oversight

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)

       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
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