NPGA Eyes Federal Regulatory Roadmap for 2015

News reports just before Thanksgiving highlighted that the Obama administration had quietly fed a heaping helping of 3400 new federal regulations into the rulemaking pipeline for this year. Euphemistically couched as the Unified Agenda, it serves as the administration’s roadmap for regulations it intends to finalize in coming months. Noted was that, in 2012, the White House had more than 4000 regulations, and while that number decreased in 2013, it went up again in 2014. Pro-business commentators underscored that over the past six years of the Obama administration, the cost of complying with new government rules has averaged $16 billion a year.
Jan 2015 BPN cover
Along with other industry groups, the National Propane Gas Association (NPGA) is scrutinizing the regulatory pipeline’s turbid outfall to determine what might splash up on its shore this year. Mike Caldarera, vice president of regulatory and technical services at NPGA, says the U.S. Department of Transportation’s (DOT) final rule regarding rail transportation of flammable gases and liquids, expected in January, is first up. DOT’s notice of proposed rulemaking and a companion advanced notice of proposed rulemaking propose enhanced tank car standards, a classification and testing program for gases and liquids, and new operational requirements for flammable trains that include braking controls and speed restrictions on so-called “high-hazard flammable trains,” or HHFT.

It is the proposed speed restrictions that most concern NPGA. Although the suggested heightened regulatory regime primarily targets Class 3 flammables—as identified by their boiling point and flash point—such as crude oil and not propane, which is classified as a Class 2 liquid, speed restrictions have the potential to slow down the entire U.S. rail network, comments Caldarera. “Railways aren’t highways. You don’t just turn off and take an alternate route.” And if a final rule is published in January, he adds, its effective date would fall in the middle of winter, a period when efficient propane transportation by rail requires certainty and flexibility, not slowdowns. This is especially consequential in light of the Cochin pipeline reversal and removal from propane service. That former major transportation link is now being supplanted by rail deliveries.

DOT proposes a definition of HHFT as a train carrying 20 or more tank car loads of flammable liquids, and that carriers be required to perform a routing analysis that would consider nearly 30 safety and security factors and select a route based on findings of the analysis. Comments are being solicited for three speed-restriction proposals: HHFTs with any tank cars not meeting enhanced design standards that are also being proposed in the rulemaking would be limited to a maximum 40 mph in all areas; a 40-mph speed restriction in high-threat urban areas; and a 40-mph speed restriction in areas with a population of 100,000 or more. Separately, DOT’s Pipeline and Hazardous Materials Safety Administration (PHMSA) is evaluating a 30-mph speed restriction for HHFTs that do not comply with additional enhanced braking requirements that are being proposed in the rulemaking.

Caldarera notes that the impetus behind the DOT action stems from a July 2013 derailment that resulted in explosions and fires in Lac-Mégantic, Quebec. The incident claimed the lives of more than 40, severely injured others, and caused extensive damage to the town. The train, which was left unattended and subsequently rolled away, included five locomotives, a loaded boxcar, and 72 tank cars loaded with crude oil.

After the incident, Transport Canada and DOT’s PHMSA and Federal Railroad Administration (FRA) jointly issued a safety advisory to railroads and commodity shippers detailing actions to better ensure the safe transport of hazardous materials. The advisory elementally included reviewing staffing levels and reviewing procedures when leaving trains unattended. The safety advisory also recommended testing and sampling crude oil for proper classification for shipment, as well as reviewing all safety and security plans. Finally, FRA convened an emergency meeting of its Railroad Safety Advisory Committee to begin deliberations with railroad management, labor, shippers, car owners, and others as the agency considered recommendations to be made part of regulations in the U.S.

Thereafter, the Association of American Railroads (AAR) provided comments on extensive proposed regulations being considered within DOT, reiterating the freight rail industry’s commitment to the safe movement of flammable liquids by rail and improved tank car standards. AAR underscored that when considering the final rule, DOT should take into account not only the crude-by-rail safety measures outlined in the industry’s voluntary agreement with the agency, but the fact that the increased movement of crude oil, in particular, represents America’s move toward energy independence.

“Railroads are proud of their hazardous materials safety record, which reflects steadfast attention to training and protocols, as well as a constant focus on safety improvement and advancement,” said AAR president and CEO Edward R. Hamberger. “Railroads have been at the forefront of advocating for safer tank car standards and we believe that the public supports regulation that weighs both safety and the ability to move people and goods in a timely and efficient manner.”

Among its comments, AAR urged that DOT require 40 mph speed limits only in federally designated high-threat urban areas for trains with at least one legacy DOT-111 tank car moving flammable liquids—as the railroad industry agreed to implement for crude oil by July 1, 2014 as part of its voluntary agreement with the agency. This additional speed restriction would be on top of the rail industry’s self-imposed, nationwide 50 mph limit for trains with 20 or more cars loaded with any hazardous material. Earlier, AAR collaborated with oil industry customers represented by the American Petroleum Institute and identified new tank car standards for flammable liquids, as well as retrofit standards for tank cars currently used to move crude oil.

Crane Rule
The Occupational Safety and Health Administration’s (OSHA) crane rule is also on NPGA’s radar. Although the agency has published a formal extension of implementing crane operator certification requirements under its Cranes and Derricks in Construction final rule for three years—from November 2014 to November 2017—in the interim OSHA will address operator qualification requirements for the crane standards, including the role of operator certification.

The final cranes and derricks rule published Nov. 9, 2010 required crane operators on construction sites to meet one of four qualification/certification options by Nov. 10, 2014. OSHA published the final rule, a number of parties raised concerns with OSHA about the standards requirement to certify operators by type and capacity of cranes, and questioned whether crane operator certification was sufficient for determining if an operator could operate their equipment safely on a construction site. The agency published a notice of proposed rulemaking on Feb. 12, 2014, proposing to extend both the deadline for operator certification and the employer duty to ensure competent crane operation for three years. OSHA analyzed the comments, and heard testimony, and decided to grant the extension.

NPGA’s Caldarera says the crane rule concerns many industries, and that the association is working toward exempting propane from the third-party training and certification requirement under the rule between now and its final implementation. “At minimum we are seeking something more favorable and less onerous and expensive than a third-party training and certification requirement. PERC has developed a training program, and we remain engaged.”

The OSHA rule pertinent to the propane industry falls under its construction set, and as written requires extensive training and certification by an accredited third party for crane operators of most cranes above 2000 lb capacity. This includes most truck-mounted articulating (knuckle boom) and telescopic (stick boom) cranes used in propane operations. Traditionally, crane operations conducted in the propane industry were not considered as construction activities and were covered under OSHA’s less stringent general industry rules, under which crane operators were required to be trained, but were not required to be tested and certified by an accredited third party.

The Propane Education & Research Council’s (PERC) crane operator training program covers many of the basics surrounding crane safety. The program illustrates and addresses tasks associated with, and specific to, the propane industry. PERC notes that while the program might not contain all of the specific information to prepare employees to pass a third-party certification exam, it does provide a cost-effective means to train employees. In addition, the course of study is sufficient to designate an employee as a competent crane operator in training, and provides a means to prepare for a certification examination and a hands-on practical exam if in fact third-party certification is mandated. OSHA has begun the process of developing a standard to ensure crane operator qualifications, and NPGA expects to engage with the agency at the beginning of this year regarding its priorities.

CFATS
NPGA recently responded to a Department of Homeland Security (DHS) advanced notice of proposed rulemaking that sought input on its Chemical Facility Anti-Terrorism Standards (CFATS). Regulations under CFATS established requirements for certain facilities that store a chemical in excess of a determined screening threshold quantity, this to determine whether they are deemed a risk for a terror attack. NPGA has urged DHS to disclose the criteria it uses to determine if a facility is at high risk for a terror attack since CFATS was established in 2007, but has not prevailed and is revisiting that request.

NPGA notes that DHS has repeatedly stated that its criteria used to classify facility vulnerability and risk is classified, and cannot be shared with industry. Therefore, a regulated facility has no way of knowing what its vulnerabilities are, or what threat it must protect itself against. The association is once again calling upon DHS to establish a mechanism that fully explains the agency’s methodology for determining if a facility is high risk, and how designations for threat tiers are calculated. DHS should also work directly with regulated facilities to convey areas of risk and vulnerability, the association maintains. NPGA comments that such an approach is more cost-effective for implementing any needed risk-based performance standards.

Also recommended by NPGA is that DHS combine and reduce some of the risk-based performance standards in order to improve efficiency. Site Security Plan and Alternate Security Plan requirements should be reevaluated to reduce complexity. Finally, the association is urging the agency to consider exempting propane storage facilities located in rural settings from overall CFATS requirements due to what it terms is the very low probability that such facilities would ever be targeted for attack.  

“We were lucky that 97% of our facilities weren’t covered, but 3% were and that represents a couple hundred facilities,” Caldarera says. He explains that most propane installations didn’t fall under CFATS screening because NPGA prevailed in raising the threshold of stored volumes at facilities from an initially proposed 7500 lb to more than 60,000 lb (14,285 gal.). Thereafter, all facilities that stored over 60,000 lb were required to register with DHS and complete an online Top Screen questionnaire. The agency reviewed submissions and determined either to place facilities in one of four risk-based tiers, or relieve them of further action.

Caldarera comments that if the 7500 lb requirement had remained in place, screening would have covered many more facilities, including customer installations in the industrial and agriculture sectors. Rather than comply with ramped-up regulatory oversight, it was feared many operators would choose instead to eliminate as much propane from their operations as possible, or replace the fuel entirely in order to avoid compliance.

“The question remains, how does DHS define high risk,” says Caldarera. “Is it population, proximity to defense installations? DHS won’t tell you because its method is classified. You can only guess that questionnaire data goes into some kind of black-box software. Operators of facilities are left to guess what the risks and threats are, and how to mitigate them. It remains a million-dollar question. NPGA wants DHS to be more forthcoming and detailed, and share information with facilities that are being regulated. Otherwise, everyone ends up spending money for security measures, but for what?”   

The NPGA vice president adds that the most recent round of DHS rulemaking concerning CFATS was prompted by the April 2013 explosion at a West Texas fertilizer company that was storing ammonium nitrate, among other chemicals. The plant, located just north of Waco, Texas, was obliterated in the blast, which set off an inferno. Fifteen were killed and more than 160 injured. Over 150 buildings were damaged or destroyed. According to company filings in 2012, the facility stored 540,000 lb of ammonium nitrate and 110,000 lb of anhydrous ammonia at the site. Then-DHS Secretary Janet Napolitano told Senate investigators that the company did not appear to have disclosed its ammonium nitrate stock to her department. Federal law requires that DHS be notified whenever more than one ton of the chemical is stored, or 400 lb if the ammonium nitrate is combined with other combustible materials.

Liability Coverage
DOT’s Federal Motor Carrier Safety Administration (FMCSA) is considering a rulemaking that would increase the minimum levels of financial responsibility for motor carriers, reports NPGA, including liability coverage for bodily injury or property damage. The agency is seeking public comments through an advanced notice of proposed rulemaking that was recently issued. The notice also addresses financial requirements for brokers and freight forwarders, as well as existing rules for those that are self-insured.

NPGA explains that FMCSA recently reviewed results of a study authorized by Congress to evaluate the appropriateness of current minimum financial responsibility requirements, found in the Code of Federal Regulations at 49 CFR Part 387, Section 387.9. The requirements have remained unchanged since the mid-1980s for motor carriers of property and passengers. Study findings underscored that although catastrophic motor carrier-related crashes are rare, costs for severe and critical injury crashes can easily exceed $1 million, and current insurance minimums do not adequately cover catastrophic crashes, mainly because of medical costs.

“This deals with DOT minimum financial requirements, $5 million for interstate and $1 million for intrastate,” says Caldarera. “Costs have gone up. The comment period is open through the end of February, after which FMCSA will access information and open another round of public input. A final rule is expected to be a year away. Our major concern is how it will affect insurance premiums for our members.” NPGA is reviewing the notice and will be preparing a response.

In its notice, FMCSA seeks information posed by 26 questions to provide a basis for proposing changes to insurance rules. Among them: How often is the minimum level of financial responsibility exceeded by damages caused by an unintentional release of hazardous materials from a carrier required to have $5 million in coverage? How would increasing the minimum financial responsibility requirements affect safety? What percentage of fleets already have liability coverage that exceeds the minimum requirements, and by how much? If the required amount of financial responsibility is increased, what is a reasonable phase-in period for insurance companies and motor carriers to adjust to the new requirements?    —John Needham

New Year Outlook: State Associations Promote Propane Causes

While national issues such as the 50-cent-per-gallon credit for propane autogas have attracted attention in the propane industry, work is also taking place at the state level to help propane marketers run their businesses more profitably and serve customers better. Many propane marketers and suppliers serve as association board members on a volunteer basis to make sure propane earns a seat at the table when it comes to enacting favorable state legislation benefiting propane marketers in various ways.

New-Years-Outlook-for-photos-1Pre-buy legislation is one of those issues. The Propane Gas Association of New England (PGANE) continues to monitor legislative activity in that area for all six New England states. Norm Guerette, general manager for Dead River Co. (Portland, Maine), who currently serves as chairman of the board for PGANE, mentioned a New Hampshire law that legislators changed last year to allow prepaid contracts to be solicited only after May 1 each year. PGANE supported the change as an added layer of protection for consumers.

“Now we’re just abiding by the current regulations and monitoring what might be proposed in the various state legislatures and deciding whether or not we’re in favor of them,” Guerette said. 

PGANE’s work in this area is an example of how state associations’ work benefits propane marketers. State associations are working on numerous issues as the new year begins.

Western Association: 

Preparing the Industry for Cap-and-Trade

The Jan. 1, 2015 compliance date for California’s cap-and-trade program has passed, and although the impact on propane pricing was not yet known at press time, the Western Propane Gas Association (WPGA) is working to keep its members informed and make sure they are ready for price increases. AB 32, the California Global Warming Solutions Act of 2006, requires a sharp reduction of greenhouse gas (GHG) emissions in California. The regulation authorizes the annual collection of a fee from large sources of GHG emitters. WPGA is also working to provide details to consumers that AB 32, which the state’s voters approved, will result in price increases that will likely be passed down to the end users.

The association held a conference call in late November to address the issue. Participants included more than 20 members, a WPGA legislative lobbyist and an association attorney. The association suggested several steps to deal with the issue, including encouraging propane companies in California to contact their state assembly and senate representatives to ask them to sponsor legislation in 2015 to end or delay the program. WPGA will also send a letter to the California Air Resources Board (CARB), which is the agency overseeing the cap and trade program, noting the problems that propane companies are facing in California because of the uncertainty of pricing. The association will also continue to be active with the Fed Up at the Pump coalition, which includes the California Independent Oil Marketers Association and the Western States Petroleum Association, as they work to achieve change with this program.New-Years-Outlook-for-photos-2

“We’re letting our customers know how difficult it’s going to be,” said WPGA chair Bruce Thompson of Energy Insurance Services (Phoenix). “California is going to be the trend-setter. Other states need to be very aware of this. It will be coming their way soon.” 

WPGA is working on additional issues, such as the national 3% average annual decline in propane use over the past few years that is affecting WPGA members as well. The group believes the drought that the region has experienced during the past few years is a good opportunity to sell propane-fueled agricultural irrigation engines, and the Western Propane Education & Research Council (WPERC) is working on promotional tools geared toward farmers. Thompson added that the WPGA’s Clean Fuels committee continues its ongoing work to reduce CARB regulations and promote propane autogas. WPGA members have been traveling to engine fuel events, promoting the use of propane.

Thompson also led the association’s effort to find a replacement for association president and CEO Lesley Garland, who left for a position with the National Propane Gas Association (NPGA). The group hired Joy Alafia, former director of business products with the California Association of Realtors, as the new WPGA president and CEO. 

Louisiana: 

Making Sure Propane Has a Voice

The Louisiana Propane Gas Association (LPGA) always keeps a close eye on national and state-specific propane-related legislation, but the association also monitors general small business regulations as they affect LPGA members. The group is paying close attention to tax extender legislation that would include the 50-cent-per-gallon alternative-fuel tax credit and the infrastructure tax credit. In December, the credits were extended to the end of 2014, but uncertainty exists regarding how Congress will act on the issue this year.

“But we’re always looking at small business regulations, as they affect our members as much as the fuel regulations,” explained LPGA president Bryan Cordill of Cordill Propane (Monroe, La.). One of those is Section 179 of the IRS tax code that tax extender legislation would make permanent. The section allows businesses to deduct the full purchase price of certain equipment purchased or financed during the tax year.

New-Years-Outlook-for-photos-2bFunding the activities of the state’s regulatory agency, the Louisiana Liquefied Petroleum Gas Commission, is a more propane-specific activity of the association. Most of the commission’s activities are funded through license fees collected through a percentage of retail and wholesale propane sales. The commission has experienced budget shortfalls as of late, and LPGA is working to help the commission stabilize its budget. “If we have large variations in weather or cost, those fees can go up and down somewhat unpredictably,” Cordill noted. “So we are working with them to try and stabilize without a net increase in dealer fees.”

The association has also been active as a stakeholder with the Louisiana Clean Cities coalition, helping to guide the coalition’s conversations to include propane. “We do that to make sure propane autogas has a voice,” Cordill said. To keep propane at the forefront of people’s minds when thinking of alternative fuels, the association places demonstration vehicles at the coalition’s Alt Fuel Day events. LPGA executive director Randy Hayden has served as a keynote speaker at a quarterly coalition stakeholder meeting.

Cordill noted that the association is monitoring the continued trend of consolidation in the industry, with the number of independent propane marketers in steady decline. He believes that the increased cost to operate a small business is a main reason for the consolidations. His company, Cordill Propane, is one of those small independents, and it’s doing well, with revenues up over last year. “We sell a good amount of hearth products and what we call ‘burner tips’ so customers have something to use their propane in. We continue to market those.”

Texas: 

Supply Still an Important Issue

With the Mont Belvieu propane storage location and various additional supply points located in the state, Texas survived last winter’s supply and infrastructure problems in fairly good shape. But having all that supply kept state propane officials busy as out-of-state transporters, primarily from the Midwest, flowed into Texas to load their trucks with product. All those out-of-staters meant Texas officials were busy enforcing Department of Transportation licensing requirements and Railroad Commission of Texas (RRC) regulations.

Propane marketer Todd Dorris of Roadrunner Energy (Uvalde), president of the Texas Propane Gas Association (TPGA), noted that the association helped the out-of-state companies secure emergency allowances to help propane marketers elsewhere. 

According to Dorris, the association is not doing much differently this year. “After last winter, in Texas and across the nation, people have realized storage and education of customers is needed, and people have stepped up to secure storage and supply sooner,” added Dorris, whose company, Roadrunner Energy, sells strictly propane.

On the regulatory side, the association’s Technology and Safety Committee is working on complying with the most recent versions of NFPA 58, the Liquefied Petroleum Gas Code; and NFPA 54, the National Fuel Gas Code. The state operates with the 2008 version of NFPA 58 and the 2006 version of NFPA 54, so the association is working with the RRC to consider adopting the current versions of those codes.New-Years-Outlook-for-photos-4

TPGA is also monitoring challenges to legislation, stating that the RRC has the ultimate authority when it comes to propane in Texas. RRC rules supersede rules of a local jurisdiction. Challenges could come during the next legislative session starting in March from entities such as city councils or firefighter associations. Dorris can sympathize with both sides of the discussion because he serves as a volunteer firefighter in Uvalde.

“I think from a safety standpoint in Texas, we’re pretty safety conscious. We’ve never had any major issues with safety concerns when it comes to propane.”

New York: 

Projects Include Storage, Supply, Transport

The New York Propane Gas Association (NYPGA) recently completed a two-year strategic planning process that NYPGA president Rick Cummings notes will help the association keep pace with the industry and ensure the association provides its members with all the tools they need to succeed. 

As a result of that process, Shane Sweet recently joined NYPGA as executive/technical director. He will join current executive director Barb Roach to help ensure propane is kept at the forefront of energy growth in the state.

NYPGA continues to work actively with Crestwood Midstream to win approval for its Finger Lakes LPG storage project. This project has languished with the New York Department of Environmental Conservation and Gov. Andrew Cuomo’s office for more than five years.

“We feel that infrastructure projects like this are vital to ensuring a steady and economical flow of propane to New York residents and the Northeast,” Cummings stated. “The NYPGA has teamed with Crestwood to provide press conferences, radio appearances, bill stuffers, letters, and more, all to support approval of this important project.”

In addition, as winter approaches, Cummings said the NYPGA continues to foster its cordial and productive relationships with members of the propane supply and transportation industries. The association meets regularly with members of the trucking, pipeline, rail, New York State DOT, and other organizations vital to propane supply needs in the winter months. “We have found that keeping these lines of communication open is extremely valuable when it comes to solving supply issues as they arise,” Cummings noted.

Kansas: 

Leak Tests, Irrigation, Membership

Safety is a common theme of propane gas associations, but the Propane Marketers Association of Kansas (PMAK) is expanding its work in that area to focus even more on safety and compliance at the customer level. More specifically, the association is encouraging propane technicians to conduct leak tests on all customer out-of-gas calls, said David Perkins, area sales manager for Bergquist (Toledo, Ohio), who is PMAK president.

Various insurance companies are encouraging marketers to perform leak tests every five years and to perform leak tests on out-of-gas calls to determine if a leak caused the customer to run out of gas.

The association has been promoting its safe appliance installation program. In addition to providing a rebate for customers replacing existing appliances with propane appliances, the program encourages propane appliance installers to perform a leak test at the time of installation.

“But it’s also there to promote propane,” Perkins explained. “The program is being promoted heavily and will be promoted heavily next year, and if it’s successful, it will continue.”

The association is also encouraging marketers to persuade farmers to use irrigation engines and is planning events for farmers to learn about the benefits of those products.

Association membership numbers have declined as a result of mergers and company closures, resulting in less dues money coming in to the association. Participation in association activities and programs is lower when fewer independent marketers are involved. Raising dues or restructuring are two options that have been considered.

PMAK is also looking to provide additional services to members, such as educating them on better methods of collections and receivables. “I think collections is always an issue anytime you’re in business, but more so last year with the high fuel costs,” Perkins noted.

New England: 

Infrastructure and Attracting Talent

In addition to its work mentioned earlier in monitoring pre-buy legislation activity, PGANE has supported various infrastructure projects that will affect New England, such as the permitting of a propane storage cavern in the Finger Lakes region of New York. PGANE is also backing the expansion of the Sea-3 terminal in Newington, N.H., which is in the middle of a zoning ordinance fight. “We’re supporting them getting their retrofit program in place so they can handle more rail product,” said Norm Guerette, PGANE board chairman. 

Infrastructure is a top activity of the association, but the group is also working to attract young talent to the propane industry. PGANE is attempting to persuade students of trade schools, trade high schools, and vocational schools to consider the propane industry as a career choice. The group is building a database listing those schools and checking to see if they have HVAC or similar programs. PGANE also seeks to serve as speakers at school career days. 

“We’re trying to make the propane industry a little more high-profile and gain some exposure with students getting out of trade school and looking for a career.” 

Supply, logistics, and infrastructure are always among the top issues of concern for PGANE. With the newfound abundance of product, the infrastructure has not caught up with the supply. Getting all that gas to where it’s needed the most is an ongoing challenge, he added.

“That was part of the issue last winter in the Midwest,” Guerette stated. “Suppliers just couldn’t get enough gas to the Midwest. As an industry, we have some logistical issues to solve.” He noted that his company in December just opened a new plant with 30,000 gallons of storage in Bridgeton, Maine.—Daryl Lubinsky

Finally, Some Positive Signs For the Residential Sector

The propane industry’s residential business has seen a steady decline since the real estate market began to weaken around 2008, but that sector is finally seeing some stability. Although propane space-heated households declined by more than 1 million over the past 10 years, with an average drop of 1.7% per year since 2008, preliminary data suggests that the number of propane households in 2013 remained stable.

“New construction in general is up, which means new propane households are increasing and actually increasing relatively quickly right now, and we’re seeing a fairly significant conversion rate from the fueloil market,” said Michael Sloan of ICF International (Fairfax, Va.). “We also saw a modest increase in the propane market share in new residential construction in 2013.”

PERC-Sloan-for-photos-1But propane is continuing to lose market share as a significant number of households turn to electricity. In addition, the quantity of propane used per customer is still declining as the result of improvements in efficiency. Because of that, the overall residential market continues to be soft, said Sloan, who gave a presentation titled “2015 Propane Market Outlook, Major Trends Driving Change in the Propane Industry” to the Propane Education & Research Council (PERC) at its November meeting. Sloan expects the full Propane Market Outlook report to be released before the end of the year, but his presentation to PERC in November highlighted the residential market portion of the report.

ICF projects the residential market to continue to rebound. New propane household construction will not return to where it was before 2006, but newly constructed residences with propane space heating will roughly double over the next two to three years, relative to where it was in 2013.

Narrowing down the data by region for residential lots over one-half acre, propane has been “hitting it out of the park” in New England, (as the graph below shows), with more than 60% market share there, Sloan noted, adding that the mid-Atlantic region is also doing well.

A look at fueloil conversions provides more good news for propane. As the map at the top of the facing page illustrates, although fueloil still heated 6.4 million homes in 2013, higher than the current number of propane-heated homes, it has virtually disappeared in new construction. Its share of the new construction market is essentially zero.

“And the existing stock has been declining on average about 4% a year, so they’re losing about 300,000 households per year,” Sloan pointed out. The question is, where are those households going? ICF estimates that about 10% to 15% of the households moving away from fueloil are moving to propane. That number varies based on geographical location, with the number higher in New England, where most of the conversions are taking place, and lower in warmer climates.

When it comes to growth in the number of households using propane as their primary space heating fuel, ICF sees strength in the Northeast. The New England states, as shown in the center graph at right, will approach 100,000 new households over the next six years, and the Mid-Atlantic will see around 40,000. The Mountain Pacific region looks flat and the Midwest and South Atlantic will continue to see declines.

On a less-positive note, the industry continues to see a long-term trend in efficiency improvements, leading to a decline in sales per customer for space heating that will likely continue, as the lower right graph indicates. Sloan noted that will vary depending on what happens with propane prices, but the decline is almost inevitable as households replace existing furnaces and water heaters with more efficient models and as building codes continue to improve overall household energy efficiency.

“The combination of the slow decline in [propane space-heated] households and improvement in efficiency will lead to a continuing decline in sales in the residential market,” Sloan noted. “That shows in all of our analyses and forecasts.” But the decline in conventional markets is more than offset over time by growth in new engine markets and additional market opportunities, he added. “Overall, our forecast for the next few years is slow growth in the overall consumer propane market.”

In other PERC business at the meeting, a representative for Encana Services Corp. (Calgary) asked for PERC support on a project to produce a new blend of HD-5 that would expand volumes available for current markets and allow marketers continued access to growth in autogas. Gregg Dighero, who is based in Denver as director of NGL marketing for Encana, said a lower-volume propane blend of HD-5 would make more usable propane with existing infrastructure. Encana produces natural gas, oil, propane, and other natural gas liquids.

Speaking with BPN after the meeting, Dighero noted that he has heard some of his customers ask why producers can’t get propane in all the areas it is needed when propane is in such abundant supply. He contends that broadening the specification for HD-5 could be a solution to that question. Producers could use more of the existing infrastructure to make up to 20% more propane without having to invest in additional infrastructure. Dighero’s proposal would do that while keeping some of the qualities that exist in today’s HD-5 engine fuel. He proposed to ask the National Propane Gas Association (NPGA) and the Gas Processors Association (GPA) to come up with a plan detailing costs for a study on sanctioning a new blend and then a new specification for HD-5.

Dighero presented a graphic at the meeting that featured a proposed example of what the new blend would look like. Typical U.S. propane currently contains 92% propane, 5.5% ethane, 1.5% iso-butane, and 1% normal butane, while the potential new blend would contain 67% propane, 15% iso-butane, 13% ethane, and 5% normal. He noted that his proposed product would more closely match the HD-5 blends used around the world.PERC-Sloan-for-photos-2

“Everybody is running different blends than we do,” he stated, adding that the current HD-5 standard was established in 1962 as an auto-grade fuel and hasn’t been upgraded since. “We have the purest spec for propane out there. With the influx of NGLs we have, it makes sense that it’s time to take a look at that standard and see if we can broaden it a little bit to be able to have those barrels available where we need them.”

Larry Osgood, president of Consulting Solutions LLC (Monument, Colo.), who consulted on the project, also spoke with BPN and called the proposed blend “propane with more ethane and butane in balance so that it’s fully interchangeable with our current world’s tightest propane spec. I’d also recommend the spec not be revised but rather be an optional spec to the current HD-5 where the new expanded blend makes sense.”

Some producers in attendance expressed concern about blending the current blend of HD-5 with a proposed new blend. PERC asked Dighero to address those concerns and get more input from GPA and NPGA.

Also on the agenda was an update by the council’s chief business development officer Tucker Perkins on products in the propane-fueled lineup. He noted that 20 brands of lawn mowers now offer products that run on propane, and while attending the GIE show in Louisville in October, he heard positive comments from landscapers who use the products and from mower manufacturers who said sales are going well.

Perkins also reported that package delivery company UPS, which in May announced plans to purchase 1000 propane-fueled delivery trucks, is fully deployed in Louisiana and Oklahoma and is in the process of rolling out the vehicles in Colorado and California. “They said they have never had a deployment of an alternative fuel that has gone this smoothly,” Perkins added.

He noted that Frieightliner has sold about 200 S2G propane-fueled bobtails. Of the total, 95% of users have been pleased with the vehicle and the remaining 5% reported various problems such as the check engine light turning on. Not all of those problems involved propane.

Perkins stated that the U.S. Department of Energy’s National Renewable Energy Laboratory was scheduled to host an invitation-only propane autogas technology forum in Golden, Colo. a week after the PERC meeting, on Nov. 13. In addition to PERC and DOE, participants include engine and parts manufacturers and fuel suppliers. He emphasized that educating the department on issues affecting propane autogas and getting the DOE thinking of propane as a viable fuel when funds become available for projects were PERC’s main goals at the meeting.     —Daryl Lubinsky

Industry in a Strong Position After Mid-Terms

The National Propane Gas Association (NPGA) considers itself a bipartisan organization, supporting legislators from both major political parties. That was especially the case last winter, as Republican and Democratic Congress members and governors joined forces to take action to improve the delivery of propane and to prevent supply problems from occurring in the future. “I think we learned the lesson that propane is everywhere,” said NPGA senior vice president of public and governmental affairs Phil Squair. “It’s bipartisan, and nobody doesn’t like propane if it’s in their district, so that was pretty good to see.” But he believes many NPGA members are happy with results of the Nov. 6 mid-term elections in which Republicans took control of the U.S. Senate and gained seats in the House.

Squair-Elections-for-photos-1Several propane-friendly senators are now positioned to serve as chairs of various Senate committees, which for the propane industry is a significant aspect of the Republicans’ Senate takeover. Sen. Lisa Murkowski (R-Alaska), who in recent months has spoken in favor of building more propane infrastructure to keep pace with production, is lined up to chair the Senate Energy and Natural Resources Committee. Sens. John Thune (R-S.D.) and James Inhofe (R-Okla.), who have also supported propane issues, are set to lead the Commerce Committee and Environment and Public Works Committee, respectively. Also, Rep. Cory Gardner (R-Colo.), who has been friendly to propane causes in the past, was elected to a U.S. Senate seat. Squair noted that Reps. Bob Latta (R-Ohio) and Tim Walz (D-Minn.) continue to be supportive.

The propane industry is currently working on a full legislative agenda that is still active — not many industries can say the same thing, Squair commented. Reinstating the public education activities of the Propane Education & Research Council (PERC) is a top issue on that calendar. Renewing the 50-cent-per-gallon alternative fuel credit and the alternative fuel vehicle refueling property credit, which expired at the end of 2013, is another.

According to Squair, determining what actions the lame duck Congress will take before the 114th Congress is sworn in this coming January is difficult. But NPGA will work to get Congressional action on the PERC issue during the lame duck session. Two bills, both titled “The Propane Supply and Security Act,” are in the House and Senate, but the bills probably won’t see any action before next year. A section addressing the data that the U.S. Department of Commerce (DOC) uses to calculate propane prices compared with prices of competing fuels is part of the bills. The Propane Education and Research Act (PERA) that created PERC stated that if the price of propane exceeds the competitive fuel index price by more than 10.1%, PERC’s educational outreach activities will be restricted. That restriction occurred in 2009 and is still in place, but NPGA is disputing the method DOC uses to make the calculation.

NPGA worked to get a new standalone bill that focuses on the DOC portion, changing the method DOC uses to make the price calculation. The work paid off on Nov. 17, when Latta and Walz introduced the Propane Education and Research Enhancement Act.

Propane and other alternative energy industries are working to extend tax credits including the 50-cent-per-gallon alternative fuel credit and the alternative fuel vehicle refueling property credit that expired at the end of 2013. Those business groups are putting a lot of pressure on lawmakers to pass the extenders package, titled the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act in the U.S. Senate. The EXPIRE Act would extend 26 tax breaks due to expire this year and more than 50 expired tax breaks, including a tax exemption on wind projects, credits that include energy incentives for wind, solar, alternative fueling stations, electric motorcycles, renewable fuels and energy efficiency, and a $4000 tax deduction for tuition costs. The Senate Finance Committee and other committees have worked overtime to get those credits through because they know many businesses rely on them, Squair noted. He added that the Senate has leaned toward extending the credits for two years to the end of 2015, which NPGA favors. But the House has discussed eliminating most of the credits and making permanent some business-friendly rules, Section 179 — which allows businesses to deduct the full purchase price of certain equipment purchased or financed during the tax year—and bonus depreciation, which covers new equipment.

Squair-Elections-for-photos-2a
He has heard different scenarios as to which side will prevail in the tax credit discussion, which could include an extension of one or two years, or Congress could extend some of them permanently.

“That’s part of what’s going on [in November] as the lame duck organizes itself is to figure out what kind of tax policy can get done during lame duck. We’re part of a broad coalition pushing this as hard as we can to try and get those through.”

The propane and natural gas industries are working together to change the method in which the excise tax is calculated. The calculation is currently done on a per-gallon basis, with a gallon of propane and a gallon of gasoline both taxed at 18.3 cents per gallon. But NPGA is trying to change the method to be based on energy content rather than volume only. The association is pushing a provision that would keep gasoline at 18.3 cents per gallon, but because propane has lower energy content than gasoline, users of propane would get about 1.3 gallons for that 18.3 cents. That would help propane compete better with gasoline in the marketplace. Squair noted that the natural gas industry is working on a similar comparison between natural gas and diesel. He added that Republicans and Democrats seem to favor the proposals. NPGA hopes to see the issue included in the tax extenders debate this session, but if not, it will push to include it as part of the tax reform debate in the next Congress.

NPGA’s endeavors to enact legislation favorable to the industry involves many phone calls and e-mails, working with Congressional staff members to get them the information they need, and reminding them how propane-specific issues benefit their constituents. Although last winter’s supply and infrastructure issues were tough on the industry, one positive aspect was that legislators learned more about the propane industry and its importance to the public. The legislators now know that they can help ensure the issues of last winter don’t happen again. The PERC/DOC issue is a good example.Squair-Elections-for-photos-2b

“The ultimate goal of this is so that PERC can use its full assessment dollars to communicate with the public in ways that will ensure consumer preparedness as well as grow the market,” Squair explained. “If we can grow the market in the summertime, that means we’ll be able to move more propane in the wintertime because of the way the pipeline and rail allocation rules work. If you buy less propane in the summertime, the pipelines aren’t going to ship much for you in the winter. And vice versa, if you ship a fair amount in the summertime, they’ll ship more when you really need it in the winter. That’s why we’re trying to get PERC to be able to reach out on preparedness and growth initiatives so that we’re better positioned to compete against other energies and substances that get transported on the rails and pipeline.”     —Daryl Lubinsky

Cautious Optimism, Mixed with Good Supply News

The National Propane Gas Association’s (NPGA) board of directors heard good news regarding inventories at its fall meeting in Miami Oct. 26-28. However, with crop drying just two weeks in, and winter weather yet to arrive, the mood certainly wasn’t one of over-confidence in light of last winter’s unexpected supply and logistics challenges. “The weather last winter, I would argue, was the most challenging in our 100-year history,” said NPGA president and CEO Rick Roldan. “We do have a better early-warning system in place today, and we are more prepared.”

Board-Meeting-for-photos-1NPGA’s Propane Supply & Logistics Committee was informed that, as of mid-October, primary U.S. propane inventories stood 23% above average at 81.6 MMbbl, some 15.6 MMbbl higher than the 2013 total headed into the winter heating season and with crop drying in the Midwest well under way. Houston-based Ron Gist, research director at IHS, said regional stocks, while all above average, varied by region. He pegged PADD I (East Coast) volumes at 22% above average, while PADD II (Midwest) came in at just 9% above. PADD III (Gulf Coast) volumes were a whopping 32% above, and PADDs IV and V (Rocky Mountain-West Coast) supplies were reported to be 37% higher than average. Meanwhile, inventories in Canada were building to high levels, but from a low level from last winter.

Based on projections under a new project being conducted by IHS for NPGA, the consultancy’s analysis calls for East Coast stocks to remain on the high side of the historical range; mid-continent propane inventories should remain near the middle of the typical range; U.S. Gulf Coast supplies will be dependent on cracking rates and exports; the Rocky Mountain region should decline, but remain well above the typical range; and propane volumes in the West Coast should remain about average. For the nation as a whole, propane inventories will likely remain on the high side of the historical range.

The project, scheduled to go live this winter, is charged with providing NPGA with monthly primary propane inventories based on regional supply/demand balances. IHS has prepared monthly forecasts for the total U.S., as well as annual supply/demand forecasts by PADD. Data sources include monthly regional supplies and inventories from the Energy Information Administration (EIA), monthly regional imports and exports from EIA, and annual propane demand by end-use sector in each state from the American Petroleum Institute. Seasonality of annual data is being calculated or estimated by IHS.

Also tracked are inter-regional transfers between PADDs, monthly propane demand for ethylene production, and bi-monthly waterborne exports from IHS Waterborne Energy. Gist noted that missing from the current data are transfers to and from secondary (retailer) storage and tertiary (end-user) storage.

Output from the supply/demand analyses will provide monthly propane supply and demand by PADD, monthly propane inventories—days of supply in each PADD and expected inventories relative to historical “minimum” levels, monthly analysis of deviations between forecasts and new data, and monitoring of EIA weekly inventory data for inaccuracies and inconsistencies. Use of the new data acquisition is aimed at assisting NPGA members to adjust their propane acquisition strategies, proactively develop requests to state and national regulators for hours-of-service waivers, and to develop insight into implied changes in secondary and tertiary storage levels.

Gist concluded that primary stocks of propane in every region of the nation fluctuated wildly in the last three years — record high inventories in 2012, record low supplies in 2013, and higher record volumes in 2014. “These fluctuations are the result of vastly new dynamics in the U.S. market. Rapid increases in propane supplies from gas processing due to shale gas production, reduced use of propane as a feedstock in ethylene plants, and the need to export surplus propane from the U.S. and build new export terminals.” He added that while infrastructure has been added, one pipeline, the Cochin, had been lost. Additionally, propane stocks in Canada are high because the U.S. doesn’t need as much propane from its northern neighbor, whereas Canada needs the U.S. market. And while propane imports into the U.S. from Canada had declined, they have now stabilized.

Characterizing the U.S. NGL market, Gist explained, are domestic propane supply factors that include high production of natural gas and correspondingly low prices, very attractive gas processing margins, rising production of all NGLs, including propane, due to gas arriving at gas plants that is relatively wetter, and processors maximizing recovery of liquids, with the single exception of ethane. At the same time, refinery production of propane is not changing appreciably.Board-Meeting-for-photos-2a

While U.S. gas plant production of propane has more than doubled in only seven years, from about 400,000 bbld in 2007 to more than 1 MMbbld this year, refinery production is much lower than gas plants and is not changing appreciably. Gist placed refinery production mostly holding between 500,000 bbld and 600,000 bbld from 2007 to the present. Gist also pointed out that U.S. waterborne imports of propane had long fallen to zero — until they were needed last winter.

He further noted that domestic propane production from gas processing will continue to increase due to rising production of natural gas, preferential production of wet gas, and very attractive gas processing margins. Refinery supplies of propane should remain fairly stable, and the need for Canadian imports will decline due to the significant rise in domestic U.S. supply. He commented that the latter factor begs the question, where will surplus propane in Canada go?

Another factor affecting propane supplies, added Gist, are propane cracking rates, which increased after the 2008 recession but plummeted in 2014 as petrochemical users turned to cheaper ethane as a feedstock. He said in another year additional ethane crackers will be coming online, which should boost prices for that liquid.

International factors in the propane market are led by exports. Gist reported that exports in several regions, among them Algeria and Angola, have stagnated in recent years. Conversely, global demand for propane has continued to grow, and in this tight market international prices for propane have risen much higher than in the U.S., making the nation an attractive source to offshore buyers. In response, U.S. propane exports have set new record highs every year since 2008, rising from just over 50,000 bbld to an estimated near-450,000 bbld this year.

High exports were partially responsible for propane price spikes in the U.S., said Gist, but the price differential for propane in Asia versus the U.S. collapsed due to those high prices and waterborne exports dropped sharply. Nonetheless, he added that American propane remains the cheapest in the world, and that exporters make more money selling propane abroad than butane. As a result, U.S. LPG export capacity is expanding rapidly. However, North American prices “must remain lower than in other regions to incentivize exports.”

In other business, both the marketer and state/district directors meeting and Governmental Affairs Committee meeting focused attention on natural gas line extensions. Randy Thompson of ThompsonGas (Boonsboro, Md.), Governmental Affairs chairman, commented that the issue was one of the most dire currently facing the propane industry. Thompson said natural gas utilities are proposing “to push extension costs out to the entire rate base,” rather than incorporating the traditional procedure of charging new customers for extending natural gas mains.

Committee members noted that if the cost of extending natural gas lines was allowed to be spread among existing rate payers, such extensions would proliferate, deeply impacting propane operations and threatening “natural gas only” in some states. Following the Nov. 4 national and local elections, NPGA was to undertake a data-gathering effort to determine hot spots for such activity, and also conduct outreach with public utility commissions.

Board-Meeting-for-photos-2bFinally, the Governmental Affairs Committee outlined a new panel that has joined its regulatory and compliance, autogas, energy policy, and pipeline advocacy task forces. The rail advocacy task force, chaired by Andy Ronald of Crestwood Midstream (Houston), is laying out its organizational plans and next steps, among them meeting with the U.S. Surface Transportation Board (STB).

The board, the successor agency to the Interstate Commerce Commission, is charged by Congress to have jurisdiction over railroad rates, service issues, and rail restructuring transactions, in addition to certain pipelines not regulated by the Federal Energy Regulatory Commission (FERC). Outreach to STB on the part of the new task force would be similar to NPGA’s past engagement with FERC in pipeline tariff disputes.               —John Needham