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Will federal intervention help ease supply, distribution issues?

July 24, 2014 By    

Propane leaders reach out to legislators, agencies in effort to strengthen supply, distribution chain after last winter’s struggles.

Pipeline transparency. Federal information and data collection. The Department of Commerce restriction on the Propane Education & Research Council (PERC). Hours-of-service (HOS) exemptions.

Minnesota marketers

Minnesota marketers meet with Rebekah Solem, a legislative assistant to Rep. Collin C. Peterson, D-Minn.

These and other supply-related issues took center stage at Propane Days, the National Propane Gas Association’s (NPGA) annual lobbying event in Washington, D.C., where propane marketers, suppliers and allied trade representatives visited Capitol Hill to brief legislators on ways the federal government can help ease propane supply and distribution for future winters.

“All of these are things we believe can make a material difference in how we operate in the winter,” said Phil Squair, NPGA’s senior vice president of public and governmental affairs, as he briefed a roomful of Propane Days attendees before they headed to the Hill. “The people on the other side of the table are going to know you had a tough winter, but our industry served customers – even if it cost us more to do so. If there was some short filling, [tell legislators] we voluntarily increased our transportation costs so that no customer would go unserved. That’s a pretty powerful message you can communicate to the people on the other side of the table.”

Sen. Al Franken, D-Minn., who also addressed Propane Days attendees, is actively crafting a bill with Sen. Tammy Baldwin, D-Wis., that’s intended to help alleviate some of the industry’s winter supply and distribution concerns. A Department of Energy (DOE) study that determines the cost benefits of a propane reserve, which Franken publicly proposed as a Midwest solution, could potentially be part of the bill.

“We shouldn’t be having these problems in the 21st century of the United States,” Franken said at Propane Days. “We shouldn’t have people shivering in their homes, scraping by to keep their livestock alive. That’s why I’m working now to do everything I can to help prevent this from happening again.”

Although the idea of a propane reserve has gained some traction in the mainstream media, some of Franken’s constituents – specifically propane marketers – have reservations about a reserve as a solution.

“In theory [a propane reserve] sounds good, but there is a limited amount of storage right now,” said Bradley Box, energy division manager at Northern Star Cooperative Services, in a meeting with a legislative assistant to Rep. Collin C. Peterson, D-Minn. “So if the government takes any supply for a reserve, that will create some problems. Storage is tight as it is.”

Box suggested a propane reserve positioned in the crude oil-heavy Bakken region of the Upper Midwest might be a worthwhile solution. But the problem Midwestern marketers like Box face is getting propane from where it’s available to where it’s needed. And in Minnesota, where the Cochin Pipeline is no longer a source for marketers, the alternative source is rail.

“In Minnesota we’re focused on putting all of our eggs in the rail industry,” Box said. “We’re trying to replace the greatest majority of supply by rail.”

“Are there enough railcars? We have pressure from oil coming over from the Bakken,” said Will Norman, co-president and COO at Como Oil & Propane, adding that an argument can be made that a rail crisis is coming.

Drew Combs, vice president of propane for CHS, supported Norman’s comment, saying rail companies will prioritize Canadian oil over propane.

“All things come back to educating consumers about how propane delivery works,” Combs said. “It helps to educate them that they need to fill earlier.”

Consumer outreach
One step marketers would like the Department of Commerce (DOC) to take that would allow them to better educate consumers about the benefits of summer fill and, ultimately, improve winter supply is to eliminate the financial restriction on PERC’s educational outreach activities. The restriction was put in place in 2009 amid rising propane prices, and the propane industry continues to lobby against it.

The industry argues DOC has used incorrect data to determine that PERC’s educational outreach activities were driving a disproportionate demand of consumer-grade propane compared to competitive fuels. According to NPGA, DOC mistakenly considers the Propane Education and Research Act (PERA) to be a law focused on residential propane use only. The law, however, states PERA covers the residential, commercial, agricultural, internal combustion and industrial markets.

“The formula DOC uses is problematic,” Box said in the meeting with Peterson’s office. “We think we have a pretty good chance of getting the restriction lifted. None of us want to see a repeat of last winter. We’ll do anything we can to make sure it doesn’t happen again. We want to be prepared for it if it does.”

According to NPGA, the industry has tried to make its case regarding the restriction directly to DOC in the past but with no favorable results. Now, the association is asking Congress to urge DOC to use data published in the Energy Information Administration’s “Petroleum Marketing Annual.” According to NPGA, this is the only current published source of annual, national and public propane price data as PERA requires.

“Sen. [Mary] Landrieu, [D-La.], wrote the best letter arguing our point, and she only recently got a response,” Squair said. “[DOC] responded and said they were convinced it’s a residential-only law. The House and Senate are keyed up on this law. We need to go back and up the level of concern we have.”

Greg Noll, executive vice president of the Propane Marketers Association of Kansas (PMAK), expressed his concerns about the DOC interpretation in a meeting with Republican Rep. Tim Huelskamp’s office.

“We have our hands tied on how to promote this industry,” Noll said. “We’re still restricted by this dinosaur interpretation.”

If industry representatives didn’t have their hands tied, Noll and others argue, propane marketers could better educate consumers about supply and distribution logistics and the importance of filling their tanks in the summer.

“Build summer load. Build year-round load,” said Roger Leider, executive director of the Minnesota Propane Association, in the meeting with Peterson’s office. “We would also love to build the autogas industry to be much bigger, but we need to be relieved of that restriction.”

Study supply, distribution
One issue Noll raised in his congressional meetings on behalf of Kansas marketers, along with PMAK’s Peggy Hurd and Ferrell North America’s Jimmy Ainsworth, was HOS exemptions. According to NPGA, the Department of Transportation currently has no authority to grant a waiver from the interstate system’s weight restrictions.

“Weight limitations are different in every state, so when an executive order is issued problems still happen,” Noll said.

Industry representatives are for the federal government conducting studies related to propane supply and distribution, as well. One example would be a DOE study to determine the impact of establishing a Midwest propane reserve. A second DOE study would focus on propane exports and their effect on the winter heating season.

“We know the importance of exports. We would see a depressed price,” Noll said. “But we would like exports to be critically monitored during the critical heating season. We don’t want exports when no product is around. We don’t want them to be hurting the U.S. market.

“When we pick back up after heating season then exports can take off.”

Ainsworth supported Noll’s case in their meeting with Huelskamp’s office.

“We would not ask the congressman to eliminate imports but to analyze whenwe’re importing,” Ainsworth said. “The concern is if we get low storage levels.”

A third study the industry asked for at Propane Days would be a Federal Trade Commission endeavor that assesses how propane markets performed during winter, whether they operated freely and whether natural supply-and-demand forces determined prices.

In addition, Ainsworth encouraged better oversight from the Federal Energy Regulatory Commission (FERC).

“We’re not typically looking for more regulations, but there is no oversight on [pipeline] tariffs,” Ainsworth said. “Some years ago Enterprise [Products Partners] wanted to double their tariffs. Our industry mitigated that, but there were big costs involved. I would encourage [Huelskamp] to get FERC to regulate the pipelines more.”

Another supply-related concern of Ainsworth’s is the number of available transport drivers during peak season.

“Going into the winter the trucking industry is short some 20,000 to 25,000 transport drivers,” he said. “That affects the season and asks us to go to a state’s governor earlier than we have in the past [for HOS exemptions]. We feel it’s time to start the conversation and garner the right support for seasonal exemptions.”

Noll weighed in on HOS exemptions, as well.

“HOS as a seasonal exemption would be useful for our industry,” he said. “There are seasonal exemptions in other businesses. We’re not asking DOT to remove items that pertain to safety. Let’s just fix service.”

The government and your business
What role can the federal government play in easing the winter pains you’ll experience going forward? Here’s a look at four federal departments and agencies, as well as actions the industry is urging them to take to help alleviate supply and distribution problems.

Department of Commerce (DOC)
The problem: DOC has restricted the Propane Education & Research Council’s (PERC) consumer education activities since Aug. 4, 2009. The growth in residential propane prices, compared to competing fuels, exceeded a statutory threshold outlined in the Propane Education and Research Act of 1996, the legislation that created PERC. As a result, a consumer-protection clause kicked in, and PERC has been limited to efforts pertaining to safety and training and research and development. However, since the restriction took hold, the Energy Information Administration (EIA) has stopped collecting this price data – measuring residential, consumer-grade propane prices – used by the DOC in its analysis.
The solution: If DOC used EIA-published data from the “Petroleum Marketing Annual,” the only relevant data currently available, DOC would find PERC is not exceeding the threshold, the National Propane Gas Association (NPGA) says. Thus, the DOC restriction would be lifted, and the industry would have more funds available to promote its product, encourage summer load and better avoid winter supply pitfalls. … On a separate note, NPGA also believes DOC should publish timely data on propane exports.

Energy Information Administration (EIA)
The problem: Unavailable and untimely EIA inventory data impacted propane marketers’ purchasing decisions last winter and was a contributing factor in the shortage.
The solution: NPGA crafted three solutions for EIA. One is to collect more comprehensive data on propane storage, including separate data for propane and propylene. EIA currently combines propane and propylene inventories. Another solution is to collect inventory at a higher resolution than the Petroleum Administration for Defense Districts (PADD) levels. A third is to collect storage capacity information at major market centers such as Conway, Kan., Mont Belvieu, Texas, and sub-PADD regions.

Federal Energy Regulatory Commission (FERC)
The problem: Propane prices spiked far beyond normal levels last winter due in part, marketers say, to a lack of propane pipeline oversight from FERC.
The solution: Increase FERC oversight of pipelines to include rate monitoring and adopt a conduct code for propane pipeline owners and operators that’s similar to one already in place for interstate natural gas pipelines.

Department of Transportation (DOT)
The problem:
According to NPGA, DOT currently has no authority to grant a waiver from the interstate system’s weight restrictions. This was a significant problem last winter as many marketers had transports cross multiple state lines to source propane and some states have irregular weight restrictions.
The solution: NPGA offers a solution in amending the Stafford Act, which would give the secretary of transportation the proper authority to grant a narrow waiver from the weight restrictions on the interstate highway system during a winter fuels emergency.

The propane industry experienced one of the most challenging winter heating seasons on record in 2013-14. In preparation for future winters amid a changing energy environment, LP Gas is examining the issues that led to what some called a crisis supply situation. We are reaching out to all segments of the industry to explore our past and future, bringing attention to key subjects, initiating industry dialogue and providing necessary education to our readers.

About the Author:

Kevin Yanik was a senior editor at LP Gas Magazine.

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