Q&A: David O'Connor, Division of Energy Resources, on fuel prices

www.boston.com By Andrew Caffrey, Globe Staff, 3/2/2003

The long cold winter has been unusually tough on New Englanders' pocketbooks. Geopolitics - a potential war in the Middle East and the political crisis in Venezuela, a major US oil supplier - have combined with unusually cold weather and low fuel inventories to send prices skyrocketing. Heating oil prices hit a three-year peak during one snap in February, and natural gas utilities are seeking rate increases for Massachusetts customers of as high as 36 percent.

Boston Globe reporter Andrew Caffrey talked with David L. O'Connor, commissioner of the Massachusetts Division of Energy Resources, about whether fuel suppliers will take steps in the coming months to avoid a repeat of the high prices and low inventories that have plagued us this winter.

Q. What's the outlook for next winter?

A. On natural gas, for example, we have a somewhat lower level of production from wells in the United States. The overall US production is likely to stay flat or even decline a bit over the year, and therefore suppliers would be looking for Canadian sources. In New England we want to be sure utilities put enough in storage over the summer. The utilities have done a good job in their planning for how much they have in storage. Those storages will be almost completely depleted. So one of the things we're going to see is more aggressive buying to make sure by next winter, we've got the most appropriate amount in storage. That is the most stabilizing factor in prices for consumers.

Q. So can we expect higher levels of gas storage than normal next winter?

A. Probably not. This year the volatility we've seen in prices is related to tremendous demands because of the weather. For the most part it's a necessary risk utilities take and the consumer takes that risk as well. We have been encouraging the gas companies here to enter into what we call hedging contracts - financial instruments that try to provide a hedge against this volatility. Last year the state Department of Telecommunications and Energy approved the use of those financial instruments for the first time.

I think the combination of the approval of the department and the winter we just had is going to encourage a lot of companies to take a harder look at these financial arrangements that would mitigate the volatility of short-term prices.

Q. And oil suppliers? Can we expect them to build larger inventories?

A. No. Wholesale oil suppliers would argue they have used good professional judgment - that everyone got the oil they needed, but the prices were a reflection of high demand and scarcity because of the lack of production from Venezuela.

Q. Why wouldn't they buy more for next winter just to be on the safe side?

A. As you start into the winter, if you have that outlook, ''Gee, last winter prices got really high,'' you could end up with way too much on hand at the end of the winter, and therefore absorbing significant losses and needing to charge more later. So it's a balancing act, where they've got to buy the right level.

Probably the single most important influence will be the decisions made by retail customers to enter into contracts with suppliers. I've been encouraging consumers to shop around for contracts. I think it's in the consumers' interest, and in the dealers' interests.

Q. Isn't there a risk to customers locking in because oil prices can change quickly, downward, too, especially if a war against Iraq ends quickly?

A. There is some risk, no question about it. Yes, there is a scenario where prices could be high in the summer, and then it turns out the war ends quickly, and prices fall. People under contract could pay more, but I think the chances are more likely to be the other way around.

This story ran on page C2 of the Boston Globe on 3/2/2003.