Propane the Exceptional Energy

Transcription

1 National Propane Gas Association June 2001 Propane the Exceptional Energy Policies for a 21st Century Fuel

2 Table of Contents EXECUTIVE SUMMARY Principles of a New Energy Policy SECTION I: GENERAL POLICY OVERVIEW Introduction Propane Markets: A Brief History and Description Meeting America s Energy and Environmental Needs The Propane Advantage Propane and the Rural Economy Propane: Focus on the Future SECTION II: SPECIFIC POLICY ELEMENTS Create Competitive Markets to Foster Efficient Energy Use and Environmental Improvement Promote Efficient Use of Energy Promote Environmental Quality Observe Fuel Neutrality Provide Critical Information Enhance Fuel Distribution Efficiency Maintain Over-the-Road Delivery Capability Ensure Pipeline Availability Improve Waterborne Deliverability Increase Rail Efficiency Expand Storage Capability Add Flexibility to Federal Assistance Programs Encourage Diversity in Primary Energy Sources Provide Incentives for Domestic Production Promote Energy Security through Diverse Import Sources Support Research and Development

3 Policies for a 21st Century Fuel EXECUTIVE SUMMARY Rising prices and shortages have once again made energy a topic of concern for policymakers and the general public. Energy is critical to the U.S. economy, yet we tend to take abundant, reliable and economical energy supplies for granted. When prices are low and supply is abundant, few people care about the growing dependence on OPEC or the difficulty in siting new energy facilities. Such issues are raised only at obscure policy seminars attended by industry analysts and insiders. For those who thought that energy shortages and price spikes were a thing of the past, the last two years have been a rude awakening. The western U.S. in general, and California in particular, suffers from inadequate electric supply and skyrocketing wholesale electric prices. California has had several rolling blackouts in the past year, with more expected this summer. The price of transportation fuels increased sharply in late 1999 and has remained at historically high levels. Siting of new energy infrastructure including generating plants, pipelines, and storage facilities is costly, time consuming, and difficult in the best of circumstances. In short, there is a growing realization that cheap, plentiful energy cannot be taken for granted and that a new national energy policy is needed to ensure that our nation s economic growth and prosperity are not jeopardized by problems in the energy sector. A new national energy policy should, among other objectives, foster the production and use of clean, versatile, domestically produced, portable, and widely available fuels. One fuel that meets all of these criteria is propane. Propane is used extensively throughout the U.S., supplying roughly 4 percent of our national energy needs. Although many Americans think of propane as a grilling fuel, much of rural America regards propane as the essential fuel for homes, businesses, and farms. Propane is used in a wide range of residential, commercial, and agricultural applications, including home heating and cooling, the manufacturing of petrochemical products, and crop drying. It is also an environmentally friendly alternative transportation fuel. 3

4 Unfortunately, energy policy rarely has recognized propane s many positive attributes, reinforcing the incorrect view of propane as a niche fuel. As the nation looks anew at national energy policy, it is time to reassess the critical role that propane already plays in the energy mix and aggressively move to expand that role. There are barriers to more widespread use of propane that must be addressed through an energy policy that recognizes the many advantages of this remarkable energy source. To overcome the legal, regulatory, and other obstacles hindering propane s ability to expand its contribution to meeting our nation s energy needs, the National Propane Gas Association recommends that the following goals and provisions be included in national energy legislation: Promote Efficient Energy Use! Modify federal energy efficiency standards to consider overall source-to-site efficiency.! Sponsor the development of a model analytical framework that state regulators could use to assess the site-to-source implications of electric utility demand-side management programs and gas utility proposals to expand their distribution area. Encourage Diversity in Primary Energy Sources! Provide authorization to expand domestic oil and gas exploration and production in areas such as the North Slope of Alaska and the outer continental shelf.! Provide incentives and a favorable regulatory climate for new investments in domestic refining capacity. Observe Fuel Neutrality in Tax Policies! Restrict the ability of rural electric cooperatives to use tax-exempt status to gain an artificial competitive advantage in propane supply and distribution. Promote Environmental Quality! Establish a federal emissions certification program designed specifically for small volume manufacturers to facilitate certification of after-market alternative fuel vehicle conversion. 4

5 ! Promote the use of alternative fuels by exempting clean fuels from the Federal Highway Motor Fuels Excise Tax for a period of ten years and by establishing additional incentives targeted toward the development of vehicles and infrastructure. Enhance Fuel Distribution Efficiency! Natural Gas Liquid Pipelines: Ensure that allocation policies and guidelines are openly published and distributed.! Over-the-Road Trucking: Maintain flexibility in hours of service (HOS) regulations and establish an HOS pilot program for propane marketers.! Tankers and Barges: Exempt propane suppliers from the Jones Act during winter months to facilitate emergency shipments of propane.! Railroads: " The Surface Transportation Board should undertake a study of railroad service quality, focusing on the effects of mergers on performance. " Railroads should publish on-time-delivery statistics.! Storage Facilities: Create a tax incentive to expand storage capacity.! Petrochemical Disclosure: Provide statutory authority to the U.S. Department of Energy to require disclosure of petrochemical feedstock inventories. Support Research and Development! Federal R&D efforts should leverage and coordinate with the propane industry s R&D program, with a particular emphasis on assisting the development and commercialization of fuel cell and microturbine technologies that would benefit rural America. 5

6 Principles of a New Energy Policy There actually is significant agreement on the essential contours of energy policy in the 21st century, and that agreement is built upon a bipartisan understanding of energy that has been in existence from the 1970s. Obviously, some of the particulars are subject to debate and emphasis shifts according to the immediate problems identified. However, basic principles remain the same: # Efficient energy use is critical # Competitive markets should be fostered wherever practical because robust competition is the best way of delivering energy services at affordable prices # Fuel diversity in production and distribution must be maintained # Domestic energy sources should be encouraged # Environmental protection should be encouraged # Energy infrastructure must be expanded significantly and in an environmentally responsible manner Today s use of propane is fully consistent with these policy objectives. Moreover, expanded use of propane in lieu of other energy sources can help accomplish many of these objectives at an affordable price, if policies are adopted that help expand propane markets. Given all of its advantages, it is natural to ask why propane is not the fuel of choice in more applications. In part, this is because propane traditionally has been viewed as a by-product of natural gas processing and crude oil refining and therefore has lacked the marketing priority of other oil and natural gas products. But an equally important obstacle to the wider use of propane is the fact that energy policy rarely has recognized propane s advantages, reinforcing the incorrect view of propane as a niche fuel. A more balanced and insightful energy policy, however, would recognize the significant role that propane can and should play in meeting the Nation s energy needs. This report outlines some key features of a balanced energy policy. It then identifies legal, regulatory, and other obstacles that are hindering propane s ability to meet our energy needs and explains how these obstacles can be removed in the context of national energy legislation. 6

7 SECTION I: GENERAL POLICY OVERVIEW INTRODUCTION Energy powers America s economic growth. But when the energy system falters, as it has in the past year, energy policy emerges as an important means of maintaining or restoring economic prosperity. Today, we see energy issues on the front page nearly every day in articles about rising home heating costs, electricity shortages and price spikes, and increased prices for transportation fuels. However, energy policy experts agree that there is no magic bullet that will solve all of our problems. From the standpoint of national energy policy, an ideal fuel would be one that primarily is produced domestically, widely available, environmentally superior, delivered through multiple distribution channels, versatile in many applications, and largely unaffected by the not in my back yard syndrome that inhibits energy infrastructure expansion. Actually, one fuel already exists that meets those requirements, and it already is in many backyards: propane. Although many Americans think of propane as a grilling fuel, much of rural America regards propane as the essential fuel for homes, business, and farms. Propane actually is used in a wide range of commercial and consumer applications, but its importance to the U.S. economy is not as well understood as the other fuels that dominate energy policy discussions. As the Nation looks anew at national energy policy, it is time to reassess the critical role that propane already plays in the energy mix and aggressively move to expand that role. The possibilities are exciting and include new electricity generation technologies, consumer appliances, commercial applications and advanced vehicles. But there are barriers to more widespread use of propane that must be addressed through an energy policy that recognizes the many advantages of this remarkable energy product. This report discusses propane s critical role in the economy and outlines key energy policies that must be implemented for the country to realize fully the economic and environmental advantages of greater propane use. 7

8 Propane Markets: A Brief History and Description Propane in the 20th Century Liquefied Petroleum Gas (LPG) represents various mixtures of propane and butane that were first isolated during the first decade of the 20th century, both from early oil refineries and from natural gas pipelines. In fact, LPG was initially regarded as waste until various government projects sponsored by the U.S. Bureau of Mines and pioneering entrepreneurs found ways to store, transport and use propane during the 1910s and 1920s. Uses expanded steadily during the 1930s and resumed in the post-war 1950s, when propane became the dominant constituent of LPG. In fact, propane played a significant role in transportation during the middle decades of the 20th century, although its use declined in that market beginning in the 1960s. But growth in propane use in other applications has remained steady during the entire 20th century. a From Wellhead to Burner Tip: Propane Production, Storage & Distribution b Propane is produced in natural gas processing facilities (which remove liquids to produce pipeline-quality gas) and petroleum refineries. About 10 percent of propane is imported, mostly from Canada (via railway and pipeline) and also from Algeria, Saudi Arabia, Venezuela, Norway and the United Kingdom via ocean-going vessels. Three types of storage facilities contain propane inventories:! Primary Storage consists of refinery, gas plant, pipeline and bulk terminal stocks. These include the large bulk storage facilities built from depleted underground mines and salt domes, clustered mostly around Conway, Kansas; Mont Belvieu, Texas; and Hattiesburg, Mississippi.! Secondary Storage consists of large above-ground tanks located at industrial sites and at approximately 13,000 retail dealer locations across the U.S.! Tertiary Storage consists of tanks at the point of end-use, primarily residences, businesses, and farms. Propane distribution from producers and primary storage facilities primarily occurs through pipelines, barges and railroad tank cars, and transport trucks. Propane distribution from secondary storage to final customers is largely accomplished through local delivery trucks known as bobtails. a See Butane-Propane News, June b See Energy Information Administration, Propane Prices: What Consumers Should Know, October 2000, DOE/EIA-X045. 8

9 Meeting America s Energy and Environmental Needs Propane already is the fuel of choice in a variety of applications and has the potential to contribute significantly to solving energy and environmental problems in a wide array of markets. Energy policy should recognize this potential and serve to expand propane use where it can benefit the nation. The Propane Advantage Propane is a fuel with unique advantages in America s energy system. It is domestically produced, environmentally clean, affordable, versatile, distributed through multiple channels, and available in every region of the country. An Efficient Fuel In some ways, propane combines the best attributes of natural gas and liquid petroleum products. Because propane is burned as a gas, it is an inherently clean and efficient way to utilize hydrocarbon energy. Because it is stored and transported as a liquid, it has a greater energy density than natural gas and more options for transport, contributing to propane s overall efficiency from production to end-use. These properties contribute to propane s versatility and diversity in distribution channels, allowing propane to serve high-value markets where alternatives are sometimes impractical, more costly, or less efficient. A Domestically Produced Fuel Propane is obtained through natural gas processing and petroleum refining. Consequently, the domestic production of propane is influenced to a significant extent by the demand for natural gas, home heating oil, and gasoline. About 90 percent of the United States propane supply is produced domestically, with roughly equal amounts provided by refinery production and natural gas processing. Over half of the 10 percent of U.S. propane supply that is imported comes from Canada. The production of propane from both refineries and gas processing plants is fairly constant in the short term. There is not much seasonality in propane production. Furthermore, the 9

10 relative shares of propane supply provided by refining, gas processing, and imports has remained stable in recent times. Propane demand, however, peaks in winter months, creating the need for bulk storage for seasonal inventory build-up and drawdown. A Clean Fuel One of the most important benefits of propane is that it is an extremely clean fuel. It emits minimal sulfur oxides and has ultra-low emissions of particulates, carbon monoxide, and volatile organic compounds. It also burns much more cleanly than gasoline and diesel fuel. As a result, propane is approved as an alternative clean fuel under the Energy Policy Act of 1992 and the Clean Air Act Amendments of Since it emits less carbon dioxide per British thermal unit (Btu) than gasoline, heating oil, coal, kerosene, jet fuel, and diesel fuel when burned, propane also is an excellent fuel for reducing emissions of greenhouse gases. Indeed, an analysis of the total fuel cycle greenhouse gas emissions from gasoline and alternative transportation fuels performed by the U.S. Department of Energy showed that propane emitted fewer greenhouse gases per vehicle mile traveled than compressed natural gas, ethanol, methanol, and gasoline. 1 A Versatile Fuel Propane is used extensively throughout the United States, supplying roughly 4 percent of our national energy needs. Approximately 40 percent of all propane production is used as feedstock for olefin plants that produce key chemical building blocks such as ethylene, propylene, and benzene. The second largest use of propane is in the residential and commercial sectors, where it is used for a variety of heating, cooking, and domestic needs. Other propane uses include industrial heat and power, transportation, and agriculture. Millions of Americans use propane to heat and cool their homes and businesses. In fact, 5 percent of all households depend on propane as their primary source of heat, and more than 20 percent of all manufactured housing is heated by propane. The greatest residential demand occurs in the South, Midwest, and Northeast, areas well served by interstate natural gas liquids pipelines. In addition to heating, residential and commercial customers use 1 See Alternatives to Traditional Transportation Fuels 1994, Volume 2, Greenhouse Gas Emissions at 10

11 propane for water heating, cooking, refrigeration, clothes drying, barbecuing, outdoor lighting, and pool heating. In industry, propane offers businesses great versatility. It provides manufacturers an alternative to electricity or an auxiliary fuel for interruptible natural gas service. Propane also allows companies to locate and operate facilities away from natural gas distribution systems. Industrial uses of propane include space heating, infrared heating, process heating in furnaces, brazing, soldering, cutting, heat treating, annealing, and vulcanizing rubber. More than 450,000 forklifts are powered by propane in factories and warehouses because of its safety, reliability and low emissions. Over half of the farms in the United States use propane for a wide range of applications because of its convenience, portability, and environmental advantages. Typical uses include drying crops, controlling weeds, curing tobacco, operating irrigation pumps, and providing frost protection. In the transportation sector, propane is becoming an increasingly popular fuel, particularly where improved air quality is essential. Propane from Source to Consumer Source: Energy Information Administration 11

12 An Available Fuel The propane industry uses an integrated delivery structure to distribute propane from primary storage facilities to end-users. Transportation of propane to retail consumers is accomplished by use of pipelines, barges, rail cars and trucks. More than $10 billion is invested in facilities and equipment for this transportation alone. These investments include about 70,000 miles of pipeline, approximately 22,000 rail cars, and a fleet of more than 90 barges, 6,000 transport trucks, and 25,000 local delivery trucks. Major pipelines connect the primary production region near the Gulf Coast with large demand areas in the South, Northeast, and the agricultural areas of the Midwest. Two Canadian pipelines help supply areas of the upper Midwest. Short-term supply imbalances generally have to be resolved by rail car and truck transportation. A recent survey of propane marketers found that most propane companies offer different delivery options, with automatic delivery (91 percent) and will call (84 percent) being the most frequently cited options. A large majority of the surveyed companies customers (67 percent) chose the automatic delivery option. Additional programs offered by propane companies include budget plans, summer fill-up programs and a pre-buy program. About 40 percent of propane customers are on a summer fill-up program. A study performed by the international energy consulting firm, Purvin & Gertz (Houston, Texas) concluded that propane consumers were evenly divided with respect to the type of delivery service preferred. Approximately 48.6 percent of customers are routed or keep-full accounts; 51.4 percent are will call accounts. 2 An Alternative Transportation Fuel A relatively little known fact about propane is that it is the most widely used alternative transportation fuel in the world. More than 350,000 vehicles in the United States, including 80,000 buses, taxis, and fleet vehicles, use propane instead of gasoline or diesel fuel. In the next ten years, propane s use as a transportation fuel is expected to rise as more automobile manufacturers take advantage of propane s desirable properties, such as its higher octane 2 Propane Market Dynamics and Industry Infrastructure. Purvin & Gertz, Inc. Houston, Texas. September

13 than gasoline. Other advantages of propane-powered vehicles include greater range and the relatively low incremental cost of vehicles. Considering the fact that about 52 percent of propane production is produced from domestic natural gas supplies, propane also provides an important pathway to introduce natural gas as a transportation fuel, helping to break that sector s dependence on petroleum. As of 1996, more than 75 percent of the alternative fuel vehicles (AFVs) in use were designed to operate on propane. That same year, almost 250 million gasoline-equivalent gallons of propane were consumed by propane-fueled AFVs. More than 80 percent of privately owned AFVs are light-duty vehicles fueled with propane. 3 Many of these vehicles are the delivery trucks (bobtails) used to deliver propane to households and businesses. Nearly half (47 percent) of the propane provider fleet vehicles were fueled by alternative fuels, and most of those vehicles were powered by propane. Nearly all of the propane vehicles reported by propane providers (89 percent) were dedicated vehicles or vehicles that operate solely on one fuel. 4 Unfortunately, current federal environmental policies are discouraging the conversion of vehicles to propane-burning engines, with the perverse result that propane providers increasingly are being forced to use a dirtier fuel diesel in their delivery vehicles. Propane and the Rural Economy Rural America provides the raw materials food, fuel, minerals, forest products and other essential commodities that the American economy cannot do without. Because of propane s ability to be delivered anywhere, including areas without natural gas distribution, this fuel plays an essential role in the rural economy. Propane s importance to the U.S. rural economy is demonstrated by the fact that more than 30 percent of all rural households use propane (compared with 8 percent of total U.S. households) and about 20 percent of rural households use propane as their primary heating fuel. In 1997, rural households invested more money on propane (about $2.8 3 Alternatives to Traditional Transportation Fuels Energy Information Administration, U.S. Department of Energy, DOE/IA-0585(96), December Describing Current and Potential Markets for Alternative-Fuel Vehicles. Energy Information Administration, U.S. Department of Energy, DOE/EIA-0604, March

14 billion) than on any other fuel except electricity. On average, each rural household spends about $540 annually on propane. 5 Almost 70 percent of all local agricultural cooperatives, which play a prominent role in providing farmers with agricultural inputs, sell propane. 6 Propane has a wide range of agricultural applications (apart from home heating), including crop drying and ripening, powering irrigation pumps, heating livestock shelters, and controlling weeds and pests. In addition, propane s portability gives farmers the freedom to select locations for storage-tank placement to ensure accessibility for each specific need. Propane s obvious environmental advantages contribute to its popularity with farmers. For example, propane is non-toxic and insoluble in water and therefore poses no threat to aquifers or groundwater supplies. Propane: Focus on the Future Although propane is established in a number of key markets, there are many new applications and markets in which propane can flourish under the appropriate energy policy. New energy technologies are emerging that combine fuel efficiency with superior environmental performance in electricity production, residential and commercial heating and cooling, and consumer appliances. Propane can provide an economical fuel source for these new technologies in many circumstances. New Electric Generation Technologies Although electricity markets in some regions of the country have experienced severe difficulties in the past two years, new generation technologies are emerging that hold a bright future. These technologies are smaller than the large central stations that dominated the electricity generation sector in the second half of the 20th century and are collectively known as distributed generation, because they can be sited on or near the point of end-use and thus bypass the bulk transmission system. Many of these technologies are expected to use natural gas as the primary fuel. However, propane can become the fuel of choice in many circumstances by virtue of the same 5 These data are drawn from the 1997 Residential Energy Consumption Survey (RECS) on the use of energy in residential housing units in the United States. See 6 Local Petroleum Operations, U.S. Department of Agriculture, RBS Research Report 149, September

15 economics that favors distributed generation in the first place, such as limited access to natural gas and electric transmission infrastructure. Within the next ten years, advanced fuel cells that use propane will be used increasingly for distributed power generation. Fuel cells and microturbines both enable energy users to generate their own electricity without access to power lines. Moreover, when these technologies are fueled by propane, users do not require access to gas lines, creating the opportunity to have electric power at virtually any location. If successful, fuel cells and microturbines are expected to increase demand for propane more than any other new application. While fuel cells and microturbines have enormous potential to reshape consumer energy choices, fulfillment of this potential will require substantial investment in research, development, and testing. The Propane Education and Research Council has identified the key technological developments required to foster the commercialization of propane-fueled distributed generation. 7 For example, development of a propane-to-hydrogen reformer appears to be the most promising means of enabling fuel cells to use propane. Commercialization of propane microturbines is contingent upon the development of cost-effective pumping, vaporizing, and control equipment. New Consumer and Industrial Technologies Efficient, heavy-duty reciprocating engines based on propane could penetrate transportation markets, especially where diesel engines pose environmental or health concerns. Engines fueled by propane have low emissions and are well suited for a variety of on- and off-road vehicles, as well as for industrial applications. Improved reciprocating engines will require better fuel control systems and integration. Hence, near-term R&D will focus on improving the precision and robustness of fuel injection systems in propane burning engines and on formulating a propane-specific catalyst to clean up exhaust further. New gas-fired air-conditioning equipment could stimulate off-season propane demand. Indeed, gas air conditioners offer a way to balance winter and summer loads in the 7 Propane Vision and Industry Technology Roadmap, Propane Education & Research Council and National Energy Technology Laboratory. Washington, DC. June The Propane Education & Research Council was authorized by Congress by Public Law , the Propane Education and Research Act, October 11,

16 residential and commercial markets. Reduced equipment costs could pave the way for increased interest in using propane air-conditioning where natural gas is unavailable or impractical. Further demonstration of propane air conditioning is needed to determine technical issues, develop operating experience, and expand awareness. Research and development also is needed to identify and evaluate means of reducing the manufacturing cost of air conditioning units. 16

17 SECTION II: SPECIFIC POLICY ELEMENTS Policymakers need to keep in mind the many areas where propane can contribute to the objectives of a new national energy policy. A new energy policy needs to recognize the economic and environmental advantages of using propane in a wide variety of settings. That is not to say that policy should confer special treatment on propane or any other fuel. But policy should allow fuels with distinct advantages to compete fairly with other energy sources in order for their benefits to be fully realized. The following discussion outlines how policies can create a level playing field that will allow propane to realize its unique benefits in the context of a broad new national energy policy. Create Competitive Markets to Foster Efficient Energy Use and Environmental Improvement Promote Efficient Use of Energy Expanded propane use can enhance the overall efficiency of energy markets by minimizing the amount of energy used from the source (e.g., the wellhead) to the site (e.g., a residential water heater). Source energy typically is defined as the energy that is used to perform a specific function, such as space heating, air conditioning, or water heating (i.e., site energy) plus the energy consumed in producing and delivering that energy, including production, transmission, and distribution losses. 8 Thus, source energy accounts for the efficiency of energy use over the entire production, transportation, and distribution process. 9 Focusing solely on energy efficiency at the point of use is very misleading, because it overlooks the amount of fuel used to deliver a given amount of energy to an end-user. For example, today s electric water heaters are very efficient at the point of use, but because of losses in the generation, transmission, and distribution of electricity, only about 27 percent of the fuel used to produce electricity actually is delivered as useful energy to a customer s home. 10 Thus, on a source-to-site basis, electric water heaters are far less efficient than 8 See the definition of the California residential energy code in Measures of Residential Energy Consumption and Their Relationships to DOE Policy, RAND, Science and Technology Policy Institute. Prepared for the U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy and the Office of Science and Technology Policy, MR DOE, November 1999, p This is why an analysis of energy use from the source to the site commonly is known as fuel cycle analysis or full fuel cycle analysis. 10 Krebs, Mark. Is DOE Leading Us Astray? Energy, Winter 1999, pp

18 18 Note: Represents the sum of the estimated delivery cost of transporting required amount of fuel and/or electricity from the source (point of extraction to residential meter not including water heater) and the estimated annual cost of operating water heater in its installed configuration at the site. Delivery cost accounts for estimated cumulative efficiency of fuel extraction; processing; transportation; and conversion and distribution processes. Estimated costs were determined using data published by the U.S. Department of Energy; American Gas Association; and Gas Appliance Manufacturers Association. Baseline water heaters are (a) propane: 40 gallon RSV; 40 mbtuh input; EF=0.54; and (b) electric: 50 gallon RSV; 4.5 kwh input; EF=0.86.

19 propane (or natural gas) water heaters, requiring approximately twice the energy resources of propane units for a given volume of heated water. Efficiency Standards. One of the most important ways in which the federal government promotes energy efficiency is through the promulgation of minimum efficiency standards for appliances and heating and cooling systems. 11 To date, DOE has set such standards based almost exclusively on the efficiency of energy used directly by the appliance. This narrow, limited approach to efficiency measurement is misguided, because it overlooks the fact that propane (and natural gas) is inherently more efficient in overall energy terms than electricity for applications such as water heating and space heating. Simply put, far less energy is consumed in transporting propane to end-users than is lost when generating electricity from fossil fuels and distributing that electricity to the customer. By focusing only on site efficiency, the DOE standard-setting process forces propane water heaters to achieve higher levels of efficiency even though they already are far more efficient than electric water heaters on a source-to-site basis. To the extent that a minimum efficiency standard for propane water heaters increases their cost, it could have the perverse result of increasing the market share of less efficient electric water heaters. While recognizing that there are difficult measurement issues associated with a source energy analysis, NPGA believes that DOE must immediately begin to include a full sourceto-site analysis in its standards process to a much greater extent than it has in the past. Congress should, if necessary, amend the Energy Policy and Conservation Act (EPCA) to require DOE to include a source-to-site analysis in its determination of national efficiency standards. Congress already has indicated support for such a modification to DOE s standard setting process. In 1998, both the Senate and House issued report language directing DOE to increase greatly its efforts to consider the total energy consumed over the fuel cycle in setting appliance standards. By following this course, Congress will take a major step in the direction of improving air quality and providing realistic information to energy consumers. Utility DSM Programs. Another area in which federal and state policy has tended to define efficiency and least-cost too narrowly is the integrated resource planning (IRP) 11 The U.S. Department of Energy s appliance standards program is conducted pursuant to the Energy Policy and Conservation Act (EPCA). In 1987 and again in 1992, EPCA was amended to establish national efficiency standards for certain appliances and a schedule for DOE to conduct periodic rulemakings to review and update these standards. 19

20 and demand-side management (DSM) programs implemented by electric utilities. Electricity in many states continues to be provided by regulated monopoly suppliers, and most of these states require their electric utilities to prepare resource plans and offer DSM programs. In general, DSM programs offer customers a financial incentive to install more efficient electricity-using devices, such as appliances or climate control systems. In principle, such programs can be a way of deferring or reducing the need for additional electric capacity. Unfortunately, such programs sometimes give customers an incentive to switch to an electric appliance, such as a water heater, even though the subsidized electric appliance uses more energy resources than the non-electric appliance it replaces. Hence, DSM programs can bias the market in favor of electricity-using technologies and be counterproductive from the standpoint of improving energy efficiency and minimizing total energy expenditures. Title XVI of the Energy Policy Act of 1992 (EPACT) already requires DOE to take into account all costs associated with the production, transportation, distribution, and utilization of an energy resource in its development of a least-cost energy strategy. Under this authority, DOE should provide information on source-to-site efficiency to state regulators and establish a model analytical framework that states would be encouraged to use for comprehensively determining and comparing the total costs and benefits of DSM programs. Such a framework would emphasize total energy resource efficiency rather than the comparative end-use efficiency of competing technologies. Gas Utility Expansion Cross-Subsidies. Although natural gas company ratemaking is a state-level issue, the same principles outlined above can help state public utility commissions evaluate the potential for ratepayer cross-subsidies often sought by gas utilities when they expand into sparsely populated areas more economically served by propane. Both economic and energy efficiency can be compromised as some gas distribution systems propose to expand into areas already well served by propane suppliers. System expansions that provide a satisfactory return on investment are economical and should be permitted. However, when realization of a satisfactory return on investment depends on existing ratepayers subsidizing expanded access to new customers, the expansion is not warranted. Such situations should be identified readily by applying a version of the model analysis framework suggested above for electricity programs. 20

21 Promote Environmental Quality Propane could play a key role in mitigating ground-level ozone (smog) and other environmental problems related to the transportation sector. As noted above, propane emits fewer greenhouse gas emissions per vehicle mile traveled than gasoline, methanol, ethanol, or compressed natural gas. Instead of encouraging propane use, however, current federal policy actually is discouraging the use of propane as a transportation fuel. In fact, many propane suppliers are being forced to purchase diesel delivery vehicles because current rules have made after-market conversions to propane prohibitively expensive. Attrition of propane-fueled vehicles could be as high as 30,000 per year. The disincentive to use propane is the result of a policy established by the U.S. Environmental Protection Agency (EPA) in its implementation of emission certification rules for mobile sources. This policy requires a full certification procedure for after-market AFV conversions. The cost of conducting full certification testing is estimated to be approximately $125,000 per engine family, excluding the certification fee. Because of the limited number of vehicle conversions performed under a single certificate, the incremental cost of a converted vehicle has increased dramatically solely due to the cost of the certification procedure. This has resulted in a cost-driven moratorium on vehicle conversions because federal certification procedures have become simply too costly and cumbersome. This impediment to propane-fueled vehicles clearly is not in the public interest. To rectify this, Congress should mandate the establishment of a permanent federal emissions certification program designed specifically for small volume manufacturers and conversion specialists. Temporary Suspension of Excise Tax for Clean Fuels. Congress continues to recognize the need to promote alternative motor fuels as an important piece of our nation s energy policy. As recently as 1997, Congress acted when it realized there was a clean fuel tax penalty and reduced the motor fuel excise tax on those fuels that were effectively taxed at a rate higher than gasoline. Given that there still is inequity in the code for some fuels, Congress should pass a moratorium on the highway excise tax on all alternative motor fuels (as defined by EPACT) for 10 years. This 10-year exemption, or holiday, from the 21

22 highway excise tax would give propane and other alternative fuels an improved opportunity to expand their share of the transportation fuels market and overcome manufacturer resistance to AFVs. Congress should also foster the use of cleaner-burning fuels by adopting other tax measures geared toward stimulating vehicle and infrastructure development. The Senate is currently considering S.760, sponsored by Senator Orrin Hatch (UT) and co-sponsored by Senators Rockefeller (WV), Jeffords (VT), Kerry (MA), Lieberman (CT), Chafee (RI), Crapo (ID) and Collins (ME). This far-reaching bill encourages the use of cleaner-burning fuels through tax credits for the use or retail sale of propane and other alternative fuels, the installation of refueling infrastructure, and the purchase of alternative fueled vehicles. Observe Fuel Neutrality Government should not pick winners and losers in competitive energy markets but often does so indirectly through various provisions of the tax code that have differential impacts on various fuels. The following example clearly shows how misconstrued tax policy can distort competitive markets. Anti-competitive Tax Preferences. Rural Electric Cooperatives (RECs) are statutorily protected from paying some of the taxes typically borne by investor-owned utilities. These exemptions are arguably legitimate, insofar as they permit these entities to provide electricity at affordable rates in rural areas. However, these special tax provisions are intended to flow to electricity customers. Many RECs have entered the propane supply business, effectively transferring this tax benefit to a new line of business where they compete directly with propane suppliers that pay all applicable state and federal taxes. This is unfair competition and not economically beneficial because RECs can undercut competitive suppliers by virtue of tax preferences rather than more efficient delivery. RECs must derive at least 85 percent of revenues from sales to members in order to retain their tax exemptions under Internal Revenue Code Section 501(c)(12), and such sales must be substantially related to the organization s exempt function. NPGA believes that RECs propane sales do not qualify for this preferential tax treatment, since RECs can enter the propane distribution business and potentially undercut suppliers that bear a higher tax 22

23 burden. Congress should amend the tax code to ensure that all non-electric energy services provided by a REC are provided through one or more for-profit affiliates of the cooperative. Moreover, the assets or earnings of a REC should not be permitted to cross-subsidize services provided by any for-profit affiliate. Provide Critical Information Accurate and timely information is a necessary component of any well functioning market. While information on the price and consumption of propane is publicly available, buyers and suppliers of propane would benefit from a more accurate measurement of propane production and the amount of propane held in primary storage at bulk terminals. Such information would, for example, assist the purchasing strategies of propane retailers by giving them a more accurate picture of short-term supply. Hence, the NPGA strongly supports the Energy Information Administration s (EIA) initiative to obtain a separate, on-going measure of the supply of propane. EIA currently collects data on the combined supply of propane and propylene. If approved, this change in EIA s reporting requirements would take effect in The large inventories of propane held by petrochemical companies are a potential source of supply for the retail market, particularly when propane prices are at a level that makes it economically attractive for such companies to sell their inventories. EIA does not, however, currently collect information on the amount of fuel grade propane held by petrochemical companies. NPGA believes that EIA should be directed and authorized to collect and publish data on the propane inventories stored at petrochemical facilities. (EIA already collects data on the inventories of propane marketers.) Publication of this information from October through March would give propane buyers and sellers more complete information on the nationwide stock and potential short-term supply of propane during the critical winter heating season. Only the total, nationwide supply of propane held by petrochemical companies should be published, thereby protecting the confidentiality of information provided by individual companies. In addition, EIA s enhanced authority should be narrowly drawn to apply only to petrochemical stocks rather than all secondary storage. 23

24 Enhance Fuel Distribution Efficiency A key advantage for propane is the fact that it is delivered over a diverse set of channels, ensuring availability at affordable prices. However, there are policies that affect each separate delivery channel and that require attention if this flexible and resilient distribution network is to work well. Maintain Over-the-Road Delivery Capability Unfortunately, hours of service (HOS) regulations have been proposed by the Federal Motor Carrier Safety Administration (FMCSA) that would hinder the propane industry s ability to provide timely, cost-effective delivery service to retail marketers and end-users. The FMCSA s proposed rules would eliminate the legitimate exceptions in the current rules designed to meet the needs of individual sectors, thereby sacrificing time-honored practices for the sake of uniformity. The relatively tailored approach of the current rules reflects the fact that within each sector there are significant differences in operations, leading to very different driver fatigue profiles. In 1999, the American Trucking Associations (ATA) sponsored a study to understand better how driver loading and unloading activities contribute to driver fatigue and consequent effects on driving alertness. The ATA study supports the propane industry s position that FMCSA s proposal should not be finalized by showing that propane delivery drivers are less prone to fatigue than other types of delivery personnel and can therefore operate safely with the current rules on hours of service. The propane industry has an excellent record of safety under the existing rules. According to a December 2000 survey conducted by Science Applications International Corporation (SAIC), 98 percent of propane marketers reported zero accidents resulting from driver fatigue, even during weather-related emergencies. To facilitate the safest and most efficient propane delivery, the FMCSA should implement an HOS pilot program for propane marketers along the lines of that proposed by the agency for fuel oil dealers. FMCSA s proposed pilot program recognized the need for additional research on fatigue in the fuel oil delivery sector. The program would allow participating employers flexibility to get their drivers behind the wheel after a minimum 24

25 thirty-two consecutive hours off-duty. NPGA believes this could be of substantial benefit compared with current rules, which limit drivers hours on both a daily and weekly basis. Propane marketers and their customers would benefit from such enhanced scheduling flexibility, particularly during the busy winter heating season. Unfortunately, to date no program has been established, an omission that should be remedied, if necessary, through legislative approaches. Other means whereby FMCSA could reduce delivery burdens and enhance customer service in the winter are (1) to cover propane delivery operations within the definition of utility service vehicles, which would allow a more favorable weekly hours restart, and (2) to cover propane delivery drivers as driver-salespersons, since they already satisfy the definition in the regulations. Ensure Pipeline Availability Recent electricity shortages in California have alerted policymakers and the general public to the fact that our nation s energy infrastructure is not keeping pace with our increased demand for energy services. While there are various reasons for this, unquestionably the primary reason is that it has become very difficult and expensive to build new energy facilities virtually anywhere in the U.S. National energy policy must facilitate the costeffective expansion of our energy infrastructure. The propane industry currently is not suffering from a shortage of pipeline or primary storage capacity. However, siting obstacles and high costs could potentially hinder the propane industry s ability to serve new and expanded markets. To decrease the possibility of future disruptions in propane supply, NPGA believes that policies designed to facilitate the expansion of energy infrastructure should recognize the need to expand the pipeline and storage capability of the propane industry. While NPGA supports the approach contained in Section 921 of S. 389 sponsored by Senator Frank Murkowski (AK) to reclassify oil and gas pipelines as 7-year property for depreciation purposes, we believe that Section 921 requires a technical correction. Because the definition in 921(b) covers pipe, storage facilities, equipment, distribution infrastructure, and appurtenances used to deliver oil, natural gas, crude oil or crude oil 25

26 products and the definition in 921(c)(2) does not explicitly stipulate natural gas liquids pipelines, it could be argued that pipelines built to transport propane derived from natural gas processing facilities would not qualify for this tax treatment. To avoid this potential uncertainty, we believe that Section 921 should be amended to explicitly include pipelines that transport natural gas liquids. While legislative action to encourage pipeline siting and expansion is necessary, the pipeline operators themselves can make critical improvements to the pipeline infrastructure. Each of the three major propane pipelines has a FERC-approved tariff setting forth the terms and conditions under which it transports propane. These tariffs include provisions and policies addressing the allocation or pro-rationing of pipeline capacity. Interestingly, the three major propane pipelines have very different policies with very different levels of detail for allocating supply to marketers. NPGA believes that shippers and pipeline interests are best served by policies and guidelines that are openly published and distributed. Shippers and their customers need to understand exactly how their allocated portion of limited capacity is determined and how capacity in general is allocated. 12 They also need to know when an allocation is called and why it was called. Moreover, the tariff should ensure that all shippers, including pipeline affiliates, receive notice of any allocation simultaneously to reduce the opportunity for unlawful discrimination against one shipper and preferential treatment of another. Improve Waterborne Deliverability A portion of the domestic propane supply serving the eastern U.S. is transported by ship and barge. During the winter heating season, emergency shipments to the eastern U.S. and New England in particular may be required to serve higher than expected demand. To facilitate emergency shipments of propane during the winter, NPGA believes that vessels that transport propane should be exempt from Section 27 of the Merchant Marine Act of 1920 (commonly known as the Jones Act) from November through February. The Jones Act and related statutes require that vessels used to transport cargo and passengers between U.S. ports be owned by U.S. citizens, built in U.S. shipyards, and manned by U.S. citizen 12 Shippers may or may not be retail propane marketers. Marketers are often the customers of pipeline shippers. 26