[House Hearing, 107 Congress]
[From the U.S. Government Printing Office]




 COLLECTION AND DISPOSITION OF FEDERAL OIL AND GAS ROYALTIES TAKEN IN-
                                 KIND

=======================================================================

                           OVERSIGHT HEARING

                               before the

                       SUBCOMMITTEE ON ENERGY AND
                           MINERAL RESOURCES

                                 of the

                         COMMITTEE ON RESOURCES
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             June 12, 2001

                               __________

                           Serial No. 107-36

                               __________

           Printed for the use of the Committee on Resources



 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house
                                   or
         Committee address: http://resourcescommittee.house.gov

                                _______

                  U.S. GOVERNMENT PRINTING OFFICE
73-043                     WASHINGTON : 2002

____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512�091800  
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001

                         COMMITTEE ON RESOURCES

                    JAMES V. HANSEN, Utah, Chairman
       NICK J. RAHALL II, West Virginia, Ranking Democrat Member

Don Young, Alaska,                   George Miller, California
  Vice Chairman                      Edward J. Markey, Massachusetts
W.J. ``Billy'' Tauzin, Louisiana     Dale E. Kildee, Michigan
Jim Saxton, New Jersey               Peter A. DeFazio, Oregon
Elton Gallegly, California           Eni F.H. Faleomavaega, American 
John J. Duncan, Jr., Tennessee           Samoa
Joel Hefley, Colorado                Neil Abercrombie, Hawaii
Wayne T. Gilchrest, Maryland         Solomon P. Ortiz, Texas
Ken Calvert, California              Frank Pallone, Jr., New Jersey
Scott McInnis, Colorado              Calvin M. Dooley, California
Richard W. Pombo, California         Robert A. Underwood, Guam
Barbara Cubin, Wyoming               Adam Smith, Washington
George Radanovich, California        Donna M. Christensen, Virgin 
Walter B. Jones, Jr., North              Islands
    Carolina                         Ron Kind, Wisconsin
Mac Thornberry, Texas                Jay Inslee, Washington
Chris Cannon, Utah                   Grace F. Napolitano, California
John E. Peterson, Pennsylvania       Tom Udall, New Mexico
Bob Schaffer, Colorado               Mark Udall, Colorado
Jim Gibbons, Nevada                  Rush D. Holt, New Jersey
Mark E. Souder, Indiana              James P. McGovern, Massachusetts
Greg Walden, Oregon                  Anibal Acevedo-Vila, Puerto Rico
Michael K. Simpson, Idaho            Hilda L. Solis, California
Thomas G. Tancredo, Colorado         Brad Carson, Oklahoma
J.D. Hayworth, Arizona               Betty McCollum, Minnesota
C.L. ``Butch'' Otter, Idaho
Tom Osborne, Nebraska
Jeff Flake, Arizona
Dennis R. Rehberg, Montana

                   Allen D. Freemyer, Chief of Staff
                      Lisa Pittman, Chief Counsel
                    Michael S. Twinchek, Chief Clerk
                 James H. Zoia, Democrat Staff Director
                  Jeff Petrich, Democrat Chief Counsel
                                 ------                                

              SUBCOMMITTEE ON ENERGY AND MINERAL RESOURCES

                    BARBARA CUBIN, Wyoming, Chairman
              RON KIND, Wisconsin, Ranking Democrat Member

W.J. ``Billy'' Tauzin, Louisiana     Nick J. Rahall II, West Virginia
Mac Thornberry, Texas                Edward J. Markey, Massachusetts
Chris Cannon, Utah                   Solomon P. Ortiz, Texas
Jim Gibbons, Nevada,                 Calvin M. Dooley, California
  Vice Chairman                      Jay Inslee, Washington
Thomas G. Tancredo, Colorado         Grace F. Napolitano, California
C.L. ``Butch'' Otter, Idaho          Brad Carson, Oklahoma
Jeff Flake, Arizona
Dennis R. Rehberg, Montana
                                 ------                                
                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on June 12, 2001....................................     1

Statement of Members:
    Cubin, Hon. Barbara, a Representative in Congress from the 
      State of Wyoming...........................................     1
        Prepared statement of....................................     3
    Kind, Hon. Ron, a Representative in Congress from the State 
      of Wisconsin, Prepared statement of........................    64
    Maloney, Hon. Carolyn B., a Representative in Congress from 
      the State of New York, Press release and statement 
      submitted for the record...................................    51
    Tancredo, Hon. Thomas G., a Representative in Congress from 
      the State of Colorado, Prepared statement of...............    63

Statement of Witnesses:
    Cruickshank, Walter, Associate Director, Policy and 
      Management Improvement, Minerals Management Service........    29
        Prepared statement of....................................    31
    Harpole, John A., President, Mercator Energy LLC.............    34
        Prepared statement of....................................    36
    Jacob, James M., Manager of Consumer Advocacy, KeySpan 
      Corporation................................................    45
        Prepared statement of....................................    47
    Leggette, L. Poe, Fulbright & Jaworski LLP, on behalf of the 
      American Petroleum Institute, Independent Petroleum 
      Association of America, Independent Petroleum Association 
      of Mountain States, Domestic Petroleum Council, and U.S. 
      Oil and Gas Association....................................    18
        Prepared statement of....................................    19
    McMahon, M. Brian, McMahon & Spiegel,........................     4
        Prepared statement of....................................     6


 
 COLLECTION AND DISPOSITION OF FEDERAL OIL AND GAS ROYALTIES TAKEN IN-
                                  KIND

                              ----------                              


                         Tuesday, June 12, 2001

                     U.S. House of Representatives

              Subcommittee on Energy and Mineral Resources

                         Committee on Resources

                             Washington, DC

                              ----------                              

    The Subcommittee met, pursuant to notice, at 10:05 a.m., in 
Room 1324, Longworth House Office Building, Hon. Barbara Cubin 
[Chairman of the Subcommittee] presiding.

 STATEMENT OF THE HONORABLE BARBARA CUBIN, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF MYOMING

    Mrs. Cubin. The oversight hearing by the Subcommittee on 
Energy and Mineral Resources will come to order.
    The Subcommittee is meeting today to hear testimony on 
collection and disposition of Federal oil and gas royalties 
taken in-kind. Under Rule 4(G), the Chairman and the Ranking 
Member are the only ones that can make opening statements, and 
so I wonder if Ron would mind if I made his. In this hearing, I 
think it would probably be okay, but he will be here later. He 
is on a flight back to Washington and I am sure he will be able 
to make it for part of the hearing.
    This hearing will continue to focus on the Subcommittee's 
inquiry on issues relevant to our energy supply for the nation 
from public lands and the outer continental shelf. But we are 
not today here to decry the lack of access to potential 
reservoirs of oil and gas, or seams of coal, or geothermal 
resources on our public land. Nor are we here today to ponder 
ways to get those energy reserves into production and thence to 
consumers more quickly than the current regulatory regime has 
allowed. Rather, the topic for today's discussion is about 
whether the Federal Government ought to consider greater use of 
in-kind collections for oil and gas royalties owed on producing 
leases.
    The Subcommittee has a history over the past several 
Congresses of debating the problem of valuing oil and gas for 
royalty purposes in those instances where no arm's length 
transaction exists at the wellhead. Royalty in-kind, or RIK, is 
simply the exercise by the Secretary of Interior of her 
existing authority to demand that a Federal lessee surrender to 
the government his or her royalty obligation, not in a cash 
payment but rather as a fraction of the oil and gas volume that 
is produced.
    In this manner, the morass of calculating the wellhead 
value of the commodity from a downstream price with a net-back 
formula for processing, transportation, and marketing 
deductions is eliminated. Auditing of the volume of oil and gas 
produced must still occur, but this has to happen with in-value 
royalty payments, as well, so what it amounts to is checking 
the flow meters and seals against tampering, which would be a 
far easier job than calculating value.
    But what happens then? The Secretary must dispose of these 
volumes in some manner. In the Wyoming crude oil pilot MMS 
project, royalty oil was aggregated (and oil from State leases, 
as well) and they were bid out at semi-annual auctions. This 
appears to have been a success in terms of demonstrating an 
ability to receive an uplift for the Federal Government and the 
State of Wyoming compared to those leases which did not 
participate in the RIK project.
    On the outer continental shelf of the Gulf of Mexico, 
natural gas royalties have been targeted for in-kind pilot 
programs. As I have noted in previous hearings, MMS has 
transferred gas to the General Services Administration, which 
has used it to heat Federal facilities, including the Longworth 
House Office Building, which we are now in--In fact, I wish 
they would use a little bit more of it, John, to get the air 
conditioning a little cooler in here, please.
    This is as far as the General Services Administration has 
used RIK so far, but in what other ways is it possible that RIK 
might provide flexibility to fill another governmental need?
    Well, President Bush's National Energy Policy report 
recommends that the Secretary of Interior work with the 
Secretary of Health and Human Services to draft legislation to 
bolster the Low-Income Home Energy Assistance Program, or 
LIHEAP, through the dedication of oil and gas royalties. While 
this could be done with royalty dollars rather than royalty gas 
molecules, is there a reason to explore the latter approach? I 
think there is.
    Could a pilot program be established to test the benefits 
of directing Federal royalty natural gas volumes to a utility 
with experience in delivering energy to low-income households? 
If so, would OCS leases be the better choice for a pilot, or 
would onshore public land leases?
    These are several of the questions that we shall pose to 
our witnesses today to begin to flesh out, or put some flesh on 
the bones of the President's recommendation.
    And lastly, I would like to thank all of our witnesses for 
coming to educate us on this issue. The RIK idea has engendered 
passionate debate in the past about whether the oil and gas 
industry is trying to escape its proper obligation to pay 
royalty based on a fair market value of the production. I think 
at this time it is demagoging to portray the industry as 
``cheats.'' Yes, we all acknowledge that large sums have been 
proffered by companies in settlements of lawsuits, and a recent 
judgment in an Alabama court levied a huge award against one 
major oil company. But a jury in California a few years ago 
rebuffed claims that this same energy company had cheated on 
its State lease obligations.
    One point should be obvious, that had the Federal lessees 
paid these disputed royalties, in-kind, the U.S. taxpayer would 
have been the immediate beneficiary because there would have 
been no delay in collecting the proper value. My position 
continues to be that each and every lessee is obligated and 
must pay every single penny that it owes in royalties, whether 
it is in cash or in-kind, no more and no less. But they have to 
be held responsible for that.
    Within the context of all of this, now let us turn to the 
issue of whether RIK can provide a benefit to our less 
fortunate citizens on a cold winter's night or a hot summer's 
day, like today.
    [The prepared statement of Mrs. Cubin follows:]

  Statement of The Honorable Barbara Cubin, Chairman, Subcommittee on 
                      Energy and Mineral Resources

    This hearing will continue the Subcommittee's inquiry on issues 
relevant to energy supply for our Nation from public lands and the 
outer continental shelf. But we aren't today to decry the lack of 
access to potential reservoirs of oil and gas, or seams of coal, or 
geothermal resources.
    Nor are we here today to ponder ways to get those energy reserves 
into production and thence to consumers more quickly than the current 
regulatory regime has allowed.
    Rather, the topic for today's discussion is about whether the 
Federal Government ought to consider greater use of in-kind collections 
for oil and gas royalties owed on producing leases.
    The Subcommittee has a history over the last several Congresses of 
debating the knotty problem of valuing oil and gas, for royalty 
purposes, in those instances when there is no arm's-length transaction 
at the wellhead. Royalty-in-kind, or R-I-K, is simply the exercise by 
the Secretary of the Interior of her existing authority to demand that 
a Federal lessee surrender to the government his or her royalty 
obligation not in a cash payment but rather as a fraction of the oil 
and gas volume produced.
    In this manner, the morass of calculating the wellhead value of the 
commodity from a downstream price with a net-back formula for 
processing, transportation, and marketing deductions is eliminated. 
Auditing of the volume of oil and gas produced must still occur, of 
course, but this must happen with in-value royalty payments, too, and 
it amounts to checking the flow meters and seals against tampering - a 
far easier job than calculating value.
    But, what happens then? The Secretary must dispose of these volumes 
in some manner. In the Wyoming crude oil pilot MMS has aggregated its 
royalty volumes (and those of State leases as well) and bid them out at 
semi-annual auctions. And this appears to have been a success in terms 
of demonstrating an ability to receive an ``uplift'' for the feds and 
the State of Wyoming compared to those leases which did not participate 
in the R-I-K pilot.
    On the outer continental shelf (OCS) of the Gulf of Mexico, natural 
gas royalties have been targeted for in-kind pilot programs. As I have 
noted in previous hearings, MMS has transferred gas to the General 
Services Administration which has used it to heat Federal facilities - 
including the Longworth House Office Building in which we sit.
    This is fine as far as it goes, but in what other ways might R-I-K 
provide flexibility to fill a governmental need?
    Well, President Bush's National Energy Policy report recommends 
that the Secretary of the Interior work with the Secretary of Health & 
Human Services to draft legislation to bolster the low income home 
energy assistance program, or LIHEAP, through the dedication of oil and 
gas royalties. While this could be done with royalty dollars rather 
than royalty gas molecules, is there a reason to explore the latter 
approach?
    Could a pilot program be established to test the benefits of 
directing Federal royalty natural gas volumes to a utility with 
experience in delivering energy to low-income households? If so, would 
OCS leases be the better choice to pilot or would onshore public lands 
leases? These are several questions we shall pose to our witnesses 
today to begin to put flesh onto the bones of the President's 
recommendation.
    Lastly, I'd like to thank all of our witnesses for coming to 
educate us on this issue. The R-I-K idea has engendered passionate 
debate in the past about whether the oil & gas industry is trying to 
escape its proper obligation to pay a royalty based upon a fair market 
value of the production. I believe that demagoging the industry as 
``cheats'' is unproductive. Yes, large sums have been proffered by 
companies in settlements of lawsuits and a recent judgment in an 
Alabama court levied a huge award against one major oil company. But a 
jury in California a few years ago rebuffed claims that this same 
company had cheated on its state lease obligations.
    One point should be obvious - had the Federal lessees paid these 
disputed royalties in-kind, the U.S. taxpayer would have been the 
immediate beneficiary because there would have been no delay in 
collecting the proper value. My position continues to be that each and 
every lessee is obliged to pay every penny of royalty owed in-cash or 
in-kind. No more and no less.
    Within this context let us now turn to the issue of whether R-I-K 
can provide a benefit to our less fortunate citizens on a cold winter's 
night, or a hot summer's day.
                                 ______
                                 
    Mrs. Cubin. Since the Ranking Member is not here, I would 
be happy to recognize Mr. Inslee, if he would like to make an 
opening statement.
    Mr. Inslee. I will defer, Madam Chair. Thank you very much.
    Mrs. Cubin. I would like to introduce the first panel of 
witnesses and welcome them and thank them very much for being 
here with us today. Mr. M. Brian McMahon, McMahon and Spiegel; 
Mr. L. Poe Leggette, Fulbright and Jaworski, on behalf of API, 
IPAA, IPAMS, EPC, and USOGA.
    The Chair now recognizes Mr. McMahon. I would like to 
remind you that your verbal testimony is limited to 5 minutes, 
but your entire testimony will be put in the record, and point 
the timing lights out to you.

       STATEMENT OF M. BRIAN McMAHON, McMAHON AND SPIEGEL

    Mr. McMahon. Thank you, Madam Chairman. I would like to 
thank you for inviting me to appear today to this hearing, and 
I would like to thank specifically Carolyn Maloney, 
Representative from New York, who personally invited me to talk 
at this hearing Friday afternoon.
    In May 1998, I appeared before--
    Mrs. Cubin. Well, that was quick work and good work to get 
here.
    Mr. McMahon. I got little sleep. In May 1998, I appeared 
before this Subcommittee to support MMS's efforts to adopt new 
valuation regulations for Federal royalty oil. At that time, we 
discussed the use of RIK sales. These are important issues for 
California. We have a large amount of Federal oil production in 
California and California's share of royalties goes directly to 
support its educational system.
    California is concerned that the recent Wyoming RIK 
experience not be misinterpreted and used to justify unwise or 
costly RIK policies. As we pointed out in 1998, California has 
decades of experience in conducting RIK sales. We made the 
following points then in 1998 and we make them today.
    First, Long Beach and California have been conducting 
royalty in-kind sales since the early 1970's.
    Second, RIK sales achieve prices consistently higher than 
posted prices for California crudes.
    Third, major oil companies, with rare exceptions, will not 
bid on RIK sales. The reason is that if they bid higher than 
their posted prices, they would undermine their posted prices. 
They use posted prices as the basis of their royalty 
obligations for non-Federal oil and for many of their purchases 
of crude oil from producers and non-working interest owners.
    Fourth, although RIK sales prices are consistently above 
posted prices, they are consistently below fair market value. 
We noted then and note now that the price of Alaska North Slope 
crude oil, ANS crude oil, sold in Long Beach is consistently 
above the royalty in-kind's prices that we receive in 
California. Attached to my written testimony, you will see a 
bar chart which compares posted prices, RIK sales in 
California, and ANS prices as quoted in Long Beach.
    For these reasons, we supported MMS's efforts to base 
Federal royalties on readily available and competitive market 
prices, such as the spot price of ANS on the West Coast and the 
reported spot market prices for West Texas sour crude and West 
Texas intermediate crude.
    The observations we made before the Committee 3 years ago 
about Long Beach's and California's RIK sales are still true 
today. Major oil companies, with rare exception, still do not 
bid on RIK sales, but when we do get RIK sales, non-majors bid 
on RIK sales and their prices are higher than postings.
    One preliminary observation: MMS published their new 
regulations on April 15 of last year and they were to go into 
effect June 1 of the year 2000. MMS, as far as I know, has no 
reliable data on the prices they have received under the new 
regulations. I am not faulting MMS for doing this, but when 
they did their study of the Wyoming RIK sales, they did not 
compare the prices received under those sales with the prices 
they are to receive under the new regulations. There is no 
reason to ignore the impact of the new regulations, even though 
we still do not have any results yet. Much less is there any 
reason to abandon the new regulations in favor of an all-out 
RIK program on the basis of this pilot study.
    Let me look now to the Wyoming study itself. As shown in 
the report that I have prepared and attached to my testimony, 
its striking feature is that it is consistent with California 
and Long Beach's experience. First, only 15 companies ever 
bothered to submit comments. Only one of those, Exxon, was a 
major oil company. Only seven companies were winning bidders 
and none of them was a major oil company. Most of them were 
marketers or brokers, not refiners, which suggests that these 
firms would be reselling the oil to refiners at even higher 
prices.
    Second, as in the California experience, the accepted bids 
were higher than the prices posted by the major oil companies.
    And third, as discussed below, the RIK sales prices were 
lower than market prices. We are going to use Canadian crude 
oil prices to measure the effectiveness of the RIK sales in 
Wyoming.
    Fourth, the sales constituted 1.6 million barrels over an 
18-month period, and that represents less than 1 percent of the 
total crude production of the Rocky Mountain area.
    I guess I am out of time already?
    Mrs. Cubin. You are out of time, if you could just sum it 
up.
    Mr. McMahon. Okay. What we did, in brief, Madam Chairman, 
was we compared Canadian crude prices, we adjusted for 
transportation to Wyoming, and as three charts show that are 
attached in a study we commissioned on the RIK sales in 
Wyoming, they show that in all cases, the prices that--we will 
call this market prices for Canadian crude--are higher than the 
RIK sales prices.
    That does not mean that we believe that MMS did not conduct 
the sales correctly. We approve of the way MMS conducted the 
RIK sales. But what this shows is that unless major oil 
companies are willing to participate in RIK sales, that is, bid 
on oil and bid prices higher than their postings, you are going 
to continuously find, even in the future, that the prices 
received in RIK sales are less than true market prices. That is 
why we recommend that the MMS new regulations, which do depend 
on market prices, are continually used in the future.
    I think at some appropriate time, when MMS gets more data 
on the new regulations and how the costs of the new regulations 
compare with the RIK sales and the prices received under the 
new regulations, then I think we are in a more appropriate 
position to be determining the effectiveness of the RIK 
program. Thank you very much.
    Mrs. Cubin. Thank you, Mr. McMahon.
    [The prepared statement of Mr. McMahon follows:]

 Statement of M. Brian McMahon, for the City of Long Beach as Trustee 
                      for the State of California

    Madam Chairman and members of the Subcommittee:
    Thank you for your invitation to appear today to testify in this 
hearing on the collection and disposition of Federal oil and gas 
royalties taken in kind.
Introduction
    In May 1998, I appeared before this Subcommittee to support MMS's 
effort to adopt new valuation regulations for Federal royalty oil. At 
that time, we discussed the use of royalty-in-kind (RIK) sales. These 
are important issues for California. We have a large amount of Federal 
oil production in California, and California's share of royalties goes 
directly to support its educational system. California is concerned 
that the recent Wyoming RIK experience not be misinterpreted and used 
to justify unwise and costly RIK policies.
    As we pointed out in 1998, California has decades of experience in 
conducting RIK sales. The points we made then are still valid today:
     LLong Beach and California have been conducting royalty-
in-kind sales since the early 1970's.
     LRIK sales achieve prices consistently higher than posted 
prices.
     LMajor oil companies, with rare exceptions, will not bid 
on RIK sales. The reason is that if they bid prices higher than posted 
prices, they would undermine their posted prices. They use posted 
prices as the basis for their royalty (non-Federal) obligations, and 
for many of their purchases of crude oil from producers and non-working 
interest owners.
     LAlthough RIK sales prices are consistently above posted 
prices, they are consistently below fair market values. We noted that 
Alaska North Slope (ANS) crude prices in Long Beach are consistently 
above the RIK prices in sales by Long Beach and California, as shown by 
the attached bar chart.
    For these reasons, we supported MMS's efforts to base Federal 
royalties on readily available and competitive market prices, such as 
the spot price of ANS on the West Coast and the reported spot market 
prices for West Texas sour crude and West Texas Intermediate crude.
    The observations we made before this subcommittee three years ago 
about Long Beach and California's RIK sales are still true today: major 
oil companies still do not bid and RIK sales prices continue to be 
higher than posted prices, but lower than market values.
    One final preliminary observation must be made: MMS published the 
new pricing regulations on March 15, 2000 to go into effect on June 1, 
2000. Thus, MMS does not yet have any reliable data concerning the 
amount of royalties collected under the new regulations. MMS has not 
been able to compare the prices received in RIK sales of Wyoming crude 
oil with the prices they receive under the new regulations. 
Nonetheless, that is no reason to ignore the impact of these 
regulations in evaluating a pilot RIK program. Much less is there any 
reason to abandon the new regulations in favor of an all out RIK 
program on the basis of a very small pilot study.
The MMS Wyoming Study
    This brings us to the Wyoming study itself. As shown by the 
attached report, its most striking feature is that it is consistent 
with Long Beach's and California's experiences in RIK sales. First, as 
to participants, only 15 companies ever bothered to submit comments on 
the proposed program and only one, Exxon, was a major oil company. Only 
seven companies were winning bidders. None of the winning bidders was a 
major oil company. Most winning bidders were marketers or brokers, not 
refiners, which suggests that these firms could resell the oil to 
refiners at even higher prices.
    Second, as in the California experience, the accepted bids were 
higher than the prices posted by the major companies.
    Third, as discussed below, the RIK sales prices were lower than 
market prices.
    Fourth, these sales of 1.6 million barrels over an 18 month period 
represent less than 1% of the total crude oil production in the Rocky 
Mountain area.
Canadian Crude Oils are a proper Benchmark to Evaluate the RIK Prices
    Contrary to MMS claims, Canadian crude prices are the appropriate 
standards for evaluating the Wyoming RIK program. The Rocky Mountain 
area is a crude deficit area, i.e., it produces less crude oil than it 
refines. Canadian crude oils are the marginal supply for refineries in 
the Rocky Mountain area. Canadian crude oils are refined in Colorado, 
Wyoming, Montana and Utah and constitute about one third of the crude 
oil refined in the Rocky Mountain states. Canadian crude oil is an 
appropriate pricing benchmark for the Rocky Mountain area.
The RIK Prices are below Market Value
    We compared spot prices for both sweet and sour Canadian crude oils 
that are shipped into the United States with the three Wyoming RIK 
crude types. The RIK prices for Wyoming sweet crude were compared with 
the spot price of Edmonton Par crude (a sweet crude) after adjustment 
for transportation into Wyoming. See Figure 1 of the study by our 
consultant, which shows that the spot prices of Edmonton Par crude were 
significantly higher than the RIK prices for the relevant time period. 
The difference was $2 to $3 per barrel. Put another way, the RIK prices 
were $2 to $3 per barrel below market value.
    The RIK prices for Wyoming General Sour crude were compared with 
the spot prices for Canadian Bow River Crude oil (a sour crude oil). 
(See Figure 2). In the early months of the pilot program, the Canadian 
Bow River spot price exceeded the RIK price for Wyoming General sour 
crude by as much as $4.50 a barrel, although in the last five months of 
the program, the prices fell much closer in line.
    We also compared the RIK prices for Wyoming Asphaltic crude with 
the spot prices for Canadian Bow River crude (see Figure 3). The RIK 
price was considerably below the Canadian crude price during the first 
pilot sale and then was not as much below the Canadian crude price in 
the other two pilot sales. RIK prices for Asphaltic crude reached near 
parity with the spot prices of Canadian Bow River crude oil in the 
second half of the third sale.
    The fact that Canadian crude oils were generally priced above the 
RIK pilot prices is evidence that the RIK sales prices usually did not 
equate to market value.
MMS was wrong to reject Canadian Crude Oils as Benchmarks
    MMS alluded to three reasons why Canadian crude oils should not be 
used as a benchmark for the RIK sales prices. First, not all Wyoming 
crude oils compete with Canadian crude oil at Billings (Montana). 
Second, Canadian crude production is less mature than Wyoming crude 
production. Third, Canadian crude is transported to both Midwest 
refineries and Rocky Mountain refineries. None of these is a valid 
reason to reject Canadian crude oils as benchmarks for RIK sales of 
Wyoming crude oils. None of these considerations is sufficient to 
reject Canadian crude as a benchmark with which to compare the Wyoming 
RIK prices.
    First, whether Canadian crude oils compete with Wyoming crude oils 
at Billings is irrelevant. They do compete with Wyoming crude oils 
generally in the Rocky Mountain area. Second the fact that Canadian 
crude oil production is less ``mature'' than Wyoming crude oil 
production is similarly irrelevant. Presumably, MMS means that crude 
oil is cheaper to produce in less mature areas than in mature areas. 
Although that fact may be important to the profits of crude oil 
producers in both areas, that is no reason why it should have anything 
to do with how much refiners should be willing to pay for crude oils. 
Therefore, the maturity of crude oil producing areas does not affect 
the market values of crude oils.
    Finally, both Canadian crude oils and Rocky Mountain crude oils are 
refined in both the Rocky Mountain area and the Midwest. These crudes 
compete with one another in both areas.
Other alleged Benefits of RIK Sales
    MMS admits that, because it is still developing its processes for 
managing RIK, it is unable to document cost savings at this time. Just 
as the costs of the RIK program are uncertain so are the costs of using 
the new MMS valuation regulations. In analyzing the possible benefits 
of the RIK program, MMS has compared the RIK prices with posted prices 
and not with the prices established by the new valuation regulations. 
The proper comparison is with the prices established by the new 
valuation regulations. So, too, in documenting any cost savings 
achieved by RIK sales, the cost of the RIK program should be compared 
to the cost of implementing the new valuation regulations. Those 
regulations, like the RIK program, are designed to reduce the costs of 
auditing.
    In short, because the costs of auditing under the new MMS valuation 
regulations are uncertain at this time, no legitimate estimate of any 
cost savings using RIK sales can be made at this time.
Congress should not take money from the states
    The probable losses from the Wyoming pilot underscore that Interior 
needs to experiment and evaluate the pros and cons of an RIK program 
further before Congress begins legislating. The need for legislation 
is, indeed, doubtful. The right to take in kind exists under current 
law. The respective obligations of the lessee and lessor are set out in 
the lease and in long held interpretations of leases. Neither the 
government nor industry has demonstrated a need for an additional 
authority to operate an RIK program. Moreover, other than speculation, 
no evidence has been offered that the additional authority requested 
will result in enhancing, rather than decreasing, royalty revenues to 
the public beneficiaries. It is noteworthy that the former Chairman of 
this Committee exempted his own State of Alaska from the RIK 
legislation then under consideration.
    Under current law, states receive a percentage of the United 
States' ``royalty interest.'' A royalty interest is a cost free 
interest. It is unlike, for example, a working interest, under which 
the owner of that interest shares in the costs of exploring, developing 
and operating the lease. The cost of those obligations that a lessee is 
required to perform are not deductible from a royalty interest.
    The oil industry, however, seeks to allow Interior to use royalty 
revenues to pay for performing certain services--services that are not 
deductible from the United States' interest when royalties are paid in 
value.
    Clearly, industry is supporting this added authority as an adjunct 
to its claims that Federal lessees are not required to pay for these 
types of costs. Their assertion of a need for Interior to have funds to 
pay ``downstream'' costs is but a euphemism for post-production and 
marketing costs. Their claims for deducting those costs from royalties, 
however, were rejected repeatedly during the lengthy rulemaking leading 
to the 1988 regulations, and during the more recent rulemaking on the 
new oil rules. Interestingly, industry prohibits deducting those same 
type of costs when it is the royalty owner.
    The oil industry advocates allowing Interior to use royalty 
revenues to pay for such matters as the hiring of independent brokers 
or marketers to sell production taken in kind. Let's be honest: if the 
government feels that it is inadequate to the task of marketing--that 
privatization will be of assistance--it should continue to take royalty 
in value. Taking royalty in value is the essence of ``privatization''. 
Moreover, such ``privatization'' can only reduce the ``royalty 
interests'' of states like Wyoming and California by forcing them to 
assume costs that currently do not reduce their royalty revenues.
    Last year, Congress finally passed legislation to end the Net 
Receipts Sharing program, under which the costs of Interior's 
administration of the mineral leasing laws were deducted from the 
states' share of royalties. As the Chair will surely recall, the Net 
Receipts Sharing program resulted in substantial disputes between the 
states and Interior because the Federal Government could not justify 
and account for its costs. Indeed, Wyoming was at the forefront of the 
Net Receipts sharing battle. The authority that industry seeks for 
Interior is simply Net Receipts Sharing in a different form.
    If Congress wants the government to be in the oil business, it 
should appropriate the money to do so through the annual appropriations 
process, where its performance can be evaluated and budgeted on a 
yearly basis. What it should not do, however, is transform the very 
nature of the public's royalty interest into a working interest through 
the guise of making the in-kind program ``permanent.'' If Congress 
wants Interior to stand in the shoes of a lessee, without the express 
consent of the royalty beneficiaries, the Federal Government should 
assume those costs that lessees assume today, leaving the states' and 
the public's cost free royalty interest intact.
    I will be happy to answer any questions the Committee may have.

    [GRAPHIC] [TIFF OMITTED] T3043.008
    
    [GRAPHIC] [TIFF OMITTED] T3043.009
    
    [GRAPHIC] [TIFF OMITTED] T3043.010
    
    [GRAPHIC] [TIFF OMITTED] T3043.011
    
    [GRAPHIC] [TIFF OMITTED] T3043.012
    
    [GRAPHIC] [TIFF OMITTED] T3043.013
    
    [GRAPHIC] [TIFF OMITTED] T3043.014
    
    [GRAPHIC] [TIFF OMITTED] T3043.015
    
    [GRAPHIC] [TIFF OMITTED] T3043.016
    
    Mrs. Cubin. The Chair now recognizes Mr. Leggette.

STATEMENT OF L. POE LEGGETTE, FULBRIGHT AND JAWORSKI, ON BEHALF 
 OF AMERICAN PETROLEUM INSTITUTE (API), INDEPENDENT PETROLEUM 
     ASSOCIATION OF AMERICA (IPAA), INDEPENDENT PETROLEUM 
  ASSOCIATION OF MOUNTAIN STATES (IPAMS), DOMESTIC PETROLEUM 
    COUNCIL (DPC), AND U.S. OIL AND GAS ASSOCIATION (USOGA)

    Mr. Leggette. Madam Chairman, Mr. McMahon went over by a 
minute and 20 seconds, so I will make up for it by going under 
by a minute and 20 seconds.
    Mrs. Cubin. And we will appreciate that very much.
    Mr. Leggette. Madam Chairman, the associations on whose 
behalf I appear today want to thank you for the leadership that 
you have shown in prodding the Federal Government into taking 
more of its royalties in-kind. As the record of this hearing 
will show, your efforts are beginning to pay off. MMS is 
beginning to find that it can, at least in many cases, make 
more money with less administrative expense than it can when 
taking royalty in-value. It is beginning to find that it can 
manage RIK with fewer personnel than is needed to manage 
royalty in-value.
    Madam Chairman, you are right to continue to press MMS to 
pursue RIK. The reason is simple. Members of this Subcommittee 
know that all claims that RIK is bad financial business for the 
government boil down to a debate over one of two things, either 
the so-called duty to market production at no cost to the 
Federal Government, or a debate over whether comparison of the 
oil that is being sold, such as Wyoming oil or oil from the San 
Joaquin Valley in California, can fairly be compared with other 
oil, such as Alaskan North slope crude oil or Canadian crude 
oil, with multiple adjustments to try to make it equivalent.
    Now, on the duty to market point in particular, if members 
believe that lessees have such a duty, then they are likely to 
think that the government will be worse off if it takes 
royalties in-kind. Let me explain why that position hurts the 
Treasury.
    Even the prior administration agreed that no lessee is 
required to sell production downstream. It said so repeatedly 
in legal briefs. If the duty to market does exist, MMS cannot 
be sure that it will capture the benefit of value added 
downstream if it relies on royalty in-value. The lessee always 
has the option of selling at the lease. The only way the 
government can be sure to gain value added downstream is to 
take the royalty in-kind and sell it itself.
    Furthermore, we have litigated with the government over 
this so-called duty. So far, we have won. If we continue to win 
in IPAA v. Armstrong, the government will never get more than 
the value at the lease if it takes royalty in-value, even when 
the lessee markets downstream. Again, the only way the 
government can be sure to gain value added downstream is to 
take royalty in-kind and sell it itself.
    The most important issue today, however, is not the value 
of gas at the wellhead, it is the high cost of gas at the 
burner tip, in the homes of low-income families. Using RIK gas 
to benefit LIHEAP, the Low-Income Housing Program, is a 
brilliantly creative idea. Some have introduced legislation to 
take Federal royalty revenues from royalty in-value and help 
fund LIHEAP, a good idea, perhaps, but let me suggest a better 
one. Use RIK. Why? For the reasons that you gave yourself at 
the start of this hearing.
    A unit of gas is a unit of gas. When I produce six units of 
gas in the Gulf of Mexico, I owe the government one of those 
units. All reasonable people can agree on that. But people will 
disagree over whether the unit that I owe the government is 
worth $3, $3.25, or $4. In short, if Congress funds LIHEAP 
through royalty in-value, it will import into that program 
years of controversy over what the value of production really 
is. If it supports LIHEAP through RIK, it dramatically reduces 
the controversy. Better yet, as the next panel will explain, it 
can reduce the administrative costs of running the LIHEAP 
program itself.
    If Congress decides to pursue RIK for LIHEAP, our 
associations stand ready to help the Committee prepare 
legislation to make the concept work. The LIHEAP concept is an 
exciting new use of the RIK program, a program that recent MMS 
experience shows can equal or exceed the value obtained from 
royalty in-value, take fewer personnel to administer, and 
increase the certainty for all stakeholders.
    Again, we thank you, Madam Chairman, and all members of 
this Subcommittee who continue to support a program where 
everyone wins. Thank you.
    Mrs. Cubin. Thank you, Mr. Leggette.
    [The prepared statement of Mr. Leggette follows:]

      Statement of L. Poe Leggette, Partner, Fulbright & Jaworski

Introduction
    Good afternoon, Madame Chairman and members of the subcommittee. My 
name is Poe Leggette. I am a partner at the law firm of Fulbright & 
Jaworski, LLP. I am grateful for the opportunity to appear here before 
you today on behalf of the American Petroleum Institute (API), the 
Independent Petroleum Association of America (IPAA), the Independent 
Petroleum Association of Mountain States (IPAMS), the Domestic 
Petroleum Council (DPC) and the U.S. Oil and Gas Association (USOGA).
    My testimony will discuss the advantages of royalty-In-kind (RIK), 
for both the industry and the government. We applaud the committee for 
holding a hearing to explore the potential efficiencies available to 
the Federal Government and to industry if the use of in-kind royalty 
collections is broaden beyond current practice, and to compare and 
contrast this with the more typical practice of in-value collections. 
The entire oil and gas industry believe RIK provides the government 
numerous opportunities to creatively provide energy to in-need end-
users while at the same time efficiently ensuring that the Country is 
receiving each royalty molecule of gas or oil due to the government. In 
fact Madame Chairwoman, it is this very committee that has led the way 
for encouraging RIK since the 104th Congress. We appreciate your 
efforts, including the RIK appropriations language contained in fiscal 
year 2001 Interior Appropriations, which gave MMS limited flexibility 
to do more with RIK.
    For several years, there has been and remains today widespread 
support for RIK in the oil and gas industry. So much so, in fact, that 
in 1997 the trade associations mentioned above, which represent 
substantially all of the U.S. oil and natural gas industry, united to 
organize a multi-association committee to work in conjunction with the 
Minerals Management Service (MMS) and other stakeholders to formulate 
and promote a workable system through which Federal royalties might be 
taken in-kind.
    I am pleased to be able to report to you today that MMS has made 
great strides in this arena through the establishment and continuing 
operation of its RIK pilot projects. The industry applauds the MMS RIK 
management team for the creativity and flexibility it has demonstrated 
in putting together these RIK pilots. While problems have inevitably 
arisen, industry views none of these as being intractable so long as 
the agency maintains its demonstrated commitment to cooperatively 
searching for the best and most efficient solutions.
    Despite the successes of these RIK pilots, industry believes much 
work remains to be done. The pilots can only go so far, given certain 
legislative barriers. We encourage Congress to provide MMS the 
legislative RIK tools needed to fully expand the volumes of oil and gas 
royalties it takes in kind, it Congress and the Administration deem 
appropriate, to provide energy to in need consumers.
Complexity of the Royalty In-Value Process
    RIK offers the most logical and efficient means of avoiding the 
kinds of disputes over oil and gas valuation that have arisen in recent 
years. The markets for oil and gas are extremely volatile, and their 
rapidly changing nature renders the determination of product value at 
various points of sale a very complex, labor-intensive exercise which 
all too often results in protracted, costly disputes. Any set of 
regulations designed to capture value in such an uncertain atmosphere 
must of necessity be vague and open to interpretation by the various 
players in the process. Interpretations lead to disagreements, 
disagreements to disputes, disputes to litigation.
    Capturing volume is a very simple process by comparison. A barrel 
of oil is a barrel of oil. A cubic foot of gas is a cubic foot of gas. 
So long as the measuring devices used are accurately calibrated, there 
is no room for interpretation, and no need to estimate the value of the 
production. For example, if a lessee in the Gulf of Mexico produces six 
barrels of oil, he satisfies his royalty obligation by delivering one 
barrel to the government. Simple as that.
    With RIK, the accounting is simplified. There is no need to 
estimate the value of production. The auditing is simplified; all that 
needs to be verified is the volume of production and the volume 
delivered as royalty. Disputes are fewer.
    This simplicity of process is the main reason for the industry's 
support of the RIK process. Lessees have a business need for certainty 
in the royalty payment process, but simplicity should be appealing to 
every stakeholder; the lessee, who produces the oil and gas and pays 
the royalties; the Federal Government, who collects the royalties; and 
the beneficiaries who share in the royalty revenues, states like 
Wyoming, New Mexico, Colorado and California.
    We urge the Federal Government to take full advantage of RIK and 
make it the standard method for collecting royalties, with royalty in-
value becoming the exception rather than the rule. A permanent RIK 
program would greatly enhance government flexibility by offering 
several options for disposing of its royalty share: selling the royalty 
production on the open market or to small refiners; making available 
the royalty production for use in government/public facilities; filling 
the strategic petroleum reserve; or providing cheaper energy to pre-
approved low-income families. For example, satisfying low-income 
heating needs via RIK versus sending royalty payments, ensures that 
every molecule is delivered in a timely fashion and provides the 
government and utilities an opportunity to provide further advantage to 
low income families by participating in the market place.
    We were pleased that RIK was referenced in the Administration's 
National Energy Policy as a way to accommodate the strategic petroleum 
reserves. Additionally, the National Energy Policy proposes the use of 
royalty payments for LIHEAP. As you will hear today, by taking this 
payments in-kind, many benefits will occur to both the government and 
the recipients under the LIHEAP program.
Need for Legislative Action
    The governing mineral leasing statutes already allow the Secretary 
to take royalties in-kind. The pilot projects thus far conducted by MMS 
demonstrate that RIK works. However, some enhancements to the current 
statutory language would make RIK work even better.
    It is important to note that the RIK concept had its germination 
and grew rapidly during the last years of the Clinton Administration. 
Clinton Administration officials were resistant to the idea at first, 
but commendably were willing to explore the idea through the conduct of 
a series of pilot projects. Over time, these pilots evolved and became 
better tests of RIK as experience was gained. The pilot projects now 
demonstrate that RIK can increase revenues to the Treasury and reduce 
administrative costs. The pilot projects also show that the Secretary 
is handcuffed in some instances by existing statutory language and by 
budgetary constraints that prevent the department from fully exploiting 
the concept. MMS and industry joined together last year to endorse 
language that would have corrected some of these roadblocks, but much 
of that language was unfortunately struck on the floor of the House.
    We urge Congress to work together with the Administration to craft 
solutions to eliminate or avoid unnecessary obstacles to optimization 
of an already proven RIK program. . Industry does believe the current 
statutes provide MMS much flexibility to enter into creative RIK 
programs, but to eliminate any uncertainty legislative language should:
     LClearly delineate producer and government obligations
     LProvide the government use of in-value proceeds to cover 
any expenses downstream of the lease
     LProvide for reports to congress
     LAllow disposition to Federal agencies or entities 
designated by the Federal Government
    In closing, let me again thank you for this opportunity to appear 
before you today on behalf of the industry trade associations
    The industry also wishes to commend you, Madame Chairman, and this 
Committee for all the hard work you and your staff members have put in 
over the years, encouraging the creation and growth of the Federal RIK 
program. Working together, this Committee, the Congress, MMS and 
industry have demonstrated that RIK is a very useful tool to optimize 
MMS's royalty collection efforts. Working together, we can ensure that 
RIK ultimately achieves its maximum effectiveness.
    I would be happy to answer any questions the committee may have.
                                 ______
                                 
    Mrs. Cubin. I will begin the questioning. I would remind 
the members and have them remind me if I go over that our 
questioning is limited to 5 minutes.
    I wanted to ask you, Mr. McMahon, your testimony seemed to 
be more about RIK in general than its application to LIHEAP, 
which is really what the subject of this hearing is. So I would 
just like to know what your opinion about royalty in-kind being 
used for LIHEAP, what is your opinion for that?
    Mr. McMahon. To tell the truth, I have not had a lot of 
time to think about that, but I will share with you some 
experiences we have had in California recently.
    Mrs. Cubin. Well--
    Mr. McMahon. And I am going to tie it in to LIHEAP.
    Mrs. Cubin. Okay, because your testimony focused just 
really pretty much on RIK in general--realizing you had such a 
short time to prepare.
    Mr. McMahon. Right.
    Mrs. Cubin. So please do not think in any way I am being 
critical about that. But I would really sort of like a broader 
picture, because the question that I would like to have 
answered is, is RIK for LIHEAP a reasonable option, especially 
in times when we are in a situation where we have energy 
problems? Would gas from the outer continental shelf or from 
the public lands be better used if we channeled that to a 
utility to distribute it?
    It seems to me common sense that when you eliminate the 
audits, you eliminate the lawsuits from royalty, or for the 
value, and you eliminate the middleman, that you could deliver 
more energy to the houses of poor people if you did that. So if 
you would just respond to that, that is what I am trying to get 
at.
    Mr. McMahon. Sure. But our California experience is this. 
Where we get gas is from the Gulf Coast area and New Mexico. 
Let us suppose that the government does have production of gas 
in that area and we use some of that gas. It has to go through 
a pipeline which is owned by a company called El Paso. El Paso, 
as far as I know, does not own the production. So some 
arrangement would have to be made to go through El Paso 
pipeline--
    Mrs. Cubin. Sure. There would be transportation costs, 
right.
    Mr. McMahon. And more than that. Because there is a 
constriction in the pipeline now, it is not clear now much of 
the extra gas can go through. The next step is the utilities in 
California, like Southern California Gas Company, PG&E. Again, 
what obligation do they have to ship Federal gas over their 
lines?
    Mrs. Cubin. I would think that it would be ludicrous to 
assume that gas would be coming out of California to take care 
of this proposal, or at least this idea that we are 
entertaining. No, California needs everything it has got, so 
that would not be it.
    I would like to ask Mr. Leggette, you have been working, as 
you said in your statement, on royalty in-kind issues and 
talking about this issue for a long time. Could you please 
describe to me the problems that there are with the 
administration of a royalty in-kind program? And what I am 
specifically talking about are the accurate volumes being 
recorded and those kind of things and what you would do to go 
about making sure that the correct volumes were reported and 
that the government got its correct share?
    Mr. Leggette. For Federal production, production from 
Federal leases, lessees are required to submit plans to the 
government for approval in advance of installing their 
production equipment. The government is entitled to veto those 
plans or require alterations if it feels it necessary to make 
sure that oil or gas will be accurately measured. MMS then 
conducts, or onshore, the Bureau of Land Management, periodic 
site inspections to check the meters, and companies are 
required routinely to check the meters and provide the results 
of those checks to the Federal Government.
    Now, this regulatory hand is in addition to the incentive 
in the private sector between producer and purchaser to make 
sure that these instruments are working correctly. But it is, 
compared with determining what royalty value is, it is a 
relatively simple process.
    Mrs. Cubin. And certainly, it seems that there is room for 
mischief there, measuring volumes.
    Mr. Leggette. Oh, absolutely.
    Mrs. Cubin. But that same mischief is available when you 
measure the volumes when they are going to be charged in-value, 
the royalties in-value, because it has to come out of the well 
and the volume has to be measured correctly and that is when 
the arguments start. So RIK is not any more vulnerable to this 
sort of tampering, or mischief, if you will, than royalty in-
value, would you agree with that?
    Mr. Leggette. That is exactly right.
    Mrs. Cubin. And could you explain to me how you think the 
duty to market issue would play out under RIK?
    Mr. Leggette. Well, it would be addressed because the 
government would be fulfilling its obligation to market its 
production and to get the best return it can for the taxpayers, 
or alternatively, to serve alternate purposes that reduce the 
cost of government or other government programs, such as 
heating this building or perhaps benefitting a program like 
LIHEAP.
    Mrs. Cubin. Or preferably cooling it today.
    Mr. Leggette. Point well taken.
    [Laughter.]
    Mrs. Cubin. The Chair now recognizes Mr. Inslee.
    Mr. Inslee. Thank you. I may ask some fairly low-level 
questions here, but I hope you will appreciate this is a 
relatively new issue, at least to me.
    I would ask both gentlemen to comment. As I understand the 
proposals for universal RIK, its intent is to reduce 
litigation, reduce uncertainty, and the like. But it would seem 
to me if we go that route, it is going to set up a whole new 
level of responsibility for the Federal Government, both as to 
merchandising, marketing, transporting, storing, insuring, a 
whole new system of the Federal Government for handling this 
product as a marketing agent. Is that a fair assessment, and if 
so, what are the challenges and how would that be done? I just 
ask both gentlemen to comment on that.
    Mr. Leggette. Mr. McMahon yields.
    Mr. McMahon. For the time being.
    Mr. Leggette. For the moment. Yes, he reserves the right to 
rebut.
    There is no reason why the Federal Government would have to 
create a large new marketing department to make royalties in-
kind work. Experience in Alberta, Canada, indicates just the 
opposite, and I believe, if you were to ask that question of 
the MMS witnesses coming after me, they would say that the 
early indication is that they can manage a large volume of 
Federal production with far fewer people when promoting it in-
kind rather than claiming it in-value, and the reason is that 
the Federal Government, even without the aid of help from 
outside marketers, enjoys a very important position in the 
marketplace. It has access to substantial volumes in every 
field in which there is a Federal lease.
    And so companies can come to MMS with creative proposals, 
unusual transportation arrangements that can beat the market 
and give the government better value than other producers can 
get. More importantly, one change that we would hope the 
Congress would consider would be to allow MMS to contract with 
the expertise of private marketers to further enhance its 
position in the market.
    Mr. McMahon. Let me respond. Right now, as far as we can 
tell, MMS does not have the qualifications to market crude oil. 
The option would be, if all the oil is sold in-kind, if you do 
not want MMS marketing Federal production, then MMS is subject 
to being passive and let oil companies come in and tell MMS 
what price they are willing to pay.
    Obviously, in my mind, you are going to have to set up a 
bureaucracy to deal with marketing. Marketing is complicated; 
not a simple matter, and you simply cannot let oil companies 
dictate the processes that will be used to market the crude 
oil. You have to go out and market it aggressively. So I think 
there is a large cost involved in RIK which is not involved in 
an intelligent, comprehensive evaluation procedure.
    I emphasize again, I think the major issue here is unless 
you have competition, true competition among major oil 
companies for RIK sales, you are not going to get competitive 
prices. We have yet to see that happen, either in Long Beach or 
California or even in the Wyoming experience. You do not have 
majors coming in to bid, and if they do not come in and bid, 
then you are only going to have a small segment of the market 
that is bidding on the crude oil. So far, we have not had the 
experience of the major oil companies bidding on RIK sales.
    Mr. Inslee. When you say bid, do you mean bid for purchase 
from the government?
    Mr. McMahon. Correct. We have not seen that. In 30 years in 
California, only one major oil company has ever won a bid, and 
that is Texaco, and Texaco is about to disappear because it is 
being purchased by Chevron. Chevron, Mobil, and Exxon, even 
though they have large presence on the West Coast, have never 
bid on royalty crude oil, and we do not see any majors in 
Wyoming bidding on Federal royalty crude oil. What you see are 
the marketers, the middlemen, and the only sense that that 
makes is that they are going to resell it at a higher price. I 
mean, why else would you be a middleman if you did not think 
you could get a higher price from a refiner?
    Now, why do the refiners not go out and bid for royalty 
crude oil? Because then they would have to turn to their 
royalty owners and say, well, we did bid this price which is 
higher than what you are getting for your crude. So you see the 
conflict they would be in. So they would rather have the 
middlemen come in, do the bidding, do the dirty work, and then 
purchase from then, so then they can turn to their royalty 
owners and say, we did not buy the crude at the lease and so, 
therefore, we do not have to pay you the higher price. So they 
are in a conflict situation regarding the royalty in-kind and 
that is why, as far as we can tell, they will never bid on the 
royalty in-kind oil.
    Mr. Inslee. Mr. Leggette, do you want to respond to that 
concern?
    Mr. Leggette. Well, in the time remaining, probably the 
most effective thing I can do is to defer to the answer that 
the Minerals Management Service people will give you. They have 
the experience not only with the Wyoming project, but with a 
gas pilot project in the Gulf of Mexico. My impression is that 
some very heavy-duty players in the gas market are bidding on 
those programs, but they have the details.
    Mr. Inslee. Thank you.
    Mrs. Cubin. The Chair now recognizes Mr. Otter.
    Mr. Otter. Thank you very much, Madam Chairman, and 
gentlemen, I apologize for being late. If I cover some ground 
that has already been plowed, I sincerely apologize for it.
    One of the things that is always of interest to me in a 
marketplace is what is the next generation going to look like. 
Perhaps, and I do not know if you are willing to speak for the 
industry or your segment of that industry, but what I would 
really like to know is where do we go from where we are today? 
My question centers to how much of the industry profit today is 
actually being spent on alternate forms of energy, research and 
development, alternate forms of drilling and recovery, proving 
up an oil field, blocking new oil bodies or ore bodies? How 
much of the industry profit or cash flow is going into the next 
generation of energy needs?
    Mr. Leggette. I will only be able to give you a most 
general answer. It, of course, varies from company to company, 
but my impression is that for most companies, it is quite a 
lot. Many--
    Mr. Otter. What is quite a lot?
    Mr. Leggette. Money is going back into looking for new 
reserves, but also exploring alternative forms of energy. Some 
of the majors have established whole new business units that 
focus on alternative forms of energy. Shell and British 
Petroleum come prominently to mind, but they are hardly alone. 
And the independents that IPAA and IPAMS represent are very 
active in plowing the money that is currently being made in the 
prevailing price regime back into new exploration, to 
enhancement of declining fields, to new drilling in existing 
fields to further enhance the ability to deliver through the 
existing pipeline infrastructure.
    Mr. Otter. Mr. McMahon?
    Mr. McMahon. I am really not qualified. I will make two 
observations, though. One is that the major oil companies are 
pulling out of California. For example, Chevron turned back 
some leases they had offshore which were already being 
developed. They appear to be sending their money overseas 
because they make higher overseas profits.
    The second point is, the L.A. Times reported just this past 
week, the opposition of the oil companies against the use of 
ethanol in California as a way of cleaning up the gasoline. So 
at least on that issue, they appear to be opposed to that kind 
of alternative energy source. But generally speaking, I am not 
in a position to answer the question.
    Mr. Otter. Well, gentlemen, what I am concerned about, as 
we see the consolidation of energy resources and energy 
production, I know 20 years ago when I was drilling oil wells 
in the Knox zone of Kentucky, Tennessee, and Ohio, there was an 
awful lot of folks that were interested in the development side 
of it, and today, we were at five and now it looks like we are 
going to be at four with the Texaco and Chevron merger. I am as 
concerned about that consolidation and what that consolidation 
can do to our dependence on those consolidated efforts, and I 
am well aware that not all the consolidation is purely 
marketplace driven. But I am concerned that where our next 
generation of energy is going to come from along the line I 
just asked on energy production and the research and 
development for the future.
    How about on the conservation side, and if you could give 
me a percentage. Now, if you were telling me, for instance, Mr. 
Leggette, that 15 or 20 percent of the cash flow or 35 or 40 
percent of the profits that the industry is generating is going 
in to develop the next generation, is that too high? Is 35 to 
40 percent of the profit going into the next generation, is 
that too high? Let me ask you that question first.
    Mr. Leggette. I would be guessing wildly, although I would 
be happy to try to get that information for you.
    [The information referred to follows:]
    Members of the Independent Petroleum Association of America are 
largely non-integrated oil and gas exploration and production companies 
whose focus is the development of oil and gas reserves. It is estimated 
that these companies put nearly all of their profits back into 
exploration and production activities. These companies typically do not 
allocate funds to the pursuit of alternative or renewable energy 
sources.
    Mr. Otter. How about you, Mr. McMahon?
    Mr. McMahon. I would have no idea.
    Mr. Otter. Along that same line, how much research and 
development is going into conservation? When are we going to 
see 70 miles a gallon for an internal combustion engine? When 
are we going to see more kilowatts produced per 250 megawatt 
hydropower plant now on X-number of cubic feet per second? And 
I am not exactly sure what that figure is, but it seems to me 
that if the lowest-hanging fruit here in this whole thing is 
conservation, or getting a larger bounce for our buck, that is 
where we ought to be spending our profits for the future. If 
you could just review that--I am out of time, but if you could 
just quickly embrace that for me for a minute, I would 
appreciate it.
    Mr. McMahon. All I could tell you, Congressman, is that in 
California, the electricity-generating facilities are not owned 
by major oil companies. They are owned by much smaller 
companies. It appears that the major oil companies have figured 
they cannot make money generating electricity, so they are not 
devoting their resources to more efficient electrical 
generating facilities.
    Mr. Leggette. Questions about car fuel efficiency really 
will have to be addressed to Detroit, not to Houston, and about 
kilowatt hours to the Edison Electric Institute and not the 
American Petroleum Institute or the IPAA.
    But plainly, as I think the President's plan recognizes, we 
have to attack both sides of the equation. The NRDC issued a 
report earlier this year indicating that if two steps were 
taken, increasing the CAFE standards for cars and imposing 
requirements on replacement tires, the nation could save 50 
billion barrels of oil over the next 50 years. That is about a 
billion barrels a year.
    The Department of Energy, however, projects that increase 
in demand domestically for crude oil between now and 2020 will 
be two billion barrels of oil a year, meaning even if we did 
everything that the NRDC was proposing, that would only reduce 
the increase in our demand for petroleum. Plainly, both sides 
of the equation need to be addressed, production and 
conservation.
    Mrs. Cubin. The Chair now recognizes Mrs. Napolitano.
    Mrs. Napolitano. Thank you, Madam Chairman. I am very much 
interested in the statements, and I, too, also was a little bit 
late in getting here, so I am assuming some of the information 
might have been covered.
    Part of what really troubles me, and I have been in 
government long enough to know that private industry normally 
says, government, stay out of business. You are not in the 
business to do business. You are in the business to do 
government policy, et cetera. So to buy into an idea that the 
government can begin to have in their hands, and as Mr. McMahon 
was indicating, to set up another infrastructure, another 
bureaucracy to deal with the sale and the proceeds and 
everything that goes with it just does not quite make sense. To 
me, I would think industry would be saying, government, stay 
out of it. We will take care of it.
    One of the questions that I have is the industry itself is 
asking that the government take in-kind?
    Mr. Leggette. Yes, ma'am.
    Mrs. Napolitano. And the reason is?
    Mr. Leggette. Unlike proposals in the 1970's, where the 
Federal Government was considering forming its own oil and gas 
company to drill offshore and install its own production 
platforms, this is a much more limited role for Federal 
Government in the marketplace. The government is not taking on 
the geologic risks of drilling and the safety risks and 
operational risks of installing and operating platforms.
    Mrs. Napolitano. But it is taking other risks, sir.
    Mr. Leggette. Certainly, it is taking some market risks, 
like other entities in the marketplace. The reason that the 
industry supports that move is that, in the long run, it is 
more efficient both for the government and for industry to let 
the government make its money on its own, because the 
alternative is to have companies exposed to endless rounds of 
lawsuits under the False Claims Act and investigations and 
criticisms by Members of Congress.
    Mrs. Napolitano. How would those be avoided, sir, because 
right now, from what I am reading in some of the information 
given to us, is there are already several--a few suits against 
some of the major oil companies, as well as some of the minor 
companies, in regard to the False Claims Act. It seems to be 
there is a serious issue in underreporting.
    Now, if we were able to bring that into compliance somehow, 
and I do not understand why the oil companies would be not 
happy to do what is naturally requested of almost any business, 
is adequately report, and they are trying to overturn that law, 
it just does not make sense for us to say, on one hand, it is 
okay to go ahead and start having the government set up its 
own, we will take care of it, when they are not even providing 
fully adequately reported sales, if you will.
    Mr. Leggette. There is only one lawsuit of which I am aware 
where someone is claiming that companies have underreported the 
volume of natural gas. That is a case where the government took 
its royalties in-value, not in-kind, the Chairman's point 
earlier. That case was investigated by the Department of 
Justice, which has declined to intervene. But under law, the 
relator is entitled to go forward, and that matter is in 
litigation and we will see what comes of it. But that is a 
problem that is a possibility that can occur whether you take 
royalty in-value or in-kind. If you take it in-value, you have 
two potential sources of dispute. If you take it in-kind, you 
only have one.
    Mrs. Napolitano. But it would be very expensive for the 
government for me. How could an RIK program be designed that 
would minimize the pitfalls?
    Mr. Leggette. To minimize the pitfalls?
    Mrs. Napolitano. Right. In other words, be able to do away 
with that second pitfall you were just talking about, the 
thicken problem.
    Mr. Leggette. The value pitfall?
    Mrs. Napolitano. Right.
    Mr. Leggette. Well, by taking royalty in-kind, the 
government is then putting the production out for bidding and 
we think the best way to make sure that the government does the 
best job it can is to allow the government to hire outside 
marketing expertise to advise it. Let me assure you that it is 
a whole lot cheaper for the government to hire a marketing 
consultant than it is to pay millions of dollars in royalties 
to False Claims Act private relators in these cases. There 
would be a big savings for the government there alone.
    Mrs. Napolitano. Well, I am afraid that government does not 
do things expediently, so I would be prone to challenge that a 
little bit.
    Mr. McMahon, your comment?
    Mr. McMahon. Yes, a couple of comments. One is that you are 
absolutely correct that in order to market properly, you have 
to have a bureaucracy to do it. You do not want people that are 
not sophisticated trying to market the crude and getting a good 
price for the Federal Government. Some of the oil is in out-of-
the-way places, for example, offshore, California for one 
place, and in order to bring it to a market center where there 
are competitive prices, you need someone that is sophisticated 
to be able to do that.
    The second point I will make is that we have heard a lot 
here today about litigation, and why was there litigation? 
There was litigation because, in the past, what the oil 
companies did was they reported the value of crude oil in terms 
of their own prices. That is, oil companies like Chevron, 
Mobil, Exxon would say, this is what the crude is worth and 
this is, therefore, what we are going to pay you. There was no 
check on them.
    What we found, and throughout the country this was 
happening, was that the oil companies were setting up 
affiliated oil companies in which they were selling the 
production at posted price to an affiliate and the affiliate 
would then turn around and sell at a higher price. That was 
clearly an unfair situation.
    Now, what MMS has done, it took them 4 years because of oil 
industry objections, they went to market-based criteria for 
value. When you are hearing in the news every day the price of 
West Texas crude is X-amount of dollars, it is because that is 
a market that is recognized throughout the oil industry. The 
price is not dependent on a single oil company. It is like the 
stock market. The reported price of West Texas crude oil is the 
result of lots of buyers and sellers coming together. That is a 
great indication of what the value of the crude is, and there 
cannot be a dispute about what the value of West Texas crude 
oil is. So we will expect fewer disputes under the new 
regulations, and that is what we would like to see actually put 
in place and look at it maybe in a year or two as to whether it 
is working or not.
    Mrs. Napolitano. Thank you very much, Madam Chairman.
    Mrs. Cubin. I would like to thank the witnesses for their 
testimony and answers to the questions. Thank you, Mr. McMahon, 
for coming on short notice. We appreciate your being here.
    Mr. McMahon. Thank you, Madam Chairman.
    Mrs. Cubin. Likewise, Mr. Leggette.
    Mrs. Cubin. The Chair now would like to recognize the 
second panel, Mr. Walter Cruickshank, the Associate Director of 
Policy and Management Improvement of the Minerals Management 
Service, who has been a regular visitor with this Committee. He 
is accompanied by Mr. Milt Dial, the Assistant Program Director 
for Royalty In-Kind; Mr. John Harpole, the President of 
Mercator Energy; and Mr. James Jacob, Manager of Consumer 
Advocacy, KeySpan Corporation.
    I would like to also welcome all of you gentlemen and thank 
you very much for being here. We always appreciate hearing from 
Mr. Cruickshank, who has been, as I said, a regular person here 
in front of this Committee, and so now I will recognize him for 
5 minutes. I point out again that the timing lights will be 
there on the table.

 STATEMENT OF WALTER CRUICKSHANK, ASSOCIATE DIRECTOR OF POLICY 
   AND MANAGEMENT IMPROVEMENT, MINERALS MANAGEMENT SERVICE, 
 ACCOMPANIED BY MILT DIAL, ASSISTANT PROGRAM DIRECTOR, ROYALTY 
              IN-KIND, MINERALS MANAGEMENT SERVICE

    Mr. Cruickshank. Thank you, Madam Chairman. Good morning to 
you and members of the Subcommittee. Thank you for the 
opportunity to testify this morning about the MMS's royalty in-
kind program. I have submitted written testimony for the 
record, and given your background on this issue, I will just 
briefly provide an overview of the current status of our RIK 
projects and a summary of our findings of our initial 
evaluation of the Wyoming oil RIK pilot.
    Turning first to Wyoming, MMS and the State have been 
cooperatively developing an oil RIK program since 1998. MMS has 
been taking up to 6,000 barrels per day of RIK crude oil and 
competitively selling that production in the open market. The 
State of Wyoming has also included RIK oil from the State lands 
in this program. Currently, we are selling approximately 2,000 
barrels per day of Federal RIK oil in Wyoming.
    In March of this year, MMS issued its initial evaluation of 
the Wyoming pilot for the first 18 months of operations. The 
report concludes that the Wyoming pilot demonstrates that in 
some, but not all, circumstances, taking oil royalties in-kind 
and selling it through a competitive bidding process is a 
viable alternative to the historical method of collecting 
royalties in-value. We used the following criteria as the basis 
for evaluating success: Revenue neutrality for the government; 
reduced administrative burdens for both lessees and the 
government; and simplicity, accuracy, and certainty for all 
parties.
    To summarize, the main findings of the report, first, 
selective use of RIK can be revenue neutral. We received an 
average premium of about 45 cents per barrel over the value 
reported to the State for royalty and severance tax purposes. 
And I would note that the State's regulations for royalty and 
severance tax, in essence, are the same as the requirements for 
value under the new oil valuation rule. However, at the time of 
the evaluation, the payments to the State had been largely 
unaudited.
    Second, lessees benefit from a reduced administrative 
burden, from both the dramatic reduction in reporting to MMS as 
well as the avoided costs of audits and valuation disputes.
    Third, there is greater certainty for both lessees and the 
government. Not only are the valuation disputes avoided, but 
the potential exists for completing the volume reconciliation 
process in 90 to 120 days, allowing us to close the books on 
royalty obligations in months rather than years.
    However, RIK does not work across the board. One of the 
things we found in Wyoming is that a number of properties 
served only by trucks were not drawing competitive bids or 
purchaser interest, and, therefore, we stopped offering those 
properties in the State.
    Currently, we are working with the State in planning the 
next phase of competitive sales of Wyoming RIK oil, with 
deliveries commencing this fall.
    In 1998, MMS also started working with the State of Texas 
General Land Office on a second RIK pilot involving natural gas 
production from Federal leases in the 8(g) zone, offshore 
Texas. The primary activity under this pilot was to mutually 
explore ways to market Federal RIK from 8(g) leases, building 
on GLO's experience with their own successful RIK program. 
Competitive sales began in June 1999 and initially focused on 
monthly spot market sales of natural gas. Total sales volumes 
reached 75,000 MMBTUs per day, with deliveries to both Federal 
facilities and private purchasers.
    For reasons of administrative simplicity, this pilot was 
merged this fiscal year with our broader OCS gas pilot. We have 
started work on our evaluation of the Texas gas pilot and 
expect to complete that by the fall.
    In November 1999, MMS began our third RIK pilot involving 
natural gas from OCS leases across the Gulf of Mexico. Much of 
this initial gas was sold to the General Services 
Administration for use in managing its program of supplying 
natural gas to Federal facilities. As previously mentioned, we 
did combine the two gas pilots together and today we are 
selling approximately 380,000 million BTUs per day of natural 
gas at offshore and onshore delivery points.
    An important feature of this pilot is that with the 
authority provided in the fiscal year 2001 appropriations bill, 
we have begun entering into agreements for transportation of 
the RIK gas to pooling points and market centers away from the 
lease. Because of our strong presence across the Gulf, we have 
found this authority to be a cost effective means for shipping 
the government's share of production. In some cases, we have 
been able to negotiate better rates than other shippers along 
the pipeline. We have also used the new authority to pay 
processing costs, and that has proven beneficial in situations 
where pipeline companies have issued operational flow orders 
requiring gas to be processed. We feel the continuation of this 
authority beyond fiscal year 2001 is critical for testing 
alternative approaches to selling production at market centers 
removed from the lease.
    In August of 2000, we commenced our fourth pilot for RIK 
crude oil in the Gulf of Mexico. We are currently selling about 
7,600 barrels per day and planning the next sale with 
deliveries in October.
    Finally, I would note that we are continuing to operate our 
small refiner RIK program, currently providing five small 
refiners with a total of 70,000 barrels of RIK oil per day from 
the Gulf of Mexico and the Pacific.
    In closing, I would like to say that we are continuing to 
study RIK as a possible business approach for managing oil and 
gas royalties. Pilots are founded on the premise that oil and 
gas royalties are a revenue-generating asset for the public and 
the decision whether to take royalties in-kind or in-value 
would be based on the best way to manage that asset.
    Your Subcommittee is now considering whether to broaden RIK 
beyond this current practice. MMS is prepared to provide 
technical assistance to you as you proceed. We also expect to 
work with all stakeholders as the administration implements the 
recommendation from the President's National Energy Policy to 
bolster LIHEAP funding using a portion of oil and gas royalty 
payments.
    I thank you, Madam Chairman, and I would be happy to answer 
any questions.
    Mrs. Cubin. Thank you, Mr. Cruickshank.
    [The prepared statement of Mr. Cruickshank follows:]

    Statement of Walter Cruickshank, Associate Director, Policy and 
          Management Improvement, Minerals Management Service

    Madam Chairman, I wish to thank you and the members of your 
Subcommittee for the invitation for the Minerals Management Service 
(MMS) to be here today to present testimony regarding its royalty in 
kind (RIK) activities.

Introduction
    As you are aware, MMS's mission consists of two major programs: 
Offshore Minerals Management and Minerals Revenue Management (MRM). The 
leasing and oversight of mineral operations on the OCS and all mineral 
revenue management functions for Federal (onshore and offshore) and 
American Indian lands are centralized within the bureau. In 2000, OCS 
oil and natural gas production accounted for roughly 25 and 26 percent, 
respectively, of our Nation's domestic energy production--
oil production was over 500 million barrels and natural gas production 
was over 5 trillion cubic feet. The amount of oil and natural gas 
production in 2000 was the most ever produced on the OCS. In addition, 
in fiscal year 2000, MMS collected and distributed about $7.8 billion 
in mineral leasing revenues from Federal and American Indian lands.
    By provisions of law and lease terms, Federal oil and gas royalties 
can be paid by the lessee either as a share of cash proceeds realized 
by the lessee (in value) or with a share of production (in kind). The 
decision as to whether royalties will be paid in value or in kind is 
solely the lessor's (the Government). Historically, the MMS collected 
royalty payments in value, except for its Small Refiner Program whereby 
the Government receives oil royalty payments in kind on selected leases 
and in turn sells the production to qualified small refiners at fair 
market value.

RIK Feasibility Study
    In 1997, the MMS formed an RIK Study Team to investigate the 
feasibility of the U.S. Government taking its oil and gas royalties 
from Federal leases in kind rather than in value. The Study Team 
concluded that under the right circumstances, RIK could be workable, 
revenue neutral or positive, and administratively more efficient for 
MMS and industry. The Study Team also recommended the following:
     LDevelopment of a long-term OCS RIK pilot program with 
input from the States of Texas and Louisiana for the marketing of 
substantial volumes of U.S. royalty gas.
     LEstablishment of a joint MMS/Wyoming team to examine the 
viability of an oil RIK program in Wyoming.
     LEstablishment of a joint MMS/Texas team to identify and 
assess a range of possible RIK programs involving OCS 8(g) leases 
offshore Texas.
     LEvaluate the potential for additional RIK pilot programs 
upon the successful implementation of any pilot project.
    In response to the recommendations of the Study Team, MMS 
aggressively initiated a series of pilot projects with the following 
goals:
     LTo determine the circumstances (market conditions) in 
which RIK makes sense and identify those key success factors.
     LTo determine if the government (and industry) can save 
money by reducing the administrative cost and burden of collecting and 
verifying royalties.
     LTo determine if RIK can provide accurate, simple and 
certain royalty collection.
     LTo determine if RIK can create value (revenue enhancement 
or neutrality) for the taxpayer.
     LTo conduct evaluations, which will include the criteria 
listed above, of each of the pilots and share with all interested 
parties.

RIK Pilot Program
    The RIK pilot program commenced in 1998 with the initiation of its 
first pilot with the State of Wyoming involving crude oil. Since then, 
the pilot program has continued to expand in Wyoming and on the OCS in 
the Gulf of Mexico for both oil and gas. Each of the pilot projects is 
designed to test a variety of approaches to utilization of the RIK 
option for managing the Federal royalty asset. Pilot evaluations are 
being conducted to ascertain pilot successes and lessons learned that 
are incorporated into succeeding pilot activities. I would like to 
briefly address each of MMS's RIK pilots and the evaluation work that 
has been completed to date.

The Wyoming Oil RIK Pilot
    Under the Wyoming pilot, the MMS and the State of Wyoming's Office 
of State Lands and Investments have been cooperatively developing an 
oil royalty in kind program. Since 1998, MMS has been taking up to 
6,000 barrels per day of RIK crude oil produced from Federal leases in 
the Powder River Basin and Big Horn Basin of Wyoming and competitively 
selling the production in the open market under 6-month term contracts. 
The State of Wyoming has also included State lands RIK oil in the pilot 
sales. Currently approximately 2,000 barrels per day of Federal RIK oil 
are being sold under the Wyoming Pilot.
    In March 2001, MMS issued its evaluation of the Wyoming Pilot for 
the period October 1998 through March 2000. The report concludes that 
the Wyoming Oil RIK pilot successfully demonstrates that in some but 
not all circumstances, taking oil production in kind and selling it 
through a competitive bid process is a viable alternative to the 
historical method of taking royalties in value. The following criteria 
were established as the basis for evaluating its success:
     LSimplicity, accuracy, certainty for lessees and 
government.
     LRevenue neutral (or better) for government;
     LReduced administrative burdens for lessees and 
government.
    To summarize the main findings of the report, the Wyoming oil RIK 
pilot demonstrated:
     LSelective use of RIK can be revenue neutral--MMS received 
an average premium of 45 cents per bbl over the values reported to the 
State for royalty and severance tax purposes.
     LLessees benefit from a reduced burden--an 80% decline in 
the number of lines reported and the avoided costs of valuation 
disputes.
     LGreater certainty for both lessees and the government--
valuation disputes are avoided and the potential exists for completing 
the volume reconciliation process in 90-120 days.
     LRIK does not work across the board--MMS stopped offering 
trucked properties because of the lack of competitive bids and 
purchaser interest.
    The Wyoming pilot also provided the MMS and the State with valuable 
experience in operating an ongoing RIK program. In several areas, 
experience from the three sales allowed the MMS and State to review 
previous results and improve processes for the next cycle. Reviewing 
the bidding mechanisms and the properties which were receiving bids led 
to the expansion of the possible bidding and pricing mechanisms and to 
the elimination of trucked properties from subsequent sales. Feedback 
from sale participants provided impetus to eliminating burdensome and 
unnecessary qualification requirements. On the pricing side, MMS gained 
valuable insights into the complexities of the Wyoming oil market and 
discovered the need for MMS and the State to further investigate 
alternative pricing mechanisms and different sales terms. Although the 
overall value received in kind was at or above the comparable in-value 
number, this was not the case for every month for every property.
    MMS and the State of Wyoming are currently in the planning phase 
for the next competitive sale of Wyoming RIK oil for deliveries 
commencing in the Fall 2001.

The Texas 8(g) Gas Pilot
    In 1998, MMS in partnership with the State of Texas General Land 
Office initiated the second RIK pilot project involving OCS natural gas 
production from Federal leases in the Texas 8(g) zone of the Gulf of 
Mexico. The 8(g) zone refers to leases within 3 miles of State waters 
and from which Texas receives 27 percent of the revenues. The primary 
activity under this pilot was to mutually explore ways to cost-
effectively market both Federal RIK gas from the 8(g) zone and State 
leases. Sales began in June 1999, and initially focused on monthly spot 
market sales of about 25,000 mmbtu/day of natural gas. Total sales 
volumes reached 75,000 mmbtu/day with deliveries to both Federal 
facilities and private purchasers. For reasons of administrative 
simplicity, the pilot was merged in fiscal year 2001 with the OCS pilot 
for non-8(g) gas. Sales of 8(g) gas to Federal facilities and other 
purchasers continues under the overall Gulf of Mexico gas pilot.
    The MMS has commenced its evaluation of the Texas 8(g) gas pilot 
and expects to complete its analysis in the Fall 2001.

The Gulf of Mexico Gas Pilot
    In November 1999, MMS began a third RIK pilot, involving non-8(g) 
Federal offshore leases in the Gulf of Mexico. Initial activities 
centered around competitively-offered contracts with successful bidders 
taking approximately 200,000 mmbtu/day of royalty natural gas from 
specified offshore locations and delivering natural gas volumes and 
qualities of equivalent value to a specified onshore location. Much of 
this gas was sold to the General Services Administration for use in 
managing its program of supplying natural gas to Federal agencies. As 
previously mentioned, for reasons of administrative simplicity, the MMS 
merged the OCS Texas 8(g) and the non-8(g) gas into one pilot in fiscal 
year 2001. Under the merged gas pilot, the MMS is today selling 
approximately 380,000 mmbtu/day of natural gas at offshore and onshore 
delivery points.
    An important feature of this pilot is that, with the authority 
provided in the fiscal year 2001 appropriations bill, MMS began 
entering into agreements for the transportation of RIK natural gas to 
pooling points and market centers away from the lease. Because of the 
strong presence of MMS royalty production throughout the Gulf, the MMS 
has found this authority to be a cost-effective means for shipping the 
Government's share of production. In some instances, MMS has been able 
to negotiate better rates than other shippers along the pipeline. 
Authority for the payment of processing costs has also proved 
beneficial for operating this pilot, particularly in situations where 
MMS was forced to process its royalty share due to operational flow 
orders. Continuation of this authority beyond fiscal year 2001 is 
critical to the RIK pilots for testing alternative approaches to 
selling production at market centers removed from the lease.

The Gulf of Mexico Oil Pilot
    In August 2000, the MMS commenced a fourth pilot for the 
competitive sale of RIK crude oil from Federal offshore leases in the 
Gulf of Mexico. Under this pilot, MMS is currently selling about 7,600 
barrels of crude oil per day through September 2001. We are now in the 
planning phase for the next sale with deliveries beginning October 
2001.

Small Refiner RIK Program
    Beyond the RIK pilot program, the MMS continues to operate its 
existing Small Refiner RIK Program. The objective of the Small Refiner 
Program is to help assure adequate supplies of crude oil at equitable 
prices are available to eligible small refiners. The business processes 
followed in operating the program have historically been complicated 
and labor intensive. The MMS has worked with parties affected by the 
Small Refiner Program in the last several years to bring about a number 
of improvements including:
     Lintroduction of a competitive bidding process that 
increases price certainty for the small refiner and MMS.
     Lestablishment of a volume nomination process for MMS to 
manage operators' deliveries of oil to small refiners thereby reducing 
monthly imbalance problems
     Lchanges in MMS payment requirements to have small 
refiners pay on actual oil deliveries rather than estimated volumes, 
thereby reducing problems with small refiners having to pay for oil 
they did not receive, and
     Lstreamlined information collection by no longer requiring 
operators to report RIK sales on the MMS royalty report.
    Today, MMS is providing three small refiners in the Gulf of Mexico 
and two small refiners in the Pacific with a total of about 70,000 
barrels of RIK oil per day.

Managing MMS's RIK Activities
    To provide the needed management focus and visibility to RIK 
activities for the future, the MMS established through its October 2000 
reorganization of the Royalty in Kind Office within the MRM. The RIK 
Office is the focal point and accountable for the management and 
coordination of all MMS activities related to the operation of the RIK 
pilots, the Small Refiner Program, and other RIK activities. The RIK 
Office is staffed with employees experienced in the pilot program and 
the Small Refiner Program. The Assistant Program Director for RIK 
reports directly to the Associate Director for the MRM.

Evolving MMS's RIK Activities
    In January 2001, MMS published its RIK Road Map to the Future. The 
Road Map outlines a 3-year business plan for further development and 
operation of MMS's RIK pilots and Small Refiner Program, and 
integration of the RIK option into the overall asset management 
strategies of the MMS.

Closing Remarks
    We at the MMS are striving to adopt a balanced approach in 
developing the RIK option as a viable tool for the management of the 
Nation's royalty assets. We have been deliberate in exploring new 
opportunities for optimizing value and gaining market insight, yet have 
remained cautious to proceed slowly and build upon the lessons learned 
through experience.
    This MMS is continuing to study RIK as a possible business approach 
for managing oil and gas royalties. MMS is evaluating experiences to 
date and will continue to explore the potential of RIK through pilot 
projects and long-term projects.
    Madam Chairman, this concludes my prepared remarks. However, I will 
be pleased to answer any questions Members of the Subcommittee may 
have.
                                 ______
                                 
    Mrs. Cubin. The Chair now recognizes Mr. John Harpole to 
testify.

   STATEMENT OF JOHN HARPOLE, PRESIDENT, MERCATOR ENERGY, LLC

    Mr. Harpole. Thank you, Madam Chairman and members of the 
Committee. I am John Harpole, President of Mercator Energy. I 
would just like to thank you all for having me here today. I 
come from a big family. I am the eighth child of nine and I am 
really not used to people wanting to hear what I have to say, 
so thank you for this opportunity.
    Mercator Energy is a natural gas services consulting 
company based in Denver that provides marketing services to 
natural gas end users and producers. During my 20-year career 
in the gas industry, I have purchased gas for most of General 
Electric's industrial facilities and also marketed gas for 
producers such as McMurry Oil Company located in Casper, 
Wyoming. Those varied experiences have provided me with an 
extensive view of the natural gas industry, from the wellhead 
to the burner tip.
    Today, I am here representing myself. My goal is to help 
author an efficient solution for low- and fixed-income 
individuals who have been and continue to be hurt by rising 
natural gas prices. I would like to describe the efficiencies 
of a novel concept to expand existing low-income energy 
assistance programs by taking Federal royalty gas in-kind and 
allocating that gas directly to prequalified low-income energy 
assistance needs.
    This Committee is certainly aware of the dramatic increase 
in natural gas prices during the last 12 months. I have 
prepared an illustration that shows the average gas prices from 
1991 to 2001. You can see that just in the 2001 time period as 
compared to the 10-year average, we have got a 126 percent 
increase.
    All three sectors of the natural gas customer base have 
been dramatically impacted by the price increase. Residential 
customers, the largest consumer sector, have naturally screamed 
the loudest. Most residential customers are what natural gas 
derivative traders refer to as ``naked the forward price'' for 
natural gas. While commercial and industrial customers have the 
option to lock down forward prices to ease the impact of 
volatile pricing, residential customers remain exposed. The 
financially naked residential natural gas customer is too often 
the one turning off the thermostat and throwing on the extra 
blankets.
    The irony of all this is apparent in this illustration. In 
sheer numbers, the 58 million residential customers are those 
that vote, and as a result, they can drive public policy on an 
issue that they rarely have control over. Of those 58 million 
residential customers, 24 percent, nearly 13.8 million people, 
qualify for LIHEAP assistance. LIHEAP assistance is available 
to households whose income is 150 percent of the Federal 
poverty level, or 60 percent of the State median income. 
Administrative expenses for LIHEAP organizations are required 
to stay at or below 10 percent of total monies funded.
    Now, how can royalty gas help? It is simple. As an owner of 
royalty interests in all Federal lands, the Federal Government 
is the largest natural gas producer in the U.S. In 1999, the 
Federal Government received $2.1 billion in revenue for natural 
gas. In 2001, based on the price increase, the Federal 
Government should receive nearly $6 billion, a $4 billion 
increase as compared to 1999.
    Why not incorporate those dollars in a solution for the 
needy? I would like to walk you through one possible solution. 
KeySpan Corporation, the largest gas utility in the Northeast, 
serves about 2.4 million customers in three States. KeySpan 
consumes about one million MMBTU of gas per day in their New 
York service territory. One of their many long-term supply 
contracts calls for the purchase of gas from an offshore Gulf 
of Mexico producer in the amount of 60,000 MMBTU per day, so 
60,000 a day as compared to the million a day that they consume 
in New York City. That volume is then transported a distance of 
1,400 miles on Transco pipeline to KeySpan service territory in 
New York City. In January of 2000, KeySpan's 54,000 low-income 
customers burned about 8,200 MMBTU per day. That is, the low-
income used about 8,200 MMBTU per day.
    Under the proposed solution, the offshore producer could 
change the price for that 8,200 a day--that is the portion of 
that 60,000 MMBTU sale to KeySpan--to $2 or whatever the 
Secretary of Interior deems an appropriate price for the price 
transfer to the LIHEAP folks. This one transaction, one 
transaction, could lower the natural gas price for 54,000 low-
income customers in New York City. Under this solution, the 
utility simply transfers the price benefit directly to the low-
income recipient via their monthly utility bill. LIHEAP incurs 
no additional administrative burden because it has already 
qualified the recipient for assistance.
    Additionally, a number of other flexible royalty in-kind to 
LIHEAP approaches can be pursued that help address issues 
raised by various industry participants. This concept is not 
meant to be a long-term social welfare entitlement program. 
Rather, when natural gas spot market prices return to levels 
near the 10-year average, the program could be reviewed on a 
seasonal basis. We need enabling legislation to see this thing 
happen.
    The benefits are three-fold, at least beyond helping the 
low-income. The proposed program could provide an additional 
benefit to the low-income in addition to increasing LIHEAP 
funding. The LIHEAP program, and this is a quote from the Chair 
of the National Fuel Funds Network, ``The LIHEAP program may be 
nearing its administrative capacity in terms of delivering 
significantly more dollars. Additional delivery mechanisms,'' 
and I quote, ``such as utilities, would expedite delivering 
dollars to people in need.''
    Producers, pipelines, and utilities could work in 
collaboration in pursuit of the solution, and the diversity of 
this approach would allow residential customers perhaps to 
better understand how the molecule of gas gets to the 
burnertip.
    In conclusion, we are requesting this Subcommittee's 
assistance in putting together the required enabling 
legislation. That is my reason for appearing here today. The 
efficiencies of this proposal and the benefits to all parties 
involved should motivate us to move forward. Thank you for your 
time.
    Mrs. Cubin. Thank you, Mr. Harpole.
    [The prepared statement of Mr. Harpole follows:]

      Statement of John A. Harpole, President, Mercator Energy LLC

Introduction
    Madam Chairwoman and members of the Committee: I am John Harpole, 
President of Mercator Energy. Mercator Energy is a natural gas services 
consulting company based in Denver, Colorado that provides marketing 
services to both natural gas end-user and natural gas producing 
customers. In the mid-1980's, the Federal Energy Regulatory Commission 
(FERC) created open-access transportation on interstate natural gas 
pipelines via FERC Order 436. At that time, I was employed by an oil 
and gas production company owned by General Electric. As a result of 
FERC Order 436, I was put in charge of supplying natural gas to 55 
General Electric industrial plants behind 34 utilities and 18 
interstate pipelines. It may also be of interest to you, Madam 
Chairwoman, to note that my company marketed all of the natural gas 
production out of the Jonah Field in Sublette County, Wyoming, for 
McMurry Oil Co. from 1992 to 2000. Those varied experiences have 
provided me with an extensive view of the natural gas industry--from 
the wellhead to the burnertip.
    Additionally, I have served as Vice-Chairman of the Natural Gas 
Committee of the Independent Petroleum Association of America and on 
the governing boards of two regional producer trade associations, the 
Colorado Oil and Gas Association and the Independent Petroleum 
Association of Mountain States. Over the last twelve years, I have 
authored articles about a number of timely issues affecting the natural 
gas industry for such publications as American Oil & Gas Reporter, Oil 
and Gas World, Hart's Energy Markets, and Natural Gas Focus. Although I 
have testified before FERC, this is my first opportunity to testify 
before Congress.
    I am here representing myself and my company, an independent, 
regional natural gas consulting firm, not an industry organization or 
political entity. My participation is the result of my interest in 
seeing the idea that I will describe further herein, reach fruition. 
While the resulting program should provide opportunities for positive 
public relations and increased public awareness of how the natural gas 
industry ``works'', my true goal is to help author an efficient 
solution for low- and fixed-income individuals who have been and 
continue to be hurt by rising natural gas prices.
    Last month, President Bush's National Energy Policy Development 
Group specifically recommended that the President ``take steps to 
mitigate impacts of high energy cost on low-income consumers'', 
including ``directing the Secretaries of the Interior and Health and 
Human Services to propose legislation to bolster LIHEAP [Low Income 
Home Energy Assistance Program] funding by using a portion of oil and 
gas royalty payments'' and ``redirecting royalties above a set trigger 
price to LIHEAP, whenever crude oil and natural gas prices exceed that 
trigger price, as determined by the responsible agencies.'' (Chapter 2, 
page 2-12)
    Today, I appear before you to describe and explain the efficiencies 
of a novel concept to expand existing low-income energy assistance 
programs by taking Federal royalty gas in-kind and allocating that gas 
directly to pre-qualified low-income energy assistance needs. On 
February 7, 2001, Colorado Governor Bill Owens sent a letter to Vice 
President Cheney's office outlining the general terms of the concept. 
That letter resulted in press coverage from a number of natural gas 
industry trade publications. I have attached copies of the letter from 
Governor Owens and the response from Vice President Cheney's office as 
exhibits to this testimony.
    After the effort that a number of parties contributed to this 
concept, it was gratifying to see the National Energy Policy 
Development Group select it for inclusion in the policy document that 
was released last month. As evidence of the bi-partisan support this 
concept has received, a variation of this idea was introduced in the 
House of Representatives on March 8, 2001 by Carol Maloney, (D-NY) as 
HR962, and a similar bill in the Senate by Charles Schumer (D-NY) and 
Hillary Rodham Clinton (D-NY).

The Need
    This Committee is certainly aware of the dramatic increase in 
natural gas prices during the last 12 months. Most experts agree that 
the two major driving forces behind the price increase were the 
following:
    1. LA wholesale shift from coal to natural gas as the fuel of 
choice by electric utilities. This change is a result of stricter 
Federal air quality standards for coal-fired power plants; and
    2. LThe exploration and production communities' inability to keep 
pace with increases in demand which has been exacerbated by more 
restrictive Federal land access and right-of-way regulations.
    We, as a country, cannot simultaneously restrict coal-fired 
electric generation emissions, access to Federal lands, waters, and 
right-of-ways, and not expect a resultant increase in natural gas 
prices. Recent Federal policy and regulations have contributed 
significantly to the recent surge in gas prices. If the Federal 
Government decides to pursue the concept I am proposing, the irony of a 
Federal solution that would address the needs of those individuals most 
severely impacted,--that is, those with low or fixed incomes--might not 
be lost on the American public.
    In an effort to convey the dramatic price increase, I have prepared 
an illustration that shows the average gas prices from 1991 to 2001.

[GRAPHIC] [TIFF OMITTED] T3043.017


    All three sectors of the natural gas customer base have been 
dramatically impacted by the price increase. Unlike their industrial 
and commercial counterparts who can lock down gas prices either 
physically or financially, residential customers--the largest consumer 
sector--who rely on utilities to supply their natural gas, do not have 
access to individually-negotiated fixed-price contracts or any other 
type of long-term, fixed-price hedging tools. In fact, as a result of 
various state public utility commission rulings, regulated utilities 
generally are allowed to pass through the actual cost of natural gas to 
residential customers, regardless of what the price may be. However, 
the utilities are not allowed to earn a rate of return on the commodity 
portion of those pass-through gas charges. If they were allowed to do 
so, simple logic would dictate that the more they paid and charged for 
gas, the higher the utility's rate of return would be.
    Furthermore, most utilities have no incentive to try to predict or 
``outguess'' the forward price for natural gas by locking down long-
term, fixed-price contracts for their residential customer base. 
Utilities face the 20-20 regulatory hindsight of state public utility 
commissions whenever commodity prices increase. Many of those 
utilities, instead, buy gas for their residential customer base under 
contracts that are tied to a monthly spot-price index. Utilities have 
found themselves in a no-win situation. There is no incentive to pursue 
the absolute lowest prices available, and their purchasing strategy is 
constantly second-guessed when higher prices occur. This situation 
results in a purchasing methodology relegated to a laissez-faire 
monthly spot-market price. Many public utility commissions are now 
rethinking purchasing policies as a result of the recent dramatic 
natural gas price increase.
    Because of the trend toward spot-market purchasing, most 
residential customers are what natural gas derivative traders refer to 
as ``naked the forward price'' for natural gas. The spot market 
purchasing strategy provides tools for commercial and industrial 
customers to mitigate the impact of volatile pricing, but residential 
customers remain vulnerable. The financially ``naked'' residential 
natural gas customer is too often the one turning off the thermostat 
and throwing on the extra blankets.
    The irony of all this is apparent in the illustration below. 
Residential gas consumers in this country total about 58 million, more 
than ten times the number of commercial customers and 250 times the 
number of industrial customers. Yet residential customers are those 
most severely impacted by gas prices. In sheer numbers, the 58 million 
residential customers are the voting public, and consequently, they can 
drive public policy on an issue that they rarely have control over. Of 
those 58 million residential customers, 13.8 million qualify for LIHEAP 
assistance.

[GRAPHIC] [TIFF OMITTED] T3043.018


LIHEAP
    ``The Low Income Home Energy Assistance Program (LIHEAP) was 
created under the Omnibus Budget Reconciliation Act of 1981 (OBRA) to 
help low and fixed income households pay their fuel and utility bills. 
LIHEAP funding is allocated by the Department of Health and Human 
Services (HHS) and administered by the states, with the states having 
maximum flexibility in directing program funds.
    ``LIHEAP is one of the original seven block grants authorized by 
OBRA. Over the last decade, the LIHEAP program has evolved from 
providing only financial assistance to low-income households to today's 
efforts that include residential weatherization and home-energy repair. 
``[under the program] states are given the flexibility to direct 
program funds as needed, allowing individual states to tailor programs 
according to the needs of its low and fixed income residents. In 
addition, states are required to maintain administrative expenses at or 
below ten percent [of the total allocated dollars], ensuring that most 
of the monies go directly to needy households.--Finally, LIHEAP serves 
as discretionary, in many cases one-time, assistance providing a bridge 
that helps the working poor and avoiding dependence on welfare 
programs.'' (LIHEAP Issue Brief 1998-04)
    According to the qualification criteria set forth by the Federal 
LIHEAP program, approximately 24% of the country's 58 million 
residential customers qualify for energy assistance. LIHEAP assistance 
is available to households whose annual income is 150% of the Federal 
poverty level or 60% of the state median income. As you can well 
expect, the number of applicants increased dramatically in conjunction 
with the natural gas price increase over the last heating season. 
Nearly 70% of the households receiving LIHEAP assistance in 1995 
survived on an annual income of less than $8,000. Nearly 34% of those 
households had at least one member 60 years of age or older. In 
addition to low-income households, senior citizens and individuals on 
fixed-incomes have been especially impacted by high natural gas costs.

The Source
    The Federal Government is the largest natural gas producer in the 
United States. When royalty volumes from every onshore and offshore 
well are aggregated, the volume of daily production owned by the 
Federal Government exceeds that of the country's largest commercial 
natural gas producer. In 1999, the Federal Government received $2.1 
billion in total revenues from onshore and offshore natural gas royalty 
payments paid individually each month by each natural gas ``wellhead 
operator''. Based upon actual NYMEX natural gas settlement prices for 
the first six months of 2001 and the projected NYMEX futures prices for 
the remainder of this year, the Federal Government should receive 
nearly $6 billion in royalty payments in 2001.
    The Federal Government, through the Minerals Management Service 
(MMS), currently takes in-kind approximately 400,000 MMBtu per day of 
its total 2.5 million MMBtu per day of offshore royalty gas. That is, 
the Federal Government sells the gas itself rather than relying on a 
sale by the wellhead operator. The administration of this program and 
its associated costs and benefits represent a true success story within 
the Department of Interior. Fewer than 14 employees at the MMS sell the 
400,000 MMBtu per day of gas in the open market on a monthly basis. The 
Federal Government also manages a successful onshore oil royalty-in-
kind program in the state of Wyoming.
    By any standard, the royalty revenues received in 2001 by the 
government can be considered a windfall for the Federal treasury and 
for the onshore states that receive a 50% share of these onshore 
royalty revenues. Rather than see that windfall ``disappear'' into 
Federal and state treasuries, why not incorporate those dollars in a 
solution for the needy?

One Approach
    Most, if not all, utilities in the eastern United States have 
arranged for long-term natural gas supplies from producers in the Gulf 
of Mexico. As you are aware, the Federal Government, under the terms of 
Federal leases granted to exploration and production companies, has the 
option to receive a one-sixth royalty payment on production located in 
offshore waters or take the equivalent volume of gas in-kind.
    Nearly every utility in the western half of the country acquires a 
portion of its natural gas supplies from production located on Federal 
lands in the Rocky Mountains. On those lands, the Federal Government 
receives a one-eighth royalty payment and also retains, under its lease 
agreements, the option to receive its royalty in-kind.
    In the majority of cases, whenever a utility purchases gas from 
producers with production on Federal lands, the utility utilizes its 
own transportation contracts on interstate pipelines in order to 
effectuate the transportation of gas ``from the water'' (Gulf of 
Mexico) or from ``The Rockies'' to their utility's front door, the 
``citygate.
    As an example, KeySpan Corporation, the country's fifth largest gas 
utility and the largest gas utility in the Northeast, serves 2.4 
million customers in three states. On an average January ``peak'' usage 
day, KeySpan consumes 1,100,000 MMBtu in its New York City service 
territory alone.
    In January of 2000, in KeySpan's New York City service territory, 
54,000 pre-qualified residential low-income customers accounted for a 
``low-income average daily demand'' of 8200 MMBtu per day. Obviously 
the 8200 MMBtu per day of usage related to low-income demand is just a 
fraction (seven-tenths of one percent) of the total volume of gas 
consumed in New York City by KeySpan customers. The ``low-income 
volume'' was calculated by identifying the LIHEAP recipients by account 
number and totaling the daily usage for each account. That aggregate 
demand volume obviously changes each month. Note that the ``low-income 
volume'' for KeySpan's New York City service territory of the largest 
gas utility in the northeast amounts to less than three-tenths of one 
percent (0.3%) of the Federal Government's total offshore royalty gas 
volume.
    One of KeySpan's many purchase contracts calls for delivery of gas 
from an offshore Gulf producer in the amount of approximately 60,000 
MMBtu per day. That volume is then transported by KeySpan under a firm 
transportation agreement with Transcontinental Gas Pipe Line Corp. a 
distance of 1400 miles to KeySpan's service territory in New York City. 
As a result of this transaction, the offshore producer/wellhead 
operator, pays the Federal Government a monthly royalty equal to one-
sixth of the Gulf Coast sales price arrived at with KeySpan. The 
producer remits payment to MMS with MMS Form 2014.
    Under this proposed program, KeySpan, in conjunction with the 
offshore producer, could change the price for the 8,200 MMBtu per day 
of the total 60,000 MMBtu per day to $2.00 per MMBtu (or whatever ``set 
trigger price'' might be determined by the Secretary of Interior). This 
one transaction could lower the natural gas price for 54,000 LIHEAP and 
other prequalified low-income customers in New York.
    This solution adds no net administrative burden or cost to either 
the offshore producer, the utility or the state LIHEAP administrator. 
The producer could simply indicate on the required Federal royalty 
paperwork (a simple redesign of Form 2014 would be required) that a 
specified portion of the royalty gas was sold in-kind at the 
predetermined LIHEAP set trigger price to the producer's utility 
customer, who verifies the sale volume and price for audit purposes. 
The utility then transfers the price benefit directly to the pre-
qualified low-income recipients via their monthly utility bills. LIHEAP 
incurs no additional administrative burden because it has already 
qualified the recipient for assistance.
    Under this approach, the producer handles the sales transaction of 
in-kind royalty gas. The only additional administrative burden is MMS's 
audit of the transaction. By not having to add special purchase 
contracts, the utility can simply transport the gas under existing 
long-term arrangements.
    The above approach is not the only solution to moving royalty in-
kind gas to low-income recipients. A number of flexible options can be 
pursued that help address the concerns of various industry 
participants. For example, some utilities may not have the information 
systems infrastructure necessary to allow them to identify specific 
recipients and pass through the lower-priced royalty-in-kind gas. 
Additionally, it may make more economic sense to have the government 
purchase firm transportation directly from the pipelines or pipeline 
shippers in those few instances where short-term ``released-capacity'' 
transportation may be cheaper than the utility's underlying firm 
transportation agreements.

Enabling Legislation and Pilot Projects
    This novel concept is not meant to become a long-term social 
welfare entitlement program. Rather, when spot market prices return to 
levels near the ten-year average (which could be calculated on either a 
NYMEX, regional, or citygate basis), the need for the program could be 
reviewed on a seasonal basis.
    Enabling legislation is, however, needed to address the Mineral 
Leasing Act and the Outer Continental Shelf Lands Act to allow the 
Secretary of Interior to accept a price that benefits the low-income.
    We must move quickly in order to implement a pilot program that 
will address the high natural gas prices that are anticipated for this 
coming winter's heating season. Utilities could be selected for pilot 
programs in which each utility could tailor the concept to its own 
needs and requirements.
    More than enough Federal royalty gas exists to satisfy all of the 
low-income demand nationwide. The nation's top 25 natural gas utilities 
serve 52.5% of all residential consumers in the United States. Under 
the above-described ``KeySpan'' approach, one ``deal'' alone can 
``cover'' the low-income needs behind one of the largest gas utilities 
in the country utilizing only 3/10ths of one percent of the available 
offshore Federal royalty gas volumes. Imagine what 25 ``deals'' a month 
could do for other low- and fixed-income consumers! Auditing 25 
transactions a month would be a nominal task for the MMS given the 
measure of benefit it would provide to recipients. MMS's cost to audit 
would be minuscule compared to the ``up-to-ten-percent'' cost of LIHEAP 
administration.

The Benefits
    Important collateral benefits to this program are apparent beyond 
lowering the price of natural gas for low- and fixed-income households.
    1. LThe proposed program could provide an additional benefit to the 
low-income in addition to increasing existing LIHEAP funds. This is 
best described by Karen Brown, current Chairman of the National Fuel 
Funds Network, who says in a letter (copy attached) that, 
``Additionally, in times of such crisis as last year, simply increasing 
dollars to be delivered through a finite and, in some cases, much 
outdated delivery structure such as LIHEAP is not fully effective. The 
LIHEAP program may be nearing its administrative capacity in terms of 
delivering significantly more dollars--especially without investing 
more dollars to improve such an infrastructure. Additional delivery 
mechanisms such as utilities would expedite delivering dollars to 
people in need.
    2. LBy working in collaboration, producers, pipelines and utilities 
can direct more dollars to the needy by avoiding the ``up-to-ten 
percent'' administrative cost inherent in the LIHEAP program. As an 
example, if this Federal royalty-in-kind (RIK) solution results in $1 
billion in benefits to LIHEAP customers, eliminating the 10% 
administrative charge adds another $100 million to the bottom line for 
low- and fixed-income customers.
    3. LLIHEAP and similar programs could redirect a larger pro-rata 
share of their funds to conservation efforts as a result of the base 
cost of natural gas being addressed by this program.
    4. LThe diversity of this approach allows for a greater level of 
understanding about how a ``molecule of gas'' travels from the wellhead 
to the burnertip. For example, utilities could provide informative 
leaflets with their bill that describe the program in simple, everyday 
terms, thereby helping to educate and raise the level of awareness 
among those customers who know the least amount about our industry and 
yet are impacted the most by price volatility.

Conclusions
    If, as many industry experts indicate, natural gas prices continue 
to remain 30% higher than just one year ago, more and more individuals 
on low or fixed incomes will continue to seek energy assistance from 
state and Federal programs. Under this proposed program, the Secretary 
of Interior has the option to decide if and when natural gas prices 
become high enough to warrant allocation of royalty in-kind gas to 
LIHEAP programs. If the Secretary so designates, producers, utilities 
and state LIHEAP organizations will not need to scramble to introduce 
new programs overnight, but will have the flexibility to reduce the 
price of gas supplies designated for LIHEAP recipients.
    While LIHEAP offers other energy assistance programs that can 
benefit from any additional dollars the Federal Government may allocate 
to them in times of high energy prices, 100% of the benefit of low-
priced, in-kind royalty gas is passed on to LIHEAP recipients free of 
any additional administrative fees.
    Requesting this Subcommittee's assistance in putting together the 
requisite enabling legislation is my reason for appearing here today. 
The efficiencies of this proposal and the benefits to all parties 
involved should motivate us to move forward.
                                 ______
                                 

    [A map and letters attached to Mr. Harpole's statement 
follow:]
[GRAPHIC] [TIFF OMITTED] T3043.005

[GRAPHIC] [TIFF OMITTED] T3043.006

[GRAPHIC] [TIFF OMITTED] T3043.007

    Mrs. Cubin. The Chair now recognizes Mr. James Jacob to 
testify.

STATEMENT OF JAMES JACOB, MANAGER OF CONSUMER ADVOCACY, KEYSPAN 
                          CORPORATION

    Mr. Jacob. Good morning, Madam Chairman and members of the 
Committee. KeySpan is the largest gas company in the Northeast 
and the fifth largest in the country. We serve 2.4 million gas 
customers in three States. We are also the largest privately-
owned power producer in New York State, with 6,200 megawatts of 
generation.
    Since 1998, KeySpan, formerly known as the Brooklyn Union 
Gas Company, has grown from one of the most respected local gas 
distribution companies in the country to a diversified energy 
company with a footprint in the Northeast. KeySpan also 
provides management services for the electric transmission and 
distribution services owned by the Long Island Power Authority. 
In addition to our natural gas customers, KeySpan serves 1.1 
million electric customers on Long Island.
    KeySpan is committed to providing assistance to low-income 
and special needs households. We have over many years 
established partnerships with State and local government social 
service agencies and community-based organizations to maximize 
the use of the limited resources available to serve this at-
risk population. KeySpan is an active participant in the New 
York State HEAP Block Grant Advisory Council. We take an active 
role in promoting, advertising, and enrolling eligible 
customers in this vital program.
    Recognizing our corporate obligation to the communities we 
serve, KeySpan has supported urban renewal initiatives through 
our Cinderella program, now in its 31st year. In 1983, we 
created a fuel fund in New York City that we call the 
Neighborhood Heating Fund. This fuel fund has been a critical 
part of KeySpan's response to the need for public and private 
partnerships to supplement LIHEAP funding. We have created or 
support similar fuel funds in all of our service territories.
    This winter was extraordinary in the Northeast because of 
two main factors, the cold weather lasting for longer than 
average and the high price of gas used in heating homes. 
Understanding the incredible burden faced by low-income 
customers, KeySpan responded by adding additional funds to 
their heating fund. To date, KeySpan has contributed more than 
$7.4 million to these energy assistance programs. As there was 
an increased demand for energy assistance, this money quickly 
made its way to the households desperately in need of 
assistance.
    In the early 1990's, KeySpan created two targeted low-
income assistance programs. The first is On Track, a 
comprehensive behavioral modification program focused on energy 
and financial management that serves 1,700 customers per year 
in New York State. The second is the Residential Reduced Rate. 
This program helps make energy more affordable for our low-
income customers in New York City by providing a discount on 
their basic service charge.
    I would like to focus on our New York City operation today 
as I ask for your support in piloting a natural gas royalties 
in-kind program for low-income customers. KeySpan Energy 
Delivery of New York serves 1.1 million customers in three 
counties within New York City. We currently have identified 
over 120,000 special needs households in this area. Studies we 
have conducted tell us that over 43 percent of our payment 
trouble customers have incomes at or below 150 percent of the 
Federal poverty level. Census data and other income studies 
conducted for our service territory support the findings of our 
research.
    Every year, KeySpan works with thousands of low-income 
households struggling to meet their energy expenses. These are 
good people and they are facing hard times. Many are having 
difficulty with their bills for the first time. We see families 
that have had their income reduced by catastrophic illness, 
senior citizens adjusting to the loss of a spouse and the 
associated change in their financial status, and single-parent 
households struggling to keep their families together, and many 
of our neighbors who, because of loss of employment, are facing 
a crisis.
    Recognizing that a large number of households are facing 
difficult choices, KeySpan implemented a discount rate for low-
income customers in 1993. We currently have 54,000 households 
enrolled in this program. The special needs customers enrolled 
in this program receive a 30 percent reduction in their basic 
service charge.
    As we develop the proposals I am supporting today, we 
approached our regulatory agency, the New York State Public 
Service Commission, and we are pleased to report that they are 
supportive of this undertaking. While this project was 
underway, the price of natural gas has increased substantially. 
We believe that the timing for a new public-private partnership 
to assist low-income households is critical.
    In our residential reduced rate, we have a self-identified 
group of low-income and special needs customers who have asked 
us for the lowest possible residential rate. Our proposal would 
not mandate participation, but offers the lower-priced 
commodity based on program eligibility criteria. We believe 
that the voluntary enrollment provision is critical since we 
support the right of customers to choose and to make informed 
decisions in the emerging competitive marketplace. As these 
customers are already aggregated for our discount rate, they 
are the group that would benefit the most from the commodity 
discounts associated with royalties in-kind. This group has a 
better bill payment history than our normal residential 
customers and this has been a multi-year experience, and we are 
concerned that with the growing energy crisis, that these 
customers will face additional terminations for non-payment in 
the near future unless we come up with a mechanism to reduce 
energy burden.
    With your support, the Department of the Interior can 
arrange for the delivery of natural gas as royalties in-kind. 
In the program that we are proposing, KeySpan would need an 
average of 8,200 decatherms of natural gas per day for these 
customers during January. When this has been accomplished, 
KeySpan could supplement the already discounted transportation 
rate with a much lower commodity cost. We would continue to 
provide all the customer care functions for these customers and 
we would use our existing capacity to transport the natural 
gas. We would also seek to reduce or eliminate any associated 
demand charges related to this new supply.
    This partnership would reduce the energy burden for low-
income households, helping them to reach the elusive goal of 
energy affordability. We ask that you support the proposal for 
natural gas royalties in-kind as a direct and meaningful method 
of addressing the energy burden of low-income households. 
LIHEAP and royalties in-kind are essential to the well-being of 
a major segment of our population. Thank you very much.
    Mrs. Cubin. Thank you very much, Mr. Jacob.
    [The prepared statement of Mr. Jacob follows:]

  Statement of James M. Jacob, Manager of Consumer Advocacy, KeySpan 
                              Corporation

Introduction
    Madame Chairman and members of the committee: I am James Jacob, 
Manger of Consumer Advocacy for the KeySpan Corporation. KeySpan is the 
largest Gas Company in the Northeast and the 5th largest in the 
country. We serve 2.4 million gas customers in three states. We are 
also the largest privately owned power producer in New York State with 
6,200 Megawatts of generation. Since 1998, KeySpan formerly known as 
The Brooklyn Union Gas Company has grown from one of the most respected 
local gas distribution companies in the country to a diversified energy 
company with a footprint that spans the Northeast. KeySpan also 
provides management services for the electric transmission and 
distribution services owned by the Long Island Power Authority. In 
addition to our natural gas customers, KeySpan serves 1.1 Million 
electric customers on Long Island.
    KeySpan is committed to providing assistance to low income and 
special needs households. We have, over many years, established 
partnerships with State and Local Government social service agencies 
and community based organizations to maximize the use of the limited 
resources available to serve this ``at risk'' population. KeySpan is an 
active participant on the New York State HEAP Block Grant Advisory 
Council. We take an active role in promoting, advertising and enrolling 
eligible customers in this vital program. Recognizing our corporate 
obligation to the communities we serve, KeySpan has supported urban 
renewal initiatives through our ``Cinderella'' program now in its 31st 
year. In 1983, we created a fuel fund in New York City that we call the 
Neighborhood Heating Fund. This fuel fund has been a critical part of 
KeySpan's response to the need for public/private partnerships to 
supplement LIHEAP funding. We have created or support similar fuel 
funds in all of our service territories. This winter was extraordinary 
in the northeast because of two main factors, the cold weather lasting 
for longer than average and the high price of gas used in heating 
homes. Understanding the incredible burden faced by low-income 
customers, KeySpan responded by adding additional funds to their 
heating funds. To date, KeySpan has contributed more than $7.4 Million 
to these energy assistance programs. As there was an increased demand 
for energy assistance, this money quickly made it's way to the 
households desperately in need of assistance.
    In the early 1990's, KeySpan created two targeted low-income 
assistance programs. The first is ``On Track'' a comprehensive 
behavioral modification program focused on energy and financial 
management that serves 1,700 customers per year in New York State. The 
second program is the Residential Reduced Rate. This program helps make 
energy more affordable for our low-income customers in New York City by 
providing a discount on their basic service charge for qualified 
customers.
    I would like to focus on our New York City operation today as I ask 
for your support for piloting a Natural Gas Royalties in Kind program 
for low-income customers. KeySpan Energy Delivery of New York serves 
1.1 Million customers in three counties within New York City. We 
currently have identified over 120,000 special needs households in this 
area. Studies we have conducted tells us that over 43% of our payment 
troubled customers have incomes at or below 150% of the Federal poverty 
level. Census data and other income studies conducted for our service 
territory support the findings of our research. Every year KeySpan 
works with thousands of low-income households struggling to meet their 
energy expenses. These good people are facing hard times. Many are 
having difficulty with their bills for the first time. We see families 
that have had their income reduced by catastrophic illness, senior 
citizens adjusting to the loss of a spouse and the associated change in 
their financial status, single parent households struggling to keep 
their families together and many of our neighbors who because of the 
loss of employment are facing a crisis.
    Recognizing that a large number of households were facing very 
difficult energy choices, KeySpan, implemented a discount rate for low-
income customers in 1993. We currently have 54,000 households enrolled 
in this program. KeySpan's Residential Reduced Rate offers a discounted 
transportation rate or basic service charge that includes the first 6 
therms of natural gas. The special needs customers enrolled in this 
program receive a 30% reduction on their basic service charge.
    In order to qualify for the Residential Reduced Rate, a customers 
must be currently receiving Medicaid, SSI, Public Assistance, LIHEAP, 
Food Stamps, Child Health Plus (New York State health insurance for 
uninsured children), Veteran's Disability Pension or Veteran's 
Surviving Spouse Pension.
    Four years ago, as part of our ongoing advocacy program, we 
initiated research into a mechanism to deliver lower priced natural gas 
to this identified special needs population. Traditional utility rate 
setting mechanisms do not have a provision for directing the lowest 
priced commodity to a sub-set of customers. As we developed our 
proposal, the Company approached our regulatory Agency, the New York 
State Public Service Commission, and we are pleased to report that they 
are supportive of this undertaking. While this project was underway, 
the price of natural gas has increased substantially. We believe that 
the timing for a new public/private partnership to assist low-income 
households is critical.
    In our Residential Reduced Rate, we have a self-identified group of 
low-income and special needs customers who have asked us for the lowest 
possible residential rate available. Our proposal would not mandate 
participation but offers the lower priced commodity based on program 
eligibility criteria. We believe that the voluntary enrollment 
provision is critical since we support the right of customers to choose 
and to make informed decisions in the emerging competitive marketplace. 
As these customers are already aggregated for our discount rate, they 
are the group that would benefit from commodity discounts associated 
with the Royalties-In-Kind proposal. Our Residential Reduced Rate 
customers as a group have demonstrated a better bill paying history 
when compared to the general residential customer population. This 
multi-year collection experience shows the direct results of affordable 
energy for low-income consumers. However, current collection forecasts 
project a somewhat darker future as low-income consumers react to 
higher energy prices. We have already seen growth in the amount of our 
past due accounts. We expect that delinquency and subsequent 
terminations of service for non-payment will grow if a mechanism for 
reducing energy burden is not found.
    Many of the customers in our program were recipients of Public 
Assistance. We believe that additional targeted energy education 
materials including the use of bill inserts, coupled with affordable 
energy, will assist these households in the transition to self-
sufficiency.
    With your support, the Department of the Interior can arrange for 
the delivery of natural gas as royalties in kind. In the program that 
we are proposing, KeySpan would need an average of 8,200 dth of natural 
gas per day for these customers during the month of January. When this 
has been accomplished, KeySpan could supplement its already discounted 
transportation rate with a much lower commodity cost. KeySpan would 
continue to provide all of the customer care functions for these 
customers and would use its existing transportation capacity for this 
program. We would seek to reduce and or eliminate any associated demand 
charges related to this new supply with our existing natural gas 
suppliers.
    This new public/private partnership would reduce the energy burden 
for these low-income households helping them to reach the elusive goal 
of affordable energy.

Conclusion
    We ask that you support the proposal for using Natural Gas 
Royalties in kind as a direct and meaningful method of addressing the 
energy burden of low-income households. In today's uncertain economic 
climate with energy costs rising, there are more people in need of help 
than ever before. In the face of daily announcements of layoffs, 
industry restructuring, and downsizing, programs such as LIHEAP and 
Royalties in Kind are essential to the well being of a major segment of 
our population.
                                 ______
                                 
    Mrs. Cubin. I will begin the questioning. I would like to 
start with Mr. Cruickshank. Rumor has it that Joe Skeen's 
Subcommittee markup of the fiscal year 2002 appropriation for 
Interior has the same RIK language that it had last year. Is 
that sufficient or do you think Secretary Norton needs more 
authority?
    Mr. Cruickshank. I think that that language will be 
sufficient for us continuing what we are doing now. If the 
Secretary wanted to consider taking the program in a different 
direction, then we would have to see if the authority was 
sufficient for those decisions.
    Mrs. Cubin. So to use RIK gas for LIHEAP, you would think 
that it would be necessary for Congress to take action or not?
    Mr. Cruickshank. It might. I think we would have to work 
through the specific proposal and see how it fit with our 
existing authorities. Some things we would be able to do, some 
we might not, and we would need to really work through specific 
proposals on that.
    Mrs. Cubin. Okay.
    Mr. Cruickshank. But as you have noted, the President's 
energy plan does call for us to propose legislation to use 
royalties to bolster LIHEAP, so I am sure we will be 
considering those authorities in that context.
    Mrs. Cubin. How would an RIK LIHEAP program actually work?
    Mr. Cruickshank. Do you want to handle this one, Milt?
    Mrs. Cubin. I mean, I have been working with royalty in-
kind ever since I have been here, and so has Mr. Thornberry, 
but the other members of the Committee have not, and so I think 
what I would like you to describe is the collection, the 
distribution, the offset of the value or just how a program 
works, how an RIK program works and how we would get it out to 
the people that we are trying to take care of.
    Mr. Dial. In answering that question and making reference 
to Mr. Jacob's proposal, basically, from an RIK perspective, if 
we were dealing with outer continental shelf leases in the Gulf 
of Mexico and we were dealing with natural gas, typically, what 
would occur would be an identification of properties where a 
royalty obligation exists, or a royalty collection is 
occurring. That collection, if it were currently in-value, 
would be converted at the discretion of the Secretary to an in-
kind collection, basically, a one, for most leases, a one-sixth 
of total production coming off a lease be converted to an in-
kind take of royalty, and that in-kind take of royalty, that 
physical production, would be delivered to a central 
aggregation point.
    What I heard Mr. Jacob describe would be that KeySpan would 
either itself or through intermediaries arrange for the 
physical movement of that gas to New York. That is the physical 
aspects of how, I guess, we would envision, just in the short 
discussion that we have had, of this particular proposal.
    Mrs. Cubin. So in other words, the gas itself would go to 
the utility. The utility would deliver the gas to the homes and 
that would replace an additional appropriation that the 
Congress would make. Would that be a shortcut to it? Mr. 
Harpole?
    Mr. Harpole. Can I try to answer your first question, and 
then I will try to clarify the second? Deanna, can you put up 
the map, please? The concept that I have discussed with KeySpan 
is that they hold firm transportation on Transco right now that 
actually picks up gas in the Gulf Coast. And so one of their 
purchases--they may have 40 different packages of gas that they 
buy on a daily basis, but one of their purchases is directly 
with the producer on the Gulf Coast. That accounts for about 
60,000 MMBTU per day, 60,000 of the million that they use 
behind their New York City service territory.
    And so if you imagine there is a one-sixth royalty on all 
that gas, 10,000 of that, if the producer did not do it in-
kind, 10,000 of that MMBTU would be paid to the Federal 
Government on a 2014 Form. What I am saying is, instead of 
doing that, let us have KeySpan identify the volume that they 
need under the existing contract. KeySpan says, I need 8,200 of 
that 60,000 at the Secretary of Interior's price, but I will 
transport it. I will transport it even though my transportation 
value is probably--the value of that transportation that they 
hold in the winter is four to five times less than what the 
market could charge for that similar transportation quantity.
    So it is kind of a seamless transaction. You do not have to 
buy new gas to cover those people, and I would love to kind of 
address the California question that was asked earlier, but it 
is a pretty seamless transaction that would cover 54,000 people 
with one deal.
    One thing I would like to point out is that only three-
tenths of 1 percent of the available royalty gas offshore, only 
three-tenths of 1 percent would cover all of KeySpan's New York 
City service territory.
    Mrs. Cubin. I realize my time is out, and rather than going 
to a second round of questioning, I wanted to ask one question 
of Mr. Cruickshank. It has been alleged or suggested here today 
that MMS would have to establish a huge new big bureaucracy to 
market this gas. I would like your response to that.
    Mr. Cruickshank. I do not think that would necessarily be 
the case, Madam Chairman. Right now, our operating principle is 
to collect the royalties in-kind and get them to a pooling 
point or a market center that is close to the producing area. 
It is not the most complicated of transactions to do and 
selling gas at a market center is also fairly straightforward. 
I think if we were to get ourselves heavily involved with going 
downstream from there, then we would have to pick up a lot of 
additional skills and that would become more complicated. But 
the way we are operating right now, I do not think we need to 
build up too big a bureaucracy to do so.
    Mrs. Cubin. In conjunction with that statement was the 
statement that MMS does not have the expertise to do this. 
Would you agree with that or not?
    Mr. Cruickshank. We have been developing the expertise, and 
that is part of the reason for the pilots. I think that the 
folks that have been working the pilots since 1998 have 
developed a lot of that expertise and are operating very well 
and doing things that all the other marketers do out there very 
successfully. That is only a small number of people, and if we 
were to grow the program by a large amount, we would certainly 
need to train more people and acquire additional expertise over 
time. But it is the folks doing the work now that have 
developed that expertise.
    Mrs. Cubin. Thank you very much.
    The Chair now recognizes Mrs. Napolitano.
    Mrs. Napolitano. Thank you, Madam Chairman. First, I would 
like to put into the record Representative Maloney's statement, 
Madam Chair. She has not been able to be here.
    Mrs. Cubin. Without objection.
    [The prepared statement of Mrs. Maloney follows:]

    [GRAPHIC] [TIFF OMITTED] T3043.001
    
    [GRAPHIC] [TIFF OMITTED] T3043.002
    
    [GRAPHIC] [TIFF OMITTED] T3043.003
    
    [GRAPHIC] [TIFF OMITTED] T3043.004
    
    Mrs. Napolitano. It is with great interest that I am 
listening to the actual process by which we could accomplish 
the assistance to the low-income, and that is of great interest 
to me, but I still have concerns whether or not the system will 
be able to function. Mr. Cruickshank, you indicate that there 
are some pilots.
    Mr. Cruickshank. We have been operating pilots where we 
have been taking royalties in-kind and selling them at the 
market centers. There has not been a pilot yet to deliver 
royalty in-kind to the LIHEAP program.
    Mrs. Napolitano. So we are just speculating that that would 
work. What would you think would be the most, I would not say 
onerous, but what would be the biggest obstacle to be able, to 
any of you gentlemen, to be able to put a program that would 
actually serve the low-income and still be able to have the 
government be able to maintain a fairly good process that would 
not endanger future programs, because if you realize, once you 
set it in place, all you have to do is keep adding to it, and 
we want to be sure that there is something that is going to be 
there for a good number of years, that is going to be adequate 
to serve the people that it is meant to serve, and that it does 
not infringe upon either the business sector, i.e., the gas 
companies, or that it does not impact other areas that will 
eventually be impacted, because you are going to have a rise 
and fall of prices much as you have in gasoline, and you have 
seen that increase. In 10 years, you have had a 100 percent 
increase almost. How would you be able to keep that?
    I mean, there are all kinds of questions that come into my 
mind, because people on fixed income do not have, generally, a 
doubling of their income within a certain period of time. So 
you are talking about being able to provide those folks with 
adequate sources of gas and still maintain a price that is not 
going to affect both the government and private industry. 
Gentlemen?
    Mr. Harpole. Can I take the first swing at that?
    Mrs. Napolitano. Please.
    Mr. Harpole. It is a good question, several different 
questions in there.
    Mrs. Napolitano. A lot of them.
    Mr. Harpole. A couple come to mind.
    Mrs. Napolitano. In my mind, there are more.
    Mr. Harpole. I will try my best. This, in no way, shape, or 
form, is meant to upset the marketplace. In fact, the royalty 
gas that is purchased by a marketer or a utility right now is 
inherent in the 8(a) production that they buy from a producer. 
So when you think about it, when they buy that gas and take it 
to the utility, they are not allowed to earn a rate of return 
on the commodity portion of their gas cost. They have to pass 
that through. Utilities earn a rate of return based on their 
cost of service. If they are allowed to earn a rate of return 
on $20 gas, they would buy $40 gas. So it is a pass-through and 
so there is no inherent impact on the marketplace from that 
standpoint.
    It is not meant to be a social or a welfare-type program. 
If the alternative is to buy gas--if the alternative is to 
transfer monies to LIHEAP, LIHEAP can spend up to 10 percent of 
those monies on administrative cost. So in my mind, if the top 
25 utilities cover 52 percent of the residential customer base 
and we just solved New York City's KeySpan service area problem 
with one deal, imagine what 25 deals could do in terms of 
solving 52 percent of the residential customers' exposure to 
low-income high heating bills.
    And then, in addition, think about what it does when LIHEAP 
can reschedule other funds to go to conservation and other 
programs. It is meant to kind of augment the LIHEAP program and 
the ease and efficiency of it is such that if you just took $1 
billion of royalty gas--just $1 billion of royalty gas--but if 
you took $1 billion of royalty gas in-kind and gave the money 
to LIHEAP, $100 million of that could be spent on 
administrative costs. It would not cost a fraction to audit 
this program, where you see where the utility says, this is how 
much I need for my low income. I cannot imagine a utility 
overstating that so that they can make more money. This is one 
where we are kind of all helping--the entire industry is 
helping that person lower their energy cost, and the efficiency 
is, in part, is the elimination of the administrative overhead.
    Mrs. Napolitano. That is great, and Madam Chair, may I just 
stress one point, is that I have heard the utilities would not 
want to make a profit, but let me tell you, I have had 
utilities tell me they have to make a profit for their 
investors, and I told them I do not get that kind of assurance 
from my stockbroker. So it is kind of like, do we allow it? How 
much of it? Is it a fair return? Look at what is happening with 
the price increases, both in the energy and electricity and 
also in gas. So to me, it is very open. It is like anybody can 
do anything they want until we begin to close the gaps and the 
loops. Your statement that the transporter will not charge 
because it is a seamless thing, they will make some money 
somewhere.
    Mr. Harpole. They are allowed to earn their cost of service 
rate of return on the transportation.
    Mrs. Napolitano. That is what we heard of energy, too.
    Mr. Harpole. But honestly, for me, I would hate to be a 
utility, because you are allowed to earn a rate of return, but 
there is no incentive for you to go out there and buy gas at a 
cheaper price, because if you guess wrong, you cannot pass 
through that cost to your customer base. And so they live in a 
box. These folks from KeySpan--
    Mrs. Napolitano. In other words, it is--
    Mr. Harpole. Right. It is a no-win situation and there is 
constant 20/20 regulatory hindsight.
    Mrs. Napolitano. But you understand from our vantage point 
is we have our constituents saying to us, take care of it. How? 
And so we need to find out, how do we best work with the 
industry to be able to be sure that we are doing the right 
thing for them.
    Mr. Harpole. I think what you have before you, 
Congresswoman, today is a producer group, an interested party 
in myself, and a utility group that are saying, this is a great 
solution. It is a seamless-type solution. And the utility is 
willing to allow their transportation that is worth a lot more 
in the marketplace to be utilized to save money for the low 
income.
    Mrs. Napolitano. Thank you, gentlemen, and I have gotten 
that message.
    Mrs. Cubin. The Chair now recognizes Mr. Otter.
    Mr. Otter. Mr. Harpole, I am interested in your comment 
that this was not meant to be a welfare program. What was it 
meant to be, then?
    Mr. Harpole. It is definitely a transfer of wealth right 
now. This is--
    Mr. Otter. What would you call it? If you did not call it a 
welfare program, what would you call it?
    Mr. Harpole. It is the Federal Government helping step in 
to solve a problem that they helped create.
    Mr. Otter. That they helped create?
    Mr. Harpole. The higher natural gas prices, in my opinion, 
are a direct result of more air emissions standards. Now, I am 
from the natural gas industry and when I see every utility out 
there choosing natural gas as a generation of source, I feel 
like the dog that was chasing the car and I caught it. So every 
utility out there--of the 250 projects, electric generation 
projects, that are proposed, all but five are natural gas fired 
right now nationwide. And so we have seen the shift, and you 
can blame it on the Federal Government or just blame it on 
people that want to try to reduce emissions, but we have seen a 
shift in the fuel of choice to natural gas. But at the same 
time, as a third generation native of Colorado, we see access 
to Federal lands where a lot of those unknown and undeveloped 
reserves, or the undeveloped reserves, are situated.
    And so from my perspective, having seen this from the 
wellhead to the burnertip, those two Federal issues have helped 
create a price increase. We cannot be surprised by the fact 
that gas prices have increased when we increased the demand and 
then also reduced access. At the beginning of the hearing 
today, the Chair recognized that we do not want to go into 
issues about why prices have increased and why we need more 
access to Federal lands, but I think that issue is a direct--
the pricing that we are realizing today is a direct result of 
several different conflicting policies, restrict air emissions, 
restrict access to Federal lands.
    Mr. Otter. Well, given your enthusiasm for this kind 
program, then why would not the Federal Government, why would 
not this Committee also include the rights-of-way across 
Federal ground for pipelines, for instance, as in-kind as well? 
Why not allow the use of Federal lands for rights-of-way and 
the transmission of pipelines and use that as sort of a toll. 
Say, well, we are going to toll you X-number of dollars per 
cubic foot and that is going to go into the in-kind, as well. I 
can see a tremendous new bureaucracy being built up in order to 
keep track of all these little accounts that would absolutely 
delight those who believe that government ought to be the one 
that is dividing up scarcity.
    Why would we not include all these other things? Say, in 
low-cost housing, if you are going to harvest forests off of 
Federal land, then out of every 1,000 feet, say 100 feet of 
that has got to go to low-cost housing. Where would we stop?
    Mr. Harpole. Congressman Otter, I am about as right-wing a 
Republican as you will ever find. The gentleman to your left 
actually is my Congressman and he knows that for a fact.
    Mr. Tancredo. I can attest to that.
    Mr. Harpole. There was a time when the Federal Government, 
to create an incentive to expand the nation actually awarded 
every other section on either side of the railroad.
    Mr. Otter. Yes.
    Mr. Harpole. We have a problem right now. We have an energy 
crisis. It is hitting the people that do not understand the 
issue the most, the 58 million residential customers, and we 
need to come up with some creative solutions to solve that 
problem.
    What I would like to do, in coming up with this idea, let 
us release the pressure valve on the people that are the most 
affected, and that is the low-income portion of those 58 
million customers that really do not understand the flow of the 
molecule of gas from the wellhead to the burnertip. This is a 
program that you could dial up and down. If the gas prices 
return to a 10-year average, the program is terminated and 
the--
    Mr. Otter. And the bureaucracy goes away?
    Mr. Harpole. The bureaucracy goes away. And it is not the 
bureaucracy that you create in the LIHEAP program. It is a much 
more efficient approach.
    Mr. Otter. We have got to have some institutional memory 
here, and the institutional memory that I can recollect is that 
I have never seen one go away, but that is a subject probably 
for a different day.
    Mr. Cruickshank, have you audited any of these pilot 
projects for success?
    Mr. Cruickshank. We have done an evaluation of the Wyoming 
oil pilot.
    Mr. Otter. Is that an audit?
    Mr. Cruickshank. It is not an audit. That would, in 
essence, be auditing ourselves in a sense. We are taking the 
production. We do use our auditors from the royalty program to 
verify that the volumes delivered are the correct volumes. But 
we are selling the product under contractual obligations with 
private companies or with the General Services Administration, 
and as we verify the volume, since the price is written in the 
contract, we are able to tell without a full-scale audit 
whether we are being paid the right amount.
    Mr. Otter. I see. What would be wrong with the government 
just assuming a working interest in an ore body, or not in an 
ore body, but in a gas field? Why would we not just assume a 
working interest like if we were the landowner, which I think 
we are?
    Mr. Cruickshank. In a sense, when we take royalties in-
kind, the operators are treating us as a working interest in 
terms of delivering the production to us and giving the 
information that one needs to manage the production one takes 
off of a lease. We are not a full working interest in the sense 
that we are not at the table to help decide how the oil and gas 
reservoir is going to be developed and what investment 
decisions to make, and I think that that would be the big issue 
with your proposal. Should the government be there with the 
lessee deciding exactly what sorts of investments to make and 
when to make them?
    Mr. Otter. But is that not what happens? If Butch Otter 
owns a chunk of ground and there is a gas reserve underneath 
it, there is a gas deposit underneath it and they drill down 
and I maintain a one-eighth working interest in that well or in 
that whole field, do I not then come to the table and say to 
the folks who would develop it, who are actually getting the 
resource as a result of their development and their ability to 
accommodate the money necessary, the investment and exploratory 
funds necessary in order to develop the field, I make those 
decisions, and the decisions that I would make, Mr. 
Cruickshank, would be based upon how much more return am I 
going to get for my one-eighth, right?
    Mr. Cruickshank. The fundamental difference between a 
working interest and a royalty interest is that role in the 
decision making about the operations on the lease.
    Mr. Otter. One more question, then. Are we not the 
landowner?
    Mr. Cruickshank. Yes, we are.
    Mr. Otter. Thank you.
    Mrs. Cubin. The Chair now recognizes Mr. Rehberg.
    Mr. Rehberg. Thank you, Madam Chairman. You will note that 
I sit to the right of the entire Committee. There is a reason 
for that on the conservative meter.
    I do not have a problem with your idea. In fact, I think we 
do need a short-term solution and we have to be very creative 
without masking what created the problem, and that is supply 
and demand.
    As I look at your map, that is a nice pipeline, but it does 
not do anything for Montana, and over the course of the 
testimony, we have heard that there is a bottleneck at the 
pipeline. Can it work in areas where there are, in fact, the 
inability to get our gas into the pipeline?
    Mr. Harpole. Yes. I was hoping someone would ask that 
question to clarify a statement that Mr. McMahon made earlier. 
He indicated that it would require additional transportation 
volumes to get to California. In anticipation of that question, 
I pulled down the list of parties that transport gas on the El 
Paso pipeline and Trans-Western pipeline from the San Juan 
Basin, predominately Federal lands, from the San Juan Basin 
into California, and SoCal has 500,000 MMBTU a day of gas 
transportation. Similar in concept to the offshore idea, they 
could take advantage of that.
    As you well know, Montana Power sources gas from all over 
Montana. In addition to doing this on Federal lands, that is 
gas that is brought in from Montana, you could do it on State 
lands, also, but that would be left up to the individual States 
to solve that problem. But Montana, as you well know, is 
surrounded by Federal lands and one-eighth of that royalty gas 
would be available. Now, remember, one-eighth of that royalty 
gas is transferred to the State once it is received and one-
eighth goes to the Federal Government.
    There may be some people in New Mexico that do not want 50 
percent of their share going to California to solve a problem, 
but in my estimation, the Federal Government has more than 
ample volumes of gas to cover the low-income heating needs in 
Southern California. You will not be using 80 to 100 MMBTU a 
day in Southern California for the low-income just because of 
the temperature difference there.
    Mr. Rehberg. Let us assume I am with you, then. By creating 
an opportunity for people to become dependent upon Federal 
sources for their natural gas, do we, in effect, then leverage 
them into supporting our additional, not only construction of 
pipelines, but also taking land out of production in places 
like the Missouri Breaks, which they most recently did under 
the President's Executive Order?
    Mr. Harpole. That was not the initial thought. That was not 
the motivation behind the idea. But for once, we might have 
what I would characterize as non-producing States. You might 
finally have even a Republican that has never voted for lands 
access issues, his constituents might finally be impacted by 
access to Federal lands by virtue of the royalty gas that is 
available from Federal lands that helps his constituents. And 
so it is a terrific link in the sense that, again, we just need 
to educate people as to where the gas resource comes from.
    If you want to know where natural gas is consumed, look at 
a population density map of the U.S. If you want to know where 
it is produced, look at a pipeline map of the U.S. They are not 
the same. And so I think, honestly, all Americans need a better 
appreciation of where we source natural gas and how critical it 
is for us to maintain our own domestic energy policy to 
continue to source that gas in U.S. waters and on U.S. lands.
    Mr. Rehberg. I tried to follow the conversation with 
Congressman Otter. Do you think there is an opportunity--let me 
use as an example Montana again. A lot of our natural gas comes 
in from Canada, and so that is clearly not a Federal gas, but 
it is mixed with Federal gas, but the pipeline does, in fact, 
go across Federal properties. Could we, in fact, then make a 
connection between the pipeline going across the Federal 
properties and use some of the Canadian gas that is in that 
line if it is a higher percentage than would be available under 
your pilot program?
    Mr. Harpole. Yes. I actually did some expert witness work 
on a case involving Montana Power several years ago and 
Colorado Interstate Gas has an interconnection south of 
Billings that sources gas in the Powder River Basin and also in 
the Green River Basin, and at that time, I think it was 
responsible for about 20 percent of the gas volumes delivered 
into Montana Power. About 80 percent does come in off of 
Caraway, the connection in Canada.
    But as you saw in New York City, 80 to 100 MMBTU a day, I 
mean, honestly, my father was born in Deer Lodge. What is the 
usage in Billings? We are not talking about a lot of gas volume 
there. So there should be plenty, I mean, in order of magnitude 
of 100 times more than what you might actually need for the low 
income.
    Mr. Rehberg. Thank you.
    Mrs. Cubin. The Chair now recognizes Mr. Thornberry.
    Mr. Thornberry. Thank you, Madam Chairman. As you mentioned 
a few minutes ago, you and I have been dealing with royalty in-
kind issues since we have been here, partly out of a 
frustration of trying to put a value on gas and then figure out 
what that is so that proper payments can be made to the Federal 
Government, and then the continual lawsuits that seem to go on 
forever after that is made.
    And so we have talked about royalty in-kind as far as 
figuring out a way to take the Federal share of gas and selling 
it on the market and receiving the money that way. We have also 
looked at ways to use the Federal share of gas to heat Federal 
facilities. There, of course, is a little of that going on. 
There is a State program that does that in Texas, run by the 
General Land Office. And we have explored the possibility of 
military bases or other Federal facilities that could use this 
gas in a more direct way.
    I think this suggestion kind of takes it even to the next 
step and tries to get around all of the difficulties in putting 
a value on what that is worth but making some good use. I think 
you are right. I think it is creative and it is interesting to 
me.
    Mr. Harpole, I am still trying to understand, and I am sure 
it is just me, on the transportation side of this, obviously 
you have gas that these utilities will just pass along to the 
low-income folks. What is the motivation for them to provide 
the transportation, or is that something that we, the Federal 
Government or the LIHEAP program, has to pay to get 
transported?
    Mr. Harpole. I would like to take a crack at this and then 
turn it over to Jim Jacob for KeySpan, if I can, to further 
answer the question. But there is in most States, and I would 
say 95 percent of the States, State utility commissions require 
public utilities to hold upstream firm transportation on 
interstate pipelines in adequate volumes to cover a peak day 
need on their system. Now, there are a lot of thoughts in that 
one sentence. But again, the only utility that I know of in the 
country that has relinquished firm transportation to the 
marketplace is Atlanta Gas Light, and if you have read any 
paper in the last 3 years, you realize that that was not 
necessarily the best program in the country.
    Yesterday, I asked some gentlemen from KeySpan how many 
utilities on the East Coast have firm transportation all the 
way to the Gulf Coast in order to satisfy some of their supply 
and they said--they did not hesitate--they said 100 percent, 
100 percent. And so that is transportation that is already in 
the queue because those are the customers that they have to 
cover. They are the last supplier of resort for that customer 
base. And so those utilities will always be able to cover the 
residential customer base. They will be required to by their 
State utility commission.
    I do not know, Jim, if you have something to add to that.
    Mr. Jacob. I would just like to add that in New York State, 
we do have an obligation to serve all customers who ask us for 
service, and even in recent hearings for providers of last 
resort in the emerging competitive marketplace, it has been 
determined that somebody, even if it was not a utility, and 
that is several years downstream, it would have to be an entity 
within the State, either a marketer or a utility company, who 
will have that capacity to supply natural gas and electricity 
to customers as needed. So I think that certainly in New York 
State, utilities will be the provider of last resort for the 
next several years, and we can certainly benefit low-income 
customers in New York State by using a royalties in-kind 
program at this time.
    Mr. Thornberry. But you have to be compensated to transport 
that gas from production areas up to New York, because it costs 
you something to do that, right?
    Mr. Jacob. We would already be transporting gas for these 
customers. This would simply be a lower-price commodity that we 
could pass on to consumers. So our cost, and I am not an expert 
on our contract, certainly, but we already have supply 
contracts, as John noted, in the Gulf region, and so we would 
simply be passing this through the same pipeline system, 
through our city gate at the beginning of our territory and to 
our customers who were enrolled in this low-income initiative. 
So for us, it would simply be a mechanism that we could show on 
their utility bill as a reduction, along with some of the 
education programs that we would like to do with these same 
customers to help them to understand this changing competitive 
marketplace that is the energy world today.
    Mr. Thornberry. So it would not cost you anything 
additional to transport this gas, more than it already costs to 
get the gas to each residential home?
    Mr. Jacob. It is my understanding that there would not be 
any change in those structures. We are already transporting gas 
from that region to the New York City gate.
    Mr. Harpole. And if I could add something to kind of help 
toot KeySpan's horn here, KeySpan is one of the few utilities, 
if you unbundle the cost of gas to residential customers, say 
there is a commodity cost, there is an interstate pipeline 
transport cost, then there is a cost to transport across the 
utility grid to get it to the residential customer, that last 
piece, they have actually cut that cost for the low-income by 
30 percent. No other utility in the country has ever even 
offered something that large in terms of percentage cuts. And 
so this is one where they would benefit by the lower commodity 
cost, they pass through the same interstate transport costs 
under their costs of service, but then again, they even give 
that set of customers, the low-income, a 30 percent discount on 
what they charge to transport across their pipe.
    Mr. Jacob. And if I could just add, as I said in my 
testimony, these customers who have benefitted from this 30 
percent discount to date pay much better than the average 
residential customer base that we serve, so that once we have 
addressed an affordability issue, it really makes a difference 
in their lives and many of them have transitioned from public 
assistance and they are still on the food stamp program and 
still categorically eligible for LIHEAP, but it makes a real 
difference and we have seen that.
    Now, the higher energy costs of the last year are starting 
to affect that. This program would allow us to reduce that 
burden by the commodity cost. We would still retain our 
discount rate of 30 percent and these customers would benefit 
and learn about the process of gas supply and competition at 
the same time.
    Mrs. Cubin. The Chair now recognizes Mr. Tancredo.
    Mr. Tancredo. Thank you, Madam Chairman, and I apologize 
for, first of all, being late and then having to run in and out 
here. As a result, I probably will not ask a question that may, 
in fact, end up being redundant. I would just say that your 
particular leadership in this area, Madam Chairman, has been 
very helpful to me and elucidative, and although I have not 
spent the same amount of time in the Congress or on this issue 
as Mr. Thornberry and you, I have come to the conclusion that 
royalty in-kind is a far better way of determining the exact 
value of the royalty that the Federal Government should be 
obtaining from the industry than is the present process that 
leaves so much up to--that causes so much confusion about 
whether we are talking about wellhead prices or downstream 
prices upon which that valuation is determined.
    So I have somewhat reluctantly come to the conclusion that 
royalty in-kind is the best way to go. The only thing I have 
ever heard as a major sort of argument against it from a 
philosophical standpoint is that it puts the Federal Government 
into the position of being one of the world's largest oil and 
gas brokers if the program is fully implemented. But it seems 
to me that if we could direct a portion of these direct 
payments to LIHEAP and the Strategic Petroleum Reserve, as has 
been recommended by the National Energy Policy, that we could 
diffuse some of that criticism, and appropriately so.
    Along with that, of course, the program does eliminate the 
middleman that costs all energy consumers additional money, and 
oil and gas producers must provide exhaustive accounting, as 
has been attested to--I did hear that--valuation paperwork 
costing millions of dollars. The Federal Government must 
process that paperwork. In a way, we could, I guess, present 
this as being an energy savings plan, not have to cut down so 
many trees to produce so much paper.
    But I must say that my added support for this concept is 
brought to bear as a result of Mr. Harpole's analysis and 
participation in it. I think he is one of the most 
knowledgeable individuals in this field. He has been a leader 
and a pioneer of the concept in Colorado, and, in fact, I know 
that Governor Owens, our governor, is strongly supportive of 
the RIK to the LIHEAP concept, and his confidence in that, by 
the way, I am sure, comes to a large extent from his support 
and confidence in you, Mr. Harpole. So I think we can all learn 
a great deal from your testimony and I look forward to reading 
the various testimonies that have been provided for the record, 
and I thank you all.
    [The prepared statement of Mr. Tancredo follows:]

  Statement of The Honorable Thomas G. Tancredo, a Representative in 
                  Congress from the State of Colorado

    Thank you Madame Chairman. Your leadership on this Royalty in Kind 
concept for oil and gas leases is so strong and well developed, and I 
applaud you for holding a hearing which adds a new, and logical, twist 
to the royalty-in-kind program.
    The only criticism I've heard regarding royalty-in-kind that holds 
any weight is the assertion that the Federal Government would, itself, 
become one of the world's largest oil and gas brokers when the program 
is fully implemented. If we could direct a portion these royalty-in-
kind payments to LIHEAP and the Strategic Petroleum Reserve, as 
recommended by the National Energy Policy report, we could certainly 
diffuse some of that criticism. Not to mention the fact that royalty-
in-kind programs should eliminate the ``middleman'' that costs all 
energy consumers additional money, as oil and gas producers must 
provide exhaustive accounting and valuation paperwork costing millions 
of dollars, and the Federal Government must process that paperwork. Who 
knows? With royalty in kind, we could probably save a few trees.
    No one commands more knowledge on this topic, and the LIHEAP 
``twist'', than Mr. John Harpole a constituent and friend of mine who 
is here today. He has been a leader and pioneer of the concept in 
Colorado. In fact, I know that Governor Bill Owens is strongly 
supportive of the royalty-in-kind-to-LIHEAP concept, and his support 
comes largely from his confidence in Mr. Harpole. I think we should all 
learn a great deal from his testimony.
    Again, thank you Madame Chairman for holding this hearing today
                                 ______
                                 
    Mr. Tancredo. I guess I should say one other thing. If 
there is something that we have not asked you that we should, 
anyone can go ahead and respond, and this is the time to do it.
    Mr. Harpole. I think the one that I would just like to 
reiterate, would this work for California utilities? Yes, it 
would. Would this idea work to maybe perhaps lower electricity 
costs by taking royalty gas to electric generators? Yes, it 
possibly could. I really believe in this idea. You can probably 
tell, I speak about it so passionately. I think it is a concept 
that is terrific because all the different parties work 
together. It really would be the Federal Government, the 
pipelines, the producers, the utilities, kind of working in 
conjunction and coming up with a solution for people that are 
most impacted by our commodity, and perhaps at the same time 
help educate them.
    Mr. Jacob. And if I could just add that the LIHEAP delivery 
network is strained to capacity. It is difficult to administer 
programs. In New York State, we only serve 50 percent. We have 
12 percent of the national allocation of funds and we are only 
able to serve 50 percent of the eligible households. This 
mechanism, using utilities, takes that burden off. It allows us 
to bring direct assistance to the low-income households who are 
LIHEAP-eligible or members of other low-income programs and it 
does so while allowing the network to redirect its sources to 
help other fuels, to help other people in crisis, maybe to 
mitigate some emergencies, to reduce the number of terminations 
for non-payment, and perhaps to allow some additional dollars 
from LIHEAP to go to weatherization and conservation efforts to 
solve the longer-term initiatives.
    So I think that this is a wonderful opportunity to use the 
natural gas that currently goes for valuation as royalties in-
kind that would help low-income customers directly. As a 
consumer advocate, that is the piece that I see. This is not to 
replace the LIHEAP program. Certainly, it needs to be funded 
and funded appropriately. But this is a wonderful way to 
supplement that, particularly during this time of crisis.
    Mrs. Cubin. Thank you. The Committee thanks the witnesses 
for their testimony and for the answers, the good answers to 
the questions. I think we have had a great discussion here 
today. I also thank the members for their thoughtful questions.
    I would like to include a statement from Congressman Ron 
Kind in the record, without objection.
    [The prepared statement of Mr. Kind follows:]

Statement of The Honorable Ron Kind, Ranking Democrat, Subcommittee on 
                      Energy and Mineral Resources

    This morning we meet to review and discuss the Federal oil and gas 
``royalties-in-kind'' or R-I-K program in preparation for Committee 
consideration of a national energy bill.
    The witnesses today have been asked to focus on the pilot projects 
currently underway at the Minerals Management Service. And, also to 
comment on a proposal sponsored by our colleague, Representative 
Carolyn Maloney, to utilize royalties-in-kind in the Low Income Home 
Energy Assistance Program.
    Let me state at the outset that the proposal to explore using 
Federal royalty oil and gas in a pilot with LIHEAP has merit.
    This in no way means we would support a proposal to convert the 
current Federal oil and gas royalty system from cash payments to a 
wholesale marketing scheme. Under current law, the Secretary of the 
Interior has the option to take royalties-in-kind at her discretion. 
Studies by the GAO and CBO have concluded that a nationwide, mandatory 
RIK system would not be in the public's best interest.
    The oil and gas industry's abysmal record on underpayments has 
rendered their support of a national mandatory RIK system highly 
suspect. As an April 6, 2001, editorial in USA TODAY stated, ``By 
assorted estimates, the industry has shorted the government on oil-
royalty payments alone by about $100 million a year through a variety 
of price-fixing and record-fiddling games. That's almost 10% of the 
government's $1.1 billion annual collections.
    However, to the extent that we can merge the extraction of our 
Nation's natural resource base with positive social goals, such as 
providing low-income energy assistance, we are open-minded and 
interested in hearing the testimony of our witnesses today.
                                 ______
                                 
    Mrs. Cubin. The hearing record will be held open for 10 
days in case there are some other questions that the members 
come up with and we would appreciate your response in writing.
    So if there is no other business before the Subcommittee, I 
again thank all of you for being here and the Subcommittee is 
adjourned.
    [Whereupon, at 11:48 a.m., the Subcommittee was adjourned.]