* Phillips 66 CFO says power restored at 238,000 bpd Bayway
* Sources say earliest restart seen next week due damage
* Hess 70,000 bpd Port Reading plant still powerless; Ontario back
* Colonial Pipeline hopes to restart Linden terminal by Friday
* EPA grants diesel fuel standard waiver for New Jersey
Oct 31 (Reuters) - East Coast fuel supplies seemed set to remain tight into next week, as spotty electrical power and flooding damage stymied the recovery of two New Jersey refineries after Hurricane Sandy.
Two days after Sandy ripped across the heart of the region's energy system, shutting terminals, pipelines and ports and snarling the complex logistics systems needed to supply the nation's densest population of consumers, firms were struggling to restore normal operations in the New York City area.
Sources familiar with operations at the 238,000-barrel-per-day Phillips 66 Bayway refinery, the region's second-largest, said it was unlikely to resume output before next week at the earliest. The storm surge pushed water across a divided highway and over individual unit instrumentation and controls.
``The main problem is going to be the instrumentation,'' said a source familiar with refinery operations. Another source said the cogeneration plant that feeds power to the refinery is still shut, which company officials confirmed was a problem.
Phillips 66 said it had restored power to the plant after Hurricane Sandy's storm surge caused ``some'' flooding. But executives provided no damage assessment or time frame for resuming output. It can sometimes take weeks to fully repair damage from salt water, experts say.
Hess Corp. said on Wednesday that its 70,000 barrel per day refinery in Port Reading, New Jersey, remained without power, offering no estimate of a restart date. Colonial Pipeline, which supplies 15 percent of the region's fuel form the Gulf Coast, said it hoped to resume shipments by Friday.
Seven oil tankers anchored outside of New York harbor were unable to discharge supplies into the main hub for oil trading due to Coast Guard restrictions.
Power outages at offloading terminals across the area also threatened shipments for companies including Magellan Midstream Partners, NuStar Energy and Motiva.
There were some signs of improving supplies.
Imperial Oil's 121,000-bpd Sarnia, Ontario, refinery, resumed operations after losing power a day ago, and four of the six East Coast's refiners were up and running.
Also, the federal government moved to head off a potential squeeze on supply of distillate fuel, which will be in high demand for stand-alone power generators and, as the winter wears on, for home heating fuel in much of the Northeast.
The U.S. Environment Protection Agency (EPA) granted New Jersey a waiver to sell higher-sulfur diesel fuel -- which is easier for refiners to make -- for the next two weeks. Mid-Atlantic stockpiles of ultra-low sulfur diesel of 15 parts per million, the state norm, are 15 percent below their five-year average. Overall distillate inventories are 46 percent below.
Benchmark New York gasoline futures surged more than 7 percent early on Wednesday as traders fearful of a squeeze on physical cargoes covered short positions ahead of expiry and marketing firms looked to secure scarce supplies.
But prices ended barely 1 percent higher as traders wrestled with the question of whether reduced gasoline demand would outweigh a potentially prolonged curtailment on supplies.
The flooding at Bayway, seen by experts as the refinery most vulnerable to Sandy's record 14-foot storm surge and subsequent power outages, is a potential second nightmare for Phillips 66, which took three weeks to restart its Alliance, Louisiana, refinery after Hurricane Isaac in August.
Late on Tuesday, New Jersey utility PSE&G said it had ``re-energized'' three of six flooded switchyards in the key energy supply hub around Linden, offering hope for improving supplies.
But the view emerging on Wednesday was of lingering damage that may take until next week to be resolved.
A Phillips 66 spokesman declined to comment on any specific damage, referring to the company's earlier statement that it needed to finish site assessments before planning a restart.
Asked about the source reports in an interview, executives confirmed that the floodwater had reached some of the sensitive electronic controls, but could not provide any more details on the damage or timeline for ramping up output.
``To the best of my knowledge, there was some flooding of some of the electrical units' substations and they're working through that, drawing it back out,'' Tim Taylor, Phillips 66 executive vice president of commercial, marketing, transportation and business development, said in an interview following its earnings.
Chief Financial Officer Greg Maxwell also confirmed that cogeneration power plants had been knocked out.
``They were down, at least the one we connect to. But I think part of the reason they were down was the loss of power from the grid, and so we don't know as of this morning whether they have started back up or not,'' Maxwell said.
Phillips 66 also notified regulators of smoke coming from flares at the refinery, although the sources said this was simply venting excess gases from the shut-down.
Power supplies were slowly being restored across New Jersey. The Department of Energy said 51 percent of homes and businesses in the state were still without power, down from around 65 percent on Tuesday afternoon.