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 

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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 sector1

 purchasing about 

45 percent of total production and the petrochemical industry purchasing 

about 37 percent in fiscal year 2001. The principal users of propane and 

their respective shares of total sales are shown in figure 2 below. 

 1

 The commercial aspect of this sector includes sales to mostly small businesses, which 

primarily use propane for space-heating, water heating, and cooking. 

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 

Pa

0 and quantity Q0 as determined by the intersection of supply Sa

 and demand D0. Next, assume that 

demand increases, as depicted by an outward shift in the demand line to D1. Because supply is 

somewhat elastic, additional supply is made available to meet the increased demand, albeit at a 

higher price Pa

1. The increase in price is represented by ∆Pa

 — the difference between Pa

1 and Pa0. 

However, in an inelastic supply situation, the supply response is weaker. A more limited quantity is 

supplied to the market to meet the increase demand, resulting in a steeper rise in price than in the 

more elastic case. Graphically, this inelasticity is represented by a supply line that is much steeper 

than the elastic supply line. Taking an extreme example, assume that supply is perfectly inelastic — 

that is, supply is fixed no matter what the demand — as depicted in panel B with a vertical supply line 

Sb

. The initial price and quantity are the same as in panel A. Given the fixed supply, in order to meet 

the same increase in demand to D1, the price would have to increase to Pb

1 to “choke off” the excess 

demand. The increase in price from Pb

0 to Pb1 for the inelastic supply case, as represented by ∆Pb

, is 

significantly higher than the increase in price in the elastic supply case, ∆Pa

. 
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 (Pa

0 versus Pa1) compared with the price response in the inelastic market in 

panel B (Pb

0 versus Pb1). In both examples, supply drops as depicted by an inward shift from S0 to S1. 

In this market, this drop could be due, for example, to an accident that disrupts a major pipeline. Also, 

in both examples, demand rises, as depicted by an outward shift from D0 to D1. In this market, this 

could be the result of an unusually cold winter snap. We have constructed both examples in such a 

way as to leave the quantity of the commodity unchanged at Q0. As can be seen, in the market with 

elastic supply and demand, the decline in supply and the rise in demand result in a relatively small 

price increase (∆Pa

). However, in the market with inelastic supply and demand, the increase in price 

due to the supply and demand shifts is considerably larger (∆Pb

). 

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, prices3

 for each month 

during the 5 years of winter heating seasons. We obtained comparable 

fixed-price contract prices from a large corporate retailer.4

 Based on the 

profile of an average residential consumer in a significant winter heating 

region, our hypothetical consumer participating in the price stabilization 

program purchases 900 gallons of propane per year. For purposes of this 

example, we assumed that the price stabilization program participant 

commits to purchasing 900 gallons during the summer each year for a total 

of 4500 gallons over the 5 years. For the consumer buying at the current 

market price, we assume the consumer buys the amount of propane 

actually needed that heating season (which varies with demand). We 

calculated the amounts purchased each year by dividing the national 

residential propane demand for each year by the total national demand for 

the 5-year period to determine the percentage of total demand for each 

year. We then used the resulting percentages to allocate our hypothetical 

5-year consumption of 4500 gallons over each of the 5 years. In both cases, 

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

gallons). 

 3

 Mont Belvieu propane prices are the most widely recognized prices in the world propane 

market according to EIA officials. 

4

 These prices do not include transportation costs or profit margins, making them more 

comparable to the Mont Belvieu price. Sometimes propane marketers charge a 

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

the contract price. 
Page 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 funding7 for LIHEAP. The Coalition of 

Northeastern Governors in March of 2001 urged the House Committee on 

Appropriations’ Subcommittee on Labor, Health and Human Services, 

Education, and Related Agencies to provide an advance appropriation and 

advance funding for LIHEAP for fiscal year 2003 as part of its deliberations 

for the fiscal year 2002 LIHEAP appropriation. In April of 2002, 129 

congressmen, members of the bipartisan Northeast-Midwest 

Congressional Coalition, requested that the Labor-HHS-Education 

Appropriations bill include $3 billion in advance appropriations for 

LIHEAP in fiscal year 2004. They stated “an advance appropriation would 

enable state LIHEAP directors to plan the use of their state’s LIHEAP 

allocation for the following fiscal year, including prepurchasing winter 

heating fuels to take advantage of lower prices.” As recently as January 

2003, 48 senators sent a letter to the President advocating the inclusion of 

advance funding for fiscal year 2004 in the fiscal year 2003 appropriations 

request. 

Funding for these LIHEAP programs is provided through federal grants 

and state supplemental sources. While federal LIHEAP funding accounted 

for the majority of funding nationwide in fiscal year 2002, state 

supplemental funding can vary significantly by state. In California, federal 

funds only accounted for 21 percent of total LIHEAP funding in fiscal year 

2002. Other states like New Mexico, are much more dependent on federal 

funds, with 94 percent of total funding in fiscal year 2002 coming from the 

federal government. Details on federal and state LIHEAP funding for each 

 6

 U.S. General Accounting Office, Energy Policy: Propane Price Increases During the 

Winter of 1996-1997 (GAO/RCED 98-52R, Dec. 16, 1997). 

7

 An advance appropriation is budget authority provided in an appropriation act, which is 

first available in a fiscal year beyond the fiscal year for which the appropriation act is 

enacted. Advance funding is budget authority provided in an appropriation act to obligate 

and disburse (outlay) in the current fiscal year funds from a succeeding year’s 

appropriation. 
Page 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 

educationb

(%) 

Research and 

developmentb

(%)

Safety and 

trainingb (%) Othera,b(%) 

1998 0.1 $ 8,581,329 23 13 16 11 

1999 0.1 9,666,889 25 16 22 17 

2000 0.1 10,012,106 32 12 19 21 

2001 0.2 19,236,525 49 12 16 13 

2002 0.3 29,526,723 53 8 17 16 

2003c 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 states12 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. § 6404(j)); requires PERC to 

annually submit its proposed budget to the Secretary of Energy who may then recommend 

appropriate programs and activities (15 U.S.C. § 6404(k)); states that the Secretary of 

Energy shall receive notice of PERC meetings and may require reports on PERC activities, 

as well as reports on compliance, violations, and complaints regarding implementation of 

the Act (15 U.S.C. § 6404(l)); states that PERC may recommend changes in the Act or other 

statutes that would further the act’s purposes to the Secretary of Energy (15 U.S.C. § 6407); 

requires the Secretary of Commerce to make its annual analysis of changes in the price of 

propane relative to other energy sources available to the Secretary of Energy, as well as to 

Congress and the public (15 U.S.C. § 6408(a)); requires PERC to inform the Secretary of 

Energy, along with Congress, of any restriction of its activities resulting from a propane 

price index exceeding a certain amount (15 U.S.C. § 6408(b); and requires the Secretary of 

Commerce to submit its biannual report (the Secretary of Energy may request a report 

more often than every two years) examining the effect of PERC’s operations to the 

Secretary of Energy, as well as to Congress (15 U.S.C. § 6411). 
Page 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 fundsa

State Supplement 

to LIHEAPb

 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. § 8626 allows states to carry over up to 10 percent of their LIHEAP block grant 

into the next year. 

2

 42 U.S.C. § 8626a authorizes the Secretary to provide supplementary funds to states that 

have acquired non-federal leveraged resources for the LIHEAP program. 

3

 42 U.S.C. § 8626b authorizes the Secretary to provide some funds to states in support of 

Residential Energy Assistance Challenge activities that (1) minimize health and safety risks 

that result from high energy burdens on low-income Americans; (2) prevent homelessness 

as a result of inability to pay energy bills; (3) increase the efficiency of energy usage by 

low-income families; and (4) target energy assistance to individuals who are most in need. 

4

 This analysis includes only LIHEAP funding since state funding for weatherization was 

not available. 
Appendix II: Funding for LIHEAP and DOE 

Weatherization 

Page 42 GAO-03-762 Propane 

State 

Federal 

LIHEAP fundsa

State Supplement 

to LIHEAPb

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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