Propane: Causes of Price Volatility, Potential Consumer Options, 
and Opportunities to Improve Consumer Information and Federal	 
Oversight (27-JUN-03, GAO-03-762).				 
                                                                 
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.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-762 					        
    ACCNO:   A07748						        
  TITLE:     Propane: Causes of Price Volatility, Potential Consumer  
Options, and Opportunities to Improve Consumer Information and	 
Federal Oversight						 
     DATE:   06/27/2003 
  SUBJECT:   Consumer protection				 
	     Prices and pricing 				 
	     Energy costs					 
	     Energy demand					 
	     Fuel prices					 
	     HHS Low Income Home Energy Assistance		 
	     Program						 
                                                                 

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GAO-03-762

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

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.

Propane Prices, Adjusted to 2002 Dollars

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. 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.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 762. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact Jim Wells at (202) 512- 6877 or Wellsj@ gao. gov.
Highlights of GAO- 03- 762, a report to the

Honorable Tom Udall, House of Representatives

June 2003

PROPANE

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

Page i GAO- 03- 762 Propane Letter 1 Results in Brief 3 Background 5 Price
Spikes Caused by Inability of Supply to Respond to WeatherDriven Surges in
Demand 8 Some Residential Consumers May Have Options to Mitigate Price

Spikes 14 Numerous Federal Agencies Are Involved in Various Aspects of the
Propane Market, but Consumer Information and Federal Oversight Could Be
Improved 22 Conclusions 30 Recommendations for Executive Action 30 Agency
Comments and Our Evaluation 31 Appendix I Objectives, Scope, and
Methodology 36

Appendix II Funding for LIHEAP and DOE Weatherization 39

Appendix III Comments from the Department of Commerce 44

Appendix IV Comments from the Propane Education and Research Council 45

Appendix V GAO Contacts and Staff Acknowledgments 49

Tables

Table 1: Comparison of the Costs of Typical Consumer Purchases over a 5-
Year Period under 2 Purchasing Options 17 Table 2: Federal Agencies and
Their Respective Roles within the

Propane Market 23 Table 3: PERC Assessment Revenues and Expenditures for
1998 to 2003 26 Contents

Page ii GAO- 03- 762 Propane Table 4: Federal Appropriations for Health
and Human Services Low Income Home Energy Assistance Program and

Department of Energy Weatherization Assistance Program for Fiscal Years
1982 through 2002 (Dollars in Thousands) 40 Table 5: Total Federal Funds
and State Supplemental Funds Available by State for Fiscal Year 2002
LIHEAP Activities 41 Figures

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

Page iii GAO- 03- 762 Propane Abbreviations

CFTC Commodity Futures Trading Commission DOE Department of Energy DOJ
Department of Justice DOT Department of Transportation EERE Energy
Efficiency and Renewable Energy EIA Energy Information Administration FERC
Federal Energy Regulatory Commission FTC Federal Trade Commission HHS
Health and Human Services LIHEAP Low- Income Home Energy Assistance
Program LPG liquid petroleum gas

NPGA National Propane Gas Association PERC Propane Education and Research
Council SEC Securities and Exchange Commission SHOPP State Heating Oil and
Propane Program

This is a work of the U. S. Government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. It may contain
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copyright holder may be necessary should you wish to reproduce copyrighted
materials separately from GAO*s product.

Page 1 GAO- 03- 762 Propane 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.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 03- 762 Propane Figure 1: Residential Propane Prices* 1995 to
2003

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

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

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

officials regarding how their various low- income energy assistance
programs can help mitigate the impact of price spikes. Finally, to examine

Page 3 GAO- 03- 762 Propane the federal government*s role in the propane
market, we obtained documents and interviewed officials at federal
agencies responsible for

programs that have a role in some aspect of the propane market. We
performed our review from July 2002 through May 2003 in accordance with
generally accepted auditing standards. A detailed description of our

objectives, scope, and methodology is contained in appendix I. Propane
price spikes are generally caused by the inability of propane 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
Results in Brief

Page 4 GAO- 03- 762 Propane has declined (in terms of constant dollars),
and the timing of the funding availability generally does not allow
participation in price stabilization

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

Commerce and Energy. Finally, the Department of Energy*s Energy
Information Administration (EIA) is responsible for providing information
on energy in general, including information on propane that promotes sound
policymaking, efficient markets, and consumer understanding.

Opportunities exist to improve the performance of some federal agencies in
carrying out their responsibilities that are related to the propane
market. Specifically, under the Propane Education and Research Act of 1996
(the Act), the Departments of Commerce and Energy have oversight roles and
responsibilities for PERC, but that oversight has been insufficient. The
Department of Commerce is required to prepare two reports: one analyzing
propane prices and the other examining the effects of PERC*s operation.
According to Commerce Department officials, however, the department has
not completed any such reports because it has been unaware of that
responsibility. The Act also requires PERC to submit its budget to the
Secretary of Energy who may recommend appropriate programs and activities.
However, according to Department of Energy officials, the department has
not conducted any detailed budget reviews, recommended any programs, or
conducted any further oversight

because it does not believe it has a role in the propane market. As a
result, the federal government has no measure of PERC*s effectiveness in
conducting its programs, nor is it in a position to recommend appropriate
programs and activities.

Page 5 GAO- 03- 762 Propane Moreover, some opportunities may exist for EIA
to improve the propane market information it provides. Specifically,
although one of EIA*s primary

purposes is to provide consumers with information on energy, including
propane, EIA does not collect consumer propane price information for all
states, gather information on price stabilization options, or provide
information to consumers on different purchasing options. In addition, EIA
is continuing to work to address industry concerns that inventory data are
incomplete. According to EIA officials, propane consumers constitute

a relatively small portion of energy consumers, and because EIA has to
prioritize limited resources, it has chosen to focus its efforts on more
widely used energy sources. As a result, opportunities may exist for EIA
to further improve the propane market information it provides, although
the potential benefit of any improvements must be weighed against the
potential cost.

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

Propane, also known as a liquid petroleum gas (LPG), ranks as the fourth
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 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.

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

Page 6 GAO- 03- 762 Propane Figure 2: Propane Usage by Sector, Fiscal Year
2001

Notes: GAO analyzed American Petroleum Institute data. The residential-
commercial sector includes sales to smaller types of businesses (such as
motels, restaurants, retail stores) primarily for space- heating, water
heating, and cooking.

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

While these two sectors appear to be competing for the same product,
typically petrochemical companies purchase propane during the summer, when
prices tend to be lower and residential demand is low. During the

winter months when the demand for residential propane increases and prices
are at their highest, petrochemical companies switch to other, less
expensive types of feedstock or rely on stored propane purchased during
the summer months.

Approximately 90 percent of the United States* propane supply, 17.2
billion gallons in 2002, is produced domestically, while about 10 percent
is imported from foreign countries, primarily from Canada. Propane is a
byproduct resulting from both the refining of crude oil and from natural
gas processing with approximately equal amounts of total propane produced
from each process. After crude oil and gas are extracted from the earth,

they are shipped to an oil refinery or natural gas fractionation plant,
where propane is one of many products that can be extracted from the oil
and

Page 7 GAO- 03- 762 Propane gas. Propane is a liquid when kept under
moderately high pressure or low temperature and is generally stored at
large major distribution centers.

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

Figure 3: Propane Production, Distribution, and Utilization

Page 8 GAO- 03- 762 Propane 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.

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 Price Spikes
Caused

by Inability of Supply to Respond to Weather- Driven Surges in Demand

Propane Market Supply and Demand Are Inelastic

Page 9 GAO- 03- 762 Propane spikes typically occur. Most homes have
invested in one primary heating system, and it is neither easy nor
economical to switch among systems

using different fuels. For example, an individual may replace an obsolete
furnace with one utilizing an alternative fuel, but it may not be easy or
economical to switch solely on the basis of current prices of different
heating fuels. Alternatives to propane* which include electricity, heating
oil and wood* generally require retrofitting the heating units for the

alternative fuel. In addition, some added costs could be incurred in
switching among retailers or among heating fuels.

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

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

larger price increase in a market with inelastic supply and demand (panel
B) when demand increases and supply decreases.

Page 10 GAO- 03- 762 Propane Figure 4: Comparison of Price Impacts of
Elastic Supply and Inelastic Supply

Note: In panel A, assume we have a good with elastic supply; elastic
supply is represented by a supply line whose upward slope is relatively
not very steep. Initially, the price and quantity settle at P a

0 and quantity Q0 as determined by the intersection of supply S a and
demand D0 . Next, assume that demand increases, as depicted by an outward
shift in the demand line to D1 . Because supply is somewhat elastic,
additional supply is made available to meet the increased demand, albeit
at a

higher price P a 1 . The increase in price is represented by P a * the
difference between P a

1 and P a 0 . 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 S b . 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 P b

1 to *choke off* the excess demand. The increase in price from P b

0 to P b 1 for the inelastic supply case, as represented by P b , is
significantly higher than the increase in price in the elastic supply
case, P a .

Page 11 GAO- 03- 762 Propane Figure 5: Comparison of Price Impacts of
Elastic and Inelastic Supply and Demand

Note: To provide a more complete picture, figure 5 compares a market with
elastic supply and demand with a market with inelastic supply and demand *
like the propane market * to further illustrate the greater price response
to shifts in inelastic supply and demand. The elastic supply and demand
market (panel A) has relatively less steep supply and demand lines, while
the inelastic supply and demand market (panel B) is characterized by much
steeper supply and demand lines. The primary observation is the difference
in the price response to changes in supply and demand in the

elastic market in panel A (P a 0 versus P a

1 ) compared with the price response in the inelastic market in panel B (P
b

0 versus P b 1 ). In both examples, supply drops as depicted by an inward
shift from S0 to S1 . In this market, this drop could be due, for example,
to an accident that disrupts a major pipeline. Also, in both examples,
demand rises, as depicted by an outward shift from D0 to D1 . In this
market, this could be the result of an unusually cold winter snap. We have
constructed both examples in such a

way as to leave the quantity of the commodity unchanged at Q0 . As can be
seen, in the market with elastic supply and demand, the decline in supply
and the rise in demand result in a relatively small price increase ( P a
). However, in the market with inelastic supply and demand, the increase
in price due to the supply and demand shifts is considerably larger ( P b
).

Because of the influence of the weather on residential demand, total
propane demand generally mirrors the seasonal demand in the
residentialcommercial 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
Weather Is a Major

Determinant of Residential Propane Demand

Page 12 GAO- 03- 762 Propane measured by heating degree days, 2 and
propane demand for heating and illustrates that as heating degree days
increase, so does the amount of

propane used.

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

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

Page 13 GAO- 03- 762 Propane To complicate this market even further, the
largest component of the agricultural demand for propane is for crop
drying. This demand is not

only seasonal but can vary greatly from year to year depending on crop
size and moisture content. Ordinarily, agricultural demand for propane
does not affect regional propane markets except when the confluence of
unusually high and late demand for propane for crop drying and colderthan-
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.

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 Propane
Storage and

Transportation Infrastructure Is Limited

Page 14 GAO- 03- 762 Propane from the two major distribution centers,
pipeline availability to the area, and transport truck capacity and
availability. These constraints are

illustrated in figure 7, which demonstrates the bottlenecks, limited
pipeline capacity, and secondary storage occurring in the propane
industry.

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

Some propane marketers offer residential consumers purchasing options 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 Some
Residential

Consumers May Have Options to Mitigate Price Spikes

Page 15 GAO- 03- 762 Propane either chose not to participate or cannot
participate because they cannot afford the upfront costs or do not have
the credit required by such

programs. For low- income consumers, including those who use propane to
heat their homes, access to funding from state- operated assistance
programs may help them mitigate the impact of higher energy costs.
However, since 1982 federal funding for these programs has declined in
real terms, and the timing of the funding availability generally does not
allow these consumers to take advantage of price stabilization programs.

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.

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
Price Stabilization

Programs Potential Impact of Price Stabilization Programs

Page 16 GAO- 03- 762 Propane demand, and consumers participating in a
stabilization program may pay higher retail prices. Some programs may
involve additional cost

considerations, such as interest income that is foregone because of
advance payments and service fees that may be required. Although there are
no guarantees that these options will provide an overall lower fuel bill,
they provide stable, known prices for those who are risk- averse and offer
a way to hedge prices, especially when shortages can cause prices to
spike, as they did during the winter of 2000- 2001.

To demonstrate the potential differences in total costs between consumers
who participate in a price stabilization option and those who do not, we
conducted an analysis based on a hypothetical consumer and compared
purchases under actual market prices and fixed prices actually offered by
a large multistate retailer over the last 5 years. We determined the
market

prices by averaging the daily Mont Belvieu, Texas, prices 3 for each month
during the 5 years of winter heating seasons. We obtained comparable
fixed- price contract prices from a large corporate retailer. 4 Based on
the profile of an average residential consumer in a significant winter
heating region, our hypothetical consumer participating in the price
stabilization

program purchases 900 gallons of propane per year. For purposes of this
example, we assumed that the price stabilization program participant
commits to purchasing 900 gallons during the summer each year for a total
of 4500 gallons over the 5 years. For the consumer buying at the current
market price, we assume the consumer buys the amount of propane actually
needed that heating season (which varies with demand). We calculated the
amounts purchased each year by dividing the national residential propane
demand for each year by the total national demand for the 5- year period
to determine the percentage of total demand for each year. We then used
the resulting percentages to allocate our hypothetical 5- year consumption
of 4500 gallons over each of the 5 years. In both cases,

the total propane purchased by both consumers would be the same (4500
gallons).

3 Mont Belvieu propane prices are the most widely recognized prices in the
world propane market according to EIA officials. 4 These prices do not
include transportation costs or profit margins, making them more
comparable to the Mont Belvieu price. Sometimes propane marketers charge a

participation fee for fixed- price contracts, but this propane marketer
included these fees in the contract price.

Page 17 GAO- 03- 762 Propane As table 1 shows, over the last five winters,
the hypothetical consumer using a fixed- price contract would have spent
more for propane in two

winters (1998 to 1999 and 2001 to 2002), but less in three winters (1999
to 2000, 2000 to 2001, and 2002 to 2003). Although there is no guarantee
that taking advantage of any of these price stabilization programs will
result in a lower heating bill for a given year, this example demonstrates
that, depending on the relationship between fixed prices and market
prices, consumers may experience higher costs from such programs in some
years but may actually have savings in other years. However, consumers who
participate in these price stabilization programs may benefit from the
certainty associated with paying a fixed, known price and avoid the
negative impact of price spikes.

Table 1: Comparison of the Costs of Typical Consumer Purchases over a 5-
Year Period under 2 Purchasing Options Average fixed- price contract
Average winter market price Winter Gallons purchased Price

per gallon Total cost Gallons

purchased Price per gallon Total

cost Difference in cost

1998- 1999 900 $. 24 $216 901 $. 23 $210 $6

1999- 2000 900 .30 270 872 .50 433 (163)

2000- 2001 900 .56 504 949 .65 621 (117)

2001- 2002 900 .40 360 877 .34 294 66

2002- 2003 900 .38 342 902 .59 528 (186)

Source: GAO analysis. Note: GAO analyzed EIA and industry data.

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 Price
Stabilization

Programs Not Widely Used

Page 18 GAO- 03- 762 Propane Association official was aware of only one
propane marketer in New Mexico that offered price stabilization options.

Propane marketers that we talked to identified several reasons that price
stabilization programs are not widely used. In some cases, the marketers
viewed price stabilization programs as beneficial for their business
practice, yet they have had difficulty educating consumers regarding the
benefits of price stabilization programs. Some marketers said they find it
difficult to convince consumers to purchase propane before they need it,
especially in the summer when demand is down. As noted above, in some

years consumers may pay more for propane under price stabilization
options, which can discourage them from participating in the program in
following years. In fact, some consumers may renege on the conditions of a
price stabilization program. This type of negative reaction may cause

retailers to not offer these options. For example, in the past, one
retailer in New Mexico offered a fixed- price contract option to
consumers; however, many participants in the program failed to purchase
the contracted amounts at the contracted fixed price. When prices fell
that year, participating consumers refused to pay the higher contracted
fixed price. Thus, under the program, the retailer was stuck with higher
priced

propane that had already been bought from a supplier. This retailer has
decided not to offer this type of contract in the future. The low- income
status of many propane consumers can also be a barrier to participation in
propane price stabilization options. In general, to participate in price

stabilization programs, consumers are required to pay all or part of the
cost for the contracted propane upfront or to negotiate for a budget
payment arrangement. In some cases, consumers cannot afford to pay the
full amount of the contract, and, in order to participate in a budget
payment arrange, the consumers need a good credit rating, which some
propane consumers do not maintain. Consequently, in some markets either
these options are unavailable, or some consumers cannot participate
because they cannot afford advance payments or are poor credit risks.
Consumers who can qualify for price stabilization programs may want to
switch to a propane marketer that offers such an option. Most propane
marketers told us that it is easy to change marketers. However, in some
cases external factors may make it difficult to change marketers. For
instance, in New Mexico, many of the older homes have galvanized steel
pipes (generally referred to as *black pipes*), which are underground and
subject to corrosion. Regulations in New Mexico mandate that underground
black pipe must be replaced due to serious safety concerns about the
potential for corrosion. This becomes an issue when the home owner decides
to switch marketers, triggering a state inspection that would require
pipes found in violation to be replaced. This replacement

Page 19 GAO- 03- 762 Propane can be cost- prohibitive for propane users,
especially low- income homeowners, and can inhibit them from making a
change.

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 Energy Assistance

Programs Are Available to Low- Income Residential Consumers

Page 20 GAO- 03- 762 Propane 1982 through 2002. Figure 8 shows total
LIHEAP plus DOE weatherization appropriations for 1982 through 2002 (in
2002 dollars).

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

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

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

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

Page 21 GAO- 03- 762 Propane fixed- price contracts, as suggested by
industry, state, and federal government officials. As an example of
success with these types of

programs, in 1997, we reported that the state of South Dakota, through a
summer fill program, saved 59 cents per gallon for its customers in the
1996- 1997 heating season. The state also arranged fixed- price contracts
for elderly and handicapped clients for 1997- 1998 heating season. 6 More
recently, several groups have requested forward funding through

advance appropriations or advance funding 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 6
U. S. General Accounting Office, Energy Policy: Propane Price Increases
During the Winter of 1996- 1997 (GAO/ RCED 98- 52R, Dec. 16, 1997). 7 An
advance appropriation is budget authority provided in an appropriation
act, which is first available in a fiscal year beyond the fiscal year for
which the appropriation act is

enacted. Advance funding is budget authority provided in an appropriation
act to obligate and disburse (outlay) in the current fiscal year funds
from a succeeding year*s appropriation.

Page 22 GAO- 03- 762 Propane state in fiscal year 2002, the most recent
year available, can be found in appendix II. While no single federal
agency is solely responsible for overseeing all 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.

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. Numerous Federal

Agencies Are Involved in Various Aspects of the Propane Market, but
Consumer Information and Federal Oversight Could Be Improved

Federal Agencies Are Involved in Various Aspects of the Propane Market

Page 23 GAO- 03- 762 Propane Table 2: Federal Agencies and Their
Respective Roles within the Propane Market Agency Role in Propane Market

Department of Energy (DOE) 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. DOE*s Energy Information Administration
(EIA)

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. Federal Energy Regulatory Commission

(FERC) FERC is an independent agency responsible for ensuring

*just and reasonable rates* for interstate transportation of propane
through pipelines. Department of Commerce Commerce has a role in the
propane market as part of its

overall goal to encourage, serve, and promote the nation*s international
trade, economic growth, and technological advancement. Commerce is
required to monitor and report on the effects of PERC*s programs on
propane markets. Department of Justice The Antitrust Division of the
Department of Justice enforces federal antitrust laws in the propane
market as part of its

overall role in promoting and maintaining competitive markets. Federal
Trade Commission (FTC) 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.
Securities and Exchange Commission (SEC) 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.

Commodity Futures Trading Commission (CFTC)

CFTC is responsible for overseeing the nation*s energy commodity futures
and options markets, including propane futures and options markets. U. S.
Department of Transportation (DOT) Three DOT entities deal with safety
issues regarding different

modes of transporting propane: the Federal Motor Carrier Safety
Administration (preventing commercial motor vehiclerelated fatalities and
injuries); the Federal Railroad Administration (promoting safe and
environmentally sound rail transportation); and the Research and Special
Programs

Administration (ensuring the safe transportation of packaged hazardous
materials by all modes and the safe transportation of natural gas,
petroleum, and other gas and liquid hazardous

materials by pipeline). DOT grants waivers for motor carrier drivers
during emergencies. State governors can petition DOT for these waivers or
grant waivers themselves. Source: GAO presentation.

Page 24 GAO- 03- 762 Propane 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. 8 In fiscal year 2003, this assessment is
anticipated to support a PERC budget of about $38 million.

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

8 PERC has increased its per gallon assessment 3 years of the 6 years
since it was established. Starting at 0. 1 cents per gallon of odorized
propane sold at the wholesale level, PERC*s assessment has increased to 0.
4 cents over its 6- year history. By operation of the law and the rules
adopted by PERC, 20 percent of the assessment collections are rebated to
state propane councils or similar entities.

9 This price composite index is the 5- year rolling average price
composite index of residential electricity, residential natural gas, and
refiner price to end users of No. 2 fuel oil. If PERC*s activities are
restricted under this provision, the Secretary of Commerce is to conduct
the price analysis again 180 days later. PERC*s activities are to be
restricted until the price index excess falls to 10.1 percent or less.
PERC, in its comments on the report, provided information that propane
prices have not approached the statutory threshold that would require a
limitation on PERC*s consumer education programs. Federal Oversight of
PERC

Has Been Lacking

Page 25 GAO- 03- 762 Propane examining whether PERC*s operation, in
conjunction with the cumulative effects of market changes and federal
programs, has had an effect on

propane consumers. In preparing this report, Commerce is required to
consider whether there have been changes in the proportion of propane
demand attributable to various market segments. In addition, the Commerce
Department is required to consider whether there have been long- term and
short- term effects on propane prices as a result of PERC*s

activities and federal programs. If the Commerce Department determines
that there has been an adverse effect on consumers, the Secretary is to
include recommendations for correcting the situation. According to
Commerce Department officials, however, the department has not completed
any of the required analyses or reports because it was unaware of that
responsibility.

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

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

aggregate on its books any unused agriculture funds, which remain
available for future agriculture projects. DOE did not take any further
action.

Page 26 GAO- 03- 762 Propane seek reimbursement for oversight costs
incurred by the federal government. Since its inception, PERC*s assessment
rate, and therefore its revenue, has

continued to increase. Table 3 shows the assessment rates, assessment
revenues, and the percentages of the assessment revenues spent on each
category of expenditures in each year from 1998 to 2003.

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

Assessment rate (cents per gallon) Assessment

revenues Communications

and consumer education b (%) Research and

development b (%) Safety and training b (%) Other a, b (%)

1998 0.1 $ 8,581,329 23 13 16 11 1999 0.1 9,666,889 25 16 22 17 2000 0.1
10,012,106 32 12 19 21 2001 0.2 19,236,525 49 12 16 13 2002 0.3 29,526,723
53 8 17 16 2003 c 0.4 38,000,000 54 17 13 15

Source: GAO analysis of PERC data. Note: All assessment revenues may not
be spent in any given year but could be carried over to subsequent years
if the revenues were not all spent. As a result, expenditures for the four
categories may not total 100 percent. At the end of 2002, PERC had $5,163,
370 in cash and cash equivalents and $12,457,904 in current and long- term
investments. a Other includes agriculture (not less than 5 percent of the
funds collected through assessments shall

be used for programs and projects intended to benefit the agricultural
industry), administrative (costs can not exceed 10 percent of the funds
collected in any fiscal year), propane industry relations, and other
miscellaneous items such as depreciation, and other administrative costs.
b Rebates to state propane councils or similar entities (20 percent of the
regular assessment collected by PERC in that state is rebated if the state
has its own propane council or similar entity) may be

included in all four expenditure categories. c Assessment revenue for 2003
is a budgeted projection. The expenditure percentages are based on

the budgeted expenditures and do not include the budgeted expenditures for
the state rebates since these rebates have not been finalized.

Of its 2003 budget of $38 million, PERC budgeted about 54 percent for
communications and consumer education, which in the past has included an
advertising campaign that marketed and promoted propane. This

advertising campaign has included television and radio advertisements to
promote the safe, efficient use of propane as a preferred energy source.
While the Propane Education and Research Act does not prohibit the use of
funds for marketing and promotion activities, there is some indication in
the legislative history that assessment funds were not intended to be used
primarily for these purposes. Specifically, although PERC was modeled
after agricultural check- off programs, a June 27, 1996, Senate report
stated that, unlike the agricultural check- off programs that focused

Page 27 GAO- 03- 762 Propane on marketing and promotion, the emphasis of
PERC*s propane assessment was to be research and development. 11 In 1996,
the Propane Consumers

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

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.

11 S. Rep. No. 104- 298 (1996). EIA Propane Information

May Be Enhanced

Page 28 GAO- 03- 762 Propane The EIA State Heating Oil and Propane Program
(SHOPP), a joint effort between state energy offices in the 24
participating states 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 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

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. Price Information Is Collected

Only for Certain States During the Winter

EIA Does Not Provide Information on Price Stabilization Options

Page 29 GAO- 03- 762 Propane mechanism to help keep costs down, thus
protecting against price spikes. In addition, EIA does not collect price
information on price stabilization

programs as part of its existing price collection surveys. However, in at
least one state, this type of information is collected. In the summer of
each year the state of Vermont provides information on different price
stabilization options, including the averages and ranges for cap prices,
fixed prices, and pre- buy programs for the upcoming winter heating
season. If EIA could provide similar information on a wider scale, more
consumers may be better informed. Data on different price options could
help residential propane consumers determine which price stabilization

options are most economical over the long term and which would best fit
their needs. 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 EIA Is
Working to Address

Industry Concerns That Inventory Data Are Incomplete

Page 30 GAO- 03- 762 Propane inventory data has included propylene* a gas
recovered from the natural gas stream prior to propane being supplied to
consumers* EIA recently

started listing propylene separately, so users of the data could determine
the actual propane inventory immediately available for distribution to
residential users. Third, beginning in 2004, according to EIA, it plans to
provide additional propane information, including export and product
supply data, on a weekly basis, which will make propane data comparable to
data on other petroleum products.

Propane prices can be as volatile and as unpredictable as the weather that
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,
lowincome assistance programs face the challenge of meeting client needs
with uncertain and declining federal resources that make it increasingly
difficult to mitigate the impact of price spikes. Finally, it is not clear
what impact, if any, the federal government could have on the propane
market

through its oversight of PERC operations because the federal government
has not provided active oversight of PERC.

We recommend that the Secretary of Commerce direct the department to
complete its required reports analyzing changes in propane prices and
examining the effects of PERC*s operation. Conclusions

Recommendations for Executive Action

Page 31 GAO- 03- 762 Propane In addition, we recommend that the Secretary
of Energy do the following:  Provide more active oversight of PERC,
specifically in its review of

PERC*s annual budget plan to better position the department to make
recommendations regarding appropriate PERC programs and activities as
called for in the Propane Education and Research Act of 1996.

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

We provided Commerce, DOE and PERC with a draft of this report for 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 Agency
Comments and Our Evaluation

Page 32 GAO- 03- 762 Propane propane price data to the EIA for
publication. Within this framework, two options are available. First, PERC
could provide

funds or grant money directly to states with the intent of expanding the
survey to include additional states and/ or additional data. These states
would work with the EIA as currently done in SHOPP. PERC funding could
expand total resources available to the states and still possibly free up
a portion of the resources EIA currently contributes to the states, which
could be then be used to strengthen parts of the propane effort within
EIA. Alternatively, if permitted within the PERC framework, funding could
be provided directly to EIA which would then incorporate the funds into
its existing state grants program. Either of these options would provide
the needed resources to improve information for such items as the
collection of wholesale and residential prices on a

year- round basis for additional states beyond the current level of 24,
provide for information about the different purchasing options afforded
propane consumers, as well as to provide for continuing efforts to enhance
inventory data.

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

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

Page 33 GAO- 03- 762 Propane activities, as reflected in several
provisions of the Act. 13 We have added language in the report that
clarifies this distinction. The Act authorizes the Secretary to request
PERC to submit reports on its activities as well as

reports on compliance, violations, and complaints regarding implementation
of the Act. The Office of Fossil Fuels commented that to date, the
department has not directly received any substantive public complaints
pursuant to which it would take such action. However, we do not believe
that the Secretary*s role is limited to requesting reports from PERC only
if DOE receives substantive public complaints. In addition, the Office of
Fossil Fuels commented that the Act does not authorize, or require, the
Secretary of Energy to approve the PERC budget. We agree; however, we
believe that DOE could take a more active role in reviewing PERC*s budget
and making recommendations, as authorized by the Act. The Office of Fossil
Fuels commented that DOE does review PERC*s budget and makes
recommendations to PERC regarding its programs and activities. The Office
of Fossil Fuels stated it had expressed concerns that PERC*s fiscal year
2000 budget did not allocate at least 5 percent of that

year*s funds for projects that benefit the agriculture industry. In
response, PERC explained that the Act does not require that the mandated
agriculture expenditures be made each year, enabling PERC to carry forward
and aggregate on its books any unused agriculture funds, which remain
available for future agriculture projects. DOE did not question PERC*s
explanation that the Act does not require that the mandated agriculture
expenditures be made each year, nor did DOE make any recommendations. To
our knowledge, this is the only oversight action that DOE has taken, and
we have included a note in our report discussing this action. Finally, the
Office of Fossil Fuels commented that DOE has no

13 The Act: requires PERC to annually reimburse the Secretary of Energy
for costs incurred by the federal government relating to PERC (15 U. S. C.
S: 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. S: 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. S: 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. S: 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. S: 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. S: 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. S: 6411).

Page 34 GAO- 03- 762 Propane responsibility under the Act to ensure that
propane assessment costs are not passed on to consumers. Further, it
stated that the section of the Act

dealing with this issue, Section 10, does not assign this responsibility
to anyone. We agree that the section of the Act dealing with this issue
does not specifically assign this responsibility to DOE or to Commerce.
However, the Secretary of Energy is authorized to require reports on PERC
activities and compliance with the Act. This could include reports on
compliance with the requirement in the Act that PERC not take any action
to pass the cost of the propane assessment along to consumers.

PERC agreed with our assessment of the propane retail marketers* consumer
price stabilization programs and the marketers* experience with these
programs, but disagreed with our assessment of propane supply and demand
characteristics and the need for federal oversight of PERC. PERC
questioned the validity of our assessment that propane supply and demand

are inelastic. We believe we have correctly characterized the national
market for propane demand and supply as being relatively inelastic,
particularly as it relates to residential demand. As we noted in the
report, propane is a basic necessity used for home heating (which PERC
also states in its response) and switching to alternative sources of heat
is costly and not practical during the relatively short period of time in
which price

spikes occur. In addition, there is no readily available source of
incremental production that can increase propane supply when needed, and
there are limitations in the capacity of the nation*s propane storage and
transportation systems. As a result, propane demand and supply are
relatively inelastic for residential consumers.

PERC questioned the value of our recommendations regarding federal
oversight of PERC. We believe our recommendations that the Departments of
Commerce and Energy carry out their oversight roles and responsibilities
reflect the congressional determination under the Act that such oversight
is both appropriate and necessary. Given recent volatility in prices and
congressional concern about the impact of PERC activities on

propane prices, these agencies should conduct more active oversight. We
revised our report to include PERC*s statement that the wholesale price of
propane relative to an aggregate fuel price does not exceed the statutory
threshold that would limit its funding of consumer education programs, and
we agree that the threshold has not been exceeded. Nonetheless, we

Page 35 GAO- 03- 762 Propane believe that the federal government should
provide more oversight of PERC to monitor and assess the effect of its
operations on propane

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

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

Sincerely yours, Jim Wells Director, Natural Resources

and Environment

Appendix I: Objectives, Scope, and Methodology

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

Methodology

Appendix I: Objectives, Scope, and Methodology

Page 37 GAO- 03- 762 Propane 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

Appendix I: Objectives, Scope, and Methodology

Page 38 GAO- 03- 762 Propane 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.

Appendix II: Funding for LIHEAP and DOE Weatherization

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

Weatherization

Appendix II: Funding for LIHEAP and DOE Weatherization

Page 40 GAO- 03- 762 Propane Table 4: Federal Appropriations for Health
and Human Services Low Income Home Energy Assistance Program and
Department of Energy Weatherization Assistance Program for Fiscal Years
1982 through 2002 (Dollars in Thousands)

LIHEAP DOE Weatherization Year Appropriations Constant 2002 dollars
Percentage of

1982 dollars Appropriations Constant 2002 dollars Percentage of

1982 dollars Total

Constant 2002 dollars

Total percentage

of 1982 dollars

1982 $1,875,000 3,125,000 100 $144,000 240,000 100 3,365,000 100

1983 1,975,000 3,185,484 102 245,000 395,161 165 3,580,645 106

1984 2,075,000 3,192,308 102 190,000 292,308 122 3,484,616 104

1985 2,100,000 3,134,328 100 191,100 285,224 119 3,419,552 102

1986 2,010,000 2,955,882 95 182,100 291,324 121 3,247,206 96

1987 1,825,000 2,607,143 83 161,300 230,429 96 2,837,572 84

1988 1,531,840 2,127,556 68 161,300 224,028 93 2,351,584 70

1989 1,383,200 1,844,267 59 161,300 215,067 90 2,059,334 61

1990 1,492,950 1,914,038 61 162,000 207,692 87 2,121,730 63

1991 1,805,000 2,228,395 71 198,900 245,556 102 2,473,951 74

1992 1,500,000 1,807,229 58 194,000 233,735 97 2,040,964 61

1993 1,346,030 1,583,565 51 185,400 218,118 91 1,801,683 54

1994 1,735,408 1,994,722 64 206,800 237,701 99 2,232,423 66

1995 1,419,000 1,594,382 51 214,800 241,384 101 1,835,766 55

1996 1,080,000 1,200,000 38 111,700 124,111 52 1,324,111 39

1997 1,215,000 1,320,652 42 120,800 131,304 55 1,451,956 43

1998 1,160,000 1,247,312 40 124,800 134,194 56 1,381,506 41

1999 1,280,000 1,347,368 43 133,000 140,000 58 1,487,368 44

2000 1,844,000 1,901,031 61 135,000 139,175 58 2,040,206 61

2001 1,856,000 1,874,747 60 153,000 154,545 64 2,029,292 60

2002 1,800,000 1,800,000 58 230,000 230,000 96 2,030,000 60 Source: GAO
analysis. Note: GAO analyzed annual HHS LIHEAP regular and emergency
appropriation data provided by the Congressional Research Service as well
as DOE- provided annual weatherization appropriation data.

Appendix II: Funding for LIHEAP and DOE Weatherization

Page 41 GAO- 03- 762 Propane When combined with the net effect of annual
LIHEAP grant carry- over funds, 1 HHS leveraging incentive awards, 2 and
HHS REACH grants, 3 the

Federal government provided about 54 percent of the total LIHEAP funding
available to the states in 2002. 4 For example, the combination of 2002
federal funds of more than $1.7 billion with state funds of more than $1.5
billion allowed states to provide eligible low- income households with
almost $3.3 billion in LIHEAP benefits. However, the degree of state

participation varies from 0 percent to 79 percent, with 9 states
contributing more than half of the total funds used to fund LIHEAP
activities in their states for fiscal year 2002, as shown in table 5.

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

LIHEAP funds a State Supplement to LIHEAP b Total all funds Federal funds
as

percent of total funds

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

1 42 U. S. C. S: 8626 allows states to carry over up to 10 percent of
their LIHEAP block grant into the next year. 2 42 U. S. C. S: 8626a
authorizes the Secretary to provide supplementary funds to states that
have acquired non- federal leveraged resources for the LIHEAP program. 3
42 U. S. C. S: 8626b authorizes the Secretary to provide some funds to
states in support of Residential Energy Assistance Challenge activities
that (1) minimize health and safety risks

that result from high energy burdens on low- income Americans; (2) prevent
homelessness as a result of inability to pay energy bills; (3) increase
the efficiency of energy usage by low- income families; and (4) target
energy assistance to individuals who are most in need.

4 This analysis includes only LIHEAP funding since state funding for
weatherization was not available.

Appendix II: Funding for LIHEAP and DOE Weatherization

Page 42 GAO- 03- 762 Propane State Federal LIHEAP funds a State Supplement

to LIHEAP b Total all funds Federal funds as percent of total funds

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

Total $1,777,026,992 $1,504,172,277 $3,281,199,269 54%

Source: GAO analysis. Note: GAO analyzed HHS provided LIHEAP appropriation
and funding data and LIHEAP Clearinghouse provided state supplemental
funding data. a Includes regular and emergency LIHEAP appropriations as
well as the net effect of appropriation

funds carryovers, HHS leveraging incentive awards, and HHS REACH grants
and excludes federal funds allocated to territories and Indian tribes.

Appendix II: Funding for LIHEAP and DOE Weatherization

Page 43 GAO- 03- 762 Propane b Includes state and local level
contributions, state system benefit and utility funds (rate assistance and
energy efficiency assistance), church and community fuel funds, bulk fuel
discounts, and miscellaneous contributions.

While historical data for all states were not available, LIHEAP*s data
clearinghouse, the National Center for Appropriate Technology, could
provide information for 2001 for most states. From 2001 to 2002, 32 states
(plus the District of Columbia) had an increase in their state LIHEAP

supplement, 1 state (New Mexico) had no change, and 10 states decreased
(information was not available for 7 states). Of the increases, 10 states
increased their supplements by a total of almost $474 million or almost 90
percent of the total increase. For example, Texas increased its LIHEAP
funding from about $4 million to $169 million from 2001 to 2002. Of the
decreases, one state, Maryland, represented 60 percent of the total
decreases (or about $9 million).

Appendix III: Comments from the Department of Commerce

Page 44 GAO- 03- 762 Propane Appendix III: Comments from the Department of
Commerce

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

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.

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

See comment 4.

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

The following are GAO*s comments on PERC*s letter dated June 6, 2003. 1.
We believe we have correctly characterized the national market for

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

2. We agreed, as stated above, that propane is a basic and essential
energy commodity. The emphasis of this report is on the residential
propane market and not on the industrial propane market. The petrochemical
industry can readily substitute other feedstocks for propane when propane
prices are relatively high. However, residential consumers are less likely
to switch to alternative fuels, since many are low income and retrofitting
or replacing heating units can be time consuming and expensive, and
alternative energy fuels may be unavailable in their area. 3. We believe
our recommendations that the Departments of Commerce

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

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

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

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

Appendix V: GAO Contacts and Staff Acknowledgments Page 49 GAO- 03- 762
Propane Jim Wells (202) 512- 3841 Mark Gaffigan (202) 512- 3168 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.
Appendix V: GAO Contacts and Staff

Acknowledgments GAO Contacts Acknowledgements

(360217)

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