[1]  See Appendix A for a copy of the letter requesting the study.

[2]  The White House, Office of the Press Secretary, Press conference by the President, Feb. 16, 2000, web site www.pub.whitehouse.gov/ uri-res/I2R?urn:pdi://oma.eop.gov.us/2000/2/17/1.text.1 (Washington, DC, February 17, 2000).

[3]  Readers should note that “heating oil” is “distillate fuel oil.”

[4] For purposes of this study, the Northeast is defined as New England (Maine, Vermont, New Hampshire, Massachusetts, Rhode Island, and Connecticut) and the Mid-Atlantic Census division (New York, New Jersey, and Pennsylvania). Oil supply data are collected at a larger level of aggregation (New England, Mid-Atlantic, Maryland, Delaware, and Washington, DC). The discussions in each case refer to the Northeast and the reader should keep the distinction in mind.

[5] The terms “stocks” and “inventories” are used interchangeably in this report.

[6] Diesel fuel is low-sulfur distillate fuel oil used for truck and heavy freight transportation.

[7] Frozen waterways slowed the arrival and unloading of distillate fuel oil in New York and Boston harbors.

[8]  Home heating oil is distillate fuel oil.

[9] Energy Information Administration, Annual Energy Outlook 2000, DOE/EIA-0383(2000) (Washington DC, December 1999).

[10] Distillate fuel oil is a general classification for one of the petroleum fractions produced from crude oil. It is used primarily for space heating, on- and off-highway diesel engine fuel, and electricity generation.

[11] Diesel fuel and home heating oil prices usually move together. They are essentially the same product, except for sulfur content. On-highway diesel fuel, by statutory mandate, has a lower sulfur content than heating oil. In some regions, it is more economical for refiners to distribute one product, and so low-sulfur diesel fuel is used for both on-highway uses, where it is required, and off-highway uses, where it is not. High-sulfur distillate (heating oil) cannot be used on-highway, and it is dyed to distinguish it. Furthermore, on-highway diesel fuel is taxed at both the Federal and State levels.

[12] Not all large customers with fuel-switching capability leave natural gas fuel to use distillate. Some power plants, especially in New England, that use natural gas as baseload or intermediate load fuel will switch to residual fuel oil when the economics are favorable.

[13] West Texas Intermediate (WTI) spot price.

[14] The terms “stocks” and “inventories” are used interchangeably in this report.

[15] The Central Atlantic region is a petroleum supply region designation that includes New York, New Jersey, Pennsylvania, Delaware, Maryland, and Washington, DC. It is also known as Petroleum Administration for Defense District 1b (PADD 1b).

[16] Cambridge Energy Research Associates, Inc., “Ringing in the New Year with Backwardation and Y2K,” CERA Alert (December 14, 1999).

[17] The American Gas Association (AGA) considers full gas storage capacity to be roughly 3.4 trillion cubic feet.

[18] By November 2000, the project is expected to deliver up to 400 million cubic feet per day to the Northeast—equivalent to about 70,000 barrels of heating oil or 65,000 barrels of residual fuel oil per day.

[19] NGI’s Daily Gas Price Index (January 18, 2000), p. 3.

[20] NGI’s Daily Gas Price Index (March 9, 2000).

[21] Spot prices, also known as “cash prices,” are current market prices for immediate deliveries of the product. Futures prices, also known as “forward prices,” are the prices of the commodity for delivery at a specified time and location in the future.

[22] The prices for gas traded at Transco Zone 6 are used as indicators of spot prices for the New York citygate. See Gas Daily (Arlington, VA: Financial Times).

[23] Testimony of Gary D. Lauderdale on behalf of Transcontinental Gas Pipeline Corporation before the Senate Committee on Energy and Natural Resources, February 24, 2000.

[24] New England includes Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. The Central Atlantic region includes Delaware, the District of Columbia, Maryland, and the Mid-Atlantic Census Division, which is composed of New Jersey, New York, and Pennsylvania (see map and discussion in Chapter 1).

[25] S. McCaffrey, “Heating Oil Companies Run Out in Some Areas,” Albany Times Union (February 8, 2000).

[26] J.P. Hamilton and M. Pittman, “Utility Contracts Exacerbate N.Y. Heating Oil Shortage,” Bloomberg Newsroom (January 26, 2000).

[27] Information provided to EIA by several State offices (discussed in more detail in Chapter 4); and Petroleum Industry Research Foundation, What Happened to Heating Oil (New York, NY, 2000), p. 6.

[28]The Midwest Census region is composed of Ohio, Indiana, Illinois, Iowa, Michigan, Wisconsin, Minnesota, Missouri, Kansas, Nebraska, North Dakota, and South Dakota.

[29] Energy Information Administration, State Energy Data Report 1997, DOE/EIA-0214(97) (Washington, DC, September 1999).

[30] Energy Information Administration, A Look at Residential Energy Consumption in 1997, DOE/EIA-0632(97) (Washington, DC, November 1999).

[31] Energy Information Administration, Residential Energy Consumption Survey (RECS) data for 1980 and 1997.

[32] U.S. Census Bureau, Current Construction Reports—Characteristics of New Housing: 1998, C25/98-A (Washington, DC, July 1999).

[33] American Gas Association, Residential Natural Gas Market Survey 1998 (Washington, DC, December 1999).

[34] Energy Information Administration, A Look at Residential Energy Consumption in 1997, DOE/EIA-0632(97) (Washington, DC, November 1999).

[35]Energy Information Administration, A Look at Residential Energy Consumption in 1997, DOE/EIA-0632(97) (Washington, DC, November 1999).

[36]Tables B1-B10 in Appendix B provide a historical comparison of residential equipment, fuel use, and expenditures for a variety of categories.

[37]Oil and gas bills were provided to EIA for the period from October 1978 through March 2000 for a customer of Long Island Power Authority.

[38] Chapter 5 describes pricing options for distillate fuel oil at the wholesale and retail level in greater detail.

[39] Insolation is the rate of delivery of direct solar energy per square unit of horizontal surface area, often expressed in annual number of kilowatthours per square foot. Insolation values determine the viability of photovoltaics for a particular location.

[40] As with any sample survey, the results of CBECS95 contain a certain measure of error associated with individual data points. Point estimates are presented here for discussion purposes; however, for use in an analysis, survey results should be presented as a range of values with an associated probability.

[41] Energy Information Administration, State Energy Data Report 1997, DOE/EIA-0214(97) (Washington, DC, September 1999).

[42] Fuel oil estimates from CBECS95 consist primarily of distillate fuel oil but may include small amounts of residual fuel oil and kerosene.

[43] As such, this is an optimistic estimate of fuel-switching potential. The fuel-switching potential would be 35 to 40 percent lower if switching were limited to fuel use to provide heating.

[44] Energy Information Administration, Fuel Oil and Kerosene Sales 1998, DOE/EIA-0535(98) (Washington, DC, August 1999), and earlier issues.

[45] The MECS94 fuel-switching tables give the maximum amount of distillate fuel oil that could be switched to a given other fuel. The sum of the individual quantities exceeds the amount of switchable distillate fuel oil. The calculations in the text subtract the maximum amount that could be switched to natural gas from the amount of switchable distillate fuel oil to impute the quantities for the other fuels (coal, electricity, residual fuel, etc.).

[46] Calculated from AEO2000 Supplement Tables 1, 2, 11, and 12. See web site www.eia.doe.gov/oiaf/aeo/supplement/index.html.

[47] Energy Information Administration, State Energy Data Report 1997, DOE/EIA-0214 (Washington, DC, September 1999).

[48] 1998 is the last year for which both utility and nonutility generator data are finalized.

[49] Distillate fuel oil used for electricity generation is also referred to as “light oil.”

[50] Nonutility generator consumption data include data for cogenerators, small power producers, and independent power producers. Some of this consumption is typically reported in the industrial sector.

[51] Includes Delaware, Maryland, the District of Columbia, Virginia, West Virginia, North Carolina, South Carolina, Georgia, and Florida.

[52] The 1989 values are for utilities only. Monthly data for nonutility generator consumption in 1989 are not available.

[53] An electricity generator is “dispatchable” if it can be called on to generate electricity as needed.

[54] Because natural gas prices are lowest from April through August, any distillate fuel oil consumption during those months can be roughly attributed to increased electricity demand and the inability to burn natural gas—that is, to the use of distillate-only generators.

[55] In the discussion of natural gas supply, the Northeast consists of the New England Census division (Connecticut, Massachusetts, Maine, New Hampshire, Rhode Island, and Vermont) and the Middle Atlantic Census division (New Jersey, New York, and Pennsylvania).

[56] LNG is natural gas converted to a liquid state by cooling to -260^oF (-162^oC). The transformation reduces volume by a factor of 600 to 1, which makes it a useful storage option. The ability to regasify LNG rapidly makes it especially suitable as a source of gas supply to satisfy peak demand.

[57] The last year of available EIA natural gas data with regional detail is 1998.

[58] Current supply is the sum of production, imports, and net inflow from other domestic regions. It excludes storage withdrawals.

[59]“Supplies from the domestic transportation network” refers to the infrastructure from which the gas enters the region. The supplies may originate either as domestic production or as foreign production that passes through other U.S. regions.

[60]Public Utility Commission of Ohio, Weather Impacts on Gas Cost and Residential Winter Heating Bills, 1996-1997 (January 31, 1997), p. 6.

[61] Energy Information Administration, EIAGIS-NG (March 2000).

[62] The completion of the Maritimes & Northeast Pipeline occurred late in the year. It did not initiate flow to U.S. markets until January 4, 2000.

[63] Major pipeline segments operated by the Columbia Gas Transmission Company, CNG Transmission Company, National Fuel Gas Supply Corporation, Tennessee Gas Pipeline Company, Texas Eastern Transmission Company, and Transcontinental Gas Pipeline Company traverse the area around Leidy, Pennsylvania. The new Independence Pipeline and Transco Market-link projects both propose significant development of capacity in the area, and Tennessee Gas Pipeline and National Fuel Gas Supply Companies have also indicated tentative plans to expand segments of their systems in the area.

[64] Three projects that were originally announced for development in 2000 have yet to be filed with the FERC, and another 10 projects currently scheduled for 2000 in their filings have yet to be approved by the FERC.

[65] This simple summation of project capacities is for illustrative purposes. Because some of the projects are complementary and some are competing and might be mutually exclusive, the estimate of 5.9 billion cubic feet per day does not mean that these projects, if built, could satisfy additional market demand of that magnitude.

[66] For example, in January 2000, the New York Public Service Commission, fearing potential disruptions of electric service, asked FERC not to award final environmental clearance to the Millennium pipeline, because they were opposed to the sharing of a transmission right-of-way with Consolidated Edison Co. of New York as an “unacceptable risk.” See “NY Pulls in Welcome Mat for the Millennium,” NGI’s Daily Gas Price Index (January 26, 2000).

[67] Salt cavern sites are becoming common in other regions of the country, but the only one in the Northeast as of December 1998 was the N.Y. State Electric & Gas facility in Seneca county. Maximum deliverability from the site was only 80 million cubic feet per day, and it is included with the data for other underground units. Another potential underground storage option is lined rock cavern (LRC) storage, which is being researched currently. If commercially successful, LRC storage would be suitable for the Northeast. This option was not included in the present analysis.

[68] Days of supply is measured as the ratio of working gas capacity to peak day deliverability. LNG supplies and normal underground storage should not be combined for this calculation. The addition of LNG distorts the calculation because it has a very high deliverability for only short durations. In practice, flows diminish as underground stocks are depleted, and actual drainage of all working gas from depleted reservoirs would require more time.

[69] Energy Information Administration, “Natural Gas Residential Pricing Developments During the 1996-97 Winter,” Natural Gas Monthly, DOE/EIA-0130 (97/08) (Washington, DC, August 1997).

[70] In some areas, gas is delivered directly to consumers by interstate pipeline companies, bypassing the LDCs. This practice is not thought to be widespread in the Northeast.

[71] “New England’s Natural Gas Industry Reaches New Growth Levels,” New England Gas Association Press Release (March 23, 2000), web site biz.yahoo.com/prnews/ 000323/ne_gas_ass_1.html.

[72] A pipeline’s design capacity is defined as the maximum throughput that can be sustained throughout the year. Actual flow can exceed the design capacity for brief periods.

[73]Interstate Natural Gas Association of America, Gas Transportation Through 1997, Report No. 99-01 (April 1999). The stated percentages reflect primary capacity contract arrangements. Through capacity release transactions, at least some of the capacity held by firm contracts is resold on an interruptible basis.

[74]EIA is conducting a data collection effort directed to local distribution companies in an attempt to develop independent, statistically based estimates of gas service interruptions and their impact on distillate fuel oil markets across the Northeast. Results will be provided in a study scheduled for release later in 2000.

[75] Complete reconciliation may not be achieved in a single month, depending on the amount owed by the consumer. The objective of these plans is to “smooth” the amounts owed by the customer, and in practice, ad hoc adjustments are introduced to achieve that goal. For example, payments under a budget-payment plan may be adjusted upward, even when out of cycle, if costs have risen so much that further delays in cost recovery are likely to result in a substantial “shock” if allowed to accumulate until the next reconciliation month. Thus, even customers under a plan for payment smoothing will experience some impact from a sudden, large increase in upstream gas prices.

[76] Alternative payment plans are not particular to natural gas markets. Similar plans are offered to heating oil customers.

[77] Present small-volume heating oil customers, such as residential and commercial consumers, can shift to natural gas also, but the present analysis is limited to large-volume customers. In general, small-volume consumers do not have strong economic incentives to switch from distillate.

[78] The EIA estimate is based on confidential data and therefore cannot be described in detail; however it is quite close to the 100,000 barrels per day estimated independently by the Petroleum Industry Research Foundation (cited in Chapter 2).

[79] Although not essential to the present analysis, the market impact of energy consumers shifting from natural gas to distillate depends on market transactions, and not on changes in fuel oil consumption, which are not necessarily equivalent. They can differ due to consumer use of on-site stocks of their alternative fuel, thus resulting in market purchases less than the daily consumption increase. On the other hand, the purchasing practices of switchable customers might increase transactions by more than the increase in consumption: i.e., on the day of purchase, large-volume users may buy fuel oil supplies for a number of days or longer. An analysis of the fuel oil market response also would depend on the duration of the incremental demand, because the cumulative drawdown would affect available inventories. Because the present analysis is concerned with the magnitude of incremental switching volumes to estimate gas capacity requirements at peak, duration is not considered to be relevant.

[80] Although the schedule of distillate purchases can have a significant impact on the distillate market, this analysis estimates distillate consumption, as opposed to purchases, because the focus is to calculate the comparable level of natural gas that would be consumed if natural gas were consumed in place of distillate.

[81] Although new pipeline generally is built to service an expanding market, it can also serve to relieve low pressure areas on the existing system and to offer competitively priced gas from an alternative source to an area already served, thus displacing existing capacity. Furthermore, pipelines are built to target specific customers in a region. The resulting pipeline may not be suitably located to serve an unanticipated emerging market, such as consumers wishing to switch from distillate to natural gas use.

[82] Peak day consumption is met also by storage withdrawals, and so flow capacity into the region increases by less than the rise in peak day consumption.

[83] Pipeline construction cost estimates are from Energy Information Administration, Natural Gas 1998: Issues and Trends, DOE/EIA-0560(98) (Washington, DC, June 1999).

[84] One of the reasons for this was that almost all of the projects were low-mileage or compression additions rather than long-haul new pipelines.

[85] Federal Energy Regulatory Commission, Office of Pipeline Regulation, Case Tracking System.

[86] A complete determination of the ability of these specific projects to satisfy the projected demand would require a detailed analysis that is beyond the scope of the present effort.

[87] Energy Information Administration, The Value of Underground Storage in Today’s Natural Gas Industry, DOE/EIA-0591 (Washington, DC, March 1995).

[88] The Central Atlantic region includes Delaware, District of Columbia, Maryland, plus the Mid-Atlantic Census Division, which is composed of New Jersey, New York, and Pennsylvania.

[89] EIA’s petroleum supply data show supply on the basis of broad regions, Petroleum Administration for Defense Districts (PADDs). The information to quantify supply details for regions smaller than the PADDs is not generally available, although selected data series are available on a sub-PADD basis, separating PADD 1, the East Coast, into New England, the Central Atlantic, and the South Atlantic. See Chapter 1 for definitions.

[90] Energy Information Administration, Fuel Oil and Kerosene Sales 1998, DOE/EIA-0535(98) (Washington, DC, August 1999).

[91] Hedging programs are based on the commodity futures price of heating oil.

[92] There was widespread press coverage of supply dislocations and readjustments. See, for instance, Hartford Courant,“Supply of Oil Tightens, Weather Keeps Tanker Waiting in New Haven Harbor” (February 3, 2000), and“Dwindling Supply Adds to State’s Oil Crunch . . .” (February 4, 2000).

[93] Although the Virgin Islands are officially part of the United States, EIA data classify petroleum shipments from the Virgin Islands as imports.

[94] Time exchanges occur when one company provides a quantity of a product to another with an agreement that it will be repaid in kind at a later date.

[95] The Jones Act requires that U.S. flagged ships transport shipments between U.S. ports after international ships are off-loaded.

[96] Testimony of Peter D’Arco, SJ Fuel, Before the House Committee on Commerce, Subcommittee on Energy and Power, U.S. House of Representatives (March 9, 2000).

[97] For instance, officials in the office of the Attorney General of Massachusetts were quoted as saying that they had received complaints about six companies that had imposed surcharges on fixed-price contracts (see Boston Globe, “Worcester Heating Oil Company to Repay Customers It Surcharged” (February 26, 2000)). While the story does not cite the number of heating oil dealers active in the State, the dealer’s trade association in Massachusetts has some 700 members. The case of the Worcester dealer cited in the article’s headline ended with the dealer making restitution to its 6,000 fixed-price customers and donating $10,000 for low-income heating assistance; the dealer in question has stated publicly that the surcharge was allowed by the contract. The Attorney General of Rhode Island received complaints on nine companies, all of which finally honored the fixed price (see Providence Journal,“Oil Dealers Will Honor Contracts” (February 18, 2000)).

[98] Companies can purchase an option contract above a futures contract strike price as a hedge that, if the price exceeds the strike price before the option expires, they can either sell the option for a profit or ask for delivery at the lower strike price. However, if heating oil futures fall below the strike price at the expiration of the option contract, the option expires and the option seller keeps the premium.

[99] Interruptible customers are those whose gas service can be curtailed to assure gas service to firm-service customers.

[100] Requirements for alternate fuel capability and minimum maintenance levels of alternate fuel supply (e.g., 10 days worth) vary from utility to utility and normally are integrated into gas utility tariffs. Brooklyn Union’s new tariff for large-volume users, for example, requires a minimum 10-day supply;  most other New York State gas utilities specify only the requirement to maintain an alternate fuel capability. The Public Utility Commissions or their equivalent endorse these gas utility practices or requirements through their acceptance of  the gas utilities’ tariffs. Enforcement is left entirely up to the gas utilities.

[101] State of New Jersey, Board of Public Utilities, Board of Public Utilities Heating Oil Review (February 23, 2000), web  site www.state.nj.us/ bpu/wwwroot/communication/Govrpt.PDF.  At the hearings, New Jersey gas utilities noted that some of their interruptible gas customers were given their normal interruption notice (about 8 hours) to stop using gas but chose to stay on natural gas despite agreed-upon heavy price penalties for continued use—as much as 10 times their normal gas rates and well above the distillate fuel oil price. This suggests that at least some of those interruptible customers had below-normal alternate fuel inventories and had to continue operating with natural gas, even at much higher costs. Hearings have been held by the Board of Public Utilities on the cause of the distillate fuel oil price spikes, and final recommendations are expected by the end of May 2000.

[102] The average winter East Coast and total U.S. distillate stock patterns are based on data for the years 1989-1999.

[103] Petroleum Industry Research Foundation, “Oil Markets During the Cold Weather: The Buck Stops Here,” Memorandum Submitted to the Subcommittee on Energy and Power of the Energy and Commerce Committee, U.S. House of Representatives (February 18, 1994).