PANEL II OF A HEARING OF THE HOUSE ENERGY AND COMMERCE COMMITTEE'S OVERSIGHT AND INVESTIGATIONS SUBCOMMITTEE; SUBJECT: ENERGY SPECULATION: IS GREATER REGULATION NECESSARY TO STOP PRICE MANIPULATION? PART II; CHAIRED BY: REPRESENTATIVE BART STUPAK (D-MI); WITNESSES: DOUG STEENLAND, PRESIDENT AND CEO, NORTHWEST AIRLINES; STEVEN WILLIAMS, CHAIRMAN AND CEO, MAVERICK USA; EUGENE GUILFORD, EXECUTIVE DIRECTOR AND CEO, INDEPENDENT CONNECTICUT PETROLEUM ASSOCIATION; LOCATION: 2123 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

PANEL II OF A HEARING OF THE HOUSE ENERGY AND COMMERCE COMMITTEE'S OVERSIGHT AND INVESTIGATIONS SUBCOMMITTEE SUBJECT: ENERGY SPECULATION: IS GREATER REGULATION NECESSARY TO STOP PRICE MANIPULATION? PART II CHAIRED BY: REPRESENTATIVE BART STUPAK (D-MI) WITNESSES: DOUG STEENLAND, PRESIDENT AND CEO, NORTHWEST AIRLINES; STEVEN WILLIAMS, CHAIRMAN AND CEO, MAVERICK USA; EUGENE GUILFORD, EXECUTIVE DIRECTOR AND CEO, INDEPENDENT CONNECTICUT PETROLEUM ASSOCIATION LOCATION: 2123 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C. TIME: 2:15 P.M. EDT DATE: MONDAY, JUNE 23, 2008

REP. STUPAK: I'll now call our second panel of witnesses to come forward.

On our second panel we have Mr. Doug Steenland, who is president and CEO of Northwest Airlines; Mr. Eugene Guildford, Jr., who is the executive director and CEO of the Independent Connecticut Petroleum Association; and for a third introduction, I'm going to yield to my friend, Congressman Mike Ross of Arkansas, to introduce Mr. Williams.

Mr. Ross, I'd like you to introduce Mr. Williams, please.

REP. MIKE ROSS (D-AR): Again, Mr. Chairman, thank you. I'm a member of the full committee, not this subcommittee, and I appreciate you letting me sit in and I appreciate you selecting an Arkansan who is one of our witnesses today.

And if my projections are correct -- I'm on the Energy and Health subcommittees -- I think sometime around 2029, I'll get to chair one of those and I'll certainly return the favor to you at that time.

I would like to thank my fellow Arkansan, Mr. Steve Williams, for coming before the committee to testify today about his extensive experiences with rising diesel prices. Mr. Williams is the chairman and CEO of Maverick USA, which operates the second largest company- owned flatbed truck fleet in the United States. In addition, he has served as both chairman of the Arkansas Trucking Association and the American Trucking Association. Steve is also on the executive committee of the American Transportation Research Institute, and the Transportation Research Board of the National Academics of Science.

Mr. Chairman, I think it's important that we have Steve on the panel today, because we've got trucking businesses that are going out of business because of these high diesel prices. And we also all know that it directly relates to this recession we're in, because we're all paying more for products, because if you think about it, just about everything you buy ends up on the shelf by the way of a truck that's typically running on diesel.

So Mr. Chairman, thank you for your interest in this issue. Thank you for this hearing today, and thank you for including an Arkansan, that has nationwide experience in the trucking industry, as a part of this panel.

I look forward to Steve and everyone else's testimony.

REP. STUPAK: Thank you, Mr. Ross. And if you're going to be subcommittee chair at 2029, I think you have to take that up with Mr. Dingell. He'll still be running the committee then. (Laughter.)

It's the policy of this subcommittee to take all testimony under oath. Please be advised that witnesses have the right under the rules of the House to be advised by counsel during their testimony. Do any of you wish to be advised by counsel?

The witnesses are indicated that they do not. Therefore, I'm going to ask you to please rise and raise your right hand and take the oath.

(The witnesses are sworn in.)

Let the record reflect that the witnesses replied in the affirmative. You are now under oath.

Mr. Steenland, we'll start with you, please, for an opening statement. We have five minutes set aside. If you have a longer statement, it will be submitted for inclusion in the hearing record.

Mr. Steenland, if you would please.

MR. STEENLAND: Chairman Stupak, Chairman Dingell, Ranking Member Barton, Thank you very much for the opportunity to appear here today. I do so wearing two hats: one as chairman of the Air Transportation Association, the trade association of U.S. airlines; the other is as the presidency of Northwest.

Having listened to the experts on the original panel, it was a very thoughtful discussion. As an industry, we support their recommendations and we would urge the Congress to adopt them expeditiously.

Rather than to repeat what they've just gone through, I think it would be more helpful from the committee's perspective to focus on the real impact that this incredible increase in the price of oil has had on the airline industry.

Specifically, oil is now 40 percent of the total costs of the airline industry. For U.S. carriers from 2007 to 2008, the oil bill has gone from $41 billion per year to $61 billion per year -- a $20 billion increase. For Northwest alone, in one year our fuel costs have gone up by $2 billion. The U.S. airline industry this year is forecasting a loss well in excess of $10 billion.

In this instance, the challenge is not so much -- is as much speed with which this increase has occurred as the magnitude. If you look back over the years from 2005 to 2007, oil went from approximately $26 a barrel to $72 a barrel. While those price increases were difficult, given the time period over which they occurred, they were by and large manageable.

2007 with oil in the $70 range, the airline industry was profitable and we would love if 2008 came even close to looking what 2007 was like; however, when the price of oil over the course of 10 months goes up $70 a barrel and every dollar is -- in Northwest it costs us $42 million a year in additional costs. When oil goes up almost $11 in one day, then you have volatility in any given day of well in excessive of $3, you're really living in an entirely different world.

The consequences of this are dramatic. So far this year, eight airlines have shut down, two have filed for Chapter 11. And all of the major network carriers are in the process of significantly shrinking their capacity. The Northwest case will be between 8.5 and 9.5 percent smaller the fourth quarter of this year than where we were last year. Other airlines are shrinking in similar magnitude.

Why is this happening? It's happening because we have no choice but to take these price increases and pass them through to our customers. We've been through significant restructurings. In Northwest's case, we've taken $2.5 million a year out of our cost structure and through increasing our revenue. So therefore, we need to pass these prices through. And as they get passed through, the consumer is going to be traveling less, because as prices go up -- just like with anything in society -- demand will go down. And when demand comes down, we need to adjust the supply to reflect what that demand is.

So unfortunately, communities will lose service, the level of service will go down, inconvenience will increase and adjustments in employment will have to take place. Given the impact -- the incredible impact of air service on the economy, that is then going to ripple through and have a correlative effect on other businesses and other things that we do.

For those reasons, we would urge that the Congress act quickly, agree on a bipartisan measure that can address the issue that got raised by the panel this morning. And we would hope that we would be able to see legislation passed by the Congress by the August recess.

Thank you very much.

REP. STUPAK: Thank you.

Mr. Williams, you're opening statement. I'm going to ask you to pull that mike up there a little bit.

MR. WILLIAMS: Mr. Chairman and members of the subcommittee, my wife and I started our company in 1980 with one truck. We employ nearly 2,000 people today and operate a little over 1,500 tractors. And our company serves the steel, building materials and flat-glass industries.

In 2007, despite revenues of 300 million (dollars) we lost money for the first time in our 27 year history of the company. Our fuel bill increased $12 million between '06 an '07 and we were not able to recover this increase due to the weak economy and frankly, a loss of pricing power. The national average price of diesel fuel on June the 16th was $4.62. And if this price remains constant for the rest of the year, our company's fuel bill will increase by $49 million this year from 66 million (dollars) to 115 million (dollars) a 72 percent increase.

The fuel crisis is having a dramatic affect on the trucking community at large. Tom Albrecht, an industry analyst with Stephens, Inc., wrote in June that these fuel prices could force as many as 14 to 16 percent of the trucking industry to cease operations. Not only will this further reduce capacity in the market, it will make the used truck market even worse, for you see, there are few domestic buyers for used equipment and over the last year, we as a company have been forced to wholesale our tractors to Russia and to Vietnam.

But the implications to the U.S. economy, obviously, are much of greater concern. Energy experts can certainly lend more to this debate than I on the impact that speculation that energy is having on the energy markets, but for example, Professor Greenberger testified on June the 3rd before the U.S. Senate Commerce Committee and said, quote, "By any objective assessment, the crude oil market is now overwhelmingly dominated by speculation." End quote. We've heard an awful lot about that already today. But at a minimum, energy trader statements continue to be at the minimum, self-fulfilling prophecies.

Additionally, oil prices simply do not reflect the fundamentals of supply and demand. Tim Evans, an energy futures analyst at Citigroup wrote on June the 5th that "If demand growth is faltering and supply is rising, just as economics would predict should occur in the face of rising prices, just why are prices raising so persistently strong?" End of his quote.

I'd like to thank the subcommittee's interest in examining ways to regulate this activity, and to whatever degree commodity prices are affected by speculation in the market, we must eliminate this unnecessary burden on our economy and we must do so quickly. I would emphasize quickly. I believe that our efforts to deal with the current cost of fuel must be part of a comprehensive strategy, and this strategy must first focus on the factors that are driving the cost of diesel. Second, the strategy must include regulatory policies that will allow our industry to be better stewards of the resources that we have -- a strategy that could reduce our dependence on foreign oil and improve the quality of our environment.

We need an overall strategy that can improve fuel efficiency and safety while serving the U.S. economy that will be twice its current size within the next 20 years. Trucks will continue to deliver most of our nation's goods. However, in order to meet the demands of our society, 87 percent more trucks will be required than are currently on our highways. This will further increase congestion. Air pollution will burn even more fuel. In order to meet this challenge, we must consider policies to limit vehicle speeds, create incentives for limiting -- for adopting environmental and safety technology, invest in highway system capacity to reduce highway congestion and safely improve vehicle productivity.

We must encourage the use of renewable fuels that -- as a part of a sensible, national fuel standard. We must assess the true value proposition of renewable fuels such as corn ethanol and biodiesel. We must understand the implications of their productions and the conditions of their use. Increased domestic exploration and increased refining capacity must be encouraged when they can be expanded in an environmentally responsible fashion. I have voluntarily invested tens of millions of dollars in virtually all of the fuel saving -- safety- improving technologies that are available on the market today. But it's going to take much more than that. It requires a globally competitive regulatory change to enable the continued evolution of the trucking industry to safely meet our nation's needs. I have authored and offer a comprehensive strategy to meet the challenges that we face, and this document has been -- as a part of this attachment -- this document to detail specific action items and it's titled "U.S. Freight Transportation Sustainability Initiative."

I appreciate this opportunity, Mr. Chairman, to offer to my insight into measures that this nation should take to help address the high cost of petroleum. Thank you.

REP. STUPAK: Thank you, Mr. Williams.

Mr. Guilford, your opening statement, please, sir.

MR. GUILFORD: Thank you, Mr. Chairman, members of the committee.

In March of 2004, our association went to Connecticut 1st District Congressman John Larson, who concerns about behavior of the energy commodity markets -- the enormous daily volatility we were seeing in those markets and asked if our Congressman couldn't work with other members of Congress to initiate a Government Accountability Office study of the authorities of the Commodities Futures Trading Commission to determine if the CFTC had sufficient authority and resources to properly oversee all energy complex trading activities. Our members, on behalf of our heating oil consumers in our state, are physical traders. We offered to our consumers the opportunity to lock in their heating oil prices for the summer -- for the winter, rather. So this is an extremely important issue to us and to our customers.

When that study's results came back, we learned that the CFTC had multiple loopholes in its statutory authorities without reason, not the least of which we now know -- it was in the Enron loophole, the swap trade loophole and the foreign boards of trade loophole, effectively blinding the CFTC to more than half of the daily activities in the energy complex. In short, we learned that the CFTC did not have sufficient authority and resources. And while Congress recently closed the Enron loophole, we know we have more to do.

The evidence of the need of this enquiry here and elsewhere in Congress is clear. On Black Friday -- June 6, 2008, crude oil hit an all-time high of $139.12 a barrel. Heating oil and gasoline hit new highs of $3.98 and $3.55 a gallon, respectively. The total crude oil traded on the NYMEX that day equaled over 1 billion barrels for 12 days of world consumption and 214 days of U.S. consumption. Four billion barrels of heating oil were traded, equaling half of the total U.S. consumption of heating oil in one year. Wall Street's justification for sending this multibillion-dollar energy bill to America pointed to (a) one Morgan Stanley analyst's view of crude oil going to $150 a barrel by the 4th of July after having declined $15 a barrel in the previous week; (b) European Central Bank's worrying about inflation and increasing interest rates driving down the value of the dollar, increasing the billions flowing from investment banks and hedge funds into commodities; and (c) the Israeli Transportation Minister threatening Iran over its nuclear program.

Not even when Hurricanes Katrina and Rita actually did damage to America's energy production did prices rise as much on June 6, 2008. And nothing that happened that Friday had any bearing on energy production. It was entirely speculation-driven fear on the part of Wall Street. The average service station operator we represent had to spend $8,000 for a load of gasoline in 2002. And now for that same load of gasoline, he spends over $25,000. The average 2-and-a-half million-gallon heating oil distributor that had to capitalize just over $1 million for the heating season in 1998-99 for wholesale heating oil will need to capitalize over $9 million in the coming heating season -- more than three times the net value of the company itself. In one month, next January 2009, this average local heating oil retailers will sell 20 percent of his annual volume, requiring $2 million in credit just to buy wholesale heating oil for the general public in one month.

Now in a world of trillions and billions, that may not seem like a lot, but multiply that times 300 heating oil retailers needing $2 million each and pretty soon, that's real money and we're a small state. Multiply that times 25 oil heat states and you have a tremendous amount of capital that's going to be needed just to get us through this coming season. And we face the same credit crunch as every other American when it comes to attempting to borrow these staggering sums just to be able to serve our customers. These crushing prices hurt not just the least well-off of our customers, whose annual low-income energy assistance benefit paid for less than half of last year's energy needs and it will pay for less than a quarter of next year's energy needs based on where prices are headed, but these prices now drive the middle class to taking longer to pay their bills as they resort increasingly to using credit cards just to get by. More than a quarter of our customers were over 45 days late in paying their energy bills at the end of the recent heating season. In short, America is drowning is a sea of red ink trying to cope with energy costs, from airlines to trucking companies to large and small businesses, agriculture and everyday Americans.

We advocate strong and immediate actions to close the foreign boards of trade and swap trader loopholes in current law. We advocate for strong and immediate actions to substantially reduce the role of noncommercial energy complex investors as they are now buying more paper contracts than physical energy, and where they cannot accept physical energy itself, their role in the energy market trading should be severely restrained. You will hear that such actions will reduce liquidity and potentially drive prices higher. We're all drowning in the liquidity from -- pumped into the system from hedge funds, investment banks, index funds and derivatives traders. We had no liquidity issues in 2002 in a market that operated with greater stability and certainly at the point of price discovery that it was meant to be, with significantly less participation from noncommercial financial interests.

This debate, to us, is about the -- excuse me -- is about the liquidity we lack in being able to serve our customers and our customers' lack of liquidity in being able to afford the energy they need to run their businesses, to use transportation and to heat and cool their homes. Our members are taking strong advantage of alternative fuel opportunities that this Congress has provided them; more than 30 percent are involved in biofuels. Our state has been the first in the nation to create a Fuel Oil Conservation Fund and Board, specifically designed to reduce the amount of fuel oil that is used in our state by upgrading old, inefficient heating systems to new high- efficiency heating systems by taking advantage of some of our industry's best technology. So we're trying the best we can on the demand side.

Finally, this isn't just about oil and gasoline. The December 2008 NYMEX contract for natural gas has increased in value 83 percent since January, a harbinger of higher electricity and heating costs in the coming months just around the corner for natural gas users. And prices have already started to rise for end-user consumers of natural gas. So there doesn't appear to be anywhere anyone can go in order to escape the reality of higher energy costs in America.

Thank you, and I would be happy to answer any questions you might have.

REP. STUPAK: Thank you. And thank you all for your testimony.

Mr. Steenland, at the outset, let me note that your testimony contains a number of helpful recommendations to reduce excessive speculation in the energy markets, such as closing the Enron loophole or a London loophole, as some call it, closing the swaps and sealing off some of the exemptions that have contributed to the rapid run-up in oil speculation.

Is dealing with the impacts of market speculation the highest priority for the airline industry?

MR. STEENLAND: I think the highest priority is to look to tackle the overall price of fuel, given the fact that it's now 40 percent of our -- of our total cost pie. And when we look at it, we think the solution is a multi-faceted solution, in that clearly addressing the financial speculation I think is the most immediate thing that a Congress can do.

I think we would also recognize, as the first panel did, that there are longer-term issues that have to be addressed in the form of supply, in the form of conservation. We ourselves are investing $6 billion, in terms of a new fleet that will be more cost-effective.

But when you think about the kind of impact on the price of crude, that the remedies for financial speculation were talked about -- whether it's 30 (dollars) or $40 a barrel, or whether it's 60 (dollars) or $70 a barrel; and the fact that those changes -- those price impacts, if they're true, are likely to happen very, very quickly; that's what brings us to the point of recommending that the Congress act with alacrity, and look to tackle on these reforms promptly -- hopefully, prior to the August recess, so we can see some of these price rollbacks happening now, because the impact of those price increases is truly devastating.

REP. STUPAK: What percentage of the increase in your oil costs can you actually put on, and take and pass on to the consumer? Do you pass it all on? Do you pass part of it on?

MR. STEENLAND: Clearly, we have not passed all of it on. Partly, it's due to the speed with which -- with which this has occurred. If you just look at our first quarter, for example, our fuel bill for operating basically the same sized airline went up by about $450 million. And our pre-tax profit -- this year we had a pre- tax loss versus a pre-tax profit, that gap was about -- we deteriorated to the tune of about $250 million. Our energy costs went up $450 million, our profitability swung by about $250 million.

REP. STUPAK: So, what would you say to the consumer out there? How much has their airline ticket gone up because of oil prices -- 20 percent, 30 percent, 40 percent?

MR. STEENLAND: It probably depends on where you are. So, in some places it probably has gone up 20 (percent) or 30 percent. Others, it's probably not gone up very much at all. The unfortunate reality is, is that it hasn't gone up enough to offset the price increases that we've seen so far.

So, if you take the prices that are now in the market, and you simply carry them forward -- because we've been, sort of, chasing this price going up --

REP. STUPAK: Right.

MR. STEENLAND: -- and if you assume that these are the prices for the next 12 months or the next 24 months, the price of air travel is going to materially increase over what it is today.

REP. STUPAK: What happens if it stays at $140 a barrel? Is there going to be an airline industry left?

MR. STEENLAND: I think there will always be an airline industry. But I think the industry will be much smaller than what it is today, simply because the number of consumers that can afford what air travel is going to be at those rates, is clearly going to be less. And the industry is going to have to right-size itself to deal with that -- with the fewer number of people that will be traveling.

REP. STUPAK: Thank you.

Mr. Williams, with diesel about $5 a gallon, how many firms have gone under, and what's the outlook for your industry?

MR. WILLIAMS: Well, the only time this has occurred, prior to -- where there's been a significant loss in capacity, was in 2001. But, all the records would indicate that we're -- we're in uncharted waters here. The acceleration of failures is increasing.

Again, the 10 (percent) to 15 percent would represent, you know, 150 (thousand) -- 200,000 individual units. And the numbers are hard to get, because -- I think it's important for people to understand when they think of the trucking industry. I mean, 91 percent of what we would call the capacity that exists in the market, is made up of carriers that have 20 trucks or less. The remaining 9 percent maybe represents 60 percent of the overall capacity. So, it's a very fragmented community.

A lot of those people that have gone out of business, they don't send out press releases and say, we've quit. You'll just find the truck in a yard, or you'll find the truck on a used truck lot somewhere. So, it takes a little while for that data to come in.

But it's going to get much worse as -- there's an awful lot of mid-sized carriers that are, that have failed, but have, you know, due to credit extensions, and the fact that there is such a tremendous amount of used equipment sitting, you know, with no buyers in this market, that that situation will get much worse before it gets better.

REP. STUPAK: Let me ask you what I asked Mr. Steenland. How much can you actually pass through to the customer? You said you haul steel, how much of that cost -- can you pass the whole increased cost to your company you're hauling the steel for?

MR. WILLIAMS: In 2007, when our fuel prices increased and the economy was extremely soft, we were not able to pass that on. And, therefore, we had, again, our net -- first net loss.

REP. STUPAK: First loss, yeah.

MR. WILLIAMS: This year things are better. We're actually holding our own. We're almost back to break-even, which I never thought would look good. But, we're -- but it is simply a -- the economy has not recovered in those segments that we serve. It is simply because of capacity that has gone out of the market. Therefore, we have our pricing power again.

I think it's -- I think I can respond to that a little easier by saying, for example, the steel industry, whose prices of their steel maybe are up threefold this year and are doing quite well, still cannot move their product to market because of capacity. The building materials side of the business, business is off 30 percent compared to last year, and last year was a horrible year. They can't move what little shipments they have. They have trouble moving it.

And certainly the flat glass industry is suffering from a lot of the same issues. So, the impact in the supply and demand equation, for us, simply is being driven by a lot of capacity leaving the market. And those people that remain will be able to raise their prices to recover that fuel.

REP. STUPAK: A lot of our constituents are saying, when I go to the store, everything costs more, costs more, because that's the transportation cost. Is that a fair statement?

MR. WILLIAMS: We are, and continue to try to pass our costs on. And it will vary from market segment to market segment, depending on the capacity that still is in that marketplace.

Customers, again -- in '07 that was the same situation, but in '07 did not keep this as whole as they currently are. And you will see the price in -- and the various products that we haul will certainly have to increase as the cost of fuel continues to rise. There's no doubt about it.

REP. STUPAK: Mr. Guilford, you recommended that Congress take a look at heating oil futures contracts. And you suggest heating oil has skyrocketed far in excess of supply and demand simply because diesel costs are hedged against the price of heating oil, even though diesel volumes far exceed the heating oil volumes.

Has your industry raised this with NYMEX, or the Commodities Futures Trade Commission?

MR. GUILFORD: Yes, we've explored the idea of separating the heating oil and the diesel fuel contract out, but we're not exactly certain of what would the consequences of that would be yet.

REP. STUPAK: Okay. What was -- were they receptive to this idea of splitting them?

MR. GUILFORD: Sure. I think that they're receptive to listening to the idea about whether or not the contract should be separated, but we all understand the responsibility to make sure we understand what the potential consequences of doing that would be before it's actually done. So, it's important to us that we understand that first.

And I think one of the examples of why it's important to continue that discussion is what happened on June the 6th. The heating oil contract went up 29 cents that day -- the heating oil contract on the eve of one of the most severe heat waves in the Northeastern United States. Clearly, it wasn't driven by demand. Not a lot of people using heating during that period of time. So it seems to us reasonable that we would want to explore that.

REP. STUPAK: Thank you.

Mr. Whitfield, for questions.

REP. WHITFIELD: Thank you, Mr. Chairman.

Mr. Steenland, did I understand you to say that your jet fuel costs over the last year increased by $420 million in one year?

MR. STEENLAND: If that were only true. We expect our 2008 costs to be almost $2 billion on our 2007 costs.

REP. WHITFIELD: This is fuel costs only?

MR. STEENLAND: This is fuel costs, right. And for the U.S. carriers, we expect costs to be over $20 billion higher in '08, versus '07.

REP. WHITFIELD: Well, obviously, you can't operate very long with fuel costs that high, I would assume. What steps can you take, as CEO, to -- under the current market conditions, to address this issue? What steps are available to you?

MR. STEENLAND: Well, the most immediate effect is look to try to pass these costs through onto the customer. And that's not always effective, because customers -- passengers don't always have to fly. And when the price of air travel gets a little too high, some elect to drive, in lieu thereof; take alternative vacations. Business travelers may elect to stay home.

So, there a -- you know, there's clearly an elasticity here. Other options are to look to recognize that demand is going to go down, and fly less.

REP. WHITFIELD: So, can you cancel routes on your own, or do you have to get some regulatory approval to do that?

MR. STEENLAND: You can do it on your own. And every major U.S. airline has announced significant capacity reductions, in the fourth quarter when you measure the size they're going to be this year versus the size they were going to be last year.

REP. WHITFIELD: And then Mr. Williams, in the trucking business, what percent of your business would be under contract, and what would be -- what I would refer to as the spot market?

MR. WILLIAMS: Oh, it's -- unlike the pre-deregulation market, where it was more regulated, most everyone still operates under what would be characterized as a contract --

REP. WHITFIELD: Okay.

MR. WILLIAMS: -- a market. But it is more -- it's handled -- the discipline is more of a -- it functions more as a spot market, quite frankly.

REP. WHITFIELD: So, under the terms of the contract, you cannot readily pass on those fuel costs to the shipper?

MR. WILLIAMS: No. And there's traditionally a fuel surcharge mechanism that's a function of that. And, unfortunately, the way this price of fuel has moved, it has never kept us whole. When price is continuing to increase we're always behind. And then the burden of cash flow, certainly for many of the operators, is a burden as well.

REP. WHITFIELD: And you said your fuel costs increased by $12 million last year?

MR. WILLIAMS: That was between '06 and '07, and it actually has gone up -- we're projecting it to go up $50 million this year.

REP. WHITFIELD: Fifty million.

MR. WILLIAMS: Fifty million from $49 (million).

REP. WHITFIELD: Well, I know that both of you do support the proposals to reform that the first panel had suggested. And we certainly are looking into that.

I want to approach this from a little different perspective, Mr. Williams, and that relates to -- I was reading an article recently that said that the U.S. has the stiffest diesel emissions standards in the world, and that trucks meeting those standards gets, on an average, of three miles per gallon. Now, is that accurate, or is that misstated?

MR. WILLIAMS: I would say that's been misstated.

REP. WHITFIELD: Okay.

MR. WILLIAMS: The facts are that, as we have met the most recent EPA mandates -- I believe in '02, '07, we have a 2010 coming, and in the first two series of those we actually lost fuel efficiency as we were achieving the goal of improving the exhaust emissions.

We support that. And we have tried to invest in technologies and systems that would enable us to have that -- have an offset. But, we certainly want to continue to support that. But the reality is that we've actually ended up running the same miles, burned more fuel, to accomplish a cleaner environment.

REP. WHITFIELD: Yeah, so you're --

MR. WILLIAMS: But the number's more -- in, like my fleet average is 6.7 miles per gallon, so --

REP. WHITFIELD: 6.7 miles.

MR. WILLIAMS: -- so, the three would be -- there is actually, unfortunately, probably equipment that still remains in the fleet that would, maybe, operate at that level.

REP. WHITFIELD: Well, you know, I think it's important that we talk about this because we do all want to protect the environment. But, we also know that in doing that it's raising our costs, and it's going to raise fuel costs.

And I read this quote in an article comparing trucking in China and trucking in America. And it talks about in China, a $23,000 diesel engine would meet Euro II requirements -- maybe Euro requirements go up to IV.

And in the U.S. the trucks that we buy are in the neighborhood of $46 (thousand) to $50,000 per diesel engine, and yet we're getting, like, six miles to a gallon. So, I mean, you know, six miles to a gallon. But, I just appreciated your comments on that since I didn't know what the actual facts were.

MR. WILLIAMS: Well, I think it's important that we're missing -- it's interesting listening to the previous panel's remarks, and the fact that it's taken $5 diesel and $4 gas for us to be talking about this. And then yet there are so many things that we have within our control, regardless of the price, that will allow our fleets to be much more efficient. But we have chosen to not to accept the challenge of trying to make the regulatory changes that need to be made.

But, the U.S. has the most restrictive truck size (and weight ?) policies of any industrialized nation on this planet --

REP. WHITFIELD: Right.

MR. WILLIAMS: -- and it'll be interesting to see if we're so enamored with doing the right thing if prices fortunately were to come down, because I think, quite frankly, there's a motivation to do an awful lot of these things that we need to be doing, regardless of the price.

Going to the point about emissions and the overall sustainability of our industry, I think that we need to spend a lot of time talking about those as well.

REP. WHITFIELD: Well, it certainly affects our competitiveness with other countries like China, and so forth. Thank you.

REP. STUPAK: Thank you, Mr. Whitfield.

Mr. Dingell -- Chairman Dingell, do you have some questions?

REP. DINGELL: Mr. Steenland, welcome --

MR. STEENLAND: Thank you, Mr. Chairman.

REP. DINGELL: -- welcome to our panel. You've served the committee and the country well, and I'm very grateful to you.

Mr. Steenland, as I understand it, Northwest Airlines uses a future market to hedge its fuel costs. However, I believe you are now encountering a market that has been thrown so far out of balance by pure speculation and speculators that prices no longer reflect the true fundamentals of supply and demand. Is that statement correct?

MR. STEENLAND: We believe that is true, Mr. Chairman.

REP. DINGELL: What is the -- what is the practical effect of that?

MR. STEENLAND: The practical effect, as we've seen, is an increase over the last 10 months in the price of oil of $70 a barrel, which puts oil in a -- in completely unchartered waters and threatens the integrity of the airline industry as we know it.

REP. DINGELL: But in your view, the market no longer exists as a proper hedging tool for you, and for the rest of industry, because of the fact that it's gotten so distorted. Is that correct?

MR. STEENLAND: Well, I think it's primarily the financial players that are in the market that are, whether it's the -- whether it's video barrels, or paper barrels, whatever you, whatever you call them, that's clearly had the, sort of, the retro-rocket impact on the price of fuel.

We hedge today where we can. It's not very attractive at these prices, but when you consider what the -- what the run-up is, you know, we look to basically buy some insurance policy against prices going even higher. So, we do that, and the market's available to do that. And it's an important piece of the energy process.

But, it's clearly the financial players that have had the impact that we've all -- we've all testified to, and talked about this morning.

REP. DINGELL: Page eight of your testimony, you gave us some superb recommendations. But, just to try and summarize, would raising markets -- market margin requirements on speculators have a positive effect on the market?

MR. STEENLAND: We believe it would.

REP. DINGELL: To what degree? And why?

MR. STEENLAND: Well, I think by taking some of the leverage out of the business so, you know, you're not just putting up 5 percent, but you're putting up 50 percent, or 33 percent, depending on the recommendations. That may mean that there'll be less liquidity, less pressure coming in on the futures market, which clearly, you know, as that price continues to move up it affects the spot price that we have to pay.

REP. DINGELL: Mr. Williams and Mr. Guilford, would you like to comment on that last question? Would raising margin requirements for speculators have a positive effect on the market?

MR. GUILFORD: Yes, we think that it would, although we have question about if you're -- if you're operating a $5 billion hedge fund in Fairfield County and, for example, you have the ability to invest a million dollars at 9:00 in the morning, to leverage a $100 million worth of heating oil; and you cash out that position at 4:00 in the afternoon and book a $3.6 million profit, whether increasing just the margin requirements is going to be sufficient. Because, frankly, if you gave me that deal, I'd probably take it every day even if I had to put more money on the table.

REP. DINGELL: Mr. Williams?

MR. WILLIAMS: I would have to defer to the previous panel to respond to that, but I think it's important to note -- in regards to earlier comments related to hedging, that the trucking industry operates on such narrow margins that the notion that there's significant hedging in our marketplace, I think would be -- would be wrong.

REP. DINGELL: So, you can't -- what you're telling us is you can't take advantage of the hedging market because of your margins?

MR. WILLIAMS: Yeah. To whatever degree trucking is hedging, it is very minimal, and it has historically been that way because we cannot -- I mean, it's a risk to come to work every --

REP. DINGELL: I don't mean to cut you off, but I have many questions and a little time.

Starting with Mr. Steenland, would closing the London Loophole, the swaps loophole and the Enron Loophole have a positive effect on the market? Yes or no?

MR. STEENLAND: We believe it would by creating greater transparency and clear opportunities to regulate where appropriate.

REP. DINGELL: Mr. Guilford?

MR. GUILFORD: Yes, sir.

REP. DINGELL: How important is it, gentlemen, for the Congress to get their -- and the government to get its arms around the problem of excessive speculation in the energy markets?

And to you, Mr. Steenland, would this be a matter of high priority to the airline industry at this time?

MR. STEENLAND: Very high. And if you just think back to what our panelists said this morning, while they had differences of opinion, I think they ranged from, you know, $30 a barrel to $70 a barrel as to what they thought the impact would be of the series of the recommendations that are on the table.

REP. DINGELL: Thank you.

Mr. Guilford?

MR. GUILFORD: To put it in context with the 8 billion gallons of heating oil used in this country each year, and we've seen an increase of $2 a gallon just in the last 12 months and it's cost consumers an additional $16 billion for our product.

REP. DINGELL: So you're telling me it's a matter of urgent concern.

MR. GUILFORD: Yes, Mr. --

REP. DINGELL: How about you, Mr. Williams?

MR. WILLIAMS: Soon.

REP. DINGELL: Now --

MR. WILLIAMS: Urgent.

REP. DINGELL: I'm sorry. I thought you answered.

MR. WILLIAMS: No. And I'm saying it's urgent and it is extremely urgent.

I thought it was interesting that a lot of the questions related to the implications for the managers and for the funds themselves. And I can tell you, there's a whole bunch of people in America driving cars and driving trucks that are having difficulty getting to work today and I would say we need to move extremely fast. And that would be my opinion.

REP. DINGELL: I'd love to ask you all a question, but I noticed the clock has run out on my time.

What are the consequences if the Congress doesn't act on this matter?

May I have unanimous consent for one more minute for the response to my question?

REP. STUPAK: Without objection.

REP. DINGELL: Thank you.

Start in that order, Mr. Steenland, if you please.

MR. STEENLAND: I think the consequence is we'll all be spending more for oil than we otherwise need to.

REP. DINGELL: Mr. Williams?

MR. WILLIAMS: I would agree. And there will be a tremendous loss of capacity within the commercial fleet. And those that remain will actually have a very difficult time meeting the shipping needs of the community.

REP. DINGELL: Thank you.

Mr. Guilford?

MR. GUILFORD: Well, it's oil -- it's oil, it's natural gas, it's gasoline and people's ability to get back and forth to work. It ripples throughout the entire economy. And frankly, the $2.5 billion the Congress spent last year low-income energy assistance is probably going to have to be more like $7 billion just to keep up and that's just for low-income energy assistance.

REP. DINGELL: Mr. Chairman, I thank you and my colleagues for your grace and kindness to me. I yield back the balance of my time.

REP. STUPAK: Thank you, Mr. Dingell.

Mr. Barton for questions, please.

REP. BARTON: Thank you, Mr. Chairman.

Mr. Steenland, I've been told that Southwest Airlines has had an advantage in the airline industry because several years ago, they were prescient enough to hedge in the markets and get a fuel cost advantage and that they've continued to maintain that advantage in this market. Is that a true statement?

MR. STEENLAND: Southwest made, in my judgment, one of the great bets of all time when it made its fuel wagers back -- I think it was the 2002-2003 time frame. So they've enjoyed a significant advantage over the rest of us who either couldn't or did not make that former bet.

REP. BARTON: Now, I understand that the first time Southwest did it, the rest of the industry didn't see a need to -- it wasn't the fact that they couldn't. But this time around, in speaking with Gerard Arpey, who's the CEO of American Airlines, who's headquartered within shouting distance in my district, he indicated that American is doing some hedging, but they just don't have the financial ability to do as much as Southwest continues to do.

Would you agree that generically, Southwest just has a -- because of their cash flow position and their profitability has had a greater ability to hedge than some of the other airlines who've been in bankruptcy or close to bankruptcy?

MR. STEENLAND: Well, they clearly have a balance sheet advantage over the rest of the industry. And back in that 2002-2003 time frame, that really allowed them to make that wager where the rest of us really couldn't, because we didn't have the balance sheet or the assets to provide the counter party risk.

And so, when one makes those kind of bets, sometimes you're right and sometimes you're wrong. And you've got a party on the other side who's making the counter bid. So you know, being able to participate in hedging doesn't automatically mean that your fuel bill is going to be lower. But in this instance, you know, Southwest clearly was the beneficiary of a very brave and in hindsight, very smart move.

REP. BARTON: Now, the last question on this subject, before I go to the next subject: I always assumed that Southwest was playing in the futures market, but I was told this morning that they were actually buying options on the Chicago commodities market. Do you know if that's true or not?

MR. STEENLAND: I don't. There's any number of ways that one can participate in this. One can actually, you know, buy options going forward. One can put in place callers so you have a protection against a runaway price on the top. And in return, you give up some potential upside if the prices drop below a certain amount.

So the cafeteria list of the ways in which one could hedge are almost infinite lists. And you can either -- you know, two ways of doing it are either by, you know, looking to actually buy the product going forward and locking in your price or approaching it more like an insurance policy and looking to get protections against what otherwise might be a runaway price.

REP. BARTON: Now, are you testifying on behalf of the airline industry or just for Northwest?

MR. STEENLAND: I'm wearing both hats.

REP. BARTON: Both hats, okay.

Does the airline industry support this two-tiered system that we talked about in the first panel where market participants who actually take physical possession are willing to provide fiscal delivery, would play under a different set of rules than non-physical participants who are in it purely for the financial opportunity? Does the airline industry support that?

MR. STEENLAND: I don't think we've specifically addressed that, Congressman. If it would result in lower prices and taking out some of the speculative activity by people that are purely playing on the video barrel side, I believe we would support that.

REP. BARTON: And aviation fuel that commercial airliners used is not gasoline, it's not diesel. It's a form of kerosene. Is that -- ?

MR. STEENLAND: That is correct.

REP. BARTON: And so I guess it's theoretically possible we could do something on that specific fuel type that might be of some help to the airline industry.

MR. STEENLAND: You know, it all ultimately comes out of the crude oil barrel. But we've actually been faced with a double whammy where the crack spread to take that crude and refine it into jet has also been at historic highs over the course of the last several months. So when people talk about oil at $130 a barrel, a lot of times you have to add $30 to then refine it into jet. So we've been talking about, you know, $160 a barrel for jet fuel.

REP. BARTON: And right now if I were to go to a municipal airport in my congressional district where general aviation planes fuel up, what's the approximate price they would pay for a gallon of aviation fuel?

MR. STEENLAND: I think well north of $4.

REP. BARTON: So it's higher -- similar as gasoline, but it's not as high as diesel.

MR. STEENLAND: I don't know where diesel's trading. And sometimes what comes out of the FBOs tends to be a little higher then, because it's got taxes and stuff built in it, but it'll be north of $4.

REP. BARTON: And Mr. Williams, you own a trucking firm, is that correct?

MR. WILLIAMS: Yes, sir.

REP. BARTON: Those in your industry that are going out of business -- and we're told that there are approximately 1,000 trucking companies a month that are going out of business -- is it principally because they don't have the capitalization to pay the higher fuel costs as they fuel their trucks in routine operations?

MR. WILLIAMS: Yes, sir. It's, again, for the large segment of the community that is poorly capitalized and it's been mostly cash flow operators for many years and they have a great deal of difficulty in these markets.

And then there are certainly much larger carriers that are public companies that are certainly well capitalized, but they also bear an awful -- I mean, not as much of a burden.

REP. BARTON: My time has expired.

Did the companies that are managing to stay in business -- they apparently are -- I think you said in your opening statement you are being able to pass through some of your increased fuel costs, is that correct? A better market than it was in that regard?

MR. WILLIAMS: Driven by a lack of capacity and competition within that marketplace, yes, because of the good naturedness of --

REP. BARTON: Oh, I know. I understand.

And in the airline industry, because of the competitive pressure primarily of the low-cost carriers like Southwest, you're not able to pass through fuel costs, because they're unwilling to raise the price. Is that correct?

MR. STEENLAND: That's clearly a reason. Another reason is that there's excess capacity in the market. And given that, it's just difficult to pass price through.

REP. BARTON: Okay. Thank you, Mr. Chairman.

REP. STUPAK: If I may on that -- Did Southwest just increase their fares? I mean, they always advertise "nothing more than 299 (dollars)" and aren't they now at 549 (dollars)? I think something I read in USA Today or something like that.

MR. STEENLAND: Southwest has not been immune from this. And yes, they have been on occasion taking fare increases. But I think it's fair to say that the level of fare increases and the frequency of them has been less than what the network carriers have been looking to try to get.

REP. STUPAK: Okay, thank you.

Mr. Inslee for questions.

REP. INSLEE: Mr. Barton noted different kind of fuels in aircraft. I've got to point with some pride to the first commercial flight using a non-oil-based fuel using a biofuels was in a plane built in my district, or next to my district, a Boeing 747 with Virgin Air using a biofuels designed in my state by people at Imperium Energy and it could have some good things happening there and we look forward to that.

This is a fairly unusual situation, I think, where three major pillars of our economy that you represent here -- hard-hitting business people come and ask the government to do something in a market -- in a capitalistic market. I think that's kind of unusual.

When I and others urged the administration to intervene during the original Enron debacle, the vice president sort of told us we didn't understand economics and sort of implicitly said we were a bunch of communist hippies that, you know, just didn't understand how capital markets work. And you are suggesting the government has to do something to allow the capital markets to really function.

At its base level, could you just explain to us why, in this particular circumstance, you believe that that's necessary? Why should the government have to do anything here that the market just can't figure out themselves?

MR. GUILFORD: Congressman Inslee, our congressman is John Larson from Connecticut. And he's fond of sending me clips of the congressional record, where he gives floor statements where he's addressing these issues, where he refers to his rock-rib Republican constituents who are talking to him about the problems with these markets and talking about us.

There are probably no greater defenders of the free enterprise system than we are. But where we see what should be free, open, transparent markets, that are as free of manipulation as is humanly possible to create, significantly -- at least, in our opinion -- out of sync with reality, then we have no choice but to ask our government to step in and bring order to what should be a marketplace that works as a point of price discovery as opposed to what it's turned into.

MR. STEENLAND: If I could just add: The commodities market is a regulated market. There have been changes in it that have gone on over time. And when you see today where, you know, the financial side of the market is 13 times what the physical side is and then you see the volatility that exists in that market, I think it creates the necessity to have a discussion like we're having today to revisit whether the regulatory structure that's now in place is the appropriate one and whether changes should be made to get us back into a mode that better reflects what supply and demand and more realistic prices should be.

REP. INSLEE: So I assume that you don't believe this is a fool's errand. I assume by your comments that you don't think this will simply drive investments offshore and we'll have no regulatory control over them.

Why do you believe this will be successful and not believe that people will just, you know, flee to some foreign market beyond our control?

MR. STEENLAND: Well, I think the panelists this morning addressed that issue. And they're far more expert at this subject than I am. But when you think -- when you see all the other folks who are experts in this come to the same conclusion, I think it certainly leads the airline industry to the view that these are appropriate and necessary steps to take very promptly.

REP. INSLEE: Thank you.

REP. STUPAK: Mr. Walden for questions.

REP. GREG WALDEN (R-OR): Thank you very much, Mr. Chairman.

I want to talk about, Mr. Williams, about the issue with trucking, because it's now costing what, about $1,400 to fill up a truck with diesel every time you go somewhere and haul goods?

MR. WILLIAMS: You get to do that everyday just about.

REP. WALDEN: And the trucks that you have that are surplus that you said you're selling overseas -- I think you said into Vietnam and other countries -- is part of that because of the new requirements on fuel and engines here in United States if they can't be reused here efficiently?

MR. WILLIAMS: No, sir. The market is just so poor here, I mean, there's a secondary market after we keep a truck for 42 to 48 months, for example, and get a half a million miles on it, then it would typically go into a secondary market. That market doesn't exist, because those people are the people that have been pretty much ran out of business and have not been able to survive.

So a lot of the equipment that we would be stockpiling up and we will have acres and acres of trucks parked in this country before it's over. We're losing a lot of that equipment now overseas, which has not been done, but it's not because of any new mandates or anything such as that.

REP. WALDEN: Now, this committee or the full committee and the Energy and Air Quality Subcommittee of this committee, are looking at the issue of carbon and carbon sequestration and cap and trade. Estimates are that could significantly increase the price of fuel and the price of home heating oil especially, the price of fuel oil for your jets, the price of diesel for your trucks and the price of gasoline. Some estimate, and some have even suggested on this committee, of a minimum additional 50 cent a gallon increase as a price signal in the market. And whatever the price signal in the market is, it would have to be above today's fuel costs.

I'm curious from each of you: What would those cost increases mean to your industry if where you're at today is debilitating?

MR. WILLIAMS: If I --

REP. WALDEN: Yeah, sure.

MR. WILLIAMS: I think it's one of the parts of this whole conversation that's been disturbing in that to whatever degree the price of fuel is higher because of speculation, it's a limiting factor on us in raising our taxes that we need to raise so that we can invest in infrastructure and offer some long-term solutions for our citizens.

So if in fact $2 is going -- in the price of oil -- or in the price of diesel is going to the benefit of the speculator, I would prefer to see 50 cents of that in this example going into our highway trust fund specifically being used for investments in highways and bridges to move this nation's freight.

REP. WALDEN: Right. But I don't think the cap and trade proposal puts the money into roads and bridges necessarily.

MR. WILLIAMS: I would certainly not -- I think from a mobile source, I think cap and trade is not a good methodology. I do support carbon taxes -- fuel tax system -- as long as that money is specifically used on infrastructure investment.

REP. WALDEN: Okay.

Mr. Steenland, how's the airline industry going to be effected under these cap and trade proposals?

MR. STEENLAND: It depends on which one. You know, a properly constructed cap and trade proposal, you know, if it's global, if everybody's in it, you know, might be a way to address the overall carbon issue.

I think we need to take a step back or two, though, because some of the policies are based on projections of growth. It might have been what the industry was going to grow when fuel was at $60 a barrel. But if fuel is going to be at $130, $140 a barrel, there's going to be retraction instead of growth. And that's going to make a contribution right then and there to carbon emissions.

So some of the footprint upon which some of these policies are being based, I think, needs to be reexamined based on some of the existing fuel functions that are out there.

REP. WALDEN: Mr. Guilford, when you're heating with oil at home, what's another 50 cent a gallon do to the consumer?

MR. GUILFORD: Well, the devil's in the details, Mr. Walden, because we can document in our industry through research and work that's been done at the DOE's Brookhaven National Laboratory that in the last 25 years, we've managed to have a significant reduction in the per-consumer-per-gallon consumption of heating oil, because of the introduction of new technologies that our industry's brought online.

REP. WALDEN: More fuel efficient furnaces.

MR. GUILFORD: Exactly, exactly. For example, if you can take a 65 percent efficient furnace and turn it into an 85 percent efficient furnace, you can cut the consumer's consumption from 1,000 to under 700 gallons.

So depending on how such a thing was structured, we could document that we can already meet some of the cap and trade ideas that we've seen. If it ends up resulting in a significant increase in the price of our fuel, if it makes us uncompetitive, obviously that would be something that would be, you know, very detrimental to our customers.

REP. WALDEN: Yeah, because I've heard that some estimates out there are upwards of $6 trillion shift in the economy in higher taxes, and I just -- as I listen to the woes of each of your industries today, and the impact I hear at home, whether I'm at the grocery store in Hood River, Oregon or out meeting with farmers in Pine Grove or somewhere, I'm trying to figure out, when it comes to cap and trade, it means you're going to pay for something you've never paid for before, and that's carbon, and that's coming out of, ultimately, the consumer's pocket, right? I mean --

MR. GUILFORD: Exactly.

REP. WALDEN: Isn't that going to adversely affect people that you're trying to serve in your own companies?

MR. GUILFORD: Enormously. And on the heating side, the only solution that we have is to continue to become more and more and more efficient, which, clearly we've proven we've been able to do over the last 25 years, but we would need another quantum leap in that ability.

MR. STEENLAND: I think it'd be fair to say that the airline industry has literally invested tens of billions of dollars in new equipment.

REP. WALDEN: To be more efficient.

MR. STEENLAND: You know, we, for example, are 25 percent more efficient than what we were back in 2000. So that's cost us billions of dollars. But in terms of, you know, one, saving in fuel, and two, emitting less carbon, you know, we have really taken a very positive step in that direction, as has our competitors.

REP. WALDEN: No, I don't doubt that. It's just a matter of, what's this added cost going to do to industries and individuals and consumers that already seem to be pretty maxed out? So, thank you, Mr. Chairman.

REP. STUPAK: Thank you. Mr. Green, for questions.

REP. GREEN: Thank you, Mr. Chairman. Let me first say I, having watched the airline industry and the trucking industry because of the district I come from, for a number of months, you know, with the impact of the high fuel costs on our economy, you're the first that get hit -- simply a canary in the mine shaft, so to speak, because it's going to reverberate in everything that's delivered by the trucks and everything else. So it's -- the rest of the economy needs to cushion itself because those costs are going up.

Mr. Steenland, in your testimony, you mentioned that there are several factors affecting the oil prices and an energy policy that addresses our nation's oil supply consumption need to help remedy oil prices. In your opinion, is our current energy policy going in the right direction in addressing our supply needs, and could increased energy supplies offset some of the unnecessary price increases due to the speculation in the markets?

MR. STEENLAND: I think as a longer term solution, figuring out ways to -- in an environmentally prudent way -- to bring more supply online would be a appropriate plank in our overall energy policy as well as looking at alternative fuels, looking at proper conservation methods. It needs to be a total package and we need to address it in that total way.

REP. GREEN: I guess that's what I have heard from people. It's not a silver bullet. Sure, we need to deal with the speculators; we need to do alternatives and hopefully, for example, the biofuel for the 747. In fact, we just opened a huge biofuel facility in Houston that's the largest refinery in the country, that's non-edibles. Hopefully -- that those biofuels will be non-edible so we don't see the price of our food go up.

MR. STEENLAND: But I think that's a good example of where biofuels are -- is really a multi-generational type of approach whereas potentially, the kind of things we're talking about today, we could see an impact in 30, 60 days, that some of these other events are longer-term.

REP. GREEN: Yeah. But we need to do it all. We need alternatives in -- control the current market, but also we need to produce more domestically so we can get that into the market.

MR. STEEDLAND: We do.

REP. GREEN: In your opinion, is ICE regulatory body of financial services authority be called an equivalent regulatory body to the CFTC if they do not require position limits or other rules to prohibit excess speculation? Do you think that the ICE's regulatory body, the financial services authorities have anything equivalent to what we have with the consumer -- our CFTC?

MR. STEEDLAND: I would defer to someone else to answer that question.

REP. GREEN: I'll wait until our next panel, then.

Mr. Williams, in fact, let me -- Mr. Chairman, I'd like to submit for the record -- I have a jet fuel reality actually presented by Continental Airlines, which appropriately is from Houston that shows the crack spread that's increased on a monthly basis for jet fuel as the price of oil goes up. And I was going to ask Mr. Williams, I haven't seen anything based on diesel fuel prices, because we know diesel has gone up. Does your association or anyone have any that can compare to, for example, in April '01, the price of a barrel of oil was $101. The crack spread for getting to jet fuel was 27.1 (dollars), whereas on June the 9th, a little over a month later, the price of oil per barrel was 134.4 (dollars), but the crack spread went up to 31.2. Do you have any information on the diesel, how it's gone up based on any of the refining costs?

MR. WILLIAMS: No sir, we can make that information available to you.

REP. GREEN: I think just for the committee's benefit in the long term, Mr. Chairman, I would like to submit that to the record.

REP. STUPAK: Sure, it will be submitted without objection. And the gentlemen should know that EIA, the Energy Information Agency has provided that information on diesel. The crack spread is about 58 cents right now. It was about 47 cents. That's the wholesale crack. We're seeing that increase going up --

(Cross talk.)

REP. GREEN: Mr. Guilford, I know the cost of home heating oil has increased. Have you looked at -- is the volatility in the natural gas market as much as it is in the oil market?

MR. GUILFORD: We haven't looked at it as closely as we do heating oil because we certainly live in heating oil everyday. But it certainly -- there seems to have been-- with the closure of a loophole involving natural gas derivatives in 2004, somewhat less volatility. And I think that when the next panel meets, that Professor Greenberger can address that for you in some detail.

REP. GREEN: Mr. Chairman, I appreciate that because I think there's been some less volatility in another hydrocarbon market that maybe we could look at and see outcomes. I want to thank you for this panel.

REP. STUPAK: All right thank you, gentleman. Also, the EIA -- I know you received a copy of the report -- they looked at the first three months of '08 and compared it with other first three months for the last five years. And in diesel in particular they've exported from this country 335,000 barrels of diesel per day to keep the margins tight in this country. So, there's plenty of supply but what they're doing with it certainly affects the price. Mr. Melancon for questions?

REP. MELANCON: Thank you, Mr. Chairman. Mr. Williams, my son graduated from high school with a young man that's been driving trucks with his dad for years, and I saw him this weekend. And he said at the rate they're going, they're going to sell the truck and he's going to look for a job. So I understand -- and this is a good hard-working kid, so I hate so see that happen to, whether it's small operations or big operations.

I don't really have a whole lot of questions in this sector because most of the things I'm concerned about are the regulators. But, what's, for each one of you, Mr. Steenland, from your perspective how long can Northwest or the industry continue before it becomes totally devastating from the standpoint of not being able to continue as a company or as an industry?

MR. STEENLAND: Well, for eight airlines it's already too late. They're liquidated and they'll never come back. Two airlines are now in Chapter 11. And other airlines it's sort of a function of what their total liquidity is. And basically the industry is going to have to -- it's sort of a bit of race where we're looking to pass through these costs as quickly as we can that gets to the speed with which the price has gone up. And as those costs get passed through, as we talked about before, demand shrinks. And so we need to take capacity out and we need to reach that equilibrium point where customers are paying the level of airfare that clearly compensates us for our fuel bill. And the industry is right sized then to meet that demand.

REP. MELANCON: Are you seeing reductions immediately in your passenger -- (inaudible)?

MR. STEENLAND: Certainly.

REP. MELANCON: Do you know what percent that's buying?

MR. STEENLAND: I mean, it's a function of -- we can always put a passenger on the airplane depending on the price that we're prepared to charge. So if you look at the usage on airplane, it's still fairly high but people are not paying what the true cost is of what it's costing us to provide the service.

REP. MELANCON: Gotcha. Mr. Williams, any projections?

MR. WILLIAMS: I think well capitalized carriers will continue to survive but I think it's important to note that, you know, when they're wounded as they are, they're unable to invest in a lot of the new technologies that will allow us to continue to meet our fundamental challenge, and that is to move much more freight in a much more congested environment while we improve highway safety. And that's the disservice that's actually going on here as well. But we're wasting some time as we need to get on about doing better things in a better way. Even if we lose a big chunk of the market, the part that we have to understand is that this capacity leaves a lot faster that it will ever come back. And when this economy returns, which I'm very hopeful that it will soon, there's going to be a significant problem on how we get goods to market, whether it's strawberries or a coil of steel. And that's a very real probability.

REP. MELANCON: I see the railroads are advertising trying to -- kind of doing a comparison. Have you seen decrease in your amount of freight that you're hauling?

MR. WILLIAMS: Certainly the building material industry is tied directly to the, you know, the housing crisis that we're facing. The steel industry is very robust, but that's because principally driven by the dollar proposition by exporting more steel and importing less steel into this country. The glass side of the business is actually quite good. But that's principally to industry consolidation within that segment and exports to Canada. So, collectively, demand is up for us currently. But it's again because of really a lack of capacity within the market. So we have some restored pricing power. So, I mean that makes us feel good, but it's the overall impact of the cost of transportation to the economy that I think needs to be our greatest concern because it is painful for my employees.

I've closed three terminals -- I actually announced that this last week. We're laying some people off in those areas. We have people that we're losing that have to -- had to drive too far to come to work. And it's a real burden on the men and women and their families in this country.

REP. MELANCON: Thank you. Thank you, Mr. Chairman.

REP. STUPAK: Thank you. Mr. Ross, for questions.

REP. ROSS: Thank you, Mr. Chairman. For -- Mr. Williams you refer in your testimony to Congress supporting globally competitive regulatory changes. What types of changes are you referring to?

MR. WILLIAMS: Specifically, I commented earlier about the size and weight regulations. You know, the -- we're the weakest link in the chain. It's a global supply chain and the United States has found itself in a precarious position of being the weakest link. We have the most restrictive size and weight regulations in this country (sic). And so there's opportunity there for us to increase our competitiveness by bringing ourselves up to international standards, and I think that should be a goal of ours in the years ahead.

I think the part that's interesting about that, and I alluded to this earlier, is that, will we have the appetite for doing that, though, when fuel maybe comes back down to a -- maybe a more market- driven price assuming that speculation is contributing to that price of oil. And that kind of comes back to where we're doing a lot of soul searching within our organization and certainly we have within the industry about, you know, is this all about the money or is this all about doing the right thing for the environment as well? So I think that truck size and weight regulation is a good example of how, for example, depending on the type of more productive vehicle that's in use, and most of this equipment is in use all over this country, and certainly in every other country, ranges anywhere from 11 (percent) to 35 percent more productive.

For example, in my own organization, if I simply slow down, idle my equipment less and were to take advantage of one of these particular adjustments that I'm talking about that we have regulatory power to change, I could reduce my fuel consumption by 37 percent. And that's without any new technology. And to give you an idea of what that would mean to me in a marketplace that I lost money in last year, that would save me $50 million in fuel. So I think sensible long-term strategies on bringing ourselves more into line with what's going on with the rest of the world would have significant effects both for the environment, for highway safety, and certainly would reduce our dependence on foreign oil. But that's going to take a constructive change.

REP. ROSS: It would seem to me that -- I mentioned earlier I think these high fuel prices -- gas, diesel apparently next is going to be natural gas, we'll experience that in the winter -- have a direct relationship to this economic recession we're in. So I think a lot of people are wondering, you know, how long are we looking at prices the way we are now? And it affects everyone. I represent a lot of farmers. Diesel prices have really affected them because that's how they irrigate and get their produce to market.

I just -- since this meeting started, I talked to an electrical contractor who has a diesel pickup and he requires a pickup because of the nature of his work. He said it cost him $150 to get to work today. Now, granted, he drove quite a ways to get to work today but I mean, you know, it's unconscionable. I had a small trucker call me recently. He just has three trucks. He says, you know, he bids on a job and he has to be competitive with his bid, and then overnight the price of diesel goes up and sometimes it goes up from when he starts the job several times before he finishes the job. And there goes his profit. And what was going to be a small profit ended up, you know, in a situation where he was losing money. And that's a small trucking firm. Obviously, you're much larger than that.

I guess where I'm going with this is, isn't it true whether it be the airline business -- and I'd like to get an answer too from the airline industry -- whether it's the airline business or trucking business you all are absorbing some of the increases right now, I would guess, hoping that the economy turns around and to hanging onto your market share, but at what point do you have to start passing all this along, and what does that do to an already struggling economy? And I'd like to get an answer from both of you all on that if I may.

MR. STEENLAND: Well, we're a very high fixed cost business, so, you know, we own or lease our airplanes. We can't just simply, you know, turn them on and turn them off. We have 29,000 employees that we want to, you know, keep gainfully employed. We have long-term rentals at airports. So we're paying all those costs, whether we're flying or not, and so we're flying the airline as everyone else is. And the challenge is that we haven't yet been able to simply pass through the costs, because if we truly just simply posted prices out there that fully reflected what the price of jet fuel is, people would say -- a number of people would say, "I'm not traveling." And an airplane seat is a perishable seat. So when it takes off today and, you know, the flight leaves Minneapolis and it's going to L.A., if there's not someone paying for that seat, it's gone. It's not something we can put in inventory and sell the next day or the next day after that. And so it puts tremendous pricing pressure on the business, and it ultimately requires the right equilibrium between those people that are prepared to pay the pass-through costs and what the size and capacity of the industry is. And at today's prices, the industry is losing money. The U.S. airline industry will lose over $10 billion this year. And so, you know, if this is in fact what the price of fuel is going forward for the longer term, airfares inevitably are going to have to go up.

REP. ROSS: How much higher would airfares be today if all the increased cost in fuel was being passed on to your customers? And, by the way, thanks for getting me here this morning.

MR. STEENLAND: No, thank you. I'd say 20 percent.

REP. ROSS: Twenty. So, to truly reflect today's energy prices, you're saying airline tickets would be 20 percent higher. And I guess at some point, if prices on energy don't come down, they will be. Right now, I'm sure it's trying to charge what the market will allow and also, I'm sure, trying to protect or grow your market share factors into it. If I could get a response to that from Mr. Williams as well, because I sense that some of the smaller guys out there with two or three trucks are becoming less and less competitive and, as a result, we're going to have less competition wherever this thing settles out, and what does that do to the economy?

MR. WILLIAMS: I think we're going to see a lot of the changes that we saw post-1980 when the industry was deregulated. This is a point in time when there's going to be a significant change in the make-up, I believe, because of the burden that most of the carrier community can't continue to bear.

The gentleman that may be losing his job driving a truck that he owned might actually migrate to a company such as mine and drive a truck for me, but that doesn't limit the pain and anguish that -- of his loss of equity in that piece of equipment or in the nest egg that maybe he or his father had generated over their entire lifetimes. And so there's going to be a lot of pain in the transition, I guess would be my point. And I think an interesting addition to that would be the comment that we're in the process of pricing our truck order when we will buy about 500 additional trucks next year that'll be replacements. Those trucks are extremely more expensive and the most dramatic increase in price than I've seen in any year-to-year in all the 30 years that I've been in business. And I'm talking about in excess of 20 percent increase. And that's driven indirectly by the price of oil driving the price of steel, driving the price of tires, and all the components that are within that truck, not to mention all the technology that we voluntarily purchase. So significant increases, and they're coming back to roost even on our own doorstep.

REP. ROSS: Mr. Chairman, I see I'm well over my time. I thank you for being so generous and indulging.

REP. STUPAK: I thank the gentleman.

Well, that concludes all the questions of this panel. Let me just mention a number of organizations have already endorsed our legislation, H.R. 6330. I know, Mr. Steenland, your organization has, Teamsters have, others. You may want to look at -- give us our comments, not just 6330, but there's a number of pieces of legislation that's pending before Congress, and we're trying to take a look at it. Your testimony today has been most helpful, but it'll also be helpful to have your input on some of this other legislation, whether it's 6330, my bill, PUMP Act or any of the other pieces of legislation would be helpful to us as we try to move something on this legislation. But, thank you for being here, and thank you for your testimony.