The Consolidated Appropriations Act of 2004 (P.L. 108-199) was passed and signed by President Bush on January 23, 2004.  A total of $1.8 billion has been appropriated for the FY 2004 LIHEAP program, as well as an additional $100 million in emergency contingency funds.  Mr. Rissing noted that P.L. 108-199 provides an across-the-board rescission of 0.59 percent for all programs and program categories.  Therefore, the final amounts are $1,789,380,000 for the LIHEAP block grant and $99,410,000 for contingency funds.   The Weatherization Assistance Program is funded at $228.5 million for FY 2004, an increase of $5.2 million from its FY 2003 level.  After an across-the-board cut, funding will be reduced to $227.2 million.  For FY 2005, the House Labor, HHS, Education Appropriations Committee has provided LIHEAP with $1.9 billion, with $100 million for the emergency contingency fund.  This is a slight increase from the current year’s regular funding of $1.789 billion and $99.4 million in emergency funds.  The president's FY 2005 budget, released February 2, proposes LIHEAP funding at $1.85 billion and would increase emergency funding from $100 million to $200 million.  In addition, the president's budget requests $500,000 to conduct an evaluation of LIHEAP.

     The SLC member states comprise about 36.6 percent of the U.S. total population and 39.8 percent of the country’s low-income individuals.  As the population in the South increases, the demand for LIHEAP assistance also increases.  Less than 15 percent of eligible Southerners are receiving LIHEAP assistance, as there simply is not enough funding in the program to be distributed to all of those seeking it.

     Embedded within LIHEAP is a distribution formula, developed in 1984, that considers state residential fuel consumption for space heating and cooling (through the use of electricity, natural gas, fuel oil, liquid petroleum gas, wood, and coal); annual and average heating and cooling degree days by region, weather zone, and state; the percent of low-income household heating and cooling; and the average price for each fuel in each state.  Mr. Rissing stated that this formula rarely is applied and that using this original formula’s criteria as the sole determinant of LIHEAP’s state allocation is a mistake.  Though states in the Northeast may benefit from this formula, Southern states are penalized by it due to the relatively few days of extreme cold. 

     With reauthorization of the Energy Act coming up in January of next year, Mr. Rissing urged SLC legislators to act to ensure that LIHEAP funding is distributed based on state-specific needs and, thus, more equitable to Southern states. 

II.        New Source Review Reform

            Margaret Claiborne Campbell - Partner, Troutman Sanders, LLP, Georgia

Background

     In August 2003, the Environmental Protection Agency announced a rule to reform New Source Review, the program aimed at bringing older power plants, refineries, and industrial factories into Clean Air Act compliance when facilities are upgraded or generating capacities are enhanced.  This presentation reviewed proposed New Source Review reforms, pending legal actions, and how reforms will affect state regulation of air emission sources.

Presentation

     Older power plants, according to Ms. Campbell, have been exempted from various new pollution rules by the Clean Air Act on the condition that electric generators be brought up to current standards when facilities are upgraded, a process known as New Source Review.  Under the New Source Review requirements, plants are not subject to increased pollution controls or required to install modern scrubbers if routine maintenance is performed and the cost to do so does not exceed 20 percent of the total cost of replacing the entire part or operating unit.  Ms. Campbell stated that what constitutes routine maintenance often is a point of contention.  This is an issue being investigated by the EPA and the U.S.Department of Justice and is at the center of dozens of pending state and federal lawsuits against power plants across the nation.

     On August 27, 2003, a new EPA rule was announced allowing aging power plants and factories to upgrade their facilities and spend up to one-fifth of their replacement value without being subjected to the New Source Review requirements.  Ms. Campbell stated that under this new rule, modifications could not affect the basic design of the plant or allow it to exceed any of its emissions limits.  It remains uncertain what affect this new rule will have on pending (since 1999) New Source Review legal disputes.

     On October 2003, seeking to block the rule change, 14 Northern states and more than 20 northeastern cities filed a lawsuit against the EPA, arguing that only Congress has the power to make major revisions to the Clean Air Act.  On December 2, 2003, seven states opposed the changes to the modification rule by filing Freedom of Information Act requests with the EPA, Department of Energy, and the White House Council on Environmental Quality as part of a legal challenge to the new rules.

     According the Ms. Campbell, “On December 24, 2003 the U.S. Court of Appeals for the District of Columbia Circuit issued an order to stay the October 27, 2003, routine maintenance, repair and replacement rule (RMRR).  The order states that ‘petitioners have demonstrated the irreparable harm and likelihood of success on the merits required for the issuance of a stay pending review’.”  Following the Court’s ruling, the EPA announced on January 2004 that the agency would aggressively enforce the pending New Source Review cases until the courts resolve the legal challenges to the rule change.  On January 28, 2004, the U. S. Department of Justice filed a lawsuit against the East Kentucky Power Cooperative, arguing that it modified three of its coal burning power plants without obtaining the proper permission or installing the best available control technology as required by New Source Review.

     In closing, Ms. Campbell noted that maintaining clear air attainment will continue to pose significant challenges to Southern states due to the region’s rapid population growth, increased automobile use, increased electric generation, and industrial expansion.  Although current and pending federal regulatory initiatives may better aid this progress, the responsibility for meeting clean air requirements continues to lie primarily at the local and state level.  Accordingly, reducing emissions from mobile sources will have the greatest impact on curbing local ozone.  States likely will expand vehicle emission testing and other controls to areas in noncompliance with the 8-hour standard.

III.       2004 SSEB Legislative Digest

            Representative Jimmy Skipper  - Georgia     

Background

     The Southern States Energy Board’s Legislative Digest, a review of significant energy and environment legislation adopted by the 16 SLC member states in 2004, was presented.

Presentation

     Representive Skipper began his presentation by stating that the Southern States Energy Board publishes, annually, the Energy & Environment Legislative Digest.  The Digest is a compendium of representative energy and enviromental quality measures enacted by the Board’s 18 member states and territories during the current legislative session.  During 2004, SSEB member governors signed more than 400 energy and environment bills into law.  Energy-related legislation focused primarily on natural gas and petroleum regulation and utility managment issues.  With regard to environmental issues, many states addressed enviromental land management and the protection of critical water supplies, national security, and state emergency response plan to natural disasters.  An analysis of the legislative activity in the SSEB member states shows that the region remains committed to protecting the natural resources and environmental quality.

     For a copy of the Legislative Digest, contact the Southern States Energy Board at 770. 242.7712 or visit the SSEB at http://www.sseb.org.

IV.       Consideration of Policy Positions

     In accordance with SLC Rules for filing policy positions, the Chairman introduced four policy positions for consideration by the Committee:

1.  Support of reform and full funding of the federal Low Income Home Energy Assistance  Program (LHEAP);

            2.  Rectifying America’s natural gas supply/demand and network imbalances;

            3.  America’s fundamental energy supply, demand, and network imbalances; and

            4.  Support of the environmental benefits of EPA’s proposed clean air rules.

     All positions were passed by the Committee without amendment and subsequently adopted by the Southern Legislative Conference on Tuesday, August 17, 2004.

V.     Legislative Roundtable Discussion

     During the roundtable discussion, Committee members were asked to review any legislation or debate of importance, in particular relating to energy and environment topics, in their respective states during the last legislative session or interim.

Alabama—The state successfully challenged an injunction imposed by the U.S. 11^th Circuit Court on the practice of hydraulic fracturing, or “fracking.”  This process forces water into coal seams to bring methane gas to the surface.  A Florida environmental group had sued the state, claiming the process contaminates underground drinking water, an assertion state-funded research disputed. 

Arkansas—No session.

Florida—No Report

Georgia—The General Assembly passed the Comprehensive Statewide Water Management Act in the 2004 session, which requires the state Department of Natural Resources to develop a water management plan for the entire state for the purposes of managing water resources in a sustainable manner to support the state’s economy, protect public health and natural systems and enhancing the quality of life for the state’s citizens.  This is particularly important as the state is still in a dispute with Florida and Alabama over the distribution of water in two shared river systems.

Kentucky—No Report

Louisiana—In response to five parishes being out of compliance with federal air quality standards, the state has introduced reformulated gasoline among other measures.  Vehicle emissions inspection fees also increased to $8 (from $3), with the Department of Environmental Quality receiving $2 of the fee (the remaining $6 was retained by the inspection station.)  Another important issue the state addressed is coastal erosion.  The Legislature passed legislation that authorizes and provides procedures by which the state Department of Natural Resources can expropriate property in the coastal zone needed for  barrier island preservation, restoration, or creation for coastal wetlands purposes. 

Maryland—The state took steps in the 2004 session to protect the Chesapeake Bay.  Among them was the creation of the Bay Restoration Fund, which is created by a fee on users of wastewater facilities and septic tanks ($2.50 per month for sewer system customers; $35 per septic tank draining).  The fund is to pay for upgrades to failing septic systems and waste treatment facilities on a cost-share basis.  The state also put in place several actions that encourage farmers to develop and implement nutrient management plans.  Finally, the state is evaluating the activities that have been undertaken in the past 15 years to determine their effectiveness.

Mississippi—An issue that was debated that did not pass this past session was a retooling of the state’s brownfields program, with proposals to increase the utilization of the program.  Among the changes considered were tax incentives for developers and funds to local governments to help prepare the permits required.  Legislation that did pass moved the authority to sell oil and gas leases from the state Department of Environmental Quality to the Mississippi Development Authority.  In so doing, the legislation also restricts drilling in the Chandeleau Sound (offshore from Gulfport and Biloxi), providing for drilling only in the areas of the Gulf of Mexico near the state’s borders with Louisiana and Alabama.

Missouri—No Report

North Carolina—No Report

Oklahoma—The state considered, but did not pass, legislation on tax incentives for ethanol manufacturing.  The state eliminated the property tax on pollution control equipment for oil refineries.

South Carolina—No Report

Tennessee—No Report

Texas—No Session

Virginia—The General Assembly passed a combination of air, waste and water permit fees that will generate approximately $6 million.  The Department of Environmental Quality is required to evaluate and implement measures to improve the long-term effectiveness and efficiency of its programs.

West Virginia—No Report

VI.       Nominating Committee Report

     The Nominating Committee, chaired by Repersentative Boyd Hickinbotham, Arkansas, recommended that the Energy and Environment Committee elect Senator Chris Ullo of Louisiana as Chairman and Representative Ron Peters of Oklahoma as Vice Chairman for 2004-2005.  The Committee voted, concurring with those recommendations.

     With no further discussion, the meeting was adjorned.

PROGRAM SESSION

Tuesday, August 17

I.          Energy Prices & Economic Impacts

James Kendell  –  Director, Oil and Gas Division, Office of Integrated Analysis and Forecasting, Energy Information Administration, U.S. Department of Energy, Washington, D.C.

Charlie Drevna – Director of Advocacy, National Petrochemical and Refiners Association, Washington, D.C.

Background

     With gasoline prices reaching record highs in 2004, and natural gas prices continuing their upward climb, American consumers, businesses, and manufacturers are feeling the pinch, both directly and indirectly.  This session provided a forecast on energy prices; examined supply and consumption issues; and explored overall U.S. economic impacts.  Particular focus was on the impact increased natural gas costs have on the manufacturing industry, and oil costs and Clean Air Act regulations have on America’s refinery capacity.

Presentation

     Mr. Kendell began his presentation by noting that according to the Oil and Gas Journal, the United States had 22.7 billion barrels of proved oil reserves as of January 1, 2004, the eleventh highest level in the world.  These reserves are concentrated overwhelmingly (over 80 percent) in four states--Texas (24 percent, including the state's reserves in the Gulf of Mexico); Alaska (22 percent); Louisiana (20 percent, including the state's reserves in the Gulf of Mexico); and California (19 percent, including the state's federal offshore reserves). U.S. proven oil reserves have declined by around 20 percent since 1990, with the largest single-year decline (1.6 billion barrels)occurring in 1991.

     During 2003, the United States produced around 7.9 million barrels per day (MMBD) of oil, of which 5.7 MMBD was crude oil, and the rest involving natural gas liquids and other liquids.  The U.S. total oil production in 2003 was down sharply (around 2.7 MMBD, or 25 percent) from the 10.6 MMBD averaged in 1985.  The U.S. crude oil production, which declined following the oil price collapse in late 1985 and early 1986, leveled off in the mid-1990s, and began falling again following the sharp decline in oil prices in late1997 and early 1998.  With the rebound in world oil prices since March 1999, U.S. crude production fell slightly in 2002 and 2003, and is now at a 50-year low. 

     The United States contains more than 500,000 oil-producing wells, the vast majority of which are considered marginal or stripper wells, generally producing only a few barrels of oil per day. During 2003, top oil-producing areas included the Gulf of Mexico (1.6 million bbl/d), Texas onshore (1.1 million bbl/d), Alaska's North Slope (949,000 bbl/d), California (683,000 bbl/d), Louisiana onshore (244,000 bbl/d), Oklahoma (178,000 bbl/d), and Wyoming (143,000 bbl/d).

     According to Mr. Kendell, oil production in the lower-48 states is expected to decrease by 120,000 bbl/d, to 4.64 million barrels per day, in 2004, followed by an increase of 110,000 bbl/d in 2005.  Generally speaking, onshore production in the lower-48 states, particularly in Texas, is falling, while offshore (mainly in the Gulf of Mexico) production is rising.  In 2004, Gulf of Mexico oil production is expected to increase from new fields that came online in late 2003, combined with start-ups at the southern Green Canyon deepwater area in late 2004.  By late 2005, the Mars, Mad Dog, Ursa, Thunder Horse and Nakika federal offshore fields are expected to account for about 12 percent of oil production in the lower-48 states.  Meanwhile, Alaskan oil production is expected to decrease by 2.1 percent in 2004 and by 5.3 percent in 2005, continuing a steady decline since the state's peak output in 1988 (2.017 million bbl/d).  As of February 2004, Alaska was producing about 938,000 bbl/d of oil. Alaska is expected to account for 16 percent of the total U.S. crude oil production in 2005.

     In early 2000, the Energy Information Administration (EIA), in response to a Congressional request, issued a report on potential oil reserves and production from the Arctic National Wildlife Refuge (ANWR).  The report, which cited a 1998 U.S. Geological Survey study of ANWR oil resources, projected that for the mean resource case (10.3 billion barrels technically recoverable), peak production rates could range from 1.0 to 1.35 MMBD, with initial ANWR production possibly beginning around 2010, and peak production 20 years to 30 years after that.

     Higher OPEC oil output during the second quarter, noted Mr. Kendell, has so far failed to dampen upward price pressure as West Texas Intermediate prices reached the mid $40s per barrel level in early August.  With rising consumption and little global surplus production capacity, near-term prices remain volatile and sensitive to news relating to possible reductions in oil production. Some reduction in prices is likely if increased production continues to flow and inventories build. However, short of a serious slow down in demand during the coming months, the floor likely will remain above $30 for the foreseeable future. 

     U.S. gasoline prices, while down from their May highs of more than $2 per gallon, have been stuck in the high $1.80s to low $1.90s per gallon for the past six to seven weeks.  Higher crude oil prices could create some late-summer gasoline price increases but gasoline inventories are now at the top of the normal range and spot prices have shown some weakness despite elevated crude oil costs.  Average pump prices for regular gasoline are expected to drift toward the lower $1.80s per gallon by fall.

     Natural gas prices retreated in early August as storage levels remained on a normal track and summer demand levels appeared manageable.  However, with the economy continuing to expand and supply growth sluggish at best, prices (which averaged about 5.83 per mcf during the first week of August) are expected to rise above $6 per thousand cubic feet (mcf) by fall.

     In closing, Mr. Kendell said that looking ahead to the next heating season, emerging fuel cost profiles for the fall and winter months suggest that increases in average consumer heating fuel prices from the 2003-2004 heating season are likely.  Under baseline weather conditions, demand for fuel is likely to increase in the Midwest and drop in the Northeast (particularly in the first quarter).  Finally, Mr. Kendell noted that weather patterns will drive the eventual outcome, but higher overall heating expenditures are likely this winter unless above-normal temperatures prevail.

     Next, Mr. Drevna began his presentation with an overview of the National Petrochemical and Refiners Association (NPRA).  In 2004, energy legislation remains a top priority for the 108th Congress.  As a national energy policy is debated, there is rising concern in Congress and across the nation that natural gas supplies that fuel many of America’s homes and factories are at unprecedented risk.  Most believe that if the government does not act now to foster supply and production of our own abundant reserves, the nation could be rapidly heading toward a natural gas crisis.

     On March 24, the Senate Environment & Public Works Committee held a hearing on the environmental impacts of natural gas production.  The NPRA submitted a statement for the record urging policymakers and stakeholders to take all necessary steps to increase natural gas supply as soon as possible, as tight natural gas supplies and high prices severely disadvantage the U.S. refining and petrochemical industries and could hinder the economic recovery under way.

     In January 2004, according to Mr. Drevna, the U.S. Department of the Interior issued a rule providing new incentives to boost domestic natural gas production in the hard-to-reach, deepwater areas of the Gulf of Mexico.  The rule is expected to save consumers $570 million a year and create as many as 26,000 jobs.  Mr. Drevna stated that the rule is an excellent short-term step which will go a long way to help sustain a reliable supply of natural gas.  However, according to Mr. Drevna, the NPRA feels that the comprehensive energy bill lacks adequate incentives to increase natural gas supply and will work with Congress in 2004 to enact additional legislation to encourage natural gas production.

     On February 12, 2004, the Subcommittee on Energy of the House Resources Committee held a hearing on the plight of the nation's natural gas consumers.  The conclusion of the proceedings was that all consumers--residential, commercial, and business--may have to continue to pay high natural gas prices.  The testimony reinforced the findings of the 2003 National Petroleum Council report that predicted the United States will pay an additional $1 trillion in natural gas costs during the next 20 years unless current policy is altered.  Further, according to the EIA, its original estimate of natural gas supplies over the next 20 years has been revised downward by an additional 5 percent.

     A major concern of the petrochemical industry is secure, affordable, and geographically diverse access to adequate supplies of natural gas and natural gas liquids.  The DOE has estimated that demand for natural gas will increase by 60 percent in 2020.  According to Mr. Drevna, policies that promote multi-pollutant approaches to emission reductions and tax incentives for alternative-fueled vehicles will drive up the demand for gas and have significant impacts on natural gas supply and price.  In closing, Mr. Drevna stated that the impact on natural gas supply of policy and programs that result in fuel switching should be factored in when making policy decisions.

     At the end of the presentation, questions and comments were taken from the members, and with no further discussion, the meeting was adjourned.