The Big Chill
A winter fuel crisis of high prices and shortages could darken homes and factories
While the Big Chill will hit low-income households the hardest, no one may be immune if the weather turns foul. New England and perhaps all of the Northeast, including New York City, are a special worry. Gas companies grant big price breaks to customers year-round if they agree to have their service cut when supplies are short. Chances are great these discount customers will be shut down this winter, and they include manufacturers, some schools and hospitals, and, ominously, about 77 percent of New England's gas-fired electric power generation, which requires large quantities of fuel.
The curtailment of "interruptible" customers will trigger a double squeeze on consumers throughout the Northeast. First, costs for home heating oil will skyrocket, as scores of power plants and other interruptible gas customers switch fuels and make a grab for all the oil on the market. Even though heating oil is a major fuel source in the Northeast, there are no oil pipelines from refineries into New England, which relies on deliveries by tanker or barge. And in recent years, the oil industry--following the U.S. industrial trend--has been keeping inventories low to promote efficiency. Tim Irving, executive director of Heat, U.S.A., a company that buys heating oil in bulk for northeastern homes, recalls that in the most recent severe cold snap, January 2004, the industry simply could not ship in sufficient supplies. "The just-in-time inventory system, when put together with the utility policy of having interruptible gas customers, creates a very volatile situation where literally in a week, New York harbor went dry [of heating oil shipments] because utility customers went on line," Irving says. "Your middle American ends up paying more to support this situation."
Some say the heating oil shortage will be made even worse because the U.S. oil industry's exports of distillate fuel oil, a category that includes both diesel and heating oil, have skyrocketed this year by nearly 50 percent, to 42.4 million barrels through September. Consumer advocates say the exports have set the stage for a price spike, but the oil industry maintains the exports, mainly to Latin American countries that lack their own refineries, were not extraordinary. In any case, experts believe that this may be the first year the president opts to tap the Northeast Home Heating Oil Reserve established in 2000. Prices were high enough that the "market disruption" trigger actually was reached for a time in October, but warm temperatures meant there was no urgency to release the 2 million barrels of oil, or 10-day supply, stored in New Jersey, Connecticut, and Rhode Island.
In the dark. The second threat is a severe electricity shortage in the Northeast--with possible brownouts or blackouts. Deregulated natural-gas-fired power generators, under no legal obligation to serve customers as the old monopoly electric companies were, can simply stop generating power. Some plants will be interruptible customers with no backup fuel source. But in other cases, power plants that have firm natural gas contracts will stop generating electricity anyway and sell their fuel at enormous profit. That is precisely what happened during the three-day January 2004 cold snap, when more than 25 percent of New England's generating capacity went off line and the reserve margin was near zero. The market weathered that storm, but ISO New England, the organization responsible for managing the electric grid, says that even under normal weather conditions, electricity demand this winter most likely will set a new record surpassing that of the perilous 2004 cold snap. The grid operator has taken steps to head off a shortage, spearheading a public-relations campaign to urge New Englanders to conserve electricity, attempting to work out agreements with big customers to curtail demand, and asking the Coast Guard to station ice-breaking barges in locations that will assure fuel oil deliveries can make it downriver to electric plants. But Connecticut Attorney General Richard Blumenthal says as long as power generators are allowed to shut down and sell natural gas during a weather crisis, there is a risk of the kind of market chaos, as well as manipulation, that roiled California in 2000 and 2001. "The result could be a calamity," he says.