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Testimony of
William M. Flynn, Vice President
New York State Energy Research and Development Authority
before the
United States Senate
Committee on Governmental Affairs
March 24, 2000
17 Columbia Circle· Albany, New York 12203-6399 ·
(518) 862-1090 · fax (518) 862-1091
Chairman Thompson, Senator Lieberman, distinguished committee
members, and guests. On behalf of Governor Pataki and the
residents of New York State, I thank you for the opportunity
to testify today concerning the energy supply and price problems
that New York State and the Northeast region have been experiencing
since late January.
There is not another state in the union that relies on heating
oil more than New York to meet its heating needs. Forty-three
percent of New York's households use oil for space heating.
That's 2.9 million households. Nearly 80% of those homes are
concentrated in the New York City Metropolitan area, including
Long Island. New York's residential sector is the largest
consumer of heating oil and kerosene, or distillate fuels,
in the nation. New York State accounts for 20% of the total
U.S. distillate demand. As you can see from those numbers,
New York's residential customers bear the brunt of any increase
in heating oil prices.
As a side note, let me say here that the economic burden
associated with spiraling oil prices is not confined to just
heating oil. New York consumers use more than 5.6 billion
gallons of gasoline, and nearly a billion gallons of diesel
fuel annually, accounting for 4.5% and 2.7% respectively of
national demand for these two motor fuels. The current surge
in retail pump prices is significantly increasing the cost
of commuting and transporting goods in New York.
Returning to heating oil issues, after a slow steady climb
through the fourth quarter of 1999, home heating oil prices
soared to record high levels beginning in late January. At
the height of the price spike, the statewide average price
for heating oil increased by more than 75 cents per gallon.
On January 17, 2000, the statewide average price was $1.24;
on Monday February 7th, that price was $2.02 per gallon. To
put this statewide price in perspective, last year at that
time, the average price for a gallon of heating oil was 91
cents. Since February 7th, we have seen this $2.02/gallon
price decrease about 51 cents a gallon, but that retail price
is still nearly 67% above the 90-cents-a-gallon year-ago level.
(See attached chart)
As I mentioned just a minute ago, the concentration of residential
heating oil customers in the State is in the New York City
metropolitan area and on Long Island. In early February, heating
oil prices in this region were running at about $2.25 a gallon,
more than double that of a year ago.
That's critical in New York, because over the four-month
winter heating season, from November through February, New
York's residential, commercial, and industrial customers combined,
consume, on average, 13.1 million gallons of distillate fuel
per day. At its peak in January, demand hit a high of approximately
17 million gallons a day.
A small portion of that demand was for kerosene, which is
an important fuel in the Northeast. Kerosene is used as a
blending agent for heating oil and diesel fuel to prevent
gelling and improve viscosity in low winter temperature, with
a relatively small amount being used for space heating purposes.
Kerosene aside, when you look at the enormous amount of daily
distillate fuel use, you can begin to see the huge economic
impact that we have been faced with.
Let me say that New York State has not been alone in feeling
these effects. Throughout this period, we have been sharing
information regarding prices, supplies, and strategies with
other northeastern states through the Coalition of Northeastern
Governors and the National Association of State Energy Officials
on a weekly basis. This information sharing proved invaluable
in helping to assess the supply and price situation throughout
the Northeast.
While I don't believe there is a definable single factor
that you can point to as the ultimate cause of the price spike,
there were a number of market factors that contributed which
bear mentioning.
From a historical perspective, we can look back at the second
quarter of 1999 when crude oil prices began to rise from a
low of $11 a barrel at the beginning of the year, to nearly
$3 0 a barrel (173 % increase) during the last week of January.
Recently oil prices climbed to more than $34 a barrel in February
although they are now hovering in the $27-28 a barrel range.
Certainly, this price escalation was influenced by several
factors. While domestic economic growth and economic recovery
in the Pacific rim contributed, the most significant factor
was production cutbacks by OPEC and non-OPEC producers that
began in March 1999. This worldwide reduction of between 4
to 5 million barrels per day in crude oil production resulted
in a corresponding reduction in petroleum products, which
meant that the system had less slack to meet higher demand
levels when the sustained cold weather snap arrived.
I just used the term "slack" to describe a market
situation where additional supplies are not just sitting around
waiting to be used. The petroleum industry, like other industries,
has adopted "just in time re supply" of inventories.
This change in industry practice that developed over the last
several years has had a large impact in New York. According
to New York State Department of Environmental Conservation
data, New York's total petroleum bulk storage capacity has
declined by 15% and our heating oil storage capacity has declined
by nearly 20% over the past five years. Additionally, over
this same period, in-state storage capacity for gasoline has
fallen over 17%. 1 understand that New York is not alone in
seeing its storage capacity being reduced. There are several
reasons for this decline in New York, including the high costs
associated with meeting more stringent environmental regulations,
increasing insurance and carrying costs to hold petroleum
products, and the lack of market incentives to build and maintain
new facilities.
As anyone from the Northeast can tell you, winter is fickle.
This past December saw record temperatures roll in, but not
record cold temperatures, they were record mild temperatures
that continued into early January. When the extreme cold weather
arrived in the middle of January we experienced a sharp increase
in demand by all sectors simultaneously. For the two-week
period ending January 29, the temperature was 56% colder than
last year at that time, and 18% colder than normal. This spike
in demand was critical because, following on the heels of
extremely mild December weather, sufficient supplies were
not available. The latest available data indicates that this
has not been a harsh winter. October 1, 1999 through March
18, 2000 data shows that temperatures have been 9% warmer
than normal, and one percent warmer than last year.
The combination of increased demand and insufficient supplies
created greater competition among buyers, including interruptible
natural gas customers and electric generators, that served
to drive already high prices higher. An interruptible gas
customer is generally a large fuel user who contracts for
below-market natural gas prices throughout the year in exchange
for switching to an alternative fuel when the utility needs
gas capacity or when the temperature reaches a designated
degree number.
However, some believe that interruptible natural gas customers
and electric generators were major contributors to the sharp
increase in demand and the corresponding higher prices for
petroleum products. We are looking into this situation in
New York to see what effect interruptible gas customers and
electric generators had on the supply and price of petroleum
products. Early indications are that an additional 3.4 million
gallons a day of distillate fuel were consumed by traditional
customers. Another incremental 1 million gallons a day was
consumed by interruptibles; 720,000 gallons used by electric
generators, and 320,000 gallons used by tariff customers,
those switched by a temperature trigger. Demand by these customers
occurred at the same time that supplies were dwindling and
prices were sky-rocketing.
The competition for product that occurred during the cold
snap, and the fact that competition was driven in part by
low regional supply stocks throughout the entire winter season,
leads me to another major market force that has played an
important role: refinery utilization.
New York does not have any refineries within the State. We
rely on refineries in New Jersey, Pennsylvania, the Gulf Coast,
and overseas to meet our product needs. National refinery
utilization rates dropped to about 84% in early February,
and have only rebounded to 90% by mid March. At the end of
December, refineries were operating at 89.7% of capacity.
A year ago, when the oil markets were calm, the comparable
utilization rate was 94%. Heating oil production on a national
basis was down 16% from a year ago in early February. On the
East Coast, heating oil production was down 46% from year-ago
levels at the beginning of February. While refinery utilization
began to rise in late February in response to increased pressure,
questions still remain as to why there was low utilization
when the demand for heating oil was so robust.
Switching concerns for a moment, today domestic gasoline
output approximates 7.9 million barrels a day. That's about
5% more than last March, but national inventories remain lower
than a year ago.
These refining patterns raise questions both nationally and
regionally. Before the January cold snap, national heating
oil stocks were nearly 30% lower compared to last year, and
Middle Atlantic States' (NY, NJ, Delaware, Pennsylvania) heating
oil inventories were 16% lower than a year earlier. By the
third week in January, these heating oil reserves had shrunk
to nearly 15 million barrels, or 50% less than a year ago
and below any comparable level of the past seven years. At
the same time however, diesel fuel production on a national
level increased more than 7% and on the East Coast by more
than 23%.
Today, gasoline stocks nationally are down 12% from a year
ago levels, but in the Middle Atlantic states inventories
are 20% lower than last year. The result is that the price
of unleaded regular in New York has escalated 17 cents a gallon
in recent weeks from $1.43 at the end of January, to $1.60
in mid-March. The current statewide average gasoline price
exceeds the previous all time high of $1.51 gallon established
in early December 1990, during the Persian Gulf War.
Caught up in all of these market forces were the consumers.
Everyone from residential heating customers to hospitals,
public health and safety agencies, trucking firms, small businesses,
large fuel oil dealers, and the motoring public are feeling
the effects of these price increases. Particularly hard hit
during that period, and still looking for relief from high
diesel fuel prices is the trucking industry. There are reports
that the average retail price of a gallon of diesel fuel rose
over 63% in the Northeast from $1.35 in early January to $2.06
during the latter half of the month and reached the $2.29
to $2.69 range by the first week of February. Trucking companies
have been unable to absorb these astronomical price hikes
and we are now seeing these higher costs passed along to customers.
Following the retail chain downward, these customers are then
forced to raise the prices of the goods they sell to households
and other commercial businesses, creating a major economic
impact that is still rippling through the region's economy.
While some predictions were made about possible price increases
due to known factors like the OPEC cutbacks, the sudden and
dramatic price increases we saw were way outside the expected
norm.
Take for example, the fact that the average price difference
between a gallon of 42 heating oil and crude oil over the
past year hovered around 52 cents per gallon. For the month
of February, the price differential equaled $1.01, 49 cents
over the historical price spread. While that number has dropped
to 74 cents during the past three weeks, it's still 22 cents
over the normal price spread. ( See attached chart)
Needless to say, Governor Pataki is concerned about the economic
consequences of this unprecedented rise in petroleum prices
and the effects on New York's citizens, particularly our elderly,
working poor, and low-income consumers. I will discuss the
economic impact in further detail later in my testimony. Certainly
at the onset, New York's first concern was with public health
and safety issues.
Quoting Governor Pataki, "New York is no stranger to
adversity" and thankfully so. During the past few years
New York has seen nature's forces take a toll on our State
with floods, ice storms, and other natural disasters. Those
crisis situations have helped the State refine its emergency
response capabilities and this most recent threat to the health
and safety of our residents was no different.
From our first contact with industry officials about impending
home heating oil shortages, the State's emergency response
was initiated. Governor Pataki directed NYSERDA, the State
Emergency Management
Office, the Public Service Commission, and the Consumer Protection
Board to establish an around-the-clock coordinated effort:
Telephone hotlines were established immediately to handle
emergency calls for shelter or heating assistance and to report
suspected instances of price gouging. State officials began
contacting county energy emergency coordinators across the
State to assess their local situation. Daily contact with
the U.S. Coast Guard was established. The Coast Guard is responsible
for ice-breaking activities in New York harbor and the 150
miles northward to upstate markets on the Hudson River to
ensure delivery of available fuel supplies. Daily calls were
also placed to dealers to assess supply problems and price
trends. Heating oil distributors were also supplied with emergency
contact information for their customers in the event they
experienced a shortfall in supply.
The Governor also took action on a number of regulatory fronts
to help overcome some of the supply and resupply problems
that New York encountered. These included:
Directing the State Public Service Commission to work with
New York's utilities to voluntarily keep their interruptible
natural gas customers on natural gas rather than switch to
fuel oil;
Directing the State Department of Taxation and Finance to
issue temporary interstate certificates to in-state heating
oil distributors and trucking companies to allow them to import
heating oil;
The State Department of Environmental Conservation in conjunction
with NYSERDA granted one-week waivers to allow New York City
municipal facilities to use slightly higher sulfur content
fuel oil to meet their heating needs;
The Governor also asked the State Consumer Protection Board
and NYSERDA to investigate the causes of the current shortage
and recommend measures to prevent a re-occurrence.
Besides initiating a comprehensive State action plan to help
our residents, Governor Pataki was also active on the national
level. Early on, Governor Pataki asked the Clinton Administration
for an immediate investigation into the factors that drove
the price increases and supply shortages. He also asked at
that time for additional Low-Income Home Energy Assistance
Program (LIHEAP) emergency aid to be released as well.
The Federal LIHEAP program is extremely important to New
York because we have more than 1.4 million eligible households
within the State. This year, 500,000 to 600,000 households
will be served by the program. When Governor Pataki requested
federal assistance, funds were critically needed Whelp New
York's struggling families meet the rising cost of fuel. In
response, the Department of Health and Human Services released
$45 million in emergency LIHEAP funds to 10 Northeastern states.
New York did very poorly in that initial allocation. That
prompted a second letter from Governor Pataki, and I'm pleased
to say that, in the ensuing two emergency allocation rounds,
New York fared much better.
Besides easing the financial burden on those eligible for
LIHEAP assistance, the heating oil price problem extended
beyond low-income households to families and small commercial
customers who have had trouble meeting their oil cost obligations.
To address that issue, Governor Pataki has taken action to
increase the Home Energy Assistance Program eligibility levels
in New York to 60% of the State's median income from the current
150% of poverty level.
The estimated impact this heating season on New York's economy
will be about $650 million dollars. higher than last year.
About $450 million of that increase will be borne by New York's
heating oil customers. A family that typically uses 900 gallons
of fuel oil during the winter heating season will pay an additional
$350 dollars this year. If you were unfortunate enough to
have received a 225-gallon delivery during February, you paid
about $216 dollars more than a year ago at that time.
These additional costs are now causing a ripple effect among
the states' fuel oil dealers who, in many instances, had customers
that could not make full payment for deliveries. This, in
turn, created cash-flow and bank line-of-credit problems,
which is causing concern about the increased potential for
personal and corporate bankruptcies that could weaken the
oil distribution systems. A recent survey by NYSERDA and the
NYS Consumer Protection Board found that dealers are extremely
concerned about their receivables. One dealer stated, "
We experienced extra borrowing to cover the purchase of higher
priced oil and to cover the increase in accounts receivable.
We also expect a large volume of customers who will never
pay us, which will result in increases to our yearly bad debt
expense." While some assistance may be available from
the Small Business Administration, we are hearing that a quicker
means to make funds available to dealers is desperately needed.
Why did we find ourselves in this position, and what actions
need to be taken so that we don't have a re-occurrence down
the road?
First, let me say that I was pleased to see that many of
the steps that the Pataki administration took in New York,
were incorporated into the Administration's actions that were
announced on February 10th when a second round of LIHEAP funds
were released. Hopefully those actions will now be put in
place as part of a federal action plan for the future so that
nobody is caught off guard if it should happen again.
Certainly in the short term, we need to use our influence
with the OPEC and non-OPEC cartel producers to increase production.
This is critical.
Cartel control of production has created the perception of
a shortage which is a major factor in driving these price
increases. This situation created calls in some areas for
Government to allocate fuels. That would be extremely difficult,
and someplace I hope we never have to go. We must take whatever
steps are necessary to protect our energy security and the
public's health and safety.
On February 14th, Governor Pataki called on the Federal Department
of Energy to immediately release oil from the Strategic Petroleum
Reserve (SPR). Secretary Richardson heard the same message
from elected officials from all over the Northeast on February
16th at the Northeast Heating summit held in Boston. There
was a consensus that moving SPR oil from Gulf Coast salt domes
into the market would signal that United States citizens will
not be held hostage to the whims of oil-producing nations.
If we took that significant step then to expand available
oil supplies, world oil prices would already have started
to decline, and the oil-producing nations would have been
encouraged to come to the table with greater levels of oil
production.
Also, releasing SPR oil now will prevent a repeat of the
tight supply conditions that disrupted the heating season
from extending to gasoline and diesel fuel availability as
we approach the spring and summer driving season. I'm concerned
that we have yet to see any results from the Administration's
"Oil Diplomacy Strategy" as we enter the summer
driving season. Had we released these supplies in February,
this oil would be in the marketplace now.
Another important step the Federal government can take to
help New York and other New England states is to ensure that
adequate funding is in place for Coast Guard icebreakers that
work to keep New York's waterways clear for the movement of
petroleum products and other commerce. We are hearing rumors
that by next winter services may be cut back by the Federal
Department of Transportation, the parent agency of the Coast
Guard. Should the number of Coast Guard icebreakers be reduced,
it would definitely imperil health and safety. Part of this
winter's crisis was attributable to resupply difficulties,
and if not for the Coast Guard's commitment to ensure that
these critical vessels continue to work to keep our waterways
open, we would have been much worse off than we were. There
is truly no other mode of transportation available other than
barges to deliver the quantity of fuel necessary to supply
the New York market, and parts of Vermont and Massachusetts
that are supplied from New York terminals.
Another area of critical importance is for the federal government
to do a better job of working with the states with respect
to planning and responding to emergencies. Within the Department
of Energy, the Energy Information Administration does a professional
job of collecting data and disseminating it to the states,
but there is an obvious disconnect in-house. That information
needs to be used by the Department to work with major oil
suppliers and refiners in advance of crisis situations to
make the necessary course corrections. Government cannot allow
supply disruptions to occur that threaten the public health
and safety of our citizens. The Department of Energy needs
to play a much more proactive role than it did.
We are pleased that the Department of Energy now believes
that energy emergency planning is an essential government
function.
An important step that we are looking at in New York State
is better fuel diversity. Looking at the factors that came
together to create the current situation, it's apparent that
we need to take a close look at expanding natural gas pipeline
capacity in the State and in the Northeast. The Federal Energy
Regulatory Commission can play an important role in helping
states like New York with expediting certification and approval
of new and expanded pipeline capacity into the Northeast.
As a matter of public trust, the Federal Government must
do a thorough investigation to determine if oil markets were
manipulated and profits were made on people's misery. People
in New York and throughout the Northeast want to understand
what happened to their hard-earned dollars. We believe they
need an answer. In New York, Governor Pataki has directed
the State Consumer Protection Board to vigorously investigate
any reports of price gouging involving anyone or any business
taking advantage of this severe, extreme weather by demanding
sky-high prices for basic necessities, including the fuels
we use to heat our homes. However, a full-scale Federal investigation
is warranted and needed.
Last, but certainly not least, I would be remiss if I did
not comment on the need to diversify our sources of energy
supplies. We must redouble efforts to develop domestic oil
reserves, renewable energy resources, alternative-fuel technology,
and to promote energy efficiency.
We must increase domestic oil production if we have any hope
in the future of lessening our dependence on foreign oil and
ensuring our energy security. Perhaps you don't think of New
York when you think of natural gas and oil production, but
we do have a vibrant research and development program in place
that is funding research to demonstrate increased natural
gas production and enhanced oil recovery technology. Working
with groups like the Independent Oil and Gas Association and
the New York State Oil Producers Association, we are experimenting
with new mapping programs and horizontal drilling techniques
on Appalachian natural gas and oil reserves. We must look
for every opportunity to increase domestic production, but
states can't do it alone. It will take a commitment on the
part of Congress and the Department of Energy to join the
states as partners in this effort.
In addition to encouraging domestic production, we must also
increase funding for energy efficiency initiatives. At NYSERDA
we also fund a wide-range of R&D initiatives to improve
the efficiency of oil heating equipment.
Currently, the DOE has a $6 billion budget, but only a nominal
amount of that is dedicated energy-efficiency funding. New
York State has increased funding four-fold for R&D and
energy efficiency as part of our transition to competition.
We have tremendous potential, and situations like the one
that has happened in the Northeast should serve as the lighting
rod to spur us to action, ensuring that we have a secure energy
future for our children and their children.
Once again, on behalf of Governor Pataki and the citizens
of New York, I want to thank you Chairman Thompson for the
opportunity to testify today.
I would be more than happy to answer any questions you may
have.
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