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LIHEAP Negotiations With Non-regulated Fuel Vendors880 Fixed Margin Programs, Discounts,
Summer Fill, Fuel Cooperatives During the past 25 years, significant changes have occurred in household energy use in the U.S. According to the 2000 Residential Energy Consumption Survey (RECS), compiled by the Department of Energy, fuel oil (also called heating oil) usage has declined while electric and natural gas use has increased. Since 1978, the percentage of households using fuel oil or kerosene for space heat has decreased from 22 percent to 8 percent. Over the same period, the percentage using electricity as their main heating fuel has nearly doubled, from 16 percent in 1978 to 30 percent in 2001. Use of propane and wood as the main heating fuel remained fairly constant, at 4.7 percent and 2 percent respectively. Natural gas remained the dominant main heating fuel, used by 55 percent of households in 1978 and 55 percent in 2001. Among low-income households, energy type usage mirrored the national trend, except that the increase in electricity usage was more dramatic. Since 1978, the percentage of low-income households using electricity as their main heating fuel jumped from 10 percent to almost 31 percent in 2001. Among LIHEAP recipient households, use of electricity as the main heating fuel was 21.3 percent in 2001. Low-income households that use fuel oil as their main heating fuel declined from 20 percent in 1978 to 6.7 percent in 2001. Among LIHEAP recipient households, 10 percent used fuel oil as their main heating fuel. Households that heat with fuel oil have historically had higher bills than those using other energy sources. This continues to be true among low-income and LIHEAP recipient households. While the average annual home heating bill for LIHEAP recipients was $646 in 2003, the average annual fuel oil bill for these households was $992, compared to $656 in 2002, a reflection of steadily increasing oil prices during the last couple years. The 2003 average heating bills for other fuel types by LIHEAP households were: natural gas, $696; electricity, $427; kerosene, $726; and propane, $674. The 2003 fuel costs are from the LIHEAP Home Energy Notebook for FY 2003, which is based on data from the RECS. Fuel oil bills are higher because the majority of households that heat with oil are in the Northeast and they tend to reside in older homes with older, less efficient furnaces that use more fuel. For example, the typical home in Maine uses 850 to 900 gallons of oil per year, in New Hampshire, 800 gallons. In contrast, homes heated by electricity tend to be smaller and newer, have relatively efficient heating equipment, are better insulated, and are mostly located in the South and the West. As the winter of 2005-06 approaches, all households, including low-income, can expect to be hit hard as experts predict that high crude oil prices will continue to result in higher and more volatile home heating oil prices. FY 2006 heating oil costs were expected to be 34 percent above FY 2005 costs. The Notebook also detailed the residential energy and home heating burden of low-income households versus non low-income households. Energy burden is calculated by dividing energy expenditures by income to express expenditures as a percentage of income, thus providing a measure of energy costs as well as affordability. The residential energy burden calculation takes into account total residential energy expenses while the home heating calculation includes only heating expenses. On average, LHEAP households spent more than three times as much of their incomes on heating as non low-income households, according to the Notebook:
Low-income and LIHEAP recipient households using fuel oil had the highest home energy burden in 2003, spending 6.5 and 11 percent of their incomes respectively on this heat source, compared to 1.5 percent spent by non low-income users of fuel oil. Low-income users of propane spent 5.9 percent of their incomes on heat, compared to 10.7 percent by LIHEAP recipient households and 1.9 percent by non low-income households. Low-income natural gas users had a 6 percent energy burden; electric heat users, 3.1 percent. By contrast, LIHEAP recipient households using natural gas had a 9.2 percent home energy burden; electric heat users, 5.8 percent. Non low-income households using natural gas had an energy burden of 1.1 percent, while electricity users had 0.6 percent. When it comes to total residential energy expenditures for 2003, the low-income burden is also disproportionate, the Notebook says:
Of the 8 million U.S. households that used fuel oil or kerosene as their main heating source in 2001, 2.3 million are LIHEAP-eligible, according to the 2001 RECS. Of the 4.9 million households that use propane, about 1.8 million of these users are LIHEAP-eligible. The majority of propane users are in the midwestern and southern states. The area likely to be hardest hit by oil price increases is the Northeast. Despite the fact that use of fuel oil and other non-regulated fuels has declined in the region, over 30 percent of low-income households still use these energy sources, according to the Notebook. For example, in 1987 about 43 percent of low-income households in the Northeast used fuel oil as their main heating fuel; the percent had fallen to 37.5 in 1997 and to 24.7 percent in 2002. However, in some states the percentage is higher; in Maine 66 percent of LIHEAP-eligible households use fuel oil; in New Hampshire, 52 percent, and in Vermont, 51 percent. As a result, for a number of years, LIHEAP directors in Northeast states and others across the country, have negotiated with fuel oil, propane and other bulk fuel vendors for discounted prices, credits or donations for LIHEAP recipients. The states have been prompted by volatile fuel oil prices, declining federal and oil overcharge funds for their programs, and the leveraging incentive provision of the LIHEAP regulations. Under the leveraging incentive provision, states that supplement their LIHEAP grant with additional funds or resources that directly benefit LIHEAP households can win leveraging award dollars. For FY 1991, the first year of the leveraging incentive program, seven states leveraged nearly $2 million dollars in bulk fuel discounts, credits or donations. By the end of FY 2004, at least 11 states were participating in bulk fuel leveraging, and the amount leveraged was $7.6 million. The 13 states that reported leveraged resources from bulk fuel vendors were: California, Connecticut, Indiana, Maine, Maryland, Massachusetts, Minnesota, Montana, New Hampshire, New Mexico, North Carolina, South Dakota and Vermont. The largest leveraging program has been Massachusetts' statewide margin-over-rack oil discount program, which saved $4.6 million in 2001, its best year, followed by $2 million leveraged by Connecticut and $1.5 million by Maine that same year. During 2004, Massachusetts reported savings of about $2.7 million from its margin over rack program; Connecticut reported $2 million, and Maine, $1.5 million, The first section of this paper will describe state negotiations with fuel vendors for discounts, credits or donations on behalf of LIHEAP clients; the second will cover nonprofit buying groups or fuel cooperatives, which in some cases have coordinated with LIHEAP programs. Background on the leveraging incentive program is available in a LIHEAP Clearinghouse memorandum titled Leveraging Nonfederal Funds for LIHEAP. Following is a summary of the types of bulk fuel discount programs operated by state LIHEAP agencies. Margin Over Rack or Fixed Margin Programs Massachusetts has had a long history of negotiations with oil vendors. Reacting to a 33 percent decrease in federal LIHEAP funds between 1985-89, the state instigated a pilot project for LIHEAP clients in the Haverhill area of northeastern Massachusetts for FY 1989, in which companies bid for an acceptable profit margin above their "rack" or wholesale oil price. The contract was given to the company with the best bid. Although the program was controversial with the oil industry, LIHEAP officials estimated that in 1989 it saved $85,516 or approximately 17 cents per gallon for LIHEAP clients. It was reinstated in 1990, when it saved $91,244 or approximately 20 cents per gallon. Now in its 17 th year, the Haverhill competitive bid program is no longer a pilot but a permanent program in 11 cities and towns. In FY 2004, $82,342 was saved due to the oil bid program. Despite the savings, officials say it would not be easy to duplicate in other parts of the state. Since the winter of 1991, Massachusetts has had a statewide "Margin Over Rack" (MOR) program that pays oil dealers the lesser of either a set margin per gallon or their regular retail price on the date of delivery. From 1991 through 2000, the margin was 25 cents per gallon; in 2000 the state raised it to 28.5 cents per gallon. Vendors had requested the higher margin due to their increased operating costs. While the higher margin results in less savings per gallon, the state is still pleased with the overall savings the MOR has generated. Unlike the competitive bid program where only a few dealers could participate, the MOR program allows all oil vendors to participate. Savings normally average about 10 cents per gallon during the winter months. Savings have fluctuated over the years from less than $1.5 million in the late 1990’s to a record $4.6 million in 2001. During 2004, nearly 37,000 households benefited from MOR savings of $2.7 million. The MOR concept is based on the fact that oil vendors base their per gallon retail price on a margin added to their terminal or "rack" price. Each vendor's margin is different due to variances in operating costs associated with delivery of the product. In negotiating for its discount programs, Massachusetts officials pointed out that the average vendor's business from LIHEAP clients is small; approximately 3 percent of the state's residential oil consumption is by LIHEAP clients. Countering oil industry arguments, the state maintained that while the volume was significant enough to warrant some form of discount for LIHEAP recipients, the discount would not result in significant across-the-board increases for the entire customer base. Massachusetts attributes its success with the MOR to the fact that it operates a vendor payment system in LIHEAP, which guarantees that if they deliver, the vendors will be paid. Furthermore, its subgrantees have always had good relationships with the vendors and, in promoting the concept, the state involved vendors, trade councils and subgrantees. The state has encountered little problem with oil vendors refusing to participate in the program – about 800 participated in 2003 – and this has held true during recent winters when prices have been volatile. According to the state’s 2004 leveraging report, the following procedure is used to monitor and report savings:
A copy of the state's contract with oil vendors is available on the Clearinghouse website. Connecticut 's statewide fixed margin program started out as a pilot in 1990 in one community action agency; and became statewide two years later after expanding to two other service areas. As with the Massachusetts program, a predetermined amount – 25 cents – was added to the wholesale price of fuel oil at the New Haven Harbor port for resale to LIHEAP recipients; this amount increased to 28 cents effective FY 2005 due to concern from oil vendors about increased operating costs. The program pays participating vendors the margin price or their retail price, whichever is lower. Vendors must put their regular retail price on all delivery tickets. The local administering agency or the state will calculate the fixed margin price. According to state records, the program saved LIHEAP recipients over $55,000 in its first year, an average of $0.186 per gallon. During FY 1993, the first year of statewide operations, $1 million in savings were claimed; 2004 savings were $2 million, with 24,513 households benefiting. The record year was FY 2001, with $3 million in savings. Like Massachusetts, Connecticut estimates that each vendor's LIHEAP clientele is a small part of their total business, between one to four percent, or about 2.7 percent of the state's total residential fuel oil sales. New York In New York, where at least 40 percent of low-income household use bulk fuels such as heating oil or kerosene, and approximately $60 million of the state’s LIHEAP grant is spent annually on these fuels, the HEAP Heating Oil Pilot program got underway in FY 2004 for the purpose of increasing the buying power of LIHEAP funds. The state estimates that approximately 30 percent of New York LIHEAP payments are to non-utility vendors, including home heating oil, kerosene, and propane vendors. During FY 2005, the pilot’s second year, vendors in five upstate counties (Onondaga, Dutchess, Monroe, Orange and Tioga) participated in a margin-over rack program. Participating heating oil vendors agreed to charge the lesser of their retail posted delivery price or a margin-over-rack price as follows: no more than 35 cents over the wholesale or rack price if they guaranteed the price only for the amount of the customer’s LIHEAP benefit, or 39 cents if they guaranteed the LIHEAP customer’s price for the entire heating season. Ninety-five oil vendors in the five counties participated, representing 65 percent of the dealers. In FY 2005-2006, the state will implement the pilot in twenty update counties, and by 2007-08 the state plans to put it into operation statewide. The HEAP Heating Oil Pilot Program is a partnership between the Office of Temporary and Disability Assistance, the LIHEAP grantee, and the New York State Energy Research and Development Authority (NYSERDA), which administers a statewide public benefits program funded by a system benefits charge (SBC). NYSERDA uses a portion of the SBC monies to help develop, implement, monitor and evaluate the program. For the FY 2006 program, the state plans to continue the above options for vendors and to include kerosene vendors as well. It will also offer a new option for vendors called discount off retail pricing under which vendors agree to provide a discount off their posted price of 13cents per gallon for purchases for the amount of the LIHEAP benefit or 9 cents per gallon for all deliveries to HEAP customers throughout the season. These discounts would apply to heating oil, kerosene and heating oil/kerosene blends. More information is available on the program’s home page at http://www.heapoil.org and NYSERDA’s 2003 RFP requesting a program implementor. Statewide Discount Programs Maryland: Like Massachusetts and Connecticut, Maryland has had a long and sometimes frustrating history with oil vendors. The state began by negotiating a 10-percent oil discount for LIHEAP recipients in the city of Baltimore in 1985-86. Maryland officials estimated that roughly 12,000 clients benefited from the oil discount program in the amount of $425,000. However, an attempt to broaden the discount program statewide failed due to the political power of oil dealers. Maryland's LIHEAP later succeeded in obtaining a smaller discount off the current retail oil price for LIHEAP recipients. For the first year, the discount was 3 cents per gallon, thereafter it has been 3 percent off the lowest retail price for non-LIHEAP customers. The 3 cents per gallon discount was too hard to monitor and assure compliance with, and it did not generate sufficient savings if oil prices were high. The percentage discount results in more savings for the low-income when prices go up, but does not adversely affect the dealer when the price is low. Since the program began, Maryland has added coal, propane, kerosene, and wood vendors to the discount program. The state averaged around $200,000 annually from this discount from 1991 through 1994; for FY 2004 it reported $159,356 in savings for about 16,500 households. In addition to the discount, fuel donations and other vendor credits totaled over $460,000 in 2004, according to the state’s leveraging report. Maine: The state attempted an oil discount program in 1986 that required dealers to provide a 1-cent per gallon discount to LIHEAP recipients. This proposal also encountered significant resistance from oil dealers and was subsequently abandoned. However, the state has had luck with negotiating discounts annually and for a number of years it has obtained the cash price rather than the credit price for fuel oil and kerosene for LIHEAP recipients, providing them an average savings of 10 to 25 cents per gallon. The amount Maine has leveraged from this resource has varied from a low of $677,000 in FY 1997 to a record of $2.5 million in FY 2000. During FY 2004, with over 400 dealers participating, Maine saved $1.5 million on behalf of 36,627 households. For FY 2006, the state is considering other strategies that it hopes will result in greater savings than the cash price negotiations such as fixed price contracts for the entire season or capped prices wherein prices are capped at a certain level, but customers are allowed to take advantage of lower prices if prices go down. New Hampshire: Following the experience of one community action agency that had obtained a discount for nearly a decade, New Hampshire now has discounts statewide. Each local agency negotiates discounts on fuel oil and other bulk fuels for LIHEAP recipients. In most cases agencies receive the vendor’s lower cash price rather than the credit price, resulting in savings of from 2 to 20 cents per gallon. Vendors also waive fees for after-hours delivery for savings of $30 to $50 per household and they also provide free or low-cost furnace repair. The state has averaged around $400,000 in savings annually since 1992. The program is successful because there is a four-day turn around from delivery of fuel to when the check is received by the vendor, which resulted from a Governor's executive order. (Turnaround was formerly three weeks.) Summer "Fill" or Pre-Purchase Programs LIHEAP directors have regularly taken advantage of decreases in fuel oil and propane prices by purchasing these fuels when prices are lowest, usually in the summer, and by attempting to guarantee or lock in lower prices for these fuels for low-income households. However, in recent years that has been more difficult. During the fall of 2004, several LIHEAP directors reported that fuel prices stayed high during the summer and they were less able to obtain better prices from dealers. In Vermont, where 85 percent of LIHEAP recipients heat with oil, propane, or kerosene, a somewhat new approach to deliverable fuels began in 2002 - a formal, statewide summer fuel purchase program, assisted by an advance from state funds. State legislation passed in 2001 allowed Vermont to advance non-federal funds to the LIHEAP program after July 1 to pay for summer fuel purchase (SFP) agreements with participating fuel vendors. Vendors who sign with the SFP quote a price, based on summer rates. They also guarantee a price reduction if prices fall below that quote. Because each company sets its own price, the program is not a bid process, so vendors compete only against themselves to provide their customers with the best prices. LIHEAP recipients are free to pick their own fuel vendor, whether or not the vendor is part of the SFP program. Once a vendor signs with the SFP, the LIHEAP office multiplies the number of fuel assistance customers the vendor had the previous year by the average LIHEAP benefit amount projected for the current year for the total due. The company can then decide whether it wants six monthly payments or a lump sum; the lump sum option is available only to suppliers who agree to a lower per gallon price. Fuel assistance customers get the agreed-upon price only for the fuel purchased with their fuel purchased by the customer or by other fuel assistance programs (above the individual's benefit amount) is not covered. The SFP program is available to clients on a first-come/first-served basis. Because Vermont starts accepting and processing applications in mid-July, 75 percent of clients get their full year’s benefit issued in November. During FY 2002, its first year, the SFP program enrolled 119 (60 percent) of the state's oil, propane, and kerosene dealers, serving 9,167 households (73 percent) using those fuels. The LIHEAP office reported savings of $155,900 for FY 2002, $591,497 for FY 2003 and $237,689 in FY 2004, with 8,510 households served. However, prices for the three fuels have been higher the past two summers, and fewer dealers are willing to participate and lock in prices. The number of participating dealers has fallen from 119 during the first year to fewer than 70 during FY 2005. Vermont’s SFP Documents such as a program overview, vendor agreements and instructions are accessible from the "Directors Tool Kit" on the LIHEAP Clearinghouse website. South Dakota has had a summer fill program for bulk fuels since FY 1994. Suppliers agree to deliver the fuel in the summer and to delay billing until after October 1. These agreements have continued for fuel oil users. Savings from South Dakota's FY 1995-96 summer fill program amounted to $242,920. Because fuel oil and propane prices spiked sharply during the winter of 1996-1997, the state tripled the amount of savings it usually gets from this resource to $936,831. Nearly 6,000 households benefited from the program, which is almost half of the LIHEAP population. However, the 1997 savings were not repeated in subsequent years. Savings during FY 2004 were $52,924. In 1997 the state initiated a pre-payment program for priority households (elderly and handicapped) who were propane users. Propane suppliers had three options, to give a summer price, contract or lock in a lower price for the whole year, or to offer one price for summer and one for the rest of the year. Most chose the third option. The state reported $93,800 from this program during FY 2004. In Iowa , where about 15 percent of low income households use propane, the LIHEAP office in 1997 established a pre-paid program for propane or fuel oil delivery using $2.8 million in LIHEAP emergency contingency funds. The program has continued each year since, with savings varying each year depending on fuel prices. Vendors agree to contract with LIHEAP to deliver fuel from early October to mid-April, or until funds in the prepaid LIHEAP account are exhausted. Effective FY 2004, the state allows vendors three options: to deliver fuel at the prevailing price at time of delivery, to deliver at a fixed cost per gallon, or to deliver at a fixed cost with the vendor agreeing to charge the lower price should the cost of fuel at delivery time fall below the capped price. (The state’s vendor agreements are posted on the LIHEAP Clearinghouse website.) In 2002, the program saved the state LIHEAP about $700,000. However, since then the state has not seen propane prices drop significantly during the summer, so savings have not been as significant. In Vermont, discounts and donations from oil and propane vendors amounted to over $240,000 in 2004. The state has also claimed small amounts for a wood program in two counties, using inmate labor through a contract with the Department of Corrections. Other Bulk Fuel Programs As a result of 1990 state legislation, Vermont levies a 1/2 percent gross receipts tax on all non-transportation fuels as well as regulated electric and gas utilities. The money supplements the Weatherization Assistance Program at about $4 million annually. The Vermont legislation is available online. In Virginia, all participating vendors who provide deliverable fuel to LIHEAP recipients sign an agreement stating that they will not charge the 4.5 percent Virginia sales tax to energy assistance customers. This tax is waived; however, vendor may charge any local sales tax applicable. The state has claimed over $200,000 from this resource for the past several years. Fuel Cooperatives Fuel cooperatives pool the purchasing power of consumers in order to obtain lower prices for unregulated fuels, most commonly heating oil. Unlike a bulk purchase arrangement, the customer generally purchases directly from the vendor. Most of the existing fuel co-ops are in metropolitan areas of the northeastern states. Agricultural co-ops in rural areas also sell bulk fuel and may be able to provide additional price discounts to LIHEAP programs. Some tribes or tribal organizations have been able to negotiate oil, propane and wood price discounts with individual dealers by making bulk purchases for LIHEAP and other tribal programs. Buyers Up is a nonprofit cooperative buying group founded in 1983 by Ralph Nader's Public Citizen, Inc. It has more than 4,000 members in Washington D.C., and parts of Maryland and Virginia. Buyers Up acts as an agent between consumers and local oil suppliers, negotiating volume discount prices for retail users. Members generally pay between 5 and 25 cents per gallon less than average retail prices. For members with average oil use, that can add up to savings of $100 per year. Membership fees are $20 annually and seniors get a $5 discount. Enrollment is free for LIHEAP recipients. The Mass Energy Consumer Alliance (formerly the Boston Oil Consumers Alliance) was created in 1982 to reduce the burden of high energy costs for low- and moderate-income residents of the Boston area. Its Heat Oil Alliance, a buying group, serves about 7,500 members in eastern and central Massachusetts with prices generally 15 to 30 cents below retail. During 2004 the average member saved about 17 cents per gallon, or about $150 per year. Mass Energy also operates an Oil Bank, through which it solicits member contributions to help low-income families purchase oil. It raised and distributed about $25,000 to help needy families during 2004, while also providing referrals to the LIHEAP program and other social service agencies. For more specific information on any of the topics mentioned in this memorandum, please contact the Clearinghouse. RELATED RESOURCES AVAILABLE FROM THE LIHEAP CLEARINGHOUSE Clearinghouse Memorandum # 820, Leveraging Nonfederal Resources for LIHEAP. Copies of vendor agreements from states that have negotiated bulk fuel discounts. Page Last Updated: December 7, 2005 |
