Money Man

October 1, 2006 By    

It’s been 10 years since the propane industry agreed to tax itself in order to generate funds for research, marketing and
safety programs. As president of the Propane Education & Research Council, Roy Willis oversees the annual spending of
some $50 million in programs and projects designed to enhance the industry’s image and boost sales. Have those
efforts left the U.S. propane industry better positioned to respond to a radically changing global energy market? Willis,
who was given a five-year contract extension this summer, recently discussed those issues with LP Gas Editor Pat
Hyland. Here are excerpts from that interview.

LP Gas: How do you think propane industry
views PERC and its work to date?

Willis: That’s a hard question for me to answer
because I often am the recipient of good news and
compliments from the industry, and not always are
they forthcoming with their complaints and concerns.
I think by and large in the advertising and marketing
area the industry is very supportive of the work that PERC
is doing. I think they view the campaign as an economic success
now that we have objective metrics to verify that point of view. They
also seem to appreciate that we have sort of elevated the image of our
fuel; we have elevated the image of our industry. That was very important
to us at the beginning.

In the safety and training area, I think we have gone through a
period of transition and evolution with CETP, Gas Check and some of
the other safety and training products. It’s still not yet fully realized in
terms of its ultimate potential. Work is underway and the people who
are involved in things like e-learning are very encouraged by it, but
that problem is still out there. Generally, in the safety and training area
I think the industry is supporting the direction that we are moving.

On the technology side, we get a lot of support and I think more
and more of the industry realizes how important technology is to the
future of the industry.
So, all things considered I think we are making progress. Have
everyone’s expectations been fully realized? I definitely don’t believe
that. There is work to do. Obviously, there is a body of work out there
that I hope the industry believes is an asset and a real contribution to
the overall industry. I haven’t heard to the contrary, and I suspect that
if it got to the point that the industry believed that PERC was not an
asset – and in fact was a liability – that I would know about it. These
guys aren’t bashful.

I have heard from people that would like to see the assessment
lowered, and I have heard from people that would like to give it a go
without PERC. But I don’t get the sense that that is the majority view.

LP Gas: Has the measuring stick used to evaluate PERC changed
in eight years?

Willis: Absolutely. With the Market Metrics
Initiative and our ability to look at the impact of
advertising and marketing in the residential sector,
it gave us a new tool to measure return on
investment for our advertising and marketing
efforts. That’s been successful and positive in the
industry. It also gave us a baseline for other markets
still evolving. We don’t necessarily have sufficient
investment to measure impacts in commercial or
agricultural or industrial market places, but we at least have
head counts of businesses and gallons that go into those markets.

Over time we will be able to use those metrics to judge progress and
identify trends and issues in those markets.

There also is new data on safety-related issues – accidents and
fatalities through the incident data collection project. It’s not a tool to
calculate a return on investment, but it is a benchmark by which we
can identify trends in the marketplace and hopefully gain insight that
will enable us to better build training or consumer education materials
to further reduce accidents and injuries.

At some level, the real benefit is not necessarily in terms of measuring
PERC, but in measuring the industry itself. While the PERC
programs have a significant contribution to make in some programmatic
areas like safety and training, technology, and certainly in the
advertising and marketing arena, the truth is that it requires the entire
industry to be involved in the process of building and growing the
marketplace. We can have great technology, but if there aren’t marketers
in parts of the country that want to install it or actually even go
out and sell it to the local end-user with an aggressive sales campaign,
we obviously aren’t going to achieve a level of growth and demand
that we would like to. So these metrics are really measuring the cumulative
impact of all industry efforts.

When I was working both on Capitol Hill and at the IPAA before I came to PERC, I was a fairly regular observer of energy statistics that were produced by both the industry and the government. When I got to the propane industry in 1998, I was literally shocked at how little information there was at the national level on our industry. Still today,
we depend on voluntary surveys like API just to get a handle on the
market segmentation issues and the state-by-state consumption. It’s really important for our industry to get that information, to get those
benchmarks, to get those metrics because those are the tools that
enable us to be smarter and more efficient with our resources.

LP Gas: In what area does PERC most need to improve?

Willis: Several things come to mind. In the technology area I have
set a goal for myself and for the organization in terms of attracting
additional funding to our technology programs from both private and
government sources. We have had some success, but its not at the
level that I am satisfied with. I think ultimately the test of our work is
whether or not it’s viewed as a national imperative to support the
development of propane equipment technology. We have an
opportunity and we are developing contacts in outreach areas that
have considerable promise for us.

Beyond that, I think the greatest challenge is communicating to the
industry all the things that are being done as a consequence of PERC
and its various operations and programs. We have lots of newsletters,
annual reports, a continuing presence at every one of the major industry
conventions, and outreach to individual state meetings and conferences.

We work fairly closely with NPGA and state associations on an
annual basis, comparing notes and aligning programs and collaborating
on plans. But it seems that all of that is never enough to fully get
out the message about all the things that PERC has underway.

LP Gas: What is the propane industry’s greatest need for the next
five years?

Willis: Technology, technology, technology.

LP Gas: Why?

Willis: I think we are seeing a fairly interesting phenomenon. Our
bread and butter for the longest time has been the residential market,
and it remains the core demand domestically for propane. But energy
choices, efficiency and conservation are shrinking the market. So
even as we are adding new households, the demand per household
continues to shrink. We have to look to technology both inside the
residential market – and more importantly, I think, in other markets –
where propane can provide a seasonal and predictable demand
pattern for our industry. To do that it’s going to take technology that
could be as simple as a new agricultural appliance.

We are working
on everything from hay balers to steam cultivation or even using heat
as a defoliant. Those promise to add additional demand, and that’s a
good example of the direction that we are going with our research
programs in the ag area.

Technology is ultimately going to be the
way this market grows.
If we don’t have new technology, the forces that shrink our bread-and-
butter market will continue to collapse the size of our industry.

LP Gas: Do we need to change the domestic consumption model
that has existed for such a long time?

Willis: I don’t know that we have a lot of control. The reason
residential demand is so big is because that’s where the energy need
or consumers really is. We can’t compete in
most places against natural gas; we have a
market niche where we are fighting against
heating oil, wood, geothermal and others.

The way we keep that market is not by using
the same old technology, but by using
technology that satisfies those consumers’
energy needs better and more cost
effectively than their alternatives.

We also have an underdeveloped motor
fuel market. The whole forklift market is
dependent on motor fuel technology. The
opportunities there, I think, are very promising.

In our recent history we created some
obstacles for ourselves to overcome. But
based on the work going on and what we
now know, there is still a future for motor
fuel for this industry in this country. It’s
amazing to travel as I do around the world
and see how motor fuel is so central to the
industry in other parts of the world. But in
the United States it’s still just a single-digit
percentage of our consumption in the overall
pie. The potential to grow is significant.

Again, it will have to be based on technology
and will be driven by our ability to give performance
and environmental benefits at the
same time; and in some cases even provide
economic advantages to the alternatives.

You hear about Dixie Chopper and other
mower units being introduced into the commercial
market. To get numbers that indicate
that the cost of operating the propane model
is less than the gasoline model, that’s a technological
breakthrough that could make a
difference in some markets.

LP Gas: What is our industry’s single
greatest competitive opportunity?

Willis: I think the greatest opportunity will
be in the area of new technology in
agriculture and motor fuel and in our ability
to provide electricity and other energy to
residential and commercial consumers.

Ultimately, it’s about generating electricity
at some level. I look at technology as giving
us an opportunity to generate electricity,
not just compete against it. That doesn’t
mean that we are going to have a large-scale,
multi-megawatt propane power plants.

But, I do believe that distributive generation
propane has advantages over other alternatives
that, quite frankly, we haven’t really
begun to exploit yet. We have the technology
that can run residential-sized generators and
do it economically. We have a history of storing
sufficient amounts of fuel in a residential
environment that gasoline and diesel do not.

Now, it’s about seeing those markets evolve.
I think it will start off with demand for
standby power. Folks in the upper-middle
class who have security systems and work
from their homes and are dependent on communication
equipment need reliable power
whether or not the grid is up and running. We
have already seen some evidence that those
people will be the early adapters of the standby
power systems.

In other parts of the world, I am fascinated
at how even expensive electric-generating
equipment like fuel cells and micro turbines
are being used in some countries as peak
shaving in residential and commercial environments.

It is entirely possible that individuals
will have standby generators. If the cost
of electricity, say out in California between 3
and 7 o’clock is $25 a kilowatt hour, your
propane generator will kick on and you will
supply your house with your own fuel because it will be cheaper to do it that way
than to pay the utility for the electricity.
There is opportunity out there.

LP Gas: How important is it for state
associations to more fully engage in the
rebate program?

Willis: I think all of the states are engaged
in the rebate program. Ninety percent of the
states regularly use all of their rebate dollars.

Trust me, I have heard a lot recently from
the states about the rebate program and the
impact of the API survey on state allocations.
The real challenge we have with the state
rebate program has to do with the metrics
used to allocate the funds across the states. I
can’t say it enough: the problem and the
solution are one in the same. We have got to
make a decision to support the statistics that
only we as an industry have by getting as
many companies in the industry to submit
those survey forms. It’s sad to say that almost
the majority of the independents do not participate.

The multi-states all participate and
are very reliable in terms of allocating gallons
from state to state based on their business.

We have done everything we can to
ensure that the information is confidential
and protected, but for some reason companies
in the industry just don’t submit the surveys.

It takes less than 20 minutes to fill out
the survey because the data we are asking for
are numbers that generally are readily available
to the company managers. But getting it
out of them is difficult.

LP Gas: Is there a problem with some
companies not paying their PERC assessments?
How much is it costing the industry?

Willis: We look at it on a regular basis, and
each year we have been able to identify ways
to improve our collection program. That’s
important because PERC’s role really is to
ensure that there is a level playing field for
all marketers, and that all are contributing to
the program. We have found some problems
and we have gotten compliance without
resorting to our primary tool for
enforcement, which is taking someone to
federal district court. We also have late fees
and interest penalties, and we do impose
those. We haven’t sued anyone yet, but that’s
not to say that we’ve ruled that out.

Recently, a task force investigated the
collection system. While they didn’t identify
any specific company that was not complying,
they concluded that underpayments and
non-payment could add up to millions of dollars.

Our chief financial officer is working
with the task force, our accounting firm and
our market research partner to enhance our
collection efforts. I have also began talks
with the industry in Canada, from which
more than 10 percent of U.S. supplies are
imported, to improve tracking of odorized
imports that owe the fee.

Other checkoff programs, which are
mostly agriculture programs, don’t face the
same challenge because reporting of their
units of sale is mandatory; they are required
by law. I think if we had that same kind of
mandatory reporting we would certainly be
able to more accurately account for the
assessments. But, thus far, the industry is not
willing to call for mandatory reporting.

LP Gas: Are you advocating that?

Willis: I can argue the benefits of
reporting. It would certainly improve the
data we have. But I don’t view it as my job
to advocate policy for the industry.

LP Gas: What role will PERC continue to
play in the Global Technology Conference
beyond this year in Chicago?

Willis: There is a great deal of interest on
a global basis in the PERC research
program. Even though it may be modest in
terms of its share of our overall budget, it is
one of the largest propane-related
technology programs in the world in terms
of resource commit-ment. So I see a
demand for information about technology,
especially the work PERC is doing,
continuing.

More importantly, ideas are coming from
incredible places on how to grow the market
place using new technology. In the motor
fuel arena, for example, European and Australian
industries are well ahead of us in
terms of the technology and infrastructure.

Some of the work they have done there is
really helpful to us. But by and large,
propane technology is focused on still
improving the safety and efficiency of residential
and commercial consumption
devices. PERC is really the entity on a global
basis that’s investing in alternative uses
that don’t yet exist.

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