Wed., Feb. 26, 2014 | NEWS
h-e-L-P: The propane crisis in-depth
Part One: The basics, history and the issues
Part Two: The impact, stories and relief
Part Three: The causes, possible changes and conclusions
Greg Marsten | Staff writer
FREDERIC – If gasoline prices had tripled or quadrupled in the matter of a few weeks, you can be sure that political types, the media and the American people would be the proverbial torch-bearing villagers, seeking answers and action from Congress, the president and the oil industry.
Simple speculation on potential world conflict creates nearly immediate reaction in the oil industry, and the political pundits immediately look for someone to blame when it goes up by a quarter a gallon.
Yet liquid propane prices rose faster than ever before in recent months and the collective call for action was embarrassingly dismissive, following the lead of the LP industry, accepting their battery of excuses like gospel, doing everything but blaming it on haunted pipelines before they really explained the causes.
But apparently, enough people have pressed the issue, as it seems the true causes and subsequent possible changes in the industry are beginning to have some effect.
The first hints
In spite of what many people may have heard, the first hints at problems in the LP supply began to emerge in late October and early November, as many regional and local vendors pointed out.
"I first started to notice a problem in the first part of November, with that much volume of corn drying," stated Polk-Burnett LP manager Todd Miller, who stated that while it wouldn't have been that much of a shock with a normal December, the cold weather did not allow supplies to ever catch up.
Combine the shock of a late fall, excessive grain drying, cold weather and the maintenance of the Cochin supply pipeline for several weeks in November and December on top of already pressed rail services, and the writing was on the wall for a perfect storm of an LP crisis.
The allocation system on LP is confusing but, in general, is one of a ratio of about three loads in winter for every one load in summer. As Miller and others pointed out recently, one answer to preventing the shock of the system in the fall and winter is to load up in the summer when the supply is inherently cheaper and more plentiful.
"But it's human nature to wait," Miller said.
As the weather continued to hammer the northern climates, the supplies never were able to recover.
There was solid transportation action by dozens of U.S. governors, lifting weight restrictions to allow larger loads and even allowing drivers to add hours to drivers logs as some of them drove deep into the South to find LP, often waiting in line for hours for nonallocated LP.
If you wonder where much of the extra money went as the prices skyrocketed, just look to delivery costs, as many local vendors wholesale costs rose by as much as 250 percent in several weeks.
The law of supply and demand began to bite the LP industry in the tail, as the need grew exponentially in the colder climates. The supply was either in the Deep South or had headed overseas to locations where they were getting a much higher wholesale price.
U.S. statistics support that conclusion of the overseas shipments, but it took many weeks for the industry to fess up. Like a child who spilled milk, it was everybody else's fault. Evidence of overseas shipments rising to six times their 2008 levels suggests the domestic supply was vulnerable to a cold winter and the other agent of the perfect storm.
"It did catch everybody off guard," stated Polk County emergency management director Kathy Poirier. "We knew before the price hikes that there was an issue with the supply."
Poirier and the Wisconsin Emergency Management Department had been doing vendor surveys, realizing an issue was going to pop up, and they had almost daily updates on the issue starting in January.
While WEM is not responsible for residential heat supplies, they do have elaborate contingency plans for things like massive electrical outages, where even with wood-burning stoves, homes would freeze without fans, heat pumps or space heaters. The LP issue was not on their radar prior.
"It was kind of a unique situation, not a typical emergency," Poirier said, outlining how they have plans for mass emergency shelters in the case of a major outage, but spot LP shortages or empty tanks was a different animal entirely.
"We have addressed long-term power outages, somewhat, without those things, pumps and fans, etc.," she added. "But this? Not really. It certainly brought a lot of things to the forefront, especially when there's almost no regulation of it (the LP industry)."
She talked of the heat-assistance programs, Salvation Army, Red Cross and other services, but even then there are people who don't qualify for help or have unique situations.
"There are always those who fall through the cracks," she said, noting several pieces of legislation that were meant to keep vendors from going under, such as loans from the Small Business Administration, but the WEM plans and the Department of Administration do not usually address residential issues.
Poirier and others in emergency management have discussed other supply issues, such as diesel or gasoline, and how there may be limited reserves available for law enforcement and emergency services. Even then, it's not like they keep special tanks filled and waiting for the big one to drop; they usually just have a percentage of the current supply available for emergency agency use only.
"It’s more of a priority supply issue," Poirier said. "But LP? That's different. Who's going to pay for emergency supplies and the tanks and the like?"
The natural gas realization
Much of the municipal world, with people who live in cities and villages, relies almost exclusively on natural gas, which is cleaner burning than LP and delivered through an elaborate underground pipeline infrastructure.
Therein lies another issue, as only the bulk of elected officials and people in power heard of the LP issues. While there was a brief regional blip of a problem in the natural gas supply after a northern midwinter pipeline fire affected portions of western Wisconsin and much of the Twin Cities metro area, it was solved within a week and became old news.
The reality, depth and extent of the LP crisis was never solved, per se, and only came to light with resident complaints of urgency.
But prepare for discussions on natural gas supplies as world unrest and political turmoil have reeled across Eastern Europe in recent weeks, upsetting the possible future of their natural gas supplies as spring arrives. A large percentage of Europe's gas and oil bubbles through Russian pipelines across the Ukraine, so energy and gas and oil issues are no longer just a Middle East problem.
In fact, the recent turmoil in Eastern Europe may eventually rival Middle Eastern oil-based vulnerabilities. While Russia's recent advances have threatened the natural gas supply of millions of Europeans, several high-placed political officials, including former presidential hopeful and Arkansas Gov. Mike Huckabee, have attributed the Russian advances almost directly on America's lack of domestic energy production, and not selling energy to Europe to make the Ukraine pipelines less important.
Others have noted the Arab spring-style oil industry fragility, but they only need to look as far as the rural Midwest LP crisis as an example of overseas domestic sales gone amok.
The LP overseas sales issue
As noted earlier, overseas LP sales likely contributed, at least in part, to the regional supply shortage. Combining with all the other factors, it became an emergency quite quickly.
Wisconsin U.S. Sen. Tammy Baldwin was among the first to point out the LP shortage's disastrous situation on the state, and while there was rare bipartisan agreement that the LP crisis indeed was real and avoidable, the actual answers on why it was a problem were elusive.
The Propane Energy and Research Council almost exclusively related it to transportation and, while nearly 4 million Americans who rely exclusively on LP for heat in 30 states began to see their supplies dwindle and bank accounts drain, the industry went into spin mode, it seemed, and continued to cover their tracks on the true causes and how serious it had become.
"The supply of propane is not the issue," PERC stated in late January. "The real problem for many states is transporting propane from where it’s stored to where it’s needed. Federal and state authorities have executed orders to facilitate the shipment of propane in 30 states, including lifting hours-of-service exemptions."
But there was a serious supply issue as the weather continued to go arctic, as people in the industry later admitted.
The supply problem grows
Several weeks later, PERC initiated several studies to assess the infrastructure and market factors that led to the LP crisis.
"At a time when U.S. propane production is at an all-time high, PERC wants to know what can be done to ensure that propane can be quickly and affordably put to use here at home, even during times of extreme weather. In order to do that, it will explore a variety of factors," they wrote, addressing the need to address the transportation infrastructure, specifically the shutdown of the Cochin pipeline, reversal of another pipeline that previously transported and other issues regarding the competition for pipelines.
"Measures must be taken to ensure that the proper infrastructure is available to move propane from large, national storage facilities to local propane retailers, especially in the winter," PERC said in a release.
They also noted the lack of large-scale storage facilities in the Northeast and Midwest, where most LP is used.
"Increasing local storage capacity in these regions would enable quicker response to increased demand but often requires overcoming local political and perceptual hurdles," they wrote, but most local vendors and even some government officials have said this does not seem to be a problem in our region.
As an example, Polk-Burnett has seven 30,000-gallon tanks at two locations in Centuria and Siren, which may seem massive, but is in fact just a six-day supply in cold weather. That's over 400,000 gallons of LP stored by one firm, and while they are among the largest in the county, other firms maintain large supplies, as well, and several are considering adding additional large-scale tanks after the LP crisis.
While the supply issue is beginning to clear up and is expected to be close to manageable in the coming weeks, with warmer weather, several firms also noted that people are still waiting until their tanks are even lower, so they can get lower prices.
"In some ways, that may have helped us take care of some of the backlog," Miller said. "It might have been a good thing for people to wait now."
The export issue
Several high-placed officials have started to note the growing export issue, and even PERC admitted in a later press release that it would be part of their own research initiative study, after previously ignoring the problem.
"(On the export issue) the U.S. is producing ample propane supply, but more is being shipped overseas than ever before,” the release stated. "In 2013, more than 20 percent of U.S. propane production was exported, up from 5 percent in 2008. Increased exports have made a large portion of these stockpiles unavailable for domestic use."
Sen. Baldwin was among the first to question the LP industry's practices. In a letter to Federal Trade Commission Chair Edith Ramirez, she sought an FTC investigation into the crisis, suggesting that Wisconsin residents and businesses that rely on the fuel and the Midwest, as a whole, are suffering because of selling ever-increasing amounts overseas.
"(I have) requested that the Federal Trade Commission investigate the propane crisis in the Midwest and whether any illegal activity has contributed to the dangerous supply shortages and excessive prices in light of the fact that propane exports increased by 120,000 gallons a day while Wisconsin faced a supply shortfall," her statement last month read. Baldwin also called on President Obama to moderate exports to ensure consumers have the fuel they need to keep warm through the winter.
In a statement last week, Rep. Sean Duffy's office noted the same, how his office has been inundated with LP calls expressing concerns on the overseas export issue, after noting how he worked with the White House, USDOT and other agencies to alleviate the transportation issue. He also had an interesting side note:
"(Last week) the House acted to extend the (transportation) waiver(s) through the end of the spring. I co-sponsored that bill, and was glad it passed ... This week I also met with National Propane Gas Association director, and Wausau resident, Gary France. He told me that without this waiver, some supplies could have been cut by up to 30 percent!" Duffy exclaimed. "During our meeting, Mr. France and I also discussed concerns that I’ve heard from many constituents regarding exports causing an increase in prices and allegations of price gouging."
Duffy noted the previously ignored issue of overseas shipments, but apparently did have some cooperation from his meeting.
"While propane production is at all-time highs, exports are outpacing our ability to produce propane at home. We must have a mechanism in place that ensures that when a propane crisis hits home, we’re able to ensure Americans have access to the propane first," Duffy wrote. "I was encouraged to hear that Mr. France agreed and he and the Propane Gas Association will continue to work with the government and industry to make sure these concerns are addressed and answered."
It may seem that with enough pressure, attention to the true causes and background, the LP crisis may really be addressed in depth by people in charge.
Why not regulate?
As the LP crisis begins to ease, the possible outcomes of an outside look at the industry leads to an obvious question regarding regulations. But the LP industry is already facing such pressures in Minnesota, where several bills have been proposed to regulate the industry's practice of shutoffs.
Referred to in the Minnesota Legislature as HF 2537 in the House and SF2164 in the Senate, they both address residential propane customers’ sale and service terms and the discontinuance of service during the heating season. In a nutshell, this bill would, if passed, cause propane suppliers to provide services and programs for propane customers and, if the customer met minimal requirements, maintain service throughout the heating season regardless of past-due account status. It also calls for propane marketer registration with the department of commerce annually and weekly reporting of their sales prices and purchase prices for propane.
There is also a proposal to address so-called price gouging, although it is notably vague and hard to define. It uses terms like "reasonable" in terms of prices, which is not likely to pass legislative muster.
Regardless, the national and state LP lobbying efforts will fight madly against any regulations, and have maintained that they should be exempt from regulations at all cost. They have been consistently against such regulation, as they illustrated in a 2010 White Paper on the possibility.
"(The NPGA) strongly opposes initiatives, whether legislative or regulatory in nature, to subject propane or propane dealers to the jurisdiction of state public utility commissions. Doing so would fundamentally change the nature of the propane industry and how it relates to its customers with respect to either price or terms and conditions of service," the paper noted.
The paper cites several reasons why they are different including that LP dealers do not have the attributes of a public service company, using permanent physical connections. "They do not have an exclusive service territory in which the state has authorized them to operate, they are not monopolies, and they do not have the power of eminent domain," they write.
The irony is that the paper then mentions that, "While propane may be viewed as a necessity of life by some customers who use it as a fuel for heating and cooking, other fuels which are sold and distributed in a fashion similar to propane (such as fuel oil, coal, wood, kerosene and others) are not said to be affected with the public interest and have not been subjected to PUC regulation."
In other words, heat is a necessity of life, but not all things that make heat are subjected, so vis-a-vis, LP should not be regulated.
"Food, clothing, gasoline and housing are also necessities of life, but these industries are not regulated as public utilities," the paper adds, ignoring the extensive regulations regarding all of those industries, from safety and labeling standards for food, to octane ratings for gasoline, rental standards for housing and more. The paper seems to relate bananas to cornflakes, on the fact that many people use them for breakfast.
The NPGA White Paper also cites several interesting conclusions on why they should not be regulated, which might stand muster, except that many of the very reasons they cite seem to have contributed to the recent LP crisis:
"... At this point, subjecting propane dealers to control by public utility commissions would result in a severe disruption in service as extensive hearings would be required to determine which dealer would become the exclusive supplier in a given area and how the “losing” dealers would be compensated for the loss of their business. The latter issue could engender claims that certain dealers are being deprived of their property rights in violation of the United States and state constitutions, further disrupting what is now a well-functioning industry."
In conclusion, the industry seems to shy away for earlier mentions that LP supplies and heat for many people is a "necessity," and thus should fall under the guise of some sort of controlling factors:
"The sale and delivery of propane is not so affected with the public interest that it should be placed under the jurisdiction of a public utility commission. Propane dealers do not have an “obligation to serve” (i.e., an obligation to sell to the public at large); instead, they market to a limited number of customers through individual transactions."
While the conclusion seems frank and to the point, it misses several major issues, not the least of which is that consumers have the benefit of competition only when they contract with a dealer. They are bound through container laws and other NPGA-derived rules that they can only buy product from that supplier, regardless of condition, supply, price or market conditions.
Competition is only a reality when there is available product, and as the last few months have shown, that is when customers are held hostage.
It is different than buying a 20-pound tank for an ice shack or a barbecue grill business and residential heating is, indeed, a necessity of life, and should probably be addressed as such.
The LP industry has made its own rules for decades, and while they have generally been a reliable commodity with a fairly efficient delivery system, they have also escaped general regulations that even the most basic utility follows, almost entirely because of their delivery system, or lack thereof.
But as this industry-created crisis has shown, the very competition they tout as the reason for no regulations has bit them in the tail like a hive of angry hornets, and they've passed their own foibles off to the customers in the form of short supplies, greedy practices and embarrassing service policies.
Several problems have emerged in the course of this research, not the least of which is that LP is not a luxury in cold weather, and that so many companies, including large, publicly held firms that trade on Wall Street, and even a local cooperative, can literally leave customers to freeze is embarrassing and absurd in a modern society.
When confronted with the cruel, heartless and 19th-century nature of those policies, they routinely pass along information for emergency relief programs as an "answer," which turns public emergency assistance funds meant for the truly needy into taxpayer-funded ways to keep their billing current.
Having a clean, zero-balance bill as a lone qualifier for keeping the heat on is not always going to be a reality when those LP deliveries can exceed $1,000. If nothing else changes, these ridiculous, shortsighted policies deserve public scrutiny and shame for the companies behind them. However, there are so many, it's hard to point the fingers at just a few.
With customers under exclusive contract with the company they owe, many cannot get fuel, and people, livestock, homes and businesses freeze.
The practice reeks of the Old World monopolistic policies of the Hudson Bay Company, where settlers were almost held hostage by the only company in town, to either buy their goods or not have a choice. Where competition dissolves into a stranglehold of billing, forcing people to go without heat or seek public assistance, as the firms refuse to work with them on solving the crisis, they in effect, create another crisis.
These policies are akin to the medical industry withholding emergency treatment until past bills are paid, which would seem barbaric in a modern society, but it is apparently acceptable as "competition" in the LP industry. Even jewelers, hardware stores, lumberyards and yes, other utilities have billing procedures.
While it can be argued that customers should set up prebuy or billing programs, reality does not always support those programs as viable for renters, limited income households or others, and in fact, those policies likely contributed to the propane crisis as people waited until the last possible minute for $1,000-plus fills, just as the weather turned brutal.
The answers are not easy
That LP escapes the legitimate governing of so-called "Cold Weather Rules" of most other utilities deserves a closer look. These policies have led numerous people to seek other sources of heat, not all of them safe, and at least some communities, such as Scandia, Minn., are looking to possibly expand natural gas lines to smaller housing communities, just to avoid such monopolistic, vulnerable practices of the LP industry.
"The city will try and facilitate discussions with two utilities to extend natural gas service to areas currently on propane," Scandia Administrator Kristina Handt told the Leader in recent weeks and other municipalities have discussed additional solar or possible expansion of energy portfolios to combat energy vulnerability.
While LP has fallen back on how great competition is, they have ignored the downsides of the industry competing among itself for its own product, even across oceans, where the politics of the BTU have become a harbinger of future battles.
The issues within the LP industry can be summed up by adding one word to a famous Edward R. Morrow quote on McCarthyism: "We cannot defend (energy) freedom abroad by deserting it at home."
Domestic LP production is at an all-time high, yet supplies are limited by a fragile network of pipelines, trucking rules, overworked and strapped rail cars and relatively little rural storage. It is akin to being in the expansive forests of northern Wisconsin and not having any firewood.
Yes, we have a system of pipelines built in the 1960s that require ever more maintenance and expansion, especially as rail lines are rarely being added. The growing boom of oil production in areas like North Dakota has also affected the existing ability for transportation for other forms of energy.
On that note, the alternatives to LP have also become the fallback to the LP industry, from wood pellets to corn to solar, expanding our energy portfolio, even in the residential home, is a true measure of security. Tax credits for alternative energies should be expanded, to lessen the reliance on single energy sources, and programs to expand and adjust private home efficiencies should be expanded far beyond their current application.
As any modern business owner knows, tax credits are the same as cash, and giving tax credits to homeowners, landlords or business owners for expanding thermal efficiency is a win-win.
Domestic heat is not a luxury to be gambled on by investors. Period. Ditto for grain drying, which even the industry admits contributed to the LP shortage. Grain dryers use massive volumes of LP, and much of that energy used to dry corn was for expanded ethanol production, and not for the safety of human consumption, as some have argued. One agricultural grain dryer can use as much LP in one hour as a typical home uses in a month.
While the dramatic increase in LP costs for various industries, from agriculture to numerous private business will of course be passed along to the consumer, that the practice can be such a factor in the domestic safety of the nation cannot be ignored.
Things to consider
If the LP industry wants to be exempt from regulations, then they should be at the forefront of innovation and encourage private LP tank purchases to encourage true competition, instead of the fake practice of competition until the tank is installed.
Maybe it is time for state container laws to be addressed in light of the recent crisis. While the LP industry has fought hard to make sure only the licensed owners of tanks should be allowed to fill those tanks, in the name of safety, the anti-trust laws have been applied at times, and if the supplier cannot meet needs in a reasonable amount of time, possibly set by the PSC, instead of the NPGA, then the supplier should be forced to find a supplier who can fill that tank.
The container law restrictions were fashioned for safety, under the guise of a competitive market only. If that competition is, in essence, for supply among vendors alone, the rules should change and the industry should recognize that safety is about more than just leaks and maintenance, it is also about the customer's safety of having heat. Customer safety in regard to maintaining heat is routinely ignored in the container policies that apply in 42 states.
While this is likely to draw negative responses from groups like the NPGA, they have repeatedly defended their policies as built around safety, but refused to accept the responsibility of the consequences of the lack of their product, if it is not available for extended periods of time.
It is not an easy quandary, but the BTUs of a heating system should not be considered a luxury, like jewelry or cable TV. It is a necessity of this climate, and the rules need to better protect the consumer, and not just the industry.
While many suppliers have touted the need for prebuying to alleviate future energy issues, it is hard to imagine what the price will be one year from now, and it surely will not be as low as it was, as the industry is likely to adjust itself. Most vendors thought the price will be between 20 and 30 cents higher, at least, this summer.
The issue of efficiency is important, either in furnaces or other areas, and one thing to emerge is the need to control their usage, which things like LP water heaters do not easily allow. You can have alternate sources of space heating and cooking with LP is minimal, but water heating is hard to vary and likely leaves little options.
The results of the numerous queries from customers left without heat or sitting on several-thousand-dollar bills for LP is dramatic, and requires legislative attention. It will drastically affect the rural economy of this and many areas, and simply assuming it is solved now is ignorant, sad and disappointing.
We can do better as a nation, whether the industry agrees or not.