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The Future of the Local Gas Distributor

Fortnightly Magazine - February 1 1995

high costs will include: gas acquisition costs, demand charges for firm pipeline transportation and storage capacity, expensive on-system storage capacity, high internal overhead, obsolete but undepreciated portions of the physical plant, and excessive administrative, metering,and billing costs.

Consumer advocates and regulators won't stand still. Rate cases will become increasingly contentious, and reductions in internal overhead will lead to write offs. Dividends and stock prices will quite likely suffer as financial markets grow skeptical about the long-term attractiveness of many investor-owned LDCs. Bond ratings may fall for some LDCs.Threat #3 - Information Technology

Information technology marks the great equalizer. It not only diffuses knowledge; it compresses the response time of consumers and competitors. Institutional strengths become weaknesses. For example, LDC billing and collection systems used to stand as a formidable barrier to entry for unregulated merchants seeking to serve the middle market for gas and eventually the residential sector. No more. LDC billing systems now offer bypass opportunities to incipient unregulated retail merchants.

About half a dozen unregulated proto-retailers already exist. More are likely to emerge. These rising new merchants plan to aggregate hundreds of thousands of middle market meters and then millions of residential meters once the middle market falls. To accomplish this goal, they are developing sophisticated next-generation billing, collection, and customer service systems. These systems will boast features no LDC system can duplicate just by tinkering around the edges, such as:highly customized invoicing;

tailored pricing and payment terms;

component billing from wellhead to burnertip; and

automatic disbursement for gas supply, transportation, and storage services.These customized information services transform the gas bill from an accounting document into a business tool for customers or competing merchants. They increase the productivity of financial capital; they convert physical assets into mere commodities.

Response #1 - Merge

Wall Street will invariably counsel its LDC clients to merge, acquire or be acquired. This advice is understandable, since it generates fees for investment bankers and securities lawyers. Acquisitions cater well to the professional pride of executives, but don't always solve problems. A merger of two flawed strategies or two uncompetitive companies or two obsolete corporate cultures may prove worse than keeping the firms apart.

Nevertheless, some corporate combinations do make sense for LDCs. A merger may allow an LDC to strike a bargain with State regulators to recover the acquisition premium over book value-a common desire in utility merger cases. Recovery might be achieved through credits generated by incentive rate making or trimming the cost of capital through a reconfigured balance sheet. Or, the LDC might join with regulators to cut risk by shedding the merchant function or perhaps even firm transportation and storage capacity on interstate pipelines.Response #2 - Reposition Inside

Precious little value remains in gas commodity sales or bare transportation; the value has migrated to knowledge end-i.e., how to make commodities useful to consumers. The gas molecule itself is not the product; the product arises instead from the portfolio of services that can be stapled to that gas molecule.

Energy consumers do not want energy per se, but the benefits that using energy bring.