The Testimony of
The Honorable Terry Goddard
Attorney General, State of Arizona
Thank you for the opportunity to present testimony on the important issues relating to gasoline in Arizona. I intend to focus my remarks on fuel supply and consumer costs, with a brief note about pipeline-related public safety.
Arizona's bright economic future depends on affordable, reliable and safe supplies of both energy (fuel and electricity) and water. Arizona is in a delicate position due to the scarcity of water and the lack of crude oil production or gasoline refining in our state. For gasoline supply in particular, Arizona depends on two pipelines, one from the West and one from the East. Affordability of gasoline is crucial for many Arizonans on fixed incomes and those workers with incomes lower than the national average who are hardest hit by rising gasoline prices. A reliable fuel supply is essential for maintaining a stable economy. Safety in supply is of the utmost importance for Arizonans' health and our environment. Fuel spills and other gasoline-related pollution affect the air, water, and land.
We have seen that increased fuel costs can also affect public safety. During the price spike of Spring 2003, several Arizona law enforcement agencies faced curtailing patrols and other activities because of budgetary constraints combined with gasoline price increases.
Arizona is facing a major shift in gasoline supply. Where Arizona traditionally received seventy percent of its gasoline from California and thirty percent from Texas, in recent years the trend is towards an even fifty-fifty split. In the future, California's demand for gasoline will likely exceed its production capacity. Not only will Arizona no longer be able to receive gasoline from California, but California may begin to compete with Arizona for gasoline from Texas.
Even while Arizona, and Phoenix in particular, move towards improved mass-transit, energy conservation, and other fuel sources, Arizona's dependence on gasoline increases daily due to enormous population growth. Both government and industry must continue to address and plan for this growth.
As Attorney General, I am charged with enforcing existing laws and representing state agencies, many of which have been working tirelessly to ease the damage caused by the recent Kinder Morgan pipeline shutdown. My office continues to work closely with the Governor's Office, the Governor's Gasoline Working Group, and other state agencies to evaluate what led to the gasoline shortage, and to develop long-term policy solutions.
The Arizona Department of Environmental Quality (ADEQ) is investigating the July 30, 2003 gasoline spill in northwest Tucson. Kinder Morgan has recently turned over voluminous documents relating to the spill and clean-up. The Attorney General's Office and ADEQ's investigation into this matter is ongoing. ADEQ also worked with the Governor and the Environmental Protection Agency (EPA) to obtain a waiver allowing conventional fuel to be used in Maricopa County during the shortages.
The Department of Weights and Measures has been instrumental in monitoring supply and fuel quality, with particular attention to the time period during the gasoline shortage.
The Department of Commerce, Energy Office is working on long-term gasoline supply policy issues facing Arizona.
The Department of Real Estate is investigating whether residential subdivision developers properly disclosed the location of the pipeline. If violations are found, these developers could face civil penalties and future difficulties in obtaining licenses to sell property. Further, home buyers who were not informed of pipeline proximity may have recourse either through private legal action or through the Department.
The Attorney General's Antitrust Unit continually monitors the market for evidence of anticompetitive behavior, including price fixing, supply manipulation, and other antitrust violations.
I am also working with legislators on proposed price gouging legislation to deter and punish those who would take advantage of consumers during a state of emergency. Prices as high as $4.96 per gallon of regular CBG were reported to and investigated by my office. Consumer feedback from about 1,000 complaints and inquiries demonstrated overwhelming popular support for price gouging legislation.
. As the pipeline enters South Tucson, it carries fuel to Phoenix through residential areas, past Mission View Elementary School and within feet of the Salvation Army Adult Rehabilitation Center on South Sixth Avenue. A smoking area at the Salvation Army is located directly above the pipeline. The pipeline travels along Starr Pass Boulevard behind residential areas and angles to the north near Cholla High School, the west side of Tumamoc Hill and "A" Mountain. The pipeline passes within a quarter-mile of buildings on Pima Community College's West Campus and residential areas along North La Cholla Boulevard. As the pipeline heads north toward Interstate 10, it runs along a wash that splits the Silver Creek subdivisions, the site of the July 30th rupture.
. July 30, 2003: The Kinder Morgan (KM) gasoline pipeline between Tucson and Phoenix ruptured, and KM reported spilling approximately 10,000 gallons of fuel in northwest Tucson over a residential construction site. After an initial repair, subsequent testing by KM revealed stress corrosion cracking, leading KM to shut down the entire Tucson-Phoenix line on August 8, 2003.
. Mid-August: Severe gasoline shortages developed in Maricopa County as a direct result of the pipeline shutdown. Gasoline prices skyrocketed. Independent dealers lobbied the Governor, the EPA and ADEQ to waive the Clean Air Act requirements, allowing the use of conventional gasoline in Maricopa County, which normally requires Cleaner Burning Gasoline (CBG).
. From 1988 to 2001: The Arizona gasoline pipeline had forty-six probable non-compliance violations noted by the Arizona Corporation Commission, including failures to comply with rules concerning corrosion control (1991, 1992, 1995). Since 1993, the Office of Pipeline Safety issued two non-compliance letters and one corrective action. The corrective action was in response to the July 30, 2003, pipeline rupture.
II AFFORDABILITY OF FUEL
Gasoline (Cleaner Burning Gasoline, or "CBG") prices in Phoenix skyrocketed from an average of $1.54 per gallon of CBG regular on July 30, before the pipeline rupture, to a record-breaking average high of $2.14 per gallon on August 26. Phoenix prices are now at an average of $1.77 per gallon.
These dramatic price increases caused lost income to businesses and consumers. Hardest hit were the working poor, those on fixed incomes, and gasoline-dependant businesses.
To address rising gasoline prices and severe price spikes, I recently sent surveys to every retail gasoline station in Arizona, requesting information on supply and pricing. As a result, we have a better understanding of the Arizona gasoline market structure and possible areas of further inquiry.
My office continually monitors and maintains a database of Arizona gasoline prices, as does the Department of Commerce. I am working with other state Attorneys General, the Federal Trade Commission, and Arizona state agencies to deter and investigate market manipulation and to promote policies to ensure safe, reliable and affordable gasoline for Arizona's future.
As I discussed earlier, I also support a Price Gouging statute to protect consumers from exploitative pricing of gasoline (and other products) during a declared state of emergency.
III RELIABILITY OF FUEL SUPPLY
As a result of the July 30, 2003 Kinder Morgan pipeline shutdown, many gasoline stations ran out of gasoline. On August 19, sixty five percent of Maricopa County retail gasoline stations were without gasoline. These shortages began on August 17 and ended on August 27.
The gasoline shortages resulted in lost revenues due in part to transportation difficulties. Working Arizonans could not get to work. Others did not drive for recreational purposes. Although difficult to quantify, Arizona likely experienced significant losses from tourism declines and event cancellations due to the instability the fuel shortage caused.
The August supply disruption could reoccur absent improvements in gasoline supply alternatives to Arizona. Additional gasoline supply may come from another pipeline, which is nearly completed, from Texas. While this new pipeline may help bring additional product into Arizona, and reduce our dependence on California gasoline, the physical capacity limitations of the existing pipeline in Arizona reduces the usefulness of this option. Further, FERC pro-ration policy needs to be reviewed as it applies to new entrants.
There is also the possibility of a new refinery here in Arizona. Again, although this may appear to be a positive solution, I have serious concerns about fiscal practicality, time to completion, pollution controls and environmental justice issues. I am investigating issues surrounding the gasoline supply shortage. My office is obtaining supply volumes from Kinder Morgan through a Civil Investigative Demand. That information is currently being evaluated. The confidential nature of the documents I am receiving precludes me from discussing this in detail.
My office will continue to assess and evaluate potential market manipulation in gasoline supply. If I discover illegal conduct, I will vigorously prosecute, as in the El Paso Natural Gas case.
IV PIPELINE SAFETY
The Corporation Commission and the Federal Department of Transportation, Office of Pipeline Safety (OPS) share the responsibility of inspecting the pipeline and enforcing proper maintenance and repairs.
Some sections of Arizona's KM pipeline are fifty-five years old and have numerous leaks and safety violations. I am concerned that improper inspection of this aging pipeline, coupled with lax to non-existent enforcement put Arizonans at risk of serious injury.
As Arizonans have recently learned, the KM pipeline traverses highly populated areas, running near schools and homes. In addition to areas I previously outlined in the Tucson area, the pipeline runs close to two schools in Maricopa County. I am concerned about the loss of life, injuries, and severe damage experienced in Washington and New Mexico. I want to see that property owners near the pipeline are properly informed, and all feasible and reasonable steps are taken to minimize risk to our citizens.
I am also concerned that there is inadequate pipeline security, including lack of physical barriers to protect the pipeline from inadvertent and intentional damage.
My recommendations for the future include increased frequency and thoroughness of inspections, stronger enforcement of violations, increased federal financial support for interstate pipeline inspections, increased authority for state inspectors, and a more aggressive approach to pipeline security.
My office continues to work with other state and federal agencies to ensure pipeline safety, reliable gasoline supply and affordable pricing. I am optimistic that increased partnerships between the federal and state pipeline enforcement authorities will aid in more effective inspections and corrective actions, as necessary. My office will continue to monitor and prosecute any illegal, anti-competitive behavior in the gasoline industry. I will continue to support price gouging legislation to protect Arizona's consumers.
Thank you for the opportunity to testify about this important, far-reaching matter.
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