utility contracts exacerbate heating oil shortage

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http://quote.bloomberg.com/fgcgi.cgi?ptitle=Gas%20News&touch=1&T=energy_news_story.ht&s=e7c505bd304472c43c4b3241913044d3 Gas News Wed, 26 Jan 2000, 11:57pm EST

1/26 17:25 Utility Contracts Exacerbate Heating Oil Shortage (Update2) By Josh P. Hamilton Utility Contracts Exacerbate Heating Oil Shortage (Update2)

(Adds quote in 11th paragraph.)

New York, Jan. 26 (Bloomberg) -- When temperatures dipped last Saturday, East Coast Petroleum Inc. diverted 75,000 gallons of scarce heating oil to an unexpected customer: New York City's Rikers Island prison, whose natural gas was being cut off.

Rikers and some other large buyers have contracts with utilities that give them cheap gas most of the time, but allow the utilities to curtail supplies when cold weather boosts demand from higher-paying customers, such as homeowners.

That happened during the recent cold spell, forcing many large users to burn heating oil, the main alternate fuel. The additional demand strained supplies, sending local heating oil prices up 50 percent over the past week. The New York area is the biggest market for home heating oil. ``You couldn't not deliver'' fuel to Rikers, said John Knief, owner of East Coast Petroleum in The Bronx. The same holds true for the 200,000 gallons of heating oil he delivered to the New York City public school system, when some of their facilities had to shift to oil from gas.

The so-called interruptible contract clauses kick in when the temperature dips to a preset level, such as 20 degrees Fahrenheit, or in some cases at the utilities' discretion.

Consolidated Edison Inc. and KeySpan Corp., the two big New York utilities, along with fuel oil companies and refiners, were lulled this season after a string of mild winters. The sudden cold snap this month, which saw temperatures plunge below zero throughout the Northeast, sent heating oil use soaring.

`Crisis Level'

Heating oil prices are at ``a crisis level,'' said U.S. Senator Charles Schumer, a New York Democrat, who says he has been swamped with calls from constituents worried about high heating oil prices. ``Heating oil is the highest it's been in history in New York,'' he said, causing monthly bills to go from $150 to $400 for some people.

While inventories normally are large enough to handle the extra demand from the customers with interruptible natural gas contracts, world oil producers have been restricting supplies to trim global surpluses. As a result, heating oil inventories in the U.S. are at a 2 1/2-year low with half the winter left. Futures prices last week rose to a nine-year high.

Some 10 percent to 15 percent of Con Ed's natural gas volume is sold to New York-area customers with interruptible contracts. About 30 percent of KeySpan's New York City natural gas sales, and 16 percent of its volume in Long Island, are moved through such contracts. While the customers can opt to keep burning gas, they would pay several times their normal rates to do so, the utilities said.

The Oil Heat Institute of Long Island, an industry group, said the changeover to heating oil by the gas customers sent wholesale prices up 75 cents in little over a week. Regional heating oil prices for immediate delivery were recently about $1.31 a gallon, according to Bloomberg Energy Service. ``Interruptible customers should be required to have a 10-day supply of heating oil on premises prior to the heating season, or utilities should not be allowed to add new customers,'' said Kevin Rooney, executive director of the Long Island group. ``They are supplying their customers to the detriment of our customers.''

The institute says it has lobbied New York State for more than a decade to legislate a mandatory 10-day backup supply of heating oil for gas users with interruptible contracts.

`Pointing the Finger'

Interruptible gas customers consumed at least 1 million gallons of heating oil a day in the New York City area last week, said John Maniscalco, executive vice president of the New York Oil Heating Association, enough to heat 100,000 homes. The sudden influx of demand strained the undersupplied market, he said. ``They're pointing the finger at us, when it's their own shortfall of inventory,'' said Robert Mahoney, a spokesman for KeySpan Corp., owner of the area's largest natural gas supplier, Brooklyn Union Gas Co. ``We're losing money by customers going to oil,'' Mahoney said. ``Our incentive is to keep them on.''

Mahoney concedes that there are financial incentives underpinning the interruptible system. For example, it doesn't have to maintain local pipeline networks that are big enough to handle demand peaks for all customers. ``We can compete with the oil price in interruptible markets by not going to the added costs of making infrastructure improvements for that small period of peak demand,'' he said.

Financial Sense

For the utilities, the system makes financial sense beyond lower capital investments. They can also lock in their normal supplies for all customers at low long-term rates, using the interruptible customers as a supply cushion. When the weather turns frigid, they can sell that low-cost fuel to residential and other firm users, who pay higher rates in exchange for guaranteed supplies. Also, the utilities can reduce last-minute natural gas buys at high prices. ``The idea is to stay off the spot market,'' said Joseph Petta, a spokesman for Consolidated Edison Company of New York, one of the nation's largest utilities.

For the past week, spot market gas in New York City cost around $8.50 per million British thermal units, compared with $3.25 a week earlier. By contrast, natural gas futures, the price at which utilities can lock in supplies, averaged about $2.35 over the last 12 months. ``It's very much in our firm customers' interest because it keeps prices lower,'' Petta said. ``For our customers, the system responds better.''

Stealing Customers

Oil dealers complain that the utilities are stealing big customers with artificially low natural gas prices, and dumping them back into the heating oil market when demand soars. ``The oil industry is bailing out the gas industry,'' Maniscalco said.

The interruptible customers last week came in ``big time'' and bought heating oil, said Philip Wechter, head trader at R.A.D. Energy Corp. in Purchase, New York, a fuel wholesaler that supplies the New York City Transit Authority and other customers. ``These are people you don't see until it hits the fan. These are utilities, schools, the New York City Housing Authority. They're all on interruptible contracts.''

And while natural gas customers may benefit when utilities dump their lowest-paying customers, homeowners who use heating oil are stuck with unexpectedly large bills. ``In 45 years, this is the highest I've ever paid, even during the Gulf War,'' said Jimmy Coretti, owner of Atlas Fuel Corp., a heating oil retailer with 2,200 customers in the New York City area. ``I don't know how they're going to pay for it -- I don't know how I'm going to pay for it.''

-------------------------------------------------------------------------------- ) Copyright 2000, Bloomberg L.P. All Rights Reserved.

-- boop (leafyspurge@hotmail.com), January 26, 2000

Answers

Thanks, Boop, a fascinating article.

So, us natural gas homeowners have a higher priority for fuel than heating oil customers.

Second, although Dodd lambasted panicky homeowners yesterday for "hoarding" fuel oil (a euphemism for filling up or topping off your one and only heating oil tank), interruptible customers are now labeled as irresponsible because they *didn't* hoard extra oil before the season began.

-- Brooks (brooksbie@hotmail.com), January 27, 2000.


Brooks, storing up heating oil before the heating season would have been stockpiling, not hoarding. Surely a frequenter of this forum should understand the difference.

www.y2ksafeminnesots.com

-- MinnesotaSmith (y2ksafeminnesota@hotmail.com), January 28, 2000.


Brooks, storing up heating oil before the heating season would have been stockpiling, not hoarding. Surely a frequenter of this forum should understand the difference.

www.y2ksafeminnesota.com

-- MinnesotaSmith (y2ksafeminnesota@hotmail.com), January 28, 2000.


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