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Senator Pete V. Domenici
Winter Fuels Outlook Hearing
October 18th, 2005
At the Hurricane Recovery Hearing on October 6th, I said that we need to have realistic expectations about how long we should expect high energy prices and we need to prepare for potential shortages.
The purpose of today’s hearing is to provide a foundation for this winter’s fuel cost expectations and to prepare us for what could be a very challenging winter.
The impact to residential heating bills this coming winter is anticipated to be severe.
Home heating costs are expected to be well above last year's levels, the result of a tight supply-demand balance exacerbated by Hurricanes Rita and Katrina.
The energy industry has made valiant efforts to recover from the storms, but we must realize that the depth of the disaster caused by the two Hurricanes may take years to recover from fully.
We were far from a strong energy situation when those storms hit us. That precarious state of energy has been a dark cloud over the economy and national security for years.
The Bipartisan Energy Bill was a long-term plan to address those energy challenges. It is a good bill that will increase energy security through R&D, regulatory certainty and resource diversification.
We will be in a better place 4 years from now thanks to that bill.
I believe that if we had passed it 4 years ago as the President requested, we might not be in as dire straits as we find ourselves in today.
Hurricanes Katrina and Rita have exposed an energy vulnerability that will be particularly evident this winter.
Access to supply and ability to move supply has been seriously compromised.
If we have a severely cold winter, we could find ourselves facing shortages of natural gas, heating oil and other products.
A majority of the United States’ 110 million households are heated by natural gas.
EIA predicts that homes heated by natural gas can expect to see on average 48% increase -- roughly $350 more than in their 2004-05 winter fuel bill. If the weather is colder than expected, these natural gas heating expenditures could rise 67% - roughly $500.
Many people have been focusing on higher gasoline prices and I am worried about those too, but the price of natural gas – particularly this winter – is one of the most distressful energy challenges we face in the near and long term.
In the U.S., natural gas prices are close to $14. In China, it’s less than $5. In Saudi Arabia, it’s about $1.
If we translated gasoline prices to the level of increases faced by natural gas – we would be seeing $7.00 a gallon gasoline at the pump right now.
When we drive up to a gas station we can brace ourselves for the high prices we see displayed on the station signs, but winter fuel costs could be real price shockers to consumers across the nation when they open their monthly bills.
My goal for this hearing is to make more people aware of the potential winter high price crisis and consider recommendations our witnesses will offer to deal with the winter forecast.
I expect the witnesses today to emphasize the importance of conservation.
According to the American Chemistry Council, if every American turns down their thermostat just 2 degrees this winter, it could free up 3 billion cubic feet of gas per day. That is the equivalent of the output we could get from 3 LNG terminals.
Other conservation steps that Americans need to consider are things like lowering the thermostat on your gas hot water heater to 120 degrees. According to API’s Use Energy Wisely web site that can save consumers up to $45 per year.
Conservation will be an important tool to help us get through the winter as well as a good habit to form in the future, but conservation alone will not solve the crisis.
As I have expressed many times before, I believe that this country must make the best use of all its natural resources without ever failing to protect both the environment and the economy.
Tomorrow this Committee will report Reconciliation language to the Budget Committee. That represents a step towards bringing more domestic oil from ANWR to U.S. consumers.
Although off-shore resources like Lease 181 will not be part of the Reconciliation, I am committed to finding a way to bring those resources to the American public.
In the area on the Outer Continental Shelf known as the non-leased portions of Lease Sale 181 which is not under moratorium, but in which we are not allowing leasing, there is approximately 7.2 trillion cubic feet of gas. In the areas more than 100 miles from any state coastline, resources are estimated to be approximately 6 trillion cubic feet of gas. According to API, 1 trillion cubic feet will heat one million homes for 15 years.
I hope that Lease 181 will be dealt with by the President or Congress in the near future. The benefits that more natural gas from Lease 181 can provide cannot be ignored while we struggle through a potentially crippling energy crisis.
I thank the witnesses for being here today.
Witness Panel 1
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.
Mr. Tom Kuhn
TESTIMONY OF EDISON ELECTRIC INSTITUTE
HEARING ON WINTER FUELS OUTLOOK
SENATE ENERGY AND NATURAL RESOURCES COMMITTEE
OCTOBER 18, 2005
To help address significantly higher energy prices this winter, EEI believes that:
• Congress should fully fund the Low-Income Home Energy Assistance Program (LIHEAP) in fiscal year 2006. The Energy Policy Act of 2005 (EPAct 2005) authorized LIHEAP funding at $5.1 billion.
• Congress should fully fund energy efficiency and conservation public information and outreach efforts. EPAct 2005 authorized $90 million per year for five years for public education.
• Congress should work with the Administration and the states to increase access to oil and natural gas supplies from our vast onshore and offshore resources, including from the unleased portions of leasehold 181 in the Gulf of Mexico, and to extend the drilling season for selected onshore areas.
To help improve the fuel diversity of future generating facilities, EEI believes that:
• Congress should provide greater regulatory certainty for coal-fired generating facilities through passage of sensible multi-emission legislation along the lines of the “Clear Skies” bill.
However, EEI strongly opposes any efforts to ration fuel supply or dictate fuel choices for the electricity industry.
• Both the Powerplant and Industrial Fuel Use of 1978 and the Public Utility Regulatory Policies Act (PURPA) were attempts by Congress during the Carter Administration to dictate fuel choices and energy purchases to utilities. Both bills adversely distorted electricity markets and impacted consumers.
• This is a major reason why EEI opposes federally mandated “efficient dispatch” proposals, a renewable portfolio standard and any effort to limit utility access to natural gas for electricity generation. Raising consumers’ electricity bills is not a solution to higher natural gas prices.
TESTIMONY OF TOM KUHN
ON BEHALF OF THE EDISON ELECTRIC INSTITUTE
BEFORE THE COMMITTEE ON ENERGY AND NATURAL RESOURCES
WINTER FUELS OUTLOOK
OCTOBER 18, 2005
Mr. Chairman and Members of the Committee:
My name is Tom Kuhn, and I am President of the Edison Electric Institute (EEI). EEI is the premier trade association for U.S. shareholder-owned electric companies and serves international affiliates and industry associates worldwide. Our U.S. members serve 97 percent of the ultimate customers in the shareholder-owned segment of the industry and 71 percent of all electric utility ultimate customers in the nation. We appreciate the opportunity to testify on the upcoming winter fuels outlook and ways to help consumers deal with high energy prices.
EIA 2005-2006 Winter Fuels Outlook
The latest forecast from the U.S. Energy Information Administration’s (EIA’s) Short Term Energy Outlook, which was released last week, is predicting significant increases in fuel costs for home heating this winter. This comes on the heels of extremely high prices for gasoline and other transportation fuels.
Customers who are part of the nation’s largest home heating sector—the 60 million households that use natural gas—could see their home heating bills go up by an average of almost 50 percent. The average natural gas household spent about $750 last winter to stay warm. This winter, it should expect to spend about $1,100.
The price for heating oil, which is used by about eight-and-a-half million homes and is the dominant fuel source in the Northeast, is expected to increase about 32 percent. The typical oil-heated home last year spent about $1,200 on heating bills. This year that cost could be as high as $1,577.
The average cost of using electricity to heat homes is expected to be about 5 percent more this winter nationwide, affecting about 31 million households in the country, with higher costs in some regions. The average spent on electricity for heating last year was about $717, which would mean this year it will be about $755. This sounds relatively low, but the majority of electrically heated homes in the U.S. are in the South, which has a relatively short heating season, and southern homes also are more likely to use heat pumps, an efficient form of electric heating.
Residential electricity prices are expected to average 9.3 cents per kilowatthour (kWh) in 2005 and about 9.5 cents per kWh in 2006, with significant regional differences depending on the fuel mix used to generate electricity in each region of the country.
Of course, consumers’ heating bills will depend largely on temperatures this winter. EIA’s estimates also are somewhat sensitive to how fast the oil and natural gas infrastructure in the Gulf of Mexico recovers from the two recent hurricanes. As of October 13, about sixty percent of the daily gas production in the Gulf of Mexico remained offline. By the end of the year, it is estimated that about one-fifth of natural gas production will still be offline, and EIA estimates that production will not return to pre-hurricane levels until March 2006. The hurricanes aggravated an already tight supply and demand situation. The wholesale price for natural gas is now trading between $13 and $14 per thousand cubic feet, which is roughly twice as high as a year ago.
All classes of consumers—industrial, commercial and residential—are feeling the effects of high energy prices. High prices for natural gas, heating oil and transportation fuels are having a ripple effect throughout the economy. Utilities that use natural gas to generate electricity also are feeling the pinch. Electric utilities do not benefit from higher energy prices, since they are often “caught” between high fuel costs and regulatory limitations on electricity rates. Like consumers, these utilities are seeking to use natural gas as efficiently as possible and are switching to more economical fuels whenever it is feasible.
Electric Utilities are Helping Energy Consumers
There are no quick and easy answers to our energy policy challenges. Increasing the supply and diversity of our nation’s available energy resources involves long-term solutions, many of which were included in the Energy Policy Act of 2005 (EPAct 2005). We commend the Committee’s leadership in getting that legislation enacted. But there are additional steps that can be taken to reduce energy demand and help ease prices in the near term. Electric utilities are actively working with their customers, state and federal governments, and others to help consumers manage their heating bills through direct assistance and other programs to reduce demand and increase energy efficiency.
• Special Focus on Low-Income Consumers
Low-income consumers are a special focus of the industry’s energy conservation efforts because they are especially vulnerable to high energy prices. According to the Department of Energy (DOE), low-income households spend 14 percent of their annual income on energy, while non-low-income households spend 3.5 percent.
EEI strongly supports full funding for the Low-Income Home Energy Assistance Program (LIHEAP), which Congress authorized at $5.1 billion a year in EPAct 2005. LIHEAP helps pay the winter heating bills or summer cooling bills of low-income and elderly people. Increased funding for the LIHEAP program is the most immediate and direct way that those in need may receive assistance this winter. An increase in the base funding for LIHEAP ensures that states will receive the funds necessary to provide heating assistance this winter, as well as cooling assistance next summer.
During extreme weather conditions, low-income consumers often are forced to choose between buying fuel to heat or cool their homes and buying food or medicine for themselves and their families. Since two-thirds of the families receiving LIHEAP assistance have incomes of less than $8,000 a year, the program clearly helps the people who need help the most.
Unfortunately, funding shortages in the LIHEAP program threaten to disproportionately affect America’s poor, especially the elderly, whose health and well-being depend on a comfortable living environment, and who are more likely to suffer during brutal weather conditions. The present program of approximately $2 billion serves only 20 percent of the eligible population with average payments of $311 per family.
An EEI survey shows that nationwide there are more than 800 programs available for low-income customers, including billing assistance, weatherization help, community development and outreach, and more. For many years, EEI member companies have established fuel funds to provide low-income households assistance with their utility bills, weatherization repairs and other programs, totaling over $1 billion annually. This year, companies are redoubling their efforts, pledging millions more dollars for assistance and energy efficiency efforts, and working with state officials to implement energy savings education programs.
• Proactive Initiatives Benefit Consumers, the Environment, and the Nation’s Electricity System
America’s electric utilities are among the nation’s leaders in encouraging the efficient use of energy. Since the early 1970s, electric utility programs and services have helped residential, commercial, and industrial customers take control of their energy bills.
These efficiency efforts are making a difference. Over the past 15 years, electric utility efficiency programs have saved about 700 billion kilowatthours (kWh) of electricity. That is enough to power almost 65 million homes for one year. Electric utilities invested more than $4.55 billion in energy-efficiency efforts between 2001 and 2003 alone. Many of these activities are accelerating. In California alone, between 2006 and 2008, shareholder-owned utilities will be spending nearly $2 billion on efficiency programs and activities.
These utility efficiency efforts are helping customers lower their electric bills, but that is just the beginning. Electric utility efficiency efforts also lead to fewer emissions, result in the more efficient use of generation and transmission assets, and reduce demand during peak periods, ultimately deferring the cost of building additional generation, and thus reducing consumer bills over the long term.
Electric utilities around the country offer energy-saving tips and advice. Most also have special conservation and energy-management programs and incentives. These can include:
? Energy-efficiency rebates to make purchasing high-efficiency appliances, including lighting, heating, air conditioning and refrigeration, and industrial equipment, more affordable.
? Low-interest loans to help consumers finance the purchase of high-efficiency equipment.
? Online energy audits to enable consumers to analyze their energy use and get recommended adjustments from their own computer.
? Home and commercial construction programs to offer incentives and training to encourage energy-saving designs and the installation of high-efficiency appliances, equipment, and lighting.
? Advanced metering, variable pricing, direct load control and demand response programs to encourage industrial, commercial, and residential customers to reduce their electricity use during peak periods. Load control programs give customers a bill credit in exchange for allowing the utility to cycle their large energy-consuming appliances and equipment on-and-off, and demand response programs offer innovative rate options to shift electricity use to non-peak periods.
EEI and its members also have twice yearly workshops with major national customers where we compare notes on energy efficiency practices, experiences, and new ideas. EEI also offers a brochure, “More Than 100 Ways to Improve Your Electric Bill,” to help residential customers control their electric bills.
Consumers support the industry’s energy-efficiency efforts. Two out of three Americans now say they are hearing more about the need to use energy efficiently and to conserve energy. The vast majority of Americans (80 percent) also say they are taking extra steps to conserve electricity in their homes.
• Coalitions Expand the Industry’s Effectiveness
EEI and its member company utilities are involved in a variety of energy-saving coalitions at the national, state, and regional level. For example, EEI currently is working with DOE, the Alliance to Save Energy, and a coalition of manufacturers, trade groups and consumer groups to implement an energy efficiency and conservation public information and outreach campaign.
The campaign will educate consumers to use energy wisely by providing tools to help them control costs, teach consumers about available energy efficiency tax incentives for homes and appliances, and increase consumer awareness that wise energy use is good for the country. This campaign will run through the heating season and likely will become part of a long-term public-private effort to change public opinion about the value of energy efficient behavior.
However, this campaign is severely underfunded. In order to be effective, much more money is needed. Changing consumer behavior requires a long-term, sustained effort. EPAct 2005 authorizes $90 million per year for five years for public education. However, even with private matching funds, including a major contribution from EEI, the program will have only about $2 million to spend this winter.
The electricity industry supports many coalitions focused on energy use. Descriptions of many of the major coalitions appear at the end of this testimony (Appendix 1).
EEI’s website [www.eei.org/wiseuse] includes: specific tips on how consumers can “take charge of their home heating bills” through simple, money-saving steps; brief descriptions of the many available individual utility-based conservation and efficiency programs; and information on the hundreds of low-income assistance programs available through our member companies.
• Supply and Demand for Natural Gas-Fired Electricity Generation
The reality is that the U.S. market for natural gas is a regional market, in contrast to the global oil market. We draw our natural gas supplies almost exclusively from a North American resource base, supplemented with some liquefied natural gas imports from foreign sources.
Our supplies from that resource base are currently constrained by two factors: declining production from existing open fields and a public policy decision to place off limit for development substantial areas within the U.S. that have natural gas reserves. This resource constraint is exacerbated further by a geographic concentration in the location of our developed gas reserves and related infrastructure. The resulting supply shortfall, potential for disruption, and related high prices are a drag on the economy and are incompatible with the growing, job-producing economy that Americans have come to expect.
EEI and its member companies have testified in the past that Congress needs to take steps to increase supply from every available resource that can be recovered consistent with environmental protections. This includes onshore and offshore domestic development, the construction of the infrastructure needed to deliver that product to market and access to foreign sources of international liquefied natural gas resources. EEI continues to support this position. The Minerals Management Service conservatively projects undiscovered and technically recoverable natural gas reserves of 128 trillion cubic feet (TCF) in Alaska and 284 TCF offshore. In comparison, the United States currently consumes 22 TCF per year.
We encourage Congress and the Administration to take the necessary steps to obtain oil and gas production from the unleased portions of Leasehold 181 in the Gulf of Mexico and extend the drilling season for selected onshore areas. We applaud the beginning of serious discussions of how to address domestic development issues, and we believe there can be a solution that addresses the concerns of the coastal states and the needs of our national economy.
• “Efficient Dispatch” Proposals
Concern about high natural gas prices has brought about renewed interest in legislative proposals to require the “efficient dispatch” of electric generating plants. While the goal sounds laudable, these proposals raise serious practical and policy concerns about consumer electricity prices and operation of the electricity system.
Advocates of efficient dispatch are seeking to require greater use of non-utility gas-fired generation, which they claim will reduce overall consumption of natural gas because these plants tend to be newer and burn gas more efficiently. Both the Powerplant and Industrial Fuel Use of 1978 and the Public Utility Regulatory Policies Act (PURPA) were attempts to dictate fuel choices and energy purchases to utilities. Both bills adversely distorted electricity markets, which impacted consumers. This is a major reason why EEI opposes federally mandated “efficient dispatch” proposals. Raising consumers’ electricity bills is not a solution to higher natural gas prices.
“Efficient” dispatch is not the same as “economic” dispatch. In fact, efficient dispatch can often result in uneconomic dispatch that leads to higher electricity prices for consumers. The most efficient gas-fired generating plants do not necessarily provide the lowest-cost power to consumers. Different types of gas-fired plants have different operating features that are important in determining when they are used. These include thermal efficiency, short-term fuel costs, fixed capital costs, emission rates, plant location and interconnection with the grid, and start-up times, among others. It is not possible to decide which plant is the best to operate by looking only at thermal efficiency, and it is often the case that the goals of dispatching plants with the greatest level of thermal efficiency and dispatching the lowest-cost available power to consumers are incompatible.
For example, utilities use their less efficient single-cycle gas turbine, gas-fired power plants at times of peak demand because these single-cycle plants have the ability to start up very quickly, are operationally very flexible and are used for reliability purposes. In addition, older steam turbine plants are generally fully depreciated. Also, their fuel is often supplied under stable, long-term contracts that serve to mitigate the price volatility found in the natural gas spot markets. Under such circumstances, from a consumer perspective, these plants are the best choice to run and have the lowest cost, despite having lower thermal efficiencies than other gas-fired plants that may be available.
Decisions about which plants to run also can affect congestion on the transmission system. Running a more efficient plant in one part of the grid instead of a less efficient plant elsewhere on the grid can increase transmission congestion and create a situation where some consumers on the “downstream” side of the congestion point actually pay more.
Nationally, utilities routinely operate their generation units in a manner that benefits electricity customers, in an effort to dispatch the lowest cost unit available to serve the next increment of load, recognizing any generation or transmission operational constraints.
In addition to dispatching their own generation units on an economic dispatch basis, utilities, on a daily basis, seek out alternative non-utility generation sources from which to purchase energy that is available at a lower cost than their own generation. This routine inclusion of non-utility generation in their economic dispatch process enables utilities to provide energy to their customers at an even lower cost than if they relied exclusively on their own generation portfolio.
Many regions of the country are served by regional transmission organizations (RTOs) or independent transmission organizations (ISOs), which have Federal Energy Regulatory Commission (FERC)-approved dispatch procedures in place that are designed to optimize the use of the mix of energy resources available in each respective region. The RTOs and ISOs dispatch generating facilities according to comprehensive dispatch plans that balance a number of important factors, including efficiency, lowest-cost available power, reliability, fuel diversity, environmental goals and transmission constraints.
The dispatch systems used by utilities that are not in RTOs or ISOs are subject to regulatory oversight by state regulatory commissions. State commissions ensure that short-term costs are minimized, subject to operational, contractual and environmental constraints, and that other objectives are met, such as maintaining reliability, long-term rate stability, fuel diversity, promotion of renewable resources and other important criteria.
Congress should not disturb generation dispatch plans already in place, whether they are plans administered by RTOs or ISOs, or utility plans subject to state regulatory oversight.
During consideration of EPAct 2005, an “efficient dispatch” amendment was offered in the Senate Energy and Natural Resources Committee, where it was defeated by a 17–5 vote. EPAct 2005 requires two federal studies of economic dispatch, one to be conducted by DOE and the other by FERC-state joint boards. Congress should refrain from moving forward with more dispatch legislation until it receives the results of these studies and any policy recommendations they might propose.
• The Importance of Fuel Diversity
Low-cost, reliable electricity results, in part, from our ability to utilize a variety of readily available energy resources – coal, nuclear energy, natural gas, hydropower, and emerging renewable energy resources, such as wind, biomass and solar. Fuel diversity is key to affordable and reliable electricity. This Committee recognized this important fact in crafting EPAct 2005, which includes many provisions that will promote long-term fuel diversity. A diverse fuel mix helps protect consumers, our economy and our national security from contingencies such as fuel shortages or disruptions, price fluctuations and changes in regulatory practices. A diverse fuel mix takes advantage of regional differences in fuel availability that have evolved over many decades.
Coal and electricity are inextricably linked to the economic health of the nation. Coal is the fuel for more than half of our country’s electric generation, and electric generation drives economic growth. Electric demand, coal-fired generation and GDP growth are all projected to grow at a steady pace to 2025 and beyond.
While coal fuels slightly more than 50 percent of the generation produced in the U.S., it fuels upwards of 80 percent of the electric generation in many specific states. These coal-fueled plants help to keep the price of electricity stable and affordable for consumers and businesses. The map at the end of our testimony shows how different regions of the country rely on different fuel mixes to generate electricity. Interestingly, roughly 40 percent of coal used for power generation in 2004 came from the Powder River Basin region in Wyoming.
Coal will continue to play a key role in electric generation due to its reliability, affordability and fuel source security. New baseload generation is projected to come from coal and nuclear energy in 2025 and beyond. Between 2004 and 2025, EIA projects that 87 gigawatts (GW) of new coal-fired generation will be built.
EEI member companies are already planning for substantial investment in new, large, baseload coal and nuclear generating plants to respond efficiently to growth demands, environmental requirements, and the expected limited availability and relatively high cost of natural gas. Public databases indicate that there are currently at least 38 large-scale (500 megawatts (MW) or more) coal projects totaling 30,197 MW being planned. Twenty-two projects (or 18,247 MW) have been announced, while 16 projects (or 11,950 MW) are undergoing feasibility studies. They all have scheduled online dates between 2006 and 2013.
EEI believes that many more such projects are under study but have not yet been announced. These new plants promise to be much cleaner than the ones in today’s coal-fired fleet, and they will provide opportunities for new advanced clean coal technologies such as super-critical pulverized coal and integrated gasification combined cycle plants. Some of these projects may present above-market costs initially, but costs will come down and risks will diminish as new plants are built and improved designs become standardized.
Nuclear energy uprates are estimated to account for an additional 3.5 GW of electric generation. However, EEI does not agree with EIA’s projection that no new nuclear plants will become operational between 2003 and 2025, as several consortia are working on new plants. Nuclear energy is critical to meeting our country’s growing demand for new baseload generation and is a top-rated option now available for reducing greenhouse gas emissions.
Natural gas plants, which provide baseload generation in some regions, will continue to be well-suited for peaking. Generation from non-hydroelectric renewables – particularly wind energy – is expected to increase as these technologies become more economically competitive and as reliability and transmission issues are addressed. Renewables are a growing part of many utilities’ generation portfolio, and EEI supports measures to promote their expansion through tax credits and increased funding for research and development, as well as renewable programs in the states. However, because of their intermittent nature and the concomitant need for backup generation, renewable resources such as wind and solar energy will be limited in their ability to displace coal plants, nuclear energy and hydroelectric plants in baseload generation. And, while no new hydroelectric generation is expected, the challenge will be to maintain the nation’s hydropower resource through relicensing. In short, it is important to recognize that different regions of the country rely on different fuel mixes for their electric generation. Secure and diverse electric generation sources are critical to the economy and national security.
• The Need for Environmental Certainty
Due in part to the complexity, cost and uncertainty of existing clean air regulation, over 90 percent of new power plants built over the past decade have relied on natural gas to produce electricity. However, given the unpredictability of natural gas supply and price, federal clean air policy must not force increases in the use of natural gas for electric generation. Federal energy and clean air policy goals can be better met, and consumer price increases kept to a minimum, through properly crafted “multi-emission” legislation, along the lines of Clear Skies. The regulatory certainty provided by multi-emission legislation would promote continued use of the nation’s abundant and low-cost coal resources, require continuing environmental progress, and alleviate pressure on the natural gas supply.
The U.S. electric power sector has reduced air emissions substantially under existing programs. Since 1980, the industry has cut sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions by over 40 percent, while increasing net generation from coal by nearly 70 percent. Multi-emissions legislation would require SO2 and NOx and mercury emissions to be reduced by an additional 70 percent.
In addition, power plants could take new steps to increase their efficiency if EPA’s 2003 NSR rule were codified. Increased efficiency at existing plants leads to lower fuel consumption, greater fuel availability to the market, and lower average fuel prices due to lower overall demand. Because the electric power industry’s emissions of SO2 and NOx are capped, and the regulations require state-of-the-art emission controls for all new plants, such improved NSR policy would not increase emissions.
It also is important to exercise caution to assure that proposals for addressing climate change and greenhouse gas emissions do not increase the pressure to shift from coal to natural gas, thus exacerbating the current shortage and price volatility of natural gas. Rather, we need to emphasize the development and deployment of technologies that will reduce or avoid greenhouse gas emissions. Again, we commend the Committee for your attention to technology advancement in EPAct 2005 and encourage continuing emphasis in this area.
• Challenges and Possibilities for Near-Term Reductions in Natural Gas Usage for Electricity Generation
Electric power plants are subject to economic, engineering and environmental realities and constraints. For example, power plants built to use natural gas or oil cannot burn coal directly. Power plants with long-term fuel contracts may not be able to switch to another fuel or procure new supplies in a tight spot market. There are challenges to transporting enough coal or oil to some plants; in fact, there are cases now where utilities are burning natural gas because of the problems associated with transporting coal out of the Powder River Basin. Nuclear power plants are operating at high capacity factors. To increase output at our nation’s nuclear plants, companies could upgrade some existing facilities to improve efficiency and employ new instrumentation technologies. However, uprate applications and reviews are complex and require careful review and approval by the Nuclear Regulatory Commission.
In addition, environmental permits can limit the specific types of coal and oil that can be consumed at individual plants. When power plants switch from natural gas to oil or use more coal, SO2 and NOx emissions increase, often substantially. Such emissions are regulated by the Clean Air Act, state law and local regulations. While in many situations power plants could increase emissions by using more emission credits, doing so would come at a steep price (e.g., approaching $1,000 per ton of SO2 and $2,500 per ton for NOx).
That said, there is limited promise that some existing coal-based plants could increase their electric production, or that retired or mothballed plants could be started up again. And, although oil prices have increased significantly, the price of oil has increased less than that of natural gas, so some natural gas-based plants potentially could switch to using oil.
These opportunities often tend to be plant specific and, where feasible, economics already are driving these actions to occur. However, regulatory flexibility can help to maximize the potential for alternatives to natural gas in the short-term, and our companies stand ready to work with regulatory and policymakers to pursue reasonable opportunities.
Depending on the weather and what fuels they use, American consumers are facing significantly higher bills for heating and other energy uses this winter, due largely to tight supplies of oil and especially natural gas. Electric utilities across the country are actively engaged in programs and coalitions to promote conservation and to help customers use electricity more efficiently. They also support full funding of the federal LIHEAP program for low-income households.
Natural gas will remain an important part of the electricity generation fuel mix for the foreseeable future, so Congress should take action to increase gas supplies, while resisting calls for a return to failed or misguided demand-side restrictions on natural gas-fired generation. Fuel diversity must remain a fundamental part of our national energy policy, including (but not limited to) environmental and transportation policies to promote the use of affordable domestic coal supplies for baseload generation; and to facilitate the development and use of hydropower and other renewables.
ENERGY EFFICIENCY AND CONSERVATION COALITIONS
SUPPORTED BY THE ELECTRIC UTILITY INDUSTRY
Examples of National Coalitions:
• Alliance to Save Energy — Educates decision-makers, opinion leaders, and the public about the many benefits of energy efficiency. [www.ase.org]
• DOE Motor Challenge — Increases the market penetration of energy-efficient electric motors, where 20 percent of all electricity is consumed. By 2010, the potential savings are over 100 billion kWh/year energy savings and $3 billion (U.S.) annual energy cost savings. [www.oit.doe.gov/bestpractices/motors]
• EPA ENERGY STAR — Voluntary rating system to label appliances and products that are 10-25 percent more efficient than the federal standard. [www.energystar.gov]
• International Utility Efficiency Partnerships — Expands the development of international, environmentally friendly, energy-development projects. [www.ji.org]
• Geothermal Heat Pump Consortium — Reduces home heating and cooling energy use through the expanded use of geoexchange heat pumps. Homeowners enjoy utility bills from 25 to 50 percent lower than with conventional systems. [www.geoexchange.org]
• Peak Load Management Alliance — Promotes the concepts and technologies of reducing demand for electricity during peak periods in response to pricing signals in the marketplace. [www.peaklma.com]
• Utility Hybrid Truck Working Group — Establishes the user requirements and performance specifications for a cleaner and more efficient hybrid utility “bucket” truck. H-TUF’s goal is to meet 2010 emissions standards while improving fuel economy up to 50 percent and with it, a 50-percent reduction in greenhouse gas emissions. [www.weststart.org/]
Examples of State and Regional Coalitions:
• The Midwest Energy Efficiency Alliance (MEEA) — Advances energy efficiency in the Midwest to support sustainable economic development and environmental preservation. [www.mwalliance.org]
• New England Energy Efficiency Partnership (NEEP) — Promotes energy efficiency in homes, buildings and industry in the Northeast United States. [www.neep.org]
• New York State Energy Research and Development Authority (NYSERDA) — Administers the New York Energy $martSM program during the transition to a more competitive electricity market. Some 2,700 projects in 40 programs are funded by a charge on the electricity transmitted and distributed by the state's shareholder-owned utilities. [www.nyserda.org]
• Northwest Energy Efficiency Alliance (NEEA, or NWEEA) — By 2010, the Alliance and related utility efforts are expected to save the region over 500 megawatts. Reduction in carbon dioxide emission from the energy savings is estimated at over 2 million tons. [www.nwalliance.org]
• Southwest Energy Efficiency Project (SWEEP) — Collaborates with utilities, state agencies, environmental groups, universities, and other energy efficiency specialists on conserving electricity [www.swenergy.org]
Mr. Larry Downes
Senate Energy and Natural Resources Committee
October 18, 2005
Statement of Laurence M. Downes
Chairman, American Gas Association
The American Gas Association (AGA) represents the nation’s local gas utilities. AGA member companies acquire gas supply for, and distribute it to, their residential and commercial customers. Energy is the lifeblood of our economy and natural gas supplies about one-fourth of this country’s energy. Natural gas also is America’s most popular home-heating fuel, heating 52 percent of America’s homes.
By law the local gas utility cannot make a profit on the cost of natural gas, it is required to pass through to customers what it pays for the natural gas commodity – without any mark-up. The Department of Energy’s Energy Information Administration has projected that natural gas households will see their winter fuel bills rise from about 30 percent to about 67percent, depending on the winter weather. Clearly, the natural gas prices that are projected for this winter in the wake of Hurricanes Katrina and Rita will be a tremendous burden to our customers.
Our role as a lifeline business infuses the natural gas utility with a mandate to serve our customers safely and reliably – we do not fail in this regard. We build a supply portfolio that rests on a foundation of natural gas placed in storage during the summer months, well in advance of winter cold, when the prices generally are lower. To this we add a portfolio of natural gas supply contracts with varying terms and prices, and we are, as a whole, increasingly hedging our supply portfolio to promote some degree of price stability.
Natural gas distribution utilities also help our customers help themselves. To this end, customer education is critical. Customers can avail themselves of levelized billing plans and seek help to weatherize their homes and implement other energy efficiency measures. For those who must decide between paying their heating bills or paying their medical bills, the Low Income Home Energy Assistance Program (LIHEAP) has been designed. Funds must be accessed and accessible. Congress must do its part to see that the fully authorized level for LIHEAP of $5.1 billion is funded. Emergency appropriations of an additional $1 billion are also needed.
All of these tools will help this winter. But we cannot as a nation forever mask increasing natural gas prices with demand measures targeted at the home heating consumer alone. We must begin to take steps to diversify fuels for electricity generation. And we must take action to increase natural gas supply. Without these measures, the upward spiral will continue, and we will, winter after winter, face the same scenario – where one fall hurricane, or one winter cold snap can tilt the supply/demand balance against the consumer.
Thank you for the opportunity to testify before this committee again. My name is Larry Downes, and I am Chairman and CEO of New Jersey Resources, which operates a natural gas utility in New Jersey that provides service to more than 455,000 customers. I am also the chairman of the American Gas Association (AGA), which represents 195 local energy utility companies that deliver natural gas to more than 56 million homes, businesses and industries throughout the United States.
Energy is the lifeblood of our economy and natural gas supplies about one-fourth of this country’s energy. Natural gas also is America’s most popular home-heating fuel, heating 52% of America’s homes. As the purveyor of this home-heating fuel, natural gas utilities are a lifeline business – it is a responsibility we take seriously and, as you will see, it guides our actions.
Given the recent run up in natural gas prices in the wake of the warmer than normal summer and the Katrina and Rita hurricanes, this winter natural gas customers will likely face significantly higher energy bills. Local natural gas utilities as a whole have been consumed by planning for the winter heating season and seeking means to ease the burden that high gas prices will place on our customers.
Accordingly, our focus as a national organization is to pursue policies that will help mitigate the high cost of natural gas for our customers this winter and, longer term, increase supply. It is shocking to think that the $13 prices projected in the American Gas Foundation, “Natural Gas Outlook to 2020,” published in February of this year, have already been exceeded for short periods. That study concluded that if public policy makers and industry decision makers did not immediately address critical issues that will have a significant impact on the availability and price of natural gas, such as diversifying our electric generating mix and increasing access to domestic supplies, then prices could go as high as $13 by 2020. No one imagined that a mere 7 months later those prices would already be a reality. These higher natural gas prices will lead to much higher bills for consumers.
Higher bills are bad for customers, bad for the economy and bad for the natural gas utilities that the American Gas Association represents. More than 63 million Americans rely upon natural gas to heat their homes – unexpectedly high prices are a serious drain on their pocketbooks. High prices also put our industrial sector at a distinct competitive disadvantage, cause plant closings and idle workers.
Most observers quickly understand why higher prices are bad for customers and the economy but are not aware why they are bad for natural gas distribution utilities. By law, natural gas utilities are not allowed to mark-up the price of natural gas and must sell the gas to consumers at exactly the same price they pay for it. Natural gas distribution utilities make their money by delivering natural to our customers. Higher natural gas prices mean that our customers will purchase less natural gas. So natural gas utilities want what their customers – lower natural gas prices and reliable natural gas supply.
Last week the Department of Energy’s Energy Information Administration (EIA) issued its Short-Term Energy Outlook and Winter Fuels Outlook (October 12, 2005). The American Gas Association does not issue its own natural gas price projections, so in my testimony I will be discussing the EIA projected prices. As has been widely reported, EIA projects that the average natural gas household’s winter fuel expenditures will be 47.6 percent. Don’t let the decimal point fool you. If history is any guide, this EIA predicted percentage surely will change next month both to the right and the left of the decimal point. It is important to remember, as EIA carefully notes, that the EIA projections are based on modeling results that depend on assumptions regarding some critical variables. A significant assumption is that there will be a “medium recovery” of energy operations in the Gulf of Mexico. In other words, EIA does not assume either a best-case or worst-case scenario in projecting the recovery of natural gas production, gas processing and pipeline facilities in the Gulf. Another significant assumption is that the winter weather will be normal. A “normal” winter means weather somewhat colder than most parts of the US have seen in recent years. What if we do not have a normal winter? EIA projects that a ten percent warmer than normal winter would cause average residential natural gas prices to rise 29.8 percent, while a ten percent colder than normal winter would lead to a 67.3 percent price increase. This is quite a price range without considering best-case or worst-case Gulf of Mexico recovery scenarios. So that is what we are facing nationally – significantly higher natural gas prices in the best of cases and extraordinarily higher prices in the worst of cases.
What are natural gas distribution utilities doing to help their customers this winter? Natural gas utilities are doing what we always do – that which is necessary to serve our customers reliably this winter. That means that we are pursuing purchasing strategies that, while tried and true, have also evolved over the past five years with ever-rising natural gas prices. It is a building block process that begins months ahead of the winter heating season as utilities begin purchasing natural gas during the summer months and putting it into underground storage. Usually summer and early fall natural gas prices are lower than winter prices and purchasing storage gas in the summer and early fall provides a natural hedge.
On top of the foundation block of storage, natural gas utilities layer other supply and transportation services. Companies build and manage a portfolio of supply, storage and transportation services, which may include a diverse set of contractual arrangements to meet anticipated peak-day and peak-month gas requirements.
Layered on top of that is an increasing use of financial tools to hedge natural gas costs and promote some degree of price stability. Financial hedging tools may include options, fixed-price contracts, swaps, and futures. These hedging tools are helpful in reducing price volatility, and while natural gas distribution utilities have grown increasingly savvy in their use of these tools over the past few years, they still do not always guarantee a lower natural gas price, nor are they designed to, quite frankly. Lower prices and price stability can sometimes be competing objectives.
Natural gas distribution utilities also must help our customers help themselves. To this end, customer education is critical for a number of reasons. First, customers need to be aware of higher natural gas prices to have an opportunity to take action today to reduce this winter’s bills. That is why the American Gas Association and individual natural gas distribution utilities are working to communicate to customers regarding the anticipated higher winter bills and to offer consumers some tools to protect themselves.
One important tool is the use of budget or levelized bill plans that allow utility customers to spread out their natural gas bills so that they pay about the same amount each month year round. Enrollees in fixed bill programs are charged the same total bill each month for 11 months, regardless of weather extremes and unpredictable commodity prices. Usually there is an adjustment during the twelfth month to reflect differences in actual versus projected costs.
Another important tool is assisting customers to take steps to increase their homes’ energy efficiency and better conserve energy. Energy efficiency and conservation can do much to reduce individual energy consumption and lower customer bills. Indeed, one recent study indicated that aggressive energy efficiency measures could reduce natural gas prices by up to 25 percent. While analysts may quarrel with the likely impact of an increased application of energy efficiency measures on natural gas prices, we know that appropriate customer energy efficiency measures can benefit customers and these benefits will be more immediate in today’s high-priced environment.
The American Gas Association thanks this committee for its work in encouraging greater consumer energy efficiency and AGA and its members will continue to encourage improved customer energy efficiency and conservation to help reduce the sting of higher natural gas prices.
Another significant utility effort to help customers struggling to pay high natural gas bills is found in utility programs that provide low-income customer assistance. Each year utility programs and rate structures provide about $1.7 billion in low-income customer assistance. These programs are designed to augment the federal government’s Low Income Home Energy Assistance Program (LIHEAP), which in recent years has been funded at around $2 billion per year. Much of the utility low-income assistance comes in the form of rate assistance, which may involve reduced rates for low-income households, waivers of fees, and arrearage forgiveness. Other utility programs include energy efficiency and weatherization programs that help reduce customer natural gas consumption.
What we seek from all of these approaches is to flatten out the highest peak of natural gas prices and somewhat dampen the impact on customers of high and volatile natural gas prices. In the long term, however, these tools cannot forever mask the impact of higher natural gas prices on our customers. Other actions are necessary. They were necessary five years ago, they were necessary last year, and, even with enactment of the Energy Policy Act, they remain necessary today.
Accordingly, AGA recommends the following multifaceted actions be taken to address both ends of the delivery chain – supply and demand.
First and foremost, LIHEAP funding should be increased to the full $5.1 billion appropriated level and an additional emergency appropriation of $1 billion should be made. Without an increase in funding, the purchasing power of LIHEAP could be reduced by up to 50 % this winter. The expected rise in home energy costs hits low- and fixed-income individuals particularly hard. The National Energy Assistance Directors' Association (NEADA) just released its second annual survey of the effect of rising energy costs on poor families. Among the study's findings: 32 percent of families in the survey sacrificed medical care; 24 percent failed to make a rent or mortgage payment; 20 percent went without food for at least a day; and 44 percent said that they skipped paying or paid less than their full home energy bill in the past year. Furthermore, the number of households receiving LIHEAP assistance has increased from about 4.2 million in FY 2002 to more than 5 million this year, the highest level in a decade. LIHEAP applications are expected to increase significantly this winter. The nation should help customers who will be hit hardest by energy price increases for home heating and cooling.
Natural gas supplies must be increased. AGA supports policies that would increase the supply of natural gas in environmentally responsible ways. Demand responses can only go so far toward the goal of lower natural gas prices. And while a demand response will help us through this winter, long-term Increasing supplies of natural gas must occur if we are to reduce customers’ bills meaningfully. Accordingly, Congress should support appropriate incentives and legislative changes that would increase the production of natural gas. These priorities have not changed since I testified before this Committee in January of this year, so let me briefly reiterate a few of the most important access issues:
• Opening restricted off-shore areas for the environmentally responsible production of natural gas;
• Providing adequate funding and staff for the federal offices principally involved in the issuance of permits for natural gas and production;
• Further expanding and expediting procedures for producers to access lands and production areas; and
• Taking steps to increase the U.S. capacity to receive liquid natural gas (LNG) shipments.
Energy efficiency programs should be supported that encourage the most efficient utilization of all energy forms through the matching of each energy task with the most appropriate fuel (e.g., running computers with electricity and heating homes and businesses with natural gas). Additionally, incentives should be incorporated for more efficient energy use through tax credits for the purchase of energy efficient appliances and the construction of energy-efficient homes and commercial buildings. Congress should further accelerate the effective date of energy efficiency tax incentives in the Energy Policy Act and fund energy awareness programs at the Department of Energy.
Diversity should be the goal for fuels for new electricity generation facilities. In recent years, due to its lesser impact on the environment, natural gas has been the dominant fuel for new electricity generation. Electricity generation remains the fastest growing sector of natural gas demand. This increase in demand has occurred while production has remained stable, driving prices higher. AGA supports the direct use of natural gas and encourages electricity generators to seek greater fuel diversity, such as clean coal, nuclear, alternative and renewable fuels. AGA urges Congress to provide incentives for and reduce regulatory barriers to electricity generation facilities that use clean coal, nuclear energy and alternative and renewable fuels.
Consumer education should be the goal not just of natural gas distribution utilities but of all policy makers. We in the utility sector will continue our efforts to educate our customers – we urge Congress to also educate our customers, their constituents, so that every avenue to the customer is blanketed with information that will ease the potential cost burden that will be imposed this winter by natural gas bills.
For the past five years the natural gas distribution utility and our customers have been operating in challenging times – this winter will be no exception. While natural gas customers can do their part by embracing energy efficiency solutions, policy makers in Washington must do their part to balance supply and demand.
FEDERAL ENERGY PRIORITIES OF NATURAL GAS UTILITIES
The Energy Policy Act of 2005 was a good first step in meeting the nation's long-term energy needs. However, the federal government has not adequately addressed the need for more and diverse energy supplies, or more relief for those most at risk. Urgent action is needed now to reduce the economic burden of record-high energy costs on consumers. The federal government should take action to:
• Increase the funding for the Low Income Home Energy Assistance Program (LIHEAP)
• Increase natural gas supply for consumers
• Diversify the portfolio of fuels for electricity generation
• Support energy efficiency programs
Increase The Funding for Low Income Energy Assistance Program (LIHEAP)
The nation should help customers who are hit hardest by the recent dramatic energy price increases for home heating and cooling by increasing the appropriation for LIHEAP. AGA urges Congress to:
• Increase the annual LIHEAP appropriation to $5.1 billion
• Appropriate $1 billion for emergency assistance
Increase Natural Gas Supply
AGA supports policies that would increase the supply of natural gas in environmentally responsible ways because additional supplies typically mean energy lower bills for consumers. AGA urges the Congress to:
• Open restricted off-shore areas for the environmentally responsible production of natural gas, including in the eastern Gulf of Mexico and on the outer continental shelf (OCS)
• Provide adequate funding and staffing for the federal offices principally involved in the issuance of permits for natural gas exploration and production
• Reform the National Environmental Protection Act (NEPA) process so that it works to protect the environment and allows for responsible natural gas production
• Adopt streamlined and expedited procedures for producers to access lands and ensure that year-round production can occur in the intermountain west
• Take steps to increase the U.S. capacity to receive liquefied natural gas (LNG) shipments
• Codify into law Executive Order 13211 and a Federal Office of Energy Project Coordination
Diversify The Fuel Portfolio for Electricity Generation Facilities
Natural gas is now the predominant choice as a primary fuel for new electricity generation. Electricity generation has been the fastest growing sector of natural gas demand. This increase in demand has not been matched by production increases, driving prices higher for all consumers. AGA supports the direct use of natural gas and encourages electricity generators to seek greater fuel diversity. AGA urges Congress to:
• Provide incentives for, and reduce regulatory barriers to, electricity generation facilities that use clean coal, nuclear energy, and alternative and renewable fuels, and dual-fuel capability
Support Energy Efficiency Programs
AGA supports policies that encourage the most efficient utilization of all energy forms through the matching of each energy task with the most appropriate fuel (e.g. running computers with electricity and heating homes and businesses with natural gas). AGA urges Congress to:
• Accelerate the effective date of the energy efficiency tax incentives in the Energy Policy Act
• Fund energy awareness effort by DOE
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