Propane
Causes of Price Volatility, Potential Consumer Options, and Opportunities to Improve Consumer Information and Federal Oversight Gao ID: GAO-03-762 June 27, 2003More than 4.6 million residential households in the U.S., many with low incomes, rely on propane to heat their homes. Unfortunately, propane prices have been subject to major price spikes in two of the last three winters. Responding to congressional concern caused by these price spikes, GAO undertook a study to address the (1) factors that affect residential propane price volatility, (2) options available to propane consumers to mitigate price volatility, and (3) federal role in the propane market.
Propane price spikes are generally caused by the inability of propane supplies to adjust to unusual demand increases, such as those caused by especially cold winters. In addition, the lack of local propane storage and the constrained capacity of the distribution system can create bottlenecks in moving propane to consumers in periods of high demand. Potential options to help propane consumers deal with price spikes include programs to pre-buy propane at a certain price. Such price stabilization programs help consumers mitigate the impact of price volatility. Participants in such programs may pay higher or lower prices compared to those who buy propane at the market price but would not be subject to price volatility. However, the extent to which such programs have broader potential is unclear. In locations where such options are available, for various reasons, 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 consumers. But federal funding has declined, and the timing of funding availability generally does not allow participation in price stabilization programs. Improved information on such programs may be useful to consumers not facing other barriers. A number of federal agencies are involved to some extent in different aspects of the propane market, but some opportunities exist to improve their propane related roles. In 1996, the Congress authorized the establishment of the Propane Education and Research Council to provide programs for propane research and development, safety and training, and consumer education, with oversight from the Departments of Commerce and Energy, but that oversight has been insufficient. Also, the Department of Energy's Energy Information Administration could study the potential costs and benefits of continuing to improve the propane market information it provides to propane market participants.
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Report to the Honorable Tom Udall, House of Representatives:
United States General Accounting Office:
GAO:
June 2003:
Propane:
Causes of Price Volatility, Potential Consumer Options, and
Opportunities to Improve Consumer Information and Federal Oversight:
GAO-03-762:
GAO Highlights:
Highlights of GAO-03-762, a report to the Honorable Tom Udall, House
of Representatives
Why GAO Did This Study:
More than 4.6 million residential households in the U.S., many with
low incomes, rely on propane to heat their homes. Unfortunately,
propane prices have been subject to major price spikes in two of the
last three winters. Responding to congressional concern caused by
these price spikes, GAO undertook a study to address the (1) factors
that affect residential propane price volatility, (2) options
available to propane consumers to mitigate price volatility, and (3)
federal role in the propane market.
What GAO Found:
Propane price spikes are generally caused by the inability of propane
supplies to adjust to unusual demand increases, such as those caused
by especially cold winters. In addition, the lack of local propane
storage and the constrained capacity of the distribution system can
create bottlenecks in moving propane to consumers in periods of high
demand.
Potential options to help propane consumers deal with price spikes
include programs to pre-buy propane at a certain price. Such price
stabilization programs help consumers mitigate the impact of price
volatility. Participants in such programs may pay higher or lower
prices compared to those who buy propane at the market price but would
not be subject to price volatility. However, the extent to which such
programs have broader potential is unclear. In locations where such
options are available, for various reasons, 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 consumers. But
federal funding has declined, and the timing of funding availability
generally does not allow participation in price stabilization
programs. Improved information on such programs may be useful to
consumers not facing other barriers.
A number of federal agencies are involved to some extent in different
aspects of the propane market, but some opportunities exist to improve
their propane related roles. In 1996, the Congress authorized the
establishment of the Propane Education and Research Council to provide
programs for propane research and development, safety and training,
and consumer education, with oversight from the Departments of
Commerce and Energy, but that oversight has been insufficient. Also,
the Department of Energy‘s Energy Information Administration could
study the potential costs and benefits of continuing to improve the
propane market information it provides to propane market participants.
What GAO Recommends:
We are recommending that the Departments of Commerce and Energy
provide more active oversight of the legislatively established Propane
Education and Research Council. In addition, we are recommending that
Department of Energy‘s Energy Information Administration study the
potential cost and benefits of continuing to improve information for
propane market participants.
In commenting on the report, the Departments of Commerce and Energy
generally agreed with our findings and recommendations. However, the
Department of Energy disagreed that it has 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.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Price Spikes Caused by Inability of Supply to Respond to Weather-Driven
Surges in Demand:
Some Residential Consumers May Have Options to Mitigate Price Spikes:
Numerous Federal Agencies Are Involved in Various Aspects of the
Propane Market, but Consumer Information and Federal Oversight Could Be
Improved:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Funding for LIHEAP and DOE Weatherization:
Appendix III: Comments from the Department of Commerce:
Appendix IV: Comments from the Propane Education and Research Council:
Appendix V: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: Comparison of the Costs of Typical Consumer Purchases over a
5-Year Period under 2 Purchasing Options:
Table 2: Federal Agencies and Their Respective Roles within the Propane
Market:
Table 3: PERC Assessment Revenues and Expenditures for 1998 to 2003:
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):
Table 5: Total Federal Funds and State Supplemental Funds Available by
State for Fiscal Year 2002 LIHEAP Activities:
Figures:
Figure 1: Residential Propane Prices--1995 to 2003:
Figure 2: Propane Usage by Sector, Fiscal Year 2001:
Figure 3: Propane Production, Distribution, and Utilization:
Figure 4: Comparison of Price Impacts of Elastic Supply and Inelastic
Supply:
Figure 5: Comparison of Price Impacts of Elastic and Inelastic Supply
and Demand:
Figure 6: Demand Compared with Heating Degree Days for July 1997
through November 2002:
Figure 7: Constraints in Quickly Moving Stored Propane to Residential
Consumers:
Figure 8: Total LIHEAP/Weatherization Appropriations for Fiscal Years
1982 through 2002, Constant 2002 Dollars:
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:
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.
Figure 1: Residential Propane Prices--1995 to 2003:
[See PDF for image]
Note: Monthly prices in 2002 constant dollars, January 1995 to March
2003.
[End of figure]
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 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.
Results in Brief:
Propane price spikes are generally caused by the inability of propane
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 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.
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.
Background:
Propane, also known as a liquid petroleum gas (LPG), ranks as the
fourth 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
sector[Footnote 1] 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.
Figure 2: Propane Usage by Sector, Fiscal Year 2001:
[See PDF for image]
Notes: GAO analyzed American Petroleum Institute data.
[End of figure]
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 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:
[See PDF for image]
[End of figure]
Price Spikes Caused by Inability of Supply to Respond to Weather-Driven
Surges in Demand:
Propane price spikes are generally caused by the inability of propane
supplies to quickly adjust to unusual demand increases, such as those
caused by especially cold winters. Since neither propane supply nor
propane demand can easily adjust to changes, they are considered
"inelastic" and changes in supply or demand can result in significant
changes in the market price. Propane supply is relatively inelastic
because there is no readily available source of incremental production
that can 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 and Demand Are Inelastic:
Since propane is produced as a by-product of natural gas processing or
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 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.
Figure 4: Comparison of Price Impacts of Elastic Supply and Inelastic
Supply:
[See PDF for image]
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 PA0 and
quantity Q0 as determined by the intersection of supply SA 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 PA1. The increase in price is represented by
DPA --the difference between PA1 and PA0. 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 SB. The initial price and quantity are the same as in panel A.
Given the fixed supply, in order to meet the same increase in demand to
D1, the price would have to increase to PB1 to "choke off" the excess
demand. The increase in price from PB0 to PB1 for the inelastic supply
case, as represented by DPB, is significantly higher than the increase
in price in the elastic supply case, DPA.
[End of figure]
Figure 5: Comparison of Price Impacts of Elastic and Inelastic Supply
and Demand:
[See PDF for image]
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 elastic market in panel A (PA0 versus PA1)
compared with the price response in the inelastic market in panel B
(PB0 versus PB1). 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 price increase (DPA).
However, in the market with inelastic supply and demand, the increase
in price due to the supply and demand shifts is considerably larger
(DPB).
[End of figure]
Weather Is a Major Determinant of Residential Propane Demand:
Because of the influence of the weather on residential demand, total
propane demand generally mirrors the seasonal demand in the
residential-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 measured by heating degree
days,[Footnote 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:
[See PDF for image]
[End of figure]
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 Transportation Infrastructure Is Limited:
There are three propane storage types: primary, secondary, and
tertiary. Primary propane storage in the United States is clustered
near the 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 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:
[See PDF for image]
[End of figure]
Some Residential Consumers May Have Options to Mitigate Price Spikes:
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. Such programs may
include advance purchases, fixed-price contracts, and capped-price
contracts, all of which enable the consumer to purchase propane at a
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 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 Programs:
Residential consumers in some markets can stabilize monthly bills by
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 Stabilization Programs:
The difference in prices paid by residential consumers who participate
in 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 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, prices[Footnote 3] for each month during the 5 years of winter
heating seasons. We obtained comparable fixed-price contract prices
from a large corporate retailer.[Footnote 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).
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:
Winter: 1998-1999; Average fixed-price contract: Gallons purchased:
900; Average fixed-price contract: Price per gallon: $.24; Average
fixed-price contract: Total cost: $216; Average winter market price:
Gallons purchased: 901; Average winter market price: Price per gallon:
$.23; Average winter market price: Total cost: $210; Difference in
cost: $6.
Winter: 1999-2000; Average fixed-price contract: Gallons purchased:
900; Average fixed-price contract: Price per gallon: .30; Average
fixed-price contract: Total cost: 270; Average winter market price:
Gallons purchased: 872; Average winter market price: Price per gallon:
.50; Average winter market price: Total cost: 433; Difference in cost:
(163).
Winter: 2000-2001; Average fixed-price contract: Gallons purchased:
900; Average fixed-price contract: Price per gallon: .56; Average
fixed-price contract: Total cost: 504; Average winter market price:
Gallons purchased: 949; Average winter market price: Price per gallon:
.65; Average winter market price: Total cost: 621; Difference in cost:
(117).
Winter: 2001-2002; Average fixed-price contract: Gallons purchased:
900; Average fixed-price contract: Price per gallon: .40; Average
fixed-price contract: Total cost: 360; Average winter market price:
Gallons purchased: 877; Average winter market price: Price per gallon:
.34; Average winter market price: Total cost: 294; Difference in cost:
66.
Winter: 2002-2003; Average fixed-price contract: Gallons purchased:
900; Average fixed-price contract: Price per gallon: .38; Average
fixed-price contract: Total cost: 342; Average winter market price:
Gallons purchased: 902; Average winter market price: Price per gallon:
.59; Average winter market price: Total cost: 528; Difference in cost:
(186).
Source: GAO analysis.
Note: GAO analyzed EIA and industry data.
[End of table]
Price Stabilization Programs Not Widely Used:
According to several nationwide propane marketers, overall, few of
their 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 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 can be cost-prohibitive
for propane users, especially low-income homeowners, and can inhibit
them from making a change.
Energy Assistance Programs Are Available to Low-Income Residential
Consumers:
According to 1990 decennial data provided by the U. S. Census and
furnished by the Department of Health and Human Services (HHS), 26
percent of households across the nation, more than 24 million, meet
federal income guidelines to qualify for low-income energy assistance
and 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 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:
[See PDF for image]
Note: GAO analyzed Congressional Research Service and DOE
weatherization appropriation data.
[End of figure]
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.[Footnote 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 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.[Footnote 6]
More recently, several groups have requested forward funding through
advance appropriations or advance funding[Footnote 7] 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 state in fiscal year 2002, the most recent year
available, can be found in appendix II.
Numerous Federal Agencies Are Involved in Various Aspects of the
Propane Market, but Consumer Information and Federal Oversight Could Be
Improved:
While no single federal agency is solely responsible for overseeing all
propane-related activities and programs, numerous federal agencies have
specific propane-related responsibilities. Two federal agencies, the
Departments of Commerce and Energy, have oversight roles and
responsibilities for the Propane Education and Research Council, but
this oversight has been lacking. One federal agency, EIA, within the
Department of Energy, is responsible for providing the public and
various other groups with information on energy, including propane.
Although EIA collects propane energy information, it does not report
propane price information for all states nor provide information to
consumers on the use of different price stabilization options.
Improvements in this information 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 Involved in Various Aspects of the Propane Market:
Several federal agencies have activities and programs that touch on
propane-related issues as part of each agency's respective overall
mission and objectives. However, no single federal agency is focused
specifically on overseeing propane-related activities and programs.
These activities 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.
Table 2: Federal Agencies and Their Respective Roles within the Propane
Market:
Agency: Department of Energy (DOE); Role in Propane Market: DOE's role
in the propane market is part of its overall role in 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.
Agency: DOE's Energy Information Administration (EIA); Role in Propane
Market: EIA serves as the lead federal authority for energy information
to meet the needs of Congress, the federal 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.
Agency: Federal Energy Regulatory Commission (FERC); Role in Propane
Market: FERC is an independent agency responsible for ensuring "just
and reasonable rates" for interstate transportation of propane through
pipelines.
Agency: Department of Commerce; Role in Propane Market: 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.
Agency: Department of Justice; Role in Propane Market: 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.
Agency: Federal Trade Commission (FTC); Role in Propane Market: FTC
enforces laws that prohibit business practices that are
anticompetitive, deceptive, or unfair to consumers and promotes
informed consumer choice and public understanding of the competitive
process.
Agency: Securities and Exchange Commission (SEC); Role in Propane
Market: As part of SEC's role in securities markets, its overall role
is 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.
Agency: Commodity Futures Trading Commission; (CFTC); Role in Propane
Market: CFTC is responsible for overseeing the nation's energy
commodity futures and options markets, including propane futures and
options markets.
Agency: U.S. Department of Transportation (DOT); Role in Propane
Market: Three DOT entities deal with safety issues regarding different
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.
[End of table]
Federal Oversight of PERC Has Been Lacking:
The Propane Education and Research Act, which was enacted on October
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.[Footnote 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. [Footnote 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 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.[Footnote 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 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:
Year: 1998; Assessment rate (cents per gallon): 0.1; Assessment
revenues: $ 8,581,329; Communications and consumer education[B] (%):
23; Research and development[B] (%): 13; Safety and training[B] (%):
16; Other[A,B] (%): 11.
Year: 1999; Assessment rate (cents per gallon): 0.1; Assessment
revenues: 9,666,889; Communications and consumer education[B] (%): 25;
Research and development[B] (%): 16; Safety and training[B] (%): 22;
Other[A,B] (%): 17.
Year: 2000; Assessment rate (cents per gallon): 0.1; Assessment
revenues: 10,012,106; Communications and consumer education[B] (%): 32;
Research and development[B] (%): 12; Safety and training[B] (%): 19;
Other[A,B] (%): 21.
Year: 2001; Assessment rate (cents per gallon): 0.2; Assessment
revenues: 19,236,525; Communications and consumer education[B] (%): 49;
Research and development[B] (%): 12; Safety and training[B] (%): 16;
Other[A,B] (%): 13.
Year: 2002; Assessment rate (cents per gallon): 0.3; Assessment
revenues: 29,526,723; Communications and consumer education[B] (%): 53;
Research and development[B] (%): 8; Safety and training[B] (%): 17;
Other[A,B] (%): 16.
Year: 2003[C]; Assessment rate (cents per gallon): 0.4; Assessment
revenues: 38,000,000; Communications and consumer education[B] (%): 54;
Research and development[B] (%): 17; Safety and training[B] (%): 13;
Other[A,B] (%): 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.
[End of table]
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 on marketing and promotion, the emphasis of
PERC's propane assessment was to be research and development.[Footnote
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 May Be Enhanced:
Over time, EIA has tried to improve its propane market information
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.
Price Information Is Collected Only for Certain States During the
Winter:
The EIA State Heating Oil and Propane Program (SHOPP), a joint effort
between state energy offices in the 24 participating states[Footnote
12] and DOE's EIA, 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 Information on Price Stabilization Options:
EIA does not provide any information regarding residential propane
price stabilization programs, such as fixed-price options. For example,
the EIA 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 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 Industry Concerns That Inventory Data Are
Incomplete:
In general, EIA uses its knowledge of the energy market and input from
users of its data to decide what data to collect and distribute but
does not 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 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.
Conclusions:
Propane prices can be as volatile and as unpredictable as the weather
that 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.
Recommendations for Executive Action:
We recommend that the Secretary of Commerce direct the department to
complete its required reports analyzing changes in propane prices and
examining the effects of PERC's operation.
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.
Agency Comments and Our Evaluation:
We provided Commerce, DOE and PERC with a draft of this report for
review and comment. Commerce had no comments on the technical 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 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 activities, as reflected in
several provisions of the Act.[Footnote 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 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:
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:
Signed by Jim Wells:
[End of section]
Appendix I: Objectives, Scope, and 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.
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 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.
[End of section]
Appendix II: Funding for LIHEAP and DOE 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.
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):
Year: 1982; LIHEAP: Appropriations: $1,875,000; LIHEAP: Constant 2002
dollars: 3,125,000; LIHEAP: Percentage of 1982 dollars: 100;
Appropriations: $144,000; DOE Weatherization: Constant 2002 dollars:
240,000; DOE Weatherization: Percentage of 1982 dollars: 100; Total
Constant 2002 dollars: 3,365,000; Total percentage of 1982 dollars:
100.
Year: 1983; LIHEAP: Appropriations: 1,975,000; LIHEAP: Constant 2002
dollars: 3,185,484; LIHEAP: Percentage of 1982 dollars: 102;
Appropriations: 245,000; DOE Weatherization: Constant 2002 dollars:
395,161; DOE Weatherization: Percentage of 1982 dollars: 165; Total
Constant 2002 dollars: 3,580,645; Total percentage of 1982 dollars:
106.
Year: 1984; LIHEAP: Appropriations: 2,075,000; LIHEAP: Constant 2002
dollars: 3,192,308; LIHEAP: Percentage of 1982 dollars: 102;
Appropriations: 190,000; DOE Weatherization: Constant 2002 dollars:
292,308; DOE Weatherization: Percentage of 1982 dollars: 122; Total
Constant 2002 dollars: 3,484,616; Total percentage of 1982 dollars:
104.
Year: 1985; LIHEAP: Appropriations: 2,100,000; LIHEAP: Constant 2002
dollars: 3,134,328; LIHEAP: Percentage of 1982 dollars: 100;
Appropriations: 191,100; DOE Weatherization: Constant 2002 dollars:
285,224; DOE Weatherization: Percentage of 1982 dollars: 119; Total
Constant 2002 dollars: 3,419,552; Total percentage of 1982 dollars:
102.
Year: 1986; LIHEAP: Appropriations: 2,010,000; LIHEAP: Constant 2002
dollars: 2,955,882; LIHEAP: Percentage of 1982 dollars: 95;
Appropriations: 182,100; DOE Weatherization: Constant 2002 dollars:
291,324; DOE Weatherization: Percentage of 1982 dollars: 121; Total
Constant 2002 dollars: 3,247,206; Total percentage of 1982 dollars: 96.
Year: 1987; LIHEAP: Appropriations: 1,825,000; LIHEAP: Constant 2002
dollars: 2,607,143; LIHEAP: Percentage of 1982 dollars: 83;
Appropriations: 161,300; DOE Weatherization: Constant 2002 dollars:
230,429; DOE Weatherization: Percentage of 1982 dollars: 96; Total
Constant 2002 dollars: 2,837,572; Total percentage of 1982 dollars: 84.
Year: 1988; LIHEAP: Appropriations: 1,531,840; LIHEAP: Constant 2002
dollars: 2,127,556; LIHEAP: Percentage of 1982 dollars: 68;
Appropriations: 161,300; DOE Weatherization: Constant 2002 dollars:
224,028; DOE Weatherization: Percentage of 1982 dollars: 93; Total
Constant 2002 dollars: 2,351,584; Total percentage of 1982 dollars: 70.
Year: 1989; LIHEAP: Appropriations: 1,383,200; LIHEAP: Constant 2002
dollars: 1,844,267; LIHEAP: Percentage of 1982 dollars: 59;
Appropriations: 161,300; DOE Weatherization: Constant 2002 dollars:
215,067; DOE Weatherization: Percentage of 1982 dollars: 90; Total
Constant 2002 dollars: 2,059,334; Total percentage of 1982 dollars: 61.
Year: 1990; LIHEAP: Appropriations: 1,492,950; LIHEAP: Constant 2002
dollars: 1,914,038; LIHEAP: Percentage of 1982 dollars: 61;
Appropriations: 162,000; DOE Weatherization: Constant 2002 dollars:
207,692; DOE Weatherization: Percentage of 1982 dollars: 87; Total
Constant 2002 dollars: 2,121,730; Total percentage of 1982 dollars: 63.
Year: 1991; LIHEAP: Appropriations: 1,805,000; LIHEAP: Constant 2002
dollars: 2,228,395; LIHEAP: Percentage of 1982 dollars: 71;
Appropriations: 198,900; DOE Weatherization: Constant 2002 dollars:
245,556; DOE Weatherization: Percentage of 1982 dollars: 102; Total
Constant 2002 dollars: 2,473,951; Total percentage of 1982 dollars: 74.
Year: 1992; LIHEAP: Appropriations: 1,500,000; LIHEAP: Constant 2002
dollars: 1,807,229; LIHEAP: Percentage of 1982 dollars: 58;
Appropriations: 194,000; DOE Weatherization: Constant 2002 dollars:
233,735; DOE Weatherization: Percentage of 1982 dollars: 97; Total
Constant 2002 dollars: 2,040,964; Total percentage of 1982 dollars: 61.
Year: 1993; LIHEAP: Appropriations: 1,346,030; LIHEAP: Constant 2002
dollars: 1,583,565; LIHEAP: Percentage of 1982 dollars: 51;
Appropriations: 185,400; DOE Weatherization: Constant 2002 dollars:
218,118; DOE Weatherization: Percentage of 1982 dollars: 91; Total
Constant 2002 dollars: 1,801,683; Total percentage of 1982 dollars: 54.
Year: 1994; LIHEAP: Appropriations: 1,735,408; LIHEAP: Constant 2002
dollars: 1,994,722; LIHEAP: Percentage of 1982 dollars: 64;
Appropriations: 206,800; DOE Weatherization: Constant 2002 dollars:
237,701; DOE Weatherization: Percentage of 1982 dollars: 99; Total
Constant 2002 dollars: 2,232,423; Total percentage of 1982 dollars: 66.
Year: 1995; LIHEAP: Appropriations: 1,419,000; LIHEAP: Constant 2002
dollars: 1,594,382; LIHEAP: Percentage of 1982 dollars: 51;
Appropriations: 214,800; DOE Weatherization: Constant 2002 dollars:
241,384; DOE Weatherization: Percentage of 1982 dollars: 101; Total
Constant 2002 dollars: 1,835,766; Total percentage of 1982 dollars: 55.
Year: 1996; LIHEAP: Appropriations: 1,080,000; LIHEAP: Constant 2002
dollars: 1,200,000; LIHEAP: Percentage of 1982 dollars: 38;
Appropriations: 111,700; DOE Weatherization: Constant 2002 dollars:
124,111; DOE Weatherization: Percentage of 1982 dollars: 52; Total
Constant 2002 dollars: 1,324,111; Total percentage of 1982 dollars: 39.
Year: 1997; LIHEAP: Appropriations: 1,215,000; LIHEAP: Constant 2002
dollars: 1,320,652; LIHEAP: Percentage of 1982 dollars: 42;
Appropriations: 120,800; DOE Weatherization: Constant 2002 dollars:
131,304; DOE Weatherization: Percentage of 1982 dollars: 55; Total
Constant 2002 dollars: 1,451,956; Total percentage of 1982 dollars: 43.
Year: 1998; LIHEAP: Appropriations: 1,160,000; LIHEAP: Constant 2002
dollars: 1,247,312; LIHEAP: Percentage of 1982 dollars: 40;
Appropriations: 124,800; DOE Weatherization: Constant 2002 dollars:
134,194; DOE Weatherization: Percentage of 1982 dollars: 56; Total
Constant 2002 dollars: 1,381,506; Total percentage of 1982 dollars: 41.
Year: 1999; LIHEAP: Appropriations: 1,280,000; LIHEAP: Constant 2002
dollars: 1,347,368; LIHEAP: Percentage of 1982 dollars: 43;
Appropriations: 133,000; DOE Weatherization: Constant 2002 dollars:
140,000; DOE Weatherization: Percentage of 1982 dollars: 58; Total
Constant 2002 dollars: 1,487,368; Total percentage of 1982 dollars: 44.
Year: 2000; LIHEAP: Appropriations: 1,844,000; LIHEAP: Constant 2002
dollars: 1,901,031; LIHEAP: Percentage of 1982 dollars: 61;
Appropriations: 135,000; DOE Weatherization: Constant 2002 dollars:
139,175; DOE Weatherization: Percentage of 1982 dollars: 58; Total
Constant 2002 dollars: 2,040,206; Total percentage of 1982 dollars: 61.
Year: 2001; LIHEAP: Appropriations: 1,856,000; LIHEAP: Constant 2002
dollars: 1,874,747; LIHEAP: Percentage of 1982 dollars: 60;
Appropriations: 153,000; DOE Weatherization: Constant 2002 dollars:
154,545; DOE Weatherization: Percentage of 1982 dollars: 64; Total
Constant 2002 dollars: 2,029,292; Total percentage of 1982 dollars: 60.
Year: 2002; LIHEAP: Appropriations: 1,800,000; LIHEAP: Constant 2002
dollars: 1,800,000; LIHEAP: Percentage of 1982 dollars: 58;
Appropriations: 230,000; DOE Weatherization: Constant 2002 dollars:
230,000; DOE Weatherization: Percentage of 1982 dollars: 96; Total
Constant 2002 dollars: 2,030,000; Total percentage of 1982 dollars: 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.
[End of table]
When combined with the net effect of annual LIHEAP grant carry-over
funds,[Footnote 14] HHS leveraging incentive awards,[Footnote 15] and
HHS REACH grants,[Footnote 16] the Federal government provided about 54
percent of the total LIHEAP funding available to the states in
2002.[Footnote 17] 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:
State: Alabama; Federal LIHEAP funds[A]: $15,424,432; State Supplement
to LIHEAP[B]: $5,026,010; Total all funds: $20,450,442; Federal funds
as percent of total funds: 75.
State: Alaska; Federal LIHEAP funds[A]: 7,275,559; State Supplement to
LIHEAP[B]: 6,501,634; Total all funds: 13,777,193; Federal funds as
percent of total funds: 53.
State: Arizona; Federal LIHEAP funds[A]: 8,613,025; State Supplement to
LIHEAP[B]: 10,627,312; Total all funds: 19,240,337; Federal funds as
percent of total funds: 45.
State: Arkansas; Federal LIHEAP funds[A]: 10,847,192; State Supplement
to LIHEAP[B]: 349,197; Total all funds: 11,196,389; Federal funds as
percent of total funds: 97.
State: California; Federal LIHEAP funds[A]: 71,332,158; State
Supplement to LIHEAP[B]: 264,628,000; Total all funds: 335,960,158;
Federal funds as percent of total funds: 21.
State: Colorado; Federal LIHEAP funds[A]: 30,932,942; State Supplement
to LIHEAP[B]: 21,473,836; Total all funds: 52,406,778; Federal funds as
percent of total funds: 59.
State: Connecticut; Federal LIHEAP funds[A]: 37,775,387; State
Supplement to LIHEAP[B]: 24,471,218; Total all funds: 62,246,605;
Federal funds as percent of total funds: 61.
State: Delaware; Federal LIHEAP funds[A]: 5,108,405; State Supplement
to LIHEAP[B]: 1,132,463; Total all funds: 6,240,868; Federal funds as
percent of total funds: 82.
State: Dist. of Col.; Federal LIHEAP funds[A]: 6,041,751; State
Supplement to LIHEAP[B]: 3,324,000; Total all funds: 9,365,751; Federal
funds as percent of total funds: 65.
State: Florida; Federal LIHEAP funds[A]: 20,558,541; State Supplement
to LIHEAP[B]: 4,602,435; Total all funds: 25,160,976; Federal funds as
percent of total funds: 82.
State: Georgia; Federal LIHEAP funds[A]: 19,997,809; State Supplement
to LIHEAP[B]: 13,302,172; Total all funds: 33,299,981; Federal funds as
percent of total funds: 60.
State: Hawaii; Federal LIHEAP funds[A]: 1,809,061; State Supplement to
LIHEAP[B]: 0; Total all funds: 1,809,061; Federal funds as percent of
total funds: 100.
State: Idaho; Federal LIHEAP funds[A]: 11,689,651; State Supplement to
LIHEAP[B]: 354,804; Total all funds: 12,044,455; Federal funds as
percent of total funds: 97.
State: Illinois; Federal LIHEAP funds[A]: 104,631,043; State Supplement
to LIHEAP[B]: 74,371,237; Total all funds: 179,002,280; Federal funds
as percent of total funds: 58.
State: Indiana; Federal LIHEAP funds[A]: 47,744,961; State Supplement
to LIHEAP[B]: 6,676,010; Total all funds: 54,420,971; Federal funds as
percent of total funds: 88.
State: Iowa; Federal LIHEAP funds[A]: 30,169,525; State Supplement to
LIHEAP[B]: 4,971,043; Total all funds: 35,140,568; Federal funds as
percent of total funds: 86.
State: Kansas; Federal LIHEAP funds[A]: 15,291,178; State Supplement to
LIHEAP[B]: 0; Total all funds: 15,291,178; Federal funds as percent of
total funds: 100.
State: Kentucky; Federal LIHEAP funds[A]: 26,487,237; State Supplement
to LIHEAP[B]: 2,699,898; Total all funds: 29,187,135; Federal funds as
percent of total funds: 91.
State: Louisiana; Federal LIHEAP funds[A]: 14,900,216; State Supplement
to LIHEAP[B]: 7,466,404; Total all funds: 22,366,620; Federal funds as
percent of total funds: 67.
State: Maine; Federal LIHEAP funds[A]: 23,475,477; State Supplement to
LIHEAP[B]: 10,894,158; Total all funds: 34,369,635; Federal funds as
percent of total funds: 68.
State: Maryland; Federal LIHEAP funds[A]: 29,301,538; State Supplement
to LIHEAP[B]: 47,536,255; Total all funds: 76,837,793; Federal funds as
percent of total funds: 38.
State: Massachusetts; Federal LIHEAP funds[A]: 76,247,501; State
Supplement to LIHEAP[B]: 55,721,189; Total all funds: 131,968,690;
Federal funds as percent of total funds: 58.
State: Michigan; Federal LIHEAP funds[A]: 99,639,181; State Supplement
to LIHEAP[B]: 33,563,111; Total all funds: 133,202,292; Federal funds
as percent of total funds: 75.
State: Minnesota; Federal LIHEAP funds[A]: 72,199,490; State Supplement
to LIHEAP[B]: 42,780,327; Total all funds: 114,979,817; Federal funds
as percent of total funds: 63.
State: Mississippi; Federal LIHEAP funds[A]: 12,327,623; State
Supplement to LIHEAP[B]: 1,157,908; Total all funds: 13,485,531;
Federal funds as percent of total funds: 91.
State: Missouri; Federal LIHEAP funds[A]: 38,450,066; State Supplement
to LIHEAP[B]: 595,719; Total all funds: 39,045,785; Federal funds as
percent of total funds: 98.
State: Montana; Federal LIHEAP funds[A]: 11,574,763; State Supplement
to LIHEAP[B]: 3,544,445; Total all funds: 15,119,208; Federal funds as
percent of total funds: 77.
State: Nebraska; Federal LIHEAP funds[A]: 16,402,504; State Supplement
to LIHEAP[B]: 0; Total all funds: 16,402,504; Federal funds as percent
of total funds: 100.
State: Nevada; Federal LIHEAP funds[A]: 4,742,990; State Supplement to
LIHEAP[B]: 6,850,464; Total all funds: 11,593,454; Federal funds as
percent of total funds: 41.
State: New Hampshire; Federal LIHEAP funds[A]: 13,455,967; State
Supplement to LIHEAP[B]: 8,241,766; Total all funds: 21,697,733;
Federal funds as percent of total funds: 62.
State: New Jersey; Federal LIHEAP funds[A]: 72,227,107; State
Supplement to LIHEAP[B]: 125,027,600; Total all funds: 197,254,707;
Federal funds as percent of total funds: 37.
State: New Mexico; Federal LIHEAP funds[A]: 8,418,976; State Supplement
to LIHEAP[B]: 500,000; Total all funds: 8,918,976; Federal funds as
percent of total funds: 94.
State: New York; Federal LIHEAP funds[A]: 235,327,049; State Supplement
to LIHEAP[B]: 76,563,749; Total all funds: 311,890,798; Federal funds
as percent of total funds: 75.
State: North Carolina; Federal LIHEAP funds[A]: 35,417,925; State
Supplement to LIHEAP[B]: 2,540,147; Total all funds: 37,958,072;
Federal funds as percent of total funds: 93.
State: North Dakota; Federal LIHEAP funds[A]: 12,066,807; State
Supplement to LIHEAP[B]: 0; Total all funds: 12,066,807; Federal funds
as percent of total funds: 100.
State: Ohio; Federal LIHEAP funds[A]: 101,705,030; State Supplement to
LIHEAP[B]: 180,135,447; Total all funds: 281,840,477; Federal funds as
percent of total funds: 36.
State: Oklahoma; Federal LIHEAP funds[A]: 11,960,497; State Supplement
to LIHEAP[B]: 1,886,642; Total all funds: 13,847,139; Federal funds as
percent of total funds: 86.
State: Oregon; Federal LIHEAP funds[A]: 21,353,738; State Supplement to
LIHEAP[B]: 27,801,181; Total all funds: 49,154,919; Federal funds as
percent of total funds: 43.
State: Pennsylvania; Federal LIHEAP funds[A]: 120,319,409; State
Supplement to LIHEAP[B]: 184,518,237; Total all funds: 304,837,646;
Federal funds as percent of total funds: 39.
State: Rhode Island; Federal LIHEAP funds[A]: 13,566,678; State
Supplement to LIHEAP[B]: 9,010,676; Total all funds: 22,577,354;
Federal funds as percent of total funds: 60.
State: South Carolina; Federal LIHEAP funds[A]: 12,947,229; State
Supplement to LIHEAP[B]: 0; Total all funds: 12,947,229; Federal funds
as percent of total funds: 100.
State: South Dakota; Federal LIHEAP funds[A]: 9,456,522; State
Supplement to LIHEAP[B]: 1,020,272; Total all funds: 10,476,794;
Federal funds as percent of total funds: 90.
State: Tennessee; Federal LIHEAP funds[A]: 23,152,034; State Supplement
to LIHEAP[B]: 0; Total all funds: 23,152,034; Federal funds as percent
of total funds: 100.
State: Texas; Federal LIHEAP funds[A]: 37,918,064; State Supplement to
LIHEAP[B]: 169,000,000; Total all funds: 206,918,064; Federal funds as
percent of total funds: 18.
State: Utah; Federal LIHEAP funds[A]: 13,022,184; State Supplement to
LIHEAP[B]: 992,043; Total all funds: 14,014,227; Federal funds as
percent of total funds: 93.
State: Vermont; Federal LIHEAP funds[A]: 10,122,804; State Supplement
to LIHEAP[B]: 6,102,550; Total all funds: 16,225,354; Federal funds as
percent of total funds: 62.
State: Virginia; Federal LIHEAP funds[A]: 34,371,058; State Supplement
to LIHEAP[B]: 2,986,651; Total all funds: 37,357,709; Federal funds as
percent of total funds: 92.
State: Washington; Federal LIHEAP funds[A]: 33,130,576; State
Supplement to LIHEAP[B]: 17,924,704; Total all funds: 51,055,280;
Federal funds as percent of total funds: 65.
State: West Virginia; Federal LIHEAP funds[A]: 17,716,932; State
Supplement to LIHEAP[B]: 3,000,000; Total all funds: 20,716,932;
Federal funds as percent of total funds: 86.
State: Wisconsin; Federal LIHEAP funds[A]: 62,977,969; State Supplement
to LIHEAP[B]: 32,299,363; Total all funds: 95,277,332; Federal funds as
percent of total funds: 66.
State: Wyoming; Federal LIHEAP funds[A]: 5,401,231; State Supplement to
LIHEAP[B]: 0; Total all funds: 5,401,231; Federal funds as percent of
total funds: 100.
Total; Federal LIHEAP funds[A]: $1,777,026,992; State Supplement
to LIHEAP[B]: $1,504,172,277; Total all funds: $3,281,199,269; Federal
funds as percent of total funds: 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.
[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.
[End of table]
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).
[End of section]
Appendix III: Comments from the Department of Commerce:
THE SECRETARY OF COMMERCE Washington, D.C. 20230:
June 12, 2003:
Mr. Jim Wells:
Director, Natural Resources and Environment U.S. General Accounting
Office Washington, DC 20548:
Dear Mr. Wells:
We have reviewed GAO's proposed report entitled, "Propane: Causes of
Price Volatility, Potential Consumer Options, and Opportunities to
Improve Federal Programs" (GAO-03-762) and have no comments on its
technical content.
As required by the Propane Education and Research Act of 1996, I have
directed Commerce staff to prepare reports in 2003 analyzing changes in
propane prices and examining the effects of Propane Education and
Research Council's operations and related developments on propane
consumers. I have also directed that hereafter similar reports be
regularly prepared according to the reporting cycles established in the
Act.
Thank you for giving Commerce the opportunity to review GAO's report.
Sincerely,
Donald L. Evans:
Signed by Donald L. Evans:
[End of section]
Appendix IV: Comments from the Propane Education and Research Council:
Note: GAO's comments appear at the end of this appendix.
See comment 3.
See comment 2.
See comment 1.
See comment 4.
PROPANE EDUCATION & RESEARCH COUNCIL:
June 6, 2003.
Mark Gaffigan, Assistant Director.
Natural Resources and Environment.
United States General Accounting Office.
441 G Street, NW.
Washington, D.C. 20548.
Dear Mr. Gaffigan:.
Thank you for the opportunity to comment on the draft report
entitled "PROPANE Causes of Price Volatility, Potential Consumer
Options and Opportunities to Improve Federal Programs." At the outset, on
behalf of my board, I respectfully express my disagreement and
disappointment with the report's basic assumption and conclusions..
The basic assumption of the report is that "(s)ince neither
propane supply nor propane demand can easily adjust to changes, they are
considered inelastic and changes in supply or demand can result in significant changes
in the market price."[NOTE 1] We disagree. This assumption in our view is
fundamentally flawed and is contradicted by data in the report that shows normal
supply, demand and price interactions that demonstrate that propane is not an
"inelastic" commodity..
Propane is a basic and essential energy commodity that
competes against other major fuels in diverse and vibrantly competitive overall
energy and propane markets. As your report acknowledges, the propane market,
particularly the industrial market, regularly demonstrates its willingness to
fuel switch for both space heating and feedstock purposes from propane to other
competitively priced fuels..
We do "agree with the report's observation if... it is not
clear what impact, any the federal government could have on the propane market
through its oversight of PERC operations..."[NOTE 2] Given that propane is a
competitively traded, free market commodity and the requirement that the Propane
Education & Research Council's (PERC) assessment may not be passed to consumers by
federal mandate, we fail to see how additional federal oversight would
be cost-effective for either the government or propane consumers. If the
recommendations in the report were adopted in total, they would have no significant
benefit to propane consumers.
I have attached for your consideration charts that show basic
pricing calculations required under the Propane Education and Research Act of 1996.
The charts clearly demonstrate that the price of propane compared to the
prices of No. 2 fuel oil, residential natural gas and residential electricity
does not approach the statutory thresholds that would require a limitation on PERC's
consumer education programs. The obvious absence of this information is a
primary source of our disappointment with the report, (see appendices I
and II).
Be advised that that a majority of our retail propane companies offer
consumer price stabilization programs to their consumers. Many of them
have, as you have expressed in the report, experienced mixed results
due to a myriad of factors. Despite this experience, propane companies
continue to offer, promote and educate the public about the
availability of such programs.
Let me again express my gratitude for your request for PERC's comment
on the GAO propane report. Although we disagree with its analysis and
conclusions we remain committed to working with the GAO or any other
agency of the federal government to promote the safe, efficient use of
propane.
Sincerely,
Roy Willis
President:
Signed by Roy Willis:
Cc: The Honorable Spencer Abraham, Secretary of Energy The Honorable
Don Evans, Secretary of Commerce David M. Walker, Comptroller General
of the United States:
Jim Wells, Director, Natural Resources and Environment, General
Accounting Office Richard Roldan, President, National Propane Gas
Association:
NOTES:
[1] Draft report, p. 10..
[2] Draft report, p. 34..
The following are GAO's comments on PERC's letter dated June 6, 2003.
GAO Comments:
We believe we have correctly characterized the national market for
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.
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.
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 of Commerce is required to complete. However, we agree
with their overall conclusion that historically the statutory threshold
appears not to have been exceeded.
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.
[End of section]
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Jim Wells (202) 512-3841:
Mark Gaffigan (202) 512-3168:
Acknowledgements:
In addition to the individuals named above, James W. Turkett, Gary
Malavenda, James Rose, Amy Webbink, Timothy Guinane, Katherine Raheb,
Nancy Crothers, and H. Lee Cagle made key contributions to this report.
FOOTNOTES
[1] The commercial aspect of this sector includes sales to mostly small
businesses, which primarily use propane for space-heating, water
heating, and cooking.
[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.
[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.
[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).
[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.
[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.
[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.
[11] S. Rep. No. 104-298 (1996).
[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.
[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).
[14] 42 U.S.C. § 8626 allows states to carry over up to 10 percent of
their LIHEAP block grant into the next year.
[15] 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.
[16] 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.
[17] This analysis includes only LIHEAP funding since state funding for
weatherization was not available.
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