[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

                              ----------                              
                                                                   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

                              ----------                              


                        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:]

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    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:]

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    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:] 

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    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:] 

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    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.

                                  
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