Northeast Home Heating Oil Reserve

Northeast Home Heating Oil Reserve

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August 30, 2022
Northeast Home Heating Oil Reserve
In response to rising retail heating oil prices during the
the Administration executed transactions to exchange SPR
winter of 1999-2000 (see Figure 1), the Northeast Home
crude oil for heating oil products and to lease commercial
Heating Oil Reserve (NEHHOR) was created and
storage capacity in the Northeast region. In part to provide
authorized by presidential directive and enacted legislation
release authority that could be responsive to regional
(P.L. 106-469). The reserve was formally established in
heating oil supply shortages and interruptions, Congress
March 2001. As defined in 42 USC §§6250 et seq.,
formally authorized the NEHHOR through passage of
Northeast states include Maine, New Hampshire, Vermont,
passed the Energy Act of 2000 (P.L. 106-469).
Massachusetts, Connecticut, Rhode Island, New York,
Pennsylvania, and New Jersey. Today, the NEHHOR
In 2011, DOE sold all heating oil barrels in the
consists of approximately 1 million barrels—42 million
NEHHOR—approximately 2 million at that time—and
gallons—of ultra-low sulfur distillate (ULSD) fuel held in
allowed storage contracts to expire. Sale proceeds were
commercial storage facilities. ULSD has multiple uses, to
used to acquire approximately 1 million barrels of ULSD,
include heating, transportation, and electricity generation.
and new commercial storage contracts were established.
Administered by the Department of Energy (DOE), the
Further, Congress enacted legislation in 2011 (P.L. 112-74)
NEHHOR is not part of the Strategic Petroleum Reserve
that limits NEHHOR inventories to no more than 1 million
(SPR) and operates under specific authorities intended to
barrels of petroleum distillate. Conversion of NEHHOR
address regional heating oil supply interruptions and price
inventory was motivated by laws, regulations, and
dislocations.
standards requiring the use of low sulfur fuels. NEHHOR
barrels are currently held in storage terminals located in
Figure 1. Retail Heating Oil Prices (Nominal)
Connecticut, Massachusetts, and New Jersey (see Table 1).
Selected Northeast Home Heating Oil Reserve Events
Table 1. Northeast Home Heating Oil Reserve
Storage locations and volumes
Terminal
Operator
Location
Barrels
Buckeye Partners
Port Reading, NJ
300,000
Buckeye Partners
Groton, CT
300,000
Global Companies
Revere, MA
201,000
Gulf Oil
Chelsea, MA
200,000

Total
1,001,000
Source: CRS, price data from the U.S. Energy Information
Source: U.S. Energy Information Administration
Administration
Notes: As of August 2022.
Notes: To date, the only Northeast Home Heating Oil Reserve
emergency release was for Hurricane Sandy relief efforts in 2012.
NEHHOR Release Authorities
Background and Establishment
Releasing barrels from the NEHHOR requires a presidential
finding that a severe energy supply interruption exists. Such
Residents in Northeastern states are major consumers of
a finding is predicated on one of two conditions: (1) a
distillate fuel oil, which is often used for space heating.
heating oil market dislocation resulted from the supply
During the winter season of 1999-2000, approximately 78%
interruption, or (2) any other circumstance that constitutes a
of the nearly 6 billion gallons of distillate sold to U.S.
regional supply shortage that could be alleviated by an
residents were delivered to Northeast customers. Following
NEHHOR release.
a near doubling of retail heating oil prices between
February 1999 and February 2000, the Administration and
Market Dislocation
Congress acted to establish and authorize a government-
For the purpose of a severe energy supply interruption
controlled heating oil reserve containing no more than 2
finding, existence of a dislocation in the heating oil market
million barrels, or 84 million gallons.
is based on two specific criteria. First, the difference in
price between retail heating oil and crude oil increases by
In July 2000, President Clinton directed the Secretary of
more than 60% compared with the average price differential
Energy to establish a 2-million-barrel home heating oil
observed during the five previous heating oil seasons
reserve in the Northeast. Using SPR acquisition authorities,
(October through March), and continues for seven
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Northeast Home Heating Oil Reserve
consecutive days. Second, the price differential increases
Future of the Reserve
during the most recent week for which price information is
With limited use in response to emergency fuel shortages,
available.
and no releases in response to heating oil market
dislocations and supply interruptions, the utility and
Practical application of these statutory criteria is reflected in
benefits provided by the NEHHOR have been questioned.
DOE “trigger” reports published during each heating oil
For example, DOE’s fiscal year (FY) 2021 budget
season. These reports include required price differentials for
justification proposed to disestablish the NEHHOR, stating
each month during the upcoming season. Should actual
that the reserve “has never been used for its intended
price differentials exceed the required trigger spread, and
purpose, is costly to maintain, and generally does not
continue increasing the following week, a heating oil
provide value to taxpayers.” The House Appropriations
market dislocation could be deemed to exist and a release
Committee rejected DOE’s proposal and Congress
could be authorized.
appropriated funding to maintain the reserve.
Other Circumstances
Additionally, DOE’s FY2022 budget justification did not
The President also has a less prescriptive condition under
request budget authority to maintain the reserve. However,
which a severe energy supply interruption finding could be
Congress appropriated $6.5 million for NEHHOR storage,
made. Other circumstances, as determined by the President,
operation, and management activities. DOE’s FY2023
that constitute a regional supply shortage could justify a
budget justification requests $7 million for NEHHOR
NEHHOR release. Supply shortages would need to be of
operations.
significant scope and duration, and an NEHHOR release
would need to directly assist with significantly reducing
In May 2022, the U.S. Government Accountability Office
adverse impacts associated with the supply shortage. While
(GAO) published a report assessing the effectiveness of
terms such as “significant” and “supply shortage” are not
DOE-administered petroleum product reserves, including
defined in NEHHOR statutes, commercial inventory levels
the NEHHOR. Concurring with DOE concerns with the
are often referenced to assess the adequacy of regional
cost of maintaining petroleum product reserves, limited use,
distillate supplies. Nevertheless, this release condition
and small product holdings relative to regional market size,
provides the President with broader discretion for
GAO concluded that these reserves “are not well suited to
authorizing an NEHHOR release.
address risks” as currently structured. Release conditions
and criteria and the amount of time necessary to comply
Release Procedures and Requirements
with competitive bidding requirements are two structural
The Secretary of Energy is responsible for developing
challenges cited in the report.
NEHHOR release procedures, in consultation with the
heating oil industry. Releases can take one of two forms:
Policy Considerations
(1) competitive sales, which are awarded to the highest
Due to the uncertain nature, scope, and duration of any
bidders, or (2) exchange agreements, which require that
future heating oil supply disruptions, as well as market
awardees return an equivalent volume of ULSD plus some
dynamics and supply/demand balances when disruptions
additional barrels at a future date. Furthermore, only entities
might occur, determining the appropriate parameters for an
that sell and distribute petroleum distillate are eligible to
effective regional heating oil reserve is challenging. Policy
purchase or exchange NEHHOR barrels.
decisions with respect to size (i.e., distillate inventories),
location, release conditions, and drawdown criteria could
NEHHOR Releases
result in a reserve that is either effective at reducing the
To date, NEHHOR release authorities and procedures have
impact of severe supply interruptions or provides few
not been activated in response to heating oil supply
benefits to the region it is intended to serve. To assist with
interruptions. However, ULSD in the reserve has been
evaluating petroleum product reserve parameters, Congress
withdrawn for transportation and power generation
could direct DOE to perform NEHHOR economic benefit
purposes to support emergency relief efforts in the
analysis and sizing optimization studies. DOE conducted a
aftermath of Hurricane Sandy.
similar analysis for the SPR in 2016.
In October 2012, Hurricane Sandy damaged energy
Regional heating oil demand is one parameter that could be
infrastructure and contributed to fuel shortages in parts of
evaluated when considering petroleum product reserve
the Northeast region. Following a presidential declaration
policy. Residential distillate consumption in the United
of a severe energy supply interruption, NEHHOR barrels
States declined from approximately 6 billion gallons in
were transferred to the Department of Defense to support
2000 to approximately 3 billion gallons in 2020, a decline
first responders and other emergency operations. In total,
of nearly 50%. However, U.S. residential heating oil
approximately 120,000 barrels (nearly 5 million gallons) of
consumption is still concentrated in the Northeast states.
ULSD were provided under a loan agreement with the
According to the Energy Information Administration, 5.3
Defense Logistics Agency. The NEHHOR was replenished
million U.S. households used distillate fuel oil for space
by the end of December 2012. This intragovernmental
heating during the 2020-2021 winter. The Northeast census
ULSD loan represents the only emergency drawdown of the
region included approximately 82% of those households.
reserve to date.
Regional concentration of residential distillate consumption
has been cited in support of maintaining a government-
controlled heating oil reserve in the Northeast that can
respond to emergency situations and supply disruptions.
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Northeast Home Heating Oil Reserve

IF12205
Phillip Brown, Specialist in Energy Policy

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