U.S. Senate Committee on Commerce, Science and Transportation and U.S. Senate Committee on Energy and Natural Resources Hold a Joint Hearing on Energy Pricing and Profits

Courtesy FDCH e-Media
Thursday, November 10, 2005; 11:54 AM

The transcript picks up with Sen. Bill Nelson (D-Fla.). To return to part 2 of the transcript, click here.

STEVENS: Senator Bill Nelson is recognized for five minutes.

BILL NELSON: Thank you, Mr. Chairman.

To the oil industry's credit, in the immediate aftermath of September the 11th you froze gas prices. That was a patriotic thing to do. So thank you. There was panic.

Why did you not freeze gas prices in the aftermath of Hurricane Katrina?

RAYMOND: Senator, I can tell you that in our company's case, looking back on it in the affected areas -- Mississippi, Louisiana, and southern Alabama -- we did.

However, outside of that area, to prevent a run on the bank, we had to respond to the market. Although I know from looking back historically our prices were conservative.

MULVA: Senator, for both hurricanes our companies in the three- or four-state area, we froze prices for several days. But then in all of the markets what we looked at is, the spot price went up very quickly. We set our prices and lagged the run-up in spot prices by 50 percent. We lagged slowly and used moderation.

That was our approach because we felt supply would respond rather quickly and over time the spot market would come down. And so we lagged the market, spot market, in every situation. And now we're back into a more orderly situation where you have the spot market at or a little bit less for gasoline than the other fiscal market.

BILL NELSON: In the aftermath of September the 11th, the price jumped about 40 cents a gallon, and you all stepped in, froze the prices and assured the distribution, and things settled down.

In the aftermath of Katrina, likewise, the price rose about 40 cents, almost overnight -- exactly overnight, as a matter of fact -- in gas stations.

And so why would there not be the similar response?

RAYMOND: It was a different set of circumstances. In 9/11...

BILL NELSON: Which is?

RAYMOND: In 9/11, the industry wasn't concerned about whether there was adequate supply. No refinery was affected, no shipment anywhere was affected.

In Katrina and Rita we were very concerned about the adequacy of supply, since we've lost, A, a lot of refining capacity, and, B, in the early days the ability to move the product around. The pipelines were shut down. We couldn't get supplies to service stations.

So from an industry supply point of view, the circumstances were quite different. In our own case, in the directly affected areas, we froze the price. And, as I commented earlier, outside those areas what we tried to do is maintain continuity of supply and at the same time avoid a shortage.

HOFMEISTER: Senator, from the point of view of Shell, we also froze prices in the area itself for a period of time. And then, like any non-economic decision, which it was, it had an unintended consequence, which was, when the price was lifted, it moved very, very rapidly, having other consequences for local citizens. Nonetheless, it was the right thing to do at the time.

I think in addition the debate that took place within our own company with respect to a wider freeze option is that the unavailability of supply for quite some time, which we knew would be weeks and in some cases turned out to be months, would create an artificial demand situation in which we very seriously were concerned about outages in various markets around the country. And knowing that price is a rational mechanism to keep the balance there, we decided as we did.

PILLARI: Senator, I would, without repeating everything that's already been said, we also did freeze prices for awhile.

But I wouldn't underestimate the importance of the fact that, even today, unlike 9/11, we still have refineries and we still have infrastructure that is not in service. It is a very different situation.

BILL NELSON: Mr. O'Reilly, let me ask you. You have the leases that are left on Destin Dome, off of northwest Florida. What are your plans for those leases?

O'REILLY: Senator, we relinquished the leases. I believe there are a few of them still in the hands of another company not represented here today.

But we relinquished them after we settled out of court following our attempt to move forward with development.

BILL NELSON: All of yours were bought back, then?

O'REILLY: Correct, Senator.

BILL NELSON: Which company is it that still has the releases outstanding?

O'REILLY: I believe it is Murphy, but that's something that I would have to check.

BILL NELSON: And that's in an area about 20 miles off of Florida?

O'REILLY: That is 20 or 25 miles from the panhandle, correct, Senator.

STEVENS: Senator, your time has expired. I'm sorry.

We now have (inaudible) by the witnesses. We have Senators Allen and Burr, Snowe and Craig. And those will be the last senators to question the panel this morning. We will not come back to this panel this afternoon. We'll come back to another panel of attorneys general and the FTC.

DOMENICI: On our side, Senator Allen, you're next.

ALLEN: Thank you, Mr. Chairman. Thank you, gentlemen, for being here.

Let me go real quickly through some ideas where we can act presently to actually ameliorate, reduce the cost of gasoline -- and a big picture view from you all on the future, how we can become less reliant, less dependent on foreign sources of energy.

Every spring, around Memorial Day, gas prices go up, regardless of hurricanes. And it's because of a change in formulations. We have a proliferation of -- boutique is what they're called -- fuel specifications.

Senator Burr from North Carolina and I have teamed up on trying to bring some common sense and expand refinery capacity, reduce prices at the pump.

By rather than having 100 different blends or boutique fuels -- which impact our limited refinery capacity and then, of course, have a big impact on the pipelines that have to clean out that other blend before they bring in the boutique fuel -- what we aim to do is get it harmonized into, say, the three or four cleanest burning fuels to be used in the non-attainment areas, regions with poor air quality, and have that as a national standard; let those jurisdictions or regions choose.

Some of you all mentioned this in your remarks and the large number of fuel types that limit flexibility and product distribution and, particularly, end up disrupting supply and increasing costs.

In the event that this measure passes that Senator Burr and I are introducing, right quickly, if you could, could you estimate for us what impact that would have in lower price per gallon at the pump for American consumers if that were in effect next year?

Go through sequentially and...

RAYMOND: I think, Senator, it's really impossible to do that. You'd have to look at it area by area. But there is no doubt that the system would be much more efficient and that would be passed on to consumers.

O'REILLY: Senator, I agree with that comment. You know, when the EPA waived some of the restrictions temporarily in the aftermath of the hurricanes, it enabled a much faster response, because we were able to move gasoline from, say, Alabama, into the Atlanta market, which was deficit and in trouble in the aftermath of Katrina.

O'REILLY: So you see right away the artificial barriers that existed, how much more efficiently the system could function.

So I certainly support what you're trying to accomplish.

ALLEN: Thank you.

MULVA: Senators, I support what you're trying to do, the initiatives of going away from boutique fuels to more standardization. It will not only be more efficient, but there will be fewer outages in a regional location by having standardization of fuels.

ALLEN: Thank you.

Mr. Pillari?

PILLARI: I don't think you can predict what the price would be. What you can predict is that we could move fuels around much more efficiently and more flexibly, which means supply and demand would move into equilibrium more quickly, which will then have an impact on the market price.

ALLEN: Lowering it. Right?

PILLARI: It will certainly move into equilibrium.

HOFMEISTER: We believe that energy is a national resource, rather than a state resource, so we would support simplification, as simply -- we have a lot of experience in Europe with this. And I think we could learn some lessons from looking across the ocean.

ALLEN: All right. Let me ask you all a question looking into the future. Obviously we need more production here in the United States for American consumers, because this has a big impact on our economy, on jobs. And this is a national security issue as well.

Having to worry about getting jerked around by some of these people in the Middle East or Venezuela is not the way the United States ought to be worrying about its national security.

There are innovations. And some of you all have touched on them, whether that is solar photovoltaics. Obviously we need to have more nuclear, clean coal.

But insofar as fuels in the next 10 years, what can our government do to help, or stop hindering, the actual use of whether it's hydrogen, whether it's fuel cells, whether it's clean coal or these renewables, these biofuels? What can we do in 10 years to get our automobiles, rather than just looking at just fossil fuels, looking at these renewables and innovative approaches? What can we do in your view to actually achieve this greater energy independence?

I'm going to go Hofmeister, the other way.

Mr. Hofmeister?

HOFMEISTER: I really think this is the challenge for industry, rather than government.

ALLEN: What can we do to help or stop...

HOFMEISTER: I think in the area of research grants, in the area of enabling experimentation, in the area of enabling the auto companies, in particular, to test a variety of alternate ways of doing their business.

I think in the case of hydrogen, though, we have to be careful. I think we have to take that one step at a time. I don't think we want to rush that before for the main purpose that this is something that is going to just simply -- we have to learn as we go. This is a whole new technology. We don't want to push that too fast.

PILLAR: I think, as was just said by Mr. Hofmeister, this is a role for us. I think a consistent fiscal policy so we know how we will be treated for the long term I think would be helpful.

I think reducing permitting issues...

STEVENS: I'm sorry, Senator, your time's expired and we have two extra senators, two senators that have come back after I announced there would be no more senators.

So we have a real problem here about time.

ALLEN: Understood, Mr. Chairman.

Gentlemen, if you would please provide that answer to that question in writing, I'd appreciate it.

Thank you, Mr. Chairman.

STEVENS: Senator Burr, you're recognized for five minutes.

We'll decide what to do with the other senators in just a minute.

BURR: I thank the chair, and I probably won't take five minutes and that may help the chairman's quandary as it relates to speakers.

I think every question has been asked. Let me thank all of you for your openness and willingness to be here.

Is there anybody that disagrees that new refineries, defined as either expansion of current facilities or new facilities, is in fact needed? Anybody that disagrees that we need new capacity in refineries?

Let the record show that nobody disagreed with that.

Let me move, if I could, to several of you have mentioned that the new ultra-low sulfur diesel regulations that will take effect soon, which set new specifications for on-road highway diesel fuels that would allow new heavy duty trucks to reduce emissions by 90 percent, older trucks to run cleaner and light duty diesel vehicles such as SUVs to get significantly better fuel mileage and for a greater range of diesel retrofit technologies to be used, that this is problematic right now from a standpoint of the date certain that's set.

Can I have each one of you comment on whether you can meet that date certain?

BURR: Let's start with Mr. Hofmeister?

HOFMEISTER: Technically, we can. I think our big concern is in the distribution of the fuel and the fact that as it moves through pipelines, it could pick up other sulfur molecules.

BURR: Mr. Pillari?

PILLARI: That's a real issue for us as well. We can make it, but moving it is still problematic.

MULVA: Same issue for us.

O'REILLY: Yes, we can meet it at the refinery.

RAYMOND: Same comment, Senator. We can meet it at the refinery.

The National Petroleum Council made some comments on that in the last year with some suggestions to the EPA as to how that be managed.

BURR: Well, my hope is, and I would encourage all of you -- if we can solve the refinery issue, which you've said there's not an issue, hopefully collectively we can solve the distribution issue, which is moving it through a pipeline.

I think it's important that we remember that just like you have suppliers, there are manufacturers out there that have developed engines that are designed with the intent of running on low sulfur diesel. And anything that does not meet a time line that is in sync cheats one side or the other.

Mr. Chairman, I thank you for your indulgence. I yield back the balance.

STEVENS: Thank you very much.

Senator Snowe and Senator Craig, you're recognized for five minutes each.

SNOWE: Thank you, Mr. Chairman.

And I want to welcome all of you here today to answer some obviously very significant questions. And certainly for the state that I represent, where there are -- 78 percent of Maine people depend upon home heating oil for their fuel. And all the more concern given the prospects of winter, we've already experienced a 30 percent increase this year, which is 20 percent higher than it was last year as well.

So more than 50 percent increase and we have not yet had the onset of winter.

Home heating oil, natural gas, these are not your run of the mill commodities. These are basic necessities of life. And certainly that is true in Maine as it is elsewhere throughout the country. The recent survey indicated that one in five people the last few years when without some basic necessity, whether it was food or prescription drugs or foregoing paying their mortgage or rent payment in order to pay for their fuel.

And so it does stretch credibility in many ways, in listening to your responses here today given the fact that we have record breaking revenues, record breaking profits, and that's understandable. You're in the profit-making business and you should be.

But the question is, that in the final analysis in making those record-breaking profits, it mirrored a time where people experienced historical increases in their fuel prices, whether it's home heating oil, natural gas or gasoline.

And it's really hard to understand, and certainly most difficult to explain to my constituents as to exactly what would suggest that, was necessary during that period of time.

And I really would like to have a more direct explanation as to what we say to our constituents as to exactly why that would happen.

Can we start with you, Mr. Raymond?

RAYMOND: Well, we can, Senator.

I think the point still is that we operate in worldwide commodity markets. The prices that we charge reflect those markets. I think our primary focus, number one on our list, is always to make sure that there is adequacy of supply. We're not interested in shortages. And in order to maintain that adequacy of supply, we have to participate in those worldwide markets, and that's ultimately what gets reflected to the consumer.

SNOWE: Well, could you explain to me why I was -- my office was approached by a captain of tanker who said the industry, there was a tanker that went to Chile a month after the hurricanes that was full of gasoline that left New Jersey?

RAYMOND: I can't explain that, but I can assure you it wasn't one of ours because other than the traditional exports that the country has always had to support the Caribbean and part of Latin America, we have not participated in exporting products from the United States.

SNOWE: Have any of you?

Did any of you in this recent time during the hurricane, in the aftermath?

No. Is that true of all of you?

O'REILLY: Well, I'm not sure what the question is, Senator.

We had a question earlier about imports and exports of product, and I think I made the point that for every one barrel -- there are three barrels imported for every barrel exported.

O'REILLY: We're linked to Mexico, we're linked to Canada, and we're linked to the Caribbean. All of those markets kind of run as one. So there's traffic back and forth...

SNOWE: Well, we get much of our supply from Canada, but we saw spikes as everybody else did in America for these major increases during this time.

O'REILLY: The hurricane definitely caused a spike in prices, Senator, but I think for heating oil there is a longer-term concern, and that is that that part of the barrel, the heating oil and diesel part of the barrel that we call the distillate part of the barrel, is in high demand.

Europe is converting its automotive fleet systematically from gasoline to diesel, which is putting more worldwide pressure on the supply of diesel. That's why expanding our refining capacity in this country is so important, so that we can make more products such as diesel.

And hence the comments I made in my both opening remarks, as well as in my submitted written remarks, about what government policies need to be in place to assure adequate supply to citizens of Maine and other states.

STEVENS: Senator's time has expired.

SNOWE: Well, I would hope the industry would consider a supplemental fund for low income fuel assistance. I think that that certainly would be an appropriate gesture under these circumstances, given the profits that you're making, given the fact they are record- breaking certainly in the history of corporate America.

STEVENS: Thank you very much.

Senator Craig's recognized for five minutes.

CRAIG: Mr. Chairmans, thank you both for the hearing.

And, gentlemen, I hope you feel your time before this committee was productive. I think any objective person listening to the dialogue today that's gone on between this joint committee and you would come away a much better informed consumer than they did prior to listening. And I trust that you believe that to be a beneficial experience.

There's a great deal we know about your industry. There's a great deal the average citizen does not know. And that gap of knowledge will probably never be completed or totally understood as to why you market the way you do, why you price the way you do, world markets, fungibility and all of those kinds of things that we on these committees look at on a regular basis.

Most of the questions have been asked. One specific to my state of Idaho has not been asked. I've got an attorney general out there now scratching his head as to why Idaho gas prices are higher.

I always try to go out into Virginia to fuel up, because they're always 20 cents cheaper than they are here on Capitol Hill. But when Capitol Hill is cheaper than Idaho, and it is at this moment, I'm frustrated.

Gas in Boise was $2.50 a gallon, $2.56 a gallon this weekend. It slipped a few cents in the market.

So it is awfully difficult regionally in this country to understand why there are anomalies of the kind we have, but we have them. And so my attorney general is looking at it at this moment and a bit frustrated.

But so are my consumers. Two town meetings this weekend, and I can tell you of the some 300 total people who attended those town meetings with me, what the number one question was. It was about you and your profitability. And I must tell you, it's not terribly fun defending you, but I do, and I attempt to explain the markets. But I can't explain this one.

Can you tell me why Idaho's price is now higher than Washington, D.C.'s by a factor of 15 cents on the gallon? I doubt it.

Go ahead, Mr. Raymond, you started to reach for the button.

O'REILLY: I was going to try, but...

RAYMOND: Well, I'm going to let Dave answer, because my first comment to you, Senator, is, since we hardly market anything in Idaho I don't have a dog in that fight.

CRAIG: No, I know. I should have called Earl Holding (ph) down in Salt Lake with Sinclair, but I know what his answer is.

O'REILLY: We do market in Idaho, Senator, as you know, and I think your question is a reasonable one, and I can certainly understand why consumers would be concerned.

I just have a couple of comments. You made the point that -- and I think I made it earlier -- I think you might have heard that we do have regional markets in the gasoline system.

O'REILLY: You have underlying crude prices that drive the general level of price for products, but then the regional markets have their own supply and demand characteristics.

One of the issues in the inter-mountain area is that there's been tremendous economic growth and population growth in that area, and it is supplied by relatively small refineries.

You mentioned the holding, for example, at Salt Lake. Well, there are other smaller refineries in that area that are faced with some very challenging investment propositions to meet the new fuel requirements.

And some of these investments -- I think the affordability of these investments for the small refiners to continue to supply the markets in the inter-mountain region is a big question.

So I think you're seeing a tightness in the market. I would assume that those prices will moderate, as they have been in other parts of the country.

CRAIG: They are moderating.

O'REILLY: And that should help. But it is becoming more of a challenge to supply product in the inter-mountain region, where in past years it was a relatively easy market to supply.

CRAIG: Well, gentlemen, thank you all.

One last concern. It's been expressed by others here on the panel in different ways, and that is the price of diesel today. When you look at rural states like Idaho that are tied to markets and economies around the country by truck, substantial disadvantages begin to occur at the pump, certainly not wholesale or even large volume buying. This weekend in Idaho was about $3.20 a gallon.

And for my farmers who are seeing horrendously large input costs today because of what's going on in the diesel market, along with the natural gas for fertilizers, are very, very frustrated at this moment.

And I must tell you, that while the gas prices in Idaho are moderating, the diesel prices are just sitting there. To my knowledge, they haven't moved at all in the last month, except up. They've leveled off but they haven't come down.

You've already talked to the issue. You talked what's going on in Europe. You've talked of trying to expand capacity in that area. But great economic dislocations are occurring today as a result of that price.

Thank you all very much.

STEVENS: Thank you, Senator Craig.

Senator Talent?

TALENT: Thank you, Mr. Chairman.

I understand you're in a hurry. And I have two questions.

STEVENS: Senator, we need to hear from you. You were here early and you're entitled to be heard.

TALENT: Thank you, Mr. Chairman.

I'll try and be as brief as I can.

Mr. O'Reilly, I appreciated one part of your, well, a lot of your testimony.

TALENT: One part of it especially, I want to just read to you, on page 15: "Historical divisions are irrelevant in the energy equation we now face. When a single hurricane can knock out nearly 10 percent of our nation's gasoline supplies, it's clear that a new approach to dealing with energy issues is needed.

"This is no time for divisive, business-as-usual energy debate."

And in the next page you say, "We need to shift the framework of the national energy dialogue to acknowledge that improving America's access to oil and natural gas, investing in new energy sources, such as hydrogen fuel cells and renewables are in fact complementary goals that can help create affordable, reliable energy supplies."

So investing in renewables is a complementary goal with investing in other kinds of energy. That's what I hear you saying here.

O'REILLY: Yes, Senator.

I think the point I was trying to make in my testimony is I think we need to approach all forms of energy and not supply and not necessarily one at the expense of another, because I truly believe we're going to need it all.

TALENT: And I do, too.

And I will say to you, sir, it would have been good to have that kind of help a couple months ago when we put the renewable fuel standard on the energy bill in this committee and your industry uniformly fought it to prevent us setting a renewable fuel standard that would help us encourage the production of ethanol and biodiesel.

So I don't know whether this is an 11th hour conversion or maybe whether you were a dissenting voice at the time.

But it would be good if we could work together in the future. Are you in agreement with that?

O'REILLY: Absolutely.

TALENT: Yes. I think so, too.

One other thing I wanted -- area I want -- because you answered the question about diesel, which is question my farmers have got as well.

Mr. Mulva, this is in your testimony. On page four you say, "Until recently, accelerated levels of investment were not encouraged because growing global demand could be met largely from spare oil production in Russia and in OPEC countries and by taking advantage of spare global refining capacity and spare capacity in oil field services and supplies.

"That situation has changed. And today the industry can offer the prospects of profitable growth as it steps up its investment in huge, complex energy projects around the world."

What you're describing, it seems to me, is the fact that you all view -- and I think this is understandable -- you view this as a global -- it is a global market. And investment opportunities are global for you.

And that's a perspective I can understand.

Now, Senator Allen touched on the point that for us, while we understand that the economics of this is global, we have particular interests in the United States of America that we have to protect as well.

So in other words, my concern is that if we just let global economics dictate investment and creation capacity, we may be in a situation where in some kind of perfect world where there were no political differences between countries everybody would have adequate supply at affordable prices.

TALENT: But with that, we may be in a situation where we have plenty of capacity to do it around the world but we're cut off from it because other governments control it and they don't want us to have it.

And, of course, we've seen that with OPEC and other situations.

Now, what would you suggest, from our perspective, that we can do to make certain that we have adequate capacity here and access here? We talked about renewable, which is one way, because that's produced here.

But, would you or any others have any suggestions along those lines?

And that's, then, all I have, Mr. Chairman.

MULVA: Senator, I didn't have the opportunity of responding, Senator, before, but, really...

TALENT: Yes, Senator Allen raised the same point which, as you've no doubt noticed, the fact that one senator raises a point will not keep other senators from raising the same point.


It's almost an encouragement.

MULVA: Senator, I was prepared.

And I'll give you the three points that I think could really help us with respect to the upstream part of the business and the downstream refining part.

We need access -- access so we can explore. We need streamlined approvals and permitting and regulations. That's going to help us upstream and downstream.

And the third is: It helps us if we have the flexibility of doing these things -- in other words, I'm saying no mandates as to how this is going to be accomplished.

That helps us do what we do best, which is develop energy and supply for the marketplace.

TALENT: So, you're asking to be allowed to explore in areas where energy exists in the United States?

MULVA: Absolutely. And both upstream and downstream, on the refining side and the infrastructure side of the pipeline, we need streamlined permitting and regulation, not at the expense of the environment in any way, but we just need to get the permitting process and regulatory process streamlined.

And, when it comes down to renewables and whatever, we're all for that. But we don't need mandates to how to do that.

STEVENS: Thank you very much. The last senator to be recognized, Senator Lautenberg, recognized for five minutes.

LAUTENBERG: Thanks very much, Mr. Chairman. And my apologies for extending this hearing.

And, gentlemen, I respect very much your corporate leadership.

I come out of the corporate world. And the company that I started with a couple of poor guys from the same neighborhood now has over 40,000 employees and the longest growth record of any company in America at 10 percent each year over the previous year for 42 years in a row.

And so I respect your pursuit of profits. But I also learned one thing in my corporate world. And that is that there are obligations that extend beyond simply the profits.

There are communal obligations, particularly when you're in a business like you are, which is almost a commodity business.

I'd like to ask a couple of things that would help me understand what's been taking place here. Did your company or any representatives in your companies participate in Vice President Cheney's energy task force in 2001 -- the meeting?




(UNKNOWN): We did not, no.


(UNKNOWN): No, I wasn't here then.

LAUTENBERG: But your company was here?


(UNKNOWN): Not to my knowledge.

LAUTENBERG: In order to shake loose the pricing mechanism that exists within OPEC -- and there is a pricing mechanism there and a quota for production. Am I correct in that -- in OPEC?

(UNKNOWN): There is a quota, but most people don't observe it.

LAUTENBERG: Most people don't observe it.

Well, let me ask you this: How would you feel if an opportunity was presented in law to say that, if they engaged in any quota-setting that they might not be permitted to join another international organization, particularly the WTO, which insists on free markets if you want to participate in the business opportunity, as well as membership.

LAUTENBERG: Now, I've got a suggestion -- I've got it in written from -- that WTO, Mr. Chairman, excludes any organization that -- and, by the way, it's in their charter, anyway. That OPEC be included for review as to whether or not their quota setting violates WTO rules, and the fact is that Saudi Arabia would like to join, and several members of OPEC are currently members of the WTO.

Does that strike any of you as a good idea, bad idea?

O'REILLY: Senator, I'll try to comment on this, because I think the situation in the marketplace today is that all of the producers are producing flat out. And my understanding is that Saudi Arabia in particular has indicated that it's adding capacity, in the process of adding capacity. They made statements to that effect.

So what impact -- you know, I'm not an expert on WTO, but my observation is that today every producer seems to be stretched, including the members of OPEC.

LAUTENBERG: But they may be doing that, as Mr. Raymond said earlier, that they may have an agreement to that effect. But the real outcome is that they could exceed the agreement, but there is an agreement.

Is there any dispute about that, as to what their quotas ought to be?

RAYMOND: No, I don't think there is, Senator. But I guess the point I would make, if you look at it from, let's say the global oil markets, is that the whole consuming world is dependent on the same pool of resources.

And to the extent that this country takes actions for whatever reason to disrupt that pool, we end up penalizing ourselves.

LAUTENBERG: Well, I don't know that we disrupt the pool. They're still in this business because they need and they want the money that comes from their production.

LAUTENBERG: But they can't have it both ways. And the fact is that I have had, for some time, enormous resentment of the fact that when Saudi Arabia dialed 911 in the early '90s and asked us to come in to save the life of their countries and then turned their back on us when problems fell the other way.

It's an outrage and I don't think that we ought to let it go unnoticed.

Thanks, Mr. Chairman.

STEVENS: Thank you very much.

We're going to ask members to submit to their respective committees questions to be answered by the witnesses by tomorrow at noon -- written questions.

WYDEN (?): Mr. Chairman?


WYDEN (?): Just on that point -- and I really appreciate you and Chairman Domenici indulging me on this -- I have been trying for many years to get at an anticompetitive set of practices involving zone pricing and...

STEVENS: Senator, I have to be back here at 2:00 o'clock in another hearing.

WYDEN (?): Mr. Chairman, I would just like to clarify that the response to the questions in this area, that we could have promptly -- say, within the next two weeks. Would that be acceptable to you?

STEVENS: I think we will ask them to be as responsive as possible in two weeks if possible.

WYDEN (?): Thank you, Mr. Chairman.

STEVENS: It depends on the questions that are asked, how long it takes to get answers.

WYDEN (?): Thank you.

STEVENS: But they will be delivered to the respective committees by noon tomorrow and the staff will submit them to the witnesses.


DOMENICI: Mr. Chairman?


DOMENICI: I know we wanted to get out of here, but I want to do two things. First, I want to thank you for joining our committee or letting us join you; thank the witnesses.

I want to make two quick observations. We didn't get to ask you what you think about the future supply-demand situation. I hope you'll do that for us -- your own company's picture.

And secondly, a comment with reference to my question on how is crude oil priced. I hope you're expert enough to do a better job in writing that out than you were in answering it here, and to tell us how it's priced, what happens to it.

And secondly, could you do the same thing on natural gas, please? It comes out of the ground; what happens to it? How does it get to $6? How does it get to $12? Who gets the money along the way? Can you do that for us?

Thank you, Mr. Chairman.

STEVENS: Thank you.

In my state, diesel is $6 a gallon in rural Alaska today.


STEVENS: Diesel. And regular gasoline is over $5. We have as great an interest in this subject as anyone.

But I do thank you. I thank you for your interest in increasing supply. I think that's the answer for America is to increase the supply and enter into a new phase of conservation.

We've all supported that. We appreciate your appearance here.

This committee will stand in recess until 2:00 o'clock for the second panel.


STEVENS: This really is a continuation of the hearing we held this morning on energy prices. And the purpose of this afternoon's hearing is to discuss whether states have the tools they need to address allegations of price gouging and whether the Congress should require the Federal Trade Commission to increase its activities with regard to investigating these charges.

Now, with us today are three state attorneys general. We thank you very much for taking the time and responding to our request. The New Jersey attorney general, Peter Harvey. We put it in the right day, your election's over, Mr. Harvey. South Carolina Attorney General Henry McMaster. And the Arizona attorney general, Terry Goddard.

We're also going to have from Deborah Platt Majoras, chairman of the Federal Trade Commission.

Hurricanes Katrina, Rita and Wilma severely damaged our nation's production and refining capabilities. We heard a lot about that this morning.

In immediate aftermath of these storms, there was a sharp rise in gasoline prices. Those of us elected to public office have a duty to our constituents and all Americans, and we are concerned about these allegations of consumer price gouging. Several members have responded to these allegations by introducing price gouging legislation. Some of those bills suggest that the states should be preempted by federal legislation.

Under these proposals, the Federal Trade Commission would monitor, investigate and prosecute those suspected of price gouging.

We're very interested in hearing from the witnesses their thoughts on how to determine what really constitutes price gouging and whether the state or the federal government is best equipped to address these activities. And I look forward to your statements in this regard.

Senator Inouye?

Senator Inouye waives.

Senator Bingaman, do you have a statement?

BINGAMAN: Yes, very briefly, Mr. Chairman. I welcome the witnesses.

My understanding, at least of the bill that I co-signed related to price gouging, is that it would not preempt the states. Rather, it would give to the Federal Trade Commission authority to prosecute just as the states currently -- some of the states currently have statutes that contemplate prosecutions or authorize prosecutions for price gouging. In fact, the idea would be that the federal government or the state would have the authority to pursue a case of this type, and it would be up to the officials involved as to which chose to move ahead.

So I would just make that one clarification. But I look forward to the testimony, and I will have some questions after the testimony.

Thank you, Mr. Chairman.

STEVENS: Does any other senator wish to make an opening statement? If not, let us proceed with the witnesses that we have before us.

And I hope you don't mind, ma'am, we'd like to hear from the attorney generals first to get the background here before we get to the FTC issue.

So may I call on Mr. Harvey, Attorney General Harvey first?

HARVEY: Thank you. Chairman Stevens, Co-Chairman Inouye, Chairman Domenici, Ranking Member Bingaman, and members of the two committees, I am Peter Harvey, attorney general of the state of New Jersey.

HARVEY: Thank you for inviting me to testify today about energy pricing and profits.

As New Jersey's top law enforcement officer, I filed lawsuits in September against three oil companies and a number of independent gas station operators alleging that they violated New Jersey's Motor Fuels Act and Consumer Fraud Act in connection with gasoline price increases in the wake of Hurricane Katrina.

New Jersey's citizens, like consumers in other states, were stunned by the steep price hikes that followed this tragic storm in the Gulf States.

Similar to other states, New Jersey has a specific price-gouging law that is part of our Consumer Fraud Act. It applies, however, only when a state of emergency has been declared within our state. Its protections were not available to us following Katrina because this disaster occurred, as you know, in another region.

To protect our consumers who rightly questioned whether they were being treated fairly and honestly, we thoroughly investigated what was happening at our gas stations in New Jersey and took the strongest legal action we could under our state laws.

I am here to share our experience in New Jersey and discuss why I believe we need a federal price-gouging statute that applies nationwide to the sale of essential goods and services following a disaster occurring in a particular region of the United States.

In the week after Katrina struck, gas prices in New Jersey soared upward to an average of $3.16 a gallon by Labor Day. That was a dollar higher than the average price just one month earlier.

Hundreds of concerned citizens telephoned the New Jersey of consumer affairs and the state Office of Weights and Measures, both of which are within the attorney general's office.

The acting governor, Richard Codey, also expressed concern about escalating gas prices.

We responded by closely monitoring gas prices and investigating individual complaints regarding gas retailers.

To be specific, we sent state, county and municipal weights and measures inspectors to visit more than 500 of New Jersey's 3,260 gas stations.

The Office of Weights and Measures in the Division of Consumer Affairs has responsibility for ensuring that all commercial weighing and measuring devices, including gas pumps, accurately measure commodities being sold to consumers.

In this case under our oversight and pursuant to our statutory enforcement authority, these state and local inspectors conducted broader investigations to ensure that gasoline retailers were complying with state laws and treating consumers fairly.

They monitored price changes and demanded access to books and records that retailers are required by law to maintain and make available to state inspectors.

The inspectors identified over 100 violations of New Jersey's laws. On September 26th, 2005, my office filed suit against three oil companies: Hess, Motiva Shell and Sunoco, as well as various independent gas station operators.

The suits alleged violations at 31 gas stations, 13 owned by the three oil companies and 18 independently owned.

As I previously stated, without a declared state of emergency in New Jersey, our state's price-gouging statute does not enable us to target gas retailers and suppliers who seek to profit unjustly as a result of a disaster occurring in another part of the country.

In our suits, we instead allege specific violations of New Jersey's Motor Fuels Act and Consumer Fraud Act.

Specifically, we alleged that the defendants violated a provision in the Motor Fuels Act that prohibits a gas retailer from changing gas prices more than once in a 24-hour period.

We also alleged that price increases that violate the Motor Fuels Act constitute an unconscionable commercial practice, in violation of our Consumer Fraud Act.

In other instances we alleged that defendants posted prices on roadside signs that were lower than the actual prices charged at the pumps, a violation of the advertising regulations under the Consumer Fraud Act that prohibit deceptive practices and misrepresentations in the sale of merchandise.

In addition, we charged defendants with not maintaining and providing access to books and records required to be kept under the Motor Fuels Act.

We were able to pursue claims against these retailers who failed to obey our laws by their rapid escalation of prices. We do believe that part of the volatility in gas prices in New Jersey following Katrina was the result of retailers charging prices based not on what they actually paid, but what they feared they might eventually pay or, worse yet, on what they thought they could get away with, given the market conditions.

HARVEY: While some busy gas stations do get fuel deliveries more than once a day, others were charging increasingly high prices for the same gas that they had in the ground when the day or week began.

New Jersey's Motor Fuels Act, enacted in 1938, was indeed aimed at reducing volatility in gas pricing.

However, this trust-busting-era legislation was originally intended to maintain healthy competition by preventing one gas retailer who was perhaps in a stronger financial opposition form continuously undercutting a competitor's prices to drive the competition out of business.

In other words, sit was aimed at preventing predatory pricing. The Motor Fuels Act still carries the penalty schedule originally enacted in 1938 with penalties ranging from $50 to $200 and retail license suspension.

Unfortunately, these penalties are inadequate to punish an oil company given the enormous revenue generated by the sale of gasoline.

While the Motor Fuels Act applies to the unlawful pricing conduct engaged in by certain oil companies in New Jersey, it does not get to the heart of the price-gouging issues that we experienced in the wake of Katrina.

Our Consumer Fraud Act casts a wider net and carries penalties of up to $10,000 for a first offense and up to $20,000 for subsequent offenses.

However, this law is also inadequate because it still does not get us beyond the gas retailer and onto the conduct of the supplier or refinery.

Moreover, it does not provide penalties that, for a big oil company, represent more than a marginal cost of doing business.

We are here today because serious questions have been raised about why the major oil and gas companies posted record profits for the most recent quarter while consumers who rely upon gas every day to get to work and run essential errands were getting squeezed financially with record high prices, increased, perhaps without any economic justification.

I believe that our experience with Hurricane Katrina clearly points to the need for a federal price-gouging statute.

HARVEY: When there is a state of emergency declared in New Jersey, we have the ability under the price-gouging provisions of our Consumer Fraud Act to take action against merchants operating within the state who reap unconscionable profits from essential commodities.

In the impacted geographical area, we can prevent those affected by the disaster from being unfairly exploited by profiteers and sharp operators.

However, when there is a disaster or emergency occurring in one area of the country that affects the supply and pricing of an essential nationally distributed product, as with Katrina, we can't do much about it. Congress should provide a mechanism that reduces the volatility of gas prices across state lines.

Even if the states were to enact new laws to address these situations, a state by state approach would prove difficult and inconsistent.

A nationwide problem demands a nationwide solution, though I would recommend one that does not pre-empt state remedies and ideally one that provides an enforcement role for state attorneys general.

Let me make one thing clear.

I am not talking about attacking profits; I am talking about attacking profiteering. There is a difference.

Consumers should not face artificially inflated prices that bear no substantial relationship to the supply of goods. Congress has long recognized the need to curb profiteering.

After the outbreak of a civil war, Congress enacted the Federal False Claims Act to prevent false claims and overcharging by those who contracted with federal government to provide essential services. Its impact has greatly expanded in recent years through private enforcement actions authorized under the law.

A federal price-gouging statute should take effect when needed for a limited time span, perhaps for 60 days. The purpose of the law should be to allow things to settle, just as the New York Stock Exchange can now close the market to prevent a crash if there is a large enough fall in stock prices.

The factors involved in fuel pricing are complex, and sustained attempts to control fuel prices might prove counterproductive. Ultimately, we must have a balance that accommodates business, as well as the consumer.

People must be able to buy essential goods such as food, gasoline, home heating oil and electricity.

I would emphasize that in striking that balance we cannot lose sight of just how essential goods are to Americans.

For some, the cost of a tank of gas can be the obstacle that prevents them from driving to a doctor's appointment or to the grocery store for food. We here stories during winter of elderly Americans who freeze to death because they run out of fuel oil, and in summer of those who die in the heat for lack of electricity and air conditioning.

People should not have to make life or death decisions based upon prices that have been put out of their reach by profiteering. Many will not have a choice and the result will be death. Economics will self select them to freeze, boil or live in darkness.

If Katrina teaches us nothing else, it should teach us that our emergency plans must include providing for the poor, the immobile, the sick and the elderly -- in other words, those with the least resource to help themselves.

Thank you for giving me the opportunity to testify here today and to make my views known to you.

HARVEY: And I will take whatever questions you have when you wish to hear from me. Thank you.

STEVENS: The attorney general from South Carolina, Henry McMaster.

MCMASTER: Thank you, Mr. Chairman.

We have had some experience with this issue of price-gouging in South Carolina, which has indicated the need for strengthened laws in our state and we are working on that now. We've made a proposal. It's not been introduced. It won't be until January.

Mr. Chairman, to answer your question -- which is best equipped to deal with price-gouging, the state or the federal government -- it might depend on whom the defendant is. And if the defendant is a big oil company, then perhaps that should be a federal question there.

Any big corporation that's located outside of the jurisdiction of a state, particularly in a lengthy civil action, discovery, with lawyers and all the processes involved there, with service of process and so forth, it may be better to have a federal response if a response is necessary at all.

But as to the second question, Mr. Chairman, would we favor federal preemption, the answer to that is a solid, "No, we would not."

In our state, the federal authorities and the state authorities cooperate very closely together and we have no difficulty deputizing federal agents -- or state agents deputizing state agents as federal agents and participating side-by-side with state and federal prosecutors in the court room, whether it be federal or state, to enforce the appropriate law.

But we certainly wouldn't want our laws in South Carolina that have been written with some specificity and utilitarian purpose for us to be preempted by something else.

We have a fairly good law now. The civil law is very broad. The price-gouging, that is the one on unfair trade practices, which outlaws as a civil offense anything that is unfair or deceptive, very much as the FTC does. It's almost the same thing. We have that.

And that is useful, but we have a price-gouging law which is a part of that that we need to tune up a little bit. And I'll mention that one specific point in a minute.

But back to the day of the hurricane and thereafter, we got 550 direct complaints to my office within just a period of a couple of weeks, and awe got about a thousand referrals from the Department of Energy. We did the best we could to analyze them all. We don't have that many people that we can send out to inquire.

But what we found out was interesting. Of the pre-Katrina prices in South Carolina, depending on where you were in the state, were about $2.40 a gallon; that is, in November of '04, they were about $1.88, $1.90, $1.86.

The day before the hurricane, they were $2.40 on the average. Shortly after the hurricane, on August 29, September the 5th and the 6th, they'd gone up, depending on the part of the state, to $3.23, $3.18, $3.13.

And people were starting to complain very vocally. And, in fact, people were starting to panic as well because of very dire predictions of the consequences of the hurricane.

MCMASTER: People were hoarding gas. There were people we read about and heard about filling up their tanks from the boats and both cars, all three cars, all that sort of thing to be sure not to run out.

And by the time the weekend got there, many of the gas stations had plenty of gas but didn't have any customers because everybody had already gassed up.

Our governor, Mark Sanford, very wisely decided not to declare a state of emergency in South Carolina, which would have triggered our price-gouging statute, which has a criminal component, thinking -- and I agreed with him on that -- that to make such a declaration would have made matters worse.

It would have caused people to panic even worse.

And what they had in Louisiana, Alabama and Mississippi, that was certainly a state of emergency and a disaster.

But what we had in South Carolina, while highly inconvenient and troubling, was nothing like what they had there. So he didn't declare that and that was a good decision.

But when we got those complaints, we then began investigating. And we ran into the usual problems you run into whether it's in a civil case or a criminal case. And that is: Is the complaint credible?

And we learned a lot of times that the complaints that come in of high prices simply had no basis in fact. Either people were mistaken, or they were imagining things or some in fact were just making it up for reasons unknown to us.

We had a lot of instances where there were legitimate reasons -- that is, the prices, as we later learned, had gone up but only incrementally -- not huge increases, one after another, but they had gone up incrementally.

MCMASTER: But when we got the information on the prices that the gas stations were being charged, we saw that they were typically only 6 cents or 8 cents, maybe a little more, maybe a little less, higher than what they were being charged per gallon. I think the average was something between 2 cents and 12 cents per gallon.

And there are other legitimate factors, quirks, odd things that happened. For instance, one employee raised the price way up to $4.79, and he did so simply because he didn't want to run out of gas. Because if they ran out of gas and had to put up a sign, then nobody would come into the store to buy all the other things they sell, and that's where they make most of their money.

So that's what we ran into in our investigation.

We gathered a lot of information. And I'm happy to say we had cooperation from everyone we asked: Marathon, Ashland, BP, Shell, ConocoPhillips, as well as the American Petroleum Institute, the South Carolina Petroleum Marketers Association, all came and gave us information and maps and told us about the two pipelines, the Colonial and the Carolina Pipeline -- the Plantation Pipeline -- that come up from Louisiana and come and serve our state. And that's where most of our gas comes from.

And they gave us a lot of information.

And what it boils down to is we've ended up with seven stations that were charging $4.79 at the height of the prices that we are investigating now for purpose of seeing if we should bring a civil action against them under the Unfair Trade Practices Act, which is very broad.

Again, it's anything that's unfair or deceptive. It's based on the FTC definition.

And for a private party, it's treble damages and attorney's fees. If the government brings the case, it's $5,000 per instance, which would be $5,000 per sale.

So that's a good law to have.

But what we need is a criminal law that goes into effect in the absence of a declaration of an emergency by the governor.

In our state, our current law -- again a part of the Unfair Trade Practices Act -- says that if the governor declares a state of emergency, then the attorney general may bring a criminal case against someone who gouges prices in a number of commodities, including gas.

And price-gouging is defined as an unconscionable increase in the price, which is based on a mathematical sort of a formula. You take the average price -- it's all written in the law -- for the 30 days prior to the event in question, take the average. And if the increase is an unconscionable increase over that, then they are subject to criminal prosecution.

MCMASTER: It's a misdemeanor: $1,000 or 30 days in jail or both. But of course you have your prosecutorial discretion that would go in there as well. You don't have to prosecute everybody.

What we're asking for is this: Because our government wisely did not declare a state of emergency, we had no criminal law to use as a deterrent.

A good, specific criminal law that everybody can understand is a very good deterrent, we believe, particularly something like this that's not done in panic, not done as a result of alcohol and drugs and all those kind of things, but something that's calculated out to see how much profit's going to be made.

What we've asked for is an amendment to our price-gouging law that would allow the attorney general to bring a criminal prosecution against someone and have it triggered by our governor declaring a state of emergency in our state; or the president declaring the state of emergency; or, and this is the new part, a governor or the president declaring the state of emergency in another state and the situation in that state having a direct impact on things in our state.

And what that would have done would have been tailor-made for a situation is the one we experienced where you had clearly states of emergency in Louisiana, Mississippi and Alabama which, because of those pipelines that come right through South Carolina, that's where we get the vast majority of our gas. Amerada Hess brings some in through the port.

But that would have been tailor-made for such a prosecution. And we think, with the presence of that law, we could have advised people and made public service announcements of the presence of that law and its ready application to those situations.

We think that would have helped.

We still haven't -- back to the seven that we have ended up with, we still haven't decided what we're going to do with them. We don't have the information available.

But what it boils down to is, in South Carolina, if our general assembly will give the state this criminal authority that I've just referred to, we think that we can handle things in our state with that. If they don't, we'd be delighted to have a federal law that would apply to these things.

And thank you very much.

STEVENS: Thank you very much.

Attorney General Terry Goddard. I appreciate your coming. Thank you.

GODDARD: Thank you, Mr. Chairman. Now, Mr. Chairman, members of the committee, it's a pleasure to be here to talk about our examination in Arizona of the gas market within our state and hope that it bears some analogies for your deliberations across the country.

I will not talk about price-gouging because, in Arizona, we do not have a price-gouging statute. We do not have the advantages that have just been described to you. So perhaps the example of the absence of any kind of consumer protections in that area that are specific to gouging of prices.

GODDARD: I can't define it because we don't have a definition in Arizona.

What we do have to protect consumers are civil anti-trust provisions and consumer fraud protections. And we have tried to use those both to investigate and if we're successful, if the investigations prove fruitful, we'll be able to assess some penalties to benefit the consumers.

One such investigation has been completed and one is now under way. These tools, however, in summary, are pretty ineffective against what we've all been seeing in terms of gas marketing.

For one thing, the anti-trust laws depend on an overt conspiracy, they depend on meetings and communications, which in the gas market are not necessary. Everybody can see what the prices are, either in the public data or on the curve, and so that aspect of collusion is probably never going to exist in the gas industry.

Consumer fraud requires deceptive statements, and as I'm going to show in a moment, usually it's news events that seem to trigger the disruptions and the supply interruptions which cause our higher prices.

Now, in Arizona, we had two major examples that I'd like to talk about of supply disruptions and price spikes.

The first was in 2003 when our pipeline from Texas broke. It just stopped delivering gas to the Phoenix metropolitan area and the consequences of that were quite severe for our state.

And in 2005, the Hurricane Katrina aspects also caused crises to spike significantly.

I can't exaggerate, I can't underestimate the disruption that these price increases of gasoline have caused to our economy. I know that's been true across the country.

In Arizona, we're particularly automobile dependent. We have very long distances to travel. Commuting by car is practically the only way to get around. We have very little public transportation. So getting to work for consumers in Arizona has been a real struggle with these increases.

My office received hundreds, in fact, in 2003 we in a couple of days received over 1,000 complaints from consumers who saw prices at the pump as price-gouging, so they were pretty anxious to define it even if our legislature had not.

Now, we investigated through our civil investigative demands in 2003 and found no violation of the anti-trust laws.

But we did learn a great deal about the industry and about how gas was delivered in the state of Arizona.

Perhaps the most surprising finding, given the general disruptive aspect that the increased prices had on our economy, was that we found both times in 2003 and 2005 that retailers and wholesalers increased their profits by two to three times during the supply disruption, during the time when everybody else was tightening their belts.

GODDARD: Now, in 2003, on July 30, the Kinder Morgan pipeline from Texas to central Arizona ruptured. It was 50 years old and it simply gave out.

And that disruption lasted off and on for about two weeks. The immediate reaction was panic. People literally pumped the stations dry.

And so, the first weekend, we had prices soaring to 40 to 50 cents above the national average -- above $2, which seems cheap today, but at that point it was an incredible increase.

And some stations went up to $5 per gallon. That two-week period was very difficult for our state and the governors struggled to find ways to bring in additional supply.

And perhaps this is the best lesson that we got out of this whole program which is that, as a result of the pipeline break, we found how fragile our delivery situation was.

Ninety percent of all the gas coming into Arizona comes in two pipelines. And when we tried to supplement the one that had broken using rail transportation or trucks, we found it was extremely difficult.

Rail was virtually impossible to deliver and truck capacity was extended elsewhere.

And the governor had to request -- and it was ultimately granted -- an extension of driver hours, of 10 hours per week, in order to get existing trucks diverted to Arizona to help us move gas where the pipeline used to be.

We applied for an E.P. waiver because we have certain clean- burning fuel requirements for the center part of the state. And that was granted very quickly.

But the bottom line -- even military equipment was tried to be used and we found out the commercial nozzles wouldn't service the military tankers.

Most of our military tankers were in Iraq, but the ones that were in Arizona could not be used to help us out.

The other thing that we learned was that the industry's just-in- time delivery system leaves almost no cushion to protect consumers.

The reserves, such as they were, were gone instantly. There are no tank farms in Arizona in the (inaudible) sense. We have, at most, two or three days of reserve in the best of time; usually almost none.

Now, in 2005, the Katrina experience showed some very similar aspects. A month before Katrina, our prices were right at the national average. We didn't vary very much from that.

But as soon as the hurricane hit and the crisis was on, everybody's prices went up, but ours went up faster and stayed higher longer. We paid 15 cents above the national average, which we found quite surprising since most of our gas doesn't come from the Gulf Coast.

Almost none of it does. And our prices, for the first time in my memory, went above California's. That seems an abomination of nature, actually, living in Arizona.

For one thing, California has 10 cents per gallon higher taxes than we do. And the other problem is that we buy most of our supply there.

So how our prices got so dramatically higher than theirs is very hard to understand.

But the bottom line, when it all was said and done, was that retailer profits tripled. They went from an average of 10 cents a gallon prior to Katrina to above 30 cents a gallon in the weeks afterward in the weeks after.

We also found wholesalers...

STEVENS: Clarifying question: How did you determine that went up that much?

You just stated the profits went up how much. How was that determined?

GODDARD: The profits were a comparison between the wholesale prices AAA was able to determine and the prices that were charged at the pump. And our investigations found that. But I'm primarily citing the AAA.

We also found that wholesale prices went up an equivalent amount, slightly less, but in one case from nine cents before Katrina to 22 cents per gallon afterward.

Gas sales in Arizona are not, certainly as I understand the term, a competitive market. Supply disruption literally turns competition on its head.

We had examples, in our investigation, of service stations who basically rushed to raise their prices. If they found somebody else down the block had raised a price, they would quickly match it.

So instead of lowering prices through competitive pressure, we found they were going up. That I find hard to explain. The industry explains it by saying that these stations were engaged in replacement- cost pricing.

In other words, they were trying to price their gas based on what the next load would cost. Well, at the very best, that's a speculative and arbitrary exercise.

If they err on the high side, obviously, that's more profits. But the thing that we found most dramatic was that replacement-cost pricing seems to apply when prices are going up, but it doesn't seem to apply the cost of supply goes down.

"Up like a rocket, down like a feather," is what has now become a truism for the way gas prices operate in our state.

We also have a very fragile, as I've mentioned, and non-redundant delivery system: just two pipelines, almost no other capacity to get gas into Arizona, who has no local refinery, has no local access to crude.

That means any supply disruption for practically any reason means a spike in prices and, we now know, a spike in profits for the oil industry.

So bottom line: Just-in-time prices which eliminate the buffers that protect consumers from supply disruptions make it an incredibly vulnerable situation for consumers in Arizona and other states.

These supply disruptions immediately lead to price hikes and significant increases in industry profits.

I hope that these huge profits that have been talked about in this committee this morning can be in some large degree be diverted into diversifying the supply system, making sure that states like ours -- and I think it applies all across the country -- have some buffers, have some way to protect consumers from these very sudden spikes in prices.

GODDARD: I also believe, with my colleagues, that we need federal anti-price-gouging statutes, one that does not preempt the states, but allows us to use our unique knowledge and investigative capacity within our environment, but also that speaks to national problems, such as the Katrina situation.

It's a great pleasure to be here. And I'd be very happy to answer questions.

STEVENS: Thank you very much. I'm going to yield to Senator Domenici.

Well, it's been my intention to probably ask -- to deal with questions -- let me announce this, we've been told there are two votes that start at 3:20 and two votes that start at 5:30, so maybe we should listen to Ms. Majoras now.

Would you please make your statement?

MAJORAS: Thank you very much, Chairman Stevens, Chairman Domenici, members of the committees.

I am Deborah Majoras, the chairman of the Federal Trade Commission. I appear today to present the commission's testimony on the effectiveness on laws in preventing price-gouging. The views expressed in the written testimony represent the views of the commission. My oral presentation and responses to questions are my own and may but do not necessarily represent the views of the entire commission.

I share the keen interest of both committees on the issue of energy prices. Americans depend heavily on automobile transportation for their day-to-day survival. The cost of transportation is a significant item in their budgets. And the price of gasoline prominently displayed on gas station placards is a substantial and visible part of that cost.

Naturally, sharp increases cause concern for all Americans. Over the past 20 years, we have become used to relatively low gasoline prices and our demand rose by 30 percent over that period.

The United States now must import more than 60 percent of crude oil from foreign sources, leaving us vulnerable to world market supply and pricing decisions.

Even before Hurricane Katrina, increasing crude oil prices has resulted in rising gasoline prices during much of 2005. And now we share our rising demand with rising demand in newly industrialized nations, like China and India.

Meanwhile, it is not enough to import the crude or pump it out of the ground, it then must be refined into gasoline. U.S. refiners are operating at high capacity rates, which means that virtually any interruption in their operations will have an impact on supply and thus prices.

It was in this already tight market that Hurricanes Katrina and Rita hit, initially disrupting over 95 percent of crude oil production in the Gulf, as well as numerous refineries and pipelines.

With supplies severely interrupted by the hurricanes, our consumers watched in horror as prices at gasoline stations increased substantially and rapidly, sometimes multiple times in a single day.

Even as we all looked for ways to help our fellow citizens ravaged by these hurricanes, we were concerned that some appeared to be taking advantage of the victims' plight by gouging them with high prices.

This has led to the debate over whether the tools law enforcers currently have are sufficient to deal with sharp price increases in times of crisis.

Given the importance of the gasoline industry to consumers, the FTC scrutinizes this industry for illegal conduct like no other. To protect consumers, we carefully review proposed oil industry mergers, challenging them at lower levels of concentration than in any other industry.

MAJORAS: We scrutinize price movements and business practices, and challenge anti-competitive conduct. We review the weekly prices of gasoline and diesel fuel in 360 retail areas and 20 wholesale regions, an exercise we undertake in no other industry.

And we constantly conduct research to learn more about this critical industry and then to share that knowledge with Americans, producing recently a study reviewing industry mergers and a study that explains how gasoline is priced.

Currently, as mandated by section 1809 of the Energy Policy Act, we are investigating the industry for price manipulation and any gouging.

It is understandable that many are calling on the FTC to seek out and prosecute those who are perceived to be taking advantage of our citizens at a most vulnerable point. But neither the anti-trust laws nor any other federal statute makes it illegal to charge prices that are considered to be too high as long as companies set those prices independently.

The omission of a federal price gouging law is not, I believe, inadvertent, nor does it condone the practice. Rather, it reflects a sound policy choice that we should not be quick to reverse.

Regardless of how repugnant price gouging is, a law that prohibits it is a form of price control, which might seem attractive and humane in the short run, but is likely to harm consumers more in the long run.

The free movement of prices plays a critical role in protecting consumers from even greater hardship. They signal to producers to increase or decrease their supply, and in a period of shortage higher prices create incentives for suppliers to send more product into the market that needs it the most, something we just experienced as substantial imports from Europe have helped ease prices even as, as of yesterday, almost 50 percent of Gulf Coast crude oil production is still shut in.

Higher prices also signal to consumers to decrease their demand. And during this recent shortage we, in fact, saw signs of decreased demand in the United States not witnessed for 20 years.

We should not ignore what we know. In the 1970s price controls that were established to deal with the energy crunch resulted in massive shortages and endless lines at the pump. Higher prices, as tough as they are to swallow, and they are, help curtail panic buying and topping-off practicing that cause retailers to run out of gasoline.

The choice during times of emergency -- high-priced gasoline or no gasoline at all -- is not a good one. But, unfortunately, it's a choice that must be made.

Another problem with outlawing prices that are considered to be excessive is that it is difficult to distinguish fairly between a malevolent gouger and an honest retail gas station owner who is responding responsibly to tough market conditions.

Imagine that gas station owner A is a selfish and heartless citizen who has decided to use a national emergency as an opportunity to raise prices by 30 percent above the pre-emergency level, but without regard to costs or availability of supply. He knows that eventually competition will require him to lower the price, but he'll make as much as he can during this time when our consumers are confused and panicked.

Gas station owner B, on the other hand, is a good citizen. He has no desire to gouge consumers, but not only is the cost of his supply increasing, but the supply he has on hand is dwindling fast.

He observes the lines at his stations and sees that consumers are coming in consistently to top off the tank because they're worried about what the future might hold.

So at this rate of demand he knows that he will run out of gasoline, so he raises the price by 30 percent above the pre-emergency rate.

Now, A and B are charging the same price. So how do we distinguish between the one who has gouged and the one who reacted wisely to tough market forces?

Further, regardless of motive, both have engaged in pricing behavior that prompts consumers to reduce their gasoline consumption, which in turn reduces the time of shortage and -- this is the important point -- results in all consumers getting needed supply more quickly.

MAJORAS: Beyond the fairness and enforcement issues, a broad federal statute may chill legitimate and helpful price responses that look the same as gouging.

Retailers may be encouraged simply to maintain the current price until they run out of gasoline, and there will be no incentive to speed new supply to the markets affected by the emergency.

If Congress disagrees, however, and believes that enforcement against price-gouging is worth the cost, then it should take into account that state officials, given their proximity to local retail outlets, can react more expeditiously to complaints consumers file about local prices.

Most of the reports have alleged gouging that the FTC have reviewed involved individual retailers that raised prices sharply in response to dramatic increases in demand or expectations of decreased supply right after the hurricanes, but reduced their prices just as quickly when no other stations followed suit or when their suppliers assured them that their storage tanks would soon be refilled.

It is more effective and efficient for state and local officials knowledgeable about the local situation to handle such complaints.

I remain convinced that strong enforcement of the anti-trust laws is the best way to protect consumers from market failures. And the commission is committed to strong enforcement, but we need to remember that a market failure is not the same as a market producing a result that is tough and that we don't like.

As demonstrated over the past 75 days, if we don't like high prices, then we can, for example, use less gasoline and that will help bring the price back down.

There are no quick fixes to the gas price situation, and we should not tell consumers otherwise.

Even if Congress were to pass price-gouging legislation, it would not impact the price spikes to which we are vulnerable, as long as we depend so heavily on gasoline and particularly on foreign supplies, do not explore alternative sources of energy, do not look seriously at our rising demand and ignore our tight refining capacity.

Tough decisions lie ahead and Americans need us to address these decisions with courage, candor and resolve.

The FTC stands ready to work with Congress in any way possible.

Thank you very much, Mr. Chairman.

DOMENICI: Thank you very much, ma'am.

We're going to now proceed with questions and we're going to do it a little differently.

Senator Craig, you're going to take my place and go first on our side, followed by Senator Bingaman, and then Senator Stevens will take over on his side.

Senator Craig?

CRAIG: Mr. Chairman, thank you very much.

I guess my question is first to the three attorney generals. Under the laws that you have within your states today, have you ever found and have been successful in prosecuting price-gouging?

HARVEY: We have not. At least during my tenure, we have not.

I'm not sure we can cite any reported cases that show that we have. One of the limitations of our price-gouging statutes in New Jersey is that you must have a declared state of emergency in New Jersey.

CRAIG: Most states are like that.

HARVEY: Right.

And you must have prices that exceed more than 10 percent of the price that was charged prior to the emergency. And that has not been sufficiently documented in the past. And so I'm not aware of any suits that have been brought.

CRAIG: South Carolina?

MCMASTER: I'm not aware of any. We have had none in South Carolina that I'm aware of under the price-gouging statute, which is a part of the Unfair Trade Practice Act.

But we have had a number of cases under the Unfair Trade Practice Act which is a civil mechanism that prohibits unfair and deceptive acts.

CRAIG: Successful?

MCMASTER: Yes, sir, they've been successful.

As I mentioned, there are two sides to it. One is the private side, where any individual can bring suit and receive treble damages and attorneys fees, and in my state, if -- most of the times when anybody sues in any sort of a business type lawsuit, whether it's a breach of contract or anything else, the Unfair Trade Practice Act is always included as one of the causes of action.

But since I've been attorney general, since January of '03, we've had one case of the Unfair Trade Practice Act. That was against a power company that had put a city assessment for using the telephone poles in the bills to the customers, and some of the customers didn't live in the city. And so we brought a case against one, and the others agreed to -- they all agreed to pay some damages back to the people.

So that law has worked well. But we have had no prosecutions or civil actions under price-gouging in my state.

CRAIG: Arizona?

GODDARD: Senator Craig, we have no price-gouging statute, so I cannot say that we've ever had a successful prosecution.

CRAIG: Do you want one?

GODDARD: Very seriously. I've been to the legislature on every opportunity to try to urge the passage of such a bill.

CRAIG: I would say that some of our colleagues who are not here, specifically in Florida, have in fact aggressively used their price gouging statutes -- and successfully -- against gougers when the hurricanes hit them.

HARVEY: Senator Craig, could I...


HARVEY: ... add something? Had there been a declared state of emergency in New Jersey, we could have used ours for this Katrina incident. Instead, we used the Motor Fuels Act and the Consumer Fraud Act provisions.

There were suppliers, at least retailers, who would increase their prices as many times as five times in a single day, which violated our Motor Fuels Act. Some of these prices would have exceeded the 10 percent statutory threshold. But we simply didn't have a declared state of emergency in New Jersey.

MCMASTER: And, Senator, if I could add to that, we made it very clear in public service announcements that the Unfair Trade Practice Act was available as a remedy and we would bring those investigations in suit so vigorously, but that does not have the teeth and the deterrent effect that a criminal action has.

And without a declared state of emergency, we didn't have that available.

CRAIG: Well, the reason I asked that question -- I've got a survey here that reflects 35 states that have these laws. None of them have been successful in finding gouging.

A variety of things have happened -- state of emergency declaration. I mean, there are the mechanics within the law that trigger the action; there's no question about it. And I think the ultimate concern I have -- or at least as we walk through this in trying to understand who's on first here or who shouldn't be -- is that it is a very complicated process to determine what is or isn't fair in the market.

So is it fair, because I watched this going on now, for a single retailer to have, let's say, 10 locations in a metro market and have four different prices at those 10 different locations? It's called zone pricing. Is that gouging? Or is that marketing?

Anyone wish to respond to that?

And I have seen in the case of my major metro area in Idaho a difference of nearly 10 cents in the same retailer but in a different location where there's less competition and more traffic. Is that gouging or is that zone pricing?

STEVENS: That will be your last question, but the gentlemen should answer.

Thank you.

CRAIG: Thank you.

MCMASTER: I would say, depending on how high the price is, that would probably be zone marketing. If the price is $2.40 versus $2.50, maybe that's marketing. But if it's $5.20 as opposed to $5.30, that might be gouging.

CRAIG: Is that not in the eye of the investigative beholder?

MCMASTER: It is, and that's the difficulty with the law.

In my state, we have, again, a mathematical formula. You take the prior 30 days and compare that to what the current incident is, and if it seems to be unconscionable to the prosecutor and in his or her discretion they think it deserves criminal prosecution, then you prosecute, assuming a state of emergency.

CRAIG: Mr. Harvey?

STEVENS: Senator, we're just going to have to move on.

CRAIG: Oh, I will. I'm sorry. That's it.

Thank you, gentlemen, lady.

STEVENS: Senator Salazar?

SALAZAR: Thank you very much, Senator Stevens and Chairman Domenici and Senator Bingaman and Senator Inouye for holding this hearing.

And thank you for the panelists who are here and my former colleagues from the National Association of Attorneys General.

The question I have for you is on price-gouging as a definition to be adopted. It seems to me that what we have is a tremendous amount of noise going on all over the country about price-gouging and whether or not it's occurred. And part of the problem we have is that we don't have a set definition of what price-gouging is.

I know that our staff put together a couple of alternatives on how you would define price-gouging. Let me read you two of them and I'd like you to comment on how you would define it and whether you think that there's a definition that would make sense nationwide for price-gouging.

One of them basically says retailers charging more than a defined percentage above the price charged immediately prior to the proclamation of a state emergency. A second alternative is retailers charging an unconscionably high price that is not attributable to increased wholesale price.

So between those two definition of price-gouging, which one do you think would fit the best if in fact the Congress were to move forward and pass a national price-gouging statute? Or do you have some other alternative that would give us a definition of what price- gouging is?

And whoever wants to respond.

HARVEY: As between those two, the first would be more acceptable to me, because it has more definition. I still don't think that either is sufficiently specific to give notice and protection to consumers as well as businesses.

I would suggest taking a look at the laws we have in New Jersey. For example, we apply a 10 percent rule, and we also include increased costs that may be attributable to the retailer.

It is true that a business that faces increased costs -- for example, if a pipeline shuts down in one part of the country and that was a normal area of supply, and you have to go to another part of the country -- those costs should be built in, and then there maybe should be a 10 percent additional price increase allowed. And the window should be...

SALAZAR: You would do a numerical calculation, right, General Harvey?

How about you, General McMaster and Terry?

MCMASTER: I like the second definition better. It's similar to the one in South Carolina. It uses the word "unconscionable." It's based on a different formula there.

But I think that gives your prosecutor, your authorities more flexibility and still gives plenty of notice to those who would violate the law.

GODDARD: Senator Salazar, we proposed a provision that really was sort of a blend between the two. We did not use the word "unconscionable," because it is very subjective. We tried to use a numeric (ph). This is a prospective law, not one that was passed by our legislature. But it seemed to combine the best of both of your proposals.

It also took into account the increased costs, and I think that's critical. I mean, if a retailer has soaring costs to deal with, that's not gouging. But if, as we found to be the case in a few instances in Arizona, they simply charge what the market will bear because people are lined up at the pumps and they have no choice as to where to go, I believe that is something that needs to be penalized.

And it is not, just to put an issue here, it is not price control. We only talked about emergency situations where the normal supply and demand has broken down and where consumers are truly the victims of unconscionable actions.

SALAZAR: And, Chairman Majoras, if in fact it was limited to the emergency circumstances that General Goddard was just describing, would it still be your position as chairman of the commission to oppose that kind of a price-gouging definition?

MAJORAS: Senator Salazar, I'm actually worried that during a time of crisis it would make it worse, and here's why. Both of these definitions are looking at price only as connected to cost. What they're not taking into account is that price is also used to regulate supply in the marketplace.

So if, in fact, any place is experiencing an emergency, the gas stations who are going to run out of supply can't raise the price, what's going to happen is two things.

MAJORAS: Number one, they're going to have a shortage and run out of gas. And, number two, supplies from elsewhere around the country where refiners and gas stations can get more money because they don't have the price gap placed on them, are not going to immediately move supply into the area of emergency which, I submit, is the first thing we want to happen when we have an emergency: get more gasoline into that area.

That's what I'm worried about.

SALAZAR: Thank you.

Thank you, Mr. Chairman.

STEVENS: Thank you very much. I'm going to yield my time to Senator Snowe and -- are you leaving? And Senator Inouye, he owes his time to Senator Pryor. Because you all waited so long last time, we're looking at the last first this time.

Senator Snowe?

SNOWE: Thank you, Mr. Chairman.

I think one of the questions that I wanted to address is: How exactly do we make a distinction on the question of price-gouging?

MAJORAS: Currently?

SNOWE: Currently, yes. I'd like to ask -- yes, because I gather you're not seeking the authority or you don't think that we ought to grant federal authority.

MAJORAS: I worry that it would make things worse for consumers in the long run. And so currently, the Federal Trade Commission, which does not have authority to attack price-gouging, does not therefore have a definition of it.

But nonetheless, in this debate we've struggled with what would define it, and there are some great difficulties in doing that.

SNOWE: So it gets back to the original question about what occurred this fall. And obviously the first panel this morning and chief executive officers of, you know, the major oil companies, they gave a variety of explanations as to why they were experiencing record profits and record revenues -- not only record-breaking for their industry, but record-breaking for corporate America.

So how do we make those distinctions? We don't have a law. But aren't there other ways of being able to do it, because this is not just -- as I said this morning -- a run-of-the-mill commodity. It is a basic necessity. I mean, people are foregoing -- foregoing -- food, prescription drugs, making a mortgage or a rent payment. That's according to so many of the surveys.

On recent survey, and it's based on historical patterns on a project that was done over the last three of four years, it said one in five households went a day with foregoing necessities in order to pay for fuel prices.

SNOWE: So, this is a major issue. And we're facing onset of winter.

And so, I just wonder: How best do we go about making some distinctions as to what is, you know, the normal price increase as to one which they're taking advantage or exploiting a situation in which people have found (inaudible) it's an emergency or we're in, you know, a situation like we were in the fall where there were disruptions?

MAJORAS: Well, Senator Snowe, if there is anti-competitive behavior going on between and among these gasoline companies, we'll find that and we will prosecute.

Currently, the FTC has undertaken an investigation to see whether market manipulation at all is going on in this industry and to see whether there has been some form of gouging.

It is a major investigation. We have sent out dozens of subpoenas in the industry and we will expect to report to Congress on it next Spring.

We can give reports along the way but, once we conduct that, I hope to have better answers for you, Senator Snowe, in terms of: On a going-forward basis, what do we need to do? Because, as I said in my opening remarks, we are vulnerable to these types of price spikes.

As long as we accept the tight refining capacity and the dependence that we have on foreign oil, we're going to be in for a tough rope. So we do need to find some solutions.

SNOWE: Well, even if we did have a federal price-gouging law, would the FTC, in its investigation and study that's now ongoing, if it was price-gouging, would you acknowledge that?

MAJORAS: Well, what we're going to try to do -- and again, it's not defined, so we're working on how we would...

SNOWE: But you know the essence of it. I mean, I don't think it's a secret how you define price-gouging. I mean, that's defined in law in various ways, but pretty much the same.

MAJORAS: Essentially, yes, although I don't necessarily agree with everyone how they would define it because I think they don't take into account some actually very rational price behavior that would be good for consumers.

But, yes, of course, Senator, we're trying to work with what we know you want us to do.

And while that doesn't mean we would prosecute it, when we come back to you and tell you what we have found in this study, we will lay it out for you. And we will say: This is what we found that these companies and retail stations did when they raised prices during this time.

SNOWE: What about speculation on the market? Do you investigate that, too, and the commodities market at all?

MAJORAS: We do not. That falls in the CFTC.


Thank you, Mr. Chairman.

STEVENS: Senator Pryor?

PRYOR: Thank you, Mr. Chairman.

I want to welcome these three attorneys general here. Senator Salazar and Senator Bingaman and I used to serve in that office in our home state. So we welcome you to the Senate today.

Let me just give you, very briefly, my philosophy and my approach on this.

Consumer protection issues generally: I think if the law's structured the right way and the attorney general does his job or her job in their home state, it can really help to clean up the marketplace and really make that state jurisdiction a very good place for business to occur.

And likewise with regard to antitrust laws -- and, by the way, Arkansas does have an antitrust law; it also has a separate price- gouging statute, which are different -- I think those type laws, if drafted properly, can be very effective in making sure that the marketplace in your jurisdiction stays free.

PRYOR: And we want free markets and we want robust competition. But we need to make sure that the market laws of supply and demand are working appropriately.

So actually I think consumer protection laws, price-gouging laws, anti-trust laws can all be very good for business in this country and in your various states.

And also, to Senator Craig's question a few moments ago. After 9/11 I was the attorney general in my state, and we did find price- gouging in our state under our price-gouging law. And our law is not limited just to gasoline. It also has a number of other emergency type products in there.

And so, again, I think this was very good in settling the market down. And the threat, the deterrent that the attorney general can offer, again, can be very good for the state, very good for consumers.

So let me ask our attorneys general just a few very quick questions, especially General Harvey and General McMaster.

Have you found it difficult in your states to enforce price- gouging fairly? Has fairness been an issue in your states?

HARVEY: It has not been an issue for us in New Jersey. We've approached excessive pricing through the Consumer Fraud Act, not really through price-gouging aspect of the Consumer Fraud Act.

But fairness has not really been an issue.

PRYOR: What about you, General McMaster?

MCMASTER: Fairness on whose part? On the prosecutor's part or on the...

PRYOR: I think on the prosecutor, on the state's part. Has that been a problem, that the law's not been applied fairly?

MCMASTER: No, sir.

It hasn't been applied much. There's been several private actions and a few state actions since I've been in office, since '03, but it has not been used much by the government.

PRYOR: Do you two think that a price-gouging legislation in your states, do you think that that does your consumers more harm than good?

HARVEY: No. I think it does more good than harm. And I think if there was a federal price-gouging statute, you may want to consider giving concurrent jurisdiction to the state attorneys general to enforce it along with the federal government.

MCMASTER: I agree with that.

PRYOR: Mr. McMaster?

MCMASTER: I think ours has done much more good than harm. I don't know that it's done any harm. Our problem is it's not strong enough. We can only have the criminal sanctions when there's been a declaration of an emergency.

PRYOR: Right. I understand.

And do you believe that price-gouging statutes are counterproductive to the consumers' best interests and actually in effect hurt consumers?

MCMASTER: No. Not on the state level. I don't know about on the federal level, because I don't know of a proper definition that would apply fairly and evenly nationwide.

PRYOR: Have either of you all experienced long lines at the gas pumps or gas shortages in your states because you have price-gouging statutes?

HARVEY: No. And even when we brought our three lawsuits against Sunoco, Amerada Hess and Motiva Shell and certain independent operators, there were no lines. In fact, what we saw is prices began to decrease.

PRYOR: And lastly, Chairwoman Majoras, I want to be clear on something. The opinions you expressed today, are these -- did you share the unanimous view of the FTC?

MAJORAS: The written remarks most certainly are. And certainly parts of my oral I took from the written, so yes.

PRYOR: It's unanimous at the FTC?

MAJORAS: There was one of our commissioners who was not in town and abstained, but the three of us who remained, yes.

PRYOR: OK. Thank you.

STEVENS: Thank you very much, Senator.

STEVENS: Now we'll turn to the other side here, Senator Bingaman and then Senator Wyden recognized for five minutes.

BINGAMAN: Thank you very much.

Ms. Majoras, let me ask about this Section 1809 price-gouging study that was in the energy bill. The way I read that legislation, which the president signed in August, it directs that the FTC conduct an investigation of price-gouging, report back to Congress within 90 days of enactment.

You said that you're planning to report back next spring. How did you conclude that we did not mean 90 days when we said 90 days?

MAJORAS: Well, we received a letter from several senators who had put that provision in telling us that they meant we could begin it within 90 days. We've had several discussions with members of staff from various members.

The fact of the matter is we can give you a report within 90 days. It won't be worth much, I'm afraid, Senator. If you really want us to look at whether there's been market manipulation and whether there's been price-gouging on a widespread scale.

So we've had several discussions with members about this issue.

BINGAMAN: We'll, just for the record, I wasn't one of them, Mr. Chairman. I felt that we meant 90 days when we said 90 days. And I think the problem with waiting till next spring is that, you know, many of these issues may have subsided and gone off the national agenda, to some extent, by next spring.

So I don't know how timely your report will be once we finally see it.

BINGAMAN: I'm somewhat troubled by the testimony that the commission has provided here.

I've always thought the Federal Trade Commission's job was to be the advocate for the consumer at the federal level. And it seems as though the gist of your testimony is that the consumer is better off the higher the price is, that somehow or other that inures to the benefit of the consumer because it increases supply and it has a variety of virtues which I guess are arguable.

But it doesn't strike me that enacting price-gouging legislation at the federal level, if it's properly enforced, could harm the consumer. It's not controlling prices. You imply that this is a way of controlling prices. Did I understand your testimony correctly?

MAJORAS: Well, sure. Partly it is a way. It puts a cap at a particular...

BINGAMAN: Well, it puts a cap on unconscionable prices but any price that can be justified by virtue of cost or the increase in the price of the commodity or the market price, that is clearly not covered by price-gouging legislation, as I understand it.

MAJORAS: Senator, let me first make absolutely clear, that, yes, without question, the FTC as advocating for the consumer. And that's why I'm sitting here saying something that's difficult to say.

If on a widespread scale we do not allow retailers to price to control for shortages, in other words, if we only look at their cost, their historic cost, and we don't allow them to look at the fact that they're about to run out of gasoline, then we will have shortages. We've seen it happen in the past.

So that's what I'm worried about. The last thing in the world our consumers need during an emergency is to not have access to any gasoline whatsoever.

And the problem, sir, is yes, if we could be perfect in our enforcement and if we could zero in just on the guys who are truly unconscionably taking advantage of our citizens, but the problem is that every statute you pass and enforce, not just with, you know, a few cases here and there, but seriously enforce, will provide incentives.

And if I'm an honest retailer who really wants to do the right thing, I'm going to be so afraid to raise my price, even when I feel like I need to, to prevent a shortage. Because, for heaven sakes, I might have to go to jail for it. So that's what I'm talking about.

BINGAMAN: Let me just say, Ms. Chairman, I think the argument that we should not have tough anti-gouging legislation on the books because it might discourage lawful price increases, I just think that's a specious argument.

BINGAMAN: The truth is prosecutors, these attorneys general sitting at the table with you, every day of the week they make decisions as to who to prosecute and who not to prosecute based on who they think is out to take advantage of the situation.

And that can be done at the federal level. It has been done at the federal level in other areas. And the argument that this is difficult to enforce -- and there are a lot of subjective issues and, therefore, we don't want to put this kind of a statute on the books -- just strikes me as unfounded.

So we have a basic disagreement about this issue.

Thank you, Mr. Chairman.

STEVENS: Senator Wyden, you're recognized for five minutes.

WYDEN: Mr. Chairman, I think we just have heard from Ms. Majoras an astounding theory of consumer protection. What you've told us, Ms. Majoras, is essentially there are no prices that are ever too high because somehow, if the government does anything ever under any circumstance, that's going to create the shortage and the like.

MAJORAS: No, that's not what I said, Senator.

WYDEN: Well then, why don't you tell me what you think is an appropriate government role here. I mean, that's what all of us are asking. What we know now is 28 states have laws on the books. The gentlemen siting next to you say that they can do it.

So for the life of me, I can't figure out why somebody who is working constructively can't work this out in a bipartisan way so that we can have a tool that can be truly useful in the marketplace.

And you and I have been at this for almost two years now, and you always have an excuse for why the government shouldn't act. I mean, we still haven't gotten a response to what the Government Accountability Office said on mergers.

Of course there are reasons why gasoline prices are going up: The demand in China and mischief of OPEC. There are plenty of reasons.

But the Government Accountability Office said that the FTC is a significant factor in why people are getting clobbered on the West Coast of the United States.

And to this day you haven't responded to it.

So why don't we just stick to the issue before us today and tell me why it is so difficult for the Federal Trade Commission to work out an arrangement so that the federal government can stand up for consumers, the way 28 states do, the way these attorneys general do? Why can't we figure out a way to get that done?

MAJORAS: Well, we can. And I'm trying to be constructive, Senator. I'm sitting here and I'm telling you what we think and what these fine folks behind me who devote their lives to working on these markets think about the issue.

If we pass price-gouging legislation, sir, that only looks at cost as the only element that goes into price during a time of shortage and we enforce that on a wide scale, I submit to you that we will be back here because we will be experiencing shortages that are worse for our consumers.

And that's what I'm trying to tell you. The proposals really only take...

WYDEN: Are there any significant gaps right now in the agency's ability to protect consumers?

MAJORAS: In this industry?



WYDEN: Well, that's contrary to even what FTC people have told us. I have sat in hearings where the FTC has said that the agency can't do anything about a company that gouges unilaterally.

I think that's a significant gap, don't you?

MAJORAS: No, I don't think it's a significant gap. I don't. As we've said, we have states who can take care of this. There are local issues. States are in a much better place to respond very quickly to local market conditions.

And the fact of the matter is, what we saw in the gouging instances -- and we've been watching them and we've been looking at them as closely as we can -- is that the price came down almost as quickly as it went up. So...

WYDEN: You think, when a multinational oil company gouges the American consumer -- and they have stations all over -- that that is not a national -- that's not a matter of national concern; that's just a local concern?

MAJORAS: First of all, 80 percent of the stations are independently owned and operated, so that's who you're talking about...

WYDEN: Just respond to my question. We've got multinational companies. You've said, when they raise prices unilaterally, that ought to be a local concern. So you don't think there's anything the federal government ought to do about unilateral action by an oil company, no matter how much they raise the prices?

MAJORAS: Well, today, we allow companies to raise the price as they see fit and allow competition in the marketplace to bring that price back down.

WYDEN: And you've said that that shouldn't change. You've said that there are no significant gaps in the agency's authority. I think that contradicts what folks from the Federal Trade Commission have said.

And let me just ask one last question. This morning, the Exxon Mobil CEO testified that, when the Exxon Mobil deal was under review, the, quote, "FTC wasn't interested in Exxon Mobil expanding its refinery capacity."

WYDEN: That was the largest oil merger in history. Shouldn't the FTC consider the impact on refining capacity, including expansion of an oil mega-merger?

MAJORAS: No, no. You misinterpreted what he said. We...

WYDEN: Those were his exact words, Ms. Majoras.

MAJORAS: Well, he didn't like it because we required him to do a divestiture in order to do the Exxon Mobil merger. We said: "You cannot own both of these refineries. We need to protect competition for consumers in the refinery market, so you have to sell one." And they sold it to Valero.

That's what happened in that merger, Senator Wyden.

WYDEN: Thank you, Mr. Chairman.

STEVENS: Ms. Majoras, two senators have requested that you provide each of the committees the names of the senators who agreed that that report should be delayed. Would you do that for us, please?

MAJORAS: Absolutely.

STEVENS: Senator Cantwell, I'm going to yield to you and then I'll be the closing senator.

CANTWELL: Thank you, Mr. Chairman.

Attorney General Goddard, in your testimony you talked about the importance of the fact that the entire oil industry moved to just-in- time delivery system which vastly -- as you say in your report -- quote, "vastly reduces the numbers of refineries, minimizes inventories and storage tanks."

Now this was -- do you want to elaborate on that?

GODDARD: Senator, I would be happy to.

What we found in our research and in our investigations is that just-in-time, whereas it greatly reduces industry costs, basically makes the consumer hypervulnerable to any interruption any place that there is a maintenance in a refinery, because we have to run refineries at 96 percent or higher of capacity.

A pipeline break, such as we suffered in Arizona, there was no tank farm capacity to sort of pick up the slack in the two weeks that the pipeline was down. And there were no other alternatives out there in the market.

What I think we're looking at is a structural situation in the industry which has been able to cut the fat, if you will, cut all the items that might provide some redundancy in the market, and they've taken them away.

GODDARD: So any disruption -- what I've begun saying in Arizona is the only industry that I know of where bad news is good news is the petroleum industry. Because when they've got a reverse of any point, prices spike. And what we've found in our research is that when prices spike, profits in the last two triple.

And I would like to respond to something that the chairwoman just said, because it's all well and good to respond to shortages with increased prices. That is an important factor. But we've seen most of the profits on the downhill side. Prices do not come down as fast as they go up. It never happens that way.

And in fact, up like a rocket, down like a feather is the analysis that we find all the time.

CANTWELL: But isn't the net result of switching over to just-in- time inventories is that we've gone from oil companies having something like 26 or 30 days of oil reserves to just-in-time inventory only leaving them with maybe a couple of days of inventory?

GODDARD: Senator, that is the situation in Arizona. I can't speak for others. But we have essentially a couple of days of inventory, if that.

CANTWELL: And so we all know, when you only have a little bit of supply, of course the price goes up. Right?

GODDARD: As soon as there's any disruption or potential disruption in the market, we find a price spike ensues immediately.

CANTWELL: So this morning I asked the oil company executives about exports, for that very reason, and to provide this committee with information about whether they had exported prior to Katrina supply, whether they had ever purchased and then diverted supply coming to the United States, and whether they would supply us with information about the paper trading exchange in the off-exchange that they do related to the spot market.

Do you think that information will be helpful in trying to pinpoint this particular issue about potential manipulation of supply?

GODDARD: Senator, I certainly do. As a consumer in Arizona, if at the time that we were having emergency situations, some of our suppliers were diverting their supply overseas, I would feel doubly betrayed.

CANTWELL: Do you think that you had access to this information in your investigations before?

GODDARD: Senator, we've not had access to any information, really, outside of the geographical limits of our state.

One of the problems we have with petroleum industry numbers is the transparency is hazy at best. And it's been extremely difficult. And the reason I was reluctant to answer Senator Domenici's question about profits is that under our investigative demands, we must keep the information we get confidential.

And so it's very difficult to have a clear analysis using just the resources that I have in Arizona of the industry and its practices.

GODDARD: We certainly can't investigate beyond the borders of our state.

CANTWELL: So, certainly, you would like access to that information, even if it was in your own state, correct?

GODDARD: Absolutely, Senator.

CANTWELL: Well, hopefully, we will have the oil company executives respond, as they said in the committee hearing this morning, and actually provide that so that maybe we can draw the line between what has happened with exports and potential of supply.

I think this is a critical part of why you need federal legislation: to make sure that supply isn't manipulated and that there is transparency in the market.

That's exactly what we found out with electricity, that we didn't have as much transparency as we thought we had.

And I just, if I could make a point about one of the federal bills that we are looking at: It certainly does give the attorneys general the ability to continue to -- Senate bill 1735 which 25 of my colleagues have signed onto does give the attorneys general additional authority in Section 5 and it preserves, in Section 7, their existing authorities.

GODDARD: So I would love to hear further comments at another time on that legislation.

Thank you, Mr. Chairman.

STEVENS: Thank you very much. I'm sure you can't see this from where you are, but this is the Energy Information Administration's "Gasoline Pipelines of the Country."

As a Westerner, I'm interested in the fact that Washington state has one. A touch comes up from Utah through Idaho and over into Wyoming. California has two, maybe three, pipelines.

But the Eastern side of the country has enormous capacity for gasoline pipelines. The Western has very little. And it does seem to me that the supply concepts of the FTC are reasonable concepts to consider, but I also think that the attorneys general have something to say.

You have an Attorneys General Association, don't you?

HARVEY: Yes, sir, we do.

STEVENS: Have you all discussed this question of the adequacy of state laws in price-gouging circumstances at that association?

HARVEY: For about two years, Senator, we've been looking -- in large part raised by Attorney General Charlie Crist in Florida and Attorney General Bill Lockyer in California, among others; of course, Attorney General Goddard, as well -- we have been looking at this issue of price-gouging and gasoline pricing for at least two years.

We always seem to face in all of our states price increases that attend certain times of the year that don't seem to have any supply or market justification. They just appear and then disappear.

STEVENS: I'm an old prosecutor. I don't really like the sound of your law, Mr. Attorney General. It says the governor has to trigger it. I believe what Attorney General McMaster said, I believe that a little bit of law enforcement and winning one case and advertising it means a lot in terms of law enforcement.

I would like to suggest that perhaps your association could get together and give us the portion of a bill we might consider. We're going to have to consider these bills some time. I don't think we'll get them done before this session's over. But we're going to consider them.

And it does seem to me that the states ought to take on the role of dealing with local concerns and particularly the independent refiners. Eighty percent of these people are independent gas station owners. These, that are within one state, states ought to have a law that takes care of them and provides the adequate needs for publicity that violators will be prosecuted.

And I disagree with, to a certain extent, Ms. Majoras. I do believe that we need a federal statute that has a criminal penalty. And we have to look at it in terms of what the standard would be for that penalty.

I do want to ask the attorneys general this. I've said this before before this committee, and I come from the background of having worked in a little gas station back in the '30s, and that's a long time ago.

But still, when the price went up, the person I worked for had to raise the price in order to buy the next load of gas. Now that's a replacement theory that you seem to disapprove of.

Am I wrong, Mr. Harvey?

HARVEY: No, sir, you aren't.

Senator, what we found in New Jersey and one of the reason we brought the suits that we brought is that prices were being charged based upon gas that was already in the ground. It had been bought two days before, three days before, four days before. There was no supply issue.

And so customers were being charged pricing...

STEVENS: But that's my point. When they sell that, how are they going to buy the next gas to replace what's in that tank unless they raise the price?

HARVEY: We would argue that whatever price-gouging statute that is formulated here, that it reach also beyond the retailers to the suppliers and the refineries. I don't think it should be limited to retailers, because I agree with you that...

STEVENS: But these prices went up primarily because of overseas pricing.

HARVEY: Not necessarily. We didn't experience that in New Jersey. What we saw was not a gasoline shortage. We just saw multiple price increases.

And we didn't see a supply shortage...

STEVENS: Well, we've been reading for months about the increasing shortage of crude oil worldwide, and that it's going to get worse. As a matter of fact, I've seen charts that indicate we ought to be expecting increases now through the years ahead, as China and India and other countries start consuming more and more crude oil, unless we find some additional supply somewhere.

HARVEY: I have no doubt about that. But we're talking about the narrow period in the days following Hurricane Katrina when there was sufficient supply in New Jersey. There were in some instances five price increases in a single day. And it went on for multiple days.

After we filed suit...

STEVENS: Were these independent stations?

HARVEY: Some were. Amerada Hess, however, is a refinery and owner that owns many of its own stations. And so...

STEVENS: It's still pretty much of an independent on the world scene.

HARVEY: That's true. But you did have some company-owned stores, which is why we sued both the company as well as some independents.

STEVENS: I'm belaboring it. I do think we have to get it back.

This report, when do you think we're going to get it from the FTC, Ms. Majoras?

MAJORAS: Well, to do it right, Senator, we'll get it done in the spring. As I said, we've sent out dozens of subpoenas to lots of different companies so they can try to do this overall and get it right.

We've offered and we're happy to provide any of our initial findings along the way. But as you can imagine, a 30-day study is not worth as much as a six-month study in terms of our work. So that's the situation we're facing.

WYDEN: Mr. Chairman?


I'm trying to listen to three people at one time.

Yes, sir, Senator?

WYDEN: I'd like to be able to submit some questions for Ms. Majoras in writing. I think she distorted what Mr. Raymond said and what I asked about. He was talking about the refinery they kept, and I'd like to submit some questions to her in writing.

STEVENS: That's fine as long as we're still going to abide by the same concept this morning. Questions must be submitted by tomorrow noon and we'll submit them through the two committees.

WYDEN: Absolutely.

MAJORAS: If I may, Mr. Chairman, because I've just been accused of distortion. I'll obviously respond to it. And if I misunderstood Senator Wyden's question, then I'll answer it. But I was responding to what I thought he said this morning, and I don't appreciate accusations of distortion.

Thank you, Mr. Chairman.

STEVENS: We do thank you. I want to come down and thank you personally for coming.

STEVENS: But I think we'll just sort of stand at ease for a minute.

Senator Domenici said he wished to come back.


STEVENS: For all intents and purposes, unless you want to wait two hours, this hearing will be over as soon as Senator Domenici finishes his comments. But let me come down and thank you. We'll wait for him.


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