United States GA!0 General Accounting Office Washington, D.C. 20548 Resources, Community, and Economic Development Division B-278655 December 16, 1997 The Honorable Dale Bumpers United States Senate The Honorable Tom Daschle United States Senate The Honorable Marion Berry House of Representatives Subject: Energv Policv: Pronane Price Increases During the Winter of 1996-97 As requested, we are providing you with information on (1) the factors that caused the propane price increases during the 1996-97 heating season and (2) the options avdable to the government to cushion the potential effects of propane price increases on low-income residential consumers. We used this material to brief your offices on December 2, 1997 (see enc. I). In summary, several factors have been cited as causing or contributing to the sharply increased residential prices for propane in Arkansas, South Dakota, and elsewhere in the United States during the 1996-97 heating season. These factors include the cold weather, the need to dry wet crops in the Midwest, and the low inventory of propane going into that heating season. Other factors include pipeline problems and the fact that U.S. propane production did not rise much despite higher demand. Without imports, prices would likely have been higher. The federal government has two programs that offer several options to help cushion the effects of propane price spikes on low-income consumers: the Low-Income Home Energy Assistance Program (LIHEAP), which is administered by the Department of Health and Human Services (HHS), and the Weatherization Assistance Program, which is administered by the Department of Energy (DOE). In 1997, LMEAp’s appropriations were $1.2 billion, down from $2.1 billion in 1985. Expenditures for weatherization have also declined from $191 million in 1985 to $121 million in 1997. GAOLRCED-9%52R Propane Price Increases in the Winter of 1996-97 fS97sz5 B-278655 According to officials from the propane industry and from state and federal governments, there are several options for using LIHEAP funds, which are disbursed by HHS to states, that could help cushion the effects of propane price increases. LlHEAP’s funds could be used to purchase more propane during the summer when propane prices are lower.’ These funds could also be used to negotiate tied-price contracts during the summer as a hedge against potential price increases. However, the current federal appropriations cycle does not make funds available to LIHEAP until October 1, too late to take advantage of the lower prices in the summer. According to South Dakota and Arkansas LIHEAP officials, their funds are generally depleted between October and April. In addition, the funds can be used to implement the LIHEAP leveraging incentive program, which is designed to encourage state LIHEAP officials to adopt measures that could help LlHEAP’s recipients extend the use of their LIHEAP funds. Such measures could include, for example, negotiating fuel price discounts, paying cash to obtain discounts instead of paying by credit, or buying propane in the summer. States receive extra LIHEAP funds from HHS for the savings achieved through these programs. The Weatherization Assistance Program provides its recipients with such services as installing insulation and ventilation fans, performing heating and cooling tune-ups and modifications, and replacing units to improve energy efficiency and safety. These activities can increase home heating efficiency by up to 30 percent for the recipients, thus lowering the heating bill that they would otherwise pay. To prepare the information in this report, we reviewed the Energy Information Administration’s (EIA) study on the U.S. propane markets in the winter of 1996 97 and other data on propane from ELA, HHS’ documents on LIHEAP, and DOE’s documents on its weatherization program. In addition, we interviewed the relevant officials from these federal agencies and the propane industry as well as state officials in Arkansas and South Dakota. We also provided DOE and HHS with a draft of the contents of this report for review and comment. Both DOE and HHS agreed with our findings. We performed our review from September 1997 through November 1997 in accordance with generally accepted government auditing standards. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days from the date of this ‘For example, South Dakota’s LBIEAI? office saved an average of 59 cents per gallon over winter prices by purchasing propane in the summer for some of its clients during the 1996-97 heating season. 2 GAO/RCED-9%52R Propane Price Increases in the Winter of 1996-97 B-278655 letter. At that time, we will make copies available upon request. If you have any questions or need additional information, please call me at (202) 512-3841. Major contributors to this report include Charles W. Bausell, Jr.; Godwin M. Agbara; Jonathan T. Bachman; and Araceli Contreras Hutsell. Susan D. Kladiva Acting Associate Director Energy, Resources, and Science Issues Enclosure GAO/RCED-9%52R Propane Price Increases in the Winter of 1996-97 ENCLOSURE I ENCLOSURE I w Resources, Community, and Economic Development Division PROPANE PRICE INCREASES DURING THE WINTER OF 1996-97 Briefing for Staffs of Senators Tom Daschle and Dale Bumpers and Congressman Marion Berry GAO/WED-9%52R Propane Price Increases in the Winter of 1996-97 4 ENCLOSURE I ENCLOSURE I w Objectives l What factors caused the propane price increases during the heating season of 1996097? l What options are available to the government to cushion the potential effects of propane price spikes on low-income residential consumers? GAO/WED-9%52R Propane Price Increases in the Winter of 1996-97 .’ ENCLOSURE I ENCLOSURE I w Scope and Methodology to Determine Causes of Price Increases l Reviewed Energy Information Administration’s (EIA) study on the U.S. propane markets in the winter of - 1996-l 997 and EIA’s data on propane. l Interviewed industry and state officials in Arkansas atid South Dakota. l Our work focused on Arkansas and South Dakota. GAO/RCED-9%52R Propane Price Increases in the Winter of 1996-97 ENCLOSURE I ENCLOSURE I w Background on the South Dakota Market l Some South Dakota propane dealers have a market area of 40 miles from their bulk storage facilities. Their . market areas are limitedzby : their _ :*I transportation -. =.I- __.- =;.-:costs. :.....;;-.. . ::’ 7. _’- ._ . l (If-450 prop&e dea&rs. in South Dakota, about 99% had at least one other dealer within 40 miles of their facilities and 54% had at least 25 other dealers within 40 miles. GAO/RCED-98-52R Propane Price Increases in the Winter of 1996-97 ENCLOSURE I ENCLOSURE I GBJ Background on the Arkansas Market l As a safety measure, Arkansas passed a law limiting a propane dealer’s market area to 25 miles from their bulk storage - facilities. l Of 245 propane dealers in-Arkansas,- about 98% had at least one other dealer within 25 miles of their facilities and ,67% had at least 5 other dealers within 25 miles. GAO/RCED-9%52R Propane Price In&eases in the Winter of 1996-97 ENCLOSURE I ENCLOSURE I w Background on Causes of Price Increases 0 Retail prices rose sharply in Arkansas, South Dakota, and elsewhere in the U.S. during the 1996-97 heating season. l The spot price of propane doubled from the end of September to mid-December !996 at Conway, Kansas, a major trading hub supplying South Dakota. l The spot price of propane also rose, but not by as much, in-Mont Belvieu, Texas, a major trading hub supplying Arkansas. 9 GAOIRCED-9%52R Propane Price Increases in the Wmter of 1996-97 ENCLOSURE I ENCLOSURE I GA3 Residential Propane Prices, JW&I 994 to August 1997 Cents pet gallon 140 120 a0 .’ -..... .’ -. __..-.-.-._.--. .’ \ -.. : ._.- 60 .... ..-.-...- ..... .............. . ... +.-..-- .... .. . .... ..-. , . II94 l/95 l/96 l/97 Months United States Arkansas South Dakota ......._- ._.... Note: Price data for Ark. and S.D. are not published by EIA. Source: EIA. GAOLRCED-9%52R Propane Price Increases in the Winter of 1996-97 10 ENCLOSUlXE I ENCLOSURE I w Factors Causing Spike in Propane Prices During the Winter of 1996-97 l Demand and supply factors cited as causing or contributing to this price spike include l cold weather, l wet crops, l low inventory of propane, l production and import issues, and l pipeline problems. GAOIRCED-9%52R Propane Price Increases in the Winter of 1996-97 11 ENCLOSURE I ENCLOSURE I GAo Cold Weather and Wet Crops l Oct. and Nov. 1996 were 6% and 18% colder than normal, respectively. l At the same time, the need to dry wet crops in the Midwest increased demand. l Fearing possible winter shortages, marketers bought more propane early. l U.S. demand in Oct. 1996 was 12% higher than Oct. 1995, while demand in the Midwest was 32% higher. GAOIRCED-9%52R Propane Price hereases in the Whter of 1996-97 12 ENCLOSTJRE I ENCLOSURE I QW Lower Than Normal Inventory l inventory is typically built up between Mar. and Sept. l The Mar. 1996 inventory was the lowest for that month in more than 25 years due to cold weather inthe l-995-96 winter. l U.S. propane inventory at the end of Sept. 1996 was the third lowest ever at ‘the start of the winter season, and Midwest inventory was 22% below average at the end of Nov. 1996. GAO/RCED-9%52R Propane Price Increases in the Winter of 1996-97 ENCLOSURE I ENCLOSURE I w U S Propane Inventory, January 1994 to Juiy ;997 Barrels in thousands 60,000 - ” 1194 l/95 l/96 l/97 7197 Months U.S. total Midwest total Gulf Coast total (includes S.D.) (includes Ark.) . . ..I. Source: EIA. GAOLRCED-9%52R Propane Price Increases in the Winter of 1996-97 14 ENCLOSURE I ENCLOSURE I @D U .S. Production Up Slightly as Imports Increase l 1996 U.S. production did not rise much despite higher demand. l Propane production is a by-product of natural gas processing and petroleum refining.. . “$i. . .- 4: t,: - -,r l U.S. imports in:-1996.were 18% higher than 1995 and rose 65% from Sept. to Oct. 1996. l Without imports, prices would likely have been higher. GAO/RCED-9%52R Propane Price Increases in the Winter of 1996-97 15 ENCLOSURE I ENCLOSURE I GM U.S. Propane Production, J&WEH-~ 1994to July 1997 Barrels in thousands 40,000 L- 35,000 - 30,000 - 25,000 - 20,000 - 15,000 - 10,000 - l . . ..•- . . . . . . . . ..~....~~~---..~~~-~~....~..~....~..~~~...~~~..........~...~~-..~....~-~~. 5,000 - ._ ,[I l,:,l~l,l,l,l,l,l.l,l,l I , I a I, I. I, / , 1, I I l/94 l/95 1196 l/97 7197 Months U.S. total Midwest total Gulf Coast total - . . ..m Source: EIA. 16 GAOBCED-9%52R Propane Price Increases in the Winter of 1996-97 ENCLOSURE I ENCLOSURE I c2%3 U .S. Propane Imports, 1992-96 Barrels in thousands 50,000 40,000 30,000 20,000 10,000 0 - Source: EIA. GAOLRCED-9%52R Propane Price Increases in the Winter of 1996-97 17 ENCLOSURE I ENCLOSURE I GA-I Production Problem in Mexico l An explosion in July 1996 at a Mexican gas plant was cited by industry and state officials as contributing to the price spike _ for propane in the United States. l According to-industry sources, the .- explosion reduced Mexico’s production of propane by about- one-third, forcing .Mexico to become a major propane importer in the world market while it ceased exporting to the United States. GAO/RCED-9%52R Propane Price Increases in the Winter of 1996-97 ENCLOSURE I ENCLOSURE I w Pipeline Problems l Because the only pipeli.ne from Mont Belvieu to Conway exploded during the 1996-97 winter, propane was trucked . from Texas, which generally has higher production and inventory, to. Conway; this mode of transporting propane is more expensive than using a pipeline. l The higher spot prices at Conway than at Mont Belvieu contributed to price increases in South Dakota. GAO/EKED-9%52R Propane Price Increases in the Winter of 1996-97 ENCLOSURE I ENCLOSURE I w Pipeline Problems l Pipeline problems contributed to propane price increases in Arkansas, even though- it had a relatively mild winter. l The only pipeline connecting Arkansas to Mont Belvieu could not meet the demand in Arkansas because demand from all its shipping destinations exceeded its capacity. 20 GAO/RCED-9%52R Propane Price’Increases in the Winter of 1996-97 ENCLOSURE I ENCLOSURE I G!Q Scope and Methodology on Options to Cushion the Effects of High Prices l Reviewed documents and data on HHS’ Low-Income Home Energy Assistance Program (LIHEAP) and DOE’s . Weatherization Assistance Program. l Interviewebfederal officials and state officials in Arkansas and South- Dakota &ho implement these programs. l Interviewed industry officials in Arkansas and South Dakota. GAO/RCED-9%52R Propane Price Increases in the Winter of 1996-97 ENCLOSURE I ENCLOSURE I w Background on Options l Households in the Midwest spent about 40% more in the 1996-97 heating season on propane for home heating than normal. l The federal government has- two .. programs to help low-income consumers meet their home energy needs: l LIHEAP and l Weatherization Assistance Program. GAO/RCED-98-52R Propane Price Increases in the Winter of 1996-97 22 ENCLOSURE I ENCLOSURE I w Background on Options (continued) l LIHEAP, which gives block grants to states to help pay home energy bills, was created by the Low-Income Home - Energy Assistance Act of 1981. l In 1997, LIH-EAP’s appropriations were $1.2 billion, down from $2.1 billion in -1985. -. GAOLRCED-98-52R Propane Price Increases in the Winter of 1996-97 23 ENCLOSURE I ENCLOSURE I w Background on Options . l In 1996, 4.5 million househblds received average LIHEAP benefits of $158, down from 6.8 million households that had received _ . average benefits of $242 in 1985. l The Weatherization Assistance Program, created by;the 1976 Energy Conservation and Production Act, spent $121 million in 1997 on about 61,000 homes, down from $191 million in 1985 spent on about 97,000 homes. l Lower fuel bills result from weatherization. GAO/RCED-98-52R Propane Price Increases in the Winter of 1996-97 24 ENCLOSTJIRE r ENCLOSURE I W3 Options l Several options to cushion the effects of price increases were suggested by industry, state, and federal government . officials, including ., - l a summer fiH program,. l fix&-price’ &nt&s, a:- -. 3 l a leveraging incentive program, and l weatherization. GAO/RCED-98-52R Propane Price Increases ti. the Winter of 1996-97 25 ENCLOSURE I ENCLOSURE I G&J Summer Fill l Filling storage tanks in the summer can be cheaper due to lower prices, but the fuel must be paid for at fill-up time. - l How much more propane can be bought in a summer fill program--and how much the consumer benefits--depends on how much lower propane prices are in the summer than the winter. l Some interest income is forgone by the state when purchasing propane early. GAOIRCED-98-52R Propane Price Increases in the Winter of 1996-97 26 ENCLOSURE I ENCLOSURE I GQD Summer Fill l South Dakota’s LIHEAP office paid for summer fill for some of its elderly and handicapped clients in 1997. l South Dakota summer fill clients saved, on average, 13 cents per gallon and 59 cents per gallon, respectively, in the 199596 and 1996-97 heating seasons. l Arkansas’ LIHEAP office will consider summer fill in the future if a price spike like that of 1996-97 reoccurs. GAO/RCED-98-52R Propane Price Increases in the Winter of 1996-97 ENCLOSURE I ENCLOSURE I w Fixed-Price Contracts l Fixed-price contracts negotiated by a state guarantee a price as a hedge against price spikes, but dealers require - partial payment of the bill in advance. l How much the consumer benefits depends on how low the fixed price is and how’lmuch interest income is ‘forgone because of advance payment. l A mild winter could result in higher fuel bills under a fixed-nrice contract. GAOiRCED-98-52R Propane Price Increases in the Winter of 1996-97 28 ENCLOSURE I ENCLOSURE I w Fixed-Price Contracts l South Dakota’s LIHEAP office arranged fixed-price. contracts for some of its elderly and handicapped clients for the 1997-98 heating season. l Arkansas’ LIHEAP office will consider fixed-price contracts in the future if a price spike like that of 1996-97 reoccurs. GAO/RCED-98-52R Propane Price Increases in the Winter of 1996-97 29 ENCLOSURE I ENCLOSURE I GtcsQLeveraging Incentive Program l Under the LIHEAP leveraging incentive program, states can receive extra funds from HHS for taking actions to help lower fuel bills. for LIHEAP recipients. l In FY 1996, SD. LIHEAP..office received $44,000. in extra funds under LlHEAP’s leveraging incentive program, -mostly from propane summer fill. l Six other states took actions to lower propane bills. GAO/RCED-9%52R Propane Price Increases in the Water of 1996-97 ENCLOSURE I ENCLOSURE I w Leveraging Incentive Program Program description State Savings on propane Fuel Discount: LIHEAP Maryland _ Averaged about $200,000 officials negotiate with per year in savings for vendors for a discount on propane and other fuels behalf of LIHEAP from 1991 through 1994 customers. Discount Oregon. Averaged 10 cents per’ gallon Summer Fill: Fuel is Montana Cannot estimate savings purchased in the summer because program began to obtain the lowest summer of 1997 seasonal price for LIHEAP customers. GAO/RCED-9%52R Propane Price Increases in the Winter of 1996-97 31 ENCLOSURE I ENCLOSURE I @Q Leveraging Incentive Program (continued) Program description State Savings Cash prices: Lower cash North Dakota Averaged 10 cents per prices instead of credit gallon prices are paid. Vendor inspector fees: Minnesota About $800,000 was Fees collected from collected in FY 1993 and propane and oil dealers are FY 1994. used for weatherization and repairs of heating systems that have propane-. .. or oil furnaces. Donations: Donations are Vermont About $9,000 worth of made to LIHEAP recipients donations have been made from propane and oil annually. vendors as well as local organizations. GAO/RCED-9%52R Propane Price Increases in the Winter of 1996-9’7 32 ENCLOSURE I ENCLOSURE I w Weatherization l DOE estimates that weatherization can increase home heating efficiency by up to 30% for those served by the program, - thus lowering the heating bill that they would otherwise pay during price. spikes. l SD. and Ark.. LIHEAP officials believe that while using LIHEAP funds to help .pay fuel bills offers a short-term cushion against propane price spikes, weatherization offers a long-term cushion against them. GAO/RCED-98-52R Propane Price Increases in the Winter of 1996-9’7 33 ENCLOSURE I ENCLOSURE I GA3 Constraints on Options l LIHEAP funds are available for obligation on Oct. 1, too late for summer fill and/or fixed-price contracts that are _ negotiated in the summer. l LIHEAP’s appropriations cycle was changed from the federal FY (Oct. 1 to Sept. 30) to “program year” funding (July 1 to June $0) starting July 1, 1993 (F?L. 101-501, sec. 701). GAO/RCED-9%52R Propane Price Increases in the Winter of 1996-97 34 ‘ENCLOSURE I ENCLOSURE I GAQ Constraints l Program year fund.ing would have made LIHEAP funds available in the summer to negotiate summer fill and fixed-price - contracts. .. l According to HHS, the change wa implemented because money cou be made available to fund-both FY 1992 and program year 1993 simultane as called for in the legislation. GAO/RCED-98-52R Propane Price Increases in the Winter of 1996-97 35 ENCLOSURE I ENCLOSURE I GA3 Constraints l In 1994, the cycle was changed back to Oct. 1, to coincide with the federal FY (P L. 103-252, sec. 303). l Funds for weatherization are limited to 15% of the state’s total-funds for LIHEAP but can increase up to25% upon receiving a waiver from HHS. (141092) GAO/TXED-98-52R Propane Price Increases in the Winter of 1996-9’7 36 Ordering Information The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Energy Policy: Propane Price Increases During the Winter of 1996-97
Published by the Government Accountability Office on 1997-12-16.
Below is a raw (and likely hideous) rendition of the original report. (PDF)