You asked that we analyze a proposal developed by one of your constituents regarding the Connecticut Energy Assistance Program (CEAP). You wanted to know the implications of the proposed changes for the state budget, program beneficiaries, and the operations of the program, and other options available to the state.

You also asked how other states compensate oil dealers who participate in comparable programs. We limit our discussion to other northeastern states, because oil is not widely used for home heating in other parts of the country.  

SUMMARY

CEAP provides money to help low and moderate income homeowners and renters pay their heating bills. The program is entirely federally funded and it is likely that this funding will fall significantly this year. Moreover, increases in the cost of energy mean that it is likely that the amount of assistance the program will provide (e. g. , the number of gallons of fuel oil it pays for) would decline even if there was level funding.

You constituent (a fuel oil dealer) proposes four changes to the program. The first two would change the way that dealers are compensated for the oil they supply to program beneficiaries. The third would require the community action agencies that administer the program at the local level to pay interest on late payments to program vendors. The fourth would allow dealers to make automatic deliveries to beneficiaries, rather than getting approval for each delivery.

Since the program is federally funded, the proposals would not affect the state budget unless there was a reallocation of funding for the Department of Social Services (DSS), which administers the program at the state level. Barring such a reallocation, program eligibility criteria would have to be tightened or benefits reduced to offset the costs of the proposals. Requiring community action agencies, which administer the program at the local level, to pay interest on late payments could reduce funding for program beneficiaries or reduce funding for other programs administered by the agencies. Allowing automatic deliveries could help some beneficiaries but could impose operational costs.

Non-action on the proposals could be problematic. For example, dealers could drop out of the program if they felt that they were not being adequately compensated. This could impair the ability of some beneficiaries to participate in the program.

The state cannot avoid the difficulties created by the amount of funding available for CEAP. It could provide for greater flexibility in how dealers who participate in the program are compensated, and provide an incentive for community action agencies to pay dealers more promptly.

In most northeastern states, oil dealers who participate in energy assistance programs are paid market rates for the fuel they deliver to program participants. Massachusetts has a fixed margin policy that is similar to Connecticut’s and New York has a pilot program in which dealers in three counties can choose a fixed margin option.

CEAP

CEAP provides money to help low and moderate income homeowners and renters pay their heating bills. The program is administered under an annual plan developed by DSS. The Office of Policy and Management is reviewing the proposed 2004-05 plan, which requires the approval of the Appropriations, Energy and Technology, and Human Services committees.

Historically, the program has been administered locally by community action agencies, which are responsible for receiving and reviewing applications from beneficiaries and approving payments to gas and electric utilities and participating fuel oil dealers. DSS policy requires that the agencies pay participating vendors within 30 days of receiving their bills, although DSS staff note that this does not always happen.

For more than ten years, the payments to fuel oil dealers have been based on the lowest wholesale price paid for landings at New Haven Harbor on the day before the dealer’s delivery to the beneficiary, plus 25 cents per gallon. Under the plans adopted in the past few years, DSS can adjust the pricing mechanism to respond to unanticipated changes in the heating oil market. Occasionally, DSS has based the payments on the New Haven Harbor average or high price when little oil has been available at the low price.

The program is entirely federally funded. In 2003-04, funding was approximately $ 37 million, of which $ 35 million came a federal block grant. Approximately $ 1 million came from restitution paid to the federal government by major oil companies for violations of federal price controls that were in effect in the 1970s. In the past few years, Connecticut has received additional assistance under the Contingency Heating Assistance Program (CHAP), which enabled it provide assistance to households earning income at level higher than CEAP has traditionally served.

DSS anticipates that federal FY 2004-05 funding for CEAP will decrease by approximately $ 5. 9 million, or approximately 16%. Barring supplemental funding by the state, this means that the program will serve fewer beneficiaries or benefits will have to cut. DSS staff also anticipate that there will be no funding for CHAP this year. Actual funding levels may not be known for several months.

These reductions will be exacerbated, in all likelihood, by increases in energy prices. The U. S. Department of Energy projects that the average cost for heating oil in the northeast this winter will be $ 1. 57 per gallon, compared to $ 1. 37 per gallon last winter. The department also forecasts that the price of natural gas will increase. The forecast is available online at http: //www. eia. doe. gov/emeu/steo/pub/gifs/img005. gif.

PROPOSAL

Your constituent proposes that:

The first two proposals reflect a long-standing position of dealers that the pricing mechanism does not adequate compensate them for participating in the program. They have argued that limited quantities of oil are available at the New Haven Harbor low price, and that their actual wholesale cost is often several cents per gallon higher than this price. In addition, dealers located the greatest distance from New Haven have argued that the mechanism does not reflect the fact that they incur higher costs in transporting the oil to their customers than dealers located closer to New Haven.

POTENTIAL COSTS AND BENEFITS OF PROPOSAL

As noted above, the program is federally funded. As a result, the proposals would not affect the state budget unless state funding was reallocated to cover the costs of the proposals. The Finance Advisory Committee could reallocate funds within DSS; other reallocations would require a deficiency appropriation. The 2004-05 plan does not call for such a reallocation according to DSS staff. Assuming that deliveries under the program are comparable to those made last year, each penny increase in the margin or baseline would cost approximately $ 137,000.

Barring a reallocation, the costs of the first two proposals would require that (1) eligibility criteria be tightened, thereby reducing the number of beneficiaries or (2) benefits be cut. It does not appear that there is much room to cut the program’s administrative costs, which accounted for 9. 5% of the budget last year. Since the maximum basic benefit paid last year was $ 535, a $ 137,000 cost increase would be the equivalent to the basic benefit paid to 256 “vulnerable” households with incomes below the federal poverty level. (Under the program, there are several types of benefits. The basic benefit for homeowners depends on the household’s income and whether it is “vulnerable,” i. e. , has one or members who is elderly, disabled, or under six. ) Any cuts to funding for beneficiaries would be on top of those required to reflect decreased federal funding.

If community action agencies had to pay interest on late payments to vendors, the cost would be borne by reductions in funds available to CEAP beneficiaries or in other programs the agencies administer.

Finally, allowing automatic deliveries could reduce stress on beneficiaries by reducing the chance that they will run out of fuel. While it could also reduce the administrative burden on participating dealers, a mechanism would have to be developed to ensure that individual beneficiaries do not receive a greater benefit than allowed under the plan.

DISCUSSION AND OPTIONS

Assuming that there are no state funds available for the program, adopting the proposals would benefit participating dealers, to some extent at the expense of beneficiaries. But not adopting the proposals runs the risk that some dealers will drop out of the program, making it harder for beneficiaries who heat with oil to participate in it. Approximately 500 dealers have participated in the program in recent years, and participation has been stable, with only a handful of dealers withdrawing from the program in any year. It appears unlikely that a large number of dealers would drop out of the program if the proposals were not adopted, since CEAP beneficiaries represent a substantial share of many participating dealers’ customer base. But it is possible that dealers in certain parts of the state would be more likely to drop out of the program. For example, the costs of delivering oil in rural parts of the state are generally higher than in urban and suburban areas, because of the greater distance between customers. In addition, dealers in the northwestern and northeastern corners of the state incur higher than average costs in transporting oil to their markets. If a significant of dealers in these areas did drop out of the program, it would be harder for their customers to participate in CEAP.

As an alternative to your constituent’s proposals, the legislature, when approving the CEAP allocation plan for federal FY 2004-05, may want to consider the following options:

COMPENSATION FOR OIL DEALERS IN OTHER STATES

All of the Northeastern states have programs that are comparable to CEAP. In most of these states, fuel oil dealers who participate in the program are paid market prices for the oil they deliver to program beneficiaries. In Vermont dealers can offer a fixed price to beneficiaries before the beginning of the heating season, with the dealer setting the price. In Maryland, participating dealers must give program beneficiaries a 3% discount.

On the other hand, Massachusetts has a fixed margin policy that is similar to Connecticut’s. Participating dealers receive a 28. 5 cent margin over the wholesale price for their deliveries. (The margin was increased from 26. 5 cents two years ago. ) The wholesale price is the average price for the preceding week at the port where the dealer took delivery (Boston, Springfield, Albany, or Providence). For deliveries to Cape Cod, Martha’s Vineyard, and Nantucket, the baseline is the Providence wholesale price plus three cents.

For the past two years, New York has operated a pilot program in which dealers in certain counties can choose to receive a fixed margin above the wholesale price. This year the program is operating in Dutchess, Orange, and Tioga counties; last year it also operated in Erie County (greater Buffalo). Under this option participating dealers negotiate a fixed margin with the local action agency. This year, the state’s goal is to achieve an average margin of 35 cents per gallon over wholesale. Last year the margin ranged from 28 to 40 cents per gallon, depending on location.

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