply the fuels needed to meet the requirements of that Clean Air Act.
I assure you they are well aware of the symptoms of our energy problem and the impact it is having on agricultural producers. We have seen a tripling of some prices of fertilizer. There has been a huge increase in, as Mr. Collins previously testified, and I can tell you by prices on my own farm, the prices of anhydrous this spring. The last 2 years I paid 13 to 14 cents per pound of end. This year last—I just got a price before I came out here—25–1/2 cents per pound of end.
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LP gas on my farm for the previous several years, prior to last year I averaged—for drying, I averaged 62 cents. Last year I paid $1.05. So drying costs are going up. Diesel that I use on my farm, in 1999 my average cost for diesel fuel was 96 cents per gallon. In 2000, it was $1.21, and my last fill-up was $1.31.
As we have heard before, producers in the poultry industry are facing significant problems in heating and cooling costs. Farmers in California are rightfully alarmed at the electricity crisis in their State, as electricity runs many vital components of crop production, and processing farms—farmers in the Northwest are not only facing higher energy costs for pumping water, but also in many areas the water supply is severely curtailed because of drought and the need for—to use part of the water to generate electricity. With low commodity prices farmers face in all segments of our industry, these kinds of spiraling costs add significantly to the burdens of maintaining a structure in agriculture that farmers want and Farm Bureau policy seeks to support.
Mr. Chairman, we have many challenges in farm country. You are aware of that and the pressing need to help America's farmers and ranchers deal with these challenges. We firmly believe that the energy crisis should be looked at as an opportunity. It is an opportunity to develop energy sources in rural America, and at the same time reduce the funding requirements that this committee faces in the upcoming farm bill debate. We ask you to be bold. Decisions may not often be politically—or it may be politically difficult, but we want to stand with you in making those tough decisions. We cannot, we must not accept easy solutions that will not solve this difficult problem, and those of us in agriculture are ready and poised to be part of that solution.
[The prepared statement of Mr. Warfield appears at the conclusion of the hearing.]
Mr. LUCAS. Thank you. Mr. Swenson.
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STATEMENT OF LELAND H. SWENSON, PRESIDENT, NATIONAL FARMERS UNION, EVERGREEN, CO
Mr. SWENSON. Well, thank you, Mr. Chairman, and let me commend you for the timeliness and the importance of this hearing, especially in relation to those in production agriculture, and I commend you for that.
I want to go through my testimony. In fact, I will try to summarize some of the points out of it, and I am going to deviate from it to address also some of the concerns we see happening in the short term that we hope you will consider.
As has been pointed out, the costs and availability of reasonably priced energy resources are critical factors in affecting the economics and the efficiency right now of farmers and ranchers as they look to this next year, both in direct impacts as well as indirect impacts. And this comes on top of farmers already suffering low commodity prices, and they cannot afford to deal with these increased production costs and the outlays that they require.
As has been pointed out by Keith Collins, USDA estimates that we are looking at a $2 billion to $3 billion impact and an increased cost of production this year. And it really has a disproportionate impact on those that must utilize higher levels of crop protection products, fertilizers and ores.
In fact, one of our members in California, a dairy producer, noted that his bulk fuel for his operation has increased from $4,500 per load to $8,000 per load. His milk pickups by processors has been slowed to less than once every 12 hours than was normal due to the backup of the plant caused by brownouts and blackouts. It has forced him to delay milking for up to 7 to 8 hours, and on one occasion dump milk, where he dumped 1,000 gallons of milk. Even his monthly standby rendering pickup fee has increased from $175 to $300.
For fruit and vegetable producers, many of the same—or similar effects are being felt. Natural gas, propane have doubled in price, resulting in higher dryer costs, increased electric rates, and brownouts have impacted canning capacity. And those crops cannot simply be put into storage until the power comes back on, so it has really impacted producers of a great variety in agriculture.
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Congress should take action to address the impact of these uncontrollable costs of farmers and ranchers. Other industries, we have noticed recently, have taken action to pass on the impact of higher energy costs, such as the hotel industry passing surcharges. Energy surcharges is a part of the bill, $1.50 to $4 a night, any time you stay in a hotel in many States across this country.
Because agriculture is unique in the way that commodities are bought and sold, we urge the committee to examine and develop a mechanism to compensate producers adversely affected by the tremendous rise in costs resulting from energy price increases. That is the short term, Mr. Chairman. We hope you will give that some consideration.
Let's go to long term, because we really need to look at the vision of what we need to do on our energy policy. And we, as others, urge you to look at the significant role that renewable crop resources can play in meeting the national energy policy.
We urge you to consider to look at support of Senate bill 670, the Renewable Fuels Act offered by Senators Lugar and Daschle. It requires an increasing percentage of a renewable fuel content on all motor vehicles sold in the United States, implemented over a 10-year period, and it is a separate requirement for nongasoline fuels such as diesel. It is an environmentally sound policy. It allows the shift to ethanol and the phaseout of the fuel additive MTBE. It improves the farm economy. Renewable fuel standards could increase ethanol demand by threefold over 10 years.
It could also affect—we could take a look at the commodities of sugar, barley, potatoes, a multitude of other crops, of a benefit to them within the structure of agricultural policy. New production capacity will stimulate investment in rural America and develop new farmer-owned production cooperatives. And this is an initiative also being launched by States. It could be complemented with action at the Federal level as a part of a national policy.
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We commend Congressman Thune for his legislative initiative to extend the 10 cent ethanol income tax credit to plants whose annual production is below 60 million gallons. And we urge members of the committee to sponsor companion and renewable fuels initiatives in the House.
We also believe that as part of farm policy, we need to look at a Renewable Energy Reserve Program, a need for authority for a limited Government-owned, producer-stored reserve, dedicated to use of ethanol, not commercial food or feed markets. So it would not overhang the market. It would allow for long-term development of increased production capacity by ensuring reliability of supply and more stable prices.
We also need to make a commitment in long-term policy to the electric generation/transmission industry so that we can continue to see the expansion and growth of the service of our rural cooperatives in serving the needs in rural America; greater investment in new generating facilities not only for existing types of energy, but also alternatives, such as wind, solar, biomass, methane and thermal.
So in conclusion, Mr. Chairman, I see my time is up, I just want to urge Congress to take action immediately, a mechanism to compensate producers for the economic adversity that they are being impacted by; take and participate in providing agriculture commodities as a reliable, fairly priced energy resource; a Renewable Fuel Standard Program to be adopted; Renewable Energy Reserve Program; and a national energy policy that strengthens the rural electric cooperatives and other alternative fuels as well. Thank you, Mr. Chairman.
Mr. LUCAS. Thank you.
[The prepared statement of Mr. Swenson appears at the conclusion of the hearing.]
Mr. LUCAS. Mr. Graves.
STATEMENT OF DAVID R. GRAVES, PRESIDENT AND CEO, NATIONAL COUNCIL OF FARMER COOPERATIVES, WASHINGTON, DC
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Mr. GRAVES. Thank you, Mr. Chairman. We appreciate the opportunity to be here today and to provide testimony to this subcommittee regarding the energy questions facing American agriculture. I want to summarize my statement for you by lifting out what I believe is the central point in our testimony. But before I do that, I want to say that we certainly endorse the testimony that will also be given here today by Mr. Buckley, representing CF Industries, a very important member of our association.
When you talk about the energy supplies, the question of this hearing focuses on price and supply. My comments today will deal with the question of supply and the role that farmer cooperatives in the United States play in providing especially petroleum fuels and especially a subset of petroleum fuels in the form of diesel. Diesel fuel is the preferred energy choice by farmers today. It is very significant in their annual operations.
Agriculture being a biological process means that you really have to perform your functions on a specified time basis, or you can irreparably do harm to your production for that given 12-month cycle. Long years ago, in the early 1920's or teens, farmers understood this and started making investments of their own in petroleum refinery facilities. This was necessary for the purpose of making sure that farmers had not only reasonably priced fuels at the time they needed it, but, very importantly, that they had the supply, the quantity of the fuels when they needed it.
As Mr. Collins testified, agriculture consumes only 2 to 3 percent of such fuels in the United States, so you can imagine what the order of priority might be for noncooperatively owned refinery facilities. At the time when agriculture needs a large supply of diesel, noncooperative facilities are gearing up for the peak gasoline demand.
Over the years, farmer-owned facilities have provided up to 40 percent of the petroleum-based fuel needs on our farms and ranches in the United States. I am here today to suggest to you that there is serious threat to that source of supply. In 1950, there was as many as 20 farmer-owned cooperative refinery facilities in the United States. By 1979, the number had declined to eight. Today the number has declined further to only four.
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What jeopardizes this existence, I think, is twofold, but they are very much related. Farmer-owned cooperatives do not have access to capital markets and, therefore, capital as noncooperatively owned businesses do. What compounds that matter today, especially regarding our environmental policy in this country, is a series of regulations developed and put into rule over the last—at least last decade, but more recently focusing on the sulfur content rules that have over these last number of years developed a huge demand for capital by these cooperatively owned refineries to just bring these facilities into compliance. Today it is my understanding that the four remaining farmer-owned cooperative refinery facilities are facing a demand of up to $500 million of additional capital that will produce not $1 of income that can be rebated to the farmers as a refund for the purpose of coming into compliance with additional EPA regulations.
We think this is a matter that needs to be given serious consideration, Mr. Chairman, by you and this committee and the full Congress, because we think it is a yet another very serious threat to the adequate supply of at least petroleum fuels in the very near term. Thank you, Mr. Chairman.
[The prepared statement of Mr. Graves appears at the conclusion of the hearing.]
Mr. LUCAS. Mr. Rajkovich.
STATEMENT OF DAVID N. RAJKOVICH, PARTNER, FARMINGTON FRESH, STOCKTON, CA
Mr. RAJKOVICH. Good afternoon, Mr. Chairman. My name is David Rajkovich. I am a third-generation farmer from Stockton, California. The tree crops we produce are cherries, apples and walnuts on approximately 1,000 acres. I am also a founding partner of Farmington Fresh, which is an apple and cherry packing and marketing company which has both domestic and international marketing capabilities. The company currently packs and markets apples and cherries for over 50 growers located throughout the San Joaquin and Sacramento Valleys, and it is anticipated that this year we will pack and market close to 1 million cartons of apples and cherries, the value of those commodities being approximately $15 million.
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I would like to start with the needs and concerns of the farmers that I deal with on a daily basis. A grower's largest use of electrical energy is for irrigation. Unlike other areas of the country, almost all the crops grown in California require irrigation, and this is especially true of the fruit and nut crops. Progress has been made with the efficiency of crop irrigation in the past. It is one of the reasons that we have been able to produce higher yields per acre than ever before. This is being done after losing some of our best land to urban development. Older, wasteful flood irrigation practices have given way to furrow irrigation in orchards, and those methods have since been replaced with sprinkler and drip technologies. These new technologies bring the efficient use of water up to the state-of-the-art levels. This efficient use of water is the most effective way for a grower to reduce energy costs.
Many growers in our region are increasing their reliance recently on groundwater pumping for irrigation due to the reduced supplies of surface water. Reduced supplies of the surface water will most likely continue to be a problem for growers in the future, the reason being the increasing demand on this resource from urban users along with recently imposed habitat restoration initiatives occurring statewide.
The resulting increase in groundwater pumping is much more dependent on electrical power and will continue to tax available power supplies during the peak summer months. Over the past few years, many growers like myself have been installing diesel-powered pumping plants to lessen our dependence on electrical utilities. We try to avoid running electrical pumps during peak power load periods, saving considerable amounts of money by only running the electric pumps during the off-peak periods. However, I am now paying three times as much for diesel than I was just a few years ago. Almost all the tillage, harvesting and trucking done by farmers is dependent on diesel fuel, and the recent spike in fuel prices will have a dramatic impact on the grower's bottom line due to the fact that growers have no way to pass this energy cost on.
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I would like now to focus on an even more dependent aspect of California agriculture on electrical energy, and as an area of our packing and marketing functions. Any packer will tell you that the three largest cost components in this business are labor, power and packaging material. California is now at a severe cost disadvantage to our major domestic competition in the Northwest. The disadvantage is in both labor and energy. For years California has had a higher minimum than the Federal minimum wage, and as a large electrical power user in California, we have been paying 12 cents a kilowatt hour versus 4 cents in the State of Washington, and this is prior to all the recent uncertainties and failures of the California attempt at deregulation.
California apple growers have lost anywhere from 70 to 80 percent of their export business to Hong Kong, Singapore, Malaysia and Indonesia due to the flood of cheap Chinese apples to those markets in just the past 2 years. Taiwan, our single largest export market, has reduced purchases of California apples by 30 percent over that same time period. And now an even more harmful possibility looms in our future. Even though California cannot export any varieties of apples to Korea, Korea continues to press for the United States to allow for the importation of Korean Fuji apples. Being a Northern Hemisphere country, these apples would directly compete with freshly harvested American fruit.
Due to the highly perishable nature of tree fruit, extensive coal storage facilities are required to cool and store fruit immediately after harvest. The season starts in May with cherries and continues through December with apples. Our peak demands coincide with the State's peak power usage. On hot, dry summer afternoons, hundreds of tons of warm fruit arrives at our plant. This fruit needs to be cooled quickly to 33 degrees in order to preserve its shelf life due to the packing, marketing and shipping process.
Modern packing facilities such as ours have been built with state-of-the-art energy control systems to save as much power as possible. All of our 60,000 square feet of refrigerated storage is monitored and controlled by computer system to limit the power needed to keep the stored fruit cold. Fifty thousand square feet of packing facilities use energy-efficient motors and lighting. From a conservation approach, there is very little more that we can do to reduce our power needs, short of closing our doors.
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Most major packers in California are now installing emergency standby generator capability in order to protect the grower from the loss of refrigeration due to anticipated rolling blackouts this summer. This would add costs along with a minimum increase of 24 percent in higher utility bills that we are anticipating. We will attempt to pass this additional cost on to the growers through higher packing charges. However, since we market our packed products to an ever decreasing number of large domestic grocery store chains, we directly compete in the world market with foreign fruits. We cannot raise the market price in order to recover these costs for our growers. As usual, it will be the grower who is put in the tighter financial squeeze, facing rising production costs and then selling into a depressed market.
In conclusion, the chairman's invitation to me to address the committee today, I was asked for my opinion on how the current energy situation developed and my prognosis of the situation over the next 1 to 10 years. I won't even pretend to portray an understanding of the deregulation mess that we are currently in, but as a practical person, I do not believe that it is wise to be so dependent on out-of-State generators to supply our power needs. I can see that we in agriculture are left to scramble for whatever water and power sources that we can find, the problem being that now we are competing with 34 million others who call California home, and our State supplies for power and water have not significantly changed from 30 years ago when California only had 20 million people.
To help preserve the State's $26 billion agriculture economy, Californians need to encourage the building of clean, renewable sources of water and power, such as the Auburn Dam. I do not believe that having the State purchase power transmission lines from bankrupt utilities does anything to address the shortage of in-State power generation—generating capabilities. California leads the Nation in production of many farm commodities. It is the largest agriculture economy in the Nation. Many of our greatest modern agricultural advances in technology and innovation originated in our great State. Unfortunately, I also believe that California must have been the birthplace of the term ''not in my backyard.'' without development of new State water and power resources, it will become harder and harder to compete in this new world economy that we are now dealing in.
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And as a person with an optimistic outlook in most matters, I see little on the horizon to make me think that the economic viability of farms producing many of the aforementioned crops is very promising. With our current power situation becoming another major hurdle that farmers must try to overcome, I know I will probably encourage my children to get in another field of endeavor, much like my father tried to convince me. He said that there are easier ways to make a living. However, when you are 21 and fresh out of college, who doesn't think that they know more than their father?
Well, I don't see it happening in the next 10 years. It certainly would be sad for me to see my children or grandchildren's generation become dependent on a foreign country for a large portion of their food supply. Like today, we depend on other countries for our power supplies. Thank you.
[The prepared statement of Mr. Rajkovich appears at the conclusion of the hearing.]
Mr. LUCAS. Thank you. The Chair is going to ask the indulgence of the panel to give, let's say, approximately a 15-minute recess, since our first obligation here, representing all of you, is to cast those votes in the United States House, and we will reconvene as soon after 15 minutes as is humanly possible. Thank you.
[Recess.]
Mr. LUCAS. The hearing will reconvene, and the insights and patience of the panel is definitely appreciated also. And the nature of the body we serve in and the work we do and the schedules, we keep trying to juggle many things all at once. It is not to take away from the importance of your insights or the guidance you provide us with your testimony, but as I mentioned before we recess, our first and foremost obligation as Members of the United States House is to cast those votes on the floor.
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And with that, I believe I turn to Mr. Maze for his testimony. Begin when you are ready, sir.
STATEMENT OF DENNIS MAZE, PRODUCER, HORTON, AL, ON BEHALF OF THE ALABAMA FARMERS FEDERATION
Mr. MAZE. Thank you, Mr. Chairman.
Mr. Chairman, Ranking Member Hilliard and members of the subcommittee, I thank you for allowing me the opportunity to testify before you today. I would like to submit my written testimony for the record from which I will summarize my remarks this afternoon.
I am Dennis Maze, a third-generation poultry farmer from Blount County, Alabama. My farm consists of 200 acres, 81 brood cows and 8 broiler houses with an annual capacity of 935,000 birds, which translates to 5 million pounds of meat annually for the American consumer.
Agriculture producers such as myself continue to suffer from energy costs that are far higher than the usual. Substantial increases in gasoline, propane, natural gas and diesel have put farmers in a tight squeeze economically that has left us with little or no recourse. Although there have been many factors that have been cited for these increases, there is no question that heavy users of propane and natural gas, such as poultry producers, have been especially hit hard. Many producers, such as myself, do not have enough current income to cover the very high energy costs and other production expenses. For example, in 1999, I used 70,000 gallons of propane and spent $39,000. In 2000, I used 50,000 gallons of propane and spent $41,000. In 2001, from January through March, I used 29,000 gallons and spent $31,000. On January 1, 1999, my price per gallon was 43 cents. January 2000, my price had increased to $1.41 per gallon. At this rate I cannot continue to raise chickens and still be profitable.
My farm's first batch of chickens placed on January 8, 2000, and sold on March 12 grossed $48,000. However, my total liabilities, including debt service, gas, insurance, utilities, hired labor, led to a net loss of $800. LP gas cost alone was $22,602, or 48 percent of my gross income. Since my houses have 5 1/2 flocks per year, this resulted in a loss of one-fifth of my income for the year before I have even paid myself anything.
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Further, since propane typically accounts for over 40 percent of the total variable costs for broiler producers, the huge increase in natural gas and propane prices have left farmers with no profit. In many cases, their entire annual budget for energy costs was spent in 1 month. According to Auburn University estimates, with propane prices increasing from 70 cents to 80 cents per gallon last summer to levels approaching $1.40 per gallon, propane is now accounting for over 55 percent of those expenses.
Although farmers in my area have joined together in cooperatives to purchase propane, the cost to the growers have still increased from the gas companies. Some costs associated with transportation, for example, have increased for producers significantly. The transportation cost for using a pipeline from Bellview, TX, to Demopolis, AL, increased from 3 cents to 57 cents per gallon during the months of heaviest usage last winter. However, the wholesale price for propane did not increase proportionately.
Some poultry companies have reduced the number of chickens in each house and increased the amount of time the houses are idle between flocks. In addition, many companies are also lowering the weight in which they purchase chickens from the growers, resulting in lower revenues and less pounds of production.
Banks also typically require 55 percent of a producer's gross check to service the loan on the poultry houses, and with a double or triple energy cost, there is no profit left for the producer. While growers do appreciate the fuel allowance that some companies have passed along to growers, even profitable growers are experiencing extreme financial difficulty. The increased energy costs have also impacted other users, such as operators of greenhouses and nursery farms. The Alabama Farmers Federation has conducted an informal survey of horticulture and nursery farms in Alabama and their input costs for gas and electricity. The replies to this survey are included in my testimony.
Although poultry producers have not generally sought Government assistance in the past, the current energy situation and the lack of a comprehensive national energy policy point to the need for some financial assistance in order to prevent this situation from becoming far worse.
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The Alabama Farmers Federation strongly supports such—efforts such as H.R. 396, introduced by Congressman Pickering, that would allow the Secretary of Agriculture to provide emergency financial assistance to crop, livestock and poultry producers and greenhouse operators. I also wish to thank Congressman Hilliard for his cosponsorship.
The poultry industry is also very supportive of the bill introduced by Senator Sessions and Senator Cochran, S. 586, which would provide emergency assistance for agriculture end users.
In conclusion, I would like to state that without some financial assistance, even producers that are profitable will soon use any equity they have remaining and only add to the current financial crisis facing American agriculture. Since 75 percent of all agricultural exports in our State are from poultry, this would further harm our infrastructure and decrease producer income. Further, I would encourage this committee to continue to examine other ways to encourage the supply of energy, such as the use of renewable fuel such as ethanol and biodiesel.
On behalf of the Alabama Farmers Federation, I would like to thank you again, Mr. Chairman and committee members, for allowing us this opportunity to express our concerns as they relate to this energy crisis.
[The prepared statement of Mr. Maze appears at the conclusion of the hearing.]
Mr. LUCAS. Mr. Buckley.
STATEMENT OF GLEN N. BUCKLEY, CHIEF ECONOMIST AND DIRECTOR, AGRI-BUSINESS, CF INDUSTRIES, INC., LONG GROVE, IL, ON BEHALF OF THE FERTILIZER INSTITUTE
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Mr. BUCKLEY. Thank you, Mr. Chairman. I am here today representing CF Industries and the Fertilizer Institute. CF is a farmer-owned cooperative and one of the largest fertilizer manufacturers in North America. CF, through its member owners, accounts for approximately 25 percent of the nitrogen fertilizers used by American farmers. As Mr. Graves mentioned earlier, CF is also a member of the National Council of Farmer Cooperatives, and we also support the testimony that Mr. Graves presented earlier.
Today the focus of my statement will be on natural gas and the impact that it is having on the North American fertilizer or nitrogen industry. Natural gas is the only feedstock used in the production of nitrogen fertilizers and accounts for 75 to 90 percent of the total cash cost of production. As a result, the sharp rise in natural gas prices that has occurred over the last year has had a devastating impact on the U.S. nitrogen industry. Last fall, the run-up in natural gas prices forced up production costs to the point where producers were facing significant financial losses. Not surprisingly, virtually every producer in the industry was forced to either idle plants and/or significantly curtail production. As a result, the industry operating rate fell to 57 percent in December and to a record low of 47 percent in January. To put this into perspective, the average U.S. annual operating rate during all of the 1990's was 92 percent.
Natural gas prices have moderated over the last few months from the record highs of December and early January. This allowed the industry operating rate to move back into the 75 to 78 percent range. Unfortunately, this appears to be only temporary. Under today's natural gas prices, the industry is, at best, operating at a cash break-even position, with many plants running for the sole reason of meeting supply commitment for the spring season.
Based on recent estimates, the U.S. operating rate is likely to drop back into the 50 to 60 percent range this month, and probably below 50 percent by the time we get into mid-June. Again, this compares to an operating rate over the last 10 years that seldom fell below 90 percent of capacity.
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The sharp escalation in natural gas prices and the resulting curtailment of U.S. production facilities has also had a devastating impact on the American farmers. As we have heard in testimony earlier today, fertilizer prices have escalated dramatically. Ammonia prices at the farm level, for example, have almost doubled, increasing from an average price over the last 2 years of roughly $218 per ton to spot quotes this spring in the $385 to $400 range.
Absent a substantial long-term reduction in natural gas prices, the U.S. domestic nitrogen fertilizer industry is at serious risk. Of the 19 million tons of capacity in the United States, approximately 1 million tons has already been permanently closed, and according to a recent industry analysis, another 5 million tons could possibly close within the next 2 years. In addition, it is anticipated that the remainder of the industry will likely operate on a swing basis. That is, plants will only run when natural gas prices are low enough or fertilizer prices are high enough that producers can, at a minimum, cover their cash cost of production.
This spring imports offset part of the losses in U.S. production. Increasing reliance on imports, however, is not the answer and for the American farmer will only result in supply uncertainty and continued high prices. The domestic industry has historically been supplied by about 70 to 75 percent from domestic nitrogen fertilizer producers in the United States and another 15 percent from supplies by nearby Canadian plants. Much like the natural gas market, this North American supply base was constructed to meet U.S. demand. Offshore supply, on the other hand, was constructed to compete in a world market. In other words, offshore cargoes are sold and shipped to those markets that will yield the highest net-back prices.
Further, an extensive distribution and storage infrastructure has been developed over the years to ensure that American farmers would have adequate supplies at the right time and at the right place. This system was specifically designed to move and handle large volumes of product from North American production sites to the major consuming areas. As a result, there is limited infrastructure to off-load, store and transport larger and larger volumes of imports. This is especially true for anhydrous ammonia.
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Nitrogen fertilizers are a fungible commodity, where market prices are set by supply/demand conditions and, therefore, by the cash costs of the marginal producer. Under a continued environment of high natural gas prices, the marginal supplier to the market will be the U.S. producer. Consequently, higher import volumes will not translate to lower prices for U.S. farmers.
In our opinion, high energy prices present the most serious threat to the fertilizer sector and to farmers in general since the energy shocks of the 1970's. The fertilizer industry believes that it is essential that the United States develop a comprehensive and balanced energy policy, one that encourages the development of additional supplies and at the same time promotes the efficient use of a variety of energy sources, rather than artificially encouraging the demand for natural gas over other fuels.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Buckley appears at the conclusion of the hearing.]
Mr. LUCAS. Thank you.
The Chair now would like to turn to ranking member Mr. Hilliard, if he has any questions.
Mr. HILLIARD. Thank you very much, Mr. Chairman. Mr. Chairman, I do have several questions that I would like to ask, and the first question I would like to ask is to Mr. Maze.
Mr. Maze, in your testimony you stated that there was a fluctuation in the prices of propane from 3 cents to 57 cents last winter, and there was no proportionate increase in the wholesale price. Why was this the case?
Mr. MAZE. That is what we would like for you all to investigate. On November 2, 2000, in Bellview, TX, the wholesale price on the BPN—posted price was 62.05 cents. In Demopolis, AL, it was 66.05 cents. That is a 3.98 cent difference. Then why on January 18, 2001, Bellview, TX, price was 88.88 cents, and Demopolis, AL, was 148.80? That is a difference of 59.92 cents. On April 30, Bellview, TX, was 57.15 cents; Demopolis, AL, was 59.55 cents. That is a 2.2 cent difference.
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So we can't get an answer from the pipeline folks why that differential. I do know that when the Commissioner of Agriculture called the folks in and started questioning, the price dropped the next day.
Mr. HILLIARD. And did it drop correspondingly, or did it drop to one price all along the pipeline?
Mr. MAZE. Pretty much all the way along.
Mr. HILLIARD. Historically how has it been? Has there been any differentiation in prices along the pipeline?
Mr. MAZE. In years past, it hasn't. Back in the early 1990's, it dipped similar to this, but not this bad, and our gas company we contract with, with our co-op, passed along those transportation costs to us, and that is all they could ever say, it was just transportation costs. It is not actually wholesale price of gas. If we go to Bellview, TX, and pick it up, it would be the price I quoted.
Mr. HILLIARD. Well, let me ask this question to the panel, anyone on the panel: Do you have several suppliers that you can choose from when you purchase gas or diesel fuel or LP gas, propane gas, or are you by and large restricted to one per area?
Mr. WARFIELD. We have not seen the same kind of differential that has been experienced there in Illinois. I can't give examples that would substantiate that, and we have enough competition apparently to keep them in balance. So I do not have a similar experience to relate.
Mr. HILLIARD. Anyone else?
Mr. MAZE. January 18 in Demopolis, a Coastal Fields was $1.38. Texaco was $1.50, and Energy Service was $1.48. Econo Gas was $1.50. They are pretty close. You have some that is cheaper, but they don't have any gas to sell you.
Mr. HILLIARD. Let me ask about prepaid and other type of fall-within contracts. For those of you who prepay or sign advanced delivery contracts for your fuel, can you tell us what kind of arrangements you utilize, and have the terms available changed as the prices increase, change?
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Mr. MAZE. This past winter we had some cooperatives in north Alabama that were under contract, and when the transportation costs got so high, the gas companies, it put a burden on them. They were going to go broke, the independent gas suppliers. So they broke contract with the poultry growers, and their price went from, like, $1.20 to $1.87. They had to go out on open market and purchase their gas. And right now the local gas distributors will not book—forward-book gas, because they don't know what that transportation—they are raising the ceiling cost on that to where we can't even book the gas.
Mr. HILLIARD. What about in other areas of the country? Did you have similar type problems?
Mr. WARFIELD. The area—I am not aware of any in terms of either the LP gas or natural gas area. Where there was the most discussion in Illinois had to do with booking anhydrous ammonia, and there were some differences, but it is a matter of you needed to take—when you locked it in, you needed to say you were going to take the quantity. There were some instances in some parts of the State where they said at these early stages in the winter, they couldn't guarantee the supply, but generally it was, I think, fairly represented as the contracts were undertaken. And the question the producer had to decide was did he want to bite the bullet and pay the price or take the chance on later, and we have producers making choices both ways, but I am not aware of anybody that thought that they were unfairly treated in the process.
Mr. HILLIARD. Thank you very much.
Mr. SWENSON. That was the same we had in the Midwest was mainly related to that, a fertilizer, and requirements of which to take delivery or contract not be honored, and a lot of farmers didn't have the facilities for storage, and the contract then got voided.
Mr. MAZE. In the Southeast, we are heavily concentrated in poultry, and the cold weather compounded the problem. We had trucks coming to Demopolis from New York, and it was an 8-hour turnaround for those transports to go into Demopolis and load gas and get back out of there. So it compounded the problem with the severe cold weather we had. So the price just took off. The gas companies couldn't foresee that price on the transportation costs on the pipeline, and so it like to put them out of business, too. They had to break contract with us.
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Mr. LUCAS. Thank you, Mr. Hilliard.
If I could, I think one of the most impressive points made in the testimony earlier today by the previous panel was the observation by Dr. Collins that after the energy spikes of the early 1970's, that American agriculture, American farmers had reduced—and I believe the quote was reduced their direct energy use by 41 percent between 1978 and 1998, while productivity grew sharply. I would direct this question to Mr. Warfield and Mr. Swenson. If Mr. Collins is correct, we have conserved, we have modernized, we have become as efficient as we can. Is there anywhere else out there that we can squeeze any energy savings from production agriculture?
Mr. WARFIELD. I am reluctant to say that, because every time I think we can't do more, we end up doing it, and certainly as efficient as our industry has proven to be over time, we always seem to squeeze the last hour out.
But we certainly did take the signals from what we had in the last energy crunch, and how we farm today is certainly far different than we did before. The one known entity, though, if you are going to produce corn or other nitrogen-consuming crops, it takes nitrogen as yields go up. And there is a pretty real—strong relationship there, that you are not going to get increased efficiency, and there is not—as we increase yields, you have to have the additional nitrogen or you are not going to be able to do it, or other fertilizer components that might be energy-dependent.
And so certainly the minimum till, the no till that we have gone to, are aggressively—has certainly eliminated—and we have half the number of tractors we had at that time, and we certainly have greatly reduced our—in terms of tillage and those kinds of operations, but there is only a certain amount of things you can do relative to the physiological production, and as we are going to grow, increase—or increase our yields in those areas, it is going to take those kind of inputs to continue.
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So I can't give you examples. It is going to be certainly tougher to be more energy-efficient from here.
Mr. SWENSON. I would concur. We have taken every step, adopted every technology. The only way that I think we could get further savings is if farmers had a better return in income of which to invest in some new, more modern equipment, and which could reduce some of the continued energy demands that exist. But until that opportunity presents itself, they are having to keep continuing to use some of the equipment of which may be higher energy consumption than what they would like to see. But in the nature of practice of production, I think they have adopted all the technology that is available in there, and this year looking at greater soybean production than corn production because of an economic situation.
Mr. LUCAS. We turn to you, Mr. Buckley. As Dr. Collins pointed out in response to my question this morning, the cost of fertilizer seems to be the diving factor in making those decisions about how to use our resources out on the farm, and it appears from your testimony the key is we have to have a bigger supply of natural gas if we are going to address those needs out there. Is that a fair assessment?
Mr. BUCKLEY. Yes, it is. When you look at the situation that the fertilizer industry is in right now, natural gas prices is the thing that is driving it, and it is the only thing that is going to turn it around.
There are actually two aspects of it. One is we actually need more supply. The second is on the demand side, we definitely need to diversify our energy sources. If you look at just what has happened over the last few years in terms of electric power generation, virtually all of that increase in power generation has come from natural gas. We need to get a more diversified supply base for power generation. We need to look more at a lot of the things that Vice President Cheney was talking about the other day. What we have done is not only kept our supply from growing, but artificially raised the demand side of the equation, and that is why we are in the situation right now. And unless we see a change on the price side for natural gas, we are going to continue to look at curtailment of the U.S. fertilizer industry and high nitrogen prices.
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Mr. LUCAS. Absolutely, Mr. Buckley. As an Oklahoman, it never ceases to amaze me that as a result of previous laws passed, we haul in trainload after trainload of Wyoming coal to fire electric plants in Oklahoma, when we sat on top of some substantial resources.
Let me turn to Mr. Graves for just a moment and your discussion about the challenges that co-ops in the refinery business face, and I believe you said we were down to, what, four?
Mr. GRAVES. Right.
Mr. LUCAS. And it would cost something in the range of $500 million to upgrade those facilities to meet all the modern requirements?
Mr. GRAVES. Right.
Mr. LUCAS. What is the newest one of those four refineries, any idea; 5, 10, 20, 30 years old?
Mr. GRAVES. I am not sure, but I think it is substantially older than that. The facilities that are owned by farmers today were purchased as existing facilities when they were purchased.
Mr. LUCAS. So like good farmers, we use second-hand stuff to make——
Mr. GRAVES. Right, Mr. Chairman.
Mr. LUCAS. So then while not everything falls within the primary jurisdiction of this subcommittee, it is fair to say that pursuing an agenda in Congress that would encourage development of new facilities that would meet the modern standards, it would be more efficient, as well as making sure that the resources are there for fair competition would be an important thing?
Mr. GRAVES. We would agree with that. That would be very important in terms of the long-term welfare for the farmer himself.
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Mr. LUCAS. Absolutely.
And one last thought, and I will turn to my colleagues on the panel, my friend from California. I feel for you, sir. A number of your California Congressman like to remind me that they represent as many Okies as I represent being an Oklahoma man.
The challenges you face in your particular State, as you very clearly describe them, from energy to environment to just general land use questions, it is just quite a mountain of challenges you face. And any of my fellow Okies out there listening, you are always welcome to come home.
And with that, I turn to Mr. Putnam for any questions he might have.
Mr. PUTNAM. Thank you, Mr. Chairman.
I welcome the panel, and particularly the folks from phosphate country, which we have quite a bit of in the 12th district of Florida.
Tell me, if you would, a little bit about the import situation from the former Soviet states, what their production capacity is, how much we are bringing in, and what types of trade issues that that breakup has resulted in.
Mr. BUCKLEY. Currently we are importing approximately a million tons of ammonia primarily from Russia and the Ukraine. We don't really pull any from any of the other Republics. And that is virtually all the nitrogen that we are importing to them right now. They are one of the largest suppliers to the world market of both ammonia and urea. They are a major player in the market, and that is one of the problems with imports is that when you are looking at it from a longer-term perspective, when you look at the standpoint could imports be a feasible alternative to domestic production, and when you look at areas like the former Soviet Union, there is a significant amount of uncertainty as can they really supply our market on a regular basis, when do we need it and where do we need it. And that becomes a major question mark.
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As far as their capacity, what are they producing right now, that is a very complex industry over there. With the restructuring of the former Soviet Union and the breakup of the central planning system, they were, by far, the world's largest producer of nitrogen products. But a lot of their industry was specifically designed for their domestic market. So they really have one part of their industry, which is domestic-oriented and another part of their industry which is export-oriented.
In terms of what is operating right now, virtually the plants that can export are operating. The plants that are domestically oriented are not. So they are operating right now—and I am guessing—I don't have the numbers in front of me. I am guessing they are probably around the 40 to 45 percent operating rate, which is up from a few years ago.
But basically it is the export-oriented plants that are running today.
Mr. PUTNAM. Well, is the energy price issue in the United States such that we can bring it in from outside this country cheaper than we can produce ourselves?
Mr. BUCKLEY. Well, we certainly saw imports this year increase rather substantially, roughly a 30 percent increase in nitrogen imports. The question on a longer term perspective is, can you continue to bring in more and more imports?
I mentioned in my testimony, one of the problems that you have is that the industry, the way it stands today, was basically built around a domestic supply base going to domestic customers. So the infrastructure, which would include pipelines, storage tanks and everything that goes along with moving and handling bulk commodities, was all designed for that system. Particularly in the case of anhydrous ammonia you can bring in more imports than we brought in this year.
This year was a record amount, and you end up with these limitations on infrastructure. For example, the Gulf Central pipeline, which brings ammonia from basically Louisiana up into the Midwest, that pipeline is designed to carry, basically, domestically produced product. We have certainly over the years virtually no imports given to the Midwest as fertilizer. There are only basically four points along that pipeline that you can off-load imported ammonia, get it into the pipeline and bring it up, and there are serious limitations there for doing that. So to try to bring in more imports you run into an infrastructure limitation. That becomes a real problem.
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The other problem with imports, as I mentioned, the FSU and the Ukraine are two major exporters. Other exporters include the Arab Gulf countries like Indonesia, Venezuela and Trinidad. When you look at it at a long-term perspective, can they supply the U.S. market? Again, this question of uncertainty comes up.
During the Gulf War, for example, shipping completely shut down the Arab Gulf. So if we are relying on these sources for supply there is all kinds of political, economic questions that come into play. And given that we use all of this fertilizer within a very short period of time, we have got to have it when we need it in order to meet farmer demand. If there is anything like Gulf War, economic problems, whatever, that disrupt that supply, it definitely disrupts the America farmer and what he needs and when he needs it.
Mr. PUTNAM. So what is your mid-range outlook then for fertilizer prices over the next 2 to 3 years, assuming that the energy—I mean, factoring in the current energy status and the impacts of low commodity prices in the Midwest and all of those things that go into it, what is the industry's outlook.
Mr. BUCKLEY. Not very optimistic from the standpoint of a producer.
When you look at, as you mentioned, the low commodity prices and you look at the supply-demand situations that we are facing right now, where the price of fertilizer is going to be, at least at the farm level, is really going to depend on natural gas prices. If we are going to continue to look at $5 or higher natural gas prices, then we are going to continue to look at the prices we have right now at the farm level.
If you look at it just from the standpoint of cash production costs and what it costs to transport fertilizer up into the Midwest, if you are looking at $5 and $6 gas, our cost to get ammonia, for example, into the Midwest is going to be somewhere in the $2.40, $2.50, $2.60 range. So that is, at minimum, what the price would be. Then you would tack on dealer margins, dealer costs; and again you are back where we are today. So definitely is going to require a reduction in natural gas prices or we are going to continue to face the situation we have now.
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As far as our outlook, we use Cambridge Energy as our main source for forecasting natural gas; and based on their latest numbers for the rest of this calendar year and into next calendar year it looks like we are going to be facing $5 plus gas, with a definite potential of another run-up in prices come this winter in November and December. So under that scenario that is basically a repeat of this year. If that occurs, the industry, again, is going the have to shut down.
Mr. PUTNAM. Thank you very much.
Thank you, Mr. Chairman.
Mr. LUCAS. Mr. Pombo.
Mr. POMBO. Thank you, Mr. Chairman.
One of the solutions or one of the things that we hear in California all the time is that we are going to make up part of our shortfall with conservation and that we don't have to go out and find more energy sources, we just need to conserve, and that will make up the difference. I wanted to ask Mr. Rajkovich, you run a modern facility in California. I would like to ask you, in your farming operation, what kind of things have you done to reduce your energy consumption long before we had this recent spike in energy prices?
Mr. RAJKOVICH. I touched on that a little bit in my testimony.
I think irrigation is probably the area where we have done the most investment, and that has been done for the past 20 years. We have been trying to see how can we reduce our energy use, because it is one of our most costly inputs in producing our crops. So I would think that is probably where we have made the biggest progress, is in efficient use of water. Because we are pumping water from 120-foot depths. There is less and less surface water we can use because we are fighting over this water with the environmentalists and urban users.
On the packing facility, I mean, there is really not much more we can do with that. The company I am involved with, that I am president of at Farmington Fresh, we are in a new facility that is 5 or 6 years old. We are very state-of-the-art. There is very little more that we can do to reduce our energy use.
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Mr. POMBO. Can you use less water than what you are using now?
Mr. RAJKOVICH. No, no, not producing the crops we are producing in California. We produce a lot of specialty crops that require a lot of water. It is a supply-and-demand issue, and we have not done anything to address the supply needs.
I told someone earlier—well, the chairman asked about sending some Okies back to Oklahoma, and I don't think we are going to agree to do that, but we have some other folks that we would like to send.
Someone mentioned earlier, I think it was Mr. Thompson, about how California produces 56 percent of the fruits and nuts, and I am here to argue that some of those nuts would probably do quite well in Oklahoma if we could get them back over there.
Mr. LUCAS. You would have to pass the State health inspector.
Mr. RAJKOVICH. When the rights of a salamander or some type of toad or insect mean more than the rights of the farmers to have access to stable water supplies and when there is more whitewater rafters in California than there are farmers, it is a sad situation. But the farmers in California can feed the world. Many crops—there is over a hundred crops that we lead the Nation in production, but there is fewer and fewer farmers. We have less and less say. So we have—like I said in my testimony, we are left fighting over what is left, practically, when it comes to water and power supplies.
Mr. POMBO. You built your packinghouse and—to diversify your operation, to streamline your operation, to vertically integrate your operation. But I think that what you did is a story that needs to be told. In fact, the former Speaker of the House, Newt Gingrich, when he was in California went by your operation to see it because it was an innovative operation that he wanted to hold up as an example for the country.
You built your packinghouse at the end of an airstrip and load DC–10s full of California produce and ship it to the Far East. You wanted to take full advantage of the open markets that exist. I think it was a great idea, a great story, a great way to expand our markets. But with your increased inputs and increased costs in order to produce those products, and I know that in your oral testimony, your written testimony you went into this, but the competition that you are faced with doesn't have those same inputs.
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Mr. RAJKOVICH. Exactly. We are losing. We have not flown a planeload of produce out of our plant for 3 years now. The situation has changed 110 degrees since that plant was built 5 or 6 years ago. We are losing market share in our major Asian markets for exports.
We used to sell our premium products at a price premium to those markets, and we are losing them to other producing countries, both in the northern and southern hemisphere producing countries because of the major advantage they have. In Korea, for example, they pay $1.25 for labor. They are using many of the chemicals and inputs that we are no longer allowed to use in California due to environmental restrictions.
So it is very difficult to compete. We cannot even begin to compete with some of these countries when they are selling product to our customers for less than we can even get that product raised and packed for. It is a sad situation. It is tragic that—I think, looking down the road, 20 years, I can see us just becoming further and further dependent on other countries for these labor-intensive crops.
I am not talking about corn and cotton and wheat, things like that. I am talking about labor-intensive crops, the fruit crops, vegetables, things like that that take a large amount of water and a large amount of labor. I don't see how we can continue to produce those crops.
We produce the safest and the best quality fruit anywhere in the world, but now we have shown everyone else how to do it, and instead of exporting their products like we had hoped to we are now off-loading record amounts of these products in California.
Mr. POMBO. Thank you, Mr. Chairman.
Mr. LUCAS. Mr. Pickering.
Mr. PICKERING. Thank you, Mr. Chairman, for holding this hearing today.
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As we look at the very critical issue of energy and its cost in relationship to agriculture, the Secretary of Energy recently spoke at a conference where he predicted that farm income could be down as much as 20 percent, directly related to higher energy costs. In my State of Mississippi and the district—I know that we have Mr. Maze here from Alabama, a poultry farmer. Poultry is the largest single economy of my district. With the high fuel prices, natural gas, propane, we saw this winter, it is putting our poultry farmers at a severe strain.
I would like to talk today about a couple of things and ask some questions.
One, I serve, in addition to the Agriculture Committee, on the Energy and Commerce Committee and will be the Chair of the working group to put together the comprehensive energy bill. As soon as the President and Vice President Cheney submit their principles, we will be working on a way to try to get our domestic production up, our dependence down and our prices down. But that is a long-term problem and a long-term outlook. Is there something that we can do today that would help farmers meet the short-term crisis they face?
We have seen in our farm sector over the past 4 or 5 years low prices and drought and now the energy prices. And just as we have helped our livestock producers—for example, I have tried to find a way to help our poultry growers by introducing legislation cosponsored by Mr. Hilliard that would give assistance to farmers based on the higher energy costs.
Mr. Maze, you cited this in your testimony. Tell me today what the situation is for the poultry farmers in Alabama and across the Southeast. Has it stabilized any since this winter?
Mr. MAZE. Yes, sir. It has stabilized some, but we are still paying 80 cents per gallon for LP Gas, and you can't break even at that price, really. But the weather has helped us, if it was burning the demand that we do in the wintertime. But we are burning a lot of LP Gas, even year around, where I didn't use to burn it in the summertime. We are burning to keep those birds as hot as they want them. We have raised our temperatures in those chicken houses from 80 degrees to 92 degrees. So we are faced with depressed markets.
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The companies can't help us. They would like to, and we are in a marriage together. Without them, they can't operate; and without us, we can't operate; and without them, they can't operate.
But, anyway, we are just sitting here in a real dire need. I have got people in the coop that can't pay their gas bill. I have had to go borrow money against my cattle to pay my gas bill this winter. And we have never turned to the Government for assistance in the poultry industry. We have always been able to go to the marketplace. The companies have been able to help us. But everything's depressed, every market you look at just about. Poultry has always been the bright spot in Alabama. We have been productive. It is safe, clean. I mean, it has just been the bright spot. But we are in trouble. We are in very dire trouble.
Mr. PICKERING. You mentioned something that I wanted to follow up. I had an earlier meeting this year with the Mississippi Farm Bureau and then with financial institutions, the companies, the processors, and the farmers, the growers. They were trying to find ways to help each other, but from what you have just testified the companies really haven't been in a position to help. Have the gas companies or the financial institutions—have you found any creative solutions to help you?
Even if we were to pass legislation that I introduced earlier this year, those payments could be another—if we look at the livestock assistance payments, those took about a year to get to the farmer. Even if we had a supplemental appropriation, we could get some assistance to the poultry growers, that could be another year away. What is going to keep our poultry growers viable and able to meet their cash flow needs in both the mortgage and the high gas prices?
Mr. MAZE. I am afraid they are not going to make it. I don't think we have got the time to do it unless something happens with the market where the companies can come in and pick up and help us. We will takes assistance where we can get it, but there is more farms for sale right now in the poultry industry in Alabama than there has ever been.
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There are more farmers fixing to bankrupt than there has ever been, and you may be looking at one of them. I am third generation. My son is a senior at Auburn University in agricultural economics. I begged him to go into another field. We just don't do that.
Mr. PICKERING. He should have gone over to Mississippi State.
Mr. MAZE. Well, yeah, probably. But, buzzard school is pretty good at times, but I don't know. We have got people that has taken their whole check just to pay their gas bill, took their whole check to pay their gas bill.
Mr. PICKERING. Are we beginning to see bankruptcies?
Mr. MAZE. Yes, sir. Yes, sir, you are going to see bankruptcies this year. The lending institutions will still loan money, because I have got enough equity there in my farm that I went in last year and refinanced and borrowed $200,000. My chicken house is sitting right now running off the computer. I can sit here with the laptop, show you my chicken houses and operate them in Horton, AL, today. They are updated, state-of-the-art.
But I didn't expect this high gas prices. But if you look, I have got the figures here, in 1999, when it is 43 cents, and the trend, we had 90 cent gas in 2000, and I thought that was awful. But when we had growers paying a $1.70 and I had the Commissioner of Agriculture come up to Snead, AL, and sit in with the growers, and he said it made a very big impact on him, the Assistant Commissioner. He said he saw young people that were in trouble. The look on their face showed they were in trouble.
And I am seeing it. I had a young man went in the poultry business—because they are selling farms. If I could find me what I call a sucker today I would be out of the chicken business. I would unload the farm today. Because, looking down the road, if this trend continues—I borrowed against cattle this year. I don't have those cows to go back and borrow against next year. It is going to take two calf crops to pay off this last gas bill.
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Mr. PICKERING. Mr. Warfield, do you have any recommendations? Other than the legislation they introduced, do you see any other short-term measures that we can adopt, either through the private sector or through public policy, that would help?
Mr. WARFIELD. Well, certainly as we have looked at this situation in terms of how to turn what is a desperate situation in terms of escalating costs and saying if we can find agriculture to be part of a component of that in the broader sense, I think there are some things we can do and immediately that will help us, particularly in your capacity as you look at the energy policy, to what that involves.
And, sir, if you have visited with Mr. Wade, you have talked about what we can do on biodiesels and what we can do on ethanol to help. I think there are some things we can do to help immediately. We talked about the situation, can the industry—and when I say this I am not just talking about corn. There is a lot of products that can produce ethanol. There is a lot of biodiesel—biomass crops that can do that.
But I think that we are in a position to be able to do it, but we need the signal that we are serious about this and it is for real, and people have to be willing to go ahead and invest and be in it. I think we are right there. We need a definite signal as part of our national energy policy that renewable fuels are going to be a significant component of it, and that then has a way of feeding down through. If it can be a significant part of increasing that supply, there is certainly a lot of positive ramifications that come from that whole energy policy that will help agriculture. Even though it will not help in the next few months, it will certainly help in the next few short years.
Mr. PICKERING. Mr. Warfield, as we go forward in the Energy and Commerce Committee, I would ask all of you to please work with me, work with my office to make sure that we get the input on the biomass and the different fuel alternatives that we can use to have a win-win for American agriculture and American energy.
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Mr. Maze, I will do everything I can to see that we try to get some assistance. I am not exactly sure if we are going to be able to have a supplemental appropriation or be a part of it, but we will be trying. I know from my district and even from my family—I have a sister who has three chicken houses and everybody's hurting. So we will do whatever we can to try to help.
Mr. MAZE. We are all in the same boat, and we appreciate what you are doing. We really do.
Mr. LUCAS. Thank you, Mr. Pickering.
Once again, thanks to this panel and the previous panels who have testified in the two sets of hearings we have had over the last couple of weeks, the insights you have provided. We do face some challenges out there, and we are determined to work together to make those things happen that will help rural American production agriculture.
Without objection, the record of today's hearing will remain open for 10 days to receive additional material of supplemental written responses from witnesses to any question posed by a member of the panel.
This hearing of the Subcommittee on Conservation, Credit, Rural Development and Research is adjourned.
[Whereupon, at 4:45 p.m., the subcommittee was adjourned, subject tothe call of the Chair.]
[Material submitted for inclusion in the record follows:]
Statement of Keith Collins
Mr. Chairman and members of the subcommittee, thank you for the invitation to participate in today's hearing on energy issues and U.S. agriculture. I will first provide some background information on the general role of energy in U.S. agriculture and then discuss the more specific effects of higher energy prices on U.S. agriculture. In general, the farm economy appears to be responding efficiently and in a normal market-oriented way to increased energy prices. Some farmers are changing what they produce and how they produce by switching to alternative commodities and production inputs. Most producers are facing higher costs of production and reduced incomes due to higher energy prices. Production costs are also up for food processing and distribution, but very little effect is expected on retail food prices and the supply of food.
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BACKGROUND ON THE ROLE OF ENERGY IN U.S. AGRICULTURE
Overall energy use. U.S. farms and ranches directly purchase diesel fuel, gasoline, natural gas, liquid petroleum (LP) gas and electricity. Farmers also use significant amounts of energy indirectly through other production inputs, such as commercial fertilizers and pesticides. U.S. agriculture is a relatively intense user of energy, as indicated by comparing U.S. agriculture's share of the energy used by all sectors of the U.S. economy with U.S. agriculture's share of U.S. Gross Domestic Product (GDP). Both direct and indirect energy consumption for farm production required 1.8 quadrillion British thermal units (BTUs) in 1998, the most recent year of complete data, or about 2 percent of total energy consumed in the United States. In that year, U.S. agricultural production accounted for less than 1 percent of U.S. GDP.
U.S. agriculture has become much more energy efficient during the past two decades. Energy use grew during the 1960's and 1970's, peaking at 2.2 quadrillion BTUs in 1978. High energy prices from the early 1970's and through 1982 led farmers to become more energy efficient. Many producers switched from gasoline-powered to more fuel-efficient diesel-powered engines, adopted conservation tillage practices, shifted to larger machines, and adopted energy-saving methods of crop drying and irrigation. As a result, farmers reduced direct energy use by 41 percent from 1978 to 1998, while productivity grew sharply.
Shift to diesel. The substitution of diesel fuel for gasoline has been perhaps the most significant shift in energy use. As farm size grew, producers purchased more energy-efficient, higher horsepower, diesel-powered tractors and self-propelled equipment. Gasoline use dropped from 42 percent of total direct and indirect energy used on farms in 1965 to only 8 percent in 1998, while diesel's share of total energy used on farms rose from 13 percent to 26 percent.
Adoption of conservation tillage. Increased conservation tillage also has reduced fuel use on U.S. farms, as it requires less energy than conventional tillage that involves extensive field preparation prior to planting. Adoption of conservation tillage on major field crops, such as corn and soybeans, began to increase significantly in the 1980's but has stabilized in recent years.
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Fertilizer use. Commercial fertilizer-particularly nitrogen-is the most energy intensive farm input, accounting for about 45 percent of total energy required in farm production in 1998. Fertilizer consumption grew throughout the 1960's and 1970's, peaking at 23.7 million nutrient tons in 1981. Since the mid–1980's, fertilizer use has remained relatively stable, ranging from about 19 million tons to 22 million tons from 1984 to 1998. Use declined from its peak level in 1981 because of fewer planted acres and stable application rates.
Pesticide use. Manufactured pesticides, including herbicides, insecticides and fungicides, also require large amounts of energy. Pesticides used on major crops increased rapidly in the 1960's and 1970's, rising from 215 million pounds in 1964 to 572 million pounds in 1982. Pesticide use declined between 1982 and 1990, as commodity prices fell and large amounts of acreage were taken out of production under Federal programs. Since 1990, pesticide use has been growing, but at much slower rate than the 1960–80 period.
Energy use by commodity. Direct energy expenditures as a share of total farm cash production expenditures may be used as a measure of energy intensity for various commodities. Energy expenditures for liquid fuels-diesel, gasoline, and LP gas-and electricity vary by commodity. Poultry, which requires large amounts of LP gas and electricity for controlling the temperature of indoor facilities has the highest energy expenditure ratio. Crops that require drying and irrigation also have relatively high energy expense ratios. Dryers and irrigation equipment use various forms of energy, including electricity, natural gas, and LP gas.
Recent energy price variability. The prices that farmers pay for fuels, including gasoline, diesel, LP gas, and natural gas, are typically more volatile than other farm input prices, such as fertilizer, machinery or general supplies. Over the past 8 years, the index of prices paid by farmers for fuels price reached its lowest point in February 1999 at about 65 percent of the 1990–92 average price. Since that time, the price paid for fuels has more than doubled, reaching a high in November 2000 of 155 percent of the 1990–92 average. Fuel prices have dropped about 10 percent since November, with the index of prices paid for March 2001 at 140 percent of the 1990–92 level. Average monthly diesel prices paid by farmers have increased the most since the summer of 1999, followed by gasoline prices, and then LP prices. Increases in LP prices have been particularly noticeable in recent months, as the index of prices paid for LP increased by 75 percent from October 2000 to March 2001. USDA does not collect data on priced paid by farmers for natural gas; however, natural gas market prices have been rising since the summer of 1999. In December 2000, the price industrial consumers paid was $6.49 per thousand cubic feet, up from $3.05 the previous December. Fertilizer prices have increased steadily over the past decade, with the recent increases in natural gas prices contributing sharp increases to fertilizer prices. Pesticide prices have remained steady.
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HIGHER ENERGY PRICES AND THE EFFECTS ON U.S. AGRICULTURE
Natural gas and LPG prices. Spot prices for natural gas in January 2001 averaged nearly four times the year earlier level. Natural gas prices have been declining since early January, but remain about twice the level of a year earlier. Futures market contracts for the remainder of 2001 suggest little change in natural gas prices from recent levels. Such increases raise irrigation, grain drying and heating costs and raise production costs of other farm inputs that use natural gas in their production, principally fertilizer.
Since liquid petroleum gases (LPG), especially propane, are highly correlated with natural gas and oil prices, farm expenses for these fuels have been increasing as well. Propane production is a by-product of natural gas processing and petroleum refining and production is therefore is quite insensitive to changing propane prices. The peak demand season for propane is in the winter when it is used for residential heating, and it is an important heating source in rural areas. Price spikes can occur if colder-than-normal weather occurring early in the winter causes inventories to be drawn down quicker than usual, a factor in the increase in prices paid by farmers last winter, along with rising natural gas prices.
The higher natural gas and LPG prices have been particularly problematic for agricultural operations that rely heavily on heating, drying and irrigation. Irrigation pumps are fueled by natural gas, LPG, diesel fuel and electricity, but the most common fuel sources are natural gas, especially in the Plains States, and electricity, especially in the Western States. Higher natural gas prices are also playing a role in western electricity problems, although there are a number of other factors involved. In recent years there has been a rapidly growing dependence on natural gas for electric power generation, adding to the demand for natural gas associated with the growth in the U.S. economy.
Higher natural gas prices increase the cost of producing anhydrous ammonia, which is the main ingredient of nitrogen fertilizer in the United States. Natural gas accounts for 70–90 percent of the cost of producing ammonia. Last year as natural gas prices rose to record levels, many nitrogen fertilizer producers stopped production, and by January 2001, ammonia production had dropped to an estimated 50 percent of capacity. Recent data show that ammonia production year-to-date is 21 percent below a year earlier. Following the rapid decline in natural gas prices from the peak in January, ammonia production has returned to an estimated 80 percent of capacity.
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The decline in U.S. nitrogen production caused nitrogen fertilizer prices to increase. Many crops depend on nitrogen to achieve high yields, and U.S. farmers used over 12 million tons of nitrogen in various forms in 1999. Nitrogen fertilizer use varies widely by crop, for example, vegetables and wine grapes are among the most nitrogen dependent crops, while soybeans require very little. In late January, the spot ammonia price in the corn belt reached $360 per ton. Prices have declined since, but are still almost double last year's level. The Green Market average price for anhydrous ammonia in the Midwest as of April 23 was $338 per ton. Other fertilizer prices, such as potash and phosphate are largely unchanged from a year ago.
While nitrogen producers are working to increase production as natural gas prices have declined, the shortfall is being supplemented by imports and inventories. Imports are expected to reach record levels this year. From July 2000-January 2001, imports of nitrogen fertilizer were 28 percent above the same period last year, excluding certain imports from Russia and the Ukraine.
In order to gauge potential nitrogen supply problems for farmers this spring, USDA surveyed county extension agents in late April to determine whether farmers were having problems obtaining nitrogen fertilizer. Agents were asked, what percent of normal nitrogen fertilizer supplies are available to producers in your area? Most of the Nation reported supply availability as 95–100 percent of normal, and no State reported less than 91 percent of normal. This was an improvement compared with late March's report when a number of States reported between 70 and 90 percent of normal. This information and reports from producers and the fertilizer industry suggest that nitrogen is generally available for spring-planted crops.
Fuel prices. Last year's spike in fuel prices helped push total farm production expenses to an estimated $200 billion in 2000, 4 percent over 1999, and the first significant rise since 1997. Farm direct fuel expenditures rose to an estimated $8.1 billion in 2000, up $2.3 billion or 40 percent from 1999, accounting for about 4 percent of total farm production expenditures, the highest share since 1986. Farm fuel expenditures are expected to increase in 2001.
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Farm income. Farm expenditures for fuels and oils, electricity, fertilizer and pesticides increased an estimated $2.9 billion in 2000. This increase in costs, combined with low commodity prices, reduced net returns from the market for most farm commodities. However, with supplemental assistance, direct government payments reached a record high $22.1 billion in 2000, at least offsetting the effects of higher production costs on net returns for many commodities. For some other commodities, such as livestock, higher market returns could have offset some energy cost increases. Net cash farm income for U.S. agriculture is estimated at $56.4 billion in 2000, up from $54.6 billion in 1999. Of course, not all commodities were covered by increased direct government payments or market income.
The Department's current forecast of U.S. farm income for 2001, including forecasts of farmers' production expenditures on energy, was released in January and is updated quarterly. The January forecast placed 2001 farm expenditures on fuels and oils, electricity, fertilizer and pesticides at $30.9 billion, up $700 million from 2000 and net cash farm income down by about 10 percent. Based on developments since January, it now appears that farm spending on farm energy inputs will increase by $2 to 3 billion, with higher fertilizer expenses accounting for much of the increase. The Department will release an updated farm income forecast that will take into account these higher energy costs, as well as other changes, in late May.
What farmers are doing. Farmers are limited in what they can do to mitigate the effects of higher energy prices, although some options are available. Where possible, some producers may be able to employ different production strategies, such as reducing field operations by switching from conventional tillage practices to reduced till; adjusting fertilizer application rates; changing the timing of fertilizer application to better coincide with available supplies; or using more animal manure and green fertilizer. Nitrogen application rates are such that each added pound of nitrogen changes the expected crop yield very little for many producers. Consequently, the increased cost of nitrogen due to higher nitrogen prices will exceed the market value of the increased production generated by the last few pounds of nitrogen applied. This market signal is expected to cause many producers to trim application rates in 2001, which will also help bring the demand for nitrogen in line with the reduced production.
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Some producers may also have been able to switch to crops which require less energy inputs. Last year, there did not appear to be much adjustment due to higher fuel prices. There were more corn acres than expected and acreage planted to the major crops was up, from 330 million acres in 1999 to 331 million in 2000. However, more adjustment appears to be taking place this year. USDA's March survey of farmers' planting intentions for the 2001 crops indicated producers plan to reduce nitrogen-intensive corn acreage by 2.9 million acres or 4 percent. Acreages of the 15 principal crops were indicated to be down 3.6 million acres or 1.4 percent.
Higher energy costs in the west are also of particular concern to horticultural producers. U.S. horticulture accounts for 40 percent of total U.S. crop value and over 20 percent of all U.S. agricultural exports. California alone produces half of all U.S. horticultural products and accounts for over half of U.S. horticultural exports. Many horticultural producers in California face little flexibility in adjusting to the higher costs, as over 60 percent of production area is planted in orchards and vineyards. Aside from the expected higher costs of providing water and fertilizers to grow these high-value perennial crops, over half of total California horticultural production requires post-harvest processing.
Producers appear to be cutting back on production of some high-value crops in the face of restricted energy use and water availability in 2001. For example, in the Pacific Northwest onion producers planted less acreage than expected given recent improvements in market prices, citing power companies offering energy buy backs and concerns over water availability. Production of vegetables for canning, freezing, and drying in California and the Pacific Northwest is forecast lower partly due to similar concerns. And, sugarbeet processors in Idaho report they are uncertain as to the final acreage being planted because of energy buyback offers.
Another strategy some farmers may be able to use to limit the effect of higher fuel prices if they own storage tanks is to purchase fuel when prices periodically pull back and store it for later use. This may allow them to avoid seasonal price spikes, for example, that occur in the summer when gasoline demand traditionally goes up and in the early winter when heating oil demand increases diesel prices. Some producers may try to reduce price risk by hedging in the futures markets or entering into longer term contracts for energy-based inputs.
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Over the long term, farmers could replace old and energy inefficient farm machinery with more energy efficient equipment, similar to what occurred following the energy price hikes of the 1970's through early 1980's. In addition, more advanced farming practices could be adopted, such as precision farming that optimizes the use of chemicals and fertilizers. New seed varieties are also reducing chemical requirements. New seed varieties and larger combines can also postpone harvest fostering field drying and reducing drying costs.
What is happening post farm. The effects of higher energy prices on off-the-farm activities are also affecting producers. Higher diesel fuel prices are increasing the costs of transporting agricultural commodities from farm to consumer, and higher natural gas and electricity prices are increasing processing and storage costs. Increases in transportation costs increase the basis-the difference between prices at the farm and at terminal markets-and higher processing and distribution costs can reduce the price buyers bid for farm commodities. As a result, farmers could receive lower prices than otherwise for their products.
The cost of marketing U.S. foods has increased considerably over the years, mainly because of rising costs of labor, transportation, food packaging materials, and other inputs used in marketing, and also because of the increase in convenience and service provided with the food. Processing and marketing costs account for about 80 percent of what consumers spend for domestic farm food, not including imported foods. The remaining 20 percent represents what farmers receive. Components of post-farm costs are labor, packaging, transportation, energy, advertising, depreciation, rent, interest, and profits. Higher energy prices increase energy costs associated with food processing and retailing as well as the cost of transporting food. In 1998, energy accounted for 3.5 percent and transportation 4 percent of post-farm food marketing costs of food. Labor accounted for 39 percent and farm value of food accounted for 20 percent.
Over time, much of the increase food production and distribution costs due to higher energy prices will likely be passed on largely to consumers through higher retail prices. In 2001, the all-food CPI is forecast to increase 2.5 percent, up from 2.3 percent in 2000. Thus, higher energy prices at this point do not appear to be having much effect on retail food prices. Last year's food CPI rose slightly, mainly the result of higher meat prices due to tighter meat markets. This year's modest increase above last year is expected to reflect continuing meat as well as vegetable price increases.
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EFFECTS OF HIGHER ENERGY PRICES ON ENERGY-PRODUCING AGRICULTURE
Higher energy prices and the U.S. dependence on imported oil highlights the great potential of U.S. agriculture to help solve the Nation's energy problems. Crops, crop residues, and forest residues, as well as energy crops planted on idle or marginal crop land, could be converted to various forms of energy, such as ethanol, biodiesel, biopower, and biochemicals. Ethanol from grains now accounts for almost all of U.S. biofuel production. In 2000, more than 1.6 billion gallons of ethanol were produced by 55 ethanol plants located in 18 States. This year, production is projected to increase to 1.7 billion gallons. Total U.S. production capacity is expanding, with another 125 million gallons estimated to be under construction and over 600 million gallons in various stages of planning. Research efforts also continue to seek to improve the conversion of cellulosic materials, such as grass and wood, to ethanol. According to Department of Energy projections, cellulosic ethanol production could increase to about 250 million gallons by 2010.
Because ethanol only accounts for 1.3 percent of the U.S. gasoline supply, its price is determined by the prices of gasoline, other oxygenates, and octane. Consequently, as energy prices, including MTBE increased this past year, the price of ethanol also increased from $1.19 per gallon in February 2000 to $1.63 in February 2001. The net corn cost, which is the price of corn, minus the price of coproducts, divided by the number of gallons of ethanol produced per bushel of corn, for the average wet mill was $0.36 per gallon in 1999. The net corn cost averaged $0.42 during 2000. For 2001, assuming average weather from here on, net corn costs for ethanol plants are expected to remain about the same as last year. Stable corn price combined with higher ethanol prices are expected to lead to higher ethanol production in 2001.
USDA ENERGY ACTIVITIES
The Nation's energy problems are a top priority of the administration. The President created the Cabinet-level Energy Policy Development Group, chaired by the Vice President, to develop recommendations for addressing the Nation's energy supply and demand imbalances. Secretary Veneman is a member of the Group and has brought agriculture-related issues to the attention of the Group. The Group's recommendations are expected to be released later this month.
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USDA is also helping to address energy problems through our own programs. For example, the Department has joined with other Federal agencies in response to the President's directive to ensure that permit reviews and siting issues for new electricity generation in California are dealt with quickly.
USDA also announced the Commodity Credit Corporation Bioenergy Program for fiscal year 2001 and fiscal year 2002 to promote increased production of ethanol and biodiesel. This is a two-year program funded at $150 million per year to share the costs of feedstocks purchased for ethanol and biodiesel production. The cost-share assistance only applies to production increases above the previous year's level. For fiscal year 2001, ethanol producers signed up to produce an additional 246 million gallons and biodiesel producers signed up to produce an added 36 million gallons. This program will expand the biofuel production capacity and help ensure available ethanol capacity to meet oxygen and fuel volume needs as MTBE use is phased down.
USDA has also implemented Section 769 of the Agriculture, Rural Development, Food and Drug Administration and Related Agencies Appropriations Act, 2000, which authorized Conservation Reserve Program (CRP) land for pilot biomass projects. Under this provision, Secretary Veneman last month approved four projects for Iowa, Minnesota, New York and Pennsylvania. These projects will produce electricity using grasses (Iowa), hybrid poplar trees (Minnesota), willows and switchgrass (NewYork) and switchgrass (Pennsylvania). The program requires that all land subject to CRP contracts cannot be harvested for biomass more than once every other year; not more than 25 percent of the total acreage enrolled in any crop reporting district may be harvested in any year; and participants in a project must agree to a 25-percent reduction in their normal CRP annual rental payment for each year in which the acreage is harvested.
Finally, USDA has an ongoing program of research to improve the economics of energy production from agricultural materials. Our FY 2002 budget request proposes $82 million for discretionary spending on biobased products and bioenergy research and related programs, up from $80 million in 2001 and $72 million in 2000. In addition to new efforts to overcome the technical barriers to converting biomass to bioenergy, USDA will be working with other Federal agencies to improve coordination of government programs with universities, private sector companies and environmental organizations. One vehicle for improving coordination will be continued implementation of the Biomass Research and Development Act of 2000 that creates a structure led by USDA and the Department of Energy to coordinate Federal biomass research activities and develop more effective research plans.
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We expect our programs to be important steps in the continuing effort to realize the potential of U.S. agriculture to help meet the U.S. demand for clean, affordable energy.
That completes my statement Mr. Chairman and I would be pleased to respond to questions.
Statement of Mark Rodekohr
Mr. Chairman and Members of the Committee: I appreciate the opportunity to appear before you today to discuss the near-term outlook for energy markets in the United States.
The Energy Information Administration (EIA) is an autonomous statistical and analytical agency within the Department of Energy. We are charged with providing objective, timely, and relevant data, analysis, and projections for the use of the Department of Energy, other Government agencies, the U.S. Congress and the public. We do not take positions on policy issues, but we do produce data and analysis reports that are meant to help policy makers determine energy policy. Because we have an element of statutory independence with respect to the analyses that we publish, our views are strictly those of EIA. We do not speak for the Department, nor for any particular point of view with respect to energy policy, and our views should not be construed as representing those of the Department or the administration. However, EIA's baseline projections on energy trends are widely used by Government agencies, the private sector, and academia for their own energy analyses.
Each month, EIA updates its Short-Term Energy Outlook, which contains quarterly projections through the next 2 calendar years, taking into account the latest developments in energy markets. The projections in this testimony are from the Short-Term Energy Outlook April 2001. These projections are not meant to be exact predictions of the future, but represent a likely energy future, given technological and demographic trends, current laws and regulations, and consumer behavior as derived from known data. EIA recognizes that projections of energy markets are highly uncertain, subject to many random events that cannot be foreseen, such as weather, political disruptions, strikes, etc. Many of these uncertainties are explored through the generation of alternative cases.
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THE OUTLOOK TO 2002
Energy markets in the United States today are characterized by high prices for both petroleum and natural gas, due in large part to tight supplies of both fuels. Reductions in oil production by OPEC and several non-OPEC petroleum-exporting nations have contributed to low oil stocks. Tight natural gas supplies are also contributing to high electricity prices in California, along with high electricity demand relative to capacity, high generation outage rates, and low hydroelectric resources.
Crude Oil. At its March 17 meeting, OPEC members agreed to reduce production quotas an additional 1 million barrels per day effective April 1, 2001. This follows an earlier production quota cut of 1.5 million barrels per day announced in January that was effective February 1, 2001. OPEC has scheduled an extraordinary meeting for June 5–6, 2001 to review their production quotas. The monthly average U.S. imported crude oil price for March 2001 is estimated to be about $23.88 per barrel.
The average price of imported oil paid by U.S. refiners is currently projected in our base case to remain in the mid- to upper- $20's through 2002 (figure 1). (In terms of the more commonly quoted price of West Texas Intermediate (WTI) crude oil, which is generally about $3 per barrel
above the imported average, the expected range in the upper-$20's to lower-$30's.) There is considerable uncertainty about this and average imported prices could again go above $30 per barrel. EIA's analysis indicates that the net effect of the new quotas will be sufficient to support OPEC's desired price range even though the quotas may be partially offset by continued overproduction. EIA expects that oil stocks, particularly in the United States, will continue to be tight compared to normal levels and will provide enough support to prevent prices from falling significantly (figure 2).
Motor Gasoline. With crude oil prices remaining at relatively high levels, combined with lower-than-normal stock levels going into the driving season, gasoline prices are expected to be high again this summer. National average gasoline prices increased substantially during the month of April, rising from $1.44 per gallon on April 2 to $1.62 per gallon on April 23. While prices may moderate in the future as gasoline supplies expand, enough momentum in market prices remains that additional pump price increases may be expected in the coming weeks. Nevertheless, the introduction of additional gasoline supplies in response to today's high prices is likely to bring average prices down somewhat over the course of the summer. For the summer of 2001 as a whole, the average retail price of regular gasoline will probably be in the range of $1.50–$1.65 per gallon. This compares to an observed average of $1.53 per gallon last summer. The peak monthly price this summer could rival or even exceed last year's peak, which was a monthly average of $1.63 per gallon in June. These prices always vary widely by region due to differences in environmental restrictions and different levels of local taxes. For example, prices on the West coast are typically $0.10–$0.30 per gallon above those in the South for these reasons. Any unanticipated supply problems, such as those that occurred in the Midwest last year, could cause even wider variations in prices for short periods of time (figure 3).
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Stocks of motor gasoline are currently at low levels. As of April 20, U.S. total stocks of gasoline were at 194 million barrels compared to 201 million barrels 1 year earlier. We project that stock levels of gasoline will remain tight through the spring and much of the summer. By the end of the summer and throughout the next year, we project gasoline stocks will return to within the low end of the average range (figure 4). Gasoline stocks are relatively low in all regions of the country. In the Midwest, the motor gasoline stock situation is similar to that which prevailed this time last year, a condition that contributed to dramatic surges in prices for the region. As of April 20, gasoline stocks in the Midwest totaled 46.4 million barrels compared to 47.9 million barrels 1 year earlier. The current high prices are a reflection of this. However, it should be noted that supplies of gasoline can come from other U.S. regions and from abroad as market forces respond to these situations fairly rapidly as they did last year.
Refinery problems can have some significant impacts on prices for gasoline and other petroleum products. In the past, damage to refineries from fires or explosions has affected supply enough to contribute noticeably to or exacerbate price runups in California and other areas. Recently, a fire at a Los Angeles refinery owned by Tosco, the largest independent refiner in the United States, closed a coker unit in its 130,000 barrel-a-day Los Angeles Carson refinery. This serves as a reminder that things can and do go wrong in the refining industry. Fortunately, an adjacent plant also owned by Tosco was not damaged by the blaze, and apparently the damaged unit is not likely to strongly affect gasoline production or prices in California.
Diesel Fuel Oil. Diesel fuel oil prices have come down from their recent peak of over $1.60 per gallon seen last fall. Retail prices are currently in the $1.40 per gallon range, but are creeping up with the rise in crude oil prices. It should be noted that off-highway use of diesel fuel oil for farming is exempt from Federal diesel taxes of 24.4 cents per gallon and most State taxes, averaging an additional 20 cents per gallon. Due to the relatively warm weather in the Northeast during the last half of January and parts of February and distillate fuel production that was several hundred thousand barrels per day more than last year's level, stock levels have remained fairly steady over the past several months, though now appear to be dipping slightly. Last February, for the first time since November 1999, U.S. distillate stocks fell within the normal range. With crude oil prices expected to be lower in 2001 than in 2000, diesel fuel oil prices are likely to remain below $1.50 per gallon through 2002 (figure 5).
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Distillate fuel oil stocks are currently at the low end of the average range for the U.S. as a whole. Therefore, we do not expect to see the same price pressure this driving season as we may experience with motor gasoline. As of April 20, U.S. total stocks of distillate fuel oil totaled 102 million barrels compared to 94 million barrels 1 year earlier. We project that stock levels of this fuel will remain within the low end of the average range through the spring and summer (figure 6). In the Midwest, the distillate fuel oil stock situation is somewhat tighter than for the U.S. as a whole. EIA's weekly petroleum survey for the week ending April 20 shows that Midwest distillate stocks totaled 27.8 million barrels compared to 26.5 million barrels 1 year earlier.
Propane. The price of propane is heavily tied to the price of natural gas. Propane prices peaked last January when natural gas prices were at record highs. The spot price of propane has been heading back down recently and this should translate into lower prices for end-users. However, inventories of propane are currently at the very low end of the average range for the U.S and are below the average range for the Midwest, resulting in upward price pressure. Moreover, our forecast calls for relatively high natural gas prices through the end of 2002. Thus, the price of propane, in our view, is expected to remain relatively high over the next 20 months. Weather will also affect the price. The amount of rain and the length of the crop-drying season, particularly in the Midwest will also influence propane prices.
Ethanol. EIA does not forecast fuel ethanol prices. However, we can make some general observations about the ethanol market outlook. Ethanol will continue to benefit from the sustained high gasoline prices. The last several months have seen record high ethanol prices and production rates. Although ethanol prices have slowly been falling from their peak in January, low inventories (2.5 million barrels at the end of February 2001, compared with 4.1 million barrels at the end of February last year) should prevent a collapse in the market.
Natural Gas. Natural gas prices began increasing last summer, primarily due to low levels of natural gas storage, with spot prices increasing more than $4 per thousand cubic feet since late June. During the heating season from October 2000 through March 2001, the wellhead price of natural gas is currently estimated to have more than doubled from the price during the previous season, averaging about $5.75 per thousand cubic feet. With the end of the heating season, average wellhead prices are projected to decline, averaging between $4.20 and $4.90 per thousand cubic feet for the spring and summer. Due to projected high levels of demand growth for natural gas, particularly for electricity generation and the industrial sector, it is highly unlikely that wellhead prices will decline to the level of $2 per thousand cubic feet of 1 year ago. For 2001 as a whole, the average wellhead price is projected to be between $4.90 and $5.45 per thousand cubic feet, compared to an annual average of about $3.62 per thousand cubic feet in 2000. This translates into an expected average cost of gas delivered to industrial (including agricultural) users of between $5.50 and $6 per thousand cubic feet, compared to an average of $4.40 in 2000 and $3 in 1999 (figure 7). However, hot summer weather in regions with high levels of natural gas-fired electricity generation could reduce storage injections for next year's heating season and lead to higher price increases next fall. In 2002, we expect the storage situation to improve somewhat with increases in production and imports, resulting in perhaps a 5- to 10-percent decline in average prices. Domestic natural gas production for 2001 and 2002 is expected to rise as production responds to the high rates of drilling experienced over the past year. In 2000, drilling for natural gas in the United States increased by 45 percent over the 1999 level of 10,500 wells, in response to a 66-percent increase in the average natural gas wellhead price from 1999 to 2000. Production is estimated to have risen by 3.5 percent in 2000 and is projected to increase by rates of 3.0 percent in 2001 and 2.5 percent in 2002.
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Electricity. Electricity demand is expected to grow at a rate of about 2.3 percent in 2001 and 2.1 percent in 2002, compared to an estimated growth rate of 3.6 percent between 1999 and 2000. Slower growth is expected in part due to slower projected economic growth. Electricity demand for the winter just past is estimated to have been 4.8 percent higher than the previous winter, due to higher residential and commercial demand and the cold temperatures in November and December. Natural gas deliverability problems in California have helped to increase natural gas prices and have frequently caused interruptible customers, including electricity generators, to be cut off in that State. The current situation in California is characterized by low natural gas storage, natural gas pipeline bottlenecks, high electricity demand, and low availability of hydropower resources, combined with no significant capacity additions in the last 10 years. In addition, the San Onofre 3 nuclear unit is currently offline due to a fire in early February and may not return to service for several months. Nationally, the average residential price of electricity in the United States is projected to increase only slightly from 8.2 cents per kilowatt-hour in 2000 to about 8.4 cents per kilowatt-hour in 2002, largely due to increased fuel costs.
Conclusion. In the near term, we expect crude oil and petroleum prices to remain high and possibly move to slightly higher average levels through 2001 and 2002. National average retail gasoline prices have moved up sharply since last month (pump prices rose 18 cents per gallon since April 2, reaching $1.62 per gallon on April 23). Overall, stock levels of both petroleum and natural gas remain tight. Although distillate fuel inventories are in reasonably good shape at this point, gasoline stocks remain tight (approximately 9 percent below normal as of April 20). This relatively tight stock situation can be expected to increase the volatility in prices relative to the situation that existed as recently as 2 years ago. Over this period, continuing growth in the U.S. economy is expected to stimulate more energy demand, with fossil fuels remaining the dominant source of energy. As a result, our dependence on foreign sources of petroleum is expected to increase and domestic natural gas production and natural gas imports are expected to grow significantly.
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Thank you, Mr. Chairman and members of the committee. I will be happy to answer any questions you may have.
Statement of Leland Swenson
Chairman Lucas, Ranking Member Hilliard, members of the Subcommittee, I am Leland Swenson, president of the National Farmers Union. I am here on behalf of the NFU's 300,000 family farmer and rancher members to encourage you to take strong action to alleviate the impact of higher energy input costs that are affecting the lives and incomes of family farmers and ranchers, and distressing our Nation's rural economy. I commend you Mr. Chairman, and Mr. Hilliard, for convening this hearing on the energy supply and demand issues affecting agriculture and our industry's relationship to the development of a comprehensive energy policy for the United States.
BACKGROUND
The cost and availability of reasonably priced energy resources as direct and indirect agricultural inputs are critical factors that affect the economics and efficiency of American agriculture. In addition, agriculture represents a tremendous opportunity for the development of alternative, renewable energy supplies that are consistent with our environmental goals, desire for greater energy self-sufficiency and as a factor in rural economic development.
America's family farmers and ranchers are already suffering from low commodity price levels not seen in decades. Reductions in market sales values make it impossible to offset the increased production costs associated with energy and other input costs now plaguing rural America. Farms and ranches are dependent on stable and reasonable gasoline, diesel, LP gas and electricity prices and supplies to operate farm machinery, irrigation equipment and processing and storage facilities. In addition, the cost and availability of many other inputs necessary to farming and ranching operations are also directly influenced by energy prices from fertilizers and pesticides to our marketing and transportation system. According to USDA estimates, the extreme price volatility over the last few months will cost American producers up to $2 billion in increased input costs at the farm gate this year. It is likely these figures will be adjusted upward as the full impact of natural gas, gasoline and diesel prices reaching historic highs in recent weeks.
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For these reasons we propose the following recommendations focused on expansion of ethanol and other renewable, bio-based energy products for use and in our Nation's energy supply to help alleviate the impact of rising fuel costs and ensure supply reliability.
RENEWABLE FUELS SUPPLY
The United States is blessed with significant plant/crop renewable resources such as corn and soybeans that can play a major role in our Nation's energy policy. We can reduce our reliance on imported oil and enhance our environmental stewardship by using these and other crops instead of petroleum as chemical feedstock's to produce a range of fuels that are useful not only on the farm, but for all of our citizens.
RENEWABLE FUELS STANDARD
National Farmers Union supports legislation, specifically Senate bill 670, offered by Senators Lugar and Daschle that establishes a Renewable Fuels Standard for gasoline used in the United States. We encourage the Members of this Subcommittee to consider sponsoring companion legislation in the House to compliment the bipartisan effort in the Senate that has resulted in this initiative.
In addition we support continuation of the current reformulated gasoline oxygen requirement (RFG) and oppose any action, including waivers that would weaken the Clean Air Act.
The Renewable Fuels Standard would require an increasing percentage of renewable fuel content in all motor fuel sold in the United States over a 10-year period, including a separate requirement for non-gas fuels, such as diesel.
By providing a measured and thoughtful approach a national shift from MTBE (methyl tertiary butyl ether), a fuel additive that has contaminated drinking water supplies in many States, to ethanol can be achieved. Regulations could be initiated to reduce and phase-out of the use of MTBE in all gasoline sold in the U.S., not just in Clean Air Act non-attainment areas or those regions currently requiring the use of reformulated gasoline. By gradually increasing the use of ethanol in the near-term, we can have a smooth transition from MTBE to an ethanol standard, and spread its use over the entire U.S. gasoline market as proposed by Senators Lugar and Daschle.
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A Renewable Fuels Standard can triple the demand for ethanol over the next 10 years while maintaining the provisions of the Clean Air Act and allowing for the elimination of MTBE. Ethanol is an environmentally friendly alternative to MTBE, that both reduces air pollution when used as vehicle fuel and presents fewer environmental hazards in the transport and storage of the product. We should actively seek ways to expand its use in the near term and over the long run.
We believe this approach will help avoid supply and pricing instability, preventing possible disruption of the domestic gasoline market. This can be achieved by providing a solid foundation for growth of the ethanol industry that balances its utility as a fuel oxygenate with an increasingly important value as a domestic fuel source that reduces our dependence on oil imports.
In addition to its direct consumer and environmental benefits, enhanced ethanol and biodiesel demand policies will help improve farm income by increasing demand for feedstocks such as corn and oilseeds, thereby reducing the level of Government outlays for agricultural support programs. Furthermore, by stimulating utilization, new investment in processing facilities for ethanol and biodiesel will be necessary, providing additional opportunities for producers to participate in adding value to their commodity production through farmer-owned cooperatives.
The Government response to the MTBE problem, whether State or Federal, must assure the continued growth of the ethanol industry. We believe the future of the ethanol industry depends upon the construction and operation of relatively small ethanol facilities throughout the Nation, such as the production facility that is proposed to be built in your district Mr. Chairman. We believe that whatever legislation is developed the needs of both small and large ethanol producers must be accommodated in an equitable manner.
RENEWABLE ENERGY RESERVE PROGRAM
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As you are all aware, while we currently produce a surplus of commodities that can be effectively utilized for energy production, agriculture remains subject to the possibility of reduced crops due to adverse growing conditions such as weather. In fact one recurring criticism of the ethanol fuel industry has been that reliance on ethanol as a motor fuel component, places the country one drought away from a fuel shortage.
In order to ensure our reliability as a supplier of food, feed and fiber products as well as bio-energy feedstock, National Farmers Union supports the establishment of a renewable energy reserve program that would be isolated from the commercial food and feed markets, and would help ensure our long-term commitment to the renewable fuels industry.
The program would envisions that the Government, through the Commodity Credit Corporation (CCC), would purchase a limited amount of commodities such as corn, that would be dedicated to renewable energy production. We believe the limit should be approximately the needs for 1 year's renewable energy production. CCC would provide crop producers the opportunity to store these commodities on their farms thus earning storage income. Should commodity prices rise appreciably, i.e. in excess of 100 percent of the full economic cost of production, that would normally result in a contraction of bio-energy production, the Government would release all or part of its reserve to energy producers at the procurement cost. This would reduce the average feedstock costs for renewable fuel and provide both production and price stability. The maximum level of the reserve should be adjusted periodically to reflect projected increases in demand.
About 600 million bushels of corn or other biomass equivalent would need to be purchased to fulfill our current needs. This would result in an increase in the producer price for corn of 24 cents to 36 cents per bushel for all U.S. corn production. During this period of commodity stock accumulation and depressed producer prices, the reserve would serve to substantially enhance current farmer commodity prices and incomes while reducing Government farm program outlays.
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The creation of a renewable energy reserve would require the restoration of authority the Secretary of Agriculture was traditionally been granted prior to the limitations imposed by the 1996 FAIR Act.
Procurement outlays, at average USDA prices projected for corn of $1.86 per bushel would total approximate $1.1 billion to purchase the 600 million bushels currently utilized for ethanol production. Storage, estimated at 30 cents per bushel per year would require an additional $180 million. However, the program would result in significant farm program savings for corn and other market competitive crops. The Food and Agriculture Policy Research Institute, FAPRI, estimates the 2001 Loan Deficiency Payments for corn at $300 million. Implementation of the reserve would likely erase that projected outlay in total.
Although this reserve program provides improved commodity prices for program crop producers by removing surplus commodities from the commercial market, it has a negligible impact on the livestock industry while these reserves are held in storage. When commodity prices rise to the point that feed grain reserves are released for renewable energy production, the livestock sector will also become a beneficiary as a result of the byproducts that would enter the market dampening the effect for that sector of substantially increased grain and oilseed prices that triggered the release of the reserve.
RURAL ELECTRICITY SUPPLY
We are also very concerned about possible wild fluctuations in the price of electricity to our rural members. It appears the electricity industry is following in the footsteps of other energy sources in terms of a ''boom and bust'' economic cycle that increases overall economic instability. Market forces will tend to drive electric prices, and in many cases profits for production or distribution companies, up when power is in short supply, as we have experienced in California. Agricultural producers, especially those engaged in dairy farming or irrigated crop production, have few options to avoid devastating production and income losses resulting from increased electric rates and rolling blackouts.
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If electricity prices follow the short-term fluctuations that other energy prices have taken, things will only get worse. Our members depend substantially on electric cooperatives for a reliable and plentiful source of electricity, that have a direct effect on family farmers and ranchers efficiency, productivity and profitability. While our electric cooperatives are doing their best to transition towards a competitive environment in the wholesale and retail electric markets, they are also in need of extra generating capacity and profit margins to avoid the expanded potential of blackouts and brownouts in other parts of the country. Electric cooperatives have always served our rural members well, and we are steadfast in our support of efforts to help ensure their future during these difficult times.
As an aside, let us clearly understand that consumer-owned electric cooperatives are not part of the problem in California or the west. Rural Electric Cooperatives are consumer-owned, stable suppliers of electricity to rural America. They continue to create jobs and invest in business and infrastructure opportunities in rural America.
National Farmers Union members are historically proud founders, owners, and operators of our Nation's rural electric cooperatives, and are vitally linked to their continued success. We are also sensitive to balancing environmental and energy concerns, and urge investment in new generation facilities, including renewable, alternative sources of power generation that include wind, solar, biomass, methane and thermal.
A national Renewable Fuels Standard will allow encourage the expansion of renewable energy resources from agriculture that will reduce our dependence on foreign oil, be an integral part of a national energy plan, provide enhanced environmental benefits and, importantly for producers, boost farm income in both the short and long-term.
In order to stimulate the viability and growth of the renewable energy production sector, it is important that a limited commodity reserve be established to stabilize the availability of affordable energy feedstock that is isolated from the traditional, commercial agricultural market.
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Thank you again for the opportunity to represent family farmers and ranchers before the subcommittee. I look forward to responding to any questions you or your colleagues may have at the appropriate time.
Statement of David Graves
Mr. Chairman and members of the subcommittee, I am David Graves, president and CEO of the National Council of Farmer Cooperatives (NCFC). NCFC is pleased to offer comments today on energy supply and demand issues as they affect American agriculture in our farmer-owned system's dual capacity as energy users and as important energy suppliers to agriculture and rural America.
NCFC is a nationwide association of cooperative businesses owned and controlled by farmers. Our membership includes about 100 major farmer marketing, supply, and credit cooperatives, and State councils of cooperatives. NCFC members handle almost every type of agricultural commodity produced in the U.S., market these commodities domestically and abroad, and furnish production supplies and credit to their farmer members. NCFC members, in turn, represent 3,500 local cooperatives with a combined membership that includes most of the nearly two million U.S. farmers. Farmers have invested through their cooperatives in practically every form of farm supply and value-added/marketing activities, including nitrogen fertilizer manufacturing and petroleum refining and distribution.
Agriculture as an industry is uniquely based on biological processes. As a result, access to energy inputs in the right form, location and time at reasonable prices is critical to agriculture, both on and off the farm, including farm input supply and food and natural fiber processing and distribution. A disruption of energy inputs to agriculture of even short duration can lead to substancial reduction or even a complete loss of an entire growing season's output and inflict great harm on consumers and the national economy.
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Agriculture and rural America are typically at the end of the energy distribution chain, with fewer supply options and greater vulnerability to disruptions. Contemporary events demonstrate that the American economy, and agriculture and rural America in particular, are experiencing an increased vulnerability to energy price spikes and regional shortages.
FARMER COOPERATIVES—ENERGY USERS & SUPPLIERS
Energy supply shortages and price spikes are of major concern to farmer cooperatives, both as energy users and as energy suppliers.
Farmer-owned cooperative businesses as energy users are affected directly by energy shortages and price spikes. Cooperative nitrogen fertilizer manufacturers are critically reliant upon a reliable and affordable supply of natural gas as a feedstock and process fuel. The seriousness of what the current natural gas supply imbalance and price volatility are doing to nitrogen fertilizer supplies and prices for farmers, and to the economic viability of farmer-owned nitrogen facilities cannot be over-emphasized. Marketing and value-added cooperatives depend on reliable and affordable supplies of electricity, petroleum products and natural gas for processing, storage and transportation of perishable commodities. Supply cooperatives have similar energy needs for processing and transportation.
Farmer-owned cooperatives are also suppliers of refined petroleum products to farmer-members and rural America. American agriculture is vitally dependent upon a reliable and affordable supply of diesel fuel, propane, gasoline, heating oil, electricity and natural gas in carrying out its food, natural fiber, renewable energy and other important roles.
Agriculture's energy biorhythm contains peaks for energy demand that are steep, of short duration, and generally quite different from demand patterns in the rest of the economy. For example, when agriculture's diesel fuel needs peak in the spring, gasoline demands are growing elsewhere in the economy. Most refiners are gearing up to meet the gasoline demand. With agricultural production accounting for only 3 percent of U.S. demand for petroleum fuels, it's not surprising that most of the petroleum refining and distribution sector is more in tune with the demand patterns of the overall economy.
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To help assure a reliable and affordable supply of diesel fuel and other petroleum products, farmers in the early 1900's began to pool scarce resources through their cooperatives and invest in a refining and distribution system to help assure a reliable and affordable supply of diesel fuel and other petroleum products. Farmer-owned cooperative refiners continue to play a pivotal role in assuring availability of diesel fuel and other petroleum products to much of agriculture and rural America. Today there are four refiner cooperatives owned by about one million farm families:
CHS Cooperatives' refinery in Laurel, Montana;
National Cooperative Refinery Association in McPherson, Kansas, which is jointly owned by CHS Cooperatives, GROWMARK, Inc. and MFA Oil Company;
Farmland Industries' refinery in Coffeyville, Kansas; and
Countrymark Cooperative's refinery in Mt. Vernon, Indiana.
Refined products are distributed to farmer-members and other rural residents across rural America through several thousand local cooperatives and other cooperative outlets.
Though less than 2 percent of the refining industry, farmer cooperatives supply about 40 percent of all on-farm fuel needs in the U.S. Farm supply cooperatives also are the source of the highway diesel and home heating oil in much of rural America—in many rural communities the only remaining supplier.
Farm supply cooperatives are unique in the U.S. petroleum industry in that the farm customer is also the owner. This also carries a unique accountability to the energy needs of the member-owner. These same refineries, if no longer under farmer-ownership, arguably would not be as accountable to the needs of agricultural and rural markets.
Farmer-owned cooperatives also play a significant role in biofuels, helping their farmer-members diversify their income, capture value-added, and provide domestic, renewable energy through production and marketing of ethanol, biodiesel and other agriculture-based fuels. NCFC is supportive of policies and programs intended to promote ethanol and biodiesel, including those designed to help farmers help themselves in producing and marketing these agriculture-based fuels through cooperative and other farmer-owned businesses.
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Farmer-members of cooperatives are impacted by energy supply and price problems, both directly and indirectly through impacts on their cooperatives. Disruptions in energy supply, can result in loss of an entire season's production or adversely impact the supply and price of other critical inputs like nitrogen fertilizer.
In the event of energy price spikes, farmers as price-takers for their commodity are unable to pass energy or fertilizer price increases on to the consumer. This can have equally serious consequences for agricultural policy. For example, the U.S. Department of Agriculture recently estimated that price increases over the past few months for energy inputs and fertilizer if projected into the coming year could result in a 1–2% increase in total costs of production. While at first glance this might not seem significant, it becomes a serious matter indeed when one realizes that this cost increase also would translate into a 1/3 decrease in net farm cash income. This can have serious implications for the debate about the need for and extent of income assistance for economically distressed farmers.
To the extent that cooperative businesses are adversely impacted by energy supply disruptions and price spikes, farmer-members are also harmed through reduced patronage earnings and erosion of their equity investment in their cooperative.
NCFC ENERGY POLICY RECOMMENDATIONS
NCFC supports a strong, balanced energy policy that ensures adequate supplies of energy at reasonable prices for American agriculture and the economy. Key provisions of such a policy would include:
Consideration of the special needs and vulnerabilities of agriculture and rural America.
Responsible and timely measures should be undertaken to open up additional areas to environmentally sound domestic natural gas and petroleum exploration and production.
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An adequate domestic/North American supply of natural gas is particularly critical if farmer-owned and other domestic nitrogen fertilizer manufacturing capacity is to remain viable and continue to serve the needs of American farmers.
Toward this end, NCFC endorses the testimony and recommendations being presented at today's hearing by CF Industries, Inc., an interregional farmer cooperative and NCFC member.
A comprehensive approach should be undertaken in debating domestic production options, facilitating dialog and decisions on the full range of energy supply and conservation options and resources, rather than making decisions individually or in isolation.
Consideration of energy and environmental policy objectives should be balanced. Too often environmental policy decisions have been made without due consideration for consequences to domestic energy supply and infrastructure.
Measures should be undertaken to ensure a viable energy supply infrastructure to serve the energy needs of agriculture and rural America.
Incentives for production and use of renewable energy (ethanol and biodiesel) from agricultural products and animal wastes should be strengthened.
Financial assistance should be provided to farmers when their income is unduly impacted by energy-related price shocks.
Appropriate incentives for energy conservation in agriculture should be provided.
NEED FOR ENVIRONMENTAL COMPLIANCE ASSISTANCE FOR FARMER-OWNED COOPERATIVE REFINERS
NCFC will focus the remainder this testimony on a different but important dimension of energy policy that has serious implications for energy supplies to agriculture—the impact of costly environmental regulations on the economic viability of the farmer-owned cooperative petroleum refining system, which is further exacerbated by limited access to capital.
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While most of the current energy policy debate is focused upon energy supply and price issues, there is increasing recognition that a major component of energy policy that needs to be addressed involves maintaining an energy infrastructure to produce and distribute energy when and where needed.
The farmer-owned cooperative refinery component of that infrastructure is at risk, in significant part due to the huge costs and lack of capital for major investments that will be required to comply with new environmental regulatory requirements. Farmer-owned cooperative refiners are facing extremely burdensome regulatory compliance costs over the next few years associated with a number of recently finalized U.S. Environmental Protection Agency (EPA) air quality rules. These rules have a costly cumulative effect. Cooperative refiners' need for capital coincides with a time of continuing economic hardship for farmers, ranchers, their cooperative businesses, and the agricultural sector and rural America as a whole.
The combined capital costs for cooperative refiners of meeting sulfur requirements for gasoline and diesel fuel over a compressed time period total an estimated $400–500 million, far exceeding the current book value of these farmer-owned assets. The economic threat to this farmer-owned system is a direct consequence, not of market forces, but of heavy regulatory costs imposed by EPA mandates. The added costs bear no return on investment and impact disproportionately on cooperative refiners due to their relatively small size and inability to offset such costs through earnings on crude oil.
For farmer-owners, there is no return on this type of investment. Financial resources expended to comply with the new regulations will necessarily divert scarce capital from desperately needed projects to improve farm income. Farmers will bear these regulatory costs, through reduced patronage and erosion of equity capital. It will be extremely difficult at best for cooperatives—and ultimately their farmer-owners—to bear these costs, and more importantly to make the difficult decision to allocate scarce capital to the refinery when the need to invest in value-added initiatives that could generate income is so pressing.
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Farmer-owned cooperative refiners are unique in the petroleum industry in that they do not have the same access to equity markets as other refiners. In particular, farmer-owned cooperatives generally cannot issue stock to raise capital. With the farm economy hurting, they are particularly limited in their ability to turn inward to their farmer-owners for the additional capital needed.
Simply stated, farmer-owned cooperative refiners will need financial assistance to comply with these new Government mandates, if they are to continue to remain in farmer ownership and fulfill their critical role in supplying farmers and their rural neighbors with petroleum fuels into the future.
The capital and financial assistance needs faced by farmer-owned cooperative refiners are symptomatic of a much broader need among all farmer cooperatives. As farmers work for ways to get more of their income from the marketplace, we believe farmer-owned cooperatives can play a key role. However, to do so, they must have adequate access to capital.
Currently, neither EPA nor the Department of Energy (DOE) has programs to offer such assistance. USDA does have financial assistance tools, such as the ability to offer financial assistance to rural businesses through the Business and Industry (B&I;) loan program.
Unfortunately, the identified regulatory compliance capital requirements alone faced by farmer-owned cooperative refiners overwhelm the current design capacity of the B&I; loan program. Loans are capped at $25 million, while capital requirements to meet the new sulfur mandates at three of the four cooperative refiners are expected to exceed $100 million each.
The USDA Rural Utilities Service (RUS) loan programs were recognized in testimony given by the National Rural Electric Cooperative Association (NRECA) at the subcommittee's April 25 energy hearing for their invaluable role in providing much needed capital to rural electric utilities.
NCFC believes the current regulatory burdens facing cooperative refiners, and the need for farmer-owned cooperatives to have better access to capital to modernize and expand, pursue potential new market opportunities, and help their farmer-members generate more of their income from the marketplace, argue strongly for modernizing USDA's B&I; loan program to help address such needs. These challenges also argue for exploring other ways of helping farmers join together successfully in cooperative self-help efforts to improve their profitability and economic well-being long term.
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In conclusion, we appreciate the opportunity to share our views and recommendations, and I would be pleased to answer any questions you might have.
Statement of Glen Buckley
CF Industries, Inc. (CF) is pleased to have the opportunity to present a statement on energy supply and demand issues affecting the agricultural sector of the United States. We welcome the opportunity to discuss how the current energy situation has affected the fertilizer industry over the last eight months and what we forecast the impact will be in the months to come. We strongly support the need for a comprehensive energy policy that focuses on adequate supply sources to aid strategic industries such as ours.
CF Industries is a farmer owned cooperative and is one of the largest nitrogen fertilizer producers and marketers in North America. We operate world scale production facilities in Donaldsonville, Louisiana and Medicine Hat, Alberta, Canada. CF and its Member cooperatives account for approximately one-fourth of the nitrogen fertilizers used in the United States and approximately one-third of the nitrogen fertilizer used in the primary growing areas of the Midwest. The company also produces and mines phosphate fertilizers in Plant City and Hardee County, FL. Through its nine member owners, CF's nitrogen and phosphate fertilizer products reach farmers and ranchers in 48 States and two Canadian provinces.
Today, I am testifying on behalf CF Industries and The Fertilizer Institute (TFI). TFI is a voluntary, non-profit trade association of the fertilizer industry. TFI's 200 member companies include producers, manufacturers, distributors and retail dealers of fertilizer and fertilizer materials. In addition, we endorse the testimony being given today by the National Council of Farmer Cooperatives (NCFC). CF is also a member of the NCFC.
My purpose today is to discuss the devastating impact that the sharp rise in natural gas prices is having on both the fertilizer industry and on the American farmer. To fully understand the impact of increased natural gas prices on the fertilizer industry, a basic understanding of our products and production process is necessary.
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Natural gas is the primary feedstock in the production of virtually all commercial nitrogen fertilizers in the United States. The production process involves a catalytic reaction between elemental nitrogen derived from the air with hydrogen derived from natural gas. The primary product from this reaction is anhydrous ammonia (NH3). Anhydrous ammonia is used directly as a commercial fertilizer or is used as the basic building block for producing virtually all other forms of nitrogen fertilizer such as urea, ammonium nitrate, nitrogen solutions, diammonium phosphate and mono-ammonium phosphate. Natural gas is also used as a process gas to generate heat when upgrading anhydrous ammonia to urea.
Natural Gas+Air Anhydrous Ammonia
(CH4) (N2) (NH3)
Since natural gas is the only raw material used in producing nitrogen fertilizers, it is by far, the primary cost component. In fact, in the case of ammonia, natural gas accounts for 75 to 90 percent of the total cash cost of production.
Given this heavy reliance on natural gas, it is easy to understand the devastating impact that the recent rise in natural gas prices is having on the fertilizer industry. This can be clearly demonstrated by comparing natural gas costs, production costs and U.S. nitrogen fertilizer operating rates over the last year and half. In January of last year, natural gas prices at the Henry Hub were averaging $2.40 per million Btu (MMBtu) and the cost to produce a ton of ammonia for a typical Louisiana producer was approximately $100 per ton. At that time, the U.S. nitrogen industry was operating at approximately 90 percent of capacity. During the first half of 2000, natural gas prices began to steadily increase and by the end of June had increased to over $4.00 per MMBtu. Production costs rose to almost $170 per ton and the industry operating rate fell to 71 percent. Most of the natural gas consultants at that time thought prices had peaked. Unfortunately, they were wrong. As everyone knows, natural gas prices began to soar during the second half of the year and by the end of December had climbed on a daily spot basis to over $10 per MMBtu. Fertilizer production costs also soared to well over $300 per ton. Not surprisingly, the industry was forced to shut down capacity with the industry operating rate falling to 57 percent in December and to a record low 47 percent in January. To put this into perspective, the average annual U.S. operating rate during all of the 1990's was 92 percent.
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Natural gas prices have recently moderated somewhat from the record highs in December and early January. The lower prices have allowed the U.S. industry operating rate to move back into the 75–78 percent range. However, under today's natural gas prices, the industry is, at best, operating in a cash breakeven position with many plants running for the sole reason of meeting spring season supply commitments. Based on recent press releases and industry publications, the U.S. operating rate is likely to drop back into the 50–60 percent range by the end of June.
The sharp rise in natural gas prices and the resulting curtailment of U.S. fertilizer production has also had a dramatic impact on fertilizer prices throughout the marketing chain and, in particular, at the farm level. Nitrogen prices at the farm level jumped this year to record high levels. Based on a recent survey, the U.S. average farm level ammonia price, for example, has jumped to between $385-$400 per ton. This compares to an average of the last 2 years of $219. Urea prices have also jumped from a 2-year average of $188 per ton to $280 and UAN from $129 to $200 per ton. This translates into an increase in cost to a typical Midwest corn farmer of anywhere from $15 to $20 per acre.
Absent a substantial long-term reduction in natural gas prices, the U.S. domestic nitrogen fertilizer industry and, therefore, farm level supply, is at serious risk. Of the 19 million tons of capacity in the U.S., approximately one million tons has already been permanently closed. According to an analysis recently completed by Blue, Johnson and Associates, another five million tons could possibly close within the next 2 to 3 years. In addition, it is anticipated that the remainder of the industry will likely operate on a swing basis. That is, plants will only run when natural gas prices are low enough and/or fertilizer prices are high enough that producers can, at a minimum, cover their cash costs of production.
So what does all of this mean to the American farmer? To fully answer that question it is
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necessary to provide some additional background information. Since the 1940's when commercial fertilizers were introduced into the market on a large scale basis, farm demand for nitrogen fertilizers was always supported by a large, efficient, domestic fertilizer industry. During the 1990's, for example, approximately 70–75 percent of the nitrogen fertilizers consumed by American farmers was supplied by domestic production with another 15 percent supplied from nearby Canadian plants. The remaining 10–15 percent of the volume was sourced from offshore suppliers.
At the heart of the domestic fertilizer industry are production facilities designed to manufacture fertilizer products on a daily basis for the entire year. Many of these facilities are located near the source of raw materials but, far from the major consuming regions. Furthermore, it is important to note that most U.S. nitrogen fertilizer is consumed within a very short time frame in the fall and spring application seasons. As a result, an extensive distribution and storage infrastructure has been developed over the years to bridge this geographic and seasonal gap and ensure that American farmers would have adequate supplies at the right time. This system was specifically designed to move and handle large volumes of product from domestic production sites to the major consuming areas. Thus, the distribution and storage infrastructure is purposely integrated into the domestic production system to insure efficiency, economies of scale, and reliability of supply.
Under a scenario of continued high natural gas prices and further curtailments and closures within the fertilizer industry, U.S. farmers will likely be faced with increasing supply uncertainty and continued high prices. This year gave us a sense of the uncertainty to come. In December and January when the U.S. industry-operating rate fell to record lows of fifty percent, it was evident that there would not be enough supply to meet farm level demand. This was despite the fact that the U.S. production shut downs and increasing prices were attracting record volumes of imports. Fortunately, warmer than expected temperatures resulted in lower than projected natural gas prices. This allowed the U.S. industry to bring production back on stream and fill the potential shortfall in supply. It is clear that if natural gas prices had remained in $8.00+ range in January and February, U.S. production would have remained curtailed and imports would not have been able to fill the void.
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Longer-term, a scenario of continued high natural gas prices will undoubtedly lead to more U.S. plant closures, abandonment of marginally profitable infrastructure to rural communities, and increased imports. While higher volumes of imports could help fill part of the potential loss in U.S. supply, domestic production and distribution will have to remain viable to fully meet farmer demand. As I mentioned previously, the current distribution and storage system within the U.S. was constructed around a U.S. supply base. Consequently, there is limited infrastructure to offload, store and transport larger and larger volumes of imports. The lack of infrastructure is particularly apparent for anhydrous ammonia, which requires specialized tanks, pipelines, railcars and barges. Massive new investment and considerable lead-time will be needed if the existing infrastructure assets are left permanently stranded.
Increased reliance on imports would also result in a considerable increase in the potential for supply and price volatility. The vast majority of the U.S. industry was constructed to meet U.S. demand. Offshore supply, on the other hand, was constructed to opportunistically compete in a world market. In other words, cargoes are sold and shipped to those markets that will yield the highest netback prices. Imports are also subject to changes in world economic conditions, fluctuating exchange rates, and political and/or policy changes in other countries. A classic example of how policy changes in other countries can impact world markets occurred in April of 1997 when China banned all urea imports. Up until that point, China was by far the world's largest importer of urea. The world market was immediately thrown into turmoil. What China will do in the future is anybody's guess. However, a lifting of the ban could easily and suddenly tighten world markets and divert potential tonnage away from the U.S. market.
Increased U.S. reliance on imports will not result in lower prices for U.S. farmers. Nitrogen fertilizers are a fungible commodity product where market prices are set by supply/demand conditions and, therefore, by the cash costs of the marginal producer. Under a continued environment of high natural gas costs, the marginal supplier to the market will be the U.S. producer. Consequently, higher import volumes will not translate to lower prices to U.S. farmers.
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From the standpoint of the American farmer, it is very important to recognize that a large percentage of the domestic nitrogen industry is owned and operated by farmer owned cooperatives. This includes almost 30 percent of the total U.S. ammonia capacity and approximately one third of the total U.S. urea and nitrogen solutions capacity. Further, it is estimated that approximately half of the total nitrogen fertilizers consumed in this country is moved through the farmer-owned cooperative supply and distribution system. Consequently, closure of the U.S. industry would directly impact farmers through their investment in the cooperative system as well as their ability to purchase product—particularly in remote, rural communities.
In our opinion, high energy prices present the most serious threat to the fertilizer sector and to farmers in general, since the energy shocks of the 1970's. The fertilizer industry believes that is essential the U.S. develop a comprehensive and balanced energy policy—one that encourages the development of additional supplies and, at the same time, promotes the efficient use of a variety of energy sources and technologies.
More specifically, the fertilizer industry supports a thorough review of those policies that severely restrict oil and gas production on multiple-use Federal lands and large portions of the continental shelf. We believe that access to these reserves can be substantially beneficial towards meeting the Nation's energy needs without compromising other legitimate interests.
In addition, the fertilizer industry also believes that it is imperative that a complete review be conducted of those policies and regulations that have artificially encouraged the demand for natural gas over other fuel technology for electric power generation. The tremendous delays and burdens involved in re-licensing hydroelectric power plants, vigorous EPA enforcement activities against coal-fired power plants, and the innumerable re-licensing and spent fuel storage issuthe only practical fuel for new electric power generation plants.
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The fertilizer industry believes that a balanced and comprehensive energy policy is not only long overdue, but also essential to the long-term viability of both the U.S. fertilizer industry and the American farmer.
Thank you for the opportunity to discuss these issues with you today. We look forward to working with you over the next few months and I would be pleased to answer any questions you may have on the fertilizer industry and natural gas pricing issues.
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Statement of Dennis Maze
Mr. Chairman, Ranking Member Hilliard, and members of the subcommittee, I thank you for allowing me the opportunity to testify before you today.
My name is Dennis Maze, and I am a third-generation poultry farmer from Blount County, AL. My farm, Maze Farms, consists of 200 acres, 81 Angus cattle, and eight broiler houses with a capacity of 170,000 birds per batch.
Agricultural producers such as myself continue to suffer from energy costs that are far higher than usual or that could be reasonably anticipated. Substantial increases in gasoline, propane, natural gas, heating oil, and electricity have put farmers in a tight squeeze economically that has left them with little or no recourse. Although there have been many factors that have been cited for these increases (and this subcommittee has explored some of those factors last week), there is no question that heavy users of propane and natural gas such as poultry producers have been especially hard-hit.
Many producers such as myself do not have enough current income to cover the very high energy costs and other production expenses. For example, in 1999 my farm used 70,060 gallons of propane, and spent $39,112. In the year 2000, my farm had 50,490 gallons of propane consumption, and spent $40,874. In 2001 from January 1–March 28, my farm used 29,244 gallons of propane and spent $31,165. On January 1, 1999, my price per gallon of propane was 43 cents. By January 21, 2001 my price per gallon had increased to $1.41 per gallon. At this rate I can't continue to raise chickens and still be profitable.
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My farm's first batch of chickens in January 8, 2001, grossed $48,417. However, my total liabilities including debt service, gas, insurance, utilities, and labor led to a net loss of $815. Since my houses have 5.5 flocks per year, this resulted in a loss for one-fifth of my income for the year before I have even paid my farm anything.
In addition, producers in the poultry industry have historically had very narrow profit margins, and are responsible for paying their own utility bills. Poultry producers have no way to pass their increased cost of production to consumers since the price they receive for their product is set when they sign the contract, regardless of how much it costs to raise their chickens. For example, many farmers in the Clay County area paid over $1.67 per gallon for propane which meant they did not make enough money for their winter flocks to pay their gas bill. At that price, even the most profitable growers would have paid 67 percent of their gross check and many at the bottom of the pay scale would have paid 98 percent of their gross check at that price.
Further, since propane typically accounts for over 40 percent of the total variable cost for broiler producers, the huge increase in natural gas and propane prices have left farmers with no profit. In many cases, their entire budget for energy costs were spent in one month. According the Auburn University estimates, with propane prices increasing from 70–80 cents per gallon last summer to levels approaching $1.35 per gallon, propane is now accounting for 55 percent of those expenses.
Although farmers in my area have joined together in cooperatives and purchased propane early, the cost to the growers have still increased from the companies. Some county extension estimates for cooperatives in Franklin County estimate that booking propane gas in the summer achieved savings of $200,000 in 1999 for 56 farmers. Some costs associated with transportation of that gas increased for producers significantly. For example, the transportation costs to our cooperative for using a pipeline from Bellview, TX increased from 0.03 cents to 57 cents per gallon during the months of heaviest usage last winter. However, the wholesale price for propane did not increase proportionately.
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Poultry companies are also experiencing economic difficulty which has compounded the problem of higher energy costs coupled with lower production mandated by poultry companies. For example, one grower in Calhoun County has had their paycheck cut by almost 20 percent in the last 2 years because poultry companies have ordered growers to reduce the number of chickens in each house, and increase the amount of time the houses are idle between flocks. In addition, many companies are also lowering the weight in which they purchase chickens from growers resulting in lower revenue and less pounds of production.
Banks also typically require 55 percent of a producer's gross check to service the loan on the poultry houses, and with the double or triple energy costs, there is no profit left for the producer. While growers do appreciate the fuel allowance that some companies have passed along to the growers, even profitable growers are experiencing extreme financial difficulty.
Alabama's poultry industry is extremely important to our economy. We are the third largest broiler producer in the country, and the poultry industry accounts for approximately 78,000 jobs and $266.7 million in exports alone in our State. In the United States, it is estimated there are 70,000 broiler houses on 25,000 farms. According to the National Chicken Council, 75 percent of these farms are responsible for all or part of the energy costs used during the growout period. Approximately 900 gallons of propane are used per broiler flock with an average house producing 5.5 flocks per year.
The increased energy costs have also impacted other users such as operators of greenhouses and nursery farms. The Alabama Farmers Federation has conducted an informal survey of horticulture and nursery farms in Alabama and their input costs for gas and electricity. The replies to this survey are included in my testimony.
Although poultry producers have not generally sought Government assistance in the past, the current energy situation and the lack of a comprehensive national energy policy point to the need for some financial assistance in order to prevent this situation from becoming far worse. The Alabama Farmers Federation strongly supports efforts such as H.R. 396 introduced by Representative Pickering that would allow the Secretary of Agriculture to provide emergency financial assistance to crop producers, livestock and poultry producers, and greenhouse operators. I also wish to particularly thank Mr. Hilliard, the ranking member of this subcommittee, for his cosponsorship. The poultry industry is also very supportive of the bill introduced by Senator Sessions and Senator Cochran, S. 586, which would provide emergency assistance for agriculture end users.
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All indications are that consumers and users of energy are headed for another hard summer of high usage and high costs. Another severe summer such as the drought Alabama suffered last year, and many more growers will go bankrupt regardless of how profitable they normally are. Only a comprehensive energy policy that includes agriculture especially end users will ensure that producers that use propane, natural gas, and electricity will remain financially sound. In the meantime, Congress can provide short-term financial assistance such as that proposed by Senator Sessions and Congressman Pickering until that comprehensive policy is achieved.
In conclusion, I would like to state that without some financial assistance even producers that are profitable will soon use any equity they have remaining and only exacerbate the current financial crisis facing American agriculture. Since 75 percent of all agriculture exports in our State are from poultry, this would further harm our infrastructure and decrease producer income.
Further, I would encourage this committee to continue to examine other ways to increase the supply of energy such as the use of renewable fuels. As this Subcommittee pointed out earlier, U.S. refineries are only meeting 85 percent of domestic demand, and the U.S. continues to increase their reliance on oil imports. Efforts should be made to increase production and research into renewable fuels such as ethanol and bio-diesel in order to play a significant role in the Nation's comprehensive energy strategy with assessed tax rates that promote market acceptance
Statement of Ron Warfield
Mr. Chairman, members of the Committee, my name is Ron Warfield. I am a corn and soybean farmer from Gibson City, Illinois. I am the president of the Illinois Farm Bureau and serve on the executive board of the American Farm Bureau Federation. I am here to encourage you to take a different view of the energy problems we are facing in America.
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For 70 years U.S. farm policy has attempted to resolve the farm problem. Yes, farming is a cyclical, volatile industry. It always will be. But it's time for Congress to join agricultural leaders from around the country who believe that public spending for agriculture is more than just income support. It's an investment in our Nation's food, economic, environmental, and, of particular importance today, our energy security.
The American Farm Bureau is supportive of a comprehensive energy policy that can solve energy problems for our Nation and create income opportunities for farmers. Let me articulate three basic points:
Energy production is part of the solution to challenges we face in agriculture.
Renewable sources of energy have the benefits of being domestically produced, reliable, and clean burning.
We need a long-term energy policy that will provide for reasonable and stable prices and supplies of energy.
Our Nation has never been so energy dependent. America is struggling to satisfy an urgent spiraling demand for energy that has begun to out strip our Nation's productive capacity. We're finding it difficult to produce enough electricity to power our industry, enough natural gas to economically heat our homes, and enough gas and diesel to fire our vast transportation needs. The energy supply crisis is critically affecting farmers' bottom line.
Farmers more than anyone want to earn their income from the marketplace. Our vision for the future is that of a growing agricultural industry that will depend less on Government payments and more on returns from the marketplace. We see few better ways to boost demand for what we produce than being able to supply the energy needs of our Nation.
The Nation's energy crisis and the demands for clean air standards might provide the greatest opportunity for U.S. farmers and ranchers to increase net income without direct Government assistance.
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For example, USDA estimated in 1999 that the increase in net farm income from a 3- to 5-year MTBE phase-out would be $12 billion from 2000–10. The increase in ethanol demand resulting from MTBE's phase-out is projected to increase the average price of corn by 16 cents a bushel in 2010 and an average of 14 cents per bushel a year during the entire study period. Higher corn and other grain prices under the MTBE phase-out would lessen the need for emergency relief and reduce loan deficiency payments. Where loan deficiency payments are being made, each dime increase in corn prices could lower farm program outlays by about $1 billion a year.
Another good example is biodiesel. It is estimated that for every one percent of the diesel market captured by biodiesel, demand for soybeans will increase by 250 million bushels raising the market price of soybeans by 30 cents. A $100 million incentive program for use of two-percent biodiesel would have a $200 million return for taxpayers.
As the Congress formulates a new national energy policy, there is clearly a major role for U.S. agriculture. We grow part of the solution.
Renewable, clean burning fuels must be part of the energy mix. There are plenty of farm commodities to be utilized and an ever-expanding production capability for ethanol and biofuels.
By eliminating the use of the groundwater polluting fuel additive MTBE and retaining the oxygen requirement in the Clean Air Act, Congress can fashion an energy policy that will improve the environment and reduce our dependence on foreign oil. It could also double our demand for ethanol in 5 years and triple it in 10. The higher the profile ethanol has in our Nation's energy portfolio, the better off farmers, taxpayers and environment will be.
Farm Bureau supports policies that will maximize the use of biofuels. Biodiesel, made from vegetable oils, is poised to be a significant contributor to the U.S. alternative fuel market. Biodiesel has already passed the vigorous health effects testing requirements of the Clean Air Act and is poised for rapid growth.
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We support the national phase-out of MTBE. The EPA must not grant waivers to States attempting to opt out of the oxygen requirement in the Clean Air Act. Agriculture has the clear ability to supply the fuels needed to meet the requirements of the Clean Air Act.
I'm sure you are well aware of the symptoms of our energy problem and the impact that it is having on agricultural producers. We have seen a tripling of the price of fertilizer. There has been a huge increase in the price of anhydrous, LP and diesel that I use on my farm. In 1999, my average cost for diesel fuel was 96 cents per gallon. In 2000 it was $1.21 per gallon and my last tank fill in April was $1.41 per gallon. Producers in the poultry industry are facing significant problems in heating and cooling costs. Farmers in California are rightfully alarmed at the current electricity crisis in their State. Electricity runs many vital components of crop production and processing. Farmers in the Northwest are not only facing higher energy costs for pumping water, but also in many areas, that water supply is severely curtailed because of drought and the need to use part of that water to generate electricity. With low commodity prices farmers face in all segments of our industry, these kinds of spiraling costs add significantly to the burdens of maintaining a structure in agriculture that farmers want and Farm Bureau policy seeks to support.
Mr. Chairman, we have many challenges in farm country. You are aware of that and the pressing need to help America's farmers and ranchers deal with these challenges.
We firmly believe that the energy crisis should be looked at as an opportunity. It is an opportunity to develop energy sources in rural America, and at the same time reduce the funding requirements that this committee faces in the upcoming farm bill debate.
We ask you to be bold. There are many decisions that need to be made on energy that will have a cost for the short term. Those decisions will be politically difficult, but we want to stand with you in making those tough decisions. We cannot, and we must not, accept easy solutions that will not solve this difficult problem. Those of us in agriculture are ready and poised to be part of the solution.
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Statement of United Fresh Fruit and Vegetable
On behalf of the United Fresh Fruit & Vegetable Association (United), we are writing to express our concern on how the rising gas and energy prices are adversely affecting the produce industry. Founded in 1904, United is the national trade organization that represents the interests of producers and distributors of commercial quantities of fresh fruits and vegetables. We represent the business interests of growers, shippers, processors, brokers, wholesalers and distributors of produce, working together with our customers at retail and foodservice, our suppliers at every step in the distribution chain, and our international partners.
Last fall, USDA Chief Economist Keith Collins reported to the Senate Agriculture Committee that increased energy prices will increase fuel costs for producers by $2.2 billion. He went on to explain how farmers and ranchers across the country are paying more for the different types of fuels they use, including diesel, gasoline, natural gas, liquid petroleum gas and electricity.
Increased energy prices are dividing produce profits throughout the production and distribution chain. As much as any other course of events in recent history, the Nation's energy crisis is undermining the sustainability of our farms and rural economies. Energy is more important to food production and processing than to most industries. Agricultural cultivation often requires a number of energy-intensive input costs related to the production, transportation, storage and processing of these commodities.
As prices of power and other fuels have doubled and tripled around the Nation, already thin profit margins have severely diminished or disappeared—altogether. Crop loss has historically been associated with weather or pest disasters, but today's high prices and chronic shortages of electricity, natural gas, diesel and other energy sources have already claimed many agricultural businesses and related jobs.
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United supports researching the economic feasibility of renewable and alternative fuel and energy resources. We urge special consideration to further research and development. We strongly support the increase of renewable energy sources and research directed toward self-sufficient farming.
Thank you for your time and attention and we look forward to working with you on this and other important energy and conservation issues.
Statement of American Corn Growers Association
Chairman Lucas, Ranking Member Hilliard, and members of the House Agriculture Committee, Subcommittee on Conservation, Credit, Rural Development and Research, I am Larry Mitchell, chief executive officer of the American Corn Growers Association (ACGA). On behalf of the 14,000 members of ACGA, I would like to present our views on energy supply and demand issues affecting the agricultural sector of the U.S. economy but more importantly offer some suggestions as to how rural America can be part of the solution.
Your initiative to hold the hearings is most timely. Over the last 2 years farmers have experienced skyrocketing prices for the essential production agriculture inputs such as fertilizers, chemicals, natural gas and fuel oil. High natural gas prices have also led to large price increases for fertilizer. In addition, farmers in California have suffered rolling blackouts—severely impacting dairy operations—and farmers all over the West have suffered the consequences of numerous price spikes in electricity markets.
At the recent Rural Energy Issues Conference held by the Alliance for Rural America (ARA), a coalition made up of the American Corn Growers Association, the American Agriculture Movement, the Federation of Southern Cooperatives, the National Association of Farmer Elected Committees, the National Farmers Organization, the National Grange, and Women Involved in Farm Economics, family farmers described the impacts of the energy crisis on their livelihoods and the farm economy. Corn producers in the Midwest are reporting that increased prices for just fertilizer and energy related irrigation expenses will add an additional 30 cents per bushel to their production costs. Producers in Texas and Oklahoma are reporting anhydrous ammonia costs have risen from $65 per ton just a few years ago to over $400 per ton for this crop season, an increase of over 600 percent. These energy related costs are in addition to many other production related costs such as transportation, tillage, harvest, et cetera. After hearing of these and other cases, a member of Vice-President Cheney's task force, who addressed our conference, invited us to document cases and submit them to the task force.
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In response to this crisis we have been urging lawmakers to take steps that will ensure long-term stability. While price caps and other short-term measures may have political appeal, it is increased power production, more pipelines, and a diverse range of fuel supplies that will stabilize prices in the long-term and restore reliability. The ARA supports policies that provide incentives to increase supply. This includes alternative technologies, such as solar power projects, biomass energy and on-farm wind generation, but it also includes traditional fuels such as coal. The Federal Government must also inject some certainty into the relicensing of existing hydro projects. The Federal Energy Regulatory Commission should look at its responsibilities vis-a-vis the electricity transmission system and whether the right incentives are in place for utilities to expand the system and to use it most efficiently.
We believe that rural America can provide some solutions to our energy problems, so let me now put forth a few ideas from ACGA toward that endeavor.
BIOFULES
Ethanol. Representing corn farmers, we suggest more of this Nation's energy needs can be met with bio-energy, especially ethanol. We have made great strides over the past two decades in research, development and promotion of ethanol and we now have greatly expanded its utilization. Earlier this year, Senators Thomas Daschle, D-S.D., and Richard Lugar, R-Ind., introduced the Renewable Fuels Act of 2001 (S. 670) which, when enacted, will triple demand for ethanol. By establishing a Clean Alternative Fuels Program that emphasizes renewable transportation fuels like ethanol, our country can move away from dependence on imported energy, clean our environment, create U.S. jobs and provide additional marketing flexibility for our producers. We urge your support for this initiative.
ETBE. In addition, ACGA recommends full commercialization of ETBE (ethyl tertiary butyl ether) as an ethanol-based ether that can provide refiners with added flexibility in meeting the increased demands for reformulated (RFG) gasoline, especially in light of the lower Reid vapor pressure needed under Phase II. ETBE lowers gasoline volatility, is capable of being shipped through the vast pipeline system and has a lower Rvp (4 psi) than does other oxygenated fuels.
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ETBE is produced by reacting fuel ethanol and isobutylene in the presence of a catalyst, which produces an ether. A gallon of ETBE contains 42 percent ethanol and 58 percent isobutylene from natural gas liquids or other refinery streams.
ETBE faces three basic tax obstacles that need to be addressed before the full commercialization can be feasible. ETBE is eligible for the 54-cent blenders tax credit. However, the blenders tax credit has little or no value to an ETBE refiner because the credit can only reduce tax to the point of Alternative Minimum Tax (AMT). This AMT situation prevents the ETBE refiner from gaining the full value of the blenders tax credit.
The second obstacle is that the tax credits are claimed by the marketer of gasoline rather than the ether producer. Ethanol is splash blended at the terminal. That is traditionally where the ethanol tax credits become available. But ETBE will be blended at the refinery, so the tax credits need to be moved back to the refinery gate. Co-mingling of fuels in the distribution system means gasoline sellers cannot show a particular batch of fuel has the precise ethanol content at the terminal rack, even though the current amount was present when the ETBE was added in the refinery. The third obstacle is that the tax credits are designated as taxable income, so there is a waiting period before any tax refund from the credit comes back to the blender.
To address the problems of ETBE commercialization, the blenders tax credit should be available to a broader range of customers by not making it subject to a taxpayer's tax status. The credit should be equally credited against the AMT as well as regular income tax. In addition, the credit should be non-taxable, which is consistent with most other tax credits. A refiner certification program could possibly address the co-mingling issue.
If these issues are addressed, there are five current MTBE (methyl tertiary butyl ether) producers that can produce ETBE. They are as follows:
ARCO Chemical (Lyondell) Channelview, TX 380 million gal/year
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Texas Petrochemicals Houston, TX 189 million gal/year
Marathon Ashland Petroleum Robinson, Ill. 26 million gal/year
Koch Refining Saint Paul, Minn. 23 million gal/year
Amoco Yorktown, VA. 12 million gal/year
The majority of ethanol is sold in the Midwest, within a logical distance from an ethanol production facility. This hampers the area that ethanol can cover. However, ETBE can be shipped through the vast underground pipeline system, making it available to every area of the country. If California or other areas decide to ban MTBE, ETBE would be the ideal substitute and would be available as well.
ETBE has a lower Reid Vapor rating then does ethanol, 4 pounds per square inch (psi) compared to 8 psi for ethanol. This is especially important with the need to have a lower vapor pressure gasoline for use as part of the reformulated gasoline program (RFG). Under Phase II RFG, the national average for Rvp must not exceed 6.8 psi, so ETBE will meet this national requirement. Rvp is the time it takes a gasoline to evaporate, so the lower the Psi, the slower the evaporation rate. Ozone pollution is greatly caused by gasoline evaporation.
While ethanol has had some resistance from gasoline refiners, ETBE does not. This comes about because ETBE can be blended at the refinery, which is a logistical advantage for refiners. In addition, ETBE is made up of isobutylene, which is made up partly by a by-product of refining.
ETBE can be blended at volumes up to 17 percent and can reach up to 22 percent volume. Ethanol can only be blended at 10 percent volume.
Because ethanol is mostly contained in the Midwest, there is more potential for ethanol growth through ETBE. This could grow the overall demand for corn. Estimates are as much as 350 million gallons of new ethanol demand could come about because of increased demand for ETBE. This would equate to almost 150 million bushels of new corn demand.
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Farmer Owned Reserve and the Strategic Energy Reserve
ACGA has submitted to Congress our recommendations for the next farm bill. Our broad-based comprehensive proposal, titled The Family Farm Agriculture Recovery and Maintenance Act (The Family F.A.R.M. Act) has a provision to allow the Secretary of Agriculture the authority to establish a new Farmer Owned Reserve (FOR). The FOR is the key tool that allows farmers to manage their inventories and free stocks. If prices are low and free stocks excessive, the market will know that farmers may choose to lock up some of their inventory, and make it unavailable until prices rise. The reserve is a necessary buffer that allows farmers to have high production years without unduly depressing market prices. Acreage idling is then not required after high production years, unless reserve stocks are becoming excessive. At the same time, consumers are assured that if we have a major drought, the U.S. will have reserves that will be made available, though at higher prices. This stability of supply encourages stable growth in exports, ethanol production, food processing, and livestock production.
ACGA recommends a portion of the FOR should be dedicated to a Strategic Energy Reserve for the renewable fuels industry. This initiative would help stabilize the resulting growth in the domestic ethanol industry and give critical assurances to producers, lenders and processors that grain will be there even during lean times.
Additional Renewable Energy Sources.
Wind Energy. Wind power generation has great potential to help supply the electricity needs of our country. Studies have shown that wind in the U.S. could produce more than 4.4 trillion kilowatt/hours (kWh) of electricity each year. This is more than one and one-half times the 2.7 trillion kWh of electricity consumed in the U.S. in 1990. In addition, it is estimated that North Dakota winds alone can generate 36 percent of all the electricity needs in the lower 48 States. The interest in wind power is spreading. This Thursday, Oklahoma City will host a major wind conference, with well over 250 people already confirmed to attend. This is a small example of the interest that wind energy is generating in the Midwestern grain belt.
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The Federal Government is not the only level of Government interested in our energy situation A Minnesota law calls for fifty percent of the State's power supply to come from in-state sources by July 1, 2010. Much of the supply will come from renewable resources, particularly wind. Modern wind turbines are very efficient and can produce low-cost power. Rural areas are the most logical places to produce electricity from wind and the Conservation Reserve Program (CRP) could be used to assist in encouraging more wind generation. Current law prohibits commercial use of CRP acreage. A wind generation tower takes only a few hundred square feet for its base or foot print, which, under current law, would need to be removed from a CRP contract. ACGA suggests that a statutory modification be made to the CRP to reduce or eliminate the bureaucracy for producers who would like to erect wind-powered generators. The minor reduction in environmental benefits due to the erection of towers on these very small plots of land would be more than offset by environmental benefits gained in the production of electricity from clean and renewable wind power.
Solar Energy. In addition to bio-based fuels and wind, rural America has and will continue to be a part of other renewable energy sources such as solar, geothermal and hydroelectric. ACGA urges this committee and others in Congress to seriously consider enhancing current or providing new incentives to help in developing these renewable sources. One such initiative is the administration's 2002 budget request, which would provide a 15 percent tax credit for the purchase of residential solar energy systems, an increase from the current 10-percent investment tax credit.
environmental solutions. ACGA has long recognized the environmental advantages of using renewable corn based ethanol and ETBE in our motor fuels. We also can clearly identify the environmental advantages of using wind, solar and other renewable energy sources. ACGA would now like to suggest two other energy related environmental initiative we feel this committee should consider.
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Carbon Sequestration and the CRP
ACGA acknowledges that the crops raised by America's farmers are one of the best tools available to reduce the amount of carbon from our air. We also would hope that sometime in the not-to-distant future farmers should receive compensation for their contribution toward carbon sequestration. One suggestion we offer to this committee is to consider the enhancement of the current CRP as a vehicle to initiate this endeavor. We suggest a study to determine the advantages of providing Environmental Benefits Index (EBI) points during the CRP bidding process to producers who agree to plant cover crops proven to be higher in their carbon sequestration. If the study shows such an initiative is effective, we would urge your action to make this option available in future CRP general sign-ups. While we are addressing this subject, it should be said that ACGA calls for increasing the statutory acreage cap for the CRP from 36.4 million acres to at least 40 million acres.
Soil Testing. Soil testing can not only address the growing problem of nitrogen runoff, but it could also reduce a farmer's input costs, especially with the high costs of nitrogen fertilizers due to recent spikes in natural gas prices. ACGA, a proven leader in addressing the problems of nitrogen runoff, has recently endorsed legislation introduced by Senator Christopher Bond, R-Mo, and [Congressman] John Tanner, D-Tenn. The Fishable Waters Act (S. 678 and H.R. 325) will provide $350 million per year for clean water projects geared towards reducing the amount of nitrogen and chemicals that run off into rivers, lakes and streams.
ACGA in conjunction with the American Corn Growers Foundation developed the Agricultural Water Quality Restoration Program (AWQRP) and is based on the efforts of the organizations' over the past 5 years to recognize and address the Dead Zone problem in the Gulf of Mexico. Under the AWQRP, farmers will be encouraged to utilize soil testing as a means to reduce nitrate levels. According to university studies, 20 percent of all nitrate levels could be reduced with widespread soil testing. Therefore, financial incentives such as governmental cost sharing or tax incentives should be included in this legislation to enable farmers to use voluntary measures to reduce nitrogen runoff. The combination of the Bond-Tanner initiative along with the AWQRP will not only move towards solving a serious environment concern, but they will also reduce the energy required to produce improperly utilized nitrogen fertilizers.
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The ACGA commends you for your initiative in calling these hearings. We look forward to working with you.
United States of America Before the Federal Energy Regulatory Commission
DIALOG CONCERNING NATURAL GAS TRANSPORTATION POLICIES NEEDED TO FACILITATE DEVELOPMENT OF COMPETITIVE NATURAL GAS MARKETS
POST-CONFERENCE COMMENTS OF THE CALIFORNIA DAIRY COALITION OF CONCERNED ENERGY CONSUMERS
The California Dairy Coalition of Concerned Energy Consumers (Dairy Coalition or Coalition) hereby submits comments on the issues addressed at the technical conference held on March 15, 2001, in the above-captioned proceeding. The Dairy Coalition again commends the Commission for holding the conference and appreciates the opportunity afforded by the Commission to participate in the conference.
The Dairy Coalition was organized in the fall of 2000, in response to the energy crisis that began to manifest itself in the State of California at that time. Members of the Coalition include all of the major dairy cooperatives in the State of California, as well as all of the large proprietary dairy processing companies in the State. In California, the dairy industry is now approximately $9 billion in size, based on the value of products that are produced in the processing plants.
e. Often, this bundled product is available only from an unregulated entity—such as a marketing entity affiliated with an interstate pipeline.
The Dairy Coalition submits that the Commission should consider requiring that all entities—regulated interstate pipeline companies, their affiliated entities, and other entities which are active in these sectors—that are providing services between the wellhead and sales to end-users or local distribution companies make each such service available on a discrete basis, with the price of each service being disclosed. This would include the prices for services such as transportation, handling, storage, load balancing, etc.
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If the Commission concludes that it does not have the statutory authority to invoke such regulation over all entities active in providing these services, the Commission should, at a minimum, place this requirement on interstate pipelines and their affiliated entities. Further, the Commission should assess whether such a requirement as to all entities active in the market would be useful in carrying out its responsibilities under the Natural Gas Act; if
it does arrive at this conclusion and if additional statutory authority is needed to exercise this regulation, the Commission should request such authority from Congress.
As the Commission correctly foresaw in Order 636, only when consumers are informed about the costs of the various services, can consumers be equipped with the necessary information for market signals to move freely and thus for the market to work efficiently.
C. ORDER 637—LIFTING OF PRICE CAPS ON SHORT-TERM SALES
In adopting Order 637 in February of 2000, the Commission lifted price ceilings on the short-term release (less than one year in length) of pipeline capacity. This Order is to remain in effect for 2 years. In making this significant change, the Commission stated:
This change is intended to improve shipper options and market efficiency during peak periods, when an efficient and effective market is most needed. During peak periods, the maximum rate cap on capacity release transactions inhibits the creation of an effective transportation market by preventing capacity from going to those who value it the most. The elimination of the rate ceiling will eliminate this inefficiency and enhance shipper options in the short-term market. To protect against the potential exercise of market power, the Commission is maintaining cost-of-service regulation of the pipelines as well as improving efficiency and competition across the pipeline grid. . . . While the changes in the natural gas industry support the removal of the rate ceiling, the Commission recognizes that this is a significant change in policy.
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The Dairy Coalition believes that the ''significant change in policy'' embodied in Order 637 may be a very important factor in the events seen in recent months as the price of pipeline capacity to California has skyrocketed.
From the above quotes, it is clear that the goals of the Commission in adopting orders 636 and 637 were extremely well-intentioned. However, the Dairy Coalition would submit that the goals and objectives of the Commission in the two Orders have not been achieved. Indeed, there have been consequences, albeit unintended, which have been quite harmful to consumers, based on the events in California. The Dairy Coalition cannot speak for other regions of the country, of course. But, the Coalition submits that, even if California has been the only region which has experienced these unintended consequences, this is extremely serious—and requires an commensurately serious response on the part of the Commission. The California economy is a very significant portion of the U.S. economy. The dislocations being seen in California—which are expected to continue—have had and will continue to have a very serious impact on the Western States, and indeed the Nation's economy as a whole.
D. MARKET POWER OF INTERSTATE PIPELINES
This inquiry asked commenters to focus on whether there has been abuse of the Commission's affiliate rules for interstate pipelines. Participants at the March 15 conference articulated a wide range of views—with the interstate pipelines stating that incidents of abuse were merely anecdotal in nature. In contrast, the producing community was unified in stating that more rigorous oversight is required by the Commission—and believes that enough instances of abuse have been identified to prove that a different approach is needed than the one which is currently in place.
The Dairy Coalition asserts that the Commission has the responsibility to not allow a situation to evolve where any one entity—such as an integrated corporate entity—has the potential to assert—and thus, possibly, abuse—its power in a given market. While the pipeline entity may be acting in the interests of the shareholders of the parent company, it is clear that a situation such as was in place in the El Paso Pipeline situation can afford the potential for action(s) which are harmful to consumers. The Commission's responsibility to consumers should come first and foremost.
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The Dairy Coalition strongly urges the Commission to consider adopting regulations which prohibit unregulated marketing affiliates of regulated interstate pipeline companies from engaging in a direct transaction to purchase capacity on the interstate pipeline. The Coalition urges adoption of such a regulation because it is precisely this situation which the Coalition believes leads to the potential for market power abuse.
The Coalition would agree that transactions between interstate pipelines and regulated local distribution companies probably require different regulatory treatment than transactions between a regulated and totally unregulated arm of the same parent company. The Dairy Coalition believes the Commission is best equipped to determine the appropriate oversight of transactions between interstate pipelines and their affiliated local distribution entities.
However, with respect to transactions between unregulated marketing affiliates of interstate pipelines and their regulated pipeline affiliates, the Dairy Coalition believes that such a situation presents a very strong potential for abuse of market power. Given the current resources available to the Commission, and to consumers, the best protection against the potential for abuse of market power inherent in such situations is simply to not allow them to exist.
In these situations, it appears to the Dairy Coalition that the regulated entity can quite easily transfer all of the benefits of its regulated status—i.e., its monopolistic status—to its unregulated affiliate—which can then use these benefits to reap unregulated profits from the consuming public.
The Dairy Coalition is of course aware that it appears that a combination of factors has led to the ''break up'' of the capacity on the El Paso Pipeline into southern California, beginning in June of this year. The Coalition is very hopeful that this development will lead to a much more rapid transmission of market signals and thus vigorous market competition in the California market.
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However, the Coalition notes that it knows of nothing in Commission regulations or policy that would prevent a situation similar to that which has been in effect over the last year (and was previously in effect under the Dynegy contract with El Paso Pipeline) from going into effect again. The Dairy Coalition believes this is unacceptable public policy. In contrast, the Commission should take formal action to make clear that it will not allow a similar situation to develop in the future.
As was stated by at least one participant in the March 15 conference, an interstate pipeline having an unregulated affiliate is not in and of itself ''market power.'' But, when that affiliate either alone or in combination with the parent company has a significant market share, the position can lead to market power and abuse of that power.
At the time that the Commission adopted the current rules on pipeline affiliates Order No. 497, June 1988, then Commissioners Stalon and Trabandt expressed serious reservations that the rules being adopted were not strong enough. But, they voted in favor of the rules, on the theory that some rules were better than none. Their comments were very prescient. The Dairy Coalition urges the Commission to review these comments and to reconsider the Commission's current treatment of pipeline affiliates.
Commissioner Stalon stated as follows—comments in which Commissioner Trabandt concurred:
The Commission has a duty under the Natural Gas Act to make sure that
pipelines do not shift their monopoly power to unregulated marketing affiliates.
The shifting of the monopoly power can occur in two ways: it can occur by:
the pipeline absorbing some of the cost of the affiliate, and it can occur by the:
pipeline shifting certain revenue sources to the marketing affiliate.
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Commissioner Stalon also noted the possibility that the Commission should consider ''prohibiting pipelines from creating marketing affiliates altogether.'' He also expressed a strong preference that:
[T]here should be separate corporations for the pipeline and the marketing affiliate. The two corporations should not be allowed to share office space or employees. In addition, employees of the two corporations should be prohibited from sharing inside information, and all internal operations and meetings should be carried out separately.
E. AVAILABLE INFORMATION OF LIMITED USE
The Commission has noted in various orders, and there was significant discussion at the March 15 conference, about the amount of information available for the public to assess various transactions and activities of the interstate pipelines. The pipelines themselves claim that this information should allow any interested party to effectively monitor the activities of any given pipeline.
However, the Dairy Coalition would join with others who commented on this subject in stating that the information available on the public record is so voluminous and of such complexity that it does not serve the functions attributed to it by the Commission. Certainly, the availability of this information is preferable to it not being available at all. But, even the typical large industrial consumer does not have the wherewithal to analyze this information and utilize it to exert discipline on an interstate pipeline. Various representatives of producer interests and energy marketers noted the difficulty in making use of available statistics.
Since this information is, for all practical purposes, too voluminous and/or too complex to be useful, it is extremely important that the Commission take a very pro-active role in monitoring all activities of the regulated pipelines, as well as taking steps to remedy problematic situations when they are identified.
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V. COMMISSION MUST CONDUCT A THOROUGH ANALYSIS
The Dairy Coalition believes that the Commission and others have a responsibility to analyze and determine all of the various causes of the tremendous increases, and volatility, of the basis differential for natural gas delivered to California. The Coalition strongly believes that it is not acceptable for the Commission to state that these fluctuations in basis are the result of market forces at work—i.e., to state simply that there was ''more demand than supply.'' Also, it is incumbent on the Commission to do more—much more—than say that the tremendous price increases are part of an ill-defined ''gray market''—and that ''some portion'' of the price is due to a high price for the commodity itself.
These are far too simplistic answers for the price increases and volatility that have been seen in California. The events of recent months are not only completely unfair to consumers—these events have also been hugely unfair to producers. Producers were the beneficiaries of only a very small portion of the increased prices, based on the prices as tracked on the New York Mercantile Exchange (NYMEX). This leads to the conclusion that much of the price increases flowed to either (1) those holding the pipeline capacity between the production areas and the California border; and/or (2) those who were trading the available capacity on various markets.
The Dairy Coalition asserts that the comments submitted to the Commission in this proceeding to date depict a very complex and dynamic market place for natural gas—perhaps far beyond the imagination of Congress in 1989 or the Commission when it issued Orders 436, 636 and 637. This marketplace is being driven by a great many factors: by the large number of deregulated entities that are now active in the industry, as well as in part by deregulated entities that are affiliated with regulated entities—i.e., interstate pipelines. The market is also evolving rapidly, as the use of natural gas for electric generation—particularly in California—has become a significant aspect of the natural gas demand matrix.
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Finally, the market is being affected—perhaps to a very significant degree—by the fast-paced and evolving electronic marketplace.
A further factor in the evolving marketplace was the Commission's Order 637 (discussed above), which deregulated short-term releases of pipeline capacity. While Commission staff have informally indicated they do not believe there is much activity pursuant to this Order, comments submitted in this proceeding indicate there is indeed considerable activity in the trading of pipeline capacity, at least trading ''on paper'' of pipeline capacity. The extent to which this trading activity—activity which is in most respects unregulated—is affecting the ultimate price to consumers MUST be analyzed and understood. This analytical effort should be undertaken by the Commission.
The conversion of all of these factors has resulted in a market that only a small universe of people understand. Yet, the Commission has an obligation to all natural gas consumers to understand these dynamics in a thorough and comprehensive way—and to insure that these dynamics work to the benefit of consumers.
The Dairy Coalition submits that the Commission MUST take whatever steps are necessary to conduct a thorough analysis and thoroughly understand all of the various dynamics that are in play in this new marketplace. Once this is thoroughly understood, the Commission should use this information to adopt new policies and regulations, if the required changes are within its existing statutory authority. If needed steps are not within the Commission's existing authority, the Commission should take its conclusions to the Congress—and ask the Congress for whatever new statutory authority is needed so that the Commission can insure that this new and dynamic industry is operating to insure that market signals are working for the benefit of consumers.
VI. CONCLUSION
In conclusion, the Dairy Coalition strongly believes that the Commission has the responsibility to natural gas consumers in the State of California to aggressively investigate exactly what have been the causes of the tremendous increases seen in the price of natural gas over the last ten months. To the extent these increases have been the result of abuse of market share by interstate pipelines and their affiliated entities, the Commission must take appropriate action, including altering its regulations or policies, so that such a situation cannot develop again in California—or in other regions of the country.
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To the extent the price increases have been and continue to be the result of other factors within the Commission's jurisdiction, the Commission must aggressively and rapidly move to take remedial action.
Finally, the Dairy Coalition believes it is incumbent on the Commission to remain very vigilant and pro-active with respect to market responses to the various deregulation steps taken by the Commission, particularly Orders 636 and 637. The Commission should not wait for the consuming public to bring to the Commission's attention unintended consequences which arise from these Orders and which are acting to the detriment of consumers.
Respectfully submitted
Michael L. Reidy
Leprino Foods Company
J.A. Gomes
California Dairies, Inc.