COMMONWEALTH OF PENNSYLVANIA HOUSE OF REPRESENTATIVES

CONSUMER AFFAIRS COMMITTEE INFORMATIONAL MEETING

STATE CAPITOL ROOM B-31 MAIN CAPITOL

THURSDAY, MARCH 10, 2011 9:02 A.M.

MEETING ON NATURAL GAS INDUSTRY

BEFORE: HONORABLE ROBERT GODSHALL, MAJORITY CHAIRMAN HONORABLE JOSEPH PRESTON, MINORITY CHAIRMAN HONORABLE BRYAN BARBIN HONORABLE FRANK BURNS HONORABLE SHERYL M. DELOZIER HONORABLE BRIAN ELLIS HONORABLE JOHN R. EVANS HONORABLE JULIE HARHART HONORABLE WARREN KAMPF HONORABLE NICK KOTIK HONORABLE ROBERT MATZIE HONORABLE BRANDON NEUMAN HONORABLE JOHN PAYNE HONORABLE TINA PICKETT HONORABLE TODD STEPHENS ALSO PRESENT:

COLIN FITZSIMMONS, EXECUTIVE DIRECTOR (R) AMANDA RUMSEY, COUNSEL (R) JANE HUGENDUBLER, LEGISLATIVE ADMINISTRATIVE ASSISTANT (R)

GAIL DAVIS, EXECUTIVE DIRECTOR (D) TIMOTHY SCOTT, RESEARCH ANALYST (D) LISA KUBEIKA, LEGISLATIVE ASSISTANT (D) JERRY LIVINGSTON, RESEARCH ANALYST (D)

INDEX

TESTIFIERS

WITNESS PAGE

REP. ROBERT GODSHALL 6 CHAIRMAN

TERESA RINGENBACH 7 DIRECT ENERGY, RETAIL ENERGY SUPPLY ASSOCIATION

TERRY FITZPATRICK 10 PRESIDENT & CEO, ENERGY ASSOCIATION OF PENNSYLVANIA

PETER G. TRUFAHNESTOCK 17 STATE LEGISLATIVE & REGULATORY AFFAIRS CONSULTANT, PHILADELPHIA GAS WORKS

DAVID CALLAHAN 35 VICE PRESIDENT, MARCELLUS SHALE COALITION

BARB SEXTON 37 MANAGER – STATE GOVERNMENT RELATIONS, CHESAPEAKE ENERGY CORPORATION

ROLF HANSON 40 EXECUTIVE DIRECTOR, API-PA

WILLIAM LUCAS 51 EXECUTIVE VICE PRESIDENT, EQUITABLE GAS

MATT SOMMER 55 VICE PRESIDENT OF NATURAL GAS & ELECTRICITY, SHIPLEY ENERGY

CERTIFICATE 66

WRITTEN TESTIMONY SUBMITTED:

LOU D'AMICO PRESIDENT & EXECUTIVE DIRECTOR PENNSYLVANIA INDEPENDENT OIL & GAS ASSOCIATION

CHAIRMAN GODSHALL: Good morning. The hour of nine o'clock having arrived and left us a few minutes ago, I would like to call the meeting to order.

This is an informal meeting of the natural gas industry and is being recorded. I would like to get started with the members introducing themselves, the members and staff introducing themselves starting all the way over to my right.

MS. DAVIS: Gail Davis, Representative Preston's office.

MR. LIVINGSTON: Jerry Livingston, Representative Preston's office.

REPRESENTATIVE BURNS: Representative Frank Burns, Cambria County.

MR. SCOTT: Tim Scott, Representative Preston's office.

CHAIRMAN PRESTON: Joe Preston, Representative Preston's office.

For everybody that knows Beth Rosentel, the Executive Director, it was Jonah Allen, 7 pounds 2 ounces yesterday.

CHAIRMAN GODSHALL: It was yesterday, she's not here today?

CHAIRMAN PRESTON: I didn't mean to say it, the child was born.

CHAIRMAN GODSHALL: Representative Godshall, Montgomery County.

MR. FITZSIMMONS: Collin Fitzsimmons, Republican Executive Director, Consumer

Affairs Committee.

MS. RUMSEY: Amanda Rumsey, Republican Counsel, Consumer Affairs Committee.

REPRESENTATIVE PICKETT: Tina Pickett, Bradford, Sullivan, and Susquehanna

Counties.

REPRESENTATIVE DELOZIER: Sheryl Delozier, Cumberland County, 88th District.

REPRESENTATIVE PAYNE: John Payne, 106th District, south eastern Dauphin

County. REPRESENTATIVE BARBIN: Bryan Barbin, Cambria County.

REPRESENTATIVE KOTIK: Nick Kotik, 45th District, Allegheny County.

REPRESENTATIVE MATZIE: Rob Matzie, 16th District, Beaver and Allegheny

Counties.

REPRESENTATIVE ELLIS: Brian Ellis, 11th District, Butler County.

CHAIRMAN GODSHALL: Okay, thank you.

The purpose of today's meeting is to provide an overview of the natural gas industry for the education and benefit of Committee members, staffs, and members of the public. The natural gas industry involves a coordinated process starting with the drilling and productions of natural gas and ending with the delivery of this clean, cost-efficient fuel source to homes and businesses across the Commonwealth.

Today we will hear comments from presenters representing all areas of the industry: Gas drilling companies, competitive suppliers, and distribution companies. I'm certain that the information presented today will be informational and provide valuable insight into this complex industry.

There will be an opportunity for questions following each presentation, and I ask that members please hold their questions until that time. I would like to get started with Chairman

Preston; do you have any comments?

CHAIRMAN PRESTON: Let's get this on.

CHAIRMAN GODSHALL: Let's get going. Okay, I agree with you.

The first panel we have today is Terry Fitzpatrick, President and CEO of the Energy

Association of Pennsylvania; Peter Trufahnestock, State Legislative and Regulatory Affairs

Consultant for Philadelphia Gas Works; Teresa Ringenbach, Director Energy, Retail Energy Supply Association.

Gentlemen, it's all yours – and ladies.

MS. RINGENBACH: I am going to start out today. I am Teresa Ringenbach, I represent the Retail Energy Supply Association. I am also the Manager of Government and Regulatory

Affairs for Direct Energy. While I know many of you are familiar with RESA on the electric side, what is not so familiar to a lot of people about RESA is that we actually represent gas suppliers, too, so residential, small commercial, and big industrial customers on the gas side.

CHAIRMAN PRESTON: Not to interrupt to, but I know you may assume that a lot of us are because you have been to us before, but 50% of our members are new, so a lot of them are hearing the nomenclature and the acronyms you are using, it's kind of new to them, and I would appreciate if sometimes you would elaborate on that.

MS. RINGENBACH: So the Retail Energy Supply Association is actually a group of suppliers who represent everything from Fortune 500 and Global 500 companies all the way down to Liberty Power, which is a small mom and pop Hispanic shop. So, our purpose is to promote competitive markets for customers to be able to have choice in energy and commodities.

In Pennsylvania, RESA has been most active for electric competition, in Pennsylvania you can choose who your electricity supplier is and the utility will deliver it on their wires, on the gas side it's the same thing. The supplier will actually deliver the molecules, but we use the utilities pipes. So, we work together with the utilities.

The first slide that I brought up was just some common terms that you are going to hear in the gas industry. Wellhead, where it comes out of the ground; pipeline, which is the really big pipes that bring it to the utility; and then burnertip, which is when you hit where the utilities pipes bring everything down into those little pipes that bring it to your house, that is called the "city gate". So we bring it to that city gate where it enters the utility and then it goes down into the little pipes and then goes to your house, and that is where the utility takes over.

Customers can bring their molecules in with a supplier in two different ways. You have the transport customers. These are your big steel mills, the big manufacturing companies, they actually don't always need a supplier. They can bring it right from that big pipe all the way into the utility. A lot of times they just use the suppliers to negotiate with the market. And then you have choice. When you get down to choice, you are talking about residential and small commercial customers. So, the little guys who would go out, look for an offer from a supplier, and negotiate that price either based on what is already available or they might aggregate a group of customers to negotiate a price.

Gas choice, when you talk about residential shopping in some form, there are 22 States that allow residential shopping. The most active program in Pennsylvania to date is behind

Columbia Gas of Pennsylvania, but over the past year the Retail Energy Supply Association,

RESA, Direct Energy and other have actually been working with the Public Utility Commission to make changes that will allow gas competition to take off like it has on the electric side in the

State. A lot of changes won't actually take effect until 2012, but the cases are done. So, in terms of looking at, why are we seeing so much switching on the electric side versus the gas side, I say wait until 2012 when these changes really kick in.

A customer who purchases the molecules from a supplier, as I said, they still get their gas on the pipes from the distribution utilities. When you talk about safety, pipeline leaks, all of that still flows through the utility. No matter what, the customer always pays what is called the distribution side of their bill, the pipes. The thing that distributes it to your house all remains within the realm of the utility and that is regulated by the Commission. The last point on this slide that I want to make clear is often times people get a little confused about how does a supplier fit into this system? Just like the utility has those big, big pipelines, they have contracts, they are regulated by the Federal Energy Regulatory Commission, suppliers have contracts like that, too. Remember we talked about the city gate? Where it hits the utility system? Everything before it gets to the city gate the utilities and the suppliers are on level playing fields. We have to have contracts in place to bring it from the big pipes, we have to go buy it in the market, all of that takes place. We actually buy, we have contracts with local producers so when you think about Marcellus Shale and the local production within the State that doesn't necessarily come from the Gulf Coast or come from the west coast on those big pipes.

We can buy local production, too.

This is the old model, this is how it used to be. You had your producer, the wellhead where it comes out of the ground; you had the big interstate pipeline; you had the local utility that bought and sold the gas from the upper stream people; and then you had the distribution side that brought it to your house.

Today, it works like this. You have your producer and your pipeline, like I just talked about. We, as suppliers have to have those upstream contracts. Then in the middle you choose who you want to buy it from. You can buy it from the utility or you can buy it from other suppliers and it still goes through your local utility to take it to your house.

The Public Utility Commission, when you think of choice, you often hear the word deregulation. It is not a deregulated market. Natural gas suppliers are regulated. We are regulated in what we can and cannot say to customers, we have to get a license from the Commission, we have to post bonds to get that license, we are heavily regulated in terms of what we can and cannot do in the marketplace. There is a lot of financial security and there is a lot of investment that goes into being able to supply gas to customers in Pennsylvania.

The last term, and I hate this term so I always bring it up, is marketer. You hear the terms marketer a lot. Marketer is sort of a misnomer, because as I said, we are a gas trader, we are a scheduler, we're contracted with pipelines. We don't just market the gas. We actually have a lot of infrastructure and knowledge internally on how we buy that gas and how we bring the gas to the customer.

There is a partnership to choice and there is a partnership to the big, industrial transports, too. There is the pipeline, there is the utility, and there is the gas supplier. If we don't all work together, it's not going to work. You have the safety issue, if suppliers or the utilities or the pipelines aren't making sure that the pressure in the pipe is correct you could have problems.

They could blow up, the gas won't flow, there is a number of things that could happen. We talk daily and hourly with the utilities. They tell us what to bring in for our customers, we tell them what we're bringing in for our customers, they are talking to the pipeline, we are talking to the pipeline. Here's a picture, there are little cogs in this wheel and if any of them fail there could be problems. So, it is a constant process.

That is it.

CHAIRMAN GODSHALL: Probably a lot of what you said was old hat to people sitting in the audience, but I'm sure it's not up here.

PRESIDENT FITZPATRICK: Good morning Chairman Godshall, Chairman Preston, members of the Committee. Thank you very much for the chance to be here. I am Terry

Fitzpatrick, I'm the President of the Energy Association of Pennsylvania. You have hard copies of my presentation, I'm going to start through that and Mr. Trufahnestock who is younger and more adept at such things than me is going to try to get the PowerPoint. He's making progress on that already, I can see. I won't wait, I'll get started awhile.

The Energy Association of PA is a trade association whose members include both electric and natural gas utilities operating within the Commonwealth. As I had said when I was here a few weeks ago on the electric industry, we perform two functions. We advocate industry positions before agencies, chiefly the PUC in our case and the General Assembly, and we also have an educational role. We assist companies in sharing best practices to further all of their interests on consumer and operations issues, and we also sponsor conferences on a whole host of issues that are attended by employees of our members, employees of out-of-State utilities, and also by government employees to learn more about those issues.

The next slide shows the natural gas utilities that are members of the Energy Association.

Of that list there, all of the companies are investor-owned with the exception of PGW, or the

Philadelphia Gas Works. Mr. Trufahnestock will give some information, particularly with regard to PGW later.

The next slide, natural gas utilities, this tells you basically what we do, where we fit in the structure we're also known as natural gas distribution companies, which is the term that was used in the Gas Competition Act. We own and operate the natural gas distribution systems as distinguished form gas wells or interstate pipelines. We are also the default suppliers of gas to customers who do not choose to purchase from one of Ms. Ringenbach's members, the competitive suppliers. In purchasing gas for non-shopping customers, we have to run that by the

PUC and pursue a least cost purchasing strategy. We do not earn profit on the gas supplies that we sell to those customers, we only earn profit on the distribution charges that we have that are also set by the PUC. We also provide bills and administer programs to assist low-income customers and all of this is subject to regulation by the PUC. Here is some basic information about, and statistics about natural gas. We transport the gas, as I had said, 52% of Pennsylvanians use natural gas to heat their homes. The dispersion of that varies throughout the Commonwealth, gas tends to be concentrated more in the more developed and urban areas, I think that makes sense because that is where it is easier to put the infrastructure in to serve people. We maintain more than 47,000 miles of gas distribution mains and employ approximately 5500 Pennsylvanians.

Here is a list of the main players in the gas industry or the industry structure. You have producers, they sell gas at market prices, generally into the wholesale market. At one time, it is interesting to note, those prices were regulated at the Federal level, the prices that producers charge. However, that began to change in the 1970s with the generally movement towards less regulation and more competition. The interstate pipelines are regulated by the Federal Energy

Regulatory Commission in Washington. Natural gas suppliers, that is Ms. Ringenbach's group, they sell gas in the retail market and they are licensed by the PUC but their prices are not. They are subject to some regulations, as Ms. Ringenbach said, however, their prices are not regulated by the PUC. They are set by the competitive market. Natural Gas Utilities or NGDCs, we are the public utilities. It includes PGW, which is the term of art for them is a city natural gas distribution operation.

The next slide is just a visual depiction, general depiction of the gas industry. It shows the wells, processing plants, and electric generating plant, because gas is a very important fuel used to generate electricity. Storage facilities, it shows the city gate which Ms. Ringenbach also discussed, which is the line of demarcation between the interstate system and the local gas utility. Then it shows the various types of customers as well as some storage facilities.

Taking this now, a piece at a time, production first. The gas is moved from a well into a gathering system and then it is processed and purified and it moves into the transmission system.

The next slide, I won't go through all of this data. The first one is interesting, it says it goes into the transmission system and it is moved along by compressors and move thousands of miles to local distribution companies. Well, I think that information on that slide came from the past. It's interesting to note with the Marcellus Shale it's not always necessarily moved thousands of miles, because now we have a major source of gas which is located close to where it is used here in Pennsylvania and in the north east.

The pipeline transmission system, I think it is useful to think of that as the interstate highway system for natural gas, and then I have some numbers regarding the size of the infrastructure and the amount of it.

Underground storage facilities are a very important part of this infrastructure, generally located along the transmission network and it is stored, gas is stored there and that is very important for withdrawal during high usage periods.

This slide shows you the gas utilities as well as the interstate pipelines and tells you which gas utilities have access to which interstate pipelines, because not every utility has access to all those pipelines in PA.

Let's talk about the distribution system, which is the gas utilities part of the system. The gas moves to a city gate, the pressure is reduced and odorant is added to the gas so that it makes it, to aid in detecting it in the event there would be a leak. From the city gate it is moved to the distribution lines or the mains, and then it goes into the service lines where it goes into the customer's home or place of business.

Let's talk about gas, about the commodity itself. This is very important. There has been a dramatic change in the outlook for natural gas in the last 5-years as a result of the ability, now, to get at the gas in these shale places throughout the U.S. And I think, I really believe it is a fuel of the future. I think this plays into the presentation you are going to hear in a bit by Bill Lucas from Equitable Gas, which is one of our members when he talks about gas powered vehicles.

Most of the natural gas consumed in the U.S. is produced in the U.S., 84% of it. That is a distinction from petroleum products. The EIA (Energy Information Administration) projects that gas production from unconventional sources will increase 35% between 2007-2030. This is because of the shale formations. The Marcellus Shale formation, I think you have heard this many times and I would agree, it is a game changer as far as our energy future.

Let's look at the price of natural gas. This shows you the movement in prices from 2004-

2011. I think the important point there is that gas prices went way up right before the recession hit, and with the recession they came down, but even with some economic recovery now they are staying down. I think that price was influenced by the recession but it is also being influenced by the new supplies that are available.

Here is some more data on gas prices, it tells you about the storage inventories, how they are up and I think the third bullet there is important. EIA expects the 2011 price to drop to $4.33 per MMBtu, and this is a contrast to oil prices, which EIA projects to average, to go up 9% to

$86 a barrel, which shows that these two prices for these two important forms of energy are moving in opposite directions. Some of the factors that can contribute to the decline in gas prices, the weakened economy and higher than usual production as a result of the shale plays.

Now let's move into some of the issues that we face. Finding solutions for the State's natural gas infrastructure, obviously taking care of this massive amount of pipes is a very big job.

In Pennsylvania of the 47,000 miles of distribution mains, we have 3,276 miles of cast iron, and

8,433 miles of unprotected bare steel. If you add those two together that is roughly 25% of the infrastructure is in either cast iron or bare steel. Pennsylvania is not in any way out of the ordinary or unique there. If you look at the statistics for the rest of the Mid-Atlantic area and

New England combined, it is almost dead on in the average here with 25% of our infrastructure consisting of bare steel and cast iron.

Many existing regulatory and cost allocation policies were put into place a long time ago, and we believe they must be re-examined to ensure the continued reliability of our delivery system. Reforms to the traditional ratemaking process, we believe are necessary to enable and to incent greater investments in our gas distribution infrastructure. To be direct, this plays into the, historically this Association has backed a distribution system improvement charge for gas utilities, this year we have worked on legislation which is somewhat broader than that in that it would apply to any kind of fixed utility such as electric, gas, or wastewater. It includes a distribution system improvement charge, but we are terming it somewhat broader than that calling it alternate ratemaking mechanisms because there is a variety of mechanisms that can get you to the same place and provide the incentive for these investments. We've come to an agreement with the companies within EAP, both electric and gas on some language, and we're looking at a legislative strategy now, we'll be rolling that out, and I'll be very eager to talk to

Chairman Godshall, Chairman Preston, all of the members of the Committee about that legislation.

On the safety side, the main thing that controls our actions here is the Distribution

Integrity Management Program, or DIMP. This is a regulatory program put in place by the

Pipeline and Hazardous Materials Safety Administration, which is part of the U.S. Department of

Transportation. You see the main, the three main components of the program, damage prevention, corrosion, and operator qualification, it also requires operators to install excess flow safety valves on new and replaced residential lines to stop the flow if there is a problem. I would say about this program, it is individualized to each utility. Each utility files its own program, and that's based upon a recommendation by PHMSA that the circumstances of each utility are different. Rather than set prescriptive across the board standards here, it looks at each utility system and makes them enter into a risk analysis and then implement that.

Universal Service Programs are very important part of what gas utilities administer.

These are basically safety net social program to help low-income and payment trouble customers. The amount of money that goes into these programs is really quite large, I give there the $441 million number, that is combined electric and gas, and I also show the breakdown here.

It is paid for generally by other customers, in most cases residential customers, and there are some utility funded programs as well. The largest component consists of CAP programs under which a customer pays based on a percentage of income or some type of set discount. It is interesting, we talk a lot about LIHEAP and it is a very important program, but the reality is there is more money in these Customer Assistance Programs that utilities operate than there is in

The Pennsylvania allocation of LIHEAP, even though LIHEAP includes all fuel types and the

CAP programs are restricted to just electric and gas.

Another issue is Chapter 14. That is a law that was a part of the Public Utility Code that was added in 2004. It is entitled the Responsible Utility Customer Protection Act. It was supposed to provide for equitable means to reduce uncollectable expenses and really the goal, I think, was to protect paying customers from customers who don't pay their bills. That all comes back on the paying customers eventually, that uncollectable expense does. The PUC's recently released biennial report on Chapter 14 indicates the utilities have successfully implemented that.

I give some data there about the reduction and debt, and the reduction and write-offs as well. PGW's collections performance and overall financial health have improved dramatically since this law was passed, and Pete Trufahnestock's going to talk about that.

So, moving to my last slide, just to summarize, we would ask you to consider reforming the ratemaking process to better provide incentives for infrastructure replacement, we would like you to consider reauthorizing Chapter 14. It sunsets in 2014, but we would at least like to ask you to consider looking at it this legislative session. Also, we're interested in legislation that promotes the environmentally sound development and use of natural gas since we think it is the fuel of the future.

That concludes my presentation, thank you, Mr. Chairman.

MR. TUFAHNESTOCK: Good morning. Again, my name is Pete Trufahnestock and I just want to jump on and add a couple of little details about PGW because we are little bit different than the other utilities. I did not bring an electronic version, but you all should have a packet here in your big packet.

The first slide, there, is kind of a breakdown of PGW and I will not go over all of these statistics, certainly look at them at your leisure and I'd be happy to answer any questions about them. It is notable that we are the largest municipally owned utility in the country. PGW was chartered and so our system is the entire city of Philadelphia and not outside of it. We can't go outside of our city territory to balance our portfolio at all, which is a concern. By contrast, PECO

Energy which is right outside of our borders also doesn’t come in and compete with us. As some of you know who have been on the Committee for some time, as the industry and businesses left

Philadelphia and left our portfolio very residential based, and frankly, very low-income residential based, it presented a lot of challenges. The good news is that compared to the last three or four times that PGW has testified in front of this Committee and said, we are on the brink of disaster, I am happy to report that we are no longer on the brink of disaster and that we are stable right now. It does not mean that we are out of the woods, but we are not coming to the

Committee begging at this moment.

On slide three there are a couple of reasons for that improvement. We went through, over the last 10-years, a business transformation where, and we went underneath the PUC for regulatory relief which we hadn't had for some time, and it's no secret PGW had made some bad management decisions in the 80's and 90's, and we did not have any rate relief and so we were in a position where our debt was accumulating more and more and our system was not being well taken care of, we had become bloated and not functioning well. Through a lot of hard work through a lot of people under current management that has changed we have tremendous efficiency improvements, our collections have gone up largely because of Chapter 14 which I'll address in a minute, and our labor versus management ratio has reached an equilibrium and we're also working very well with our union. It's fairly extraordinary how the union and management have really come together to realize that PGW being healthy is beneficial for both sides, and so we're working very well together.

There's a couple of slides, and I'll point out just on slide four I'll point you to the little green bars at the bottom. That represents internally generated revenue. That's cash that the company brought in and then was able to spend on our pipe replacement program, for an example. Before 2009 the last time that PGW had any funds that we did not have to borrow was

1993. That means that all of those intervening years, as you can see that top line – which is our debt line, we were just borrowing and borrowing and borrowing. When PGW borrows money our customers have to pay. For every dollar that we borrow our customers have to pay $1.50 plus interest back which is a very bad deal for our customers. So what we're very excited about is having some internally generated funds, now, to the point where for every dollar that we collect that is just one dollar that gets spent. It doesn't have to paid $0.50 plus interest extra. That green line at the top line there should start to come down now. Right now we're about 82% leverage, so

82% debt versus 18% equity. In 5-years we hope that to be about 60/40, which is a manageable amount.

On the next graph, that is our social program cost., as eluded to by Mr. Fitzpatrick talking about the great amount of money that is spent on social programs. That yellow shaded area there coming up from the green line is our CAP program. We call it our CRP. A low-income customer that qualifies in Philadelphia pays a percentage of their income for their gas. If they could only afford to pay $75.00 a month that is what they pay. If their bill is actually $400 a month the rest of PGW's customers pay the difference. It's an enormous burden on our low-income customers just over 150% in poverty and our working poor who are paying a substantial amount to help our most needy customers. Again, the good news, the purple line represents our bad debt, which is going down. And also, the very bottom line is our conservation program which you see is taking a big jump this year and I'll talk about that at the very end, that we're making some significant investments and trying to get at the heart of these problems.

The next two slides I won't read out loud, they are basically similar to what Terry

Fitzpatrick was saying about Chapter 14 is working, these are quotes directly from the PUC study showing that PGW has improved largely because our collection rate has improved. Before

Chapter 14 was passed we were collecting $0.86 on ever dollar. That means we were at 86% collections. Every percentage point represents millions and millions of dollars that were not being collected. And so last year, even in this recession and even with our challenges and demographics, PGW collected 98% of the collection rate, just over 98%. It's dramatic turn around, we've made tremendous efficiencies in our call centers in how fast we answer calls and getting to the problem. We have a large backload of complaints that had not been gotten to, that has all been straightened out and we are doing very well.

The next two slides refer to our demand-side-management program. You've heard a lot about demand-side-management in the electric side of the industry, and we are going to be trying to tackle this one the gas side as well. What this is talking about is getting our customers more energy efficient, getting the housing stock in Philadelphia weatherized. Imagine that CAP customer I talked about a minute ago who is paying $75 a month, the reason that bill could be

$400 a month is because there could be a hole in the roof in which the heat is just going out into the atmosphere. They are turning up the heat to keep their house warm, but they are only paying, again, a percentage of their income. The only solution to that is to fix the house. We have a lot of, obviously, old housing stock in Philadelphia, this is a tremendous challenge, but we are focusing immediately on those CAP customers with the highest use and trying to get into these homes and get them so that they are locked up nice and tight. There are several other programs which you can see on slide nine, another retrofit program for non low-income customers in which they would pay, they would contribute some to the fixing up of the house, getting new gas appliances and commercial retrofit so businesses, also getting them retrofitted with new equipment to try to bring down the demand side.

The very last slide is our pipeline replacement program. I know this is on a lot of people's minds, it's no secret that there has been a couple of incidents lately in the news, one of those was in Philadelphia. This is a very brief summary where I could provide a mountain of data to show you just how seriously PGW, and I'm sure all of our other companies, take this issue. We spend, we have 800 employees alone focused on our system that are spending every hour of every day monitoring our system. We exceed all of the federal and PUC standards of how often we should be checking for things. The federal government requires us to check every pipe for leaks once every 3-years, we do every inch of our system every year. We are constantly monitoring, we are doing 18 miles of pipe replacement a year. Now, the challenge is we have almost 1600 miles of cast iron. In fact, PGW has half of all the cast iron in the State underneath our streets. And, the challenge is it's a completely urban environment. So, there is no nice country road which wouldn't be quite the hassle to disturb the streets. And, an urban environment provides a lot of danger in the sense that everything is under concrete and asphalt, if a main would break the gas is going to go towards the house and the house is very close to the street. That is the reason we are taking this so seriously. We think that our program is a prudent program, we think we are addressing what needs to be addressed. It is true that we are talking 88-years until we get all of that cast iron out of the ground at the rate we're going at the moment.

So it's significant what would help is just what Terry was talking about, which would be a mechanism where we could save our customers money on the way to replace this pipe. If we had a mechanism where we could collect the money as we go, that means every dollar that we collect from the customer goes right into this program. If we continue to have to borrow that means we borrow a dollar they have to pay $1.50 plus interest for the same work. That is why this ratemaking mechanism that Terry was talking about is so important.

Thank you.

CHAIRMAN GODSHALL: Thank you very much. At this point I would like to welcome to the forum this morning Representative Evans, Representative Kampf, Representative

Stephens, Representative Harhart, and Representative Neuman who have joined us also.

I would just like to say as far as Philadelphia Gas Works, I do remember a meeting we had about 4 or 5-years ago, you weren't quite as optimistic in Philadelphia at that time. In fact, I wasn't sure you were going to be able to buy tires for your vehicles.

MR. TRUFAHNESTOCK: That is correct.

CHAIRMAN GODSHALL: That is not stretching it. It was the way things were at that time, but I did read the Philadelphia Inquirer article pertaining to your situation, and it was really remarkable with not only Chapter 14 but with management. I believe your manager at this point is retiring, which has done a tremendous job of bringing Philadelphia Gas Works around going from 86% collection to 98% in the year 2010 is quite remarkable. Also, as they mentioned in there, that improved customer relations, reducing the amount of time it takes to connect with a customer service representative from 2-minutes to 30-seconds. That is remarkable, also, in itself.

I think I sometimes sit on the phone going through for 5-minutes trying to figure out which button to push and then I go to another series of buttons. Thirty-seconds is, again, a remarkable period of time and I really congratulate you on what you have done down there in Philadelphia.

It's been great.

I know there are some questions, Chairman Preston, would you like to start?

CHAIRMAN PRESTON: I'd like to echo the sentiments of the Chairman. Mr.

Fitzpatrick, you've mentioned some things that are historical to me seeing both sides of the gas and electric, trying to come together without a territorial fight and also through the representative from RESA and Direct Energy, during your presentation, that's probably the best simplistic explanation of the distribution system that I have ever heard. I guess when dealing with

Philadelphia Gas, we've had some very competitive and serious conversations and I guess through the industry out here, I don't think anybody on this Committee has gone through more heat about Chapter 14 than yours truly. As we get to talk about that, and we need to, but here's what I'm saying. In Philadelphia Gas Works, yes, as the Chairman said, you've come phenomenal. Your debt ratio has gone down, your collectibles are doing very well, you don't have everything you need to be able to deal with replacing all of the old iron pipe. I will also say this to you from our next phase if we're going to go into Chapter 14. I think that I've been very sympathetic in a lot of different ways, and I want to also say that if we're going to go through this next level, and unfortunately the representative who is on the Committee representing the City of

Philadelphia is not here today, but I will be talking to him just as well. You're not going to be able to talk to me unless you're going to sit down and be willing to address some of the tough choices that you're going to have to make. That is some of the other giveaways that you deal with. That is not going to help your bottom line. I'm willing to take the heat about addressing it, and I know some members from Philadelphia may not like that as far as members of the House, but the time is going to come today for you to be able to turn around and be able to get the debt ratio down with the goal that you need for 64%. If you want to be able to deliver a good enough service you can't continue to do that. Most of us would realize that when you explain the dollar versus the dollar-and-a-half, there are probably some unauthorized people you could have got it for a cheaper rate than doing it legally. At the same time, I'm encouraging you that we're going to have to bite very tough bullets if we're going to really address this. I want to really be able to say that to you. I'm just hoping we'll be able to work together and look at the CSIC and the DSIC programs so we can try to do that. We need to really sit down and talk very serious with me, I know some people may say I’m a liberal one way or another, but it's about a responsible product and delivery.

Also, in dealing with the LIHEAP, I plan on talking with some other people who aren't participating in some of those programs to see what we can try to be able to do to be able to help more people in the rural areas just as well.

Thank you, Mr. Chairman.

CHAIRMAN GODSHALL: Thank you.

At this time, first question we have is from Representative Payne.

REPRESENTATIVE PAYNE: Thank you, Mr. Chairman.

First, let me just thank Bob and Joe. Without Chairman Godshall and Chairman Preston's guidance, a lot of us new members, and I mean new not in age, but new members of this

Committee are starting from square one and saying, what are you talking about, cast iron piping?

Your presentation was outstanding.

I'd like to ask for two things, and Terry I'm going to pick on you because I know you very well, your name and the trust that we have is outstanding. I think it would be beneficial to just kind of have a graying of the gas industry like graying of America, you know, everybody here is about how things are deteriorating, but where in the Commonwealth? What percent of our oldest pipe, how old is the oldest pipe, is it all in Philly, is it all in Pittsburgh? There are a lot of old communities in Pennsylvania, I think that would be beneficial to help all the members of the

House, at least, appreciate that this is not a Philadelphia problem. I think sometimes that perception is out there. That this problem is just a Philadelphia problem. That is number one.

Number two, obviously we are hearing about the DSIC and how it worked in another industry, and can we help that work in this industry in particular 88-years or 66-years may be unacceptable based on failure rates.

The third one would be, what pipe, again, I'm going from my experience in the fire department and the water, what pipe are we putting in now? If cast iron is not good or untreated metal is not good, what are we doing to improve the industry? I think, at least for me, that would be beneficial to understand what our plan is.

Last, but not least, I see natural gas vehicles. What plan do all the industries have on their own to convert over to natural? I mean, here we are saying about Marcellus and we've got all this abundance of gas, gas is at an all-time low price, I'd be willing to bet you most of the fleet of vehicles across Pennsylvania are still driving on gasoline. I'm just like, I'm looking for you, the industry, to take that lead. Yes, we as a State have to help. We have to do some incentives to get natural gas refueling stations out there. But the first step, I think, is the gas companies then the municipalities.

Can you answer a couple of those?

PRESIDENT FITZPATRICK: Well, Representative Payne, let me echo what you said.

It's been a pleasure to know you and work with you and to live in the same area as you do. I think you really put your finger on, probably the major issues that we face. I'd be happy to have a discussion with you about the state of the infrastructure that we have and what we can do to improve that. I'm not going to be an alarmist when it comes to that, because I thought it was important when I looked at the numbers and saw the north east is really very similar to

Pennsylvania in terms of the make-up of our infrastructure. That is not to indicate that this isn't something that we should talk about and look at the policies regarding it, but I think it's the right starting point. I think we should talk about that. I can certainly understand why you would ask about it.

On the natural gas vehicles, I think you're really hitting on some of the issues there. I think when Bill Lucas gives his presentation about natural gas vehicles and what the

Commonwealth could do in terms of policies to move them forward, I think that will probably stimulate some thoughts and some questions on your part. REPRESENTATIVE PAYNE: Okay, thank you.

Again, if you have, collectively, a chart, I think it would help the members that aren't in

Philly to appreciate that the aging pipelines are, what is the oldest? One hundred? One hundred twenty five, eighty? And is it in Philly? Do we have some in Hershey and Hummelstown that are at least 50-years old? I think that would help all the members appreciate that this problem is not a

Philadelphia problem but a Pennsylvania problem.

Thank you.

PRESIDENT FITZPATRICK: I think we have data with regard to the companies themselves and what the percentages for each company, I don't know if we have anything that shows exactly where it is located, but it would give you some idea by company, anyway.

REPRESENTATIVE PAYNE: It would probably be better just to have by company, I don't need to know what street it is on, either. Thanks.

PRESIDENT FITZPATRICK: Right.

CHAIRMAN PRESTON: Representative Pickett.

REPRESENTATIVE PICKETT: Thank you, Mr. Chairman.

Recently we've heard about some disasters with gas blowing up in some neighborhoods in different cities. I don't know if any of it was in any of your territory, but what goes wrong? Is that old infrastructure? What is that?

PRESIDENT FITZPATRICK: That's a great question. I'll take a shot at it first and I think

Pete will answer it.

Yes, it did happen with our members with regard to both of those incidents,

Representative Pickett. Both of those are under investigation as to exactly what the cause was, those aren't completed yet, and I think we need to wait until the end of them to determine the cause. I would say that generally, statistics nationwide show the biggest cause of gas incidents or explosions is excavation damage, where somebody, such as a contractor would hit a gas utility line causing it to rupture. That is the largest cause statistically of what they are. Really, there are a variety of things that can enter into that and cause those types of incidents.

REPRESENTATIVE PICKETT: If I might, Mr. Chairman, that leads me to one more little question, there. One call. Is it adequate? Does it supply the correct information most of the time?

PRESIDENT FITZPATRICK: I think it does. I wouldn't say it's perfect, I'd be happy to look at that, Representative, and get back to you with improvements that we thought could be made. One thing that does come to mind, we do have some concern that the penalties for violations of the one call statute may not be sufficient to deter that conduct. I think that is something, that is administered now by the Department of Labor and Industry, we do have concern with that. That is maybe the biggest thing that comes to mind about what could be improved there.

CHAIRMAN GODSHALL: Representative Ellis.

REPRESENTATIVE ELLIS: Thank you very much, Mr. Chairman. Thank you to the panel for coming today.

Just to kind of follow-up on what Representative John Payne was saying, and Terry you said that you believe natural gas is the fuel of the future, I'd like it to be the fuel of now. I think we are already there, and one of the important things all three of you touched on was infrastructure improvements. Explain just a little bit, if you can, how that would look if we allowed you to recoup some of the costs. What would it look for the average consumer when they see their bill? How much are you talking about being able to recoup through that kind of program?

PRESIDENT FITZPATRICK: It is modeled on a mechanism that was put in place for the water industry back in the 1990's based upon the fact that they had to replace a lot of their mains.

It is called, the main thing is called the distribution system improvement charge. Now, as I said, the legislation that we are behind now is somewhat broader than that because there is more than one way to skin the cat. But, the DSIC, as it's called itself, is administered by the PUC. It simply allows the company to collect those costs as they are spent. Under traditional ratemaking if you embark upon a large capital project over many years, you have to constantly come in for rate increases in order to recover that money. There is something called regulatory lag because the rates are set based upon looking at your historic numbers, and then it takes 9-months to get through the rate case. By the time the new rates get into effect there are dollars that you don't collect, so you are constantly chasing after dollars as a result of that.

The truth of the matter is, if you embark on one of those projects you are probably hurting yourself financially in the short term, at least, by doing that. A DSIC simply allows you to collect that money as it is spent and flow that through. However, it is subject to PUC oversight to make sure all of that money is spent on the infrastructure to make sure that you do not earn an excessive profit, to make sure that it is all prudently spent, that you're not gold-plating your system. That is all subject to oversight by the PUC. It has been regarded as a national model with regard to the water industry in helping them with their infrastructure, and with all this talk about the infrastructure here and about modernizing and doing more to modernize, that is the chief thing that we think can be done in order to help that.

REPRESENTATIVE ELLIS: Okay, I guess what my point is, though, a typical consumer gets their utility bill including natural gas that has this charge, this charge, this charge. What would be looking at realistically? Because part of that, as you have mentioned, paying customers are paying for the non-paying customers, and so there are other things embedded within the bill.

Would we be looking at a 2%, a 5% increase, upwards of 10%? How would that break-down to the average consumer?

PRESIDENT FITZPATRICK: It totally will depend on the utility, first of all. When we did this analysis 2-years ago, last session, for some companies it was under $1.00, some companies it was a couple of dollars that we're talking about.

But, the key point is that it is not as if the money isn't going to be recovered. It's just a different way of doing it. Isn't it better to pay $1.50, so to speak, as opposed to waiting and then getting a rate jump? See what I'm saying?

REPRESENTATIVE ELLIS: Absolutely, I just wanted to see how it translated.

Thank you very much.

CHAIRMAN PRESTON: Mr. Ellis, relative to this, one of the safety catches with this, though, is when they finally do file rates later on, if there is a guesstimentation by the PUC one way or another that there is a disagreement on what it was, that will be fixed. See what I'm talking about? So there is a catch-all to be able to protect the consumer.

CHAIRMAN GODSHALL: Representative Harhart.

REPRESENTATIVE HARHART: Thank you, Mr. Chairman. Thank you for being here and giving your presentation.

I'd like to do a little follow-up on Representative Payne as well. I live in the Lehigh

Valley, and we had a very serious explosion in Lehigh Valley which wiped out a whole block of homes. So, as you are gathering your information as far as infrastructure goes, how bad the infrastructure, the gas lines are, if you could include the Lehigh Valley and if I could have that information I'd like to have it as well.

Also, to follow-up on Representative Pickett's question on how the explosions happen, with the Lehigh Valley, I guess they were out there to inspect it 2-weeks prior to the explosion, what do you think? From 2-weeks being checked and everything, the pipelines were okay, what do you think happened within those 2-weeks to make that explosion happen? I know it could be an act of God, it could be anything, but there had to be something that triggered that.

PRESIDENT FITZPATRICK: Representative, I'm not qualified, probably, in terms of my background to do it anyway, but with an investigation underway I think that is a mystery. It is the big question that is being investigated there. I understand why you want to know that and that is perfectly legitimate, I would just be speculating, though, if I said anything about that and I don't want to do that, Representative.

REPRESENTATIVE HARHART: That's okay, I know I asked that question before, and I do know that there is a Web site that UGI does have up there, and I guess we can follow the progress, but I thought maybe you could give me an answer as to what occurs and how in 2- weeks how a terrible accident could happen like that.

PRESIDENT FITZPATRICK: Cast iron is very strong and is meant to last for a very, very, very long time. But, it is considered a little brittle and so that is why, especially if, and again, most instances are 3rd party instances. A bulldozer coming down and hitting it. The smaller the pipe and the thinner the pipe wall the more chance there is to break. Everyone, I would assume, certainly with PGW our program is focused on the smallest pipe first. We've replaced all of our 2 and 3 inch pipe, for instance, already. We've been doing cast iron replacement for 50-years, already. Focusing on 4-6 inch pipe now. The incident, and again, I can't comment on the specifics because we're under investigation as well, but there are anomalies. It is truly bizarre that two happened in such short order. But, those 12 inch mains, it is very, very strange. I'm sure we'll find out an answer, we hope to find an answer, but those are 3/4 inch thick and usually do not break and could last another 100-years, theoretically.

REPRESENTATIVE HARHART: That is interesting.

Well, I'm going to watch the Web site and see what comes about and how it unfolds, but if you could include the Lehigh Valley in the infrastructure and how old it is, I'd like to see that as well.

Thank you very much.

CHAIRMAN GODSHALL: Thank you.

We have two more questioners. Representative Barbin.

REPRESENTATIVE BARBIN: This is a question for you, Mr. Fitzpatrick. You indicated that there are two areas of investment. One is the DSIC type area where you are replacing the pipe that has been in the ground for a long time. But the other area, which is what a lot of people on the panel have started to ask the questions on, which is, how do you make the natural gas industry here now? The Governor said in his speech on Tuesday that he would like to make this the home for the natural gas industry, and so would I. I'm looking at this price that is lower than the cost of oil. What is stopping us today? What is the cost of the infrastructure that we would need to make the municipal, the pumping facility available or to change the bus facility like they have up at State College into a place where a private citizen could go up, pull his car up, and fill up and use his credit card to do that? How much would that take? Would that take $100 million, would that take $300 million? Because on Tuesday the Governor identified

$300 million of tax credits that he wanted to provide to businesses. Can we do that for $300 million? Can we create the infrastructure? PRESIDENT FITZPATRICK: The frank answer, for me Representative, is I don't know.

I don't know how much it costs. I haven't looked into it that much. We're generally, as gas utilities, interested in trying to promote those sort of things. We're glad they're being looked at, but as you said, there is a lot of infrastructure that may be needed. Maybe in some cases you need new lines to get it to these places and that is very expensive, not to mention controversial in some cases opposition in order to do that. Refueling stations for natural gas that turn compressed natural gas used as a transportation fuel, you need the refueling stations, you need the vehicles that are capable of burning it, it's complicated and expensive. Again, I think Bill Lucas is going to talk about this and has some ideas about the fact. For example, he thinks that if gas utilities undertake to build a refueling station that consideration ought to be given to allowing them to put that in their rate base that is paid for by the customers. That is one way, perhaps, to promote it.

I don't have number, frankly, Representative. If you wanted me to look, I'm not sure we could come up with them.

REPRESENTATIVE BARBIN: Okay, what I would ask you to do, then, is in the 1980's when I first came to Harrisburg, the State fleet had cars that ran on natural gas. Can you provide us with whatever information was available in the 1980's when, this was the last time we took a look at trying to convert our cars to natural gas. We did run cars. You could get a fleet car that ran on natural gas. I'd ask that whatever information is out there be made available to the

Committee.

PRESIDENT FITZPATRICK: I'll do that, Representative.

REPRESENTATIVE BARBIN: Thank you.

CHAIRMAN GODSHALL: We've been spending not only hundreds of thousands of dollars and millions of dollars in the promotion of alternative energies, and we do have a very reliable clean burning energy right here at home, and maybe if we transfer some of that effort into what we have here in place and that we know the benefits of, we may be a little bit better off and ahead of the game. That's just my own thoughts, and I won't get a lot of raves on that one,

I'm sure.

Representative Matzie.

REPRESENTATIVE MATZIE: Thank you, Mr. Chairman.

I think more a comment than anything else, relative to the DSIC. Recently retired Senator

Barry Stout used to say, everybody wants to die but nobody wants to go to Heaven. He was referring to raising revenue, whether it was for roads or something else. A DSIC is not a tax. I think that, unfortunately, last session it got bogged down politically under the Capitol. I think we need to work very hard with the industry, we need to educate members on both sides of the aisle, we need to educate the public and explain to them, as you very eloquently did, Mr.

Trufahnestock, about the fact that hey, pay a dollar today or two dollars later. It goes with bonding or with borrowing powers. I think it's incumbent upon us as members of this Committee to have that dialogue. Often times as policy makers, whether at the State level or local level, we're reactionary. When you have two explosions like you recently had, it got a lot of attention, and then slowed down. About 5-years ago there were two explosions in the vacinity of my district, one in my district and one outside of my district near the Pittsburgh International

Airport. There was a big hullabaloo. Everybody was excited then it died down. We, as policy makers, have to go after this and work very hard with the industry so it's not 88-years to get this done. It's important for the consumers, it's important for public safety, and I think that is one of the core functions of government that we are charged to do as members of the General

Assembly. Thank you, Mr. Chairman.

PRESIDENT FITZPATRICK: If I could comment just very briefly.

Thank you, Representative. We are very happy to work with you and I would point out, we're talking about a lot of ways in which Pennsylvania is an energy leader with the Marcellus now, with some of the other things, but 18 other States have some form of infrastructure recovery, a special rate recovery mechanism. Pennsylvania does not. This is one area where I think we are behind, and if we, and we really need to catch up with some other States on this one. Thank you.

CHAIRMAN GODSHALL: Thank you.

Finally, Representative Stephens.

REPRESENTATIVE STEPHENS: Thank you, Mr. Chairman.

Question for PGW. A few months ago there were reports in the media about where you were purchasing your natural gas and its origin. Could you just comment on that?

MR. TRUFAHNESTOCK: Yes. A member of City Council was very concerned as were a lot of folks, and for good reason, about the environmental impacts of the drilling that is going on in the State. There was a movement to forbid PGW from getting its gas from the Marcellus

Shale. There were two reasons why that is not really possible. One is that if Marcellus Shale molecules end up in the interstate pipeline we have no control over that. We have no filter we could put in to prevent that from coming in. Second, we are bound by law to buy the cheapest gas, wherever that gas would be. So, at this point, we did agree to take a look at, to have a study, engage in the conversation about making sure we have good environmental policy and we certainly were supportive of the efforts to make sure that our environment is being protected.

Otherwise, we buy the gas that is the cheapest gas. CHAIRMAN GODSHALL: There was no mention of a grant coming to PGW if you pay more than the going market price. If Philadelphia is going to pick up the difference in costs?

MR. TRUFAHNESTOCK: No, sir.

CHAIRMAN GOSDHALL: There was no such thing? It was only a one way street.

MR. TRUFAHNESTOCK: No comments there.

CHAIRMAN GODSHALL: I want to thank the panel. It has been very informative, thank you very much gentlemen and ladies.

At this time we have David Callahan, Vice President of Marcellus Shale Coalition; Barb

Sexton, Manager of State Government Relations at Chesapeake Energy Corporation; and Rolf

Hanson, Executive Director API-PA.

Good morning. We are ready when you are.

VICE PRESIDENT CALLAHAN: Good morning. Thank you Mr. Chairman Godshall,

Chairman Preston, thank you for the opportunity to be here today. Thank you to Mr.

Trufahnestock, the multi-talented Mr. Trufahnestock.

I'm David Callahan, I'm with the Marcellus Shale Coalition. Joining me today is Barb

Sexton, as well. We're going to try to provide you with a brief but substantive background on the

Marcellus.

First of all, about the Coalition. The Coalition was founded in 2008. We are dedicated to the responsible development of natural gas from the Marcellus. Our membership right now is around 170 companies, it is made up of not only drillers but other companies that support the drilling industry here in Pennsylvania. I will say, you know, many of these folks are here in

Pennsylvania, have offices here in Pennsylvania, have strong roots in this Commonwealth.

We have a number of guiding principles at the MSC. I'm not going to read through all of these, but everything from safety in terms of public workplace safety, environmental protection, supporting local workforce, public dialogue and fact-based education about responsible shale gas development, and more.

When we look at the development of the Marcellus from an exploration and production perspective, we see three key phases. The upstream phase, bringing natural gas to the surface otherwise known as the drilling process; midstream, that is storing and transporting natural gas, getting it to the interstate pipelines; and then downstream, what you just heard about from Mr.

Fitzpatrick and others about selling and distributing natural gas to end users. Our Coalition is made up of folks from any number of those three areas.

In terms of, I'll get to this in a little bit, but I'll cover a little bit of this now. We're getting two different, you could say broadly speaking, two different types of gas from the Marcellus. In the northern area of the State the gas is relatively dry, in the western side of the State we are getting wet gas. That is natural gas with other rich hydrocarbons, liquids that can be used in other industrial applications, very valuable liquids.

We talked a little bit about this in the previous panel, we have traditional uses for natural gas right now, whether it is home heating and fueling, electricity generation, but now we are looking at the future and as Representative Ellis said, let's hope the future is now. We're thinking, natural gas is obviously a key raw material for other products, and as we have heard in the prior session and we'll hear in the later panel, natural gas vehicles.

Now to give you a sense, generally, of where the Marcellus Shale play is. It covers a number of different States, but Pennsylvania is clearly, clearly in the fairway of this. Ranging from the south west to the north eastern part of the State. If you look at this next slide, you'll see that Marcellus is one of a number of shale plays in the United States. Capital, as we all know and some of you may hear this a few times from us, capital moves. Capital to drill the wells, capital to get the natural gas to market, moves. Pennsylvania and the Marcellus is in competition with any one of these other shale plays, whether it's the Barnett, Eagle Ford, the Antrim up in

Michigan, the capital flows to where it is needed and to where it makes sense based on the business environment, regulatory policies, and others.

If we take a look at the next slide, you'll see that we've compiled, and this is through the end of calendar year 2010, we do need to update this. This gives you a depiction in terms of a

Countywide basis the numbers of Marcellus wells drilled in various Counties in the

Commonwealth. As you can see, there is significant activity up north in Tioga, Bradford, and

Susquehanna Counties, and additional pretty intense activity in Washington, Greene, Fayette, and Westmoreland.

Now I'll hand it over to Barb to go through some of the processes.

MANAGER SEXTON: Good morning. I'm going to cover the steps in the process. There are basically 5-steps in the production process. The first being site selection and site preparation, where we prepare the site for the drilling rig; the drilling phase; the third phase is completion; and then we move to production and finally the final phase of site reclamation.

We drill the vertical, or more commonly, horizontal rigs. The horizontal drilling allows for more efficient and a smaller footprint on the surface. The first step of drilling is securing the well's integrity with a string of conductor casing, followed by a string of surface casing to protect underground sources of drinking water. The remainder of the well is drilled, then, vertically, and then horizontally and the horizontal leg is typically about 5,000 feet. Each hole drilled is approximately 20 inches in diameter at its widest point, and becoming smaller as you progress down the hole. The development means more environmental stewardship through horizontal drilling.

Horizontal drilling has resulted in a reduced footprint on the surface. Historical or conventional vertical drilling techniques would have required as many as 40 individual vertical wells to be drilled on this pad. Using horizontal multiple drilling techniques we can consolidate all of these wells on one pad resulting in less surface disturbance.

With well casing there are five or more layers of protection that are installed in the well to isolate the well from the surrounding strata and to protect the groundwater. The metal casing shores up the drilled area, or the wellbore, both vertically and horizontally, assuring long-term integrity of the well from end-to-end. Then, the cement seals the steel casing throughout the entire well, preventing the release of hydrocarbons.

After the drilling will leagues, hydrofracturing begins. Fracking is basically a process to stimulate the natural gas from the shale. Water and sand are pumped into the shale at high pressure, fracturing the shale and allowing the gas to be released. For more than 60-years more than one million wells have been hydraulically fracked in 27 States. Over 300,000 oil and gas wells have been hydraulically fracked in Pennsylvania prior to Marcellus development. Ninety- percent of oil and gas wells use hydrofracking technology.

I'd like to cover what is in the hydrofracking fluid, it's a topic of a lot of conversation.

Ninety-nine-point-five percent of the hydrofracking fluid is actually water and sand. What is in the other .5%? It's basically friction reducers, anti-bacterial agents to prevent bacteria from growing in the well, as well as scale inhibitors.

Another common misnomer is that it takes a lot of water to frack a well. In the distance to the groundwater aquifer, the blue zone depicted on this chart shows the distance to the aquifer looking from the surface we see the deepest aquifer at about 1,000 feet. The bottom line shows where the depth to the Marcellus strata, we can see that starts at about 6,000 feet, showing that there is an isolation distance between the aquifer and the area where the shale is hydraulically fracked.

It takes about 5 million gallons per well to frack a well, and Marcellus Shale is actually a type of energy production that is not very reliant on water resources. Looking at this chart, deep shale natural gasses take about 3 gallons per million BTU to generate the gas, compared with, at the bottom of the chart, biodiesel from soy over 44,000 gallons per BTU.

The final step in the production process is site restoration. So, after all the wells on location are put into production and the pad site is reduced in size to about half. After the rig leaves we're reclaiming the site after all of the wells have put into production, we're moving from about a 3 acre site to about an acre-and-a-half. Our property owners generally see, at the reclamation phase, a small wellhead left on the site, a small amount of equipment to dry the gas, and some metering systems.

VICE PRESIDENT CALLAHAN: In terms of the terms of impact of the responsible development of the Marcellus, the Coalition commenced some studies with some economists from Penn State. We've released the results in 2009, we updated the results last year, and we're in the process of looking at those results again and updating them again this year. I just tried to put together some general ideas here in terms of the impact of the Marcellus on the Commonwealth.

In terms of economic value added, $8.4 billion in 2010, projecting that out to 10 more years from now, we're looking at an impact of just below $20 billion. State and local taxes; an impact of about $800 million, not just from the Marcellus industry itself, but from all the spinoff effects as well. Taking that out another 10-years, just under $2 billion. Now where it really makes sense to your constituents, employment. Cumulative employment gains we're looking at just under 90,000 jobs in 2010 that have been added to the economy, and projecting that out to

2020 about 211,000 jobs. In terms of output, one of the easiest ways to consider this is not looking at how many cubic feet per day, but thinking of it in terms of size. The Marcellus has the potential to be the second largest gas field in the entire world.

I know that Mr. Fitzpatrick covered some ideas from the Energy Information

Administration on the impact on supply, impact on prices, I just threw in this particular slide that came out from the U.S. Department of Energy's Energy Information Administration showing that impact of not only the Marcellus, but other shale gas plays on the supply of natural gas in the country. As we can see, we're seeing tremendous amount of domestic natural gas production growth estimated by the EIA, and I will point out, this was a draft study that came out in

November, this month they are going to have their final results, and in that final study we'll be able to see some price projections as well.

EXECUTIVE DIRECTOR HANSON: Good morning Chairman Godshall, Chairman

Preston. My name is Rolf Hanson, I'm the Executive Director of the American Petroleum

Institute, it's Pennsylvania office based here in Harrisburg. I wanted to thank you for having this hearing this morning, because so many times we find ourselves sitting before you or other

Committees with comments that are really specifically geared toward a specific piece of legislation or policy, and so what I wanted to do to today in this forum is to take an opportunity to explain what API and the industry in general is doing on the non-advocacy side dealing with

Marcellus Shale. That is something that you all have really not been exposed to, really, particularly looking at standards and certifications that are developed by the industry.

First, just let me explain, when I say the American Petroleum Institute, don't let the word petroleum throw you off base. Our members are heavily engaged in development of Marcellus Shale here in Pennsylvania, and are engaged in natural gas and oil development around the world. Just keep that in mind, don't let the word throw you off base, here.

I'm just going to do a quick one to two minute thing on API in itself, which really goes into the standards. API was formed in 1919 right after World War I, when during the first World

War, the War Department and the oil industry at that time had no coordination, really didn't know what the supplies were in this country and how much fuel they could deliver overseas to fuel the war effort and still have enough left back home. It was shortly after World War I that

API was formed. It was really formed by the companies that were evolved after the breakup of the standard oil.

In 1969, let me back up. API was formed, really, to do three things: To work taxes, develop industry statistics, and to set standards on equipment and operations. In 1969 API moved from New York City to Washington D.C., where they finally figured out that if you're not sitting at the table you're usually on the menu, so they moved the offices in '69 and started to focus more on public policy issues.

API has a staff of about 200 people across the country, we have 450 members and really under the Standards Department we have 700 committees through API that are focused on industry standards and operations. Again, this looks at every aspect of the oil and natural gas industry from exploration, production, all the way down to retail marketing.

About API's standards process, when you explain to someone that API is setting industry standards, the first question you get back, well, what does that mean? Industries setting standards for the industry? API is accredited by the National Standards Institute. In getting that accreditation, we currently, we have our programs audited every 6-months by ANSI to make sure that it reaches a consensus, balances, and is truly a due process in developing these standards. It's a very transparent process, anyone can comment on the API standards, all comments must be considered and have responses to. They are developed by consensus. I know you all know what that means, it doesn't mean unanimity, but a consensus amongst there. The committee makeup of the standards are manufacturers and service-supply companies and general interest groups.

Under the category of general interest groups, it includes government agencies. We have people,

State regulators and federal regulators that sit on our standards setting boards, as well as members from academia, engineering consultants, et cetera. All of our standards, as of 2-years ago, are now available to be viewed on the Web. We have over 500 standards within the industry that the general public is able to review. It is read-only, they are not downloadable. That really came about, and just to get back with the government agencies, as well, we have approached

DEP on this to get involved with our standard setting process, of the 500 standards, we're starting to write many more regarding hydraulic fracturing, we've developed three standards over the last year-and-a-half dealing with hydraulic fracturing, and have encouraged input from State regulators and EPA on that process.

The standards, they are cited in the U.S. Federal Code and they are adopted by reference by OSHA, EPA, DOT, BOEM, which was the former MMS. Then the standards are also, they are adopted kind of de facto internationally because API sets these standards. They are formed to be used worldwide, really, so there is a standardization of best practices and operations for oil and gas activities whether you are operating in Pennsylvania or in Malaysia.

Just at the bottom, the number of standards that we are constantly updating. In 2009, as technology and practices changed, they go back and revise and update the standards, 70 in 2009 and they actually published 62 in 2010.

We encourage people to get involved with the standard setting process. It is open, anyone can comment, and we really try to make that point known. It's well-known within the industry itself, but we are trying to broaden that to regulators so that a lot of these issues can be addressed through API standard setting process instead of dealing with them as they evolve in the States.

The next segment I go to is what at API is called Global Industry Service, but it really is our certification process. We have the side of API which develops the standard, and then the certifications is really the side that goes out into the public and implements the standards that are being developed. API's global industry services, that is just kind of the overall view of what they do from certification, training, publications, and statistics.

The certifications, I mentioned those 700 committees, it is done by 44 employees. We have 130 auditors around the world that are certified on the API standards and trained on the standards. We have offices, again, because these are worldwide operations, and the industry is growing primarily in Southeast Asia, we've opened offices in Singapore and Beijing. Here is the real critical issue here. These operations standards, certifications, are not funded by API dues paying members. These are funded by people that subscribe to the services to get certified in API standards and certifications.

I'm just going to quickly go through this. Under the certification programs, these are the programs that are offered and the one I really wanted to focus on here as it relates to Marcellus

Shale is API's monogram program. The monogram program is for manufacturers of products for the oil and gas industry. As you have manufacturers that want to be suppliers to vendors within the Marcellus, as the vendors reach out to them the first question they ask is, are you API certified? What does that mean? It means that there is a certain quality of the product that they are manufacturing that it meets industry standards. If, real simply, if a company wants to make widgets to be used in Marcellus Shale development, those widgets have to meet specific product quality standards for the oil and gas industry. What API certification does is they will, and they currently have been working with regional economic development planning corps to come in and hold meetings with manufacturers around the State to explain what the certification program is, how they get entered into it, how they would be audited, and then they can come back and audit the operations on a yearly basis to make sure that the quality control is in place. So, they are meeting as the product is coming off the assembly line that they are meeting the expectations of what the industry is looking for.

Again, currently there are 3700 licensed manufacturers across the country with the API monogram that make anything from pipeline products or steel pipe to pumps to valves to you name it.

Then, the other part of the certifications aspect does is they'll go out and do audits. Again, the 130 auditors that we have are all certified under various ISO 9001, or environmental ISO's or

OSHA's and what we do is companies, and you do not have to be an API member company, you can be any oil or gas or vending company that will ask API's certifications to come in and audit their operations to make sure that they are meeting health and safety standards for the industry under OSHA or environmental quality, or what have you. So, the auditors will go in, these auditors are trained on the most current State and federal regulations, they'll pay the auditors to come in and have them write a report as to where they could improve operations. Whether it's from a workplace safety, environmental, or general ISO 9001.

Real briefly, that's the training program that's in place to train the actual inspectors and the auditors that go out and do that.

Last year, API did just under 2900 audits, so it boils down to about 40 audits a day that

API does around the world for oil and gas operations, and for manufacturers of products for the industry.

Again, the other thing we do is certify industry personnel. Again, you'll see specific API standards that have been developed in the industry, we'll go out and train people within companies, whether you're an API member or not, train their own employees to make sure that they're up-to-date on the latest API standards and how they pertain to State and federal regulations.

Lastly, is the API University, which was launched in December 2009 where members employees from the industry can go and get trained now only on the specific standards or certifications, but also going beyond that for leadership skills or management skills within the industry. We have 140 e-learning classes for employees as well as 30 instructor-led courses, which are held throughout the country. What we have done here in Pennsylvania, we have approached the Pennsylvania DEP on the standards and up until this past year they have not had access to those industry standards, and we've put together a password protected Web site for the

DEP to have access to have all 500 standards as well as given them the opportunity to choose standards that they would like to have more in-depth information on to bring in the instructors on those specific standards, to train the DEP field staff on those specific standards. That is something that we will continue to do, those are the latest standards developed by the industry, and it's not an apples to apples comparison with these standards, we don't want these, the move is not to have these standards become law in any State, they are to be used as guidance documents for regulators, because some of the standards that are developed are not apples to apples to comparison as you go from one geographic location or one practice across the country, but it gives them the concepts and ideas to use to apply to what may fit in their State. Again, I just wanted to bring this to your attention because a lot of the time we're here on the advocacy side, and not explaining to people what we are doing on the non-advocacy side under standardization with this industry.

With that, I'll end my presentation.

CHAIRMAN GODSHALL: Thank you very much.

I did want to mention that I had Lou D'Amico, President and Executive Director of the

Pennsylvania Independent Oil & Gas Association at the last minute something came up and he couldn't be here today, he did send in testimony that I want to make part of the record and is basically a lot of history of where we were and where we come to as far as oil and gas development in Pennsylvania. I want to make that part of the record and thank Mr. D'Amico for that.

As far as questions, at this point we have Representative Pickett.

REPRESENTATIVE PICKETT: Thank you, Mr. Chairman.

Mr. Hanson, very interesting your involvement in the industry. That was a good piece of education for us today. Bradford County led the State last year in new jobs, and you can imagine in that area when you show the amount of activity up there on the map, a lot of people are interested in getting involved in the industry with jobs. Many schools up there are offering courses, even public dollars are offering some courses to get involved in the industry. The industry has shown us how they give, if they hire someone, then they run them through, I think, an online course that prepares them to get out onto a rig or whatever they are going to be training for. Are all of those things API? Does the industry look at it, if it's not API we probably are really not interested in hiring you in the end? If it's a school or one of the public dollar programs?

EXECUTIVE DIRECTOR HANSON: Chairman Godshall, Representative Pickett, it would depend on what the skill set of the job is. I mean, API standards are more specific to specific industry requirements, for example, for welding a pipeline. When you look at, whether it's a building trades apprenticeship program or a school of technology, they will train their welders to weld pipe to an API standard. Now, if it's a general job on the rig hand, that training is usually done by the individual company. They may incorporate some of those standards into their own specific training program, but again, the standards are to be used as a guidance. It's not to go to the companies and say, you must follow all of these. It's a guidance for those companies so they will individually develop their own training programs.

On specific issues which are used industry-wide to make sure that pipeline construction and the welding of those pipes is consistent throughout the system, those will be trained to API standards. API and our certifications and standards directors, who aren't here today but could get much more in depth in this. We've reached out to the technological schools in the State, we're currently working with PASE on that. But, really, on those highly skilled areas we've been focusing more with labor in the State and the State building trades, because they have their network of 64 apprenticeship training programs throughout the State, where even prior to the

Marcellus they've been training their people to those API standards.

CHAIRMAN GODSHALL: Representative Barbin.

REPRESENTATIVE BARBIN: Yes, do you do standards that affect things called

CARB's? There was some testimony to come which indicates that there are CARB standards that we've adopted here in Pennsylvania that need to be modified. Do you have a standard like that and can you provide it to the Committee?

EXECUTIVE DIRECTOR HANSON: The difference between, CARB refers to the

California Air Resources Board, which obviously are their regulatory agencies standards. The standards for API are specific to the oil and gas industry, but we have standards, as I've mentioned, from how a well should be constructed and cased from how you should isolate the aquifer from the well to hydraulic fracturing across the board.

REPRESENTATIVE BARBIN: I'm looking for the bi-fuel vehicles standard, there are four States that are doing this. What I'm wondering is, do you as the API have a standard that you suggest to States that have these bi-fuel vehicles?

EXECUTIVE DIRECTOR HANSON: I will check into that for you.

REPRESENTATIVE BARBIN: If you do, would you provide it?

EXECUTIVE DIRECTOR HANSON: Absolutely.

REPRESENTATIVE BARBIN: Thank you.

CHAIRMAN GODSHALL: Chairman Preston.

CHAIRMAN PRESTON: Thank you, Mr. Chairman.

A couple of quick things. First, in dealing with the Marcellus Shale Chesapeake, as you heard Gail Davis on my staff is here, we're in the process of looking at for the next 3-5 years, and

I'm very interested because I have to carry this hat also just as well, and women of minority as far as businesses are concerned. I'd like you to be able to get in touch with her so we can try to deal with this process. I'm not just looking at the job markets, but I want to be able to look at whether it's aerial photography, GIS, and other different things that we can look at to try to implement easier situation. I know that a lot of people that I talk to don't realize this is not an urban situation. I try to tell people, well, they want to do these jobs and say, you've got to be willing to move to Bradford County. Then it's a different story. I'm being quite honest and I think we'll be open and up front with that.

The other thing is, you heard the previous panel talk, along with yours, obviously there is going to be an awful lot of dealing with the word of infrastructure. You heard from Philadelphia Gas, we've heard from the telephone companies, and the Committee members have heard me say this. I'm tired of seeing us dig the same hole or laying the same plan. I look at the water company, and I was the Chairman of a water company in Pittsburgh for 12-years, I watched them dig a hole 16 times just to find the shut-off valve. A lot of it is the lack of the mapping, and the

GIS. You're going to play an integral part of laying an awful lot of different things down. It seemed to me, for an example, not per say with you, but it has a direct effect. In Philadelphia, I tried to tell them, if a gas company, water line company, or an oil company or whatever wants to drill, wants to lay something down, maybe we can get rid of some of these telephone poles, the lines that only last 10-years could last 25-years, and everybody could share in the costs since you're going to be digging the same hole, instead of somebody coming by in 3 or 4 years. Your pipes may be above ground, but it's going to involve an awful lot of GIS studies and this may help in the long run, your Coalition, saving some of the costs. Other people are going to have to do it, whether it's the gas company, and why the electric companies are still buying all these telephone poles I'll never know. I just wanted to say that we need to really get to that next level, and I wanted to really raise that issue, because being a member of the House but also being a person of color, that you hear it from people from an awful lot of orients of color, from the

Hispanic community, the African-American Community, Indian and Asian and Pacific-Rim people raising these issues that they have this technology, they have these capabilities, but the door is shut to them. I'd like to be able to work with you on that.

Thank you very much, Mr. Chairman.

CHAIRMAN GODSHALL: Thank you. In closing, I just want to mention that the

Marcellus industry has meant an awful lot to Pennsylvania at this point, provided hundreds of thousands of jobs and I do remember a long time ago I got, from one of our environmental groups, I got an e-mail that was very specific. It said with the development of Marcellus, it's going to be, one of the things it's going to mean, it's going to mean lower energy costs, but at the same time it could be "counterproductive to our efforts to conserve." That was hard for me, sort of, to take. It's the low-income people who couldn't afford the energy, there was no thought given to that scenario, and at the same time I do know, being familiar with the north west and the north central part of the State, what it's meant to a lot of people with a lot of jobs.

To see, again, in the New York Times did that article, job article just a week or so ago, was again a little bit hard to take. Vilifying DEP Secretary Hanger and also former Governor

Rendell who have led the industry along, I think, in a very responsible way. Without their leadership I'm not sure you would be where you are today.

Then we've thrown Radon, now, into the mix, apparently they didn't know that some of the people where we were testing for Radon before, that was not known at the time, at least by the author of the article. I did talk to American Water and they have been testing and are testing, and there have been tests made on seven of the rivers that we have in Pennsylvania even before the article, which were being done, and there was no problems at all. But, the Radon scare immediately raised all kinds of human cry in the neighborhood because people thought they knew what they were talking about. I just wanted to throw that at you, and I think a good job is being done. I know every time there is some kind of an occurrence at all it reflects on everybody, so you've got to be on your toes all the time and trying to do the best job you possibly can and I think you're doing that.

Thank you.

At this point I'd like to, our third and last panel is William Lucas, Executive Vice

President of Equitable Gas; and Matt Sommer, Vice President of Natural Gas and Electricity, Shipley Energy. I believe you're going to be talking, also, about some of the conversions that we were talking about before.

VICE PRESIDENT LUCAS: Good morning Chairman Godshall, Chairman Preston, and

Committee members. It is a pleasure to be with you this morning. I'm Bill Lucas, I'm the

Executive Vice President of Equitable Gas Company located in Pittsburgh, Pennsylvania.

Equitable has 260,000 residential, commercial, and industrial customers. We are primarily located in Allegheny County, but we do stretch out through the nine neighboring counties throughout southwestern Pennsylvania. We also have assets in West Virginia and Kentucky, about 15,000 customers.

I am here today to discuss the benefits to the Commonwealth of Pennsylvania that will result from increasing the utilization of natural gas vehicles and the efforts of Equitable Gas

Company in expanding the use of natural gas vehicles in western Pennsylvania. As I go through

I'll be referencing some slides contained in your packet, and based on some of the previous commentary to Mr. Fitzpatrick I will probably condense my remarks as I anticipate a few questions.

As we look at the global status of natural gas vehicles, what we recognize is that there is more than 12 million natural gas vehicles in the world today. Unfortunately, only 150,000 of these vehicles are located in the United States. Unfortunately, Pennsylvania only has 1,000 natural gas vehicles. When you look at the map of where the countries that have the great saturation of natural gas vehicles are located, it brings to mind that some of these countries are actually in the process of selling the United States large quantities of oil. Also, I'd like to point out that if you look at the increase in natural gas vehicles worldwide since 2004, we've seen an increase worldwide by 8 million vehicles just in the last 6-years. That begs the question of, what do the other countries see that potentially the United States did not?

The part with natural gas vehicles and the questions surrounding these vehicles has always been, does the technology work? And with the number of vehicles on the road today I can tell you without question the technology is proven and it does work.

Moving onto the Marcellus Shale, I will not spend much time on slide three because I heard earlier presenters covered a lot of good information about Marcellus. The only point that I would bring up about Marcellus that I think is of interest to the group this morning is the

Marcellus alone, the proven supply in Marcellus alone could fuel 140 million vehicles in the

United States for the next 20-years. So, we have an abundant supply, it's literally under our feet, it's just a matter of how we can get this infrastructure built and the vehicles on the road.

When you look at the benefits of natural gas vehicles, it falls into three major categories.

I'm referencing page 4, now. The three main benefits are: operational costs, environmental benefits, and reduction in dependency on foreign oil. From the operations standpoint, in today's world natural gas equivalent pricing is at $1.90 a gallon compared to $3.50 a gallon in unleaded fuel and $3.80 in diesel fuel.

Second, natural gas is absolutely better for the environment. NGV's reduce greenhouse gas emissions by 20-30% and compared to diesel, gasoline, powered vehicles and also electric vehicles, they are much more environmentally friendly. There has been a lot of discussion about electric vehicles as of late, but there are a couple of important points that need to be addressed.

First of all, 60% of the electricity used in the electric vehicles is produced by coal generating plants. Second, the main component in an electric vehicle is the lithium ion battery. The lifespan of these lithium ion batteries is approximately 5-years, the mining of lithium certainly is not very environmentally friendly, but 92% of the lithium worldwide is located outside of the United States which brings a bigger question of, if we build a greater dependency on electric vehicles, are we just continuing to build additional dependency on other foreign countries?

Also from the environmentals, what we see is that the vehicles themselves, for example, one refuse truck, replacing one diesel refuse truck would equate to removing 325 cars off the road today from a pollutant standpoint.

Why is this energy independence important? The recent unrest and conflict in Tunisia,

Egypt, Libya, Iran, and Saudi Arabia, we have seen the increase in a barrel of oil go beyond $100 a barrel. We've also seen the price locally in Pittsburgh of one gallon of unleaded gasoline rise above $3.50. Quietly these prices have increased to a level that we have not seen since Hurricane

Katrina in 2005.

What is Equitable Gas doing to support the NGV – natural gas vehicle – program in

Pennsylvania? We're actually utilizing some of the AFIG, the Alternative Fuel Incentive Grant money, and we are building a station not far from the golden triangle. Equitable is also seeding the station by the purchasing and operation of 33 vehicles that we will have on the roads by the end of 2011. Giant Eagle, which is a local food store in Crafton, which is located west of the city of Pittsburgh, is also building a refueling station in which they will have 20 tractor trailers that will be dedicated NGV vehicles being utilized to deliver products to their store. That station will also be a public/private station. Finally, through also the use of these AFIG dollars, we've worked with Waste Management on a project in Washington, Pennsylvania, in which they will be purchasing 20 refuse trucks and that project will be completed by 2011.

Moving on to slide six. When we think about the obstacles for NGV's, there are just a few, but they are big. The first one is from the cost standpoint. The initial first cost compared to an unleaded vehicle, for example, comparing a Honda Civic, is about $5,000 more in a first cost. A refuse truck, a port authority type bus, something that you would see from the port authority in

Pittsburgh, the first cost is about $50,000 higher. With these facilities, we believe the General

Assembly could consider public policy incentives for all types of vehicles to reduce the upfront cost differential for local governments, small business, and other companies in addition to residents. These incentives to purchase NGV's can come in the form of tax credits to the private sector and to residents or local governments.

The second obstacle that we are trying to overcome is the need to build infrastructure. I believe there was some commentary about earlier. Due to a former PUC ruling, a company like

Equitable Gas is not able to recover any investment that we make in refueling infrastructure.

That is something that we would like to address in the immediate near future.

Finally, several years ago the Pennsylvania Department of Environmental Protection adopted the CARB, California Air Resource Board, standard that is used in testing and certifying the durability of a new vehicle's emission system over time. This new testing procedure was adopted over the EPA certification procedure used in 33 States. The CARB certification procedure applies not only to new vehicles, but those that are up fit with a natural gas fueling system. While we applaud the DEP for its intentions regarding the adoption of a more rigorous test procedure to protect air quality in Pennsylvania, it has created unintended barriers related to the use of natural gas vehicles in the Commonwealth. One of the barriers from the adoption of

CARB is that it adds a significant cost to a natural gas vehicle that is produced in small quantities. NGV's are already more costly than gasoline vehicles, but they are cleaner from an emissions standpoint. Having the CARB standard in Pennsylvania for NGV's provides little to no environmental benefit because natural gas is already, as I mentioned earlier, much cleaner compared to diesel or gasoline. The second barrier from the adoption of CARB is on bi-fuel vehicles, which came up a few moments ago. As you know, bi-fuel vehicles use either gasoline or natural gas and CARB requires certification of not only the natural gas fueling system, but also the diesel or unleaded fueling system. This is a problem for a State that has limited natural gas refueling infrastructure.

In other words, you or I could not take a sport utility vehicle and drive that vehicle with a tank of natural gas and gasoline across the State of Pennsylvania without the fear of running out of fuel.

We strongly encourage the DEP to modify the CARB standard to assist the growth of NGV's in

Pennsylvania.

In closing, Equitable Gas is very excited about natural gas vehicles and the potential for

Pennsylvania businesses, governments, and residents. NGV's are cheaper, cleaner, they are less costly to operate, and the fuel source is beneath our feet. Equitable Gas and other private sector companies cannot grow NGV's without the partnership of State government in implementing public policy initiatives and enacting legislation that will help overcome the cost differential of purchasing NGV's and promote the construction of an infrastructure to refuel NGV's in the State of Pennsylvania.

At this point, that concludes my presentation and I anticipate in a few moments there may be some questions.

VICE PRESIDENT SOMMER: Thank you Chairman Godshall, Chairman Preston, I really appreciate the opportunity to be here today. My name is Matt Sommer, and I am the Vice

President of Natural Gas and Electricity for Shipley Energy Company.

Shipley Energy is a leading energy service provider in the central Pennsylvania region.

Through our affiliates we provide heating oil, propane, natural gas, electricity, HVAC service and installation, and bottled water to over 50,000 residential, commercial, and industrial customers in Pennsylvania. In doing so we employ approximately 750 Pennsylvanians and are a leader in the communities we serve.

When Pennsylvania enacted the Natural Gas Choice and Competition Act in 1999,

Shipley viewed this as an opportunity to expand into a new market. We've also been an entrepreneurial company and viewed ourselves not as a heating oil provider, but a provider of energy. We first started off serving customers on the Columbia Gas system, primarily in York,

Adams, and Franklin Counties. In 2002 we expanded to serve the UGI market which encompasses Harrisburg, Lancaster, Lebanon, Reading, and the Lehigh Valley as well as

Hazleton. Most recently we have expanded to serve PECO gas in the suburban Philadelphia market.

At present, we serve approximately 16,000 residential customers and last year, through the calendar year 2010, we estimate that we saved those customers in excess of $1 million.

Despite the success and the success of other competitive suppliers in bringing and alternative and genuine cost savings to the market, as was mentioned earlier, few Pennsylvanians have opted to switch to an alternate supplier. Based on the most recent statistics published by the Office of

Consumer Advocate, only roughly seven-and-a-half percent of residential customers are currently shopping. On no system do more than one-third of customers shop, and on six systems serving nearly 50% of all residential customers, less than one-half of one percent shop, if any do so at all.

In 2005 the Public Utility Commission determined that effective competition did not exist in Pennsylvania's retail natural gas market and convened a Stakeholders Group to examine ways to increase competition in the market. In 2008 they published the findings of this process and laid out action plans for brining greater competition to the market. While the time allotted here today is insufficient to go over that report in any great detail, I wanted to just bring to you our perspective of some of the most important components contained therein.

The price of the default supply service offered through the utility is known to consumers as the "Price to Compare". It is adjusted on a quarterly basis and intended to facilitate shopping by giving consumers a point of comparison to various supplier offers. Unfortunately, the price often serves as a relatively poor indicator of the market price. The fact that it is adjusted quarterly is fairly slow to react to changes in the wholesale price of gas, which forms the basis for price for retail suppliers. In an upward trending market this can make it all but impossible for suppliers to compete with this default price, and in a downward trending market it may actually make the offers appear better than they truly are. Additionally, the existence of a true up mechanism known as the gas cost adjustment can further distort the price comparison. In recent years on some utilities, this charge has been as high as 10-15% of the price of compare. It varies somewhat from system to system, but oftentimes this charge is not broken out specifically as a separate line item on the bill and simply bundled in with the distribution rate. When customers switch, then, this charge becomes known as the "gas cost adjustment" and is listed separately and can appear to be an additional charge that is incurred through shopping, which is not the case.

We also have some concerns relative to the fact that the price to compare be a full and fair representation of the entire costs of acquiring gas supply. LDC's, the local distribution companies, have optimized their supply assets that they use to serve customers through arbitrating other methods. To incentivize looking for opportunities, they are allowed to keep a portion of these profits, but the remainder is returned to ratepayers through the price to compare, so you create a situation at times where shopping customers can end up helping subsidizing non- shopping customers through the assets of their paying through the distribution rate. While getting these prices fixed will do much to improve competition, there are quite a few other barriers that need to be removed. We would encourage greater supplier participation in the market. Shipley's vision, ultimately, is to serve the entire State of Pennsylvania, but at present we only serve three systems. Two of the major factors holding us back in our expansion plans are a lack of uniformity between supply tariffs and the existence of security requirements which we feel oftentimes are higher than they need to be. Certainly the utility systems do vary pretty dramatically in many cases, so complete uniformity may not be a realistic objective, but looking at it the more similarity, even just in the language and in some of the procedures that we can create will make it the costs of expanding dramatically lower.

Lastly, the security requirements that are posted, we feel that over time these should be reviewed and as suppliers have more years of service on the system, that should be factored into account so that if we have security requirements that are higher than they— They should be as high as they need to be, but when they are higher than they need to be it simply adds cost to the competitive market. As was mentioned earlier, electricity, we've seen dramatically more shopping. And 7.6%, I think is a number that we can do a lot better as Pennsylvanians to provide opportunity for consumers to save money and opportunities, quite frankly, for companies like

Shipley, local privately-owned companies, to engage in a market that otherwise would not be open to them.

With that, I'll conclude my remarks and welcome any questions that you have. Thank you.

CHAIRMAN GODSHALL: Representative Neuman.

REPRESENTATIVE NEUMAN: Just one quick comment.

One thing, I went to NGV, I'll say forum, in Washington County, and I was happy to see the partnership with Giant Eagle and Get Go, I think that's a great thing and I think that hopefully that will snowball into more partnerships. But, one thing that you failed to mention is the most intriguing part to me, if your house is fueled by natural gas, you can actually get a small compressor and fill your car up at your house. I'm hoping that is the future of Pennsylvania, where people can fill their cars up at their home overnight and they'll be fueled when they are ready to go to work the next morning.

The one question I have for you is, how does the accelerated depreciation affect you moving in the next year or two years? Does it help you, is it a great incentive for you? That was proposed in the Governor's Budget.

VICE PRESIDENT LUCAS: Absolutely. It is a great incentive for us. Anything that we can do to accelerate the recovery of any dollars that are put forth for these NGV stations and infrastructure help us tremendously.

REPRESENTATIVE NEUMAN: What kind of return will you see on that? Is it enough of an incentive for you to move forward with a lot of projects that may have been looming?

VICE PRESIDENT LUCAS: There are some points, Representative, that we look at from the standpoint of a seed investment, and there are some cases where if we can just cover our cost of capital initially, knowing that better and brighter days are down the road, we're willing to make those types of investments.

CHAIRMAN GODSHALL: Chairman Preston.

CHAIRMAN PRESTON: Thank you, Mr. Chairman.

This is very enlightening, and I know we in America think we know everything since we're the only country in the world that doesn't use the metric system. But, I'm looking at some of the numbers that you have here when we talk about natural gas vehicles. Venezuela is 20,000; Brazil 1.6 million; Bolivia 122,000; Argentina 1.8 million; Bangladesh, 200,000; Uzbekistan,

47,000; Eastern Europe 418,000; U.S.A., United States of America, 100,000. Obviously, maybe we know something that nobody else in the world knows, but for some reason this seems to be working. When you have this type of a dichotomy, how do we get citizens and marketing concepts, and I think this is what everybody wants to know, how do you get people to be able to buy these here in the United States? We don't seem to wake up. What is really needed? How can we all work together to get this going?

VICE PRESIDENT LUCAS: Chairman Preston, I think that this is the classic case of the chicken and the egg. If we look at it from a strategic standpoint, what I would suggest is there are a few things that have to happen first. In order for folks to make the investment in the vehicles, there has to be refueling infrastructure, and I know there has been some discussion as of late about building infrastructure along the Pennsylvania Turnpike, but it needs to be much more robust than just the Pennsylvania Turnpike. I think the idea of building the infrastructure first, as

I mentioned earlier in my presentation, the idea of allowing the utility companies to recover investment in refueling stations is certainly a step in the right direction.

The second thing is the CARB issue. If that issue could be amended, then there is the ability to have dual fuel vehicles on the road, so you have the certainty of supply. So, if I'm traveling to someplace and I burn out that first tank of natural gas, I have got a diesel or unleaded backup. I think that is the second step. That will generate enough activity that, to your point, the

Sheetz, the Get Go's, the BP's, other oil companies, they will take note of the number of vehicles and start to invest capital in refueling stations.

CHAIRMAN GODSHALL: Excuse me, explain that CARB situation, which I don't understand. VICE PRESIDENT LUCAS: Okay. The California Air Resource Board is a standard. We can either follow the EPA standard or the CARB standard. Pennsylvania is one of the few States that has adopted the CARB standard. What that standard does is it raises a tremendous amount of cost because you are inspecting not only the unleaded fuel or diesel fuel tanks, but also the natural gas fuel tanks. It adds a tremendous burden. It pretty much eliminates the idea of having dual fuel vehicles. If that CARB standard, if the natural gas industry was to receive a waiver of that CARB standard, we have fleet vehicles and fleet operators in western Pennsylvania that we have talked with just in the course of the last year that said if that was overturned, they would absolutely, positively purchase vehicles that were dual fuel capable and operate them in the State of Pennsylvania immediately.

VICE PRESIDENT SOMMER: I'm going to jump in on that one as well. I think the chicken and the egg is a perfect way to look at it. Shipley operates about 30 convenience stores.

We were the first to put in an E85 pump in York County, the 85% ethanol blend. Initially we sold 1,000 gallons maybe every other month. Then it became a month, then weekly, and it really was because of the flex-fuel vehicles and the way that they are designed that they can take unleaded gas or they can take up to an 85% ethanol blend that allowed that to grow. That kind of flexibility in the fleet would be a very key element to getting the ball rolling.

CHAIRMAN PRESTON: Mr. Chairman, also, relative to your question. Several years ago I was offered an opportunity for myself to go onto the business they handle southwestern

Pennsylvania, setting up a retail system in the exact same situation that you have mentioned.

Dealing with the CARB issue and everything prohibited me and seeing that people are not going to adapt to that.

The other thing I would like you to do as a small business person, and I think that is what we are really into and a lot of the members, as well. The big ones are great, but you're the small business person that hires the local people. Submit to us some of your thoughts about the security issue, the standards, everything takes time. You heard the young lady talk earlier from Direct

Energy. When I first got started with this issue of alternative energy, everybody laughed. I remember my colleagues in the central part of the State said, this will never happen, choice will never happen in central Pennsylvania. Now there are over 11 companies knocking on doors about that. I think that we in America have to adapt and we in Pennsylvania have to start being a little bit more progressive. We're still building four lane highways instead of six lane highways.

We're going to pay for it later. I think that between the small and the big companies we really need to get that. Submit that information. I think that is very important and I really appreciate you coming, and my own gas company, I see the ups and downs of it, and I understand what you are doing and I think the people need to understand, no gas company wants to shut someone off.

You want to be able to market your product, and if you have to shut someone off and you're selling to them anymore, it means that your product is not selling. I understand that. I think we need to have a better collaboration so that we can work some things out so the small and the large can prosper and compete openly.

VICE PRESIDENT LUCAS: Thank you, Chairman.

The one point I would like to add is, as we evaluate the investment into this NGV infrastructure, timing is of the essence. If we look at the natural gas prices, as everyone knows, they are at a very low point in time. The impact that we would, the customers would recognize on their bill would be extremely small. We typically, as we look at western Pennsylvania, being at the heart bed of the Marcellus Shale fairway, we recognize that that ample supply is going to yield lower prices for quite some time. Now is the time for us to move forward with these NGV initiatives. Thank you.

CHAIRMAN GODSHALL: Thank you.

Representative Barbin.

REPRESENTATIVE BARBIN: Thank you, Mr. Chairman.

Thank you Mr. Lucas for your testimony today. I've read some research about the bi-fuel cars and your map indicates there are 100,000 of these vehicles in the United States, and four

States that are really ahead of the curve on this. Is there any reason why we can't have 3 million cars on the roads if we had a refueling station at home, a company that provided those, and stations at Get Go's or Sheetz or whoever. Is there any reason why we couldn't be in Australia?

I'm looking at your map, and your map says that back in 2004 there were only 4 million cars, it's

92% cars, so most of those cars have come onto the scene from 2004-2010. In 6-years we have tripled the number of worldwide vehicles. Is there anything other than the fact that we need a refueling station at home, and a Get Go sort of station that would keep us from doing this?

VICE PRESIDENT LUCAS: No. We see from the manufacturers that we've already noticed between the domestic automotive manufacturers there are plans for 2011, 12, 13 to introduce more CNG dedicated vehicles and potentially bi-fuel vehicles, they are just waiting for the demand. As we embark on, as you can imagine, we talk with these folks and the manufacturers' representatives almost on a weekly basis, and the issue that we draw to which are

Utah, Colorado, Texas, are probably the bigger States, and what we see from those particular

States is there was an accelerated effort to build the infrastructure along the highway systems, and then we're still waiting for some of the technology improvements on the slow-fill, which was discussed earlier, which is the home refueling, which is a 6-8 hour refueling option. The technology is improving at warp speed, and by the time we would get the vehicles on the road I'm optimistic that customers would have multiple refueling options.

REPRESENTATIVE BARBIN: Does your CEO have a refueling station at his home? A home refueling station? I've read that he does.

VICE PRESIDENT LUCAS: Murry Gerber, our former CEO, does have a refueling station. And actually, I have to mention, I'm not sure seeing this is televised he may or may not appreciate it, but he has purchased a Hummer H3 with an accelerated or a large fuel tank with

500 mile capacity, he will be leaving, I believe next month, from western Pennsylvania he has chartered a course across the country and will end up in California, and along the way he will be stopping at a multitude of school districts and businesses to show that the technology does work.

REPRESENTATIVE BARBIN: Then I only ask you to do one thing for me. I think it is time that we move forward with these gas stations since they are half the price of oil. I'd ask that you give me the language or submit the language to me so that I can introduce a bill to ask the

PUC to allow the monies to be recovered by the natural gas companies, and that language be submitted to allow the CARB standard to be revoked so that we could move forward with these vehicles in Pennsylvania.

VICE PRESIDENT LUCAS: We will do that very quickly.

CHAIRMAN GODSHALL: Thank you. I have two questions. The CARB standard, the

CARB problem that you have projected out, what is the cost of that? The cost of natural gas car you said was approximately $5,000 more, what part of that does that CARB standard play?

VICE PRESIDENT LUCAS: The 5,000 I referenced on the Honda Civic does not include bi-fuel options. It would be greater than $5,000. I don't know the exact number. On the first cost on the refuse truck, it is about $50,000 for a dedicated CNG versus diesel, the last piece of information that I saw is that it added an additional $10-15,000. I can validate those numbers and get back to your office.

CHAIRMAN GODSHALL: I would appreciate that. The other question I have; say take an ordinary car, whatever. My grandson sells Jeep Cherokees. If he gets a gas powered, natural gas powered Jeep Cherokee, how far can he go with it? What is the mileage that he could travel with an ordinary gas fuel tank, whatever you put in a car?

VICE PRESIDENT LUCAS: The rough range on a regular passenger sedan is around

220-230 miles if you have the right size tank, if you are a bi-fuel vehicle then it's, you're not going to see any appreciable decline in your miles per gallon equivalent, it's about the same.

CHAIRMAN GODSHALL: Around 200, 250 miles. So you absolutely have to have the infrastructure out there to create the, to make it a viable situation.

VICE PRESIDENT LUCAS: Correct. Correct. For right now.

CHAIRMAN GODSHALL: Okay. With that, I do want to thank everybody, the members, the audience, and the participators for, again, a very, very, very informative session. I appreciate everybody that has come here to testify and with that the meeting is adjourned, thank you.

(Whereupon, the meeting adjourned at 11:20 a.m.)

The above is a full and accurate transcript of proceedings produced by the Official Reporter’s

Office of the Pennsylvania House of Representatives.

______

Jessica L. Rabuck, Reporter's Office