Hearings and Business Meetings
October 18, 2005
SD-366 Energy Committee Hearing Room 10:00 AM
Mr. Jack Sullivan
NEW ENGLAND FUEL INSTITUTE
“WINTER FUELS OUTLOOK”
COMMITTEE ON ENERGY AND NATURAL RESOURCES,
UNITED STATES SENATE
October 18, 2005
Good morning. I am Jack Sullivan, Executive Vice President and CEO of the New England Fuel Institute (“NEFI”). NEFI is an association of more than 1,000 companies that market home heating oil to consumers throughout the six New England states. Most of the member companies are small businesses, family-owned – third or fourth generation. I am here today representing the heating oil industry, operating in 22 states, and to provide our outlook for the winter – not simply a recitation of heating oil stocks held in inventory, projected demand and prices, but the view from the small retailer serving homeowners.
In the winter, consumers do not focus particularly on gasoline prices at the pump. They are concerned about heating their homes and the amount of their paychecks that must be allocated for this essential commodity. The heating oil dealer interacts directly with homeowners and understands their problems. Dealers respond at 2:00 a.m. to a call from a homeowner to repair equipment or make a special delivery on a weekend when a consumer needs it. The industry takes pride in making sure that no one goes without heat.
I. Supply and Price Increases
We feel certain that this winter is going to be very difficult for consumers. For the past year, the prices of crude oil and correspondingly refined petroleum products, including home heating oil, have been rising. Market conditions seem to justify crude at more than $50 per barrel, and the U.S. refinery capacity is limited. The U.S., for that matter, the world, has little or no back-up capacity or product inventories to draw on.
Moreover, with the onset of Hurricanes Katrina and Rita, the nation faces a worse situation. Crude oil production in the Gulf has been shut in and several refineries are closed while others are not yet operating at full capacity. At its peak, more than 4 million barrels of refining capacity were idle. Today, more than 2 million remain out of commission. Thus, the production of refined petroleum products is well below normal. All this is occurring as the heating season begins.
Fortunately, home heating oil stocks were at reasonably good levels before the hurricanes. Today, inventories on the East Coast – the area of greatest consumption – are at approximately 38.3 million barrels. This volume is about 24% greater than the 30.9 million barrels held a year ago, and 21% greater than the average inventories of 31.6 million barrels held from 2002 through 2004. Storage facilities are generally filled, and the mild weather to date has resulted in a very limited draw on this product. We do not foresee any product shortages. Consumers will be served. However, anticipated slightly colder-than-normal weather and the continuing impact of the hurricanes on energy production will, of course, affect the price.
Heating oil prices are predicted to increase as much as one-third over a year ago. Such an increase will adversely affect all consumers. To minimize this impact, the heating oil industry works aggressively to inform consumers of ways in which they can conserve energy. The industry provides consumers with detailed recommendations, including improvements to insulation, sealing sources of heat leakage, energy-saving practices, low-cost improvements to efficiency of existing heating systems, and the upgrading of heating oil equipment. Such measures can result in significant savings, from 5% to 30%, on a homeowner’s heating bill.
However, in many instances, consumers simply lower their thermostats, close off portions of their homes and live essentially in the family room and kitchen. They forego discretionary spending – they eat out less, stay home instead of going to a movie, and limit their shopping to the basics. While not life-threatening, these circumstances are uncomfortable and difficult. Moreover, consumers often have no choice but to pay their heating bills more slowly than in prior years.
B. Low-Income Families
In contrast, higher heating bills will have a far more significant impact on low-income families. These consumers are already living at a very basic level and have nothing to cut back. Particularly in the Northeast and Midwest, low-income individuals often must choose among essentials – heat, food or medicine. These families will be put at great risk this winter.
C. Home Heating Oil Dealers
High heating oil prices also will have a devastating effect on the small businesses that supply the fuel to homeowners. We estimate that dealers will need approximately 3 times the credit they needed last year to purchase the same amount of fuel. Without this substantial increase in their lines of credit, dealers will not be able to meet their customers’ demand. In the past, traditional lending institutions have been unwilling to make additional loans to dealers because they cannot demonstrate a steady stream of revenue to repay the loan rapidly. We anticipate that these same circumstances will occur this winter.
To address this problem, many dealers will have to take second mortgages on their homes or borrow from family and friends. The heating oil industry is very resilient. Despite this fact, we are concerned that some dealers will experience a great deal of difficulty this winter.
We understand that this Committee and the Congress have the same concerns as the heating oil industry. No one wants consumers and small businesses to suffer. Therefore, we recommend that Congress adopt two measures that will address some of the problems likely to occur this winter:
1. Increase funding for the Low-Income Home Energy Assistance Program (“LIHEAP”). This program, through state grants, benefits the most vulnerable of our society. However, the regular appropriation of about $2 billion per year is terribly inadequate for the 2005-2006 heating season. We recommend that –
(a) Congress substantially increase the appropriation to a number closer to the $5.1 billion authorized in the Comprehensive Energy Policy Act of 2005 enacted this August; and/or
(b) Include at least $1.3 billion of emergency funding for LIHEAP in a supplemental appropriation; and
2. Include in the final Commerce, Justice, Science Appropriations Bill for Fiscal Year 2006, a measure from the Senate version of the bill, to provide small business disaster loans to heating oil dealers. Such loans from the Federal Government will enable small dealers to obtain the capital they need to stay in business and remain viable. These loans are temporary “bridge loans” that provide just enough money for the dealer to maintain operations while waiting for consumers to pay their bills.
In the alternative, because the “credit crunch” that we discussed is largely due to escalated prices resulting from the hurricanes, Congress could include these SBA disaster loans in a supplemental appropriation.
Home heating oil retailers will make every effort this winter, as they have in the past, to meet consumer requirements. However, this year the odds of problems occurring are much greater than in prior years. The heating oil industry recognizes that there is no magic bullet to deal with those problems, but increasing LIHEAP funding and providing SBA disaster loans for small dealers will go a long way to alleviate the pain.
Thank you. I would be happy to answer any questions the Committee may have.
October 13, 2005
NEFI energy conservation recommendations for consumers
Up to 30% energy savings can result from improvements to insulation and sealing up sources of heat leakage in the home. Some steps that NEFI recommends consumers take to reduce heat loss include:
• Replacing old insulation with newer, high quality insulation is one of the best ways to save energy, especially in homes more than twenty years old. Insulation is measured in “R-values.” The higher the R-value, the better the heat transfer resistance. NEFI recommends that insulation in ceilings and attics total at least R-22 (or at least 7 inches of fiber glass or rock wool, or 6 inches of cellulose). But it is important to note that the R-values appropriate for a home are relative to local heating needs, cooling costs and differing geographical climate conditions.
• Checking for and repairing damaged, displaced or removed insulation, and checking often overlooked “weak spots” in insulation, such as vents, outlets, switches, junction boxes and other fixtures on outside facing walls.
• Sealing cracks in the home’s foundation, removing air conditioning window units, and sealing fixed air conditioning units, attic circulation fans, and windows and doors not storm-resistant with polyethylene sheets and heavy tape.
• Sealing gaps or cracks in duct work with duct tape.
• Installing new roofing and siding that includes wind-resistant materials and quality insulation; replace cracked or missing caulking around doors and windows with all-weather stripping and caulking. If there is a lot of heat leaking through doors and windows, replacement may be the only solution.
• Ultimately, NEFI highly recommends that consumers consult with qualified home heating professionals to help isolate sources of, and significantly reduce, heat loss around the home.
Other home improvement measures NEFI recommends consumers take to prevent heat from escaping the home include:
• Installing modern paddle-type ceiling fans, which in the winter can create a convection-current that re-circulates warm air from the ceiling to the rest of the room.
• Installing radiator reflectors between the radiator and wall to improve delivery of radiant heat.
• Installing a fireplace heater grate to can capture heat from a fireplace and circulate it into the room. Manufacturers claim that these units can capture tens of thousands of wasted Btu.
• Installing water-saving showerheads, faucets and toilets. Repairing leaking fixtures.
Energy saving practices NEFI encourages American families to take include:
• Purchasing programmable thermostats to automatically set-back thermostats eight degrees (8° F) for eight hours each night, saving consumers up to 8%. However, it is important to note that NEFI strongly suggests that consumers consult with a physician to determine the safest home temperature levels for their families.
• Taking advantage of the sun – a natural source of heat – by keeping shutters, blinds, drapery and window treatments clean and open wide to let as much sunlight in as possible, a no-cost way to provide additional heat to the home.
• Closing all doors (including closet doors), windows, garages and fireplace flues when not in use. Close shutters, curtains, drapes and blinds at night to trap heat inside the home.
• Changing warm air furnace and hydro-air system filters on a monthly basis.
• Vacuuming out baseboards, radiators and vents to free of dust, lint, pet hair and other debris; and free of any obstructions to the free flow of air, such as rugs, appliances, electronics, furniture, or drapery. It is recommended that a qualified professional bleed trapped air from hot-water radiators at least once every season.
• Wrapping water heaters with a special water heater insulation blanket.
• Implementing water conservation practices such as taking a short shower rather than a bath, using cooler water when doing laundry, hang-dry wet clothing when possible and hand dry dishes rather than running the dry cycle on a dishwasher.
Low-cost improvements to efficiency of oil-fired heating systems that NEFI recommends include:
• Heating system tune-ups and heat exchanger cleaning can yield up to 10% savings.
• Reduced fuel firing rate or nozzle size reduction can yield 6-10% savings, depending on current level of over-firing.
• Reduced temperature settings of boiler water or furnace circulating air (manual adjustment) can yield 5-12% savings however may result in reduced heat delivery and perceived comfort.
• Pipe and ducting insulation might yield 5-10% additional savings.
NEFI-recommended equipment upgrades that can provide exceptional savings include:
• Installation of flame-retention head burner and repairing of cracks and damage to combustion chamber can yield 15-20% savings.
• Replacing entire system with a high efficiency oil fired furnace or burner can yield 20-40% savings.
• Installing a new high-efficiency warm air furnace can also yield 20-40% savings.
Installing a high-efficiency oil-fired water heater, which provide nearly an endless stream of hot water and during the winter this hot water is basically free – a byproduct of home heati