October 13, 2008

Feeling the Heat

By Bednar, Joseph

There's a chill settling in across the Valley.

It's not the cool weather, exactly - but, rather, anxiety over when it will blow in, and just how much it will cost to fight it off.

Gail Pisacane is all too familiar with that feeling. As the director of Energy Programs for the Valley Opportunity Council, she oversees a program that last year offered modest energy assistance to almost 12,000 low-income households. With oil prices almost $1 more per gallon than last year, the need will be more acute this fall and winter.

"Many of these people are frail and have health issues, so they're not able to keep the thermostat low," Pisacane told Business- West. "And we know the elderly are conscientious about paying bills; they'll cut back on food and medication to do it. These aren't stories we make up -- and young families have the same kind of issues."

Oil prices hovered around $2.80 per gallon on Nov. 1, 2007 and shot close to $4.50 by midsummer. Since then, the price of oil has fallen off, but analysts still expect homeowners to pay around $3.50 per gallon at the start of this year's heating season.

That poses a challenge to local agencies, like the VOC, that offer help to families through the Low Income Home Energy Assistance Program (LIHEAP), a federal benefit serving households with incomes at or below 200% of the poverty line.

VOC, for its part, distributes help to families in 23 Hampden County communities (all except Springfield, which is served by other agencies), and recipients span a wide demographic spectrum: last year, 35% were elderly individuals or couples, 34% were working families, and 9% were on some sort of welfare.

Even middle-class households are feeling the pinch - or expecting to.

"Things have definitely changed," said Laura Benoit, co-owner of Bay State Fuel Oil. "A lot of people are not pre-buying their fuel this year. I don't know if that's because they can't afford it, or because they're speculating. But with the price being as high as it is, it just puts it out of reach for many people to come up with that kind of money."

The fluctuating prices have dealers scrambling, too, said Ted Noonan, president of Noonan Energy, adding that most companies have delayed their pre-buy programs.

"Usually, we're out with a program in August, but we felt the market was too out of whack to go there," he said. "It's a big risk for dealers to put a program together because, depending on which way the market goes, it could be a windfall, or it could bankrupt their company. Nobody's willing to do it because no one knows what the price is going to be."

Essentially, he explained, as they've watched prices fall by about 80 cents per gallon recently but still remain high, dealers face the same guessing game as homeowners do, but on a larger scale. "Do you step up and buy it?" he said. "Then if the market slips, you're stuck."

As cooler weather approaches, oil prices have plenty of people feeling similarly stuck.

In this issue, BusinessWest examines what their options are - and why high energy costs threaten to cool down the entire regional economy.

The Heat Is On

In a report issued over the summer, the UMass Donahue Institute estimates that at least 163,224 low- and moderate-income households in Massachusetts will have difficulty paying their heating-oil bills this year. About two-thirds of those will experience severe difficulty paying, and among that group, almost 70,000 households are headed by people over age 60; some 25,000 are headed by residents over 80.

Heating with oil presents a unique problem for this group. Massachusetts law protects low-income and elderly residents, people who are ill, and families with infants from having their gas or electric heat shut off during the winter months, and also requires gas and electric utilities to provide discounted service to low- income customers. In addition, regulated utilities must establish payment plans for residential customers who fall behind on their bills. However, these protections are not available to oil-heated homes, because heating-oil distributors are not regulated utilities.

Between 2003 and 2008, according to the report, the regional retail price of home heating oil rose more than 175%, from $1.43 per gallon to an average of $4 per gallon this year. Based on average consumption in recent years and the most recent federal forecasts, Massachusetts household expenditures this year on home heating oil and natural gas heat are expected to total $927.2 million - followed by an additional $469.9 million increase in 2009.

The net result? The average household's oil heat bill is projected to exceed $3,000 in 2009.

"The Pioneer Valley depends on home heating oil much more than other areas of the country, so certainly Western Mass. can be expected to bear its share of that additional spending," said Michael Goodman, director of economic public policy research at the Donahue Institute.

"Consider the fact that we import the bulk of our energy, and every one of those extra dollars we spend is one less dollar spent on local businesses, such as going out to eat or purchasing goods or services," he noted. "That will certainly be a drag on the state's economic growth, as these dollars get redirected in the service of paying heating bills."

The impact could be felt by any business that offers non- essential products, or represents large purchases that can be put off indefinitely, he continued.

"Businesses that depend on disposable income are going to feel it, and are already feeling it," Goodman told BusinessWest. "As people spend more and more money filling their tank, it's going to put stress on other household expenses and require cutbacks in some areas. Restaurants and entertainment venues will be affected, but people will also put off that new car, furniture, or clothing - things that can be put on hold as people make hard decisions about how to make ends meet."

Robin Sherman, the report's lead author, put it more bluntly: "Massachusetts is facing a true crisis," she said, "and our analysis sheds light on the magnitude of the problem."

Specifically, according to the report, some 42% of Massachusetts families that will be burdened by heating costs this winter will exceed eligibility criteria for LIHEAP assistance, which, for now, will be doled out according to the federal government's 2007 formula because of budgetary foot-dragging in Washington.

"If they don't have a new budget in place, they'll fund it at last year's level," the VOC's Pisacane said. That means families will get somewhere between $345 and $503 - the range offered in 2007 - to pay for oil that has risen by almost $1 per gallon since last fall.

At $3.50 per gallon, the total benefit to those families will range somewhere between 100 and 144 gallons, and that's simply not enough, she argued. "The prices have come down, but people will still be seeing much higher prices this year than last, so the problem will be bigger."

Money to Burn

Fearing the financial hit this winter, some homeowners are looking to ditch oil heat altogether. Berkshire Service Experts, a West Springfield-based heating and cooling contractor, reports a 200% increase in customers requesting conversions from oil-heat systems to natural-gas systems.

"People are calling every day to convert from oil to gas," General Manager Schley Warren told BusinessWest. "And a lot of people don't have natural gas available on their street, so we've been recommending oil with a backup heat pump."

A heat pump, he explained, is a device that pulls warm air from outdoors - even when the temperature is low - and allows homeowners to burn less oil. "It works down to 35 degrees or so, and once it gets below that, you turn on the oil," Warren explained. "A heat pump is three to four times more efficient than electric heat, because it's gathering extra heat from outside."

Still, the company also gets occasional requests for conversion to electric heat, even though it has a reputation for being expensive; such is the current anxiety over heating with oil. But Warren said people shouldn't allow media hype and their own emotions to override common sense.

"Converting can be economically viable if you have a piece of equipment at or near the end of its life, you're going to change it anyhow, and gas is available," he said. "But if you have a newer piece of equipment, I don't know what gas prices will be in three or four years; they've been coming up to meet oil prices."

For example, Warren said he "cringed" when a customer wanted to replace a seven-year-old oil-burning system. "I love to change old equipment; that's why we're in business," he said. "But you have to get out of the emotional side and run the numbers, and see if they're going to work in the long run."

Noonan also noted the rising popularity of conversions, as well as pellet and wood stoves. "But pellet stoves cost $3,500, plus the pellets, and that's just a space heater, not something that will heat the whole home," he noted. "A better investment would be new windows or insulation, things that will bring back good dividends. I'm not sure the rush to stoves is the answer. But people react when the prices go up; they tend to look for alternatives."

Indeed, Warren said, one upside of high heating costs is a renewed awareness of ways homeowners can invest in energy efficiency. "If your home heating bills are outrageous, my first question is, 'is the house insulated properly?'" he said. "Before you change equipment or change fuels, that's your number-one concern.

"Here in the Northeast, we have a lot of older homes - 30, 40, 50 years and older - and new insulation can be the first line of defense. New attic insulation will pay for itself in the first year; then you can start looking at other things."

Sweating the Details

Benoit is glad to see Bay State's customers get some relief as oil prices continue to slide. "It's good to see it come down," she said. "That's better for consumers and for the economy as a whole."

But it's not enough to ease anxiety among homeowners, many of whom are reluctant to buy in bulk, hoping for further relief that is anything but assured.

"A lot of people want to take just 100 gallons at a time and time the market," Noonan said. "They don't know what to do."

It seems everyone is feeling the heat - well before they actually have to turn it on.

Copyright BusinessWest Sep 15, 2008

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