Hearings and Business Meetings
October 18, 2005
SD-366 Energy Committee Hearing Room 10:00 AM
Mr. Peter Smith
UNITED STATES SENATE
ENERGY AND NATURAL RESOURCES COMMITTEE
PETER R. SMITH
NATIONAL ASSOCIATION OF STATE ENERGY OFFICIALS
NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY
OCTOBER 18, 2005
WINTER FUELS OUTLOOK AND THE EFFECT OF HIGH ENERGY PRICES
Good morning. My name is Peter R. Smith. Chairman Domenici and Ranking Member Bingaman, thank you for the opportunity to testify today on the critical energy situation we are facing this winter. We believe high prices will continue for an extended period of time, well beyond this winter. I am Chairman of the National Association of State Energy Officials (NASEO), which represents the energy offices within the states, territories and District of Columbia. NASEO members serve as energy policy advisors to our respective Governors and implement a variety of energy programs targeted to al sectors of the economy. We are also responsible for dealing with energy emergency responses. I am also President of the New York State Energy Research and Development Authority (NYSERDA). I have worked on energy issues for New York State for almost thirty years.
Last week, NASEO hosted the Winter Fuels Outlook sponsored by DOE’s Energy Information Administration and Office of Electricity Delivery and Energy Reliability. We have conducted this Winter Fuels Outlook for many years, but this year the media and public attention was striking, largely due to the significant increases in a broad range of energy prices. Both the Chairman and Ranking Member of this Committee have spent many years trying to get the public’s attention to focus on important energy problems. These energy problems have not been created overnight and they will not be solved overnight.
Today I will discuss the winter fuels outlook, the impact of these high prices, what we are doing about it at the state level and what can be done about it at the federal level.
High Prices and Consumer Impacts
Guy Caruso has done a good job describing the difficult situation we are facing, including the almost 50% increase in natural gas prices (approximately 70% in the Midwest), increases of approximately one-third for heating oil (mostly impacting the northeast and mid-Atlantic regions), increases of approximately 30% for propane (impacting rural areas throughout the nation) and lesser increases of 5% in electricity costs. Even this smaller increase in direct electricity costs is misleading because of significant price spikes in states and for individual utility companies where natural gas prices set the marginal cost of electricity.
I will not repeat Guy Caruso’s statement, but I want to illuminate some critical facts. First of all, this winter’s projected price increases are on top of significant price increases last winter. This means that lower-income Americans, including those who are elderly and disabled, will be at far greater risk. It is well known that the poor pay a far greater percentage of their income for energy costs than do more affluent Americans. Further, many households in the middle income category will be significantly affected as well. In addition, for those households that both heat and drive, the double whammy of high heating fuel costs and high gasoline costs, is a huge burden.
A number of the state energy offices also operate the Low-Income Home Energy Assistance Programs (LIHEAP). In those states, where the energy offices do not actually operate the program, we work very closely with the LIHEAP offices in our respective states. With the FY’05 federal funding of approximately $2 billion, 15.6% of eligible households (federal eligibility is 60% of median income) were served, which equates to approximately 5 million families. The average benefit was approximately $313. States supplement these funds with state public benefit funds, in addition to other resources provided through private or utility networks. With winter energy prices escalating at hundreds of dollars per household we expect an enormous number of people to face stark choices as they choose between heating and eating, or other necessities. I want to stress that this is not simply a cold weather state problem. Next summer, with high prices expected to continue, the costs of air conditioning will likely increase dramatically, with similar impacts on low and middle income Americans. In addition, rural America is facing a crisis with escalating propane prices.
Another key issue is the concern regarding instability in energy prices. Clearly, prices have not only escalated but have been extremely volatile. A number of factors have contributed to the volatility, but “just-in-time” inventories have a role to play. Again, while many upper income Americans select budget billing plans, where they pay an equal amount each month, individuals that live paycheck-to-paycheck generally do not participate in these plans.
At the state level, as soon as the scope of the problem associated with Hurricane Katrina became apparent, NASEO convened all the state energy offices by conference call to share situation reports and response procedures. What we have found over the years is that it is critical to coordinate our responses so that adjoining states do not take dramatically different actions than their neighbors, thereby exacerbating the situation. In addition to conference calls, which occurred on a daily basis in the immediate aftermath of Katrina, we shared model energy emergency declarations, executive orders, public service announcements, emergency response plans and accelerated energy conservation measures, etc. We then arranged for regional conference calls. These calls have continued on an as-needed basis. We have had good cooperation from DOE’s Office of Electricity Delivery and Energy Reliability. Representatives from that office, headed by Kevin Kolevar, have worked closely with the states.
Approximately one-half of the states are involved in the State Heating Oil and Propane Program (SHOPP), which involves real-time surveys of prices and supplies for heating oil and propane during the winter months. In this activity, we have worked closely with EIA.
The states also initiated “price gouging” investigations on a coordinated basis with cooperation between multiple state agencies and the state attorneys general. We applaud efforts to expand the Federal Trade Commission’s investigatory efforts in this regard, as well as penalty provisions. Obviously, in a largely decontrolled energy market “price gouging” is harder to define. Each state has different consumer fraud statutes, but cooperation is expanding. As in any business, individual dealers may attempt to take advantage of a difficult situation, especially where panic buying is occurring. This is an area where we have encouraged the public to remain calm but to also report unusual prices. In the area of consumer fraud, our offices, in conjunction with the state attorneys general and consumer protection offices, are closely tracking any efforts by individual dealers to break fuel contracts. In some instances, even when supplies are available, some companies will attempt to claim “force majeure” in order to take advantage of higher prices. At this point, we have not identified a trend. This appears to be individual bad actors.
States have also initiated public information campaigns to reduce usage and take certain steps that can help, such as: 1) utilizing the most fuel-efficient family car; 2) taking advantage of state and utility programs to implement energy efficiency measures; 3) increasing carpooling, vanpooling and telecommuting; 4) encouraging homeowners to add insulation, caulk, weather strip, replace furnace filters, and car tune-ups, etc.; 5) lowering the thermostat and insulating water heaters; and 6) installing programmable thermostats. In New York, we have directed people to our www.getenergysmart.org web site and we are encouraging the use of Energy Star products and appliances. Most states have call-in numbers and web sites for consumers.
Again, New York has taken steps similar to other states. We have instituted a “Have an Energy Smart Winter” public outreach campaign that is multi-agency and multi-media, with the express purpose of making consumers aware of what they can do immediately to reduce their energy bills this winter. The campaign provides both energy savings tips and gives consumers information about other assistance programs that can help with their winter heating costs. Our grass roots public relations program is underway with spokespersons from agencies and authorities throughout the State doing radio and television talk shows, as well as providing opinion pieces to newspapers across the State. Governor Pataki has also proposed the following additional actions:
1) Home Heating Tax Credit for the elderly – State would offer a refundable personal income tax credit of 25% of home heating expenses when those expenses exceed 7.5% of income. Residents 65 or older with incomes up to $75,000 would be eligible and the tax credit maximum would be $500.
2) Home Energy Assistance for the elderly and low-income – The State will provide additional funds of up to $25 million, and will encourage expanded federal LIHEAP emergency funds.
3) Small Business and Farm Energy Assistance – Small businesses and farmers would be provided a refundable credit equal to 25% of heating costs (up to $3,000), if their energy costs exceed 10% (small business) or 5% (farms) of their overall operating costs.
4) Tax Credit for Home Heating Systems – A personal income tax credit, up to $500, would be offered to homeowners for 50% of the costs related to the upgrade or renovation of a residential home heating system.
5) Sales Tax Free Week for Energy Star – In order to encourage home energy conservation, two sales tax free weeks would be offered for the purchase of Energy Star appliances, weather stripping, caulk or insulation (this is similar to the effort undertaken in Georgia).
In New York, as in many other states, we have updated our energy emergency response plans to coordinate state and local agency actions. The state energy offices and the state utility commissions have expanded cooperative activities. For example, in New York, customers who hold interruptible gas contracts must have either alternative supplies, such as distillate fuel, in place or in designated storage or must have contractual rights to alternative supplies. This will hopefully avoid more significant market dislocations. A number of states have initiated innovative actions in this regard.
As part of our state energy emergency plans, depending on the energy situation this winter, the state energy offices we will be prepared to institute other measures. These actions include possible implementation of “set-aside” programs, where available supplies are targeted to high priority uses, such as police, fire and hospital services. NASEO’s Energy Data and Security Committee, chaired by Jeff Pillon of Michigan, has prepared Energy Emergency Response Guidelines, for use by the states. These are proving quite helpful, especially to those energy officials who have not been through a few crises.
On September 15, 2005, NASEO joined with the National Association of Regulatory Utility Commissioners (NARUC), the National Energy Assistance Directors Association (NEADA – state officials in charge of the LIHEAP program) and the National Association for State Community Service Programs (NASCSP – state officials in charge of the Low-Income Weatherization Assistance Program), to write both the President and the congressional leadership urging additional federal funds for a set of programs that would provide a near-term opportunity to reduce peak energy usage immediately. I will not repeat the contents of that letter in its entirety, but I am attaching it to my testimony. We urge this Committee to support efforts to fund key elements of the Energy Policy Act of 2005, which is generally the thrust of the letter from the state groups.
We urge continuing support for the efforts of the Energy Information Administration and the Office of Electricity Delivery and Energy Reliability at DOE. These offices have been critical during this emergency. We will continue our close cooperation with these two DOE offices through our Energy Emergency Assurance Coordinators (EEAC) list, to monitor markets on a state, regional and national level, and to accelerate our efforts to reduce the vulnerability of critical infrastructure. In our opinion, these offices have not received sufficient funds, especially with the limited involvement of the Department of Homeland Security in energy emergency response.
NASEO supports the specific federal actions that have been taken thus far: 1) releasing oil from the Strategic Petroleum Reserve; 2) temporarily waiving environmental requirements for gasoline types; 3) waiver of the Jones Act to permit domestic transfers of petroleum products on non-U.S. flagged tankers; 4) waiver of driver hour limitations to permit tanker truck drivers to deliver needed supplies; and 5) coordinated release of oil from IEA participating countries. We believe that we should also examine the role of expanded strategic inventories of natural gas and other products. Proposals, such as the one to expand the Northeast Heating Oil Reserve, is a good start, but may not be sufficient. Opportunities for expanded natural gas storage should be developed and consideration should be given to primary and secondary distillate storage. When this issue was raised over a decade ago it appeared that it might simply raise prices, but with increasing volatility and “just-in-time” inventories, we should address this issue together. NASEO is also concerned about diversity of supplies and refining capacity. We should examine opportunities for expansion and development of new refineries, not only including traditional refineries but also bio-refineries and alternative fuel supplies. Distributed generation utilizing alternative fuel supplies should be an element of this examination.
NASEO is pleased that Energy Secretary Bodman has joined with Kateri Callahan and the Alliance to Save Energy to promote a more aggressive public information campaign. We support funding for that program. Twelve NASEO members, led by the Colorado Energy Office and its former Director, Rick Grice, worked with the Ad Council to develop this public information campaign over a year ago. DOE also joined the states in providing funding.
As noted previously, public information efforts are critical and can lead to reductions in energy use. During the California electricity crisis in 2001, a far-reaching public information campaign, led by the California Energy Commission (the state energy office in California), produced a dramatic reduction in energy use at peak periods. We support significantly expanded funding for the Energy Star efforts at both EPA and DOE. Again, this will make a difference.
We also support the efforts that Chairman Domenici has taken to encourage DOE interest in a number of programs. Chairman Domenici wrote to Energy Secretary Bodman in September asking whether the Department could release funding quickly if funds were provided by Congress for certain key programs. These programs include: 1) the State Energy Program (SEP); 2) the Weatherization Assistance Program; and 3) Sections 126 and 140 of the Energy Policy Act of 2005, which provides for pilot energy efficiency measures for low-income communities and states. NASEO believes that if Sections 126 and 140 were funded and targeted to the four Gulf Coast states (Alabama, Louisiana, Mississippi and Texas) severely impacted by both Hurricanes Katrina and Rita, that reconstruction could proceed in an energy efficient manner. Last week Governors’ Barbour, Blanco and Riley sent a joint letter to Chairman Domenici requesting funding for Sections 126 and 140.
Senator Bingaman has taken a similar approach in a series of letters to the congressional leadership and the President recommending a number of creative measures, many of which were included in the Energy Policy Act of 2005. On a bi-partisan basis, 35 Senators wrote to Chairman Domenici and Ranking Member Reid of the Energy and Water Development Appropriations Subcommittee, urging an immediate expansion of funding to authorized levels for the State Energy Program ($100 million)(Energy Policy Act of 2005 – Section 123), the Low-Income Weatherization Assistance Program ($500 million)(Energy Policy Act of 2005 – Section 122) and an energy efficiency public education initiative ($90 million)(Energy Policy Act of 2005 – Sections 131 (Energy Star) and 134). A number of Senators on this Committee endorsed this effort. A similar letter was delivered to the House Energy and Water Subcommittee.
If the State Energy Program was funded at the authorized level of $100 million, the states could implement a dramatically expanded program to reduce energy consumption for residential consumers, schools, hospitals, businesses and the agricultural sector. For every federal dollar invested in the program, over $7 is saved in direct energy costs.
If the Weatherization Assistance Program was funded at the authorized level of $500 million, approximately 230,000 homes could be weatherized in the coming year. Every home that is weatherized reduces its energy usage by approximately 25%. In a time of increased energy costs those reductions are significantly more valuable, and are long-lived. These investments will continue to help consumers meet their energy needs for years to come.
Similar letters signed by even more Senators and House members endorsed additional funding for LIHEAP. We support additional emergency LIHEAP funds of approximately $3.1 billion, to bring funding for FY’06 to the authorized level of $5.1 billion. As noted previously, with increases in heating costs of several hundred dollars per household, this level of funding would only keep pace with the increases for the same 15% of the targeted population. This is not, in fact, a program expansion. With the level of prices expected, even where there are winter shut-off moratoriums in effect, we can predict significant numbers of shut-offs in the coming months through next spring. In the case of heating oil and propane users, where there is no comparable shut-off moratorium, we should expect significant hardship. While attempting not to be inflammatory; without additional resources people are in jeopardy of freezing to death this winter.
Congress should also accelerate the relevant tax credits contained in the Energy Policy Act of 2005 to October 1, 2005, from the present date of January 1, 2006. While the IRS has not completed its guidance documents, if Congress accelerated these credits then consumers could make use of them immediately. Section 1333 of the Energy Policy Act provides homeowners a credit of up to $500 for installing energy efficient improvements to their homes, such as insulation, windows and HVAC equipment. Section 1332 of the Bill would provide credits of $1000 - $2000 to builders and manufacturers of energy-efficient homes. New construction should set the pace for reduced energy usage. The energy efficient commercial buildings deduction (Section 1331) and the credit for residential energy efficient property (Section 1335) could also be accelerated to great positive effect. In light of our excessive reliance on oil-based fuel in the transportation sector, we also support expansion of the credit for hybrid vehicles.
In addition, separate letters have been sent by a variety of groups to the Administration and congressional leaders encouraging acceleration of the tax credits (Sections 1332 and 1333), full funding of the public information initiative and support for the State Energy Program, the Weatherization Assistance Program, the state energy efficiency pilot program (Section 140 of the Energy Policy Act) and the Appliance Rebate Program (Section 124 of the Energy Policy Act). Signatories of these letters include both the American Gas Association and the Edison Electric Institute, who are with me on the panel today, as well as the American Chemistry Council, NASEO and others.
Funding of Section 9006 of the 2002 Farm Bill, is the only short-term measure that could be implemented which is not included in the Energy Policy Act of 2005. FY’05 funding was $23 million. If funding could be dramatically expanded it could help reduce costs for farmers and rural small businesses immediately.
In summary form, the proposed federal emergency funding request for FY’06 is a follows:
1) LIHEAP - $5.1 billion ($3.1 billion in emergency funds above FY’05 funding levels);
2) State Energy Program - $100 million ($56 million above FY’05 funding levels);
3) Weatherization - $500 million ($273 million above FY’05 funding levels);
4) Energy Efficient Appliance Rebate Program - $50 million (new program);
5) Energy Star Program - $105 million ($95 million for EPA, which is $45 million over FY’06 appropriated funding and $10 million for DOE, which is $5.5 million over FY’05 funding levels);
6) Energy Efficient Public Information Initiative - $90 million (new program);
7) State Building Energy Efficiency Codes - $34 million ($29.5 million above FY’05 funding levels);
8) Heating, Ventilation and Air Conditioning maintenance program - $5 million (new program);
9) Energy Efficiency Pilot Program for the Gulf Coast states - $5 million (new program – targeted to Alabama, Louisiana, Mississippi and Texas);
10) Low-Income Community Energy Efficiency Pilot Program for the Gulf Coast states - $20 million (new program – targeted to New Orleans, Gulfport, Biloxi, Mobile, Port Arthur and Beaumont);
11) Energy Efficient Public Buildings Program - $30 million (new program);
12) State Technologies Advancement Collaborative - $20 million ($13.5 million above FY’05 funding level); and
13) Section 9006 of the 2002 Farm Bill - $46 million ($23 million above FY’05 funding levels).
As stated previously, this would simply fund the key elements of the Energy Policy Act of 2005 (other than item 13 above), which would have an immediate and positive impact.
In order for these programs to provide this relief, the funds must be distributed within two weeks of appropriation, and no later than mid-November. DOE’s history in releasing funds, at least for Weatherization and the State Energy Program, is that if funding is appropriated in October, the states don’t receive it until June of the following year. This is unacceptable. DOE procurement processes must be accelerated.
We are also deeply concerned with the impact of high prices on domestic manufacturing and jobs in this sector, such as the chemical industry. The Nation should expand funding for industrial energy efficiency. NASEO supports Secretary Bodman’s announcement to work with the 200 largest industrial facilities on energy use. Unfortunately, funding for the industrial energy efficiency program has been cut from over $140 million a few years ago to the FY’06 Budget proposal of $58 million. This effort is inconsistent and counter-productive.
One additional matter is of serious concern, and should be noted. This is not the time to eliminate the six regional offices operated by the Department of Energy. As we are attempting to deal with an energy emergency, we should not be eliminating the Department’s outreach arm to the states, businesses and others.
We have attempted to address both the short-term impacts and both state and federal responses. Immediate congressional action is imperative. We deeply appreciate the opportunity to testify and thank you for your long-term interest in a balanced national energy policy.
I am prepared to answer any questions that you might have.