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Forecasting New Gas Users

Fortnightly Magazine - February 1 1995

affected medium-sized customers more than small firms. That result agreed with observations by Boston Gas's marketing staff that environmental concern was the primary reason driving medium-sized commercial firms and organizations to replace old oil-fired equipment with gas-burning units.

The oil/gas price ratio affects inflow of applications in every customer class. But the ratio plays the primary role in predicting how often large-volume customers will seek out fuel-switching. The environmental factor was statistically insignificant for large customers. Does that mean that large establishments ignore environmental issues? Certainly not. They just behave differently. Large firms tend to be well educated; they are aware of trends in regulations and plan ahead. They can also afford installation of air filters and other pollution abatement technologies. The cost of these technologies is (in some sense) an addition to the oil cost. Thus, the oil/gas price ratio indirectly takes that additional cost into account, eliminating the need in a special (artificial) environmental factor.How Many Will Switch?

Of course, after a prospective customer inquires about fuel-switching, the key question remains: Will the customer say "yes" and actually install gas-fired equipment?

Discret choice analysis showed that the probability of actual fuel conversion by small- or medium-sized prospective customers is largely a function of the economy, reflected by the unemployment rate. For large-volume customers, the most important variable is the anticipated change in the unemployment rate (unemployment rate for the next year minus the rate for the current year). It seems as though large-volume customers arrive at their fuel-switching decisions based upon the future state of the economy. These customers will make more conversions if they believe the unemployment rate will fall during the next year.

In many cases, especially for large-volume customers, the time period between the inquiry date and the gas-on date (project completion time) exceeds one year. For forecasting purposes we will want to know in what year a prospective new customer will start buying gas. Therefore, we analyzed distribution of the completion time.

All told, the combination of formulas we derived from our statistical analysis of customer inquiries, final conversion decisions, and timing of actual equipment installation provides Boston Gas with a reliable model for forecasting the inflow of new C/I customers switching to natural gas from competing fuels. The comparison of the model estimates with the actual equipment installations (Table 2) demonstrates that the model simulates reality quite well. The errors, with one exception, do not exceed 10 percent. And in 50 percent of the cases they fall inside the 2-percent interval. The 1993 (test year) projection estimates are close to actual results. Even the 9-percent deviation for large-vloume establishments does not look high, taking into account that the estimate of 36 is not too far from the actual count of 33.Alexander Lonshteyn, PhD, is supervisor, business forecast and analysis, Boston Gas Co.

Possible Callouts:

Environmental worries prompted more inquiries from medium-sized customers than from small firms; large firms reacted only to the oil/gas price ratio.Large-volume customers actually convert to gas when they see unemployment rates dropping.Table 1

Annual Fuel-Switching Inquiries to Boston Gas Co.