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

GAO-03-762: Published: Jun 27, 2003. Publicly Released: Jul 28, 2003.

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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.

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.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In a letter dated June 12, 2003 commenting on the GAO Report (see appendix III of GAO-03-762), the Secretary of Commerce stated that he had directed Commerce staff to prepare reports in 2003, analyzing changes in propane prices and examining the effects of PERC's operations and related developments on propane consumers. The Secretary also stated in the letter that he directed hereafter that similar reports be regularly prepared according to reporting cycles established in the Act.

    Recommendation: The Secretary of Commerce should direct the department to complete its required reports analyzing changes in propane prices and examining the effects of PERC's operation.

    Agency Affected: Department of Commerce

  2. Status: Closed - Not Implemented

    Comments: The Office of Fossil Fuels, under the Department of Energy, was responsible for responding to this recommendation in reviewing GAO's draft report. In summary, as noted in the report, they do not agree with the recommendation because they believe the Act conveys oversight responsibilities on the Department of Commerce, not the Department of Energy. Therefore, they do not see a more active PERC oversight role for the Department. EIA, speaking for the Department in its November 20, 2003 response, in accordance with section 720 of title 31, United States Code, reiterated its non-concurrence with this recommendation. However, EIA also recognized confusion over what agency is ultimately responsible for oversight of various activities within PERC.

    Recommendation: The Secretary of Energy should 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.

    Agency Affected: Department of Energy

  3. Status: Closed - Implemented

    Comments: EIA has considered the cost and benefits of improving EIA's propane market information and has made proposals to improve such information. Specifically, in light of limited available resources, EIA has suggested that the potential exists for some level of additional funding for the enhancement of propane data collection efforts by EIA through the Propane Education and Research Council Act of 1996 (PERC). The source of funds could be garnered from PERC to provide the types of propane market information enhancements outlined in the GAO report. EIA has studied and considered the costs and benefits.

    Recommendation: The Secretary of Energy should direct the Administrator of EIA to study the potential cost and benefits of continuing to improve EIA's propane market information. Consideration should be given to improving information for residential consumers regarding prices and different purchasing options as well as continuing to address industry concerns regarding inventory data.

    Agency Affected: Department of Energy


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