Propane pricing all over the board

When Camano Island resident McDonald Sullivan had his residential tank filled with 176.5 gallons of propane, he was astounded at the price – $863, or $4.89 per gallon.

Upon review of the bill, he said, “I was flabbergasted,” especially when compared to a bill from 2007, when the same company charged $1.86 per gallon.

Because propane is a byproduct of crude oil, it has typically been an inexpensive fuel source. But as many people are discovering, especially on Camano Island, where propane is often used, that’s not necessarily the case anymore.

Neither federal nor governments regulate propane prices. Instead, distributors set their own prices, often determined at the local level by branch managers.

Even so, the U.S. Energy Information Administration lists average propane prices for both wholesale and residential use. The week Sullivan received his bill, those prices were $1.38 and $2.68.

Why the discrepancy?

“If I go down to the local filling station here (in Stanwood) and get my bottle filled, it costs $2.30 per gallon,” Sullivan said.

He also noted that, like many people, he’d been limiting his propane usage, trying to keep the bill down and save money in a tough economy.

“It seems they’re charging an amount that’s making up for my lack of use,” he added.

That may be the case. However, there are many factors determining the price of propane.

Steve Miller, of American Distributing, and Peter Teshima, managing director of Suburban Propane’s New Jersey headquarters, agreed that customers who use more generally pay less.

One of the biggest factors is the tank itself.

Residents who own their tank are responsible for the maintenance, repair and inspection of their equipment, while those who lease tanks receive these services for “free” as part of their contract. The propane company, though, has to recoup their expenses somehow, just like any business, Miller said. They do so through the price of the propane.

Usage is a factor, too, as Sullivan speculated.

For example, a customer who uses two tanks per year and a customer using six tanks per year both require a certain level of service (maintenance and inspection), but the propane company is making more money from the customer filling more often. That customer will likely get a better rate.

Miller also noted that customers who contract for auto-fill provide consistent business for the company. Therefore, a steady auto-fill customer will likely get a better rate than a sporadic will-call customer.

Time of year is another factor.

“Seasonal demand and supply affects pricing,” Teshima said.

Miller agreed. During a particularly harsh winter, he said, increased demand can raise prices.

Delivery location and distance traveled is also a factor.

“Certain delivery locations present more challenges in terms of transportation and delivery than a typical residential neighborhood,” Teshima said.

Miller said, “Customers may have to pay an out-ofarea fee, especially if it’s an emergency fill and we have to pull a driver off another route.”

Finally, a big determining factor is the propane company’s wholesale cost.

“Wholesale prices over the past year have jumped considerably, and are expected to continue to do so in the foreseeable future,” Teshima said.

Companies battle this, Miller said, by gambling on pre-buy or no pre-buy.

A company will often prebuy if prices are down in the summer but expected to rise in the winter. Or, a company may elect not to pre-buy, thus saving themselves from fronting the money, if they expect prices to stay put.

Obviously, Miller said, this can backfire. If a company pre-buys during the summer, expecting a harsh winter, and then winter never materializes, the lack of demand may drive prices down. The company might end up with propane that cost them more than the current market value.

Either way, the savings – or the added expenses – are passed on to the customer.

“It’s a little bit like looking into a crystal ball,” Miller said. The bottom line, both Miller and Teshima said, is that many factors determine the price a customer finally pays. Each distributor seeks to set a price that recoups the initial expense and realizes a profit. Customers then, should expect companies to charge within a range of prices.

“Our policy,” Miller said, “is that we’re gonna make a dollar off you, but we’re gonna make a fair dollar.”

With this in mind, he cautioned against extremely low prices.

“In this economy, some companies might have customers paying below cost. They’ve lost so many customers that they’re essentially buying them back with low rates,” he said.

But, he added, “it’s buyer beware – you’re going to pay down the road.”

Shop around. For example, the price per gallon at Skagit Farmer’s Supply in Stanwood on Wednesday was $2.16, assuming a 250-gallon fill on Camano Island.

Take into account whether or not a tank and its maintenance are included. What level of service does the distributor provide? How often will the tank be filled, and where is it located?

Then, consumers can make the decision best suited to their needs.