oversight

Propane: Causes of Price Volatility, Potential Consumer Options, and Opportunities to Improve Consumer Information and Federal Oversight

Published by the Government Accountability Office on 2003-06-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States General Accounting Office

GAO          Report to the Honorable Tom Udall,
             House of Representatives



June 2003
             PROPANE

             Causes of Price
             Volatility, Potential
             Consumer Options,
             and Opportunities to
             Improve Consumer
             Information and
             Federal Oversight




GAO-03-762
                                                June 2003


                                                PROPANE

                                                Causes of Price Volatility, Potential
Highlights of GAO-03-762, a report to the       Consumer Options, and Opportunities to
Honorable Tom Udall, House of
Representatives                                 Improve Consumer Information and
                                                Federal Oversight


More than 4.6 million residential               Propane price spikes are generally caused by the inability of propane
households in the U.S., many with               supplies to adjust to unusual demand increases, such as those caused by
low incomes, rely on propane to                 especially cold winters. In addition, the lack of local propane storage and the
heat their homes. Unfortunately,                constrained capacity of the distribution system can create bottlenecks in
propane prices have been subject                moving propane to consumers in periods of high demand.
to major price spikes in two of the
last three winters. Responding to
congressional concern caused by                 Potential options to help propane consumers deal with price spikes include
these price spikes, GAO undertook               programs to pre-buy propane at a certain price. Such price stabilization
a study to address the (1) factors              programs help consumers mitigate the impact of price volatility. Participants
that affect residential propane                 in such programs may pay higher or lower prices compared to those who
price volatility, (2) options                   buy propane at the market price but would not be subject to price volatility.
available to propane consumers to               However, the extent to which such programs have broader potential is
mitigate price volatility, and (3)              unclear. In locations where such options are available, for various reasons,
federal role in the propane market.             use has been mixed, with low participation rates overall. These options are
                                                not available in some markets, and some consumers may not be able to
                                                afford to pre-buy propane. Energy assistance programs can help these
We are recommending that the                    consumers. But federal funding has declined, and the timing of funding
Departments of Commerce and                     availability generally does not allow participation in price stabilization
Energy provide more active                      programs. Improved information on such programs may be useful to
oversight of the legislatively                  consumers not facing other barriers.
established Propane Education and
Research Council. In addition, we               A number of federal agencies are involved to some extent in different
are recommending that                           aspects of the propane market, but some opportunities exist to improve
Department of Energy’s Energy
Information Administration study                their propane related roles. In 1996, the Congress authorized the
the potential cost and benefits of              establishment of the Propane Education and Research Council to provide
continuing to improve information               programs for propane research and development, safety and training, and
for propane market participants.                consumer education, with oversight from the Departments of Commerce
                                                and Energy, but that oversight has been insufficient. Also, the
In commenting on the report, the                Department of Energy’s Energy Information Administration could study
Departments of Commerce and                     the potential costs and benefits of continuing to improve the propane
Energy generally agreed with our
findings and recommendations.
                                                market information it provides to propane market participants.
However, the Department of
Energy disagreed that it has                    Propane Prices, Adjusted to 2002 Dollars
oversight responsibility for the
Propane Education and Research
Council. In addition, the council
questioned the value of federal
oversight of the council’s programs
and activities.



www.gao.gov/cgi-bin/getrpt?GAO-03-762.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact Jim Wells at
(202) 512-6877 or Wellsj@gao.gov.
Contents


Letter                                                                                1
               Results in Brief                                                       3
               Background                                                             5
               Price Spikes Caused by Inability of Supply to Respond to Weather-
                 Driven Surges in Demand                                              8
               Some Residential Consumers May Have Options to Mitigate Price
                 Spikes                                                              14
               Numerous Federal Agencies Are Involved in Various Aspects of the
                 Propane Market, but Consumer Information and Federal
                 Oversight Could Be Improved                                         22
               Conclusions                                                           30
               Recommendations for Executive Action                                  30
               Agency Comments and Our Evaluation                                    31

Appendix I     Objectives, Scope, and Methodology                                    36



Appendix II    Funding for LIHEAP and DOE Weatherization                             39



Appendix III   Comments from the Department of Commerce                              44



Appendix IV    Comments from the Propane Education and
               Research Council                                                      45



Appendix V     GAO Contacts and Staff Acknowledgments                                49



Tables
               Table 1: Comparison of the Costs of Typical Consumer Purchases
                        over a 5-Year Period under 2 Purchasing Options              17
               Table 2: Federal Agencies and Their Respective Roles within the
                        Propane Market                                               23
               Table 3: PERC Assessment Revenues and Expenditures for 1998 to
                        2003                                                         26




               Page i                                                GAO-03-762 Propane
          Table 4: Federal Appropriations for Health and Human Services
                   Low Income Home Energy Assistance Program and
                   Department of Energy Weatherization Assistance Program
                   for Fiscal Years 1982 through 2002 (Dollars in Thousands)     40
          Table 5: Total Federal Funds and State Supplemental Funds
                   Available by State for Fiscal Year 2002 LIHEAP Activities     41


Figures
          Figure 1: Residential Propane Prices—1995 to 2003                       2
          Figure 2: Propane Usage by Sector, Fiscal Year 2001                     6
          Figure 3: Propane Production, Distribution, and Utilization             7
          Figure 4: Comparison of Price Impacts of Elastic Supply and
                   Inelastic Supply                                              10
          Figure 5: Comparison of Price Impacts of Elastic and Inelastic
                   Supply and Demand                                             11
          Figure 6: Demand Compared with Heating Degree Days for July
                   1997 through November 2002                                    12
          Figure 7: Constraints in Quickly Moving Stored Propane to
                   Residential Consumers                                         14
          Figure 8: Total LIHEAP/Weatherization Appropriations for Fiscal
                   Years 1982 through 2002, Constant 2002 Dollars                20




          Page ii                                                GAO-03-762 Propane
Abbreviations

CFTC              Commodity Futures Trading Commission
DOE               Department of Energy
DOJ               Department of Justice
DOT               Department of Transportation
EERE              Energy Efficiency and Renewable Energy
EIA               Energy Information Administration
FERC              Federal Energy Regulatory Commission
FTC               Federal Trade Commission
HHS               Health and Human Services
LIHEAP            Low-Income Home Energy Assistance Program
LPG               liquid petroleum gas
NPGA              National Propane Gas Association
PERC              Propane Education and Research Council
SEC               Securities and Exchange Commission
SHOPP             State Heating Oil and Propane Program




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Page iii                                                             GAO-03-762 Propane
United States General Accounting Office
Washington, DC 20548




                                   June 27, 2003

                                   The Honorable Tom Udall
                                   House of Representatives

                                   Dear Mr. Udall:

                                   More than 4.6 million households in the United States rely on propane to
                                   heat their homes, though some of these households and millions of others
                                   also use propane for cooking and heating water. Many of these residential
                                   propane users have low incomes, making them particularly vulnerable to
                                   large propane price increases. In fact, more than 35 percent of the
                                   households using propane to heat their homes are eligible for low-income
                                   government financial assistance in meeting energy needs. During the
                                   winter of 2000-2001, propane prices reached levels that were about 70
                                   percent higher than average winter propane prices from 1995 to 2000.
                                   While prices were lower the following winter, they spiked upward again
                                   this past winter. Although propane prices are typically cyclical with higher
                                   prices during the winter and lower prices in the summer, figure 1
                                   illustrates the significantly higher price spikes that have occurred in two of
                                   the last three winters compared with most previous winters.




                                   Page 1                                                     GAO-03-762 Propane
Figure 1: Residential Propane Prices—1995 to 2003




                                        Note: Monthly prices in 2002 constant dollars, January 1995 to March 2003.


                                        This report addresses (1) factors that cause propane price spikes, (2)
                                        options for residential consumers to mitigate the effects of price spikes,
                                        and (3) the federal government’s role in the propane market.

                                        In addressing these issues, we examined government and industry price
                                        data to determine how propane prices have behaved over time and
                                        obtained historical propane-price information at the wholesale and retail
                                        levels. To determine the reasons for price spikes, we reviewed literature
                                        on propane markets and discussed the market with industry experts. We
                                        also contacted state energy office officials and state attorney general
                                        offices to get their views of propane prices and markets. To identify the
                                        uses of and availability of various price stabilization options, we
                                        interviewed industry groups, five multistate residential propane
                                        corporations, and various independent or corporate retail outlets within
                                        three states. To assess whether consumers might benefit from price
                                        stabilization programs, we compared wholesale market prices as reported
                                        for Mont Belvieu, Texas, (the most widely recognized prices in the world
                                        propane market) from June 1998 through March 2003 to comparable fixed
                                        price contract values offered by a major multistate propane marketer
                                        during the summer months. In addition, we collected and analyzed funding
                                        data on state low-income energy assistance programs and talked with state
                                        officials regarding how their various low-income energy assistance
                                        programs can help mitigate the impact of price spikes. Finally, to examine



                                        Page 2                                                                       GAO-03-762 Propane
                   the federal government’s role in the propane market, we obtained
                   documents and interviewed officials at federal agencies responsible for
                   programs that have a role in some aspect of the propane market. We
                   performed our review from July 2002 through May 2003 in accordance
                   with generally accepted auditing standards. A detailed description of our
                   objectives, scope, and methodology is contained in appendix I.


                   Propane price spikes are generally caused by the inability of propane
Results in Brief   supplies to adjust quickly to unusual demand increases, such as those
                   caused by especially cold winters. Propane is a by-product of two
                   processes: natural gas production and petroleum refining. Thus, there is
                   no readily available source of incremental production that can increase
                   supply when needed. While storing excess propane can provide a cushion
                   against unexpected demand increases, nationwide storage at the local
                   retail level is limited. Much of the available storage is located at two major
                   distribution centers in Mont Belvieu, Texas, and Conway, Kansas. In
                   addition, propane is primarily transported on pipeline systems that have
                   limited capacity. This lack of local propane storage and the constrained
                   capacity of the distribution system can and has created bottlenecks in
                   moving propane to consumers in periods of high demand as occurred in
                   two of the last three winters.

                   Some propane marketers offer residential consumers purchasing options
                   for mitigating the effects of propane price spikes that are designed to
                   allow consumers to stabilize their propane costs, yet these options are not
                   widely used. Such price stabilization options include advance purchases,
                   fixed-price contracts, and capped-price contracts. In general, these options
                   enable the consumer to purchase, or contract for, propane in advance at a
                   fixed or limited price. Participation in these programs may require some
                   upfront costs, and participants may, depending on whether market prices
                   spike, have a higher or lower propane bill for a given year compared to
                   those who buy propane at the current market price. However, participants
                   in such price stabilization options would achieve a benefit from the
                   certainty associated with paying a fixed price. According to several major
                   multistate propane marketers, few of their customers use these price
                   stabilization options for a number of reasons, including difficulty in
                   educating consumers about these options. Furthermore, in some markets
                   these options may be unavailable or some consumers may not be able to
                   participate because they cannot afford advance payments or are poor
                   credit risks. Low-income consumer assistance programs run by state
                   governments can help these consumers mitigate the impact of energy price
                   spikes, including propane. However, federal funding for these programs


                   Page 3                                                     GAO-03-762 Propane
has declined (in terms of constant dollars), and the timing of the funding
availability generally does not allow participation in price stabilization
options.

A number of federal agencies are involved to some extent in different
aspects of the propane market. The Federal Energy Regulatory
Commission is responsible for ensuring “just and reasonable rates” for
interstate transportation of propane through pipelines. The Department of
Transportation deals with safety issues regarding different modes of
transportation, including motor carrier and pipeline transportation of
propane. The Securities and Exchange Commission, the Federal Trade
Commission, and the Department of Justice play roles in maintaining
competitive energy markets in general through their regulation of firms
participating in these markets, while the Commodity Futures Trading
Commission is responsible for overseeing the nation’s energy commodity
futures and options markets. In addition, in 1996 the Congress authorized
the establishment of the Propane Education and Research Council (PERC)
to provide programs for propane research and development, safety and
training, and consumer education, with oversight from the Departments of
Commerce and Energy. Finally, the Department of Energy’s Energy
Information Administration (EIA) is responsible for providing information
on energy in general, including information on propane that promotes
sound policymaking, efficient markets, and consumer understanding.

Opportunities exist to improve the performance of some federal agencies
in carrying out their responsibilities that are related to the propane
market. Specifically, under the Propane Education and Research Act of
1996 (the Act), the Departments of Commerce and Energy have oversight
roles and responsibilities for PERC, but that oversight has been
insufficient. The Department of Commerce is required to prepare two
reports: one analyzing propane prices and the other examining the effects
of PERC’s operation. According to Commerce Department officials,
however, the department has not completed any such reports because it
has been unaware of that responsibility. The Act also requires PERC to
submit its budget to the Secretary of Energy who may recommend
appropriate programs and activities. However, according to Department of
Energy officials, the department has not conducted any detailed budget
reviews, recommended any programs, or conducted any further oversight
because it does not believe it has a role in the propane market. As a result,
the federal government has no measure of PERC’s effectiveness in
conducting its programs, nor is it in a position to recommend appropriate
programs and activities.



Page 4                                                    GAO-03-762 Propane
             Moreover, some opportunities may exist for EIA to improve the propane
             market information it provides. Specifically, although one of EIA’s primary
             purposes is to provide consumers with information on energy, including
             propane, EIA does not collect consumer propane price information for all
             states, gather information on price stabilization options, or provide
             information to consumers on different purchasing options. In addition,
             EIA is continuing to work to address industry concerns that inventory data
             are incomplete. According to EIA officials, propane consumers constitute
             a relatively small portion of energy consumers, and because EIA has to
             prioritize limited resources, it has chosen to focus its efforts on more
             widely used energy sources. As a result, opportunities may exist for EIA to
             further improve the propane market information it provides, although the
             potential benefit of any improvements must be weighed against the
             potential cost.

             We are recommending that the Department of Commerce complete its
             required reports analyzing propane prices and examining the effects of
             PERC’s operation. We are also recommending that the Department of
             Energy conduct more active oversight of PERC in order to be in a better
             position to recommend appropriate programs and activities. In addition,
             we are recommending that EIA study the potential cost and benefits of
             continuing to improve EIA’s propane market information. Consideration
             should be given to improving information for consumers on prices and
             different purchasing options as well as inventory data.


             Propane, also known as a liquid petroleum gas (LPG), ranks as the fourth
Background   most important source of residential heating in the nation and is used to
             heat over 4.6 million homes. The demand for propane is divided among
             various sectors, with the residential-commercial sector1 purchasing about
             45 percent of total production and the petrochemical industry purchasing
             about 37 percent in fiscal year 2001. The principal users of propane and
             their respective shares of total sales are shown in figure 2 below.




             1
              The commercial aspect of this sector includes sales to mostly small businesses, which
             primarily use propane for space-heating, water heating, and cooking.




             Page 5                                                              GAO-03-762 Propane
Figure 2: Propane Usage by Sector, Fiscal Year 2001




Notes: GAO analyzed American Petroleum Institute data.

The residential-commercial sector includes sales to smaller types of businesses (such as motels,
restaurants, retail stores) primarily for space-heating, water heating, and cooking.

The agricultural sector includes propane used for space heating, cooking, and heating water in a
farmhouse, as well as other agricultural uses, such as crop drying, fuel to heat hen houses and other
farm buildings, and irrigation pump fuel.


While these two sectors appear to be competing for the same product,
typically petrochemical companies purchase propane during the summer,
when prices tend to be lower and residential demand is low. During the
winter months when the demand for residential propane increases and
prices are at their highest, petrochemical companies switch to other, less
expensive types of feedstock or rely on stored propane purchased during
the summer months.

Approximately 90 percent of the United States’ propane supply, 17.2
billion gallons in 2002, is produced domestically, while about 10 percent is
imported from foreign countries, primarily from Canada. Propane is a by-
product resulting from both the refining of crude oil and from natural gas
processing with approximately equal amounts of total propane produced
from each process. After crude oil and gas are extracted from the earth,
they are shipped to an oil refinery or natural gas fractionation plant, where
propane is one of many products that can be extracted from the oil and



Page 6                                                                       GAO-03-762 Propane
                                          gas. Propane is a liquid when kept under moderately high pressure or low
                                          temperature and is generally stored at large major distribution centers.
                                          When ready for use, propane is released from pressure and at normal
                                          atmospheric pressure becomes a gas that can be burned to produce
                                          energy. A major purchaser of propane is the petrochemical industry
                                          (which may resell this propane at a later date). Propane is then shipped
                                          from major distribution centers to terminals primarily by pipeline but also
                                          by rail cars, transport trucks, or barges and ships. Once the propane
                                          reaches these terminals, local retail marketers transport propane to their
                                          local retail plant using highway transport trucks. About 75 percent of the
                                          propane is transported by a pipeline-truck combination. Finally, these
                                          marketers distribute it to their customers using small delivery trucks
                                          called bobtails. Retail propane marketers range in size from small, family-
                                          owned businesses to large multistate corporations. While there are
                                          approximately 13,500 retail propane outlets throughout the country, the
                                          five largest corporate marketers account for about 28 percent of the total
                                          retail sales. Figure 3 below illustrates the production, distribution, and
                                          utilization of propane.

Figure 3: Propane Production, Distribution, and Utilization




                                          Page 7                                                   GAO-03-762 Propane
                           Propane price spikes are generally caused by the inability of propane
Price Spikes Caused        supplies to quickly adjust to unusual demand increases, such as those
by Inability of Supply     caused by especially cold winters. Since neither propane supply nor
                           propane demand can easily adjust to changes, they are considered
to Respond to              “inelastic” and changes in supply or demand can result in significant
Weather-Driven             changes in the market price. Propane supply is relatively inelastic because
                           there is no readily available source of incremental production that can
Surges in Demand           increase supply when needed since propane is a by-product of two
                           processes: natural gas production and crude oil refining. Residential
                           demand for propane is relatively inelastic because propane is a basic
                           necessity used for home heating and switching to alternative sources of
                           heat is usually not practical during the short period of time in which price
                           spikes occur. Weather is the key factor that drives home heating demand,
                           and its unpredictability can lead to wide swings in residential demand that
                           in turn lead to significant changes in market prices, both upward and
                           downward. Compounding the inelastic supply and demand situation,
                           propane storage and transportation systems have limited capacity, which
                           can create bottlenecks in quickly moving propane to consumers,
                           particularly in periods of high demand.


Propane Market Supply      Since propane is produced as a by-product of natural gas processing or
and Demand Are Inelastic   crude oil refining, and because there is no readily available source of
                           incremental production that can increase supply when needed, the supply
                           of propane is relatively inelastic. The amount of propane available to the
                           market depends on several factors, including the price of propane relative
                           to the price of natural gas. Some propane must be extracted from the
                           natural gas in order for the natural gas to be transported through the
                           natural gas pipelines; but there is some flexibility in the amount of
                           propane retained. If the price of natural gas is high compared to the price
                           of propane, then it is more economical for producers to leave more
                           propane in the natural gas to take advantage of the price difference,
                           thereby reducing the available supply of propane. Similarly, crude oil
                           manufacturers may retain propane to be used as a heating fuel for crude
                           oil processing rather than purchasing higher-priced natural gas for that
                           purpose.

                           Within the residential propane market, the demand for propane is also
                           inelastic because propane is a “necessary” good that is used to heat
                           homes. Consumers who heat their homes with propane will require a
                           certain quantity of propane even if propane prices are high. Furthermore,
                           quickly switching between alternative heating fuels is not easily
                           accomplished especially in a short period of time during which the price


                           Page 8                                                   GAO-03-762 Propane
spikes typically occur. Most homes have invested in one primary heating
system, and it is neither easy nor economical to switch among systems
using different fuels. For example, an individual may replace an obsolete
furnace with one utilizing an alternative fuel, but it may not be easy or
economical to switch solely on the basis of current prices of different
heating fuels. Alternatives to propane—which include electricity, heating
oil and wood—generally require retrofitting the heating units for the
alternative fuel. In addition, some added costs could be incurred in
switching among retailers or among heating fuels.

Any market with inelastic supply and demand characteristics –- as is the
case in the propane market –- is more susceptible to significant price
fluctuations than a more elastic market. In an inelastic market, relatively
small shifts in supply or demand can result in significant price changes.
Propane supply is relatively fixed in the short term because it is limited to
available storage within the market and cannot be quickly increased to
meet increased demand. Thus, increases in demand through such factors
as cold weather will result in a greater increase in price than if the supply
were more elastic. Also, because demand is inelastic, decreases in supply
will result in a greater increase in price than if demand were more elastic.
Supply decreases can occur in propane markets when pipelines break,
when gas processing procedures do not extract as much propane from the
natural gas-propane mix, when crude oil refiners retain propane for fueling
the crude oil refining process rather than utilizing natural gas, or when
imports are reduced because of world events.

Basically, in the perfectly inelastic supply market, more demand competes
for the same level of supply driving prices higher than they would go if
supply were more readily available — more elastic. Figure 4 illustrates this
example by comparing the smaller price increase in a market with elastic
supply (panel A) with the larger price increase in a market with perfectly
inelastic supply (panel B) when faced with the same increased level of
demand. Figure 5 demonstrates the difference for a market with both
inelastic supply and inelastic demand — as is the case with the propane
market. Note the comparison between the smaller price increase in a
market with both elastic supply and elastic demand (panel A) and the
larger price increase in a market with inelastic supply and demand (panel
B) when demand increases and supply decreases.




Page 9                                                    GAO-03-762 Propane
Figure 4: Comparison of Price Impacts of Elastic Supply and Inelastic Supply




Note: In panel A, assume we have a good with elastic supply; elastic supply is represented by a
supply line whose upward slope is relatively not very steep. Initially, the price and quantity settle at
  a                                                                  a
P 0 and quantity Q0 as determined by the intersection of supply S and demand D0. Next, assume that
demand increases, as depicted by an outward shift in the demand line to D1. Because supply is
somewhat elastic, additional supply is made available to meet the increased demand, albeit at a
higher price P 1. The increase in price is represented by ∆P — the difference between P 1 and P 0.
                a                                               a                           a        a


However, in an inelastic supply situation, the supply response is weaker. A more limited quantity is
supplied to the market to meet the increase demand, resulting in a steeper rise in price than in the
more elastic case. Graphically, this inelasticity is represented by a supply line that is much steeper
than the elastic supply line. Taking an extreme example, assume that supply is perfectly inelastic —
that is, supply is fixed no matter what the demand — as depicted in panel B with a vertical supply line
  b
S . The initial price and quantity are the same as in panel A. Given the fixed supply, in order to meet
                                                                              b
the same increase in demand to D1, the price would have to increase to P 1 to “choke off” the excess
demand. The increase in price from P 0 to P 1 for the inelastic supply case, as represented by ∆P , is
                                         b    b                                                       b


significantly higher than the increase in price in the elastic supply case, ∆P .
                                                                                a




Page 10                                                                        GAO-03-762 Propane
                             Figure 5: Comparison of Price Impacts of Elastic and Inelastic Supply and Demand




                             Note: To provide a more complete picture, figure 5 compares a market with elastic supply and
                             demand with a market with inelastic supply and demand — like the propane market — to further
                             illustrate the greater price response to shifts in inelastic supply and demand. The elastic supply and
                             demand market (panel A) has relatively less steep supply and demand lines, while the inelastic
                             supply and demand market (panel B) is characterized by much steeper supply and demand lines. The
                             primary observation is the difference in the price response to changes in supply and demand in the
                                                           a         a
                             elastic market in panel A (P 0 versus P 1) compared with the price response in the inelastic market in
                                          b         b
                             panel B (P 0 versus P 1). In both examples, supply drops as depicted by an inward shift from S0 to S1.
                             In this market, this drop could be due, for example, to an accident that disrupts a major pipeline. Also,
                             in both examples, demand rises, as depicted by an outward shift from D0 to D1. In this market, this
                             could be the result of an unusually cold winter snap. We have constructed both examples in such a
                             way as to leave the quantity of the commodity unchanged at Q0. As can be seen, in the market with
                             elastic supply and demand, the decline in supply and the rise in demand result in a relatively small
                                                 a
                             price increase (∆P ). However, in the market with inelastic supply and demand, the increase in price
                                                                                                 b
                             due to the supply and demand shifts is considerably larger (∆P ).



Weather Is a Major           Because of the influence of the weather on residential demand, total
Determinant of Residential   propane demand generally mirrors the seasonal demand in the residential-
Propane Demand               commercial sector (which accounts for more than 45 percent of total
                             demand), rising during the winter months but falling during spring and
                             summer. During especially cold weather, residential demand can increase
                             quickly. Since the petrochemical industry tends to purchase propane
                             during the non-heating season, it has diminished impact on demand during
                             the winter. While total demand for propane averaged about 52.5 million
                             gallons per day in 2002, monthly levels varied significantly, from a low of
                             about 40.3 million gallons per day during June to a high of about 69.6
                             million barrels per day during January. Figure 6 shows, from July 1997
                             through November 2002, the relationship between cold weather, as



                             Page 11                                                                        GAO-03-762 Propane
                                      measured by heating degree days,2 and propane demand for heating and
                                      illustrates that as heating degree days increase, so does the amount of
                                      propane used.

Figure 6: Demand Compared with Heating Degree Days for July 1997 through November 2002




                                      2
                                       Heating degree days can be defined as the number of degrees per day that the daily
                                      average temperature (the mean of the maximum and minimum recorded temperatures) is
                                      below 65 degrees Fahrenheit.




                                      Page 12                                                         GAO-03-762 Propane
                            To complicate this market even further, the largest component of the
                            agricultural demand for propane is for crop drying. This demand is not
                            only seasonal but can vary greatly from year to year depending on crop
                            size and moisture content. Ordinarily, agricultural demand for propane
                            does not affect regional propane markets except when the confluence of
                            unusually high and late demand for propane for crop drying and colder-
                            than-normal weather causes greater-than-normal propane stock draws.
                            Since this generally occurs at the beginning of the heating season, many
                            retailers find themselves with low inventory levels at the same time that
                            residential demand is increasing.


Propane Storage and         There are three propane storage types: primary, secondary, and tertiary.
Transportation              Primary propane storage in the United States is clustered near the
Infrastructure Is Limited   domestic propane market’s two major distribution centers in Mont
                            Belvieu, Texas, and Conway, Kansas. These areas have become major
                            distribution centers because propane is primarily produced along the Gulf
                            Coast and in the Midwestern portions of the country. In addition, salt
                            dome caverns, which are natural storage facilities with virtually unlimited
                            capacity, are located near these areas. Secondary storage consists mainly
                            of large aboveground tanks with capacity of 18,000 to 30,000 gallons
                            located at approximately 13,500 local retailers. Nationwide storage at the
                            secondary, local retail level is limited. An industry expert estimates total
                            secondary storage at about 3.85 percent of annual retail sales. Industry
                            experts have stated that most retailers maintain only a few days’ supply at
                            the secondary level because, for economic reasons, propane retailers
                            employ a “just-in-time” inventory approach. Thus, they must refill their
                            tanks every few days during the peak heating season. These experts have
                            suggested that retailers should maintain up to a 2-week supply to ensure
                            uninterrupted supply. Tertiary storage is the storage capability of end
                            users. Such storage is represented by millions of small (typically 100 gallon
                            to 500 gallon) tanks located mostly at residences.

                            While storing excess propane could provide a cushion against unexpected
                            demand increases, because much of the available storage is located at the
                            two major distribution centers in Texas and Kansas, it is difficult to get
                            this stored propane out to consumers at the residential level quickly. The
                            key mode of transporting this propane is using pipelines that link these
                            areas to the areas of primary demand, the Midwestern and the
                            Northeastern United States. However, these pipelines have a limited
                            capacity such that during the heating seasons rationing and long waiting
                            lines often exist at distribution points along these pipelines. Lead times for
                            supplying propane to a specific area of the country depend on the distance


                            Page 13                                                    GAO-03-762 Propane
                                        from the two major distribution centers, pipeline availability to the area,
                                        and transport truck capacity and availability. These constraints are
                                        illustrated in figure 7, which demonstrates the bottlenecks, limited
                                        pipeline capacity, and secondary storage occurring in the propane
                                        industry.

Figure 7: Constraints in Quickly Moving Stored Propane to Residential Consumers




                                        Some propane marketers offer residential consumers purchasing options
Some Residential                        for mitigating the effects of propane price spikes that are designed to
Consumers May Have                      allow consumers to stabilize their propane costs. Such programs may
                                        include advance purchases, fixed-price contracts, and capped-price
Options to Mitigate                     contracts, all of which enable the consumer to purchase propane at a
Price Spikes                            known, stable price over the upcoming heating season. While these price
                                        stabilization programs offer no guarantee of lower prices in any given
                                        year, consumers could benefit from more stable prices and avoid the
                                        effects of the price spikes that periodically occur. However, the extent to
                                        which these programs can be utilized is not certain due to a number of
                                        factors. In some locations, propane marketers do not offer these
                                        programs. In locations where these programs are available, consumers


                                        Page 14                                                   GAO-03-762 Propane
                            either chose not to participate or cannot participate because they cannot
                            afford the upfront costs or do not have the credit required by such
                            programs. For low-income consumers, including those who use propane to
                            heat their homes, access to funding from state-operated assistance
                            programs may help them mitigate the impact of higher energy costs.
                            However, since 1982 federal funding for these programs has declined in
                            real terms, and the timing of the funding availability generally does not
                            allow these consumers to take advantage of price stabilization programs.


Price Stabilization         Residential consumers in some markets can stabilize monthly bills by
Programs                    participating in propane marketer price stabilization programs as an
                            alternative to purchasing propane at the current market price when it is
                            needed. The programs offered by many propane marketers include
                            advance purchase, fixed-price contracts and capped-price contracts. In
                            general, these options enable the consumer to purchase propane at a fixed
                            price, thus allowing them to remain unaffected by propane price volatility
                            during the next heating season. Advance purchase or prebuy options allow
                            residential consumers to secure propane at a predetermined price for
                            deliveries made throughout the ensuing heating season. Fixed-price
                            contracts ensure guaranteed, “not-to-exceed” prices for the heating season
                            propane purchases. Capped-price contracts, similar to fixed-price
                            contracts, guarantee the fuel price will not exceed a fixed price but may go
                            down on the basis of market price at time of delivery. For a price, this
                            option provides consumers the assurance of taking advantage of lower
                            prices if the market price drops while protecting them from price spikes.
                            Many of these programs also offer budget-paying options where total
                            propane expenses are spread over a monthly payment, but these programs
                            may require an adequate credit rating. According to the propane marketers
                            we contacted, the advanced purchase and fixed-price options were the
                            most common type of option offered while fewer offered the capped-price
                            contract type of option.


Potential Impact of Price   The difference in prices paid by residential consumers who participate in
Stabilization Programs      price stabilization programs depends on how low the program price is
                            compared to what would be paid at the going market price. The prices
                            offered under these programs for the upcoming winter are typically tied to
                            the price during the current summer. When market prices increase as a
                            result of a colder winter with high demand, the residential consumers not
                            participating in a price stabilization program may face higher prices than
                            those participating in a stabilization program. However, market prices can
                            also be lower in the winter, especially during a warmer winter with low


                            Page 15                                                  GAO-03-762 Propane
demand, and consumers participating in a stabilization program may pay
higher retail prices. Some programs may involve additional cost
considerations, such as interest income that is foregone because of
advance payments and service fees that may be required. Although there
are no guarantees that these options will provide an overall lower fuel bill,
they provide stable, known prices for those who are risk-averse and offer a
way to hedge prices, especially when shortages can cause prices to spike,
as they did during the winter of 2000-2001.

To demonstrate the potential differences in total costs between consumers
who participate in a price stabilization option and those who do not, we
conducted an analysis based on a hypothetical consumer and compared
purchases under actual market prices and fixed prices actually offered by
a large multistate retailer over the last 5 years. We determined the market
prices by averaging the daily Mont Belvieu, Texas, prices3 for each month
during the 5 years of winter heating seasons. We obtained comparable
fixed-price contract prices from a large corporate retailer.4 Based on the
profile of an average residential consumer in a significant winter heating
region, our hypothetical consumer participating in the price stabilization
program purchases 900 gallons of propane per year. For purposes of this
example, we assumed that the price stabilization program participant
commits to purchasing 900 gallons during the summer each year for a total
of 4500 gallons over the 5 years. For the consumer buying at the current
market price, we assume the consumer buys the amount of propane
actually needed that heating season (which varies with demand). We
calculated the amounts purchased each year by dividing the national
residential propane demand for each year by the total national demand for
the 5-year period to determine the percentage of total demand for each
year. We then used the resulting percentages to allocate our hypothetical
5-year consumption of 4500 gallons over each of the 5 years. In both cases,
the total propane purchased by both consumers would be the same (4500
gallons).




3
 Mont Belvieu propane prices are the most widely recognized prices in the world propane
market according to EIA officials.
4
 These prices do not include transportation costs or profit margins, making them more
comparable to the Mont Belvieu price. Sometimes propane marketers charge a
participation fee for fixed-price contracts, but this propane marketer included these fees in
the contract price.




Page 16                                                               GAO-03-762 Propane
                                          As table 1 shows, over the last five winters, the hypothetical consumer
                                          using a fixed-price contract would have spent more for propane in two
                                          winters (1998 to 1999 and 2001 to 2002), but less in three winters (1999 to
                                          2000, 2000 to 2001, and 2002 to 2003). Although there is no guarantee that
                                          taking advantage of any of these price stabilization programs will result in
                                          a lower heating bill for a given year, this example demonstrates that,
                                          depending on the relationship between fixed prices and market prices,
                                          consumers may experience higher costs from such programs in some
                                          years but may actually have savings in other years. However, consumers
                                          who participate in these price stabilization programs may benefit from the
                                          certainty associated with paying a fixed, known price and avoid the
                                          negative impact of price spikes.

Table 1: Comparison of the Costs of Typical Consumer Purchases over a 5-Year Period under 2 Purchasing Options

                           Average fixed-price contract                     Average winter market price
                          Gallons          Price            Total            Gallons          Price       Total     Difference
 Winter                 purchased     per gallon             cost          purchased     per gallon        cost         in cost
 1998-1999                    900           $.24            $216                 901           $.23       $210               $6
 1999-2000                    900            .30              270                872            .50         433           (163)
 2000-2001                    900            .56              504                949            .65         621           (117)
 2001-2002                    900            .40              360                877            .34         294              66
 2002-2003                    900            .38              342                902            .59         528           (186)
Source: GAO analysis.

                                          Note: GAO analyzed EIA and industry data.




Price Stabilization                       According to several nationwide propane marketers, overall, few of their
Programs Not Widely Used                  customers use these price stabilization programs in locations where they
                                          are available. All of the large nationwide propane marketers that we spoke
                                          with indicated that most (83 percent to 95 percent) of their residential
                                          consumers purchase their propane at current market prices and do not
                                          participate in the price stabilization programs. However, participation can
                                          vary widely by region: the local propane outlets that we contacted
                                          indicated that the percentage of consumers who purchased their propane
                                          using one of their price stabilization programs varied widely. For example,
                                          we talked to five Minnesota propane marketers that all offered price
                                          stabilization options and participation among their customers ranged from
                                          25 to 70 percent. All five marketers that we talked to in Vermont offered
                                          price stabilization options with participation ranging from 5 percent to 65
                                          percent. In some other markets, the price stabilization options are not
                                          widely offered. For example, a New Mexico National Propane Gas




                                          Page 17                                                          GAO-03-762 Propane
Association official was aware of only one propane marketer in New
Mexico that offered price stabilization options.

Propane marketers that we talked to identified several reasons that price
stabilization programs are not widely used. In some cases, the marketers
viewed price stabilization programs as beneficial for their business
practice, yet they have had difficulty educating consumers regarding the
benefits of price stabilization programs. Some marketers said they find it
difficult to convince consumers to purchase propane before they need it,
especially in the summer when demand is down. As noted above, in some
years consumers may pay more for propane under price stabilization
options, which can discourage them from participating in the program in
following years. In fact, some consumers may renege on the conditions of
a price stabilization program. This type of negative reaction may cause
retailers to not offer these options. For example, in the past, one retailer in
New Mexico offered a fixed-price contract option to consumers; however,
many participants in the program failed to purchase the contracted
amounts at the contracted fixed price. When prices fell that year,
participating consumers refused to pay the higher contracted fixed price.
Thus, under the program, the retailer was stuck with higher priced
propane that had already been bought from a supplier. This retailer has
decided not to offer this type of contract in the future. The low-income
status of many propane consumers can also be a barrier to participation in
propane price stabilization options. In general, to participate in price
stabilization programs, consumers are required to pay all or part of the
cost for the contracted propane upfront or to negotiate for a budget
payment arrangement. In some cases, consumers cannot afford to pay the
full amount of the contract, and, in order to participate in a budget
payment arrange, the consumers need a good credit rating, which some
propane consumers do not maintain. Consequently, in some markets
either these options are unavailable, or some consumers cannot
participate because they cannot afford advance payments or are poor
credit risks. Consumers who can qualify for price stabilization programs
may want to switch to a propane marketer that offers such an option. Most
propane marketers told us that it is easy to change marketers. However, in
some cases external factors may make it difficult to change marketers. For
instance, in New Mexico, many of the older homes have galvanized steel
pipes (generally referred to as “black pipes”), which are underground and
subject to corrosion. Regulations in New Mexico mandate that
underground black pipe must be replaced due to serious safety concerns
about the potential for corrosion. This becomes an issue when the home
owner decides to switch marketers, triggering a state inspection that
would require pipes found in violation to be replaced. This replacement


Page 18                                                    GAO-03-762 Propane
                            can be cost-prohibitive for propane users, especially low-income
                            homeowners, and can inhibit them from making a change.


Energy Assistance           According to 1990 decennial data provided by the U. S. Census and
Programs Are Available to   furnished by the Department of Health and Human Services (HHS), 26
Low-Income Residential      percent of households across the nation, more than 24 million, meet
                            federal income guidelines to qualify for low-income energy assistance and
Consumers                   8 percent of those, more than 1.8 million households, use propane gas as
                            their primary fuel. In 3 states, 20 percent or more of low-income
                            households use propane gas as their primary fuel. All states operate
                            programs that provide funding to low-income consumers, including
                            households that use propane to heat their homes to assist them with their
                            home energy needs. The federal government provides funding through two
                            block grant programs as follows:

                            •   The Low-Income Home Energy Assistance Program (LIHEAP)
                                administered by HHS provides block grants to states to fund payment
                                assistance to low-income households as well as crisis assistance and
                                some weatherization assistance. As a block grant program, LIHEAP
                                offers much flexibility to states to administer their energy assistance
                                programs in the way that they feel best serves their low-income
                                populations. Each state operates its own program, to include taking
                                applications, establishing eligibility, and making decisions on the kinds
                                of assistance it will offer.

                            •   DOE’s Weatherization Assistance Program provides funds to make
                                dwellings more fuel efficient in the long term for low-income
                                households.

                            In fiscal year 2002, federal funding for LIHEAP was $1.8 billion, about 8
                            times greater than the $230 million provided for the longer-term DOE
                            weatherization program. However, since LIHEAP’s establishment in 1981,
                            its appropriations have significantly decreased. The 2002 appropriation
                            was $1.8 billion, which is more than a 40-percent decrease from its initial
                            funding level after allowing for inflation. Federal funding for DOE
                            weatherization, established in 1976, has fluctuated from 165 percent, based
                            on the 1982 level, in 1983, to 52 percent in 1996, and was at 96 percent of
                            the 1982 level in 2002 after allowing for inflation. However, because the
                            HHS LIHEAP appropriations are much larger than the DOE weatherization
                            appropriations, combined federal funding from both programs for 2002
                            was still 40 percent less than the 1982 level. Appendix II provides details
                            on the federal appropriations for LIHEAP and DOE weatherization for



                            Page 19                                                   GAO-03-762 Propane
1982 through 2002. Figure 8 shows total LIHEAP plus DOE weatherization
appropriations for 1982 through 2002 (in 2002 dollars).

Figure 8: Total LIHEAP/Weatherization Appropriations for Fiscal Years 1982
through 2002, Constant 2002 Dollars




Note: GAO analyzed Congressional Research Service and DOE weatherization appropriation data.


Many state officials told us that not knowing the federal funding levels
during the summer is an impediment to their ability to plan LIHEAP
funded activities, including the participation in various price stabilization
programs. In 1990, we suggested the Congress consider forward funding
for the program to increase funding flexibility.5 One benefit of forward
funding is that states could take advantage of price stabilization options to
cushion the effects of price increases, including summer fill programs, and



5
 U.S, General Accounting Office, Low Income Home Energy Assistance: Legislative
Changes Could Result in Better Program Management (GAO/HRD –90-165, Sept. 7, 1990).




Page 20                                                                GAO-03-762 Propane
fixed-price contracts, as suggested by industry, state, and federal
government officials. As an example of success with these types of
programs, in 1997, we reported that the state of South Dakota, through a
summer fill program, saved 59 cents per gallon for its customers in the
1996-1997 heating season. The state also arranged fixed-price contracts for
elderly and handicapped clients for 1997-1998 heating season.6

More recently, several groups have requested forward funding through
advance appropriations or advance funding7 for LIHEAP. The Coalition of
Northeastern Governors in March of 2001 urged the House Committee on
Appropriations’ Subcommittee on Labor, Health and Human Services,
Education, and Related Agencies to provide an advance appropriation and
advance funding for LIHEAP for fiscal year 2003 as part of its deliberations
for the fiscal year 2002 LIHEAP appropriation. In April of 2002, 129
congressmen, members of the bipartisan Northeast-Midwest
Congressional Coalition, requested that the Labor-HHS-Education
Appropriations bill include $3 billion in advance appropriations for
LIHEAP in fiscal year 2004. They stated “an advance appropriation would
enable state LIHEAP directors to plan the use of their state’s LIHEAP
allocation for the following fiscal year, including prepurchasing winter
heating fuels to take advantage of lower prices.” As recently as January
2003, 48 senators sent a letter to the President advocating the inclusion of
advance funding for fiscal year 2004 in the fiscal year 2003 appropriations
request.

Funding for these LIHEAP programs is provided through federal grants
and state supplemental sources. While federal LIHEAP funding accounted
for the majority of funding nationwide in fiscal year 2002, state
supplemental funding can vary significantly by state. In California, federal
funds only accounted for 21 percent of total LIHEAP funding in fiscal year
2002. Other states like New Mexico, are much more dependent on federal
funds, with 94 percent of total funding in fiscal year 2002 coming from the
federal government. Details on federal and state LIHEAP funding for each



6
 U.S. General Accounting Office, Energy Policy: Propane Price Increases During the
Winter of 1996-1997 (GAO/RCED 98-52R, Dec. 16, 1997).
7
  An advance appropriation is budget authority provided in an appropriation act, which is
first available in a fiscal year beyond the fiscal year for which the appropriation act is
enacted. Advance funding is budget authority provided in an appropriation act to obligate
and disburse (outlay) in the current fiscal year funds from a succeeding year’s
appropriation.




Page 21                                                              GAO-03-762 Propane
                         state in fiscal year 2002, the most recent year available, can be found in
                         appendix II.

                         While no single federal agency is solely responsible for overseeing all
Numerous Federal         propane-related activities and programs, numerous federal agencies have
Agencies Are Involved    specific propane-related responsibilities. Two federal agencies, the
                         Departments of Commerce and Energy, have oversight roles and
in Various Aspects of    responsibilities for the Propane Education and Research Council, but this
the Propane Market,      oversight has been lacking. One federal agency, EIA, within the
                         Department of Energy, is responsible for providing the public and various
but Consumer             other groups with information on energy, including propane. Although EIA
Information and          collects propane energy information, it does not report propane price
Federal Oversight        information for all states nor provide information to consumers on the use
                         of different price stabilization options. Improvements in this information
Could Be Improved        could help more consumers by providing more information on propane
                         prices and buying options. In addition, EIA is working to address concerns
                         that EIA inventory statistics used by industry to make purchasing and
                         pricing decisions are incomplete.


Federal Agencies Are     Several federal agencies have activities and programs that touch on
Involved in Various      propane-related issues as part of each agency’s respective overall mission
Aspects of the Propane   and objectives. However, no single federal agency is focused specifically
                         on overseeing propane-related activities and programs. These activities
Market                   and programs include various responsibilities—for example, overseeing
                         the transportation of propane and monitoring the competitiveness of
                         propane markets. Table 2 briefly describes these various federal agencies’
                         roles in the propane market.




                         Page 22                                                   GAO-03-762 Propane
Table 2: Federal Agencies and Their Respective Roles within the Propane Market

Agency                  Role in Propane Market
Department of Energy    DOE’s role in the propane market is part of its overall role in
(DOE)                   fostering a secure and reliable energy system that is
                        environmentally and economically sustainable. The Secretary
                        of Energy has an oversight role regarding the Propane
                        Education and Research Council’s (PERC) activities and
                        programs.
DOE’s Energy            EIA serves as the lead federal authority for energy
Information             information to meet the needs of Congress, the federal
Administration (EIA)    government, industry, and the public for policy making,
                        efficient markets, and public understanding. As part of this
                        larger role, EIA collects and disseminates data on propane
                        prices and supply.
Federal Energy          FERC is an independent agency responsible for ensuring
Regulatory Commission   “just and reasonable rates” for interstate transportation of
(FERC)                  propane through pipelines.
Department of Commerce Commerce has a role in the propane market as part of its
                        overall goal to encourage, serve, and promote the nation’s
                        international trade, economic growth, and technological
                        advancement. Commerce is required to monitor and report
                        on the effects of PERC’s programs on propane markets.
Department of Justice   The Antitrust Division of the Department of Justice enforces
                        federal antitrust laws in the propane market as part of its
                        overall role in promoting and maintaining competitive
                        markets.
Federal Trade           FTC enforces laws that prohibit business practices that are
Commission (FTC)        anticompetitive, deceptive, or unfair to consumers and
                        promotes informed consumer choice and public
                        understanding of the competitive process.
Securities and Exchange As part of SEC’s role in securities markets, its overall role is
Commission (SEC)        providing protection for investors to ensure that they are fair
                        and honest and, when necessary, to provide the means to
                        enforce securities laws through sanctions.
Commodity Futures       CFTC is responsible for overseeing the nation’s energy
Trading Commission      commodity futures and options markets, including propane
(CFTC)                  futures and options markets.
U.S. Department of      Three DOT entities deal with safety issues regarding different
Transportation (DOT)    modes of transporting propane: the Federal Motor Carrier
                        Safety Administration (preventing commercial motor vehicle-
                        related fatalities and injuries); the Federal Railroad
                        Administration (promoting safe and environmentally sound
                        rail transportation); and the Research and Special Programs
                        Administration (ensuring the safe transportation of packaged
                        hazardous materials by all modes and the safe transportation
                        of natural gas, petroleum, and other gas and liquid hazardous
                        materials by pipeline). DOT grants waivers for motor carrier
                        drivers during emergencies. State governors can petition
                        DOT for these waivers or grant waivers themselves.
Source: GAO presentation.




Page 23                                                           GAO-03-762 Propane
Federal Oversight of PERC   The Propane Education and Research Act, which was enacted on October
Has Been Lacking            11, 1996, authorized the establishment of PERC to enhance consumer and
                            employee safety and training, to provide for research and development of
                            clean and efficient propane utilization equipment, and to inform and
                            educate the public about safety and other issues associated with the use of
                            propane. PERC’s membership is made up primarily of representatives
                            from the propane production and marketing industry. PERC is similar to
                            agricultural commodity check-off programs involving such commodities as
                            beef, pork, and cotton. In a check-off program, a fraction of the wholesale
                            cost of the product is set aside by the product producer and deposited into
                            a common fund that can be employed to the benefit of commodity
                            producers and consumers. Similarly, PERC is funded by an assessment of
                            up to 0.5 cents on each gallon of odorized propane gas. PERC may take no
                            action to pass along to consumers the cost of this assessment, which is
                            currently 0.4 cents per gallon.8 In fiscal year 2003, this assessment is
                            anticipated to support a PERC budget of about $38 million.

                            The Propane Education and Research Act establishes oversight roles and
                            responsibilities for two Federal agencies, the Departments of Commerce
                            and Energy, but federal oversight has been lacking. The Department of
                            Commerce is required to prepare two reports relating to PERC. First,
                            beginning in 1999, the Commerce Department was to prepare annual
                            analyses of changes in the price of propane relative to other energy
                            sources and to make these analyses available to PERC, the Secretary of
                            Energy, and the public. If in any year the 5-year average rolling price of
                            propane exceeds a certain price composite index by more than 10.1
                            percent, PERC’s activities are to be restricted to research and
                            development, training, and safety matters. 9 Second, in 1998 and at least
                            once every 2 years thereafter, the Department of Commerce is to prepare
                            and submit a report to the Congress and the Secretary of Energy


                            8
                              PERC has increased its per gallon assessment 3 years of the 6 years since it was
                            established. Starting at 0.1 cents per gallon of odorized propane sold at the wholesale level,
                            PERC’s assessment has increased to 0.4 cents over its 6-year history. By operation of the
                            law and the rules adopted by PERC, 20 percent of the assessment collections are rebated to
                            state propane councils or similar entities.
                            9
                              This price composite index is the 5-year rolling average price composite index of
                            residential electricity, residential natural gas, and refiner price to end users of No. 2 fuel oil.
                            If PERC’s activities are restricted under this provision, the Secretary of Commerce is to
                            conduct the price analysis again 180 days later. PERC’s activities are to be restricted until
                            the price index excess falls to 10.1 percent or less. PERC, in its comments on the report,
                            provided information that propane prices have not approached the statutory threshold that
                            would require a limitation on PERC’s consumer education programs.




                            Page 24                                                                   GAO-03-762 Propane
examining whether PERC’s operation, in conjunction with the cumulative
effects of market changes and federal programs, has had an effect on
propane consumers. In preparing this report, Commerce is required to
consider whether there have been changes in the proportion of propane
demand attributable to various market segments. In addition, the
Commerce Department is required to consider whether there have been
long-term and short-term effects on propane prices as a result of PERC’s
activities and federal programs. If the Commerce Department determines
that there has been an adverse effect on consumers, the Secretary is to
include recommendations for correcting the situation. According to
Commerce Department officials, however, the department has not
completed any of the required analyses or reports because it was unaware
of that responsibility.

The Secretary of Energy also has an oversight role in PERC’s programs
and activities. PERC is required to submit its annual budget to DOE, and
DOE may recommend activities and programs it considers appropriate.
However, DOE has not conducted in-depth reviews of PERC’s budget and
has not provided any recommendations to PERC regarding its programs
and activities because it does not believe it has a role in the propane
market.10 DOE is also authorized to request reports on PERC’s activities, as
well as reports on compliance, violations, and complaints regarding the
implementation of the Propane Education and Research Act. However,
DOE has not requested such reports because it believes that the
Department of Commerce, not DOE, is responsible for PERC oversight.
Since DOE has not directly received any consumer complaints pursuant to
which it would take action, it has not considered it appropriate, or
necessary, to request reports on PERC activities or on compliance,
violations, or complaints. In addition, DOE has not monitored PERC’s
activities, or taken any other action, to determine whether propane
assessment costs are improperly being passed on to consumers. Finally,
DOE stated that it has incurred no oversight costs and that it was unaware
that it had authority under the Propane Education and Research Act to



10
   DOE noted only one instance in which it contacted PERC with questions about PERC’s
annual budget. In early 2001, DOE requested information from PERC concerning PERC’s
fiscal year 2000 budget. DOE was concerned that the budget did not allocate at least 5
percent of that year’s funds for projects that benefit the agricultural industry as required by
the Propane Education and Research Act. In response, PERC explained that the Act did not
require the expenditures to be made each year, enabling PERC to carry forward and
aggregate on its books any unused agriculture funds, which remain available for future
agriculture projects. DOE did not take any further action.




Page 25                                                                 GAO-03-762 Propane
                                      seek reimbursement for oversight costs incurred by the federal
                                      government.

                                      Since its inception, PERC’s assessment rate, and therefore its revenue, has
                                      continued to increase. Table 3 shows the assessment rates, assessment
                                      revenues, and the percentages of the assessment revenues spent on each
                                      category of expenditures in each year from 1998 to 2003.

Table 3: PERC Assessment Revenues and Expenditures for 1998 to 2003

                    Assessment                          Communications
                     rate (cents     Assessment           and consumer     Research and                    Safety and
Year                 per gallon)        revenues          educationb(%) developmentb(%)                  trainingb (%)           Othera,b(%)
1998                         0.1      $ 8,581,329                    23              13                             16                    11
1999                         0.1        9,666,889                    25              16                             22                    17
2000                         0.1      10,012,106                     32              12                             19                    21
2001                         0.2      19,236,525                     49              12                             16                    13
2002                         0.3      29,526,723                     53               8                             17                    16
     c
2003                         0.4      38,000,000                     54              17                             13                    15
                                      Source: GAO analysis of PERC data.

                                      Note: All assessment revenues may not be spent in any given year but could be carried over to
                                      subsequent years if the revenues were not all spent. As a result, expenditures for the four categories
                                      may not total 100 percent. At the end of 2002, PERC had $5,163,370 in cash and cash equivalents
                                      and $12,457,904 in current and long-term investments.
                                      a
                                       Other includes agriculture (not less than 5 percent of the funds collected through assessments shall
                                      be used for programs and projects intended to benefit the agricultural industry), administrative (costs
                                      can not exceed 10 percent of the funds collected in any fiscal year), propane industry relations, and
                                      other miscellaneous items such as depreciation, and other administrative costs.
                                      b
                                       Rebates to state propane councils or similar entities (20 percent of the regular assessment collected
                                      by PERC in that state is rebated if the state has its own propane council or similar entity) may be
                                      included in all four expenditure categories.
                                      c
                                       Assessment revenue for 2003 is a budgeted projection. The expenditure percentages are based on
                                      the budgeted expenditures and do not include the budgeted expenditures for the state rebates since
                                      these rebates have not been finalized.


                                      Of its 2003 budget of $38 million, PERC budgeted about 54 percent for
                                      communications and consumer education, which in the past has included
                                      an advertising campaign that marketed and promoted propane. This
                                      advertising campaign has included television and radio advertisements to
                                      promote the safe, efficient use of propane as a preferred energy source.
                                      While the Propane Education and Research Act does not prohibit the use
                                      of funds for marketing and promotion activities, there is some indication
                                      in the legislative history that assessment funds were not intended to be
                                      used primarily for these purposes. Specifically, although PERC was
                                      modeled after agricultural check-off programs, a June 27, 1996, Senate
                                      report stated that, unlike the agricultural check-off programs that focused


                                      Page 26                                                                        GAO-03-762 Propane
                          on marketing and promotion, the emphasis of PERC’s propane assessment
                          was to be research and development.11 In 1996, the Propane Consumers
                          Coalition emphasized the importance of federal oversight in ensuring that
                          marketing and promotional programs designed to develop and preserve
                          markets for propane are not undertaken in the guise of educational
                          programs. In 1995 hearings, Congressman Dan Schaefer voiced his
                          concern that PERC not result in a federal government requirement that
                          customers pay for advertising a product the customers already use and
                          that may ultimately cause an increase in propane prices. Under the
                          Propane Education and Research Act, PERC is prohibited from taking any
                          action to pass the cost of the assessment along to consumers, but as a
                          result of the lack of federal oversight of PERC, the federal government has
                          no assurance that this has not occurred. Moreover, the federal government
                          has no measure of the effect of PERC’s operation on propane consumers
                          and is not in a position to recommend appropriate programs and activities.


EIA Propane Information   Over time, EIA has tried to improve its propane market information
May Be Enhanced           available to the users of its data; however, some opportunities may exist
                          for further enhancement of the propane information provided. For
                          example, although one of EIA’s primary purposes is to provide the public
                          with information on energy, including propane, EIA does not collect
                          propane price information that is reportable for all states at all times of the
                          year or provide information to consumers on different price stabilization
                          options. In addition, EIA is working to address concerns that EIA
                          inventory data used by industry to make purchasing and pricing decisions
                          are incomplete. According to EIA officials, propane consumers constitute
                          a relatively small portion of energy consumers, and, because EIA has
                          limited resources, it has chosen to focus its efforts on more widely used
                          energy sources. EIA may need to reassess the propane market information
                          it provides, although the potential benefit of any improvements must be
                          weighed against the potential cost.




                          11
                               S. Rep. No. 104-298 (1996).




                          Page 27                                                    GAO-03-762 Propane
Price Information Is Collected   The EIA State Heating Oil and Propane Program (SHOPP), a joint effort
Only for Certain States During   between state energy offices in the 24 participating states12 and DOE’s EIA,
the Winter                       collects heating oil and propane pricing data in Midwestern and
                                 Northeastern states. This program was originally established in the 1970s
                                 to collect heating oil information. EIA began to collect propane price
                                 information in 1990 in response to a price spike during particularly cold
                                 weather in December 1989 in the Northeast and Midwest areas of the
                                 country. According to EIA, their analysis of energy markets during periods
                                 of tight supply prove that readily available, state specific information on
                                 prices is one factor that can calm energy markets and work to prevent
                                 higher price spikes. However, because only 24 states participate in
                                 SHOPP, this type of price information is not available for all states, even
                                 though other states also have residential propane consumers who
                                 experience price spikes. For example, in response to high propane prices
                                 in New Mexico, the New Mexico Public Regulation Commission passed a
                                 resolution in 2001 requesting an investigation into the adequacy of
                                 propane gas supplies and to study the merits of regulating prices. In
                                 addition, for those states that are included in the program today, data are
                                 only available for the winter heating season. In implementing the
                                 collection of propane price information, EIA decided to limit the propane
                                 information data it collected to states in the Northeast and Midwest, most
                                 of which were already participating in heating oil price collection. Since
                                 this program has a limited budget of $275,000 per year, EIA stated that
                                 without additional funding, it could not expand the program to include
                                 prices for additional states or for additional months.

EIA Does Not Provide             EIA does not provide any information regarding residential propane price
Information on Price             stabilization programs, such as fixed-price options. For example, the EIA
Stabilization Options            consumer information brochure, Propane Prices: What Consumers
                                 Should Know, does not mention price stabilization options. EIA does
                                 include a section discussing the reason price spikes may occur but it offers
                                 no information on alternatives for consumers to consider to potentially
                                 protect themselves from the possibility of price spikes. Alternatively, EIA’s
                                 information brochure, Residential Heating Oil Prices: What Consumers
                                 Should Know—in a section called “What can you do to lower your heating
                                 oil bill?”—does discuss the use of price stabilization options as a


                                 12
                                  SHOPP states collecting propane prices include Connecticut, Maine, Massachusetts, New
                                 Hampshire, Rhode Island, Vermont, Delaware, Maryland, New Jersey, New York,
                                 Pennsylvania, North Carolina, Virginia, Indiana, Iowa, Kentucky, Michigan, Minnesota,
                                 Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin. In addition, the
                                 District of Columbia collects heating oil prices under SHOPP.




                                 Page 28                                                          GAO-03-762 Propane
                                mechanism to help keep costs down, thus protecting against price spikes.
                                In addition, EIA does not collect price information on price stabilization
                                programs as part of its existing price collection surveys. However, in at
                                least one state, this type of information is collected. In the summer of each
                                year the state of Vermont provides information on different price
                                stabilization options, including the averages and ranges for cap prices,
                                fixed prices, and pre-buy programs for the upcoming winter heating
                                season. If EIA could provide similar information on a wider scale, more
                                consumers may be better informed. Data on different price options could
                                help residential propane consumers determine which price stabilization
                                options are most economical over the long term and which would best fit
                                their needs.

EIA Is Working to Address       In general, EIA uses its knowledge of the energy market and input from
Industry Concerns That          users of its data to decide what data to collect and distribute but does not
Inventory Data Are Incomplete   routinely carry out a formal needs assessment to determine the propane
                                data it should collect and report according to EIA officials. EIA tracks
                                propane inventory maintained at the primary storage centers but does not
                                track secondary, tertiary or petrochemical storage according to EIA
                                officials. Some state energy office and industry representatives reported
                                that EIA data do not provide an accurate picture of the inventory in the
                                propane market. One of the concerns raised by several industry
                                representatives is the lack of data describing the potentially substantial
                                petrochemical industry propane storage. Although petrochemical
                                companies may hold substantial inventories of propane for their feedstock
                                requirements, little is known about the amount of stored propane they
                                hold even though in certain situations petrochemical companies may sell
                                substantial amounts of stored propane within the retail market. Currently,
                                EIA collects primary-stock data, but since petrochemical inventories are
                                considered a secondary stock, the petrochemical inventories are not
                                collected. The petrochemical industry (the second largest purchaser of
                                propane in the market, according to the most recent data provided by EIA)
                                periodically resells propane, which affects inventory levels and market
                                prices. Thus, an incomplete measurement of propane inventory levels may
                                lead to higher prices because supply, as reflected by inventory levels, is
                                perceived to be less than the actual supply available in inventory.

                                EIA recently made some improvements to how it reports propane
                                inventory data and also has plans to increase the propane data it
                                disseminates. First, starting April 9, 2003, EIA began reporting propane
                                inventory data year round on a weekly basis. In the past, certain data were
                                available only during the heating season, but as a result of this change
                                propane supply data will be reported weekly. Second, because propane


                                Page 29                                                   GAO-03-762 Propane
                      inventory data has included propylene—a gas recovered from the natural
                      gas stream prior to propane being supplied to consumers—EIA recently
                      started listing propylene separately, so users of the data could determine
                      the actual propane inventory immediately available for distribution to
                      residential users. Third, beginning in 2004, according to EIA, it plans to
                      provide additional propane information, including export and product
                      supply data, on a weekly basis, which will make propane data comparable
                      to data on other petroleum products.


                      Propane prices can be as volatile and as unpredictable as the weather that
Conclusions           drives residential consumers’ demand for propane. While prices can move
                      sharply up and down, it is the drastic price spikes upward that grab the
                      attention of consumers, particularly those low-income consumers who
                      represent a significant portion of residential propane users and are the
                      most vulnerable to price increases. Compounding this problem is the fact
                      that prices typically spike when more propane is needed to combat cold
                      weather. While price stabilization options exist to cope with price
                      fluctuations, many consumers may not have opportunities to participate in
                      these programs. This presents a challenge to government programs
                      designed to inform consumers and those that assist low-income
                      consumers with energy needs. Efforts that increase propane market
                      information and make price stabilization options more available to
                      consumers, particularly low-income households, may help mitigate the
                      impact of sudden price spikes to some degree. EIA will have to weigh the
                      benefits of enhancing the information it provides to propane market
                      participants against a backdrop of limited resources. In addition, low-
                      income assistance programs face the challenge of meeting client needs
                      with uncertain and declining federal resources that make it increasingly
                      difficult to mitigate the impact of price spikes. Finally, it is not clear what
                      impact, if any, the federal government could have on the propane market
                      through its oversight of PERC operations because the federal government
                      has not provided active oversight of PERC.


                      We recommend that the Secretary of Commerce direct the department to
Recommendations for   complete its required reports analyzing changes in propane prices and
Executive Action      examining the effects of PERC’s operation.




                      Page 30                                                     GAO-03-762 Propane
                     In addition, we recommend that the Secretary of Energy do the following:

                     •   Provide more active oversight of PERC, specifically in its review of
                         PERC’s annual budget plan to better position the department to make
                         recommendations regarding appropriate PERC programs and activities
                         as called for in the Propane Education and Research Act of 1996.

                     •   Direct the Administrator of EIA to study the potential cost and benefits
                         of continuing to improve EIA’s propane market information.
                         Consideration should be given to improving information for residential
                         consumers regarding prices and different purchasing options as well as
                         continuing to address industry concerns regarding inventory data.


                     We provided Commerce, DOE and PERC with a draft of this report for
Agency Comments      review and comment. Commerce had no comments on the technical
and Our Evaluation   content of the report. Further, the Secretary of Commerce stated that he
                     has directed his staff, starting in 2003 and regularly according to the
                     reporting cycle, to prepare reports analyzing changes in propane prices
                     and examining the effects of PERC’s operations and related developments
                     on propane consumers. (See app. III for the Department of Commerce’s
                     comments.)

                     Three DOE offices—the Office of Energy Efficiency and Renewable
                     Energy, EIA, and the Office of Fossil Energy—reviewed the report. The
                     Office of Energy Efficiency and Renewable Energy agreed with the report
                     and provided no comments. EIA generally agreed with the report and
                     provided technical clarifications and observations. We made these
                     changes as appropriate. In addition, EIA suggested the following language
                     concerning our recommendation on how EIA might improve its data
                     collection efforts:

                               In light of the limited scope of data collection efforts by the EIA,
                               due primarily to limited available resources, the potential exists for
                               some level of additional funding for enhancement of propane data
                               collection efforts through the Propane Education & Research Act
                               of 1996. Potential funding options could be modeled after existing
                               programs administered by the EIA, such as the State Heating Oil
                               and Propane Program (SHOPP), where each year individual states
                               apply for grant money from EIA to collect heating oil and propane
                               price data from Midwestern and Northeastern states. The program
                               enlists a cooperative agreement between the EIA and individual
                               state energy offices that collect and forward heating oil and



                     Page 31                                                      GAO-03-762 Propane
          propane price data to the EIA for publication. Within this
          framework, two options are available. First, PERC could provide
          funds or grant money directly to states with the intent of
          expanding the survey to include additional states and/or additional
          data. These states would work with the EIA as currently done in
          SHOPP. PERC funding could expand total resources available to
          the states and still possibly free up a portion of the resources EIA
          currently contributes to the states, which could be then be used to
          strengthen parts of the propane effort within EIA. Alternatively, if
          permitted within the PERC framework, funding could be provided
          directly to EIA which would then incorporate the funds into its
          existing state grants program. Either of these options would
          provide the needed resources to improve information for such
          items as the collection of wholesale and residential prices on a
          year-round basis for additional states beyond the current level of
          24, provide for information about the different purchasing options
          afforded propane consumers, as well as to provide for continuing
          efforts to enhance inventory data.

We do not consider it necessary to expand our recommendation to include
this level of detail. While we believe that EIA could potentially improve
propane information for consumers, we believe the manner in which EIA
funds such efforts is a decision best left to the Department of Energy and
Congress.

DOE’s Office of Fossil Fuels (the DOE office responsible for DOE support
to propane-related activities such as PERC) generally agreed with the
report’s findings relating to the factors that impact propane prices and the
pricing options available to propane consumers to mitigate propane price
swings, but disagreed with the report’s findings and recommendations
regarding DOE’s role and responsibilities under the Propane Education
Research Act of 1996. The Office of Fossil Fuels commented that the Act
conveys PERC oversight responsibility to the Department of Commerce.
We agree that the Department of Commerce has oversight responsibilities
and our report already discusses these responsibilities. We also agree that
the Act does not require DOE to take specific oversight actions. However,
we believe that DOE has an oversight role in PERC’s programs and




Page 32                                                     GAO-03-762 Propane
activities, as reflected in several provisions of the Act.13 We have added
language in the report that clarifies this distinction. The Act authorizes the
Secretary to request PERC to submit reports on its activities as well as
reports on compliance, violations, and complaints regarding
implementation of the Act. The Office of Fossil Fuels commented that to
date, the department has not directly received any substantive public
complaints pursuant to which it would take such action. However, we do
not believe that the Secretary’s role is limited to requesting reports from
PERC only if DOE receives substantive public complaints. In addition, the
Office of Fossil Fuels commented that the Act does not authorize, or
require, the Secretary of Energy to approve the PERC budget. We agree;
however, we believe that DOE could take a more active role in reviewing
PERC’s budget and making recommendations, as authorized by the Act.
The Office of Fossil Fuels commented that DOE does review PERC’s
budget and makes recommendations to PERC regarding its programs and
activities. The Office of Fossil Fuels stated it had expressed concerns that
PERC’s fiscal year 2000 budget did not allocate at least 5 percent of that
year’s funds for projects that benefit the agriculture industry. In response,
PERC explained that the Act does not require that the mandated
agriculture expenditures be made each year, enabling PERC to carry
forward and aggregate on its books any unused agriculture funds, which
remain available for future agriculture projects. DOE did not question
PERC’s explanation that the Act does not require that the mandated
agriculture expenditures be made each year, nor did DOE make any
recommendations. To our knowledge, this is the only oversight action that
DOE has taken, and we have included a note in our report discussing this
action. Finally, the Office of Fossil Fuels commented that DOE has no



13
  The Act: requires PERC to annually reimburse the Secretary of Energy for costs incurred
by the federal government relating to PERC (15 U.S.C. § 6404(j)); requires PERC to
annually submit its proposed budget to the Secretary of Energy who may then recommend
appropriate programs and activities (15 U.S.C. § 6404(k)); states that the Secretary of
Energy shall receive notice of PERC meetings and may require reports on PERC activities,
as well as reports on compliance, violations, and complaints regarding implementation of
the Act (15 U.S.C. § 6404(l)); states that PERC may recommend changes in the Act or other
statutes that would further the act’s purposes to the Secretary of Energy (15 U.S.C. § 6407);
requires the Secretary of Commerce to make its annual analysis of changes in the price of
propane relative to other energy sources available to the Secretary of Energy, as well as to
Congress and the public (15 U.S.C. § 6408(a)); requires PERC to inform the Secretary of
Energy, along with Congress, of any restriction of its activities resulting from a propane
price index exceeding a certain amount (15 U.S.C. § 6408(b); and requires the Secretary of
Commerce to submit its biannual report (the Secretary of Energy may request a report
more often than every two years) examining the effect of PERC’s operations to the
Secretary of Energy, as well as to Congress (15 U.S.C. § 6411).




Page 33                                                               GAO-03-762 Propane
responsibility under the Act to ensure that propane assessment costs are
not passed on to consumers. Further, it stated that the section of the Act
dealing with this issue, Section 10, does not assign this responsibility to
anyone. We agree that the section of the Act dealing with this issue does
not specifically assign this responsibility to DOE or to Commerce.
However, the Secretary of Energy is authorized to require reports on
PERC activities and compliance with the Act. This could include reports
on compliance with the requirement in the Act that PERC not take any
action to pass the cost of the propane assessment along to consumers.

PERC agreed with our assessment of the propane retail marketers’
consumer price stabilization programs and the marketers’ experience with
these programs, but disagreed with our assessment of propane supply and
demand characteristics and the need for federal oversight of PERC. PERC
questioned the validity of our assessment that propane supply and demand
are inelastic. We believe we have correctly characterized the national
market for propane demand and supply as being relatively inelastic,
particularly as it relates to residential demand. As we noted in the report,
propane is a basic necessity used for home heating (which PERC also
states in its response) and switching to alternative sources of heat is costly
and not practical during the relatively short period of time in which price
spikes occur. In addition, there is no readily available source of
incremental production that can increase propane supply when needed,
and there are limitations in the capacity of the nation’s propane storage
and transportation systems. As a result, propane demand and supply are
relatively inelastic for residential consumers.

PERC questioned the value of our recommendations regarding federal
oversight of PERC. We believe our recommendations that the Departments
of Commerce and Energy carry out their oversight roles and
responsibilities reflect the congressional determination under the Act that
such oversight is both appropriate and necessary. Given recent volatility in
prices and congressional concern about the impact of PERC activities on
propane prices, these agencies should conduct more active oversight. We
revised our report to include PERC’s statement that the wholesale price of
propane relative to an aggregate fuel price does not exceed the statutory
threshold that would limit its funding of consumer education programs,
and we agree that the threshold has not been exceeded. Nonetheless, we




Page 34                                                    GAO-03-762 Propane
believe that the federal government should provide more oversight of
PERC to monitor and assess the effect of its operations on propane
consumers. (See app. IV for PERC’s comments and our response.)


As agreed with your office, unless you publicly announce the contents of
this report, we plan no further distribution of it until 30 days from the date
of this letter. At that time, we will send copies of this report to the DOE
Secretary, Commerce Secretary, PERC President, and other interested
parties. We will make copies available to others upon request. In addition,
the report will be available at no charge at GAO’s Web site at
http:www.gao.gov.

Questions about this report should be directed to me at (202) 512-3841.
Key contributors to this report are listed in appendix V.

Sincerely yours,




Jim Wells
Director, Natural Resources
 and Environment




Page 35                                                    GAO-03-762 Propane
              Appendix I: Objectives, Scope, and
Appendix I: Objectives, Scope, and
              Methodology



Methodology

              In our study of the propane market, we addressed (1) the factors that
              cause propane price spikes, (2) the options for residential consumers to
              mitigate the effects of price spikes, and (3) the federal government’s role
              in the propane market.

              To address these objectives, we reviewed pertinent documents and
              obtained information and views from a wide range of officials in both
              government and the private sector. Our review encompassed the propane
              market from production as it moves through the distribution system to
              residential sales to consumers. We obtained information and views from
              federal and state agencies and from propane industry officials. We
              interviewed analysts from the Department of Energy’s EIA, the Federal
              Energy Regulatory Commission, the Department of Transportation, the
              Department of Commerce, the Department of Justice, the Federal Trade
              Commission, the Securities Exchange Commission, and the Commodities
              Futures Trading Commission. In addition, we obtained information and
              interviewed officials from Health and Human Services’ Low Income Home
              Energy Assistance Program and the Department of Energy’s Energy
              Efficiency and Renewable Energy Department. To gain a state perspective,
              we interviewed officials from the National Association of State Energy
              Officials, various states energy offices, state attorney generals, and
              officials from state low-income assistance programs. We also discussed
              propane prices and market dynamics with representatives from various
              industry organizations, including the National Propane Gas Association,
              regional NPGA groups, American Petroleum Institute, American Gas
              Association, and Propane Education and Research Council as well as
              experts within the market. In addition, we obtained information and views
              from five of the largest propane corporations and a number of smaller
              independent or corporate retail outlets, which sell within the residential
              consumer market; a large processor/distributor; and a recognized
              organization knowledgeable in propane markets.

              In addition to our interviews, we obtained and analyzed propane price
              data supplied by EIA and a major corporate retailer. EIA provided
              historical retail and market (wholesale) prices, while the retailer provided
              comparable historical prices for fixed-price contracts offered to
              residential consumers. To determine the residential price volatility of the
              propane market, EIA provided monthly retail prices from 1993 to 2003. To
              determine the reasons for price spikes, we reviewed literature on propane
              markets and discussed the market with industry experts. We also
              contacted state energy office officials and state attorney general offices to
              get their views of propane prices and markets.



              Page 36                                                   GAO-03-762 Propane
Appendix I: Objectives, Scope, and
Methodology




To identify the uses of, and availability of, various price stabilization
options, we interviewed industry groups, five multistate residential
propane corporations and various independent or corporate retail outlets
within three states—New Mexico, Vermont, and Minnesota. We chose
these states because several officials from government and industry
identified Vermont and Minnesota as states representing the Northeast and
the Midwest, respectively. In addition, to provide balance to the state
choices, we selected New Mexico from among the states that produce
propane. To assess whether consumers might benefit from price
stabilization programs, we compared wholesale market prices as reported
by EIA for Mont Belvieu, Texas, from June 1998 through March 2003, to
fixed-price contract values offered by a major, multistate propane
marketer during the summer months. After making assumptions regarding
the “typical” residential consumers, we applied these fixed prices to the
“typical” consumption levels per year. To determine comparable
consumption behavior for consumers buying at the market price, we based
their purchases on the percentage of national demand purchased for each
year (such that the total volume of propane purchased over the 5 years
was the same under both methods). We compared the two purchasing
behaviors to determine the yearly difference between different behaviors
in our hypothetical example. In addition, we collected and analyzed
historical funding data on LIHEAP and collected information on the
allocation of these funds through the block grant process. In addition,
LIHEAP provided information for the past two years on state low-income
energy assistance programs. We also collected and analyzed DOE’s
weatherization funding from 1982 to 2003. To identify states’ views on
improvements to the low-income energy assistance programs, we
interviewed state low-income energy assistance officials. For state
funding, we acquired data from the National Center for Appropriate
Technology, which serves as LIHEAP’s data clearinghouse.

Finally, to examine the federal government’s role in the propane market,
we obtained documents and interviewed officials at federal agencies
responsible for programs that have a role in some aspect of the propane
market. To determine PERC’S mission, we reviewed the Propane
Education and Research Act, which established PERC and various
congressional records dealing with PERC. We also interviewed officials
from PERC regarding PERC’s mission, budgets, and allocations from 1998
to 2002 as well as DOE and Commerce Department officials regarding
their oversight roles and responsibilities. To determine EIA’s data
collection and distribution responsibilities, we interviewed EIA analysts
and reviewed publicly available information. We also interviewed state
energy office officials and industry officials to identify improvements that


Page 37                                                   GAO-03-762 Propane
Appendix I: Objectives, Scope, and
Methodology




could be made regarding EIA’s data collection and distribution on propane
markets.

We performed our review from July 2002 through May 2003 in accordance
with generally accepted auditing standards. However, we were unable to
access the accuracy of the propane prices and other information provided
by the EIA, LIHEAP, or industry sources as no resources exist to verify
this data.




Page 38                                                GAO-03-762 Propane
             Appendix II: Funding for LIHEAP and DOE
Appendix II: Funding for LIHEAP and DOE
             Weatherization



Weatherization

             The federal government provides funding through two block grant
             programs: 1) the Low-Income Home Energy Assistance Program (LIHEAP)
             managed by the Department of Health and Human Services (HHS)
             provides grants to states to fund fuel payment assistance to low-income
             households and for making their homes more energy efficient, and (2) the
             DOE Weatherization Assistance Program to make dwellings more fuel
             efficient in the long term for low-income households. In fiscal year 2002,
             federal funding for LIHEAP $1.8 billion (combined regular and emergency
             funds) was about 8 times greater than the $230 million provided for the
             longer-term DOE Weatherization. Since LIHEAP’s establishment in 1981,
             the program’s appropriations have faced significant reductions. The 2002
             appropriation was $1.8 billion, which is about a 40 percent decrease from
             its initial funding level after allowing for inflation. Federal funding for the
             DOE Weatherization Assistance Program, established in 1976, has
             fluctuated from $240 million in 1982, up to $395 million in 1983, down to
             $124 million in 1996, and back to $230 million in 2002, after allowing for
             inflation. However, because the HHS LIHEAP appropriations are so
             overwhelmingly larger than the DOE Weatherization appropriations,
             combined federal funding from both programs for 2002 was still 40 percent
             less than the 1982 level. Table 4 includes the total Federal LIHEAP
             appropriations, the total DOE Weatherization appropriations, and the
             combined totals for both LIHEAP and Weatherizaton (in constant dollars)
             by fiscal year.




             Page 39                                                    GAO-03-762 Propane
                                        Appendix II: Funding for LIHEAP and DOE
                                        Weatherization




Table 4: Federal Appropriations for Health and Human Services Low Income Home Energy Assistance Program and
Department of Energy Weatherization Assistance Program for Fiscal Years 1982 through 2002 (Dollars in Thousands)

                          LIHEAP                                     DOE Weatherization
                                                                                                                              Total
                                                                                                                  Total percentage
                           Constant Percentage of                   Constant Percentage of                     Constant     of 1982
Year     Appropriations 2002 dollars 1982 dollars Appropriations 2002 dollars 1982 dollars                  2002 dollars    dollars
1982         $1,875,000   3,125,000          100       $144,000      240,000          100                     3,365,000         100
1983          1,975,000   3,185,484          102        245,000      395,161          165                     3,580,645         106
1984          2,075,000   3,192,308          102        190,000      292,308          122                     3,484,616         104
1985          2,100,000   3,134,328          100        191,100      285,224          119                     3,419,552         102
1986          2,010,000   2,955,882            95       182,100      291,324          121                     3,247,206          96
1987          1,825,000   2,607,143            83       161,300      230,429            96                    2,837,572          84
1988          1,531,840   2,127,556            68       161,300      224,028            93                    2,351,584          70
1989          1,383,200   1,844,267            59       161,300      215,067            90                    2,059,334          61
1990          1,492,950   1,914,038            61       162,000      207,692            87                    2,121,730          63
1991          1,805,000   2,228,395            71       198,900      245,556          102                     2,473,951          74
1992          1,500,000   1,807,229            58       194,000      233,735            97                    2,040,964          61
1993          1,346,030   1,583,565            51       185,400      218,118            91                    1,801,683          54
1994          1,735,408   1,994,722            64       206,800      237,701            99                    2,232,423          66
1995          1,419,000   1,594,382            51       214,800      241,384          101                     1,835,766          55
1996          1,080,000   1,200,000            38       111,700      124,111            52                    1,324,111          39
1997          1,215,000   1,320,652            42       120,800      131,304            55                    1,451,956          43
1998          1,160,000   1,247,312            40       124,800      134,194            56                    1,381,506          41
1999          1,280,000   1,347,368            43       133,000      140,000            58                    1,487,368          44
2000          1,844,000   1,901,031            61       135,000      139,175            58                    2,040,206          61
2001          1,856,000   1,874,747            60       153,000      154,545            64                    2,029,292          60
2002          1,800,000   1,800,000            58       230,000      230,000            96                    2,030,000          60
                                        Source: GAO analysis.

                                        Note: GAO analyzed annual HHS LIHEAP regular and emergency appropriation data provided by the
                                        Congressional Research Service as well as DOE-provided annual weatherization appropriation data.




                                        Page 40                                                                  GAO-03-762 Propane
                                         Appendix II: Funding for LIHEAP and DOE
                                         Weatherization




                                         When combined with the net effect of annual LIHEAP grant carry-over
                                         funds,1 HHS leveraging incentive awards,2 and HHS REACH grants,3 the
                                         Federal government provided about 54 percent of the total LIHEAP
                                         funding available to the states in 2002.4 For example, the combination of
                                         2002 federal funds of more than $1.7 billion with state funds of more than
                                         $1.5 billion allowed states to provide eligible low-income households with
                                         almost $3.3 billion in LIHEAP benefits. However, the degree of state
                                         participation varies from 0 percent to 79 percent, with 9 states
                                         contributing more than half of the total funds used to fund LIHEAP
                                         activities in their states for fiscal year 2002, as shown in table 5.

Table 5: Total Federal Funds and State Supplemental Funds Available by State for Fiscal Year 2002 LIHEAP Activities

                                    Federal          State Supplement                                            Federal funds as
                                           a
State                        LIHEAP funds                   to LIHEAPb                 Total all funds       percent of total funds
Alabama                         $15,424,432                  $5,026,010                  $20,450,442                             75
Alaska                            7,275,559                   6,501,634                   13,777,193                             53
Arizona                           8,613,025                  10,627,312                   19,240,337                             45
Arkansas                         10,847,192                     349,197                   11,196,389                             97
California                       71,332,158                264,628,000                   335,960,158                             21
Colorado                         30,932,942                  21,473,836                   52,406,778                             59
Connecticut                      37,775,387                  24,471,218                   62,246,605                             61
Delaware                          5,108,405                   1,132,463                     6,240,868                            82
Dist. of Col.                     6,041,751                   3,324,000                     9,365,751                            65
Florida                          20,558,541                   4,602,435                   25,160,976                             82
Georgia                          19,997,809                  13,302,172                   33,299,981                             60
Hawaii                            1,809,061                           0                     1,809,061                           100
Idaho                            11,689,651                     354,804                   12,044,455                             97
Illinois                        104,631,043                  74,371,237                  179,002,280                             58
Indiana                          47,744,961                   6,676,010                   54,420,971                             88
Iowa                             30,169,525                   4,971,043                   35,140,568                             86



                                         1
                                           42 U.S.C. § 8626 allows states to carry over up to 10 percent of their LIHEAP block grant
                                         into the next year.
                                         2
                                          42 U.S.C. § 8626a authorizes the Secretary to provide supplementary funds to states that
                                         have acquired non-federal leveraged resources for the LIHEAP program.
                                         3
                                          42 U.S.C. § 8626b authorizes the Secretary to provide some funds to states in support of
                                         Residential Energy Assistance Challenge activities that (1) minimize health and safety risks
                                         that result from high energy burdens on low-income Americans; (2) prevent homelessness
                                         as a result of inability to pay energy bills; (3) increase the efficiency of energy usage by
                                         low-income families; and (4) target energy assistance to individuals who are most in need.
                                         4
                                          This analysis includes only LIHEAP funding since state funding for weatherization was
                                         not available.




                                         Page 41                                                               GAO-03-762 Propane
                                    Appendix II: Funding for LIHEAP and DOE
                                    Weatherization




                               Federal           State Supplement                                               Federal funds as
                                      a                           b
 State                  LIHEAP funds                    to LIHEAP                    Total all funds        percent of total funds
 Kansas                     15,291,178                            0                      15,291,178                             100
 Kentucky                   26,487,237                    2,699,898                      29,187,135                              91
 Louisiana                  14,900,216                    7,466,404                      22,366,620                              67
 Maine                      23,475,477                   10,894,158                      34,369,635                              68
 Maryland                   29,301,538                   47,536,255                      76,837,793                              38
 Massachusetts              76,247,501                   55,721,189                     131,968,690                              58
 Michigan                   99,639,181                   33,563,111                     133,202,292                              75
 Minnesota                  72,199,490                   42,780,327                     114,979,817                              63
 Mississippi                12,327,623                    1,157,908                      13,485,531                              91
 Missouri                   38,450,066                      595,719                      39,045,785                              98
 Montana                    11,574,763                    3,544,445                      15,119,208                              77
 Nebraska                   16,402,504                            0                      16,402,504                             100
 Nevada                      4,742,990                    6,850,464                      11,593,454                              41
 New Hampshire              13,455,967                    8,241,766                      21,697,733                              62
 New Jersey                 72,227,107                 125,027,600                      197,254,707                              37
 New Mexico                  8,418,976                      500,000                       8,918,976                              94
 New York                  235,327,049                   76,563,749                     311,890,798                              75
 North Carolina             35,417,925                    2,540,147                      37,958,072                              93
 North Dakota               12,066,807                            0                      12,066,807                             100
 Ohio                      101,705,030                 180,135,447                      281,840,477                              36
 Oklahoma                   11,960,497                    1,886,642                      13,847,139                              86
 Oregon                     21,353,738                   27,801,181                      49,154,919                              43
 Pennsylvania              120,319,409                 184,518,237                      304,837,646                              39
 Rhode Island               13,566,678                    9,010,676                      22,577,354                              60
 South Carolina             12,947,229                            0                      12,947,229                             100
 South Dakota                9,456,522                    1,020,272                      10,476,794                              90
 Tennessee                  23,152,034                            0                      23,152,034                             100
 Texas                      37,918,064                 169,000,000                      206,918,064                              18
 Utah                       13,022,184                      992,043                      14,014,227                              93
 Vermont                    10,122,804                    6,102,550                      16,225,354                              62
 Virginia                   34,371,058                    2,986,651                      37,357,709                              92
 Washington                 33,130,576                   17,924,704                      51,055,280                              65
 West Virginia              17,716,932                    3,000,000                      20,716,932                              86
 Wisconsin                  62,977,969                   32,299,363                      95,277,332                              66
 Wyoming                     5,401,231                            0                       5,401,231                             100
 Total                  $1,777,026,992              $1,504,172,277                   $3,281,199,269                            54%
Source: GAO analysis.

                                    Note: GAO analyzed HHS provided LIHEAP appropriation and funding data and LIHEAP
                                    Clearinghouse provided state supplemental funding data.
                                    a
                                     Includes regular and emergency LIHEAP appropriations as well as the net effect of appropriation
                                    funds carryovers, HHS leveraging incentive awards, and HHS REACH grants and excludes federal
                                    funds allocated to territories and Indian tribes.




                                    Page 42                                                                   GAO-03-762 Propane
Appendix II: Funding for LIHEAP and DOE
Weatherization




b
 Includes state and local level contributions, state system benefit and utility funds (rate assistance and
energy efficiency assistance), church and community fuel funds, bulk fuel discounts, and
miscellaneous contributions.


While historical data for all states were not available, LIHEAP’s data
clearinghouse, the National Center for Appropriate Technology, could
provide information for 2001 for most states. From 2001 to 2002, 32 states
(plus the District of Columbia) had an increase in their state LIHEAP
supplement, 1 state (New Mexico) had no change, and 10 states decreased
(information was not available for 7 states). Of the increases, 10 states
increased their supplements by a total of almost $474 million or almost 90
percent of the total increase. For example, Texas increased its LIHEAP
funding from about $4 million to $169 million from 2001 to 2002. Of the
decreases, one state, Maryland, represented 60 percent of the total
decreases (or about $9 million).




Page 43                                                                         GAO-03-762 Propane
              Appendix III: Comments from the Department
Appendix III: Comments from the
              of Commerce



Department of Commerce




              Page 44                                      GAO-03-762 Propane
                            Appendix IV: Comments from the Propane Education and
Appendix IV: Comments from the Propane
                            Research Council



Education and Research Council


Note: GAO’s comments
appear at the end of this
appendix.




See comment 1.




See comment 2.




See comment 3.




                              Page 45                                              GAO-03-762 Propane
                 Appendix IV: Comments from the Propane Education and
                 Research Council




See comment 4.




                   Page 46                                              GAO-03-762 Propane
               Appendix IV: Comments from the Propane
               Education and Research Council




               The following are GAO’s comments on PERC’s letter dated June 6, 2003.


               1. We believe we have correctly characterized the national market for
GAO Comments      propane demand and supply as being relatively inelastic, particularly
                  as it relates to residential consumers who were the focus of our
                  review. As we noted in the draft report, propane is a basic necessity
                  used for home heating and switching to alternative sources of heat is
                  costly and not practical during the relatively short period of time in
                  which price spikes occur. In addition, there is no readily available
                  source of incremental production that can increase propane supply
                  when needed, and there are limitations in the capacity of the nation’s
                  propane storage and transportation systems. As a result, propane
                  demand and supply are relatively inelastic for residential consumers.

               2. We agreed, as stated above, that propane is a basic and essential
                  energy commodity. The emphasis of this report is on the residential
                  propane market and not on the industrial propane market. The
                  petrochemical industry can readily substitute other feedstocks for
                  propane when propane prices are relatively high. However, residential
                  consumers are less likely to switch to alternative fuels, since many are
                  low income and retrofitting or replacing heating units can be time
                  consuming and expensive, and alternative energy fuels may be
                  unavailable in their area.

               3. We believe our recommendations that the Departments of Commerce
                  and Energy carry out their oversight roles and responsibilities reflect
                  the congressional determination under the Propane Education and
                  Research Act that such oversight is both appropriate and necessary.
                  Given recent volatility in prices and congressional concern about the
                  impact of PERC activities on propane prices reflected in the act, these
                  agencies should conduct more active oversight. We revised our report
                  to include PERC’s statement that the wholesale price of propane
                  relative to an aggregate fuel price has not exceeded the statutory
                  threshold that would limit its funding of consumer education
                  programs. Nonetheless, as we noted in the report, we believe that the
                  federal government should provide more oversight of PERC to monitor
                  and assess the effect of its operations on propane consumers. In
                  reference to “appendices I and II,” PERC provided more than one
                  version of the calculations and resulting graphics associated with this
                  analysis. We did not include PERC’s analysis because of the
                  uncertainty associated with the appropriate assumptions and
                  calculations to be used in conducting the analysis that the Department


                Page 47                                                 GAO-03-762 Propane
Appendix IV: Comments from the Propane
Education and Research Council




    of Commerce is required to complete. However, we agree with their
    overall conclusion that historically the statutory threshold appears not
    to have been exceeded.

4. We agree that price stabilization programs are offered in some areas
   and stated in the report that only a small percentage of propane
   residential customers participate in these programs (5 percent to 7
   percent of the national retail marketers’ customers). We also state that
   in some areas, the programs are not offered to consumers. One of the
   reasons retail marketers identified, as to why more consumers do not
   participate, is the difficulty in educating their customers about the
   benefits of these programs. Since one of PERC’s three mission areas is
   communication and consumer education, PERC could assist propane
   consumers and retail marketers by improving the consumers’
   knowledge of the costs and benefits of all propane price options.




 Page 48                                                  GAO-03-762 Propane
                   Appendix V: GAO Contacts and Staff
Appendix V: GAO Contacts and Staff
                   Acknowledgments



Acknowledgments

                   Jim Wells (202) 512-3841
GAO Contacts
                   Mark Gaffigan (202) 512-3168


                   In addition to the individuals named above, James W. Turkett, Gary
Acknowledgements   Malavenda, James Rose, Amy Webbink, Timothy Guinane, Katherine
                   Raheb, Nancy Crothers, and H. Lee Cagle made key contributions to this
                   report.




(360217)
                   Page 49                                               GAO-03-762 Propane
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