How to maximize LIHEAP dollars
As part of the 1990 LIHEAP reauthorization bill, Congress included language encouraging states to "leverage" better prices for customers participating in LIHEAP. These programs vary, but most are margin-over-rack (MOR) or discount-off-retail (DOR). MOR and DOR programs put at risk the ability of small business heating fuel dealers to remain competitive and profitable. These programs force fuel dealers to create a separate and distinct class of customers who, due to government mandate, are treated differently from all other customers.
The key word in Low Income Energy Assistance is assistance. LIHEAP has never paid the entire fuel bill for the recipient. On average, it pays 50 percent of the household fuel cost. Given this shortcoming, mandated MOR and DOR will shrink the dealer network and in many cases force the customer to switch fuel providers or deal with two fuel companies. This can and will lead to mistaken deliveries, overfilling of tanks (and spills) because Company A has no way of knowing if Company B has delivered. If heating assistance is delivered by smaller dealers who can't extend credit after the LIHEAP dollars are gone, the state will have to rely more on crisis fuel -- which is the most inefficient and costly method of delivering fuel assistance.
Utility energy providers such as natural gas and electric companies are able to build the costs of these leveraging activities into their rate bases. Utilities, which are large corporations that operate with little or no competition, can afford to - and do -- pass on this expense to non-LIHEAP customers. Heating fuel marketers -- who are mostly small family owned businesses -- can not. Doing so would jeopardize their ability to remain competitive and harm families that also struggle with heating costs but are ineligible for LIHEAP assistance.
In states with aggressive leveraging programs, some heating oil dealers have been forced to withdraw from state energy assistance programs. In Connecticut more than 200 (of 350) dealers have withdrawn from the state program in the last two years. In parts of the state CAP agencies have had difficulty finding dealers and have had to look to Massachusetts dealers to deliver fuel.
LIHEAP is the only federal low income assistance program to offer financial incentives to states that require discounted prices for low income residents. There is no leveraging program for food stamps. Multi-national corporations like Shaw's are not required to charge a different price for milk to its low income customers.
Even if such a discriminatory pricing program is imposed on one class of fuel dealers, the savings would be marginal. According to the Wolfe Report, the savings achieved under a .41 MOR proposal would provide an additional 3 gallons to each LIHEAP customer. Would LIHEAP recipients switch fuel providers for an additional 3 gallons? Is it worth increasing the state bureaucracy to handle the increased administrative burden for an extra 3 gallons? Certainly not. Especially when there are other options.
Why not protect the state's LIHEAP funds against price swings the way fuel dealers do to protect their customers? The state could easily leverage its buying capacity by hedging. If the state anticipates spending 10 to 15 million dollars a year on heating oil, they should set aside a portion of that money for call options. If the state had bought a .09 cent call option in August of 2007, the heating assistance office would have had the ability to purchase 90,000 more gallons of fuel than they would have under the current system. (See footnote below.) This winter, under the Wolfe Plan, the state would only be able to purchase 22,949, a difference of 67,051 gallons. Despite our urging to examine this alternative, Wolfe's report only gave it brief mention. Taylor Hudson of Hedge Solutions has volunteered to show the heating assistance office and state lawmakers how buying insurance against rising prices can be implemented.
This has been a long and difficult year for heating oil dealers across the Northeast. Some dealers are delivering fuel at a loss, others are not paying themselves. Fuel dealers can not continue to absorb the volatility in the oil commodities market. At these prices it is inevitable that some will go out of business. The largest heating oil company failure in history occurred in Connecticut in March 2008.
VFDA and a network of similar trade associations has recently proposed an array of measures that will ensure there is adequate supply of home heating fuel and insulate the consumer from the current volatility in the commodities markets. On April 3, Bellows Falls heating oil dealer Sean Cota testified in front of the U-S Senate Energy Committee urging immediate action.
What are we asking for?
First, we call on the Bush Administration release all 1.97 million barrels of the Northeast Home Heating Oil Reserves. Since our request was made, the American Trucking Association and the aviation industry has made a similar request.
Second, we ask Congress and the administration to implement real and substantial reforms to existing law and federal regulation designed to ensure fully transparent, accountable and stable energy futures markets. Closing the Enron Loophole and the foreign markets loophole would return the Commodity Futures Trading Commission (CFTC) the statutory authority that it has lost.
Third, increase margin requirements for speculators who cannot take physical delivery of their product. Hedge funds and investment banks are not driven to provide U.S. citizens the most affordable energy supplies; they are driven to profit from volatility.
The Wolfe Report claims that there is nothing we can do to reduce the cost of oil at the wholesale level. That is categorically false. Every Vermonter has a voice. We all need to say "Enough is enough!" It is time that the federal government stop bailing out Wall Street and help us here on Main Street. Demand oversight of the financial markets. This regulation will drastically reduce the role of hedge funds and investment banks that have funneled billions of dollars into oil commodities, yet have no intention of ever taking physical delivery of the product.
Matt Cota is the executive director of the Vermont Fuel Dealers Association.
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