[Senate Hearing 110-775]
[From the U.S. Government Publishing Office]
S. Hrg. 110-775
EXAMINING SOLUTIONS TO COPE WITH THE RISE IN HOME HEATING OIL PRICES
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
JUNE 25, 2008
__________
Printed for the use of the
Committee on Small Business and Entrepreneurship
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COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
JOHN F. KERRY, Massachusetts, Chairman
CARL LEVIN, Michigan OLYMPIA J. SNOWE, Maine
TOM HARKIN, Iowa CHRISTOPHER S. BOND, Missouri
JOSEPH I. LIEBERMAN, Connecticut NORMAN COLEMAN, Minnesota
MARY LANDRIEU, Louisiana DAVID VITTER, Louisiana
MARIA CANTWELL, Washington ELIZABETH DOLE, North Carolina
EVAN BAYH, Indiana JOHN THUNE, South Dakota
MARK PRYOR, Arkansas BOB CORKER, Tennessee
BENJAMIN L. CARDIN, Maryland MICHAEL B. ENZI, Wyoming
JON TESTER, Montana JOHNNY ISAKSON, Georgia
Naomi Baum, Democratic Staff Director
Wallace Hsueh, Republican Staff Director
C O N T E N T S
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Page
Opening Statements
Kerry, Hon. John F., a United States Senator from Massachusetts.. 1
Snowe, Hon. Olympia J., a United States Senator from Maine....... 4
Witness Testimony
Johnson, David F., Deputy Assistant Secretary for Petroleum
Reserves, U.S. Department of Energy, Washington, DC............ 11
Brooks, Jennifer, Community Relations manager, Penquis, Bangor,
Maine.......................................................... 32
Farrell, Sandra, Owner, Northboro Oil Company, Northboro,
Massachusetts.................................................. 39
Ferrante, Michael, president, Massachusetts Oilheat Council,
Wellesley Hills, Massachusetts................................. 45
Stoddard, Michael, deputy director and attorney, Environment
Northeast, Portland, Maine..................................... 58
Alphabetical Listing and Appendix Material Submitted
Brooks, Jennifer
Testimony.................................................... 32
Prepared statement........................................... 35
Response to post-hearing questions from:
Senator Kerry............................................ 87
Senator Snowe............................................ 88
Farrell, Sandra
Testimony.................................................... 39
Prepared statement........................................... 41
Response to post-hearing questions from Senator Snowe........ 91
Ferrante, Michael
Testimony.................................................... 45
Prepared statement........................................... 48
Response to post-hearing questions from:
Senator Kerry............................................ 89
Senator Snowe............................................ 92
Letter to assistant attorney generals Jed Nosal, Chris Barry-
Smith and Diane Lawton regarding National Grid Advertising. 92
Letter to Hon. Martha Coakley, Office of Attorney General,
Boston, Massachusetts regarding Keyspan Energy Delivery
``Be Green Win Green'' Promotional Program................. 95
Letter to Joseph Rogers, Office of Attorney General, Boston,
Massachusetts.............................................. 97
Johnson, David F.
Testimony.................................................... 11
Prepared statement........................................... 16
Response to post-hearing questions from:
Senator Kerry............................................ 84
Senator Snowe............................................ 85
Kerry, Hon. John F.
Opening statement............................................ 1
Post-hearing questions posed to David F. Johnson and
subsequent responses....................................... 84
Post-hearing questions posed to Jennifer Brooks and
subsequent responses....................................... 87
Post-hearing questions posed to Michael Ferrante and
subsequent responses....................................... 88
Post-hearing questions posed to Michael Stoddard and
subsequent responses....................................... 98
Lieberman, Hon. Joseph I.
Prepared statement........................................... 83
Snowe, Hon. Olympia J.
Opening statement............................................ 4
Post-hearing questions posed to David F. Johnson and
subsequent responses....................................... 85
Post-hearing questions posed to Jennifer Brooks and
subsequent responses....................................... 88
Post-hearing questions posed to Michael Ferrante and
subsequent responses....................................... 91
Post-hearing questions posed to Sandra Farrell and subsequent
responses.................................................. 90
Post-hearing questions posed to Michael Stoddard and
subsequent responses....................................... 101
Stoddard, Michael
Testimony.................................................... 58
Prepared statement........................................... 60
Response to post-hearing questions from:
Senator Kerry............................................ 98
Senator Snowe............................................ 101
EXAMINING SOLUTIONS TO COPE WITH THE RISE IN HOME HEATING OIL PRICES
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WEDNESDAY, JUNE 25, 2008
United States Senate,
Committee on Small Business
and Entrepreneurship,
Washington, DC.
The committee met, pursuant to notice, at 10:06 a.m., in
room 428-A, Russell Senate Office Building, Hon. John F. Kerry
(chairman of the committee) presiding.
Present: Senators Kerry and Snowe.
OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, CHAIRMAN, AND
A UNITED STATES SENATOR FROM MASSACHUSETTS
Chairman Kerry. The hearing will come to order. Thank you
all for being here. Good morning.
Obviously, with temperatures pushing 80 degrees here in
Washington and the thermometer in the high 70s with a nice
humid early summer day in Boston, it probably strikes some of
you as odd that we are having a hearing on home heating oil
prices. But for those of us who are New Englanders and
understand what the New England winter brings and how the
pipeline has to be fed early, not late, this is the right time
to be having this hearing. In fact, the clock is ticking when
it comes to Washington's ability to be able to step in before
it is too late and allow the crisis for homeowners who are
hard-pressed financially to face devastating circumstances.
So now and in the coming weeks, families and businesses are
going to be sitting down to sign their heating oil contracts,
and record prices are creating very difficult decisions for
them. Nationally, 7.7 million households heat their homes with
home heating oil. In Massachusetts, over 963,000 households use
home heating oil delivered by over 800 distributors, many of
them small businesses. And it is reality, not rhetoric that
price spikes will force people to decide whether to feed their
families or heat their home on any given day.
You don't have to take my word for that. The Energy
Information Administration is projecting that heating oil
prices will be up 56 percent in 2009 compared with 2007, and
that estimate may even be modest. I challenge anybody to show
me almost any worker who is going to see a 56 percent increase
in their pay, let alone a five percent, or even two percent
increase.
Prices for a gallon of home heating oil sit at over $4.50
today compared with less than $1 ten years ago. That means that
consumers are paying thousands more than they used to pay just
to heat their homes in the winter. In a slumping economy where
the cost of everything else is soaring, too--health care,
tuitions, clothing, food, all of it--in that kind of an
economy, families are facing a recipe for the toughest kinds of
choices.
Senator Snowe and I have been fighting to get Washington to
take precautions ahead of time for some time in order to avoid
the equivalent of a snowy Katrina, where we see our government
flatfooted and families shivering in their homes. For low-
income families and the elderly, the most important thing that
we can do to respond to their needs ahead of time is to fund
the Low Income Home Energy Assistance Program.
But that is just the start of a comprehensive answer to a
complex problem. Consumers bear the brunt of spikes in heating
oil prices, but small business owners are extremely hard hit,
too. Most heating oil distribution is done by small businesses
like the Northboro Oil Company owned by Sandra Farrell. As we
will hear from Ms. Farrell and other small distributors, she
and others are victimized many times over by the rising prices
of fuel. Their accounts receivable go through the roof, and
that is not an easy situation to handle during a credit crunch.
Their customers have a difficult time paying their bills, and
rising credit card fees further cut into their margins. The
volatility in the market also causes the price of hedging,
which is locking into a price and buying certainty to rise from
a few cents a gallon a few years ago to upwards of 40 cents a
gallon today.
We have to do a better job of easing the impact of these
price shocks, and this is not a new problem, but regrettably
obstruction in Congress doesn't help us to solve the problem.
Back in the winter of 2000, I authored the Home Heating
Readiness Act, which called on the Secretary of Energy to
report to Congress on the readiness of the heating oil and
propane industries to prevent and prepare for shortages, and I
supported the creation of a Northeast Home Heating Oil Reserve
to respond to localized price shocks. I have cosponsored
Senator Snowe's bill, the Energy Policy and Conservation Act,
which is a mandate for a release from the Northeast Home
Heating Oil Reserve if the price of home heating oil is over $4
a gallon. So we need to be clear about the definition of a
price shock and we need to make sure that this reserve is there
to help people when they need it, and the fact is, time is
running out.
Those are short-term, stop-gap precautions that we should
insist upon. But Congress also has to tackle the explosion of
energy prices as a whole. Crude oil prices make up 60 percent
of the cost of home heating oil, and we have just received
testimony in Congress from energy market experts and major oil
company executives that the price of oil and gas can no longer
be explained or predicted by normal market dynamics or through
their historic understanding of supply and demand forces.
As an ExxonMobil executive testified before Congress under
oath, the price of crude oil should be about $50 to $55 per
barrel based on the supply and demand fundamentals that have
been observed for years. But as we know, the current crude oil
prices are well more than double that--They are about $136
today--and there are many reasons why prices have risen to
these levels.
To be absolutely clear, we just had testimony in the
Commerce Committee a couple of weeks ago about this and I met
with one of the CEOs of one of the major oil companies in the
country last week, and all of the evidence that they have put
in front of us says that anywhere from $10 to $40 a barrel is
pure speculation and it is driving these prices. We just passed
legislation which gives the Commodity Futures Trading
Commission the authority and responsibility to prevent fraud,
manipulation, and excessive speculation in U.S. commodity
markets.
But I will tell you something. A strong Attorney General, a
strong FTC, and a strong administration would be speaking out
about this and they would be sending signals to the marketplace
that would tamp down this speculation. And the fastest,
quickest, most effective, and cheapest way to reduce the cost
of fuel to the American consumer today is for the
administration to have appropriate discussions about
intervention with respect to the speculation that is taking
place. Instead, we have a rather toothless and feckless
bureaucracy that has stood at the sidelines while the American
consumer pays a high price and while major companies walk away
with very significant windfall profits.
We also need a broader and comprehensive strategy to help
out the small businesses and consumers who get walloped by
these skyrocketing prices. This week, I will once again be
introducing along with Senator Snowe the Small Business Energy
Emergency Relief Act of 2008 to provide affordable, low-
interest, Small Business Administration disaster loans to small
businesses that have suffered economic harm and can't pay their
bills because of the huge price increases in heating oil,
propane, kerosene, and natural gas. Whether they are small
distributors or business owners who rely on those fuels to heat
stores, many small businesses are dependent on these basic
heating fuels. Our legislation will provide small businesses
with assistance when you have a very dramatic fluctuation that
is completely unanticipated and takes a working, viable
business that under normal circumstances can survive and helps
them get through that rough spot of the dramatic and
unpredictable price fluctuation.
This legislation has passed the full Senate three times. It
has passed this committee several other times, and it is time
we got the obstruction out of the way and got it into law so
that we put another tool at the disposal of our small
businesses.
I might just end by saying that with these kinds of
pressures, opportunities also present themselves, and it seems
to me that the market, with help from the government, can
unleash unbelievably powerful forces to create new efficiencies
in order to help solve the problem in the long term. Let me
give you an example.
Massachusetts Governor Patrick, Senate President Murray,
and House Speaker DiMasi have introduced legislation that would
make Massachusetts the first State to require all diesel and
home heating fuel sold in the State to contain a minimum amount
of renewable bio-based alternatives in their blends, with that
amount rising from two percent in 2010 to five percent in 2013.
These mandates will help build Massachusetts's emerging biofuel
refinery and distribution sector and save consumers money as
renewable sources become more prevalent and cheaper, and it
also obviously sends a message to the marketplace about the
perspective of the government on this issue.
We ought to be on the fast track towards increasing energy
efficiency. It is shocking to me, absolutely shocking to me,
that after all these years, 1975 and Jimmy Carter and the first
oil shock, and then 1988, Jim Hansen predicting global climate
change, and now all the rhetoric of the last eight years about
energy efficiency and climate change, et cetera, et cetera, it
is stunning to me that we still remain the most profligate,
wasteful nation in the world with respect to energy. We just
throw it away.
Our escalators are going 24/7. In other countries, they
stop and start as people get on them. Our lights are on in
halls 24/7/365. In other countries, they are dimmed and if
nobody is in the hall, they go off completely. If somebody
comes out of a room into the hall, they go on automatically. We
are so far behind that it is shameful, and we are wasting money
and fostering a greater dependency on foreign entities that
supply our fuel.
We have got to get smart here. There are real savings to be
had, and the fact is that a lot of big businesses that I have
met who are now involved in pushing for a cap and trade global
climate change response companies ranging from DuPont to Dow
Chemical to British Petroleum and others are all engaged in
major energy efficiency programs that are saving some of them
billions of dollars and others millions of dollars. So this is
the track we have to go on, and we need to make it possible for
small businesses, who often can't afford the capitalization
costs, to take advantage of these things, because in the long
run, it will make them more competitive and more efficient.
Senator Snowe.
OPENING STATEMENT OF THE HONORABLE OLYMPIA J. SNOWE, A UNITED
STATES SENATOR FROM MAINE
Senator Snowe. Thank you, Mr. Chairman, for holding this
critical hearing today. It is certainly timely with respect to
the dramatic impact that skyrocketing home heating oil and
energy costs that are burdening and bearing down on small
businesses and American consumers. I appreciate your tireless
leadership on this issue that is imposing untold hardship on
people, certainly in my State of Maine and across the country.
I want to join the Chairman in welcoming Mr. Johnson, who
is the Deputy Assistant Secretary for Petroleum Reserves, who
has been with the Department, as I understand it, since 1979,
so he has seen the dimensions of this critical question.
I also appreciate the fact that the Department of Energy
has announced its intent with an issuance of solicitation to
purchase approximately 35,000 barrels of oil for the Northeast
Home Heating Oil Reserve. I appreciate that and want to explore
that issue further with respect to the terms of adjusting the
formula in the legislation to which the Chairman had referred.
I also want to thank Jennifer Brooks, who is a Community
Relations Manager at Penquis Community Action Program, who is
on the front line of providing services to my constituents and
to the people of Maine that is so difficult during these
difficult times. Also Michael Stoddard with Environment
Northeast, for traveling from Maine to participate in this
hearing. I welcome your expertise and insight about the
increasingly dire situation that requires bold and immediate
action, analysis, and investigations into the pricing and
supply of home heating oil, and above all, how to prepare for a
potential and unmistakable tsunami that is heading for Maine
and New England and throughout this country, given the dramatic
increase in energy prices.
Mr. Chairman, the ominous reality is that alarm bells have
already sounded as we are confronting a crisis of the highest
order. Consider the example that is illustrated here on this
chart. In 2006, New England was purchasing oil per gallon for
$2.39, for 4.1 billion gallons of home heating oil,
representing 82 percent of the entire country's demand, and
costing New England $9.84 billion.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Fast forward two years, and this chart highlights that one
gallon of home heating oil in Maine currently costs $4.60, and
since the start of the 2007-2008 home heating oil season, we
have seen the price increase by more than 70 percent. So New
England may spend, in today's prices, just given the $4.60
anticipation, more than $19 billion on home heating oil alone,
compared to 2006, where it was $9.84 billion. And we are in the
middle of the summer, when demand for home heating oil is
negligible.
So I trust that this hearing will provide Mainers and
Americans with an explanation for the unfathomable price
increases as well as explore initiatives that can mitigate
these energy costs as winter approaches. It is time we begin to
understand and then act upon the root causes behind these
pernicious price increases.
As this chart indicates, from 2003 to 2007, the home
heating oil price in Maine jumped by a staggering 135 percent,
far outpacing the wage gains that the Chairman referred to,
which increased 17.1 percent. A 135 percent increase in a basic
commodity and yet wages only increased 17.1 percent.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
So it begs the question, what specific concrete steps can
we take here in Congress to reverse this calamity? How can
citizens and small businesses prepare for the winter months
ahead? What can be done to increase the inventory of our home
heating oil supply? What exactly are customers saying? How are
dealers responding?
Furthermore, I think that we need to understand exactly
what is driving up these prices, as the Chairman referenced in
terms of price speculation. Maine oil dealers told me that one
day in May the price for home heating oil went up 30 cents per
gallon, again when demand is virtually negligible, minimal, and
yet 30 cents in one day. We had the single largest increase for
oil per barrel in June. It went up $11 in one single day.
So the purpose of this hearing is again to elicit an
understanding in terms of the analysis and also to receive
answers to many of these questions and how we can stem this
crisis and prepare for the winter ahead.
Certainly, small business owners are experiencing the
financial pressure of rising energy costs and they require
assistance. According to the National Federation of Independent
Businesses, 42 percent of small businesses ranked the cost of
natural gas, propane, gasoline, and fuel oil as a critical
problem. In most cases, small businesses, instead of exploring
opportunities for expansion or growth, are forced to reexamine
their business plans, future investments, bottom-line
profitability, and job creation.
Energy price increases severely undermine small businesses,
which often lack the negotiating power and margin buffer
enjoyed by their larger counterparts, and that is especially
true for small business, oil and gas distributors. According to
the New England Fuel Institute, which submitted testimony to
this committee, heating oil has had a dramatic effect on almost
every aspect of these small business operations.
As we will discuss today, these distributors are confronted
with severely constrained bank credit lines and are unable to
secure more credit to confront rising oil prices. These dealers
are also having a difficult time maintaining a liquid cash
flow, as most customers cannot afford to pay their entire
heating oil bill. In this bleak landscape, 16 small business
oil distributors in Maine have already gone out of business in
this past year. With small businesses operating on razor-thin
margins, they often must raise prices simply to remain in
business, which in turn impinges on customers as they struggle
with inflation across the board in simply every category.
Energy cost increases are also compelling small business
executives to make reductions in other areas, such as employee
benefits and safety training. And let us not forget that these
same dynamic entrepreneurs, that we count on to create three-
quarters of all new jobs in America, are now coping with
double-digit premium increases in the cost of providing their
employees' health care.
For individual families, the situation is worsening and
becoming untenable. Mainers require between 850 gallons to
1,000 gallons a year to get through the winter. Most Mainers
are now facing a classic Catch-22. Do I lock in prices that are
nearing $5 a gallon, or do I roll the dice and gamble that
heating oil prices might somehow drop in the coming months as
the weather turns colder? The thought of spending approximately
$5,000 per family just to stay warm this winter in a State
where the per capita income is $33,000 is outrageous. The
potential scenario is nothing short of a looming catastrophe
for the region with every passing day, and this is a State that
derives 80 percent of home heat from oil. That is the challenge
that we are facing in our State and certainly throughout New
England.
Amid this challenging economic landscape and all too
polarizing political climate, there are steps and initiatives
we can take to mitigate the effects of soaring prices. That is
why I will join the Chairman when he introduces his legislation
that will provide for an underpinning to our economy, and that
is allowing for disaster assistance loans for economic
dislocation. With prices remaining close to $5 a gallon, when
the winter months come, this will certainly affect the major
part of our economy in this country that creates jobs.
The Small Business Act currently allows for the
Administrator to declare a disaster for small businesses
suffering a substantial economic injury. I think this
legislation is most appropriate in allowing SBA to provide
loans for small businesses that have suffered injury when home
heating oil prices have increased by 40 percent.
As Senator Kerry mentioned, we now have the Northeast Home
Heating Oil Reserve Program. It was created in 2000. I have
introduced legislation to adjust the Reserve's release formula,
and I appreciate Senator Kerry's cosponsorship and Senator
Dodd's. I think it is critically important that we adjust that
formula so that if prices remain above $4 a gallon, that we are
able to release that supply in a staggered fashion throughout
the winter, with the funding from its sale to also underwrite
weatherization programs.
At a time when astronomical energy prices drive individuals
to keep warm by using cooking stoves, space heaters, and
kerosene can heaters, which can lead to fires as well as
produce toxic fumes, we must take every available step to
reduce prices. That is why I vigorously fought for extending
the tax credits for alternatives and renewables. It is
regrettable we have not passed that here in the Congress. It is
set to expire at the end of this year.
But what is even more preposterous is that one of my
provisions that would provide a tax credit for remodeling of
homes to make them more energy efficient expired at the end of
last year and we were unable to get that renewed for the
beginning of this year. Here are people trying to remodel their
homes, get energy-efficient furnaces, and they are not able to
take advantage of a tax credit because it expired this last
year.
We also have the Low Income Fuel Assistance Program. I
worked to get the authorization doubled in the budget
resolution with Senator Conrad, who is the Chairman of the
Budget Committee, and now it is important to make sure that we
have the appropriations to buttress that authorization. But
given the meteoric rise in our prices, our reliance on low-
income fuel assistance will not be sufficient to address those
who are reliant on the program and even those who are not
eligible income-wise to use that program. We are going to have
to address other ways in which to help people to accommodate
these rising costs in home heating oil.
So we have to act swiftly and decisively commensurate with
the mammoth scale of our nation's energy challenges. I hope
that Congress can address these and other issues, including
speculation in the energy markets, that as many have indicated
through testimony and through studies submitted to this
Congress, that, in fact, it adds anywhere from $25 to $60 per
barrel of oil. So we do have an obligation to act, in fact,
much of which could happen today with unilateral action by the
Commodity Futures Trading Commission.
They have the powers today, for example, to require that
those oil futures that are traded in foreign markets have to
adopt the same standards and regulations that are required here
in the United States. Much of those oil futures are traded
abroad and yet they are contributing to the rising oil prices,
yet we have no way of engaging in any kind of oversight,
suspending the trading or giving the Commodity Futures Trading
Commission the emergency authority to suspend and intervene in
emergency situations to suspend the trading when necessary, in
addition to limiting the positions of individual traders when
they are cornering a market.
So there are many issues that can be addressed that could
have an immediate impact on the prices, and hopefully we can
build a bipartisan support. I think we should have a national
energy summit between Congress and the President, engage in a
bipartisan solution to this problem, and deal with it as it is
a crisis for this country.
Thank you, Mr. Chairman.
Chairman Kerry. Thank you very much, Senator Snowe. That
was an important statement and I appreciate it very, very much.
Mr. Johnson, in light of those comments as a backdrop, we
look forward to your testimony. As you know, your full
testimony will be placed in the record, so if you could
summarize, that would be helpful.
STATEMENT OF DAVID F. JOHNSON, DEPUTY ASSISTANT SECRETARY FOR
PETROLEUM RESERVES, U.S. DEPARTMENT OF ENERGY, WASHINGTON, DC
Mr. Johnson. Thank you. Mr. Chairman and Senator Snowe, I
am pleased to be here today to discuss the Northeast Home
Heating Oil Reserve, which was established by the Department of
Energy in 2000 as an emergency stockpile of heating oil to
address weather-related supply problems in the Northeast.
The vulnerability of the Northeast to heating oil supply
problems has always been a concern. The New England portion of
the Northeast is most vulnerable to any form of heating oil
supply constraints during the winter season, and New England
has no refineries so that the heating oil must all be brought
from outside the region. A high percentage of the movements
into and around the region are marine, thereby putting
movements of heating oil at risk for any severe winters when
rivers freeze, and in some cases harbors freeze and are closed
by high winds during the peak demand periods.
In July of 2000, the President directed by the Department
of Energy to establish a regional distillate reserve in the
Northeast as an emergency stockpile of heating oil to address
these winter-related problems, as occurred in the winter of
1999 and 2000. The regional distillate reserve in the Northeast
was later codified in the Energy Policy and Conservation Act as
the Northeast Home Heating Oil Reserve.
The authorized size of the Northeast Home Heating Oil
Reserve is two million barrels. The intent was to create a
stock buffer large enough to allow commercial companies to
compensate for interruptions in supply during severe winter
weather, but not so large to dissuade suppliers from responding
to increasing prices as a sign that more supply is needed. The
Northeast Home Heating Oil Reserve is comprised of government-
owned oil stored in commercial storage tanks in the Northeast,
of which one million barrels is in New England and one million
barrels is located in the New York Harbor.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
The Heating Oil Reserve currently contains 1,965,000
barrels. The Department had to sell 35,000 barrels in June of
2007 in order to have sufficient funding to award new storage
contracts for the heating oil. The current storage contracts
will provide for the storage through September 2011.
In 2008, Congress appropriated $3 million of additional
funds to repurchase the 35,000 barrels sold. Just this week,
the Defense Energy Support Center, acting as our purchasing
agent, has issued a solicitation for the replenishment of these
quantities.
The Department's response plan for the Heating Oil Reserve
provides for the release of heating oil by the means of
competitive sales. The Department has implemented an online
sales platform which will allow for the award of sales
contracts within two days, and the Department's Office of
Fossil Energy website permanently posts standard sales
provisions and also provides the means for companies and
individuals to register for prompt notification for imminent
sale. Actual sales are limited, of course, to entities
customarily engaged in the sale and distribution of petroleum
distillate. The Petroleum Reserve Office conducts pre-season
exercises of the sale system with industry every winter to
ensure the industry's familiarity with the sale system and to
receive feedback for continual improvement.
Congress in the Energy Policy and Conservation Act provided
explicit conditions for the release of stocks from the Heating
Oil Reserve. The Secretary may release stocks from the reserve
only upon the finding by the President that there is a severe
energy supply interruption. Such a finding may only be made if
it is determined that, one, a dislocation in the heating oil
market has resulted from an interruption, or two, a
circumstance exists that constitutes a regional supply shortage
of a significant scope and duration that the reserve's release
would significantly reduce its adverse impact.
To date, the Northeast Home Heating Oil Reserve has not
been needed to address an emergency winter shortage situation.
The recent winter, however, of 2007-2008 saw the end-of-season
potential supply situation develop in the Northeast as
commercial stocks fell to unprecedented lows due to high market
prices and strong demands for distillate in Europe. That
situation is not what the reserve was established to address
and would not have been characterized as a severe energy supply
disruption, as the law stipulates. However, last year's
situation does give similar concerns for this upcoming winter
of 2008-2009.
I would like to conclude by saying the Department's
Northeast Home Heating Oil Reserve stands ready to make heating
oil available in a very rapid manner in the event of a
Northeast supply shortage. We are currently adding the heating
oil to bring our supplies to 99 percent. During the winter
season, the Department of Energy also participates in weekly
energy calls with the State energy offices, local government,
the Northeast gas and heating oil associations, and the Coast
Guard and others to monitor the Northeast fuel supply
situation. These calls have served in the past to help States
exchange information, coordinate a response to stock
situations, transportation issues, price levels, and dealer and
consumer concerns.
This concludes my prepared testimony. I will be happy to
answer any questions you have.
[The prepared statement of Mr. Johnson follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Kerry. Well, thank you, Mr. Johnson.
So do I understand from your testimony that it would be
your position that you do not have the Congressional authority
to release the reserve other than in those two circumstances?
Mr. Johnson. That is correct.
Chairman Kerry. And you are saying that the circumstances
require an interruption?
Mr. Johnson. That is correct, a supply disruption.
Chairman Kerry. A supply disruption. There were two
circumstances. One was a supply disruption, and one was a
disruption of what?
Mr. Johnson. One was what is called a--there is a trigger
which is a supply dislocation, and the other one was----
Chairman Kerry. Why would what we have today not be a
supply dislocation?
Mr. Johnson. Because the President--the high prices are not
indicative of a supply interruption----
Chairman Kerry. So if there is no supply interruption and
the normal supply and demand curve is what it was, why is the
price going up?
Mr. Johnson. The price of heating oil, as you know, is--
excuse me. The price of heating oil is tied to the price of
crude and that is why--it is based on the fundamentals and the
price of crude.
Chairman Kerry. And that can't be interpreted as a supply
interruption?
Mr. Johnson. No, sir.
Chairman Kerry. So is it your position that Congress needs
to pass a redefinition or an additional circumstance?
Mr. Johnson. That would be correct.
Chairman Kerry. Interesting. Under what circumstances as a
matter of policy do you believe we should perhaps use the
reserve? Let me preface that with a threshold question. Do you
believe the reserve is large enough?
Mr. Johnson. The reserve was built to respond to winter-
related supply emergencies such as that happened in the 1988-
1989 winter and again in the 1999-2000 winter, in which prices
spiked because supplies couldn't reach the market and the
reserve was built to address those things. It was not to
address price issues as what you are thinking. So therefore
what we did is want to build only enough supplies that would
meet that immediate need. We have enough supplies that can meet
five days of----
Chairman Kerry. I understand all of that, but it is not
what I am asking. I am asking you to think out of the box a
little bit and tell me whether, given what is happening to
small businesses, given the rise in prices, as a matter of
policy, should we consider having a larger reserve which can be
released as a counter to speculation, to these very significant
spikes in price that have a profoundly negative impact on the
economy generally, and particularly on small businesses?
Mr. Johnson. Sure, the reserve could be made bigger, but
essentially if you are saying that there needs to be more
supplies, the industry should be out there providing those
supplies to build up. Is it----
Chairman Kerry. Well, we haven't built a refinery in this
country in 30 or 40 years. We don't have any refineries in New
England, I don't think.
Mr. Johnson. Correct.
Chairman Kerry. So obviously the marketplace isn't working
so well with respect to supply. They kind of like it the way it
is, a nice chokehold. Prices are up and you can make a lot of
money. My question is whether we need some intervention in the
marketplace to help consumers. People are crossing the border
to get gas in Mexico now. They take gas holidays. Did you know
that? They drive to Mexico in order to fill up because Mexico
subsidizes their gas, keeps it a lower price.
I am not suggesting we ought to subsidize the price, but I
think we should have the ability to be able to counter the
negative impact--the inflationary impact, the significant sort
of disruption, if you will, to the normal market forces that
occurs when you have a very significant increase in prices
because of speculation, as you heard Senator Snowe speak about
as well. Her experts say speculation is responsible for $20 to
$65 per barrel. I said $10 to $40. Put it somewhere in between,
$30 to $50. That is a very significant chunk of what the
American consumer is paying today due only to speculation.
So you can tamp down the speculation if you have the
ability to counter it by affecting the supply and demand curve.
Has this not occurred to you? You guys don't talk about these
things?
Mr. Johnson. Yes. Yes.
Chairman Kerry. You do?
Mr. Johnson. But, you know, the thing is if you take and
you build a reserve up there and you released it due to higher
prices, you are going to dissuade industry from bringing stocks
in to supply. They are going to have expectations more that the
government is going to release oil so therefore I should be
able to have it.
Chairman Kerry. Why wouldn't you have the counter
incentive, which is to bring a whole bunch in so that you are
the person selling it and you make more money to prevent the
government from feeling it has to? I mean, if you have got a
good business instinct, it seems to me the instinct is to try
to get as much of the market as you can, and therefore you want
to make sure you have got enough supply coming in because they
might come in----
Mr. Johnson. But should government compete with industry?
Should----
Chairman Kerry. Technically, no, but industry also ought to
behave according to some standards. This is why we have the
FTC. That is why we have a Commodity Futures Trading Board.
That is why we have an Attorney General. That is why we have
laws, blue sky laws. That is why Teddy Roosevelt busted up a
whole bunch of trusts, because people didn't behave. And we
learned a long time ago that sometimes the government has to
step in to ensure a fair playing field. That is all we are
talking about here.
Mr. Johnson. Yes, but the price of heating oil is a reality
due to the price of crude oil and essentially it is Congress--
--
Chairman Kerry. It is tied to crude oil. I understand it is
wedded to the per-barrel cost. I get it. But when you have a
region that is particularly dependent on heating oil with a
whole bunch of concomitant costs that have a profound impact on
people's ability to survive, don't you have some responsibility
to try to address that?
People are paying for something they have no control over.
For instance, they are losing their health care because defined
benefit plans are disappearing and they are being thrown into
contribution plans, so they are out in the marketplace, fending
for themselves. Their health care costs are going up. Their
benefits are going down. They turn around, college tuition is
going up. You notice tuition costs are going up? Their food
prices are going up. And now credit costs more because the
housing market has collapsed, and there has been no response
from this administration for six months despite many of our
pleas. We hopefully will pass something here in the Congress.
Haliburton is doing well. A bunch of big companies are
doing well. But the average American is really getting hurt. It
doesn't seem like there is an administration response that
wants to try to find a way to intervene and help the average
American.
Now, coming back to heating oil prices, I am asking you as
a matter of policy, would the administration support expanding
that home heating oil pool and expanding the circumstances
under which it might be released in order to relieve pressure?
You could define a set of strict impacts, but would you be
supportive of exploring something like that?
Mr. Johnson. I can't speak for the administration on that.
I do manage the Heating Oil Reserve in accordance with the
laws----
Chairman Kerry. What would you advise, as the person who
manages the heating oil? Does it concern you?
Mr. Johnson. The whole situation concerns me very much,
okay. I believe the premise of the Northeast Home Heating Oil
Reserve to meet the winter-related shortages is a very
important mission and is something that we should be doing from
the Federal Government. However, I think also the Department of
Energy is doing as much in trying to resolve some of these
issues, because it is tied to crude. The Department has
initiated efforts to increase energy efficiencies and
conservation efforts, development of cleaner, more sustainable
energy sources, alternative fuels, and also calling for the
development of production of Outer Continental Shelf, Arctic
National Wildlife Refuge, and our domestic oil shale resources.
Those things will lower crude prices, which will in turn lower
the heating oil price.
Chairman Kerry. Well, not according to the experts I have
talked to. They don't lower prices. The maximum you might get
out of ANWR is a reduction of two cents per gallon, none of
which will affect--at its maximum peak pumping, world prices at
all. And you can play Outer Continental Shelf games and all
that stuff. But we only have three percent of the world's
reserves. There is no way three percent of the world's
reserves, fully exploited, is going to affect the people who
produce 65 percent of the world's reserves. It is just not
going to happen. That is not the way the market works.
So this is a phony argument that is being sold to people,
and regrettably, when we have tried to do things like a
renewable portfolio standard, major initiatives with respect to
alternative renewables--we paid for it. We had $23 billion to
excite alternative renewables. And you didn't make the
decision, but the administration you work for helped defeat it
on the floor of the Senate in favor of fossil fuel oil. Big oil
won that battle. So we are not moving $23 billion into
incentives for alternatives and renewables.
Unfortunately, the rhetoric has worn short with me. I have
been here too long now and I know the difference between
solutions and rhetoric. It just doesn't move me. There has just
been an anemic effort to try to wean us from foreign oil or to
deal with consumer issues and I don't think it is your fault. I
think you are trapped because I think OMB and the White House
run these things and it is too bad because a lot of good
thinking and good civil service manpower gets tied up and put
into gridlock, unfortunately.
Well, let me turn to Senator Snowe.
Senator Snowe. Well, thank you, Mr. Chairman. You make an
excellent point. Ultimately, it has resulted in an all or
nothing proposition. It requires numerous components for a
balanced energy policy that has been totally absent. We have a
responsibility on both sides of Pennsylvania Avenue to address
that question, but it can't be just one thing or another. It
needs a combination.
And that is what was mentioned about the alternatives. You
are absolutely right. Here we are in the midst of this year, in
the midst of an energy crisis, and we haven't extended the tax
credits for renewables. In Maine alone, there is $1.5 billion
worth of wind projects pending the extension of the tax credits
beyond this year. It doesn't make sense that people buying
energy-efficient furnaces cannot take advantage of tax credits.
They expired at the end of last year. We cannot reach an
agreement on that question. It just doesn't make sense. It just
defies logic.
It takes all of these efforts, especially now to have an
immediate impact on the price. Whatever we can do for people to
divert to alternatives, are doable, including more energy-
efficient furnaces, whether it is oil or natural gas or
whatever. The point is that people can't avail themselves of
these tax credits as they are remodeling their homes, or to
weatherize their homes. They just can't do it because it has
expired because there is resistance on the part of some who
just simply don't think it will work. It will work.
But here we are, and the people in Maine are worried about,
one, price, which is catastrophic, and two, supply. Do you
anticipate that there will be a supply problem next year?
Mr. Johnson. Do we anticipate?
Senator Snowe. Right.
Mr. Johnson. It is hard to anticipate. You never know what
the weather is going to deal us.
Senator Snowe. So there is a possibility?
Mr. Johnson. There is always a possibility, yes.
Senator Snowe. Are you concerned about the fact that in
terms of production and oil supply, we are dramatically down
this year compared to previous years in terms of production, is
that correct?
Mr. Johnson. I can't answer that. You mean in terms of----
Senator Snowe. Well, as I understand it----
Mr. Johnson [continuing]. Crude oil production, you mean?
Senator Snowe. Yes, and supply of home heating oil, from 46
million barrels, is that correct?
Mr. Johnson. Umm----
Senator Snowe. To 25 million barrels?
Mr. Johnson. Right now, stocks are low of heating oil,
correct.
Senator Snowe. Yes, and why is that the case?
Mr. Johnson. Well, I am not an expert on that, but my
understanding is there is a lot more refining margins in
producing low-sulfur diesel, and so a lot of effort is being
given to production of low-sulfur diesel.
Senator Snowe. So more of it is going to production of low-
sulfur diesel. Is that price tied? Are home heating oil prices
tied to low-sulfur diesel? Why are the prices up, then, for
home heating oil?
Mr. Johnson. I mean, of course, that is higher than home
heating oil, and----
Senator Snowe. We are paying $4.60. My CAP program for my
distributor is $4.89. That is where we stand today, and this is
June, approaching July. You don't expect high prices at this
point for home heating oil.
Mr. Johnson. No.
Senator Snowe. So can you explain that?
Mr. Johnson. I cannot explain.
Senator Snowe. So people are asking me the question,
rightfully, why are prices so high right now? Can you give an
explanation to that? I would like to know, because you have had
obviously a breadth of experience----
Mr. Johnson. That would have to be asked of the Energy
Information Administration. I can't answer all those. We have
asked the same questions to--because we are trying to buy the
35,000 barrels to replace the oil in the reserve. We are tied
to that same market, and we had hoped to be able to buy that
35,000 with the $3 million the Congress gave us. However, we
are not going to be able to buy that much.
Senator Snowe. Because of the price?
Mr. Johnson. Because of the price.
Senator Snowe. So we need to provide additional funding to
at least meet the two million in terms of reserves?
Mr. Johnson. Yes. We will only be--we will probably be
acquiring less than 20,000 barrels.
Senator Snowe. So that is something that we obviously
should work on, to provide additional funding, given the price.
But getting back to the question of price, I know what the
original legislation called for in terms of releasing supplies
from the reserve, and as Senator Kerry was exploring, are there
any other options here. That is why I have introduced this
legislation with Senator Kerry and Senator Dodd because I do
think it is important to change the threshold for release of
those supplies.
If, for example, oil approaches $5 a gallon or more. People
are rightfully asking that question, too. If it is $4.89 today
in June, what is it going to be in September, October,
November, December, as we are approaching the winter months?
They are logically thinking, could it be worse?
Mr. Johnson. Mm-hmm.
Senator Snowe. So we are where we are today, and that is
catastrophic. It will be absolutely devastating if they are
going to approach $5 or beyond. So, that being the case, is the
administration prepared to handle those who cannot afford to
purchase it? Even with the standards for low-income fuel
assistance, which the income eligibility standard is $13,000,
if the people of Maine and throughout New England have to pay
upwards of $5,000 to heat their homes, if you are talking about
an average of $850 or $1,000, depending on the size of your
home and whether it is energy efficient and so on, you are
talking $5,000. There will be a major disruption of supply to
the home. People are just not going to be able to afford it.
What then do they do? What are we prepared for, because that
will be a crisis.
Mr. Johnson. Well, I am not sure what this program can do
about that. I mean, that is a bigger issue.
Senator Snowe. So I think the question is, there is a
possibility the price could be higher, would you agree?
Mr. Johnson. Right.
Senator Snowe. And there is a possibility there could be a
challenge to supplies. There may not be adequate supplies next
winter, that is a possibility?
Mr. Johnson. We think there will be enough supplies for the
winter. There will be production of heating oil and suppliers
will----
Senator Snowe. Given this dramatic drop in supplies this
year, and dramatic drop in production, does that compare to
previous years in terms of the production that has declined for
home heating oil currently?
Mr. Johnson. Well----
Senator Snowe. How does that compare to previous years?
Mr. Johnson. I can't answer that.
Senator Snowe. How are they going to make up for that lack
of supply? If they have reduced their production currently and
we are already down compared to previous seasons, dramatically
in terms of the number of barrels available for our nation's
supplies, how do we make that up?
Mr. Johnson. Again, that is a question that is more
appropriate for the Energy Information Administration.
Chairman Kerry. Okay. Speaking of the Energy Information
Agency, they stated that based on supply and demand, the price
should be about $90 per barrel. He further stated there has
clearly been a surge in money coming into the commodities,
including energy, which has had some upward effect on the price
above the trend line. Would you disagree or agree with Mr.
Caruso on that in terms of the role that speculation has played
in the pricing of oil?
Mr. Johnson. I am not equipped to agree or disagree. I live
with the Energy Administration's information, too.
Senator Snowe. What advice do you give to the
administration with respect to what is impending with the
reserve and price?
Mr. Johnson. We monitor the situation of the--as to
disruptions in the Northeast, okay. We manage the Northeast
Home Heating Oil Reserve. We make sure we are ready and able to
respond to any supply disruption in the Northeast that would
indeed--that people would actually be running out, not due to
prices, but due to weather-related disruption, so that we could
make a recommendation that the reserve should be released.
Senator Snowe. But at which point do you make that
decision? My concern is this. From October 2007 to May 2008,
supplies of home heating oil reduced by more than half, from
approximately 46 million barrels to about 25 million barrels.
Production currently is down 400,000 barrels per day over last
year. Where is the tipping point here? At what point do you
realize that supplies aren't adequate to make a recommendation?
We need to have a response plan, is what I am saying. We
have to have a response plan in terms of price and in terms of
supply, because oil is a basic commodity. It is the difference
between life and death. That is the point. People could freeze
to death, and they are making unconscionable choices.
I already heard those unconscionable choices before last
winter, when oil was $2.79 a gallon, depending on where you
were in the State. Today, we are talking double the price. So
where are we? Oil is a fundamental commodity and it affects the
personal well-being, not to mention the economic well-being of
this country. So we need to have a response plan, because there
are going to be people beyond the threshold of low-income fuel
assistance, which isn't even adequate--and I want to get into
that and discuss that with the second panel. But the point is,
that won't even be adequate to help those individuals, let
alone those individuals who make more than $13,000 to pay for
their $5,000 home heating oil bills.
This will be devastating, and that is the point. It will
be. It is a national emergency, considering what we know today
and what we can anticipate for the future. We have got to
prepare for the worst-case scenario, and that means lead time
and preparing and pre-planning. So that is what I am
encouraging and urging you in your conversations, discussions,
and recommendations, and looking at that supply just here and
now with what is going to happen next winter and what people
are thinking.
I am getting asked this every day. I am being asked to give
advice on whether or not they should lock into a price, the
current price. I mentioned that in my statement. People are
deciding, should we lock into a price at whatever it is,
depending on the CAP program? Is it $4.70, $4.89? Or do I wait
and hope that the price will drop? And they are going to have
to have a time constraint here in making that decision. Some
distributors are not even doing it this year, they can't afford
to, or can't get insurance to do it, if they are still in
business. So would you recommend people lock into a price
today?
Mr. Johnson. I can't make a recommendation on that. I don't
have a crystal ball.
Senator Snowe. Okay. So you see the scope of the decisions
and the challenges here----
Mr. Johnson. Oh, yes.
Senator Snowe [continuing]. And the range. We have
experienced the previous price problems in 1979, the gas lines,
as we all remember that, in 1979, 1980, 1974. Now we have got
this dimension of a problem and it is historic. I suggest that
the administration begin to plan for all these potential
contingencies, because they are life threatening and do
basically mean the difference between life and death.
So I appreciate you being here today, Mr. Johnson. Thank
you.
Chairman Kerry. Well, thank you, Senator Snowe. I think
that was an important line of questioning.
Mr. Johnson, I know you have been at the DOE since about
1979 and you were very instrumental in helping to set up this
reserve program. I don't mean any disrespect, but I do have a
sense that you sit there and interpret your job in the
narrowest sense, which is if there is a weather-related
interruption or if a ship somehow doesn't get in, that is the
interruption. But you don't interpret it in the context that
Senator Snowe has just described, where you have production
down, where you have an interruption in what is the standard
flow of the supply. And that interruption is going to have an
impact that she has described. Do you not accept that?
Mr. Johnson. I accept it, but to do anything, I would have
to--be a market intervention, and I am not--we are not equipped
to intervene in the marketplace like that.
Chairman Kerry. Even though the supply is down, even though
there is an interruption in the normal flow of produced heating
oil, why does that not qualify?
Mr. Johnson. Well, I have no authority in that area.
Chairman Kerry. Well, isn't the reserve set up to----
Mr. Johnson. I mean----
Chairman Kerry [continuing]. Intervene in the event of an
interruption in the supply?
Mr. Johnson. Sure, in releasing----
Chairman Kerry. Isn't that what Senator Snowe has
described?
Mr. Johnson. But our action is to release oil reserves in
the event of a supply disruption that is going to leave the
people without fuel. Yes, in that situation. But like I said,
at the end of the season this last year, it was very much a
concern how low the supplies were up there and industry did
respond. Industry came and kept ships coming in and kept the
supply coming while the winter kept on into March. But----
Chairman Kerry. Well, let me suggest this. Can you stay
here and listen? I want you to listen to the testimonies of the
people who are on the second panel.
Mr. Johnson. Okay.
Chairman Kerry. And I would like you to take a summary of
what they say back to the DOE. I am going to ask Senator Snowe
if she would join me in writing a letter to the Secretary in
which we describe what is now teed up to happen in New England
in the fall if we don't straighten this situation out somehow,
or if we can't guarantee a better line of supply right now that
is going to somehow affect the price, because we are looking at
some very tough stuff for people. And I hope people will take
note that on this warm June day, we are sitting here talking
about this well ahead of time.
So I thank you. I thank you for staying. I think you will
find it interesting to listen to these business folks who are
out there struggling.
Mr. Johnson. Okay.
Chairman Kerry. And then maybe we can work on some remedy
to this language issue that you are talking about.
So if I can invite the second panel up, please, we will try
to make this transition as quick as possible. And I am going to
leave Senator Snowe just for a couple of minutes. I have a
judge back here I have to go back and visit with for a few
minutes. If she could begin the process of your testimony, I
will be right back. Is that okay?
Senator Snowe. Yes.
Chairman Kerry. Thanks.
Senator Snowe [presiding]. Our second panel features a
group of people who can collectively give us a pretty complete
picture of the heating oil crisis and how to address it.
First, we are going to hear from Jennifer Brooks, the
Community Relations Manager for Penquis, a nonprofit
organization in Maine.
Our second witness is Sandra Farrell, owner of Northboro
Oil Company in Massachusetts.
Next, we will hear from Michael Ferrante, the President of
Massachusetts Oilheat Council, who is also representing the New
England Fuel Institute.
Finally, we will hear from Michael Stoddard, Deputy
Director and Attorney for Environment Northeast.
I thank all of you for being here and I look forward to
hearing your views. We thank you for taking the time. Your
complete testimonies will be submitted for the record. Thank
you.
Jennifer, will you begin?
STATEMENT OF JENNIFER BROOKS, COMMUNITY RELATIONS MANAGER,
PENQUIS, BANGOR, MAINE
Ms. Brooks. Good morning. Thank you for taking time to hear
testimony about a very important issue affecting us all, the
high cost of energy. There is not a meeting I attend that the
topic of the cost of oil is not discussed and the statement
made, what are we going to do?
More than 70 percent of people own their own home in Maine.
In Penobscot and Piscataquis County, there are more than 15,000
owner-occupied homes that were built prior to 1950. Twenty-
eight percent of those homes are considered poorly insulated.
Four out of five Maine households heat their homes with oil.
The average cost of oil in Eastern Maine is $4.65 per gallon.
The average household in Maine uses 900 gallons of oil per
year. That is $4,185. The average household income in Penobscot
County is approximately $36,845. In Piscataquis County, it is
even less.
Eastern Maine has suffered the loss of major employers
located in very rural communities. With few opportunities for
new employment, workers are left with only one option, to
travel long distances for work. Gas is at an average of $4.10
per gallon.
If small businesses are the backbone of the United States
economy, in Maine, they are the lifeline. Ninety-seven percent
of all businesses in Maine are considered small. Many of those
businesses, however, are much smaller than the SBA's definition
of small businesses. In our region, microenterprises account
for more than 25,000 jobs. In Knox County, microenterprises
account for 30 percent of the workforce. With the high energy
costs facing these microenterprises, they are truly startling.
However, they are not alone in their inability to handle
the high cost of fuel. Recently, Katahdin Paper in Millinocket
announced it's closing due to the cost of energy. Two hundred
people may lose their jobs.
Last year, Penquis provided the LIHEAP funding to 9,078
households but denied 2,151 households. Sixty percent of those
denials were due to the households being over-income. The
average benefit amount was $736. That is 158 gallons of oil at
the cost right now. In order to qualify for LIHEAP this
upcoming season, a family of four has to earn less than
$31,800. Penquis administers a Good Neighbor Fund that provides
fuel assistance to individuals who do not qualify for LIHEAP.
That is funded by private donors.
Last year, people who could not afford to purchase oil
utilized other heating sources, such as small electric heaters,
improperly installed wood stoves, even leaving their cooking
oven on and open. Between October and April, Bangor
Hydroelectric Company is prohibited by State law from
disconnecting electricity for nonpayment. Many individuals
resorted to heating by electricity. In April, Bangor
Hydroelectric Company mailed 46,000 disconnection notices,
representing 39 percent of all of its customers.
While low-income individuals in our State clearly have an
extremely hard time with these price increases, moderate-income
families that are above traditional public assistance
eligibility guidelines are at the greatest risk if there is not
a deliberate and rapid change in eligibility. They will be
driven into poverty very quickly. Any public program or
assistance offered in response to the current energy crisis
must be made available on a sliding benefit schedule that will
allow people up to 100 percent of area or Statewide median
income to receive some benefit.
We should increase LIHEAP funding to reflect both the
percentage increase in the cost of home heating oil and the
increase in need; provide grants, no-interest loans, and tax
credits to small businesses to upgrade or convert their
existing heating systems; continue to fund the SBA's microloan
program, allowing a simple loan process and providing technical
assistance to the many microenterprises; increase
weatherization funding to weatherize the homes of all families
at or below 100 percent of the area or State median income by
2015; and underwrite the costs of converting to non-petroleum
heating systems for families at or below 100 percent of the
area or State median income.
Before I conclude, I want to leave you with a few stories.
These types of situations are everywhere in Maine. You could
not open a newspaper last winter without a story about a family
and a struggle to keep warm, a fire, some sort of tragedy.
These are two families that we were able to help through the
Good Neighbor Fund. Like I said, there were so many others that
we could not.
Ruth and her husband are in their 60s and Ruth has cancer.
They have closed off part of their house to conserve energy.
They receive Social Security and their medical bills are
mounting. They owe the oil company for deliveries already made
and cannot charge any more deliveries. They were $400 over the
LIHEAP income and could not receive the town assistance.
Chris had worked all of his life until last winter when he
was laid off. He ordered 50 gallons of oil at a time, but paid
a hefty delivery charge. Swallowing his pride, he applied for
LIHEAP, only to learn that he was over income due to wages
prior to his layoff and his unemployment benefits.
Thank you very much.
[The prepared statement of Ms. Brooks follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Senator Snowe. Thank you.
Ms. Farrell.
STATEMENT OF SANDRA FARRELL, OWNER, NORTHBORO OIL COMPANY,
NORTHBORO, MASSACHUSETTS
Ms. Farrell. Good morning. Honorable Chairman Kerry,
Ranking Member Snowe, and distinguished members of the
committee, I sincerely thank you for the opportunity to speak
before you today. Unfortunately, I cannot address every issue
that we as small retail heating oil dealers are facing in the
brief time that we have here today. However, I can tell you my
story. It is a story that resonates with many of us in this
business and I am honored to be able to tell it to you today.
My family has owned and operated Northboro Oil since
January of 1953. This is our 55th year in business. We are
fairly typical of other fuel oil dealers in that we are a
multi-generational family-owned business. Growing up, the
business was a constant presence in our home. Today, Northboro
Oil is no longer run out of the family residence, but we have
retained the spirit of the business that my dad bought all
those years ago. We are still a relatively small operation,
delivering approximately two million gallons of fuel oil every
year, servicing 2,400 customers and employing 12 people, and we
are still a 24-hour, seven-days-a-week, 365-days-per-year
operation.
But something has changed since the days when my father ran
the business. Don't get me wrong. We have seen our share of
struggles, but the current state of affairs is like nothing we
have ever encountered.
I worry for my customers. Some of my customers have been
loyal to Northboro Oil since I was a young child and now they
have come to me for help. They can't pay their bills and they
are scared and angry and confused. Last year, a typical oil
deliver was approximately $500. This year, at current prices,
it will be $850 to $900 per delivery. It is not uncommon in New
England in a cold period of time for a homeowner to receive two
deliveries per month. That is going to be $1,700 to $1,900 per
month to heat their home.
It is very tough looking into the eyes of these customers
when they ask me what I think they should do. I don't know what
to tell them. For the first time, I think some of my customers
are going to have to choose between essentials to pay their
bills. I now face a harsh reality. How can I cut off delivery
to people I have known all my life? I can't even begin to
imagine. I have made so many exceptions, but if I make too many
more, the business won't survive.
And that brings me to my worry over the business. A lot of
the money is tied up currently in accounts receivable and
relatively little money is coming in. Between the winter of
2006 and this past winter, I have watched my accounts
receivable jump up by $300,000 to over $900,000 in February of
this winter. It is difficult to afford to offer price
protection contracts because the cost of insuring them is
prohibitive, not to mention the risk involved in the programs.
And I still fear with the price of heating oil at $4.60 a
gallon, or more currently, almost double what it was just last
year, the worst is yet to come.
Meanwhile, the day-to-day operational costs of running the
business keep going up. Hauling fees have increased by 22
percent since 2006, adding an additional $32,000 to my overhead
costs. And credit card transaction fees are eating away what
little profit I have managed to salvage. And there are my
employees. What happens to them if the business starts to go
under? As a small business owner, it pains me to think about
how my employees and my family will suffer if my business
fails.
In short, we are being squeezed from all directions. I have
gotten to know and work with many dealers from around New
England and I can tell you that I have never met more honest,
hard-working, family-oriented individuals anywhere. We truly
care for our customers, our employees, and the family members
that will inherit our businesses after we are through. But many
of us are in serious trouble and more will be if the current
situation continues.
A fellow dealer recently said to me, ``If I go out of
business, I will probably be all right, but what about my niece
and nephew? This is all they know.''
Thank you, Senators, for listening to me today. I am proud
to have been chosen to tell this story and I hope I have made
an impression on you today and look forward to your questions.
[The prepared statement of Ms. Farrell follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Senator Snowe. Well, you most certainly have in the
testimony we have heard so far, which is very dramatic and
wrenching.
Mr. Ferrante.
STATEMENT OF MICHAEL FERRANTE, PRESIDENT, MASSACHUSETTS OILHEAT
COUNCIL, WELLESLEY HILLS, MASSACHUSETTS
Mr. Ferrante. Yes. Senator Snowe and Senator Kerry, thank
you so much for the opportunity to speak before this committee
today. My name is Michael Ferrante. I am the President of the
Massachusetts Oilheat Council, a trade association representing
about 300 retail operations in Massachusetts. We started our
operation in 1955 and have seen a dramatic change in our
membership in terms of consolidation and the shrinking of our
industry.
As Sandra so eloquently said, our dealers face tremendous
hurdles today in this energy market. We are proud to have
teamed with New England Fuel Institute, who is the largest--
they represent the industry regionally, and we are very proud
of our work on the speculative side of the market, which we
will talk about just briefly here.
The high crude and commodity costs are really the
underpinning of what is striking so many people like Sandra. As
you so well know, the price of crude has nearly doubled since
2005. On June 6, we saw prices hovering at around $138 per
barrel. Those prices are commensurate with the rise in heating
oil. The unprecedented crude oil prices have sparked an
increase in the retail price of home heating oil in
Massachusetts to $4.60 per gallon.
A typical fuel oil dealer like Sandra selling 1.9 million
gallons is an average kind of a profile for a retailer in
Massachusetts, interestingly enough, about the size of the
reserve.
Your comments earlier, both of you articulated very well
the impact of the speculative markets on our industry, and that
is translated to severely strained credit lines for people like
Sandra. As she mentioned to you, her receivables are sky high.
A survey last week of our retail board members, about 35 of
those folks across the State, indicate that their receivables
have nearly doubled. A small Needham, Massachusetts retailer
are seeing receivables very similar to Sandra's profile.
And those receivables have also translated to incredibly
difficult situations with banking. Credit lines have had to be
increased by more than 50 percent, some from $250,000 to the
$500,000 level, some from $1 million to almost $2 million to
handle the incredible strain on their receivables. Our largest
member in Worcester, Massachusetts has had to raise his credit
line from $1.2 million to $5 million to cover the cost of fuel.
The overwhelming customer receivables, of course, is
significant. Again, the same profile is being reported across
the State. Retailers are reporting a dramatic increase in the
amount of money that is not coming into the business, and this
alone is dramatically as much as a wholesale heating oil dealer
requires prompt payment from people like Sandra. So when she
purchases fuel oil, a wholesale supplier requires payment for
that fuel within ten days. So you can see that the strain on
the receivables has a trickle-down effect, one that has had
dramatic impact on the industry.
And, of course, bad debt is another issue that is facing
our retailers. People simply cannot pay their bills. Not only
that, they will not be able to pay at all and may be struggling
to simply cover their costs at home. Unlike utilities, our
retailers do not have shut-off policies. They prefer to work
with customers and develop and establish a credit base, but
they are worried about not receiving some payments.
The lack of price protections programming is really an
issue that we are facing, and that is dramatic, as Sandra has
illustrated, as well. Those programs have become so cost-
prohibitive to construct. The insurance, the downside
protection to lock in or cap a program has risen from pennies
per gallon years ago to 45, 50, even 60 cents per gallon. Based
on a contract of 40,000 gallons, that is a staggering amount of
money for a retailer to be able to put forward to protect one
contract for heating oil. A typical home using 1,000 gallons of
heating oil, one contractor would service 40 customers.
The customer relations woes that folks like Sandra are
facing are also very significant. They are spending an
inordinate amount of time explaining very arcane machinations
in the market, taking away from their time that is very much
more needed to develop budget plans and work with their
customers on installing new efficient equipment.
I must also add that gas utility encroachment is having a
severe impact on our industry. The utilities have wasted no
time in capitalizing on the high cost of our fuel versus their
fuel, which right now has the economic advantage. It is very
hard for a small retailer to battle a super-size utility and
their marketing programs in terms of conversion. So folks like
Sandra are once again facing tremendous hurdles there.
And I must add, the Margin-Over-Rack program for LIHEAP,
the leveraging mechanism of a program that we have so
stridently supported, we have demonstrated year after year the
importance of LIHEAP funding, and our members provide lots of
evidence to support that program, but the Margin-Over-Rack
program, the leveraging program, that mechanism is really also
impacting our bottom lines.
In closing, I want to touch upon just a few points I think
that would make for sound energy policy, and you have touched
upon a lot of those. Curbing speculation in the market is
absolutely key. Providing tax credits for efficiency of
equipment is also important. Raising LIHEAP benefits is truly
the most significant thing you could do to help those in need.
The SBC charge that the Massachusetts Oilheat Council has
proposed in Massachusetts, a very innovative way to help energy
efficiency. That would be a utility-type model where we would
assess a small assessment on a gallon of heating oil that would
fund efficiency upgrades.
SBA loans, Senator Kerry, your work there is significant
and we urge you to continue to do that.
The National Oilheat Research Alliance also is another key
component of our survival. That program on a national basis has
developed incredible programs for more efficient systems. We
are burning much less fuel now than we did ever before. And I
will say, as well, that the movement towards biofuels,
renewable energy, is significant in the portfolio of things we
need to do to change the entire dynamic, lessen our dependence
on fossil fuels, and provide a cleaner-burning fuel for our
members.
And I would add one last point. Your whole discussion
around the Strategic Petroleum Reserve is an interesting one
and I ask you to pursue that vigorously. It is a small yet
substantial pool of heating oil, but nonetheless would really
have, in our view, if tested, it would be challenging to meet
the needs of the Northeast when you consider over ten billion
gallons of heating oil make up the oil heat States. In
Massachusetts alone, two billion gallons of heating oil are
sold annually. So the heating oil reserve would be used up
quickly in a time of need.
Just a note on suppliers. You have to remember that there
are only about ten or 12 key terminals in Massachusetts storing
product and those terminals are very resilient inasmuch as
providing product to the marketplace. They do a really good job
in supplying the retail operations. We have yet to test how the
reserve would work with those core terminals in distributing
product.
In closing, Senator Kerry, I want to thank you again for
your continued work on SBA activities. Senator Snowe, thank you
for having this hearing today and thank you for the opportunity
to speak to you today.
[The prepared statement of Mr. Ferrante follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Kerry [presiding]. Thank you very much, Mr.
Ferrante.
Mr. Stoddard.
STATEMENT OF MICHAEL STODDARD, DEPUTY DIRECTOR AND ATTORNEY,
ENVIRONMENT NORTHEAST, PORTLAND, MAINE
Mr. Stoddard. Thank you, Senator Kerry, Senator Snowe. My
name is Michael Stoddard. I am an attorney at Environment
Northeast, a nonprofit organization that researches and
advocates innovative environmental policies. I live and work in
Portland, Maine.
Environment Northeast is at the forefront of State and
regional efforts to combat global warming with solutions that
promote clean energy, clean air, healthy forests, and a
sustainable economy. On behalf of our organization, I want to
thank this committee for giving us the opportunity to testify
today.
In our written testimony, we briefly recap our view of the
problem presented by our present lack of tools to control
heating oil costs. These include: (1) because petroleum heating
fuels must be imported to the Eastern States, more than $11
billion leaves this region each year; (2) demand on Federal
fuel assistance for low-income households are rising, but the
funds are covering less of the household heating needs; (3) the
Federal Weatherization Assistance Project funding is so low it
would take 35 years to treat every eligible home; (4) and
despite their very good work, these programs do not provide
heating help to small business, commercial or middle-income
residential customers; (5) perhaps the biggest problem of all
is that while customers of electricity and natural gas have
access to large and growing energy efficiency programs to help
them gain control over their energy costs, heating oil
customers do not.
As explained in more detail in our written testimony,
Environment Northeast is proposing that the Federal Government
and the States coordinate on a major new initiative to help
consumers and the U.S. economy gain control over escalating oil
and propane costs. Working together, Federal and State
government should implement a comprehensive effort to develop
and fund energy efficiency programs for petroleum-based heating
fuels.
The benefits of a national energy efficiency program for
heating oil, kerosene, and propane would be many and include
the following: (1) small businesses and commercial property
owners and residential homeowners of all income levels will
finally have access to energy efficiency programs regardless of
whether they use electricity, natural gas, or oil to heat their
buildings; (2) individual homeowners can cost effectively cut
their energy use by 20 percent, delivering a cost savings of
more than $1,000 at current oil prices each year; (3)
businesses will cost effectively reduce their consumption and
heating bills by seven to nine percent every year; (4) money
that formerly left the States to importers can be saved to
trickle down into the local economy; (5) good, steady, new jobs
will be created for heating system technicians, building
contractors, and weatherization specialists.
The heating fuel efficiency programs we propose can be
implemented along two paths. For small businesses, commercial
and multi-family building owners, and residential customers
other than low-income, every State in the U.S. will offer
market-based efficiency programs much like the utility-based
programs Michael was describing, designed to function like
current electric and natural gas efficiency programs.
Market-based efficiency programs for heating fuels will
ultimately require a national budget of around $1 billion
annually. It should start low and ramp up to that level over a
three- to five-year period. One billion dollars is our
approximation of what it would cost to capture all cost-
effective heating fuel efficiency opportunities. This is the
standard being used in the electric and natural gas programs.
For income-eligible residential buildings, the
Weatherization Assistance Program budget should be expanded to
around $3 billion per year over five years in order to
weatherize every home that receives LIHEAP fuel aid, and that
would be whether they receive oil or natural gas or propane or
electricity for their heating and cooling.
Opponents of this proposal may try to paint this as a
defeatist call for Americans to accept that their only course
of action is to use less, spending the winter wrapped in
sweaters and blankets and reading by candlelight. Senators,
please do not give them the satisfaction of perpetuating this
myth. Energy efficiency is not the same as conservation. Energy
efficiency means using better technology to get the same amount
of output from your heating, lighting, appliances, and business
equipment as you did before, but using less energy in the
process. It means keeping your living room heated to the same
temperature with less energy because you have tuned up your
boiler, insulated your attic, and installed a programmable
thermostat. Energy efficiency means standing up and taking
control of the situation, not sitting back to let the situation
control us. The one thing energy efficiency does not mean is
making do with less.
So how do we take control? We take control by investing,
just the same as electric utility efficiency programs have been
doing successfully for decades. We invest tactically to help
consumers put energy-efficient products into their businesses
and homes. We invest in the difference between the cost of an
average product and the cost of a high-efficient product. And
for those who are not low-income, we leverage public dollars by
cost sharing with the customer.
Energy efficiency programs represent the best traditions of
how Americans respond when our country needs to make a major
transition. This is one of those times. We need a comprehensive
energy efficiency program for those customers who heat their
businesses and homes with oil. Thank you.
[The prepared statement of Mr. Stoddard follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Kerry. Well, thank you, Mr. Stoddard. I couldn't
agree with you more about those recommendations. I think
Senator Snowe and I would join you in articulating a lot of
frustration that we haven't been doing this for the last
several years.
I have to tell you that it is so exciting what is happening
in some quarters right now in venture capital, the private
sector, MIT, Carnegie Mellon, CalTech, and places like that.
There are just really amazing incubator projects that are
taking place, and what we could do to excite them if we got
those tax credits that Senator Snowe is referring to, the
extenders--it is just inexcusable that we are sitting here
without a national policy that allows people to get credit for
moving in some of these directions, which in fact moves the
marketplace. I know this. We saw it in Massachusetts in the
1970s and 1980s. You know, the fastest-growing sector of our
economy, with 75,000 jobs and over 1,200 new companies, was in
environmental industries, environmental impact mitigation, and
related fields when we had those major incentives, tax credits,
in place.
And then, of course, the 1980s came along and the Reagan
administration didn't believe in them ideologically and they
pulled the guts out from under them. Tenured professors who had
left their jobs to go to the Colorado Laboratory on Energy were
thrown out on the street, and the things that we had begun to
develop in our laboratories were picked up by Europeans, the
Japanese, and others and they became the world's leaders in
photovoltaics and alternative energy. It is just crazy.
Well, now we are getting back there, slowly. I visited the
other day with Dr. Craig Venter, who did the human genome
mapping project, and he explained to me that he is now entirely
focused on energy. He described to me how he and his group are
using synthetic biology to take some of the lessons learned
through the genome process about how you can create things,
knowing what the form of genes are, et cetera, and applying
this knowledge to a process that combines photosynthesis and
the microbiolab processes taking carbon dioxide to create a
feedstock for a new fuel that is clean.
Now, if we succeed in that, that is a game changer, a total
game changer. This is like Harry Truman and Franklin Roosevelt
sitting there knowing someone else is developing a bomb and if
you don't get it first, you may have a problem, and so we go
out and create the Manhattan Project. Well, we have got a bomb
ticking underneath us right now and we have no response
commensurate with the level of the challenge.
And I will tell you, if we were to unleash our colleges and
universities and entrepreneurs and venture capitalists and all
these people, revolutionary innovation is one thing we know how
to do in America. We are the best innovators and creators there
are, and we have just got to help kick it into high gear. That
is the essence of it. So I appreciate what you are saying about
those efforts.
Ms. Brooks and Ms. Farrell, I wasn't here to hear your
testimony, but I have read both of your testimonies. I
appreciate enormously what you do with Penquis and the
recommendations you made are just right on target. I mean,
those couldn't be more apt for what we ought to be doing long-
term, short-term, et cetera.
Ms. Farrell, I am fascinated, with those kinds of
receivables and this trend, how do you make it work? How do you
stay in business?
Ms. Farrell. I think that is the question we are all asking
ourselves, is how we are going to stay in business.
Interestingly enough, I went over to the office this weekend
when I was re-looking at information, and as you stated on this
warm day in June, my receivables are still $512,000. Last week,
I had one deposit that amounted just above $4,000 and another
day I had a deposit that amounted just over $9,000. The
customers----
Chairman Kerry. How far back do those receivables go?
Ms. Farrell. About--usually at the late spring, early
summer is when you see your larger over-90 because they are
starting to go into over-90. I think the over-90 was probably
about 150, and the rest of it is 60, 30. But, you know, you do
begin to----
Chairman Kerry. Have you traditionally gotten to a point
where the vast percentage of that is paid off or not?
Ms. Farrell. That is what you hope, yes.
Chairman Kerry. You hope, but have you gotten there in the
past?
Ms. Farrell. Yes, usually pretty good. You know, sometimes,
you have a little bit of bad debt. We do a little equipment
financing, so there is a certain amount that is involved in
that. But generally speaking, we try to do a pretty good job of
getting it cleaned up, because if you don't, it just goes into
the next season and it gets worse. And what starts to happen--
--
Chairman Kerry. How do you carry it? On those receivables,
what percentage are just your supply costs?
Ms. Farrell. I would say 60 percent--well, maybe even more
now. It is probably more than that because of the price of
oil----
Chairman Kerry. So basically, you are financing----
Ms. Farrell. Yes.
Chairman Kerry. You have become a financier of other
people's home heating oil.
Ms. Farrell. Yes. Exactly.
Chairman Kerry. You are a LIHEAP adjunct.
Ms. Farrell. Yes, I am. It appears that way, yes.
Chairman Kerry. Drafted, I might add.
Ms. Farrell. Mm-hmm.
Chairman Kerry. So as you go forward, have you seen some of
the other distributors go out of business?
Ms. Farrell. There are--Michael could probably answer that
better, but yes, there are distributors who have gone out of
business, and I know there are a lot of distributors who are
very concerned, because if you are not collecting the
collectables, how do you go forward.
Chairman Kerry. What would make the most difference to you?
Ms. Farrell. Well, I think having LIHEAP funding right up
front, because I know some years it seems as though we get a
portion and it is kind of distributed and then no one knows
what is going to happen. And then maybe we get another portion
that is distributed and then no one knows what is going to
happen. And that becomes cumbersome on the fuel oil dealer
accounting-wise with the customer because they don't know what
is going to happen.
You know, another thing we are running into which is, of
course, getting worse is we have our LIHEAP customer, and
LIHEAP does a pretty good job for them. A lot of their fuel oil
needs are met and they also provide some repairs and equipment
replacement, if necessary. The customer that I am very
concerned about is the customer who just falls right out of the
range of LIHEAP because there is absolutely nothing for that
customer. They may make $20 a week too much and they get
absolutely nothing.
I mean, we have a customer right now who is an 80-year-old
woman. She has Social Security, a very small pension, and she
works 20 or 25 hours a week, believe it or not, at 80 years old
at a supermarket chain in New England. And she needs a new
boiler. Her boiler is terribly inefficient. It is leaking. It
will not make it into the next heating season. We encouraged
her to apply for fuel assistance. A lot of customers are
reluctant because they figure that that is a welfare program
and a lot of your elderly and younger people feel kind of
proud. But we tell them that they really need to be doing this.
So we helped her. She got all her facts and figures. She makes
something like $30 a week too much. If she wasn't making that
$30 a week, fuel assistance would replace her boiler and she
would be getting assistance with her fuel oil, electricity,
and----
Chairman Kerry. Why doesn't she cut back a couple of hours?
Ms. Farrell. Well, she could, and we recommended that to
her, as a matter of fact. But she likes her job and she--they
were on the line, and there are many of them like her----
Chairman Kerry. Sure. She is proud----
Ms. Farrell. She is proud. I think she likes her job.
Chairman Kerry. She is feeling independent. She wants to do
it----
Ms. Farrell. The job is probably good for her. It gets her
out of the house.
Chairman Kerry. I understand.
Ms. Farrell. But there is no contingency for someone like
her. We have tried calling every other agency we can think of.
There is no help out there.
Chairman Kerry. And what happens when you lock in? I
noticed in your testimony you talked about the lock-in price
you were at, but the price went up. Do you just lose on that?
Ms. Farrell. No. How price protection----
Chairman Kerry. You insure it?
Ms. Farrell. How these plans are constructed is we will go
and purchase future contracts over the winter months and we
price them. You look on the screen, say to your supplier, get
me some contracts at these rates if they look good. Of course,
nowadays, you never know what looks good. And typically, that
would be how you----
Chairman Kerry. You are passing on based on your purchased
contract?
Ms. Farrell. Yes. We get a purchased contract, put our
margin on top of that, and that would be a fixed-price program.
Then the CAP pricing came into being when some years the retail
price of fuel would go below the fixed rate. How the CAP
program works is you essentially buy puts against your future
contract so that if the retail price of fuel oil goes down, the
customer's price will go down, also. Originally, when we
started those CAP plans, the price of oil was not as high. It
was not as volatile. The puts ran about two to three cents per
gallon. They have continually escalated with the price of oil.
The last two years, it was 17 to 18 cents out of the money
puts. That is not even in the money puts.
Last year, I created a hedging program. I hedged a million
gallons. It cost me $170,000 up front. To have created the same
program this year, it was going to cost me $400,000, and I
would have had to have been doing that program in the winter. I
just didn't have the money to do that. That is $400,000 up
front that you may never recoup if oil stays within a certain
parameter. All your options are going to expire, so you have
had to outlay this huge amount of money. You may never recoup
it and there is tremendous risk in these programs.
We will probably--probably are going to come out with a
program this year. Customers like them. I think they have
worked well for customers. But we are going to do it more in
the moment. We haven't tried to do it--you know, before, I
would have had it all set maybe three months ago----
Chairman Kerry. Right, but you are forced to be----
Ms. Farrell. I am forced to be in the moment because we
don't know what is going to happen. And once again, if a
customer, like Senator Snowe said, asks me, what do you think I
should do, locking in at $4.899 per gallon, I honestly do not
know what to tell that person. I don't even want to be locked
into those prices.
Chairman Kerry. Fair enough. Senator Snowe.
Senator Snowe. I want to thank you all for very significant
testimony. It certainly is moving to listen to the stories and
the challenges that you face respectively and the
constituencies that you represent. I think it underscores the
dramatic challenge that this country is facing and individuals
are facing caught up in the confluence of these events that are
creating a very dire situation as it stands today, and the
unpredictability of the future, I think enhances the fear and
the apprehension. It certainly has been expressed to me
personally, about what to expect for the future and how to
prepare for it.
Ms. Brooks, I know that you cover a wide ranging area in
Maine geographically, a very rural area, and the Low-Income
Fuel Assistance Program becomes a pivotal program for so many.
What would you recommend for changes, if we could sketch a
scenario for change in that program with respect to eligibility
of how it is funded? Ms. Farrell, you mentioned about having
more money available up front, which is true because you can
leverage your buying and purchasing power. Perhaps we should
put more money on the emergency side so that there is more
discretion in how it is funded rather than the full formula,
but that is always a challenge here, as well, for other reasons
I won't get into right now, but it is something that we
certainly should examine. Ms. Brooks.
Ms. Brooks. I think it is important to point out that the
LIHEAP program was never meant to pay for someone's oil for the
entire winter. However, if the average person on fuel
assistance makes about $14,000 a year and the benefit only pays
for 158 gallons of oil, I don't know how they come up with any
more money, and I know why they haven't paid their oil
companies, because they can't. They can't, with the cost of
food and the cost of gas and everything else. There is no money
left over to pay even in the summer months.
So I guess my first recommendation would be to increase the
dollars that the actual person gets, a higher benefit amount,
and also expand the guidelines so that those people that are
just above that income guideline can receive some assistance,
as well.
Senator Snowe. How many people come to you that are just
above the guidelines?
Ms. Brooks. Last year, it was a little over 2,000 that we
denied, and about 60 percent of those were because of over
income. And I know there are thousands more that aren't calling
us.
Senator Snowe. So that is between those two counties alone.
Serving two counties is more than 2,000. And given the prices
where we are today, it puts people really----
Ms. Brooks. Right.
Senator Snowe [continuing]. In some difficult financial
straits.
Ms. Farrell, what would you recommend in terms--you
mentioned about having more money up front, which is certainly
a good idea--in terms of the way the money is issued?
Ms. Farrell. Well, not that it has to come in up front, but
I think if customers knew, because it creates a lot of anxiety
in the LIHEAP customers not knowing what they are going to be
getting, because they don't know how to plan. You know, most of
these people are trying to plan and they are trying to manage.
So not necessarily that we would get the money so much up
front, but I think it is helpful to the customer to know kind
of what to expect.
One of my notes of something that I think would be helpful
other people have mentioned here today is I would love to see a
tax credit or a rebate program for customers who want to
upgrade their equipment. We have tremendously efficient oil
heating equipment, 90 percent efficient. It is clean. Customers
want to upgrade now that the prices are high. We have used
programs similar to this with the utilities have offered, and
with rebates--a lot of customers, it is enough to kind of give
them an incentive to replace their equipment. And going from
some of the older equipment to newer equipment, we are seeing
customers saving--we have two systems we have taken out in the
last two weeks. I am sure that those customers are going to
save 40 percent in their consumption of fuel oil.
So getting new equipment out there and weatherization
assistance, I think will go a long way to helping a lot of
customers reduce the amount of fuel that they are using. So I
do think that is important, would be a great thing to have and
a great tool for us.
Senator Snowe. Yes. That was one of the issues with this
tax credit, the one that expired the end of last year, was to
do just that. But I think it is interesting that home heating
oil is shortchanged in the process for enhanced efficiencies--
--
Ms. Farrell.Yes.
Senator Snowe [continuing]. Compared to electricity and
natural gas, which is the point you were making, Mr. Stoddard,
and I think that is critical. Should we set up a separate
program in order to do that across the board, set aside
funding? One of the issues that I raised with Northeast Home
Heating Oil Reserve is upon the sale of that oil, that we would
use the revenues to set aside for weatherization, for example,
as another way of doing it and making those kind of energy
efficient investments.
Mr. Stoddard. Part of what we have tried to put in our
testimony was some estimate, some reasonable, rational estimate
of what it might cost overall to try to get good energy
efficiency programs out there on a meaningful scale, and that
is where we came up with that figure, not including LIHEAP-
using customers, but everyone else. What would be cost
effective? What resource that is out there that would be
cheaper than just buying another gallon of fuel? And
nationally, that would come to about $1 billion in total.
It is important, I think, to mention that the States have
been quite active. They have been leaders, and particularly in
your two States and in the Northeast generally, in implementing
these energy efficiency programs, both in the natural gas and
the electric utilities. And the significance of that is that
there are planning and administration and implementation and
evaluation systems in place to do energy efficiency delivery.
They just don't apply to oil customers.
So I think, to go to your question, Senator Snowe, should
we establish a program, I think some programs are already
established. They just don't go to oil customers, and so the
question would be would you take funding and plow it into those
existing programs, or do you need to create something new. I
would suggest that it should be implemented on a State-by-State
basis because every State has a slightly different arrangement
in terms of government agencies, how interested the oil dealers
are in participating, and so forth, and I think the planning
has to happen on a State-by-State level.
I also feel very strongly that the States ought to chip in
their fair share. I don't know what that fair share is, but
when you hear the Massachusetts oil dealers talking about a
half-penny per gallon charge and Vermont currently assesses a
half-a-percent gross receipts tax and it was recently
recommended that they raise that to 1.5 percent. I currently
chair a committee of the Energy Task Force formed by Governor
Baldacci in our home State to look at this question of what
efficiency opportunities we might have, and there, too, we have
raised the question about what funds could we raise locally to
contribute to this solution.
So maybe some kind of matching requirement would help
entice States to chip in their share. But clearly, what our
testimony was designed to show is that the task is bigger than
probably what the States and the oil customers can carry by
themselves.
Senator Snowe. That is an intriguing possibility and it is
something we should explore in terms of maybe setting up a
matching program to expedite this process which could serve as
a catalyst, at the minimum. I mean, I think there is no
question of the necessity.
Mr. Ferrante, you have been in this business for a long
time. What do you see? How does this compare to previous energy
crises of 1979 or 1980?
Mr. Ferrante. Senator, I have been with the Council 17
years. This is unprecedented. There is no question about it. We
are at crisis proportion.
If I could echo what we are talking about here, and this is
a very important component of providing help, what we are
talking about is what is called a system betterment charge, and
if I may just take a couple of minutes to explain. It is
important to know, without sounding confrontational, if the
utilities are able to pass that charge along to every other
customer. So it is built in their rate base. So conservation
programs for gas and electric are paid for by every gas and
electric utility.
We are more than willing to embrace that, as a matter of
fact, have taken a leadership role in that position in
Massachusetts. An SBC charge of about a half-a-cent a gallon in
Massachusetts would collect about $5 million for energy
efficiency programs, and that language is now being debated on
Beacon Hill. It is unlikely it will pass this session, but
maybe next session.
The important component about an SBC for oil is that 30
percent of those funds, as designed by our language, would go
to low-income homes. There, we make a real change. We can
truly, as Sandra said to you, curtail their energy use,
increase their efficiency, hence saving everyone money. So a
half-a-cent could go a long way, but it has to be done with
some understanding. It is based on volume sold, and I can tell
you that over the last few years, we have not, quote, ``had a
normal winter.'' So depending on what you assess per gallon,
that could fluctuate every year depending on how cold the
weather is, obviously translating into how much heating oil
volume. That is very key to these programs in the long-term
success.
So what we are talking about here in a more national level,
a broader scale, we have to look at how we can supplement that
funding, let us say in Massachusetts and other Northeast
States, with some Congressional activity.
Senator Snowe. Do you anticipate there will be a supply
problem this year?
Mr. Ferrante. I would say no one in this room is really
quite capable and adept at saying there will be a supply
problem. So many factors are at play. Weather is key. What I
can tell you is the heating oil industry is incredibly
resilient. That is the best term I can use. When there is need
for product, wholesale companies will go out and get it. People
like Sandra will find a way to deliver fuel. We have not had
truly a fuel shortage or a real crisis since 2000. But I must
also add that we have not had a severe winter. That is going to
be the real test of this cascading series of events we are
talking about today. If a real winter pattern descends on the
Northeast and this country, then we will be in for a real
crisis.
Senator Snowe. What should the reserve hold? What is your
estimate?
Mr. Ferrante. Well, I think there is some reality here.
Again, you have to remember earlier in my testimony, in
Massachusetts, we have about 12 core storage terminals. These
are not your major oil companies, although one is owned by
ExxonMobil. So you have to remember around the State, where we
have just shy of a million homes using heating oil, and we
have, again, about two billion gallons sold in Massachusetts,
so we have 11 core terminals storing that product, distributing
to people like Sandra who pull their trucks under the rack, as
it is called.
We have a number of other inland terminals which are owned
by companies like Sandra. She has storage where other companies
can come in and pull from that, from those storage facilities.
So when you ask, should the reserve be bigger, I think the
answer is yes, but where would you store it? That is the
question. These 11 core terminals are your key storage
locations. They try to manage their inventory in this volatile
market with what we call just-in-time inventory. A retailer,
let us say Global Petroleum in Massachusetts, will look forward
and see what the cost of fuel is, and those who operate those
terminals are not going to be buying product and putting it
into their tanks for storage given the volatility. So they
manage the influx of inventory day-to-day during the winter.
And you know what? It has worked marvelously over the
years. They are very adept at that. So I want to leave you
today with some security knowing that these wholesale suppliers
manage the inventory scheme very well, and that works in tandem
with your retailers.
I do think, in summary, though, that the reserve should be
higher. Remember now, Sandra sells two million gallons a year,
her company alone. There are 800 retailers in Massachusetts,
many of whom sell much more than that. So the reserve, if you
look at Massachusetts only, is truly a drop in the bucket.
Senator Snowe. What do you anticipate happening to
individuals who simply cannot afford to pay this price? I mean,
beyond the scope of low-income fuel assistance, although that
is inadequate even to help those individuals currently as it
stands. Jennifer, what do you see in that respect? What are you
anticipating, because that is the concern that I have, all the
people out there that cannot simply pay for it.
Ms. Brooks. That is a great question and it is a question
that comes up often. There is talk in the State of Maine to
have warming places so people can shut their furnace down real
low during the day and go to libraries and stay warm during the
day. The reality is once you run out of oil, your pipes freeze,
your house is damaged, you have got to move.
We are in a crisis. I don't think that there is any way
else to explain it. We are in a crisis and there will be people
that will have fires, that people will have--it is a life and
death situation, really, for the State of Maine.
Senator Snowe. Well, I heard from a dealer in Maine who
said exactly that, that people were limiting it to one room,
heating one room and lowering the temperature significantly in
other rooms. I heard about an individual who was suffering from
multiple sclerosis who had set up a kerosene heater that was
not appropriate inside his bedroom and set an alarm to wake up
to make sure that it didn't go on too long without catching
fire and would get up and take a shower to keep warm during the
night. I mean, this is how dramatic it was last year.
Ms. Brooks. Right.
Senator Snowe. And one can only try to conceive of what
would happen this year and it is inconceivable.
Thank you, Mr. Chairman.
Chairman Kerry. Thank you, Senator Snowe.
Just very quickly before we wrap up, Ms. Brooks, obviously
you have recommended that we increase the LIHEAP funding, and I
guess everybody would agree that the single biggest impact,
single biggest difference is to have LIHEAP funded adequately
to help people be able to pay, is that correct?
Ms. Brooks. It is just a small----
Chairman Kerry. Excuse me?
Ms. Farrell. That is just a small percentage of the
customers, though. I mean, it is very beneficial, but it really
only helps a small amount.
Chairman Kerry. And what do you recommend doing for those
people who don't qualify, if anything?
Ms. Farrell. It is going to be a real concern, because I
have people at $700 and $800 a delivery. They just are not
paying it. They may be paying $300 one month----
Chairman Kerry. Well, do we have to take a look and
rescale--
Ms. Farrell. I don't know.
Chairman Kerry [continuing]. This thing now? I mean, what
we did previously was adjust it according to where sort of the
marketbasket was for everybody on all the costs of living. Now,
that has changed dramatically, obviously, and in places like
Maine particularly, which is going through some tough economic
times, and elsewhere, you have really got to help people. You
are going to have to find a way to do it. You may have to bring
your ceiling up as to who qualifies for some kind of help.
Ms. Farrell. Well, that would definitely be helpful. As far
as the rest of the solution, I am not sure I have the answer to
that. I mean, even if----
Chairman Kerry. I think Ms. Brooks' long-term investment
concepts are things we have batted around here for a long time,
but if you help people lower their costs at home, if you can
weatherize, if you can put in an efficient boiler, if you could
change the kind of heating system you are relying on, if you
can get triple panes, if you can do all those things, you can
cut your bills very, very dramatically, by 50 percent in some
cases, or more. Those things pay for themselves over a period
of time.
We have to do more. Mr. Stoddard, you raised that. We have
to do more to educate people and make improvements in
efficiency available to them. A lot of people don't realize the
benefits of efficiency. They think, oh my gosh, I can't afford
that, but they don't realize that in a year, it will pay for
itself with the savings they will get, and then in the
following years, they will actually save money. So we have got
to proactively get out to people, which is something we began a
number of years ago. The effort seems to have died away.
What about what Mr. Johnson was talking about? You all have
heard Mr. Johnson's statements, and I wonder if you have any
thoughts about the reserve itself. Is there a way that we
should rethink, the function of the reserve to address this
more effectively? Anybody? Mr. Ferrante.
Mr. Ferrante. I think, as Mr. Johnson said in your question
about the trigger mechanisms, they should be reexamined. I
think that there is clearly some definitions here that
lawmakers should reexamine.
Chairman Kerry. And if we reexamine them, what about the
market intervention issue that he raised? Is that appropriate?
Is it doable----
Mr. Ferrante. It is appropriate. I must agree with his----
Chairman Kerry. Is it doable with----
Mr. Ferrante. I must agree with his assessment that you
have to remember this product would be coming into the market
and would be the wholesale suppliers I have mentioned, the 11
core terminals. Those key companies have to deal with that and
reconcile with that product coming into the market. I think
they could, but the bigger it gets, Senator, the more
significant an economic or business challenge that would be for
a supplier like Global Petroleum or others to deal with what
they bring into the market.
There is no question that two million barrels is not a heck
of a lot of heating oil, but nonetheless, it has a lot to do
with storage. Where can you put this product, that product
sitting there waiting to be utilized? There is very little
storage in the Northeast. We have lost storage for heating oil.
Chairman Kerry. So what I am hearing is basically that
chasing the reserve is going to be really fighting this at the
margins, right?
Mr. Ferrante. I believe so. I mean, we have never tested
the reserve, too, and I think that is the other thing that we
have to remember. It has never really been put to a full test
and we have never triggered it to say, well, this works. That
two million barrels was distributed efficiently and adequately
to people and it was also delivered in time.
So with that said, I don't think anyone here can really
fully say what that number should be for total storage, now or
in the future. It doesn't sound like a lot to me. It never has.
And for those who I deal with on the wholesale side, they would
agree.
Chairman Kerry. One last question. Mr. Stoddard, you seem
to be advocating State management of these efficiency programs
rather than some sort of Federal standard or level. Am I
interpreting that correctly?
Mr. Stoddard. That would be my recommendation at this time,
based on the successful model that we have seen from the
electricity and natural gas utilities.
Chairman Kerry. But what do you think the role is for the
Federal Government?
Mr. Stoddard. Funding.
Chairman Kerry. What about standards? What about goals?
What about incentives?
Mr. Stoddard. Again, the kinds of standards that come to my
mind are minimum efficiency standards for appliances and
equipment, and in the last couple of years in the EPCA 2005,
you made tremendous progress doing that for many appliances, a
little bit slow still on some of the heating appliances, but
those are much better.
The other obvious minimum standard to raise is building
energy codes, and here again, that is typically the
jurisdiction of States, not the Feds. So we are starting to see
baby steps. Our home State of Maine is very proud to have
passed a very aggressive minimum building energy code last
year, but it is slow progress and I am not quite sure what the
Federal Government could do to enhance that.
One idea does come to mind, though. We have been working
with some of your staffs in the recent discussions about the
Lieberman-Warner legislation and there you have many dynamic
discussions going on about how you distribute allowances to
different States, and one suggestion would be to incentivize
States to bump up their various standards on something like
building codes in order to gain a slightly higher allocation of
allowances.
Chairman Kerry. Well, building codes are a big deal, and I
will close out by calling to your attention a Commercial
Building Initiative within the Department of Energy. I forget
which division of the Department of Energy, but we are trying
to get $20 million to the initiative and make sure it is
funded. This is an effort to encourage leads and other
standards to be applied to buildings.
People don't realize it. Buildings are the source of 40
percent of energy use in America and 40 percent of our
greenhouse gas emissions come from buildings, so there is no
solution to greenhouse gas emissions and no solution to an
energy problem through energy policy that doesn't embrace a
building standard and code for the United States. This effort,
the Commercial Building Initiative, is setting out to have a
zero net energy use building, which is doable. You can, through
efficiencies and materials and climate control and other
things, build a building that reduces net energy use by 70 to
80 percent. And then with solar and self-contained energy
grids, et cetera, you can get down to a net energy use of zero,
which is what we have to do in the country. People don't
realize it.
Planning boards, city councils, zoning departments
shouldn't allow any building to be built today that doesn't
embrace new standards for building. And it is exciting to see
what people are doing around the country. I won't go into
details, but there are some really exciting things that are
happening.
In conclusions we are very grateful to you. Senator Snowe
and I will talk seriously about different kinds of initiatives.
There are a number of different options here, and we have
obviously got to get this on the front burner. I think today's
hearing has been enormously helpful. This is what a hearing is
supposed to do; inform and educate and shed light on issues
when it is important, and I think you have all done that very
effectively today, so we are very grateful to you. We need to
enlist the Energy Department, Mr. Johnson, and get the
administration really thinking about this ahead of time,
because those supply numbers that Senator Snowe quoted are
ominous and I think we have all got to be aware of what may or
may not happen.
So at any rate, we will go about our business and do what
we can, and we are going to try to alleviate your pain, Ms.
Farrell----
Ms. Farrell Thank you.
Chairman Kerry [continuing]. And Ms. Brooks, to help you be
able to administer that terrific program up there, and we
really appreciate it. So thank you all very, very much.
We stand adjourned. Thank you.
[Whereupon, at 12:09 p.m., the committee was adjourned.]
APPENDIX MATERIAL SUBMITTED
----------
Senator Joseph I. Lieberman, Senate Committee on Small Business and
Entrepreneurship, June 25th Committee Hearing on ``Examining Solutions
to Cope With the Rise in Home Heating Oil Prices''
statement for the record
I welcome today's Small Business Committee Hearing examining
solutions to cope with the rise in home heating oil prices, and I
appreciate the leadership of Senator Snowe and Chairman Kerry in
tackling this problem.
Connecticut, along with much of the Northeast, is vulnerable to
fuel oil shortages and price spikes during winter months. Approximately
50% of people in our state use oil to heat their homes. According to
the Energy Information Administration, residential heating oil prices
are projected to average approximately $4.50 per gallon this heating
season, a 35-40% increase over last year. Heating a home for the entire
winter in Connecticut could cost more than $5,000 in such an
environment, and we rightfully have concerns about the impact on low-
income and middle class families. Coupled with the pain currently being
felt at the gas pump and in the food aisle, these projected price
increases could have serious consequences for our region.
To ease prices for small businesses, working families, and senior
citizens (especially those living on a fixed income), we must first
look to use the tools that stand ready at our disposal.
We must be prepared to release oil from the Northeast Home Heating
Oil Reserve in the event that prices remain above $4.00 per gallon. To
that end, I support S. 3170, which was introduced last week by Senator
Snowe and co-sponsored by Senators Dodd and Kerry. In the past, these
emergency reserves have been effective in helping avoid a catastrophe,
and I welcome efforts to ensure that those resources will be available
for use this year.
I also strongly urge passage of the Keeping Americans Warm Act,
which would appropriate an additional $1.0 billion to help the Low
Income Home Energy Assistance Program (LIHEAP) keep pace with rapidly
rising prices. This critical program assists vulnerable, low income
families, families who will be paying an even higher proportion of
household income for home energy this winter.
Over the long term, however, we can only tackle this problem by
changing the way we use energy, and especially oil. The only permanent
solution to high fuel prices is to free ourselves from the whim of
volatile and even hostile oil-producing nations and the greed of
commodities speculators. In short, we must end our oil addiction.
To that end, we must continue to seek new legislation on a number
of fronts, including increased oversight and smarter regulation of
energy futures markets, improved efficiency and fuel economy standards
for our homes and vehicles, caps on carbon emissions, and greater
support for renewable energy technologies. Through this comprehensive
approach, we can end our dependence on fossil fuels and become the
global energy leader the world so badly needs.
Department of Energy,
Washington, DC, October 14, 2008.
Hon. John Kerry,
Chairman, Committee on Small Business & Entrepreneurship,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: On June 25, 2008, David F. Johnson, Deputy
Assistant Secretary for Petroleum Reserves, Office of Fossil Energy,
testified regarding, ``Examining Solutions to Cope with the Rise in
Home Heating Oil Prices.''
Enclosed are the answers to nine questions that were submitted by
you and Senator Snowe to complete the hearing record.
If we can be of further assistance, please have your staff contact
our Congressional Hearing Coordinator, Lillian Owen, at (202) 586-2031.
Sincerely,
Lisa E. Epifani,
Assistant Secretary,
Congressional and Intergovernmental Affairs.
Enclosures.
Questions From Senator Kerry
Question 1. I understand there is no refining capacity in the
Northeast and the majority of home heating oil is delivered via ships.
This delivery is vulnerable to weather conditions and ripe for
interruption. Given this concern and the reliance on home heating oil
for so many individuals in the Northeast, are there steps we should be
taking to encourage other delivery mechanisms? Given the unpredictable
weather we are increasingly seeing, is a ten-day supply in our
strategic reserve adequate?
Answer l. The commercial heating oil industry has shown to be very
resourceful in managing a logistical system that, although sometimes
strained, delivers heating oil from many sources to the end user
efficiently, on time, and on specification. We would rely on the
commercial industry to determine if additional delivery methods were
required and to establish those mechanisms. The ten days of coverage
provided by the two million barrel Reserve is intended as a temporary
buffer which is adequate to tide industry over in cases in which an
imminent supply interruption is considered to be likely.
Question 2. Would it reduce the potential for price spikes to have
a larger reserve, bought in the summer months, to help ensure against
price spikes that could potentially leave consumers and small
businesses in great peril during an especially cold winter?
Answer 2. Price spikes are an indicator to industry that additional
supplies are needed. The two million barrel Reserve is sized to cover
regional supply interruptions while not directly influencing the market
price of heating oil or the industry role of providing those necessary
supplies. Although a larger reserve would allow for greater coverage in
the Northeast and more emergency response flexibility, tank storage
availability is at a premium in today's market and a larger reserve
would most likely displace much needed commercial stocks. Further,
although filling the Reserve during the summer months is an option, the
summer driving season and the transportation sector needs put pressure
on refiners so less heating oil is produced. Whatever heating oil is
produced goes directly into commercial inventories or is exported to
South America to assist with their winter season. Heating oil
wholesalers also begin building their stocks during this time for the
upcoming winter. Increasing the Reserve during the summer would cause
the Department of Energy to compete with commercial inventories and may
put upward pressure on prices of heating oil and other refined product
prices.
Question 3. What DOE programs are available to help individuals
deal with rising prices? What programs are available to promote energy
efficiency?
Answer 3. The Department of Energy operates a comprehensive
outreach program that includes both a hotline and website that provides
energy saving tips for consumers. The DOE's EnergySavers.gov website
provides the public with tips for reducing energy consumption for all
consumers from residential and vehicle owners to fleet and industry
managers.
ENERGY STAR, a program operated jointly by both EPA and DOE, offers
consumers another way to save money and energy. The ENERGY STAR label
identifies energy efficient products in over 50 categories: including
compact fluorescent bulbs, clothes washers and dishwashers, windows,
and many consumer electronics, such as televisions and computers.
ENERGY STAR products are available through all major retailers.
Another program that can help individuals deal with rising prices
is the Home Performance with ENERGY STAR program (www.energystar.gov/
homeperformance), which is also jointly administered by DOE and EPA.
Consumers can find contractors participating in locally-sponsored
programs in 23 states who use whole-house diagnostic equipment to
assess their home's energy performance. The contractors provide a list
of recommended improvements that will save money on their utility
bills, as well as improve the comfort and indoor air quality of their
home. The contractors can also install the selected improvements or
work with other qualified home improvement contractors. Typical
improvements include air sealing and adding insulation; upgrading the
heating, ventilation and air conditioning systems as well as water
heater replacement; and high performance windows, lighting, and other
appliances. Overall savings are typically 20 to 30 percent of the
homeowners' energy bills, varying by climate and size of investment.
DOE plans to expand the program into areas not currently served by
local sponsors to increase the services available to consumers.
DOE also administers the Weatherization Assistance Program (WAP).
WAP provides technical assistance and grants to State and local
weatherization agencies throughout the United States. The program
reduces energy costs for low-income households by increasing the energy
efficiency of their homes while promoting their health and safety. The
program prioritizes services to the elderly, people with disabilities,
and families with children. These low-income households are often on
fixed incomes or rely on income assistance programs and are most
vulnerable to volatile changes in energy markets. High energy users or
households with a high energy burden may also receive priority.
Households interested in participating in the program can check with
their telephone directory, utility company, or public assistance
office, for the contact information of their State or local
weatherization agency to see if they qualify.
In addition, the Low-Income Home Energy Assistance Program (LIHEAP)
administered by the Department of Health and Human Services is
available to assist income eligible clients with payment of their fuel
bills. Potential clients may contact their State LIHEAP offices for
additional information.
Questions From Senator Snowe
Question 1. Do you believe that the triggering mechanism of release
from the Northeast Home Heating Oil Reserve should be altered? Why or
why not? If so, what trigger do you believe should be provided to the
Administration?
Answer 1. The current market dislocation indicator specified in the
Energy Policy and Conservation Act has been monitored by the Department
as an alert to further investigate possible supply interruptions. Since
the Reserve was established in 2000, this calculation has only reached
the defined values three times, all of which were in circumstances that
were not characterized by a severe energy supply interruption. In
December 2000, the disparity was caused by a significant decrease in
crude oil prices due to increased OPEC production. In March 2003, the
high heating oil prices were at the end of the season. In October 2005,
the high heating oil prices resulted from Katrina refinery outages.
None of these situations were appropriate for a heating oil stock
release.
Question 2. What exact circumstances, in your opinion, would
qualify as a ``triggering event'' for the Northeast Home Heating Oil
Reserve Fund under existing law? How much more do families and business
have to spend this winter in home heating oil before a ``triggering
event'' occurs?
Answer 2. The Energy Policy and Conservation Act (P.L. 94-163)
authorizes use of the Northeast Home Heating Oil Reserve (NEHHOR) if
the President finds that a dislocation in the heating oil market has
resulted from a severe energy supply interruption or that a
circumstance exists that constitutes a regional supply shortage of
significant scope and duration and use of the NEHHOR would assist
directly and significantly in reducing the adverse impact of the
shortage.
The NEHHOR is to help industry compensate for unexpected supply
emergencies. It was not created to influence the market price of
heating oil. It is sized to create a buffer for commercial companies
but not so large as to dissuade suppliers from responding to increasing
prices as a sign that more supply is needed. However, the Heating Oil
Reserve is ready to be drawn down within days in the case of an actual
or imminent supply interruption.
Question 3. In Maine, home heating oil prices have jumped $1.89, or
70 percent, since the start of the 2007-2008 heating season. We're in a
crisis already here and we're in the middle of summer, when demand for
heating oil is negligible. What is the Administration specifically
doing to ease this crisis and prepare people for the winter months
ahead?
Answer 3. The Administration is working to increase the supply of
oil to address the energy market fundamentals that have driven oil
prices. Significant change in the energy price environment will require
persistent attention to development of alternative fuels, improved
energy efficiency, and expansion of domestic drilling access.
One tool to address heating oil affordability in the short term is
the Low Income Home Energy Assistance Program (LIHEAP) administered by
the Department of Health and Human Services. LIHEAP assists low income
households in meeting their immediate home energy needs. For FY 2008,
Congress appropriated $1.98 billion in regular block grant funds and
$590 million in emergency contingency funds, which the President may
release to assist with the home energy needs arising from an emergency
situation. In addition to the HHS LIHEAP program, the Department of
Energy works to help improve public awareness and promote information
sharing. The DOE Energy Information Agency typically provides winter
price and supply forecasts. The Department of Energy also participates
in weekly conference calls with other Federal and State energy
officials, the New England Governors Council and industry associations
to monitor State energy issues and fuel concerns so that appropriate
actions can be taken if warranted.
Question 4. Is the Department of Energy already working with the
Small Business Administration and the U.S. Department of Health and
Human Services and, the rest of the federal government, to develop a
rapid response plan if these prices do not decline? What preemptive
Administrative actions are already under way to implement a response
plan?
Answer 4. The Administration does not anticipate any precipitate or
pre-emptive actions to address heating costs. The LIHEAP and private
assistance programs are in place from prior years. The Northeast Home
Heating Oil Reserve is available at 2 million barrels, as a buffer
inventory to supply heating oil in the event normal deliveries are
interrupted, but is not intended to influence market prices.
In past years some dealers have offered their customers season-long
contracts at fixed prices, but we have not seen widespread offers of
such contracts this year. Reluctance to offer the fixed contracts for
this season may reflect industry expectations that heating oil prices
may moderate later in the summer with stock build, and that commitments
made at today's prices would be rued at a later date.
Question 5. According to data posted at the DOE's Energy
Information Administration's website, we are now confronting historic
lows as it relates to our nation's heating oil supplies with a drop
from 86 million barrels in June of 1993 to 25 million barrels in June
of this year. How do you explain this decrease in the supply of home
heating oil? Is this cause for alarm? Why or why not?
Answer 5. High-sulfur distillate fuel (containing 500 parts per
million (ppm) or more of sulfur) is typically referred to as heating
oil because home heating has historically constituted the largest
single use of this product. However, until recently, high-sulfur
distillate fuel has been used for more than just heating. Some of the
other uses included non-road diesel, locomotive, and marine use.
High-sulfur distillate fuel inventories have been decreasing since
the 1990s as demand for highway diesel has been switched to lower
sulfur distillate fuel by increasingly stringent environmental
regulations. As of June 2007, in accordance with rules from the
Environmental Protection Agency (EPA) stemming from the Clean Air Act
Amendments of 1990, fuel suppliers are no longer distributing
distillate fuel containing more than 500 ppm of sulfur for non-road
diesel, locomotive, and marine use. These sectors constituted more than
half of the overall demand for high-sulfur distillate fuel, and are now
being served by low-sulfur distillate fuel containing less than 500 ppm
of sulfur.
The significant reduction in demand for high-sulfur distillate fuel
due to this rulemaking also resulted in a reduction in inventory needs.
While demand for high-sulfur fuel was reduced by at least 50 percent,
weekly high-sulfur inventories during January through May 2008 averaged
about one-third lower than high-sulfur inventories over the same period
in 2007, prior to when the regulation took effect.
As a result of this category switching, analysts have found that
comparing current high-sulfur distillate fuel inventories to historical
data is misleading at present. It will take several years to create a
baseline for the smaller high-sulfur market. At present, those seeking
an undistorted view should focus on total distillate inventories when
analyzing heating oil or diesel fuel. Since low sulfur and ultra-low
sulfur distillate fuel can be used in the heating oil market, total
distillate inventory has merit as a measure of available distillate for
heating oil use.
U.S. total distillate inventories are currently in the middle of
the 5-year average range for this time of year, which implies stock
levels should be sufficient to meet distillate demand levels this
winter under normal weather conditions. Total distillate inventories on
the East Coast, where most of the Nation's residential heating oil is
used, are at the low end of the typical range for this time of year,
but high inventories on the Gulf Coast, which is one of the major
supply regions for the East Coast, indicate supplies are available.
Question 6. Does the Department of Energy believe oil is currently
priced according to market principles, or is there something to the
view that speculators have helped engineer price increases?
Answer 6. We believe that the price of oil is determined primarily
by the fundamentals of supply and demand. Supply has remained
relatively constant while world demand has risen. We have recently
witnessed record prices for crude oil, gasoline, and other energy
products however, this problem was not created overnight. Over the past
three years global oil supplies have remained relatively flat, at
approximately 85 million barrels per day. Demand, on the other hand,
has increased at the rate of almost 2% per year--primarily from growing
economies in Asia. This imbalance in supply versus demand is the
significant factor that has resulted in high prices.
Senator Kerry's and Senator Snowe's Questions for Penquis
questions from senator kerry
(1) What steps can homeowners take on their own to increase the
energy efficiency of their homes for the coming winter, and how much
can someone expect to save this winter from basic efficiency
improvements?
Answer: It may be helpful to think of this challenge in two ways:
energy efficiency and energy conservation.
Energy efficiency focuses on maximizing the economic benefits of
wise energy use. This could include, for example, replacing an
inefficient refrigerator, or improving the efficiency of a furnace
through a tune up or a replacement. With this approach, however, there
is typically an upfront investment and then a return over time in terms
of annual fuel or electricity savings. The return to the homeowner for
such improvements depends upon their current situation and the activity
they undertake. Space heating accounts for 58% of home energy
consumption, water heating 19%, refrigerator 12%, and appliances and
lights 11%. Perhaps the single biggest thing homeowners can do is make
sure their attic is air sealed and well insulated. This keeps heat from
escaping out the top of the house as it rises. Replacing and tuning
heating systems, repair or replacing high energy using equipment, and
adopting energy efficient practices are also good ways to save. It is
estimated by John Kriger that the typical residential building uses
1\1/2\ to 2 times as much energy as necessary to achieve comfort and
convenience.
Energy conservation focuses more upon reducing our energy use, and
asking consumers to change their behavior. Take shorter showers, turn
the heat to 68 degrees, set temperature back at night, was a full load
of laundry and dishes at one time, etc.
The biggest savings from weatherization generally come from the
buildings with the highest energy use. Based on this, we might assume
that wealthier homeowners with larger houses might experience the
greatest savings and the quickest paybacks from their energy
investments. This is a significant portion of the population because it
is these higher energy-using households that have historically not felt
the pricing pressure to make improvements, nor have they been supported
through government programs such as LIHEAP. According to nationwide
studies by the Department of Energy's Weatherization Assistance
Program, total energy savings per household range from 10 to 30%. Based
on the above logic, larger more energy intensive households might be
expected to save an even higher percentage of their energy consumption.
Finally, experience shows that the simple things (i.e., weather
stripping windows and doors, tightening doors, putting locks on sashes,
tuning up the furnace) should be encouraged and that this will initiate
savings. The larger savings are more likely to occur through a payback
that may take 1 to 10 years or more. Of course, homeowners should focus
their investments in energy savings where the paybacks are quickest.
(2) How has the Good Neighbor/Keep ME Warm Fund been affected by
rising oil prices? Has it reduced the program's effectiveness? Can this
program serve as a model to other States where citizens can step in and
help others in their community?
Answer: We are just beginning this year's heating season with
record high oil prices. With more people worried about how to handle
the cost of heating their own home, we estimate that donations to
support the Good Neighbor/Keep ME Warm Fund will be less than we have
seen in previous years. Businesses that have typically been supporters
of the funds are also struggling with a slow economy and we will most
likely see a decrease in support from them. Obviously, the program is
less effective with the high cost of oil and the decrease in donations.
It costs more to provide a family with 100 gallons of oil and we have
less dollars to support the purchase. Penquis has been administering
the Good Neighbor Fund and Keep ME Warm Fund for more than 5 years. We
have great experience in providing support to certain populations
(i.e., over income families, laid off workers) that works. We believe
that this is an excellent model to provide assistance and could be a
model program for other communities/states.
questions from senator snowe
(1) As you know, I have introduced legislation, co-sponsored by
Senators Dodd, Kerry, and Lieberman that would mandate that heating oil
from the Northeast Home Heating Oil Reserve should be released if home
heating oil tops $4 per gallon this winter. First, do you agree the
release of this reserve during a time of such unconscionable prices
could benefit Mainers who are at a breaking point? Please explain. The
Reserve currently stands at just under 2 million barrels, which is
roughly the demand for New England oil for ten days in the heart of
winter. Do you think the amount of oil held in Reserve should be
increased? If so, to what amount?
Answer: This question is beyond the scope of my expertise. However,
I would say that we feel that many Mainers, particularly the low income
and working poor, are facing desperate critical times and that there is
not one solution that will fix the issue of maintaining a safe, warm
winter for our entire population. Releasing the reserve and/or
increasing the reserve should be one of many things done to ensure the
safety of our citizens.
(2) What percentage of homes in your region could receive
additional weatherization or improved efficiency in their homes? Do you
believe that there should be an increase in weatherization assistance?
How could loan programs be improved in order to expand the number of
families who take advantage of existing programs in the State of Maine?
Answer: It is estimated that roughly 28% of owner occupied homes in
our region need are poorly insulated, many more could use upgrades in
order to be more energy efficient. Weatherization should be made
available to at the minimum all those receiving LiHEAP. However, many
home owners are just above the threshold to qualify for LiHEAP and the
weatherization and cannot afford both the high cost of fuel this winter
and a small loan payment for energy efficiency improvements, even with
a great payback. Loan programs need to be creative in their
requirements for terms of repayment. For instance, loan payments are
made only 6 months out of the year (April to October). These terms are
similar to many loans made to seasonal businesses.
(3) What specific steps could we in Congress take to assist
consumers who do not currently qualify for LiHEAP programs.
Answer: First and foremost, the eligibility for LiHEAP needs to be
expanded and put on a sliding scale so that more people can benefit
from the program. While providing tax incentives to those that are
doing energy efficient improvements is crucial, there is a portion of
citizens that can neither qualify for assistance nor afford to do any
energy improvements. Those are the citizens we worry about most.
Encouraging basic energy conservation methods such as taking shorter
showers, turning the heat to 68 degrees, setting the temperature back
at night, and simple things such as weather stripping windows and
doors, tightening doors, putting locks on sashes, tuning up the
furnace) should be encouraged and will initiate savings. Ensuring that
loan programs are available and work for low to moderate income
citizens that have very little resources to pay would be beneficial as
well.
Senator Kerry's Questions for Michael Ferrante, President,
Massachusetts Oilheat Council, From the U.S. Senate Committee on Small
Business and Entrepreneurship Hearing, ``Examining Solutions To Cope
With The Rise in Home Heating Oil Prices,'' June 25, 2008
lower sulfur diesel
In your written testimony, you warn against moving too quickly to
transition diesel fuel to low- and ultra-low sulfur diesel fuel and
heating oil because it has put a strain on availability and fuel
prices. As you note, it's important to balance the environmental
benefit with small business concerns.
What steps can be taken to make sure small distributors
are ready for this transition?
What can we do to help ease them through this important
transition?
biofuel mandate
As you note in your testimony, proposed legislation in
Massachusetts would increase the required amount of biofuel in heating
oil to 5 percent by 2013. Are small distributors prepared for this
change if it becomes law?
Do Massachusetts distributors already use a percentage of
biofuel in their heating oil?
How do you think this mandate will affect the industry?
Does it have the potential to spur local innovation and put
Massachusetts at the forefront of the biofuels industry?
the small business energy emergency relief act
I have introduced legislation that would provide low interest loans
to small businesses to help them stay afloat through this challenging
time. Since 2001, in three different Congresses, this legislation has
passed our Committee three times, it has passed the full Senate three
times, and it has enjoyed broad, bi-partisan support, with as many as
34 cosponsors at one time.
Given the tight credit markets and the extremely high
energy prices, is there still a need for this type of legislation. Can
you think of instances where a low interest loan, capped at 4 percent
with a possible term of 30-years, would help an otherwise viable small
business survive the energy price crisis?
converting to natural gas
You testified that many consumers are converting to other forms of
heating fuel in the face of aggressive marketing from power companies.
What are the claims that these companies are making and
are they valid?
What is the cost and benefit for an individual to switch
to another fuel source?
small business designation
The Small Business Administration is considering changing the
threshold for a heating oil distributor to be considered a small
business from the $11.5 million in gross receipts as it is currently
defined. I know the rising price of heating oil has caused many
businesses to lose their status as a small business while they are
delivering even less oil than before.
What are the implications of this change in definition and
will a new definition benefit small businesses?
Massachusetts Oil Heat Council,
Wellesley Hills, MA, July 22, 2008.
Senator John Kerry, Chairman,
Senator Olympia Snow, Ranking Member,
U.S. Senate,
Committee on Small Business & Entrepreneurship,
Washington, DC.
Dear Senator Kerry and Senator Snowe: Thank you for the opportunity
to testify before the Committee on Small Business & Entrepreneurship on
June 25, 2008. It was truly an honor to participate in the proceedings
and offer our insight into ``Examining Solutions to Cope with the Rise
in Home Heating Oil Prices.''
Per your request, here are our responses to your follow up
questions.
Responses to Senator Kerry From Michael Ferrante
(1) low sulfur diesel
The Oilheat industry clearly sees the value in moving its customers
to home heating oil with lower sulfur content, most likely in the 500
parts per million (ppm) range for sulfur. The fuel is cleaner-burning
and based on research done by our association, the 500 ppm fuel mixes
extremely well with soy-based biofuel up to 20% thus offering increased
environmental benefits and less equipment maintenance. Whether the
entire heating oil industry nationwide can make a smooth and timely
transition to this fuel as a total replacement for higher sulfur
content heating oil is still open for debate. Why? During extremely
cold weather, the wholesaler suppliers of heating oil in the northeast
and Canada rely on importing higher sulfur heating oil supplies from a
number of countries including Russia. And many refineries around the
globe have yet to install the necessary equipment to produce lower
sulfur heating oil. Over the next 3-4 years more low sulfur will be
produced worldwide and this will help ensure a steady supply during all
weather and market conditions. The industry believes that small
distributors will simply embrace the lower sulfur fuel when they see
that their local wholesale suppliers are offering steady supply at
market-driven prices.
However, since there is clearly a need for additional storage tanks
for home heating fuels across the country--even at the retail delivery
level the Committee can continue to support and push for Small Business
Administration (SBA) financial assistance for facility improvements and
storage tank expansion, and do whatever possible to lessen the cost of
compliance with federal rules such as the Spill Prevention Control and
Countermeasure (SPCC) plan requirements.
(2) biofuel mandate
Our association has given its full support to the biofuel mandate
legislation and we have worked closely with Governor Patrick's Advanced
Biofuels Task Force to ascertain all of the potential roadblocks to
implementation of a mandate for home heating oil. The retail industry
is very resilient and adaptable to change, and our Board of Directors
believes that since biofuels are truly vital for reducing emissions and
reducing our dependency on fossil fuels, fuel oil retailers of all
sizes will embrace the fuel. They keys to success are distribution
improvements at the wholesale heating oil distributor level, and the
building of new biofuel manufacturing facilities in Massachusetts and
the nation in order to provide adequate supply. Currently, there are at
least 20 retail heating oil companies in Massachusetts offering biofuel
blends of 2, 5 and 10%. They all report great success and customer
acceptance of the new fuel. A biofuel mandate in Massachusetts will
certainly spark local innovation and biofuel manufacturing plant
construction, and put Massachusetts in the forefront for biofuels for
home heating and transportation.
(3) the small business energy emergency relief act
First, it is important to note that our association met recently
with local officials from the Small Business Administration (SBA).
Following the briefing on the valuable programs offered currently by
the SBA, our association is undertaking a direct mail and electronic
mail outreach to about 800 retail heating oil dealers statewide to make
sure they are aware of the financing opportunities available with SBA's
help.
With respect to Senate Bill 163, MOC and the New England Fuel
Institute have reviewed the language and once again, any vehicle that
will help our industry manage the challenging business climate is most
welcome. It appears the bill does not explicitly provide loan
guarantees ($1.5 million) for heating fuel dealers but does provide
them for any small business experiencing hardship as a result of
heating fuel price increases. This may need to be clarified.The bill
also allows small businesses to use the loan guarantees to convert
heating systems to renewable and alternative fuels, and our hope would
be that heating fuel dealers would not be competing for the same loans
as a small businesses looking upgrade a heating system.
(4) converting to natural gas
The most aggressive oil-to-gas heat marketing campaign comes from
National Grid, a British-based firm that recently purchased KeySpan
Energy in Boston, Lowell, Cape Cod and Essex. Copies of some of their
recent marketing materials along with our complaints to Massachusetts
Attorney General Martha Coakley are attached to this document.
Up until the winter of 2006-2007, Oilheat maintained an often times
significant price advantage over natural gas. During the winter of
2007-2008, natural gas prices were significantly lower than heating oil
on a gallon-to-gallon comparison basis because of the price of natural
gas on world markets. Converting to natural gas is not inexpensive even
with a free or subsidized heating system from the gas utilities. First,
these free or subsidized systems are not high-performance, high
efficiency units. Installation costs for an oil-to-gas heat system can
run between $7500 and $10,000 and there is no guarantee that natural
gas prices will remain stable thus allowing the conversion customers a
reasonable pay back period. Natural gas prices have risen significantly
over the past several weeks and gas utilities in New England are
already warning of higher winter gas heating rates.
(5) small business designation
The industry welcomes the threshold change for retailers to be
considered small business under SBA rules and MOC along with the New
England Fuel Institute has lobbied for the change. This will certainly
aid some companies in their quest for financing, but since we do not
represent many of very small retailers; it is difficult for me to
assess the total impact of this rule change at this time.
Senator Olympia J. Snowe Follow-up Questions for the Record Directed to
Sandra Farrell, Northboro Oil Co., ``Examining Solutions to Cope With
the Rise in Home Heating Oil Prices.'' June 25, 2008
(a) Oil distributors are dependent on the price of diesel fuel
directly, for the diesel fuel trucks that make heating oil deliveries
and also indirectly, because the trucks that supply your tanks run on
diesel. How have higher diesel prices impacted your bottom line? Are
you making any changes to routes and fueling schedules to maximize fuel
utility? If diesel costs keep rising and the economic climate continues
to deteriorate, will start to look at reducing employees in order to
reduce costs?
(2) Senator Kerry and I have introduced legislation to give
businesses hurt by high heating oil costs access to credit through
Small Business Administration disaster loan programs. Should this
initiative pass through Congress, would small businesses, such as
yours, utilize and benefit from these loans to ease the burden of cash
flow caused by the energy crisis we are currently facing? Why or why
not?
(3) What additional steps could we in Congress take to help small
business oil and gas distributors remain viable and competitive during
this crisis?
Responses to Senator Snowe from Sandra Farrell
(1) Certainly the rising cost of diesel fuel must be passed on to
customers. As you may know, like heating oil, diesel fuel is a
distillate fuel, and the price for both fuels has risen in tandem. If
prices for diesel fuel continue to rise, we will have to pass along
those additional costs. At our company, we always examine the most
efficient routing for customer deliveries in order to maximize our fuel
use. At this point, we have no intention of reducing employees to cut
costs, but given the financial challenges within the industry at this
time, I expect that dealers will lay off employees, or sadly, go out of
business completely.
(2) First, as Michael has reported, it is important to note that
our association met recently with local officials from the Small
Business Administration (SBA). Following the briefing on the valuable
programs offered currently by the SBA, our association is undertaking a
direct mail and electronic mail outreach to about 800 retail heating
oil dealers statewide to make sure they are aware of the financing
opportunities available with SBA's help. My concern about emergency
loans is the speed at which they can be secured. My company can deliver
as much as 40,000 of heating oil per day. My suppliers require payment
for that fuel within a 10 day period. With customer payments stretched
out to 30, 60 and 90 days, it is clear that immediate cash flow to pay
suppliers is a key factor. If I were in need of an emergency loan, I
would need the funds as quickly as possible.
(3) Congress needs to continue to examine ways to reduce the impact
of speculation in the commodities market on the overall cost of crude
oil and hence refined products such as heating oil, diesel fuel and
gasoline. Congress recently acted to close the Enron loophole through
the passage of the Farm Bill and lawmakers should work to provide the
Commodities Futures and Trading Commission with more resources to
provide more transparency to the energy markets and the trading by
companies that never take physical delivery of products such as heating
oil, but seek only to make a profit on the ``paper'' transaction.
Thank you for the opportunity to provide the Committee with further
information. Please let us know if we can be of further assistance.
Michael Ferrante,
President, Massachusetts
Oilheat Council.
Sandra Farrell,
Northboro Oil Company.
Senator Olympia J. Snowe--Follow-up Questions for the Record Directed
to Michael Ferrante, Massachusetts Oilheat Council, ``Examining
Solutions To Cope With the Rise in Home Heating Oil Prices,'' June 25,
2008
(1) What are the impacts of this ``all time high'' for customer
receivables on small business dealers if consumers cannot afford to
pay? Will this further drive prices up? Why or why not?
(2) At what average price point does it become economically
inefficient, or unprofitable, for small business distributors to offer
the ``pre-pay'' option for consumers to lock-in prices for an entire
heating season?
(3) With the Federal Reserve lowering interest rates, in theory, it
should be cheaper for businesses to borrow money, but as oil prices are
skyrocketing, banks have tightened their credit risk criteria many
small businesses are forced to pay higher interest rates on their loans
and lines of credit. Compared to last year, at this time, is your
membership paying higher or lower interest rates for credit? Please
describe.
Responses to Senator Snowe From Michael Ferrante
(1) As mentioned in my testimony on June 25, 2008, I polled our
Board of Directors--about 35 retail heating oil dealers of all sizes
across the state. They reported a 30-50% rise in customer receivables
from the 2006-2007 heating season to the 2007-2008 heating season.
Although I do not have data at this time, it is certainly possible that
this factor could drive retail heating oil prices higher in the future
because dealers will be managing their capital and expenses differently
since payments from customers are slower, and because they may have to
manage more bad debt. Those losses must be absorbed or balanced in
order to remain viable.
(2) There really is no average price point in this regard. However,
the costs associated with crafting a proper pre-buy or lock-in program
are forcing dealers to withhold these types of programs. Why? The cost
of the hedge insurance per gallon. As Sandra Farrell testified, two
years ago the cost of hedging insurance was about 18 cents per gallon.
This year the cost of hedging is at least 40 cents per gallon. As
Sandra said, ``Needless to say, I cannot afford to do this program this
year, and it is my customers who will suffer.''
(3) Given a survey I conducted of our Board of Directors, it
appears at this time, that our leading members who currently have solid
relationships with their banks have secured and are securing additional
financing for their operations. I have no data on this time on the
interest rates for these lines of credit but will conduct a more
thorough assessment if the Committee needs the information.
To: Jed Nosal, Assistant Attorney General, Chief, Energy &
Telecommunications Division; Chris Barry-Smith, Assistant
Attorney General, Division Chief, Consumer Protection; Diane
Lawton, Assistant Attorney General, Consumer Protection &
Antitrust Division.
From: Michael Ferrante, President, Massachusetts Oilheat Council.
Date: May 13, 2008.
Subject: National Grid Advertising.
I am writing once again on behalf of the Massachusetts Oilheat
Council, Inc. (MOC or Council), the trade association representing the
heating oil industry throughout the Commonwealth of Massachusetts.
Established in 1955, the Council has over 300 members, including retail
and wholesale companies as well as the leading manufacturers of oil
heat boilers, furnaces, burners, water heaters and storage tanks.
The MOC is once again respectfully requesting that your office take
immediate and decisive action on a marketing campaign recently
commenced by National Grid (formerly KeySpan) that is utilizing false
and misleading statements to entice oil heat consumers within National
Grid's service territories to convert to natural gas. The MOC strongly
believes that consumers will incur significant capital costs and make
energy choices based on the inaccurate and deceptive representations of
the promotional campaign.
For the record, MOC has asked for your assistance on similar
matters in letters dated June 7, 2007, and June 15, 2006. I've enclosed
copies of both of those letters.
National Grid's current campaign includes television, print and
outdoor advertising. A print advertisement in this week's Boston Globe
(copy enclosed) states that ``If one person converts from oil to
natural gas, it takes 3,300 pounds of carbon out of the air.''
The advertisement also states that if consumers convert an ``old
oil heating system to clean natural gas'' the conversion will ``lower
carbon emissions by up to 40%.'' A similar theme is carried in their
television advertisements. These statements must be scrutinized by your
office.
National Grid has also placed advertisements in Fenway Park
claiming that converting one furnace from home heating oil to natural
gas is equivalent to taking six cars off the road, with respect to
reductions in greenhouse gas (GHG) emissions.
Once again, the state's largest gas utility is being allowed to
make statements that simply aren't true. For example, data available
from the U.S. Environmental Protection Agency (USEPA) is in stark
contrast to the claims made by National Grid in the Fenway Park
advertising. According to information readily obtained from the USEPA
website:
The amount of CO2 equivalent GHG emissions emitted
annually from the average passenger vehicle: 5.5 metric tons
The amount of CO2 equivalent GHG emissions National
Grid claims would be reduced in its Fenway Park advertising: 33
metric tons (6x5.5)
The amount of CO2 equivalent GHG emitted annually
from the average house heated by natural gas: 5 metric tons
The amount of CO2 equivalent GHG emitted annually
from the average house heated by home heating oil: 6.57 metric
tons
The actual difference: 1.57 metric tons--a number
nowhere near the 33 metric tons National Grid claims in its
Fenway Park advertising.
Additionally, when improved oil heat equipment efficiencies and
environmentally friendly home heating choices like bioheat and low-
sulfur fuel are factored into the calculation, the difference in GHG
emissions becomes so small as to be statistically irrelevant.
Clearly, National Grid is following in the footsteps of KeySpan and
has once again dramatically overstated the environmental benefits of
switching to natural gas. But for the unwitting consumer, these claims
can be highly effective for the utility in their efforts to grow market
share by converting oil heated homes to gas heat.
We ask you once again to take action against this utility and halt
this advertising campaign, and insist that the company provide the data
to back up any and all claims when comparing natural gas to heating
oil. It is simply unfair that National Grid is allowed to operate
unchecked when it comes to its marketing practices.
I eagerly await a response from your office.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Massachusetts Oilheat Council,
Wellesley, MA, June 7, 2007.
Re: KeySpan Energy Delivery ``Be Green, Win Green'' Promotional Program
Hon. Martha Coakley,
Attorney General of the Commonwealth of Massachusetts;
Office of the Attorney General;
One Ashburton Place, 20th Floor,
Boston, Massachusetts.
Dear Attorney General Coakley: I am writing on behalf of the
Massachusetts Oilheat Council, Inc. (MOC or Council), the trade
association representing the heating oil industry throughout the
Commonwealth of Massachusetts. Established in 1955, the Council has
over 300 members including retail and wholesale companies as well as
the leading manufacturers of oil heat boilers, furnaces, burners, water
heaters and storage tanks.
The MOC is respectfully requesting that your office take immediate
and decisive action on a marketing campaign recently commenced by
KeySpan Energy Delivery that is utilizing false and misleading
statements to entice oil heat consumers within the KeySpan service
territories to convert to natural gas. The MOC strongly believes that
consumers will incur significant capital costs and make energy choices
based on the inaccurate and deceptive representations of the
promotional campaign.
The KeySpan ``Be Green Win Green'' promotion is designed to
convince residential oil heat customers to convert from oil to natural
gas for a number of environmental reasons. (Attached as Exhibits A
through D are copies of the promotional materials--web, mailer, press
release, and radio transcripts respectively.) The promotional materials
encourage potential customers to ``Be Green'' for three ``Big Reasons''
which include (1) improving the residential home, (2) helping the
community, and (3) saving the planet. Associated with these exaggerated
claims is a sweepstakes that offers the grand prize winner $25,000
worth of energy efficiency products from the company. (A copy of the
rules, terms and conditions of the sweepstakes is attached as Exhibit
E.)
As part of its ``Be Green, Win Green'' promotion KeySpan asserts a
number of claims concerning the use of oil heat and oil heat equipment
that are either blatantly false or unsubstantiated. The patently false
misrepresentations contained in the ads are:
(1) ``The first place your oil furnace or boiler and tank pollutes
is your very own home.''
(2) ``You won't smell that heavy petroleum or deal with the soot
that is a natural byproduct of oil.''
(3) ``By using natural gas, you'll never run out on a cold winter
day or have to deal with frozen fuel lines.''
(4) ``An oil tank is like having a 275-gallon toxic waste dump in
your cellar.''
(5) ``. . . when you switch, you'll get rid of the 275 gallons of
toxic waste buried in your yard, or in your basement.''
Not one of these five disparaging and slanderous statements has any
basis in fact. They are merely the monopoly utility's illegal attempt
to portray the oil distribution system as unreliable and every
residential oil heat system as a source of pollution and toxic waste
that is harming the consumer and the environment.
With regard to the first and second statements, properly operating
oil furnaces, boilers, burners and storage tanks are environmentally
sound. There is no basis for the utility to assert that every heating
and storage system is polluting the home. It is also untrue that the
use of heating oil results in the smell of ``heavy petroleum'' or soot.
Heavy petroleum refers either to crude oil or No. 6 oil, not refined
No. 2 heating oil, and therefore cannot be used in a residential
heating system. Additionally, the only time that soot-type material
might be generated from an oil heat system is when the system is badly
in need of service and may be in a state of incomplete combustion.
The third statement misleads the consumer into believing that
residential consumers routinely experience frozen fuel lines and lack
of heating oil on winter days. This is false.
Despite the coldest of winters and strains on the transportation
infrastructure, residential oil heat customers are consistently and
faithfully served without any curtailment in supplies or deliveries.
Fuel lines rarely, if ever, freeze. In addition, full service fuel oil
dealers who operate emergency services during a 24-hour seven-day
period immediately remedy any ``no heat'' calls during frigid periods.
It is irresponsible for KeySpan to represent that oil heat customers
are experiencing a lack of supply and delivery of product.
The final two statements are the most egregious and offensive. In
describing a heating oil tank as a ``275 gallon toxic waste dump in
your cellar'' or the ``275 gallons of toxic waste buried in your yard,
or your basement,'' KeySpan has gone to new depths. Such a
characterization creates in the mind of the public a false and alarming
impression that no heating oil storage tank is safe, that the tanks
contain substances other than heating oil, and that each home heating
oil tank is discharging harmful, deadly, and noxious chemical compounds
and waste products into the home and the environment. Based on these
misrepresentations alone, the promotion should be ended.
With regard to these five statements, further inquiry and research
into their veracity is unnecessary. These representations are on their
face false and deceptive. They are designed to do nothing more than
frighten residential oil heat consumers into believing their health,
safety and welfare, as well as the local and global environment, are at
serious risk.
The KeySpan promotion makes further statements that require an
investigation into their validity:
(1) ``Natural gas adds value to your home.''
(2) [Natural gas] . . . ``is the preferred heating choice among
homeowners across the (U.S.). In fact, 92% of homes in the U.S. are
using something other than oil to heat their homes.''
(3) ``Switching to natural gas heating for your home is the
equivalent of planting 100 trees every year for the life of your
equipment.''
With regard to each of these statements, a consumer would have to
do a great amount of research to discover whether each of these
statements is either accurate or misleading. KeySpan should be required
to substantiate these statements, especially since they will influence
consumer decisions. For example, statement #1 contends that natural gas
adds value to your home, but there is no indication that a home heated
with a modem oil heat system is any less valuable than those heated
with natural gas.
In statement #2, the utility claims that 92% of U.S. homes are
using something other than oil to heat their homes.
Even assuming that the percentage is accurate, it would take a well
informed consumer to discern that the most likely reason for this
statistic is that the heating oil market has always been strongest in
the northeast and mid-Atlantic regions, and that other parts of the
country may rely on products other than natural gas and oil for space
heating and hot water such as electricity and propane.
The statement that switching to natural gas is the equivalent of
planting 100 trees per year for the life of the equipment is
unsubstantiated and nothing more than an attempt by Keyspan to wrap
itself around an environmental benefit through a vague reference.
With respect to the emission statistics liberally quoted in the
promotional materials, no explanation is provided for the few
authorities referenced. The MOC is presently reviewing the alleged
statistics and percentages used by KeySpan, but it should be the
utility's responsibility to provide proof for the validity of its
representations. In the MOC's opinion, since the utility was deceptive
in its representation of even the most basic of facts (i.e. that
heating oil tanks do not contain toxic waste, that heating oil systems
do not burn heavy oil, etc.), we are not confident that its
representations concerning emissions are accurate.
This is especially so since there is at least one scientific study
that compared the global warming effects of natural gas and heating oil
side-by-side and found heating oil to be more favorable to the
environment when all of natural gas's production, transportation and
use are taken into account.
The oil heat industry has adopted a reasoned and careful approach
to addressing the environmental concerns of emissions and global
warming. The industry is steadily working towards the introduction and
use of low sulfur heating oil and the use of biofuel blends in the near
future that will dramatically reduce heating system emissions into the
environment. The oil heat industry also continues to aggressively
pursue research and development for higher efficiency equipment. The
broad array of oil heat equipment currently available is highly
efficient and clean burning. Consumption of oil heat has dropped over
the years because of increased efficiencies and because our industry
emphasizes conservation with its customers. Our industry is not
satisfied that it has achieved its ultimate goal and therefore
continues to advocate for more research and development.
In conclusion, KeySpan's ``Be Green, Win Green'' promotional
program contains numerous false, misleading and deceptive
representations that will undoubtedly frighten consumers to believe
that residential oil heat is unsafe and that a conversion from oil heat
to natural gas is essential.
We therefore seek your assistance as the primary protector of the
consumer in the Commonwealth to direct KeySpan to immediately cease and
desist this promotional program, to provide evidence of its
representations contained in the promotion, and to issue statements of
correction so that the consuming public can make their energy choices
based on fact and not misrepresentations. Finally, we also suggest that
the utilization of ratepayer funds to finance such false and misleading
programs should be raised before the Department of Telecommunications
and Energy through either a separate proceeding or in the next KeySpan
gas rate case.
We thank you for your assistance and eagerly await your response.
Respectfully submitted,
Michael Ferrante,
President.
______
Massachusetts Oilheat Council,
Wellesley, MA, June 15, 2006.
Joseph Rogers,
Division Chief, Utilities,
Office of the Attorney General, Public Protection Bureau,
100 Cambridge Street, 11th Floor,
Boston, MA.
Dear Mr. Rogers, On behalf of the membership of the Massachusetts
Oilheat Council (MOC), the state trade association representing retail
and wholesale heating oil companies, as well as manufacturers of
Oilheat equipment, I am writing today to lodge a complaint with your
office regarding the latest direct mail marketing piece from KeySpan
Energy Delivery.
For the record, the MOC was established in 1955, and we currently
represent over 350 companies as well as nearly 8000 state licensed oil
burner technicians who install and maintain home heating systems across
the state.
Specifically, the MOC believes that KeySpan should not be allowed
to market its products based on misleading representations to the
public. Furthermore, the MOC does not believe it is appropriate that
the Department of Telecommunications & Energy (DTE) allows KeySpan to
utilize rate payer funds to produce and distribute marketing materials
that contain false or questionable statements about Oilheating, and for
that matter natural gas.
I urge you to examine the enclosed marketing mailer that is shaped
like a baseball and touts KeySpan's relationship with the Boston Red
Sox. How is it that the state's largest gas utility is allowed to make
the following claims?
``Because you don't pay for natural gas in advance (like
with oil), it allows you to free up capital. You pay only for what you
use, after you use it.''
``With natural gas equipment, there are fewer moving
parts, so it requires less maintenance and provides more reliability.''
``Natural gas heat also provides soot-free operation and
eliminates the hassles of environmental liabilities and costs
associated with oil tanks.''
These statements can only be described as either absurd or false.
But for the unwitting consumer, they can be highly effective for
KeySpan in growing market share by converting Oilheated homes to gas
heat.
In summary, the MOC believes that action must be taken against
KeySpan with regard to claims made in this brochure. At the very least,
they should be held responsible for providing solid data to back up any
and all claims when comparing natural gas to heating oil.
In addition, the MOC respectfully requests that your office express
these concerns to regulators at the DTE. It is simply unfair that
KeySpan is allowed to operate almost unchecked when it comes to its
marketing practices.
Respectfully yours,
Michael Ferrante,
President.
Environment Northeast,
Portland, ME, July 31, 2008.
Memorandum
To: Senator John Kerry and Senator Olympia Snowe.
From: Michael D. Stoddard, Deputy Director; Derek K. Murrow, Director
of Policy Analysis.
Re: Response to Questions Related to Oil Energy Efficiency.
Thank you for your continued interest in energy efficiency
opportunities for users of petroleum-based fuels. The following are
ENE's (Environment Northeast) responses to the questions you posed to
ENE by letter of July 10, 2008 after our testimony of June 25, 2008.
Please let us know if you have further questions or if we can be of
assistance in ongoing discussions on this critically important topic.
questions from sen. kerry
(1) What type of energy efficiency investments do you recommend to
people to increase efficiency, and what programs exist to
assist people with heating oil improvements today?
ENE: Good energy efficiency programs employ a suite of financial
incentives, including for example assessment and design help, rebates,
direct incentives to retailers, and in some cases low-interest loans,
so that the programs have the flexibility to entice a wide variety of
consumers to install/incorporate energy efficiency measures. The
specific measures (types of efficiency projects or investments) that
should be recommended will vary by state and by the situation of each
individual building or industry.
As a general principle, ENE recommends that the decision about
types of energy efficiency investments to be supported by public funds
be determined by cost-effectiveness (or the benefit-to-cost ratio) and
by the priorities of the state, as determined by stakeholder advisory
boards and technical consultants. We recommend that the efficiency
programs be run at the state level and that special attention be paid
to ensuring the oil heat programs are coordinated and integrated with
efficiency programs funded by electric and natural gas ratepayers (or
by the proceeds from CO2 cap and trade allowances). Ideally,
a significant portion of efficiency programs should be available for
``fuel-blind'' programs so that customers have access to efficiency
incentives based on the cost-effectiveness of the opportunities in
their homes (or businesses), rather than on the type of energy they
use. There are many successful programs currently providing financial
assistance for natural gas energy efficiency measures, and ENE
recommends that oil efficiency programs be modeled on these gas
programs.
As to specific individual measures, cold weather states that use
oil for heating homes and small businesses will find universally that
building envelope measures (e.g., air sealing and insulation) deliver
very high benefit to cost ratios, as do upgrades and replacements for
heating systems (e.g., furnaces, boilers, water heaters, heat pumps).
For smaller retrofit projects (e.g., less than a few thousand dollars),
rebates or ``buy downs'' have been shown to be the preferred type of
financial incentive because of the absence of paperwork and ongoing
obligations. For larger projects (e.g., gut rehab) and for incentives
in new construction, low- or no-interest loans may be helpful as
supplements to rebates and buy downs.
Existing programs to assist people with heating oil improvements
are extremely limited, under funded, and essentially are available only
to low income consumers. The federal Weatherization Assistance Program
(WAP) was recently funded at $205 million for one year, about enough to
service 80,000 low income units across the U.S. For context, consider
that there are 5.8 million income eligible homes in the country
(according to LIHEAP reports). A recent study in Vermont concluded that
the WAP provided enough funding to reach 3% of eligible homes each year
in that state. LIHEAP can supplement this amount since it allows use of
up to 15% of each state's allocation for weatherization for low income
homes. Many states do not exercise this option, but even those that do
find the amounts woefully inadequate. In Maine, for example, about $6
million of LIHEAP funds was available for weatherization in 2007. Yet
there were roughly 50,000 eligible LIHEAP customers in Maine. The
average cost of weatherizing low income homes in Maine is about $5,000
(nearly double the national average given the WAP funding cap and the
greater need to insulate against the cold and the older age of homes),
which means that only 1,200 homes (about 2.4% of eligible homes) could
be reached. Even if the national average cost for such weatherization
were assumed (i.e., $2,500/unit), still only 5% of homes would have
been reached. We are aware that NORA and state oil dealer associations
sometimes make education and training programs available, but the only
financial incentives referenced on their website are federal tax breaks
that expired last year.
At the state level, Alaska has recently established a strong but
already oversubscribed statewide program to assist heating oil
customers in capturing energy efficiency opportunities through rebates
and loans, while Connecticut, Massachusetts and Vermont have small
statewide programs for this purpose. Starting in 2008, Connecticut
provides several million dollars per year garnered from bonds, to be
administered by a stakeholder driven council, for oil efficiency
programs that have not yet been designed. In addition, the state Office
of Policy and Management is overseeing a heating system replacement
program that will offer up to $500 rebates to those installing the most
efficient oil and gas systems. Massachusetts has a ``Fuel Blind'' rule
governing its efficiency programs that apply to low income customers
(only), funded by electric and natural gas ratepayers, which enables
investments in weatherization for low-income homes using oil heat.
Vermont assesses a 0.5% gross receipts tax on energy that helps to fund
weatherization for oil heat customers. ENE is also aware of ad hoc
community-based initiatives, typically funded by charitable donations
that make small amounts of money available for weatherization. These
are the only existing assistance programs to provide energy efficiency
to oil heat customers that ENE is aware of--much more must be done.
(2) How much do energy efficiency investments cost, and how long will
it take people to recoup this money through energy savings?
Would providing low interest loans be enough in some cases to
incentivize people to invest in energy efficiency?
ENE: Energy efficiency investments may cost anywhere from a few
hundred dollars to tens of thousands of dollars per home and depend on
the age, style and upkeep of the building. By way of illustration, a
preliminary home energy audit to identify specific improvements needed
in a home may cost $200-300; insulation of the attic and basement could
cost $1,000-4,000; a replacement of an old heating system with a new
high-efficiency system may cost several thousand dollars.
Consider, for example, the following results of a study performed
for the Oregon Energy Trust., indicating the top ten most cost-
effective natural gas efficiency measures for single family households
(hhld).\1\
---------------------------------------------------------------------------
\1\ Ecotope, Inc., Natural Gas Efficiency and Conservation Measure
Resource Assessment, for the Energy Trust of Oregon, August, 2003.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Incentive
Measure Sector Cost ($/ Measure Savings Measure CSE Measure Payback (:1)
Hhld) (gal/hhld/yr) ($/gal) Life (yrs) $4.00/gal
--------------------------------------------------------------------------------------------------------------------------------------------------------
Weatherization: Walls............................................ Retrofit 984 250 0.17 45 24
Weatherization: Floors........................................... Retrofit 1400 126 0.46 45 9
Weatherization: Attics........................................... Retrofit 786 293 0.11 45 36
HVAC: Duct Seal Only............................................. Retrofit 500 122 0.28 20 14
HVAC: Furnace Retrofit........................................... Retrofit 900 79 0.65 25 6
Windows: to Class 34............................................. New 215 22 0.49 30 8
HVAC: Duct Insulation............................................ Retrofit 200 25 0.53 20 8
DHW: Eff Water Heater............................................ Retrofit 60 14 0.42 12 10
DHW: Combo Boiler (air).......................................... New 1200 149 0.54 20 7
DHW: Combo Boiler (H20).......................................... New 700 149 0.32 20 13
--------------------------------------------------------------------------------------------------------------------------------------------------------
Recent experience and studies suggest that efficiency investments
for oil heat have an average benefit to cost ratio of about $2.7 saved
for every $1 spent (by the consumer and efficiency program, combined).
This figure is based on a fuel oil cost of $1.50 per gallon. At $4.00
per gallon, the benefit would be about $7 for every dollar invested.
Given consumers' high level of motivation to participate in these
programs, public dollars are very well leveraged. A recent Vermont
study estimated that the benefit to cost ratio of just the public
dollars spent on oil heat efficiency programs would be $4.8 saved over
the full life of the measure for every $1 of public funds invested. The
best programs maximize the consumer contribution to each project, based
on their ability and willingness to pay, which means the payback to
individual consumers will differ depending on the level of their own
contribution.
To reiterate a fundamental lesson of more than three decades of
energy efficiency programs administered by the states and utilities
(for electricity and natural gas), the key element in successful
efficiency incentives is helping customers get over the ``first cost''
of efficiency measures. The use of rebates and buy downs, scaled (using
market research) to meet customers' ability and willingness to pay, has
been the most successful financial tool and has delivered both economic
and environmental benefits very cost-effectively (far less costly than
buying additional supplies of new energy).
By contrast, loan programs have been a major disappointment due to
lack of consumer interest. Loans have a place in the menu of measures,
but cannot be relied upon for high participation rates or for speedy
results. The experience of energy efficiency programs with low interest
loans has been particularly challenging in the residential sector. For
decades, efficiency home mortgages have been available to give
consumers an interest rate break for efficiency upgrades. Almost nobody
uses them. In 2006, when home heating oil prices had already begun to
climb, Massachusetts offered low interest loans for efficiency
upgrades, and less than 300 customers took advantage of the program.
This is simply too low a penetration rate to get the job done.
To be sure, such loans are not appropriate for low income
consumers. However, they are appropriate for middle and high income
consumers and small businesses, and may become more popular given the
unprecedented rise in oil prices. ENE believes that loans, while not
successful in the past, should be considered among the suite of tools
available in this new era of high oil prices.
(3) What is the best way to reach out to homeowners to best educate
them on the cost of savings of energy efficiency programs?
ENE: As noted above, ENE recommends that comprehensive, fuel blind
energy efficiency initiatives be established in each state. All such
programs typically have marketing and education budgets, as well as
training budgets for vendors and service providers. Such statewide
programs may choose to target high energy users if they have access to
data showing where to find such users, or may pursue ``direct install''
programs where vendors go door to door in targeted communities (or
targeted consumer segments) and describe the list of measures and
incentives they have available.
Other possible methods for reaching out to consumers include use of
bill inserts, and informative disclosures that could be required at the
time of sale of real estate or in mortgage/financing documents.
Contractors who do new construction or major renovations can also be a
good source of information, as are vendors at hardware and appliance
stores. The bottom line is that education and marketing should be a
part of the state's comprehensive efficiency program plan.
(4) Have you worked with NORA about developing more efficient
technologies? What do you see NORA's role (sic) in helping deal
with the rising prices of home heating oil?
ENE: ENE has not worked directly with NORA in the development of
energy efficient technologies. We have however worked with the oil
distributor trade associations in several New England states
(Connecticut, Massachusetts, Maine and Rhode Island), collaborated on
discussions about establishing new efficiency programs for oil heat
customers, and worked in a limited way with some of the industry and
NORA consultants. Historically, these associations have opposed
establishing efficiency funds for oil heat consumers, but in recent
years there has been a higher level of support from the Independent
Connecticut Petroleum Association and the Massachusetts Oil Heat
Council. We understand that NORA has performed research and generated
literature that promotes energy efficiency, primarily related to
heating equipment.
That said, ENE has a general concern that any organization funded
and controlled by the oil industry will have an inherent conflict of
interest in promoting aggressive energy efficiency programs that, if
successful, will result in lower revenue for oil dealers. The
literature provided by NORA is almost exclusively about the
opportunities connected with heating system upgrades and significantly
fails to (a) offer any financial incentives or (b) note the
opportunities for improving the building envelope.
ENE's view is that oil dealers and their trade associations should
have a voice in the development and deployment of publicly funded
efficiency programs, and should also be eligible to bid on competitive
solicitations to deliver efficiency measures to consumers, but should
not have a controlling or managing/administrative oversight role.
(5) In his written testimony, Michael Ferrante spoke of the System
Betterment Charge used by regulated utilities. NORA serves a
similar function, but do you think this type of program should
be expanded to better fund energy efficiency programs?
ENE: To be clear, NORA does not serve a similar function to what
energy efficiency advocates mean when they talk about System Benefit
Charges (SBCs) that have been so successfully run by regulated
utilities. NORA is in the business of offering tips, information, and
training and generally promoting the use of oil as a heating fuel. ENE
is not aware of any financial incentives offered by any NORA program
nor any planning, administration, implementation or oversight of any
SBC funded energy efficiency programs. More information will be helpful
to consumers, but it is not what they need most. They need financial
assistance to overcome first cost barriers to energy efficiency.
We understand that NORA's funding stream (pursuant to Public Law
106-469) is under consideration for reauthorization. The current fee
that funds NORA is $.002 per gallon assessed on all dyed #2 distillate
and all #1 distillate.
ENE recommends that an additional assessment or charge be added to
the NORA charge, but kept separate, and that the proceeds be directed
to a trust to be used for state-based efficiency programs or the
federal Weatherization Assistance Program (see further details on
funding levels in our response to Sen. Snowe's Question #3, below).
These funds should not be administered by oil dealer associations,
given their inherent conflict of interest, but such dealers and
associations should be eligible to bid on competitive solicitations
administered by statewide, state-based programs that use stakeholder
advisory boards, expert consultants, and some form of state agency
oversight. Just as electric and natural gas utilities are typically
included in the stakeholder advisory boards on an ex officio (non-
voting) status, so too should oil dealer associations be included as ex
officio voices for oil efficiency programs.
sen. snowe
(1) Most provisions encouraging energy efficiency within homes and
commercial buildings expire at the end of the year. Can you
describe how the nearing expiration may have a chilling effect
on the effectiveness of the incentives to spur greater energy
efficiency? Does it make sense to offer a longer term extension
of these provisions such as the 5-year extension for the
deduction for energy efficient commercial buildings that was
recently passed in the House but so far has stalled in the
Senate? Why or why not?
ENE: As noted in our written testimony, ENE supports extending tax
incentives for energy efficient buildings and heating systems. These
incentives effectively use the marketplace and leverage private funds
to deploy more efficient products and practices.
Nonetheless, these tax incentives do not supplant the urgent need
for comprehensive statewide efficiency investments, especially for low
income and working poor consumers, and we think the two types of tools
should be used in concert.
Many consumers are considering upgrading their old heating systems.
As with most energy efficiency improvements, the high first cost of
purchasing more efficient equipment presents a barrier. Especially when
consumers are feeling that money is tight, as in these tough economic
times, they are less likely to spend money up front to save money
later. They need to save money now. The result is that they will either
not do the replacement now, or they will do it now but stop short of
purchasing the higher efficiency systems. In this situation, federal
tax incentives can complement the incentives of an SBCtype efficiency
program, and the SBC incentive levels can be set with the tax program
in mind.
We note also that the $500 lifetime cap for certain measures is
quite low and encourage expanding the size of the cap.
(2) In your testimony, you estimate a state and federal funding level
of approx $300 million for market-based efficiency programs for
heating oil consumers in New England that would be sufficient
to capture all cost effective energy efficiency resources. Can
you list the benefits New Englanders would see should this
funding for market-based efficiency programs be allocated?
ENE: First, we wish to clarify that ENE recommends investing in
efficiency measures for oil heat customers in New England at a rate of
approximate $300 million each year, for an extended period of time, at
least 10 years in duration. Our estimate of the lifetime energy savings
from this level of investment is roughly five times (i.e., saving $1.5
billion for every year of investment).
Benefits for individual customers will vary depending on the type
and extent of weatherization and efficiency upgrades suitable for their
specific building. A recent study in Vermont projected that an
aggressive efficiency campaign for residential oil heat customers could
reduce annual fuel consumption by an average of 25% for each building
served, which at today's prices and average consumption rates
translates into an annual savings of more than $800 per household.\2\
The spending rate recommended by the study for this small state was
$200 million per year in public funds, leveraging another $200 million
in private (or customer) funds, with the exception that low income
homes would be expected to receive full subsidization.
---------------------------------------------------------------------------
\2\ Regulatory Assistance Project, Affordable Heat: A Whole-
Buildings Efficiency Service for Vermont Families and Businesses,
January, 2008.
---------------------------------------------------------------------------
A 25% reduction in energy consumed will translate to the same rate
of reduced CO2 emissions and acid rain-causing sulfur
dioxide emissions for every home that is treated. These reductions are
critical in the long term if the Northeast is to play its part in
achieving greenhouse gas reduction targets. To illustrate the point,
consider that fully one-quarter of current greenhouse gas emissions in
Maine come from the combustion of heating oil.
Other benefits of a market-based efficiency program include reduced
vulnerability to price spikes for state and municipal governments,
homeowners, and small businesses, and retention of energy dollars in
the local economy. Numerous studies show that energy efficiency
programs generate good new jobs in the local economy while diminishing
the amount of money that is shipped overseas for imported oil. Similar
levels of electric efficiency investment at the state level have led to
thousands of new energy service jobs in states like Massachusetts and
Connecticut. Efficiency programs for oil customers will also help
electric utilities and their ratepayers who are experiencing record
levels of unpaid bills even as these struggling oil heat customers turn
on electric space heaters and ovens to stay warm in the winter.
Finally, by dramatically reducing our buildings' needs for heating
and cooling, we can begin to transition to higher levels of reliance on
alternative energy supplies such as solar thermal and sustainable
biomass.
(3) Do you believe that energy efficiency programs are more effectively
run on the State level or the federal level? How much federal
funding should be dedicated for implementing energy efficiency
programs? How can the federal government work to ensure that
federal resources are being effectively utilized for energy
efficiency programs?
ENE: ENE recommends that efficiency programs be administered at the
state level because that is where stakeholders, government officials
and local vendors have the best sense of the opportunities and
resources for deploying energy efficiency equipment and services.
Stakeholders and officials at the state level are in the best position
to design programs that will fit the unique attributes of the market,
vendors, community groups, and state agencies. The existing
infrastructure for delivering energy efficiency programs is all found
at the state level, both in the form of utility and State or third-
party run programs (for electric and natural gas customers) and the
implementation of the federal WAP programs. It makes sense to piggyback
on this infrastructure.
In the context of market-based efficiency programs, ENE's position
is that federal funds should be used to leverage not only private
(consumer) contributions, but also State funding. One scenario that ENE
has modeled is the establishment of efficiency programs funded in a 2
for 1 match ($2 in federal contribution for every $1 from State
sources). Under this scenario, the federal government would contribute
$200 million if the New England states committed $100 million. ENE
assumes that the states' most probable means for generating these funds
is through a gross receipts tax or a system benefit charge (SBC). This
level of funding could also be ramped up over a 2-3 year period.
A different way to view the appropriate level of federal funding
would be to assume that the federal government takes the primary
responsibility for addressing the weatherization needs of low income
consumers. The magnitude of the problem is so large and serious that
the federal government must help. Because of the federal government's
ongoing and rising commitment to address the needs of LIHEAP customers,
ENE recommends that it establish a program to provide full
weatherization and heating system upgrades to all LIHEAP homes in the
country. Investing funds in weatherizing these homes now will reduce
the government's burden of heating oil assistance in the future.
There are approximately 350,000 LIHEAP households in the New
England. Assuming the average cost for these homes is $5,000, the cost
to serve all of them would total $1.75 billion. In our written
testimony, ENE suggested that a target be set to service every LIHEAP
household within five years, but we are mindful that there is a real
limit to how fast these programs can be ramped up given the nascent
status of the weatherization service sector. It may be more reasonable
to assume that the target for treating all low income homes should be
10 years or possibly even longer. Some WAP program administrators have
indicated that they could increase programs at a rate of 50% per year.
To ensure that federal resources are effectively utilized, three
important features should be required. First, before being approved for
implementation, all programs using federal funds should be required to
demonstrate how they will be ``cost effective,'' i.e., they will save
more money than they cost, using a predetermined test (as is done in
electric and natural gas efficiency programs). Second, all programs
should be evaluated on a regular schedule, using independent,
professional evaluators, and the actual benefit-to-cost ratio reported
so that programs can be compared with each other and with performance
in other states, and lessons learned. The federal government may wish
to reward states in subsequent budget allocations for exceeding
objective performance standards. Third, program planning, design and
oversight should incorporate regular involvement from committed
independent stakeholders, staffed by consultants expert in energy
efficiency who are paid for out of the program funds.