THE END OF CHEAP ENERGY

The recent increases in energy prices are due to a wide range of global, national, and local factors. Moreover, changes in demand for one type of energy can affect the price of another type of energy. For example, some large consumers of natural gas, including some power plants, can also use oil. When the price of natural gas increases, it can be more economical for these consumers to use oil, thereby increasing demand for oil and its price. Similarly, the price of diesel fuel is significantly affected by demand for heating oil, which is effectively the same product.

Global factors, notably the increase in world petroleum prices, have played a major role in the recent increase in heating oil and gasoline prices in Connecticut. About half of the price of heating oil is the petroleum that is used to make it.

Part of the increase in world prices has been due to the fact that demand has increased faster than supply in recent years. World demand for gasoline and other petroleum products rose by about 2. 7 million barrels per day in 2004. Demand in the emerging economies rose by almost 1. 9 million barrels per day, with China accounting for more than one half of that increase.

However, the price increases seen in 2005 were more the result of supply concerns than increased demand, according to the U. S. Energy Information Administration (EIA). The supply concerns include the destruction of energy facilities caused by hurricanes Katrina and Wilma, as well as the reduction in world spare oil production capacity. Historically, countries such as Saudi Arabia were able to react to increases in oil demand by quickly increasing their production. However, in 2005 this “cushion” fell to its lowest level in over three decades. Even though total U. S. energy demand was flat in 2005, the U. S. spot price of crude oil increased by an average of 36%. Similarly, world oil prices climbed throughout 2005 despite slower demand growth in both the United States and China, the two largest consumers of oil.

Another factor affecting oil prices is the uncertainty caused by political conflicts and tensions. In addition to the supply uncertainty caused by the Iraq war, there have been concerns over the stability of supply from Nigeria and Venezuela, which are among the largest suppliers to the U. S. Recently, oil prices have increased due to fears that Iran may reduce its oil production in response to being referred to the United Nations Security Council over its nuclear activities.

Other factors that have contributed to the price increases include (1) tightness in refining capacity and (2) limits on the ability of gasoline producers to adjust their production with changes in demand due to environmental requirements that vary by region.

It does not appear that the factors leading to today's high oil prices are likely to go away soon. In January 2006, the EIA projected that the price of crude oil would average $ 63 per barrel in 2006, and the average price of gasoline nationally would be $ 2. 41 per gallon. Historically, the price of gasoline in Connecticut has been somewhat above the national average.

The recent price increases for natural gas was partially due to the same factors as for petroleum products, notably the destruction caused by the 2005 hurricanes. In addition, demand for natural gas has grown significantly, particularly for power generation, while domestic gas production has been declining. Domestic production of natural gas fell from 19. 11 trillion cubic feet (tcf) in 2003, to 18. 52 tcf in 2004, and 18. 21 tcf in 2005. The shortfall has primarily been met by imports from Canada.

Again, it is unlikely that prices will decline substantially in the near future. The EIA projects that wholesale gas prices will average $ 9. 30 per thousand cubic feet in 2006, compared to $ 8. 88 per thousand cubic feet in 2005.

The recent increase in electricity prices in Connecticut has been in part due to factors that are specific to the state and New England. A state law passed in 1998 effectively required the electric companies to sell off their power plants. As a result, the companies buy their power from wholesale generators. Generators in New England rely heavily on natural gas and oil to produce power, while generators in other regions make more extensive use of coal, nuclear energy, and hydropower. In late 2005, Connecticut Light & Power (CL&P) bought half of the power it will need for 2006 from wholesale suppliers. At that point natural gas prices had doubled over the previous year, when the company had last bought power. This was a major factor behind the company's recent 22. 5% rate increase.

In addition, parts of New England, including the southwestern third of Connecticut, have congestion on their transmission systems that increases the cost of power. This limits the ability to import cheaper power to these areas. Instead, older, less efficient power plants in these areas need to run to meet the local demand for power. The new transmission lines being built between Bethel and Norwalk and Norwalk and Middletown should alleviate this congestion, but they will not go into service for a couple of years.

It is unclear what will happen to CL&P's rates in the near future. On one hand, the wholesale cost of power has decreased since the company made its last purchase on the wholesale market. On the other hand, transmission congestion costs are likely to rise at least temporarily. It is also likely that United Illuminating's (UI) rates will rise substantially in 2007. This is because UI's current power supply contracts, which were signed in 2003 when wholesale costs were much lower than today, will expire at the end of this year.

WHAT CAN WE DO ABOUT HIGH ENERGY PRICES?

Conserve.

Consumers can take a wide variety of steps to reduce their energy consumption and thus their bills. These include such things as turning thermostats down at night or when no one is home, caulking and weather-stripping windows and doors, and buying energy efficient appliances. A CL&P website, http: //www. cl-p. com/, describes ten low-cost measures consumers can take to reduce their energy bills.

Both CL&P and UI have extensive energy conservation programs. The Website for CL&P's conservation programs is http: //www. cl-p. com/clmres/indexclmres. asp. The Website for UI's programs is http: //www. uinet. com/clm/index. asp. Customers of both utilities can also call 1-877-WISE-USE for further information about their residential conservation programs.

Recently, both the state legislature and Congress have passed legislation designed to encourage conservation. Legislation passed by the state legislature (1) temporarily exempts insulation and several energy efficient products from the sales tax, (2) establishes a new program called HEARTH to help pay for furnace tune-ups, programmable thermostats, and other energy efficiency measures, and (3) increases income limits for the Energy Conservation Loan Program, which provides low-interest loans for insulation, energy conservation measures, heating improvements and renewable resource improvements for your home. The Department of Social Services (DSS) administers the HEARTH program for low and moderate income people, in conjunction with its energy assistance program which are described below. The Office of Policy and Management operates the program for other people. The loan program is administered by the Connecticut Housing Investment Fund (800-992-3665). In addition, a bill passed by Congress last year provides federal income tax credits for homeowners who make energy efficiency improvements from January 1, 2006 through December 31, 2007. OLR memo 2005-R-0824 describes the state and federal tax incentives.

For some consumers, signing up for time of use rates may also make sense. Most consumers pay electric rates that do not vary over time, even though it costs the electric companies more to provide power during periods of higher demand. Time of use rates are higher during these peak demand periods but are substantially less during non-peak periods (evenings, nights, and weekends). A United Illuminating website, http: //www. uinet. com/pdfs/UnderstandingRT. pdf, provides a useful discussion about time of use rates.

There also are a number of steps that consumers can take to reduce their gasoline consumption. These include making sure that their tires are properly inflated, combining trips, and avoiding jack rabbit starts.

WHAT RESOURCES CAN HELP ME PAY MY ENERGY BILLS?

Low- and moderate-income people may be eligible for help under the Connecticut Energy Assistance Program and the Contingency Heating Assistance Program, which are administered by DSS in conjunction with community action agencies. The programs help pays for such heating sources as oil, natural gas, electricity, and propane. It is open to homeowners and renters who meet income and asset limits. A DSS website, http: //www. ct. gov/dss/cwp/view. asp?a=2353&q=305194, provides additional assistance regarding these programs.

Consumers also may be eligible for assistance under delinquency forgiveness programs administered by the electric and gas companies. For more information, contact your utility company or your local Community Action Agency.

Moderate income households may also be eligible for assistance from Operation Fuel (www. operationfuel. org), a non-profit agency. In addition, many towns have private fuel banks that provide winter energy assistance to residents who do not qualify for the above programs. For more information, call Infoline (dial 211) and ask for the location of the fuel bank nearest you.