In advance of the Administration’s meeting this afternoon on post-hurricane response and recovery, Sen. Jeff Bingaman (D-NM) today in a letter to President Bush outlined several recommendations regarding our national energy system. Bingaman is the Senate Energy Committee’s top Democrat. Here is his letter:
August 31, 2005
The President
The White House
Washington, D.C. 20500
Dear Mr. President:
Hurricane Katrina has caused significant damage to petroleum production and refining facilities in the Gulf of Mexico, Louisiana, Mississippi, and Alabama. I am concerned about the impact that this damage will have on petroleum and petroleum product prices. To the extent that we see substantial increases in such prices, I worry about the negative effect this will have on the American economy, American consumers and American jobs.
I am pleased that the Department of Energy (DOE) is already taking steps to respond to the damage done by Hurricane Katrina. Prior to the hurricane, the DOE suspended its program of diverting Federal royalty oil from the market into the Strategic Petroleum Reserve (SPR), in response to directives contained in the recently enacted Energy Policy Act of 2005. On Monday, Secretary of Energy Samuel Bodman announced that the DOE stood ready to use the SPR, if needed, “to lend petroleum to refineries if they experience shortages and are therefore unable to maintain their production.” He also indicated that withdrawal and sale of oil from the SPR might also be an option to respond to supply shortfalls in crude oil. He further confirmed these plans yesterday. These are appropriate policy steps to respond to the severe economic harm that might result from the loss of offshore production in the Gulf of Mexico.
The negative effects of Hurricane Katrina to our national energy system, though, will not be limited to the loss of offshore production. A substantial amount of the nation’s refining capacity, located in the Gulf coast regions hardest hit by Katrina, was shut down as the hurricane approached. This shutdown capacity amounted to more than 1.80 million barrels per day, or more than ten percent of total refining capacity, and came just as the process of building inventories of heating oil for the winter season was beginning in earnest.
Preliminary indications are that a substantial fraction of this refining capacity may be offline for a period of several weeks. That will cause significant price effects that are unlikely to be alleviated by the release of additional crude oil from the SPR. Other policy measures should be considered in the short term in order to address these problems. The fact that our national energy system is particularly vulnerable to a loss of refining capacity in the Gulf coast area also raises important policy issues that deserve attention and thoughtful action in the medium and long term. Thus, I would like to recommend that the following steps be carefully considered by your Administration.
Increasing Fuel Flexibility for the Transportation Sector
The recent enactment of the Energy Policy Act of 2005 has provided your Administration with some new tools that it has already beginning to use. Section 1541 of the Act provides the Administrator of the Environmental Protection Agency (EPA) with new authority to temporarily waive transportation fuel specifications in the case of “extreme and unusual fuel and fuel additive supply circumstances” that are the result of unforeseen circumstances, such as natural disasters like Hurricane Katrina. I understand that the EPA has already issued such a waiver with respect to the States of Alabama, Florida, Louisiana, and Mississippi. We don’t yet know for certain whether the pattern of refinery outages in the Gulf coast area will translate into major problems nationwide in delivering one or more fuel formulations now required by specific State implementation plans in States other than the four for which you have issued the waiver. Given the scale of the damage caused by Hurricane Katrina, though, it is quite possible that such problems could arise. I recommend that you direct the DOE and EPA to maintain cognizance of this possibility and, if supply disruptions due to Hurricane Katrina materialize, I recommend that you direct the Administrator to issue any additional temporary waivers requested on an emergency basis.
Maintaining Public Confidence in the Integrity of Energy Markets
Periods of stress and high prices in the national energy system always elevate concerns about the fairness and transparency of energy markets. As American consumers face potentially unprecedented retail energy prices, they will naturally be concerned about the possibility of market manipulation and price gouging. I believe that it is important that the Federal agencies entrusted with responsibility for consumer protection, such as the Federal Trade Commission (FTC), be on heightened vigilance for such behavior, and communicate that vigilance to both industry and consumers. Section 1809 of the Energy Policy Act of 2005, responding to the high prices seen earlier this year, already mandates that the FTC conduct an investigation to determine the extent of any form of market manipulation or price gouging with respect to the price of gasoline. This investigation is to result in a report to Congress by not later than November 6. I recommend that you encourage the FTC to issue interim reports of its findings, as appropriate, to help maintain both awareness of the heightened scrutiny that is taking place and to assure the public that any improper behavior will be uncovered and dealt with quickly.
Preparing to Help Offset the Impact of High Energy Prices on Small Businesses and Low-Income Households
The high energy prices that we are seeing already and that we are likely to see this fall and winter as a consequence of Hurricane Katrina will place additional economic stress on both small businesses (which are often unable to pass such costs along) and to low-income consumers and households. I would encourage you to have the appropriate Federal agencies work with Congress to ensure that programs such as the Low-Income Home Energy Assistance Program (LIHEAP) are adequately funded and to examine ways in which LIHEAP and programs in the Small Business Administration might be expanded to provide economic assistance to low-income households and small businesses facing high energy prices.
Rethinking the Concentration of Refining Infrastructure in the Gulf of Mexico Region
Hurricane Katrina has underscored the concentration of petroleum energy infrastructure in the Gulf of Mexico area. While it is not surprising to find a robust energy infrastructure in close proximity to the offshore energy resources in the Gulf, it is also true that energy infrastructure has been concentrated in the Gulf of Mexico region due to the difficulties in siting and constructing it at other locations in the .
Here again, the Energy Policy Act of 2005 which you recently signed contains a number of provisions that will be helpful in the medium- to long-term. Because much of the problem in increasing refinery capacity nationwide has been due to past low margins in the refining sector, the Act creates a new tax deduction for investments to increase refinery capacity (section 1323). The Act also creates a new program of technical assistance at EPA to help State and local governments address applications for new or expanded refineries (sections 391 and 392).
I certainly encourage you to direct that these provisions be implemented quickly. I believe that the usefulness of these provisions could be further enhanced by an additional policy initiative. That would be to bring together the needed stakeholders to focus on ways to facilitate a more robust and distributed infrastructure for refining petroleum products. In March 2004, I wrote to you and suggested that the DOE and EPA start addressing the need for further refining capacity in areas, such as the East Coast, that now import gasoline to keep pace with demand. I suggested that States, localities, consumer groups, environmental groups, and industry all be invited to participate in a process to identify measures to facilitate refinery capacity expansion.
Now that national attention is being focused on the downsides of having our refineries excessively concentrated in one area of the country, I would urge you to set a policy discussion in motion to increase and diversify refining capacity. I recommend that you give the group a specific timetable, such as six months, in order to provide you, the Congress, and the public with a set of specific options for improving regulatory practices or streamlining permitting processes related to refinery construction or expansion.
Intensifying the National Focus on Energy Conservation in the Transportation Sector
While the preceding suggestions focus on increasing cost and supply, I believe that we must also address the demand side of the national fuels equation. There are two important steps that could be made in this direction.
The first step relates to vehicle fuel economy. On August 23, the National Highway Transportation Safety Administration (NHTSA) announced a proposed rule to increase the fuel efficiency of light-duty trucks. This action represents a step in the right direction. We need to increase our national vehicle fuel economy standards. As the National Academy of Sciences pointed out in 2001, the technology is available to do so without compromising vehicle safety or comfort. In addition, both our increasing dependence of foreign oil imports and the stresses on our national fuels infrastructure are exacerbated by the declining aggregate fuel economy of our passenger car and truck fleet. The proposed NHTSA rule, though, is too weak, and does not address the need to increase fuel economy in vehicles over 8500 pounds of gross vehicle weight (GVW) that are basically sold and used as passenger vehicles. These vehicles are now exempt from fuel economy regulation, which makes little sense. I strongly recommend that you direct NHTSA to issue a revised notice of a proposed rulemaking with a more meaningful target for all vehicles, including vehicles over 8500 pounds GVW that are generally used as passenger vehicles.
The second step would be to directly encourage the American public to take common-sense measures to improve the efficiency with which they use energy. Section 134 of the Energy Policy Act of 2005 directs the Secretary of Energy to carry out a comprehensive national program to inform consumers about (1) the benefits of reducing energy consumption during peak use periods and (2) practical cost-saving measures to reduce energy consumption, including consumption of natural gas and gasoline. Section 133 of the Act establishes a framework to carry out this education on an ongoing, self-sustaining basis. I would encourage that priority be given on both these fronts.
I hope that you will receive these suggestions in the constructive spirit in which they are offered. We made substantial progress on a number of long-term energy challenges in the Energy Policy Act of 2005 precisely because we were able to come to agreement across party lines in the national interest. I think that this sort of bipartisan spirit will become increasingly important in crafting strategies to meet the challenges that we are facing in the wake of Hurricane Katrina. I believe that taking the steps that I have outlined will help to relieve some of the pressure in our fuels markets that consumers will otherwise be seeing in the days and weeks ahead, and set the stage for a long-term improvement in our national fuels security. I hope that you will consider these recommendations favorably. I look forward to working with you on any steps needed to take action on them.
Sincerely,
Jeff Bingaman
Ranking Member
cc: The Honorable Samuel Bodman
Secretary of Energy
