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The Future of the Local Gas Distributor

Fortnightly Magazine - February 1 1995

These benefits (and their perceived value) differ not merely by type or category or consumer, but by individual user. In the years ahead, the greatest asset available to an energy services company will come from a current and comprehensive knowledge about each consumer. But very rarely will an LDC conduct an "exit" poll to fathom why a customer has fled its sales tariffs or high-cost storage rates. LDCs often grow sullen at the loss of a middle market user who sends business to an unregulated merchant. When coupled with the loss of the burnertip, this negative attitude virtually guarantees that the LDC will never grasp the changing needs of middle market buyers.

Each LDC will hold a unique set of core abilities and corporate weakness that will define the pace of change. Further, each LDC must choose from many different options for internal repositioning:(i) Phase out the regulatory bargain. As consumers go elsewhere, phase out all regulated sales by a date certain (including sales to residentials) and file unbundled non-sales tariffs in return for the freedom to offer non-commodity tariff services.

(ii) Write off losers. Abandon or sell portions of the distribution system and physical plant; use the proceeds to finance and include in rate base the cost of the most advanced information technology needed to offer non-commodity tariff-based services.

(iii) Milk the winners. Gain the right to spin off innovative or proprietary services developed within the rate base to non-regulated subsidiaries operating outside the service area, provided rate payers are compensated appropriately.

(iv) Customize tariffs. Offer a portfolio of knowledge- or system-based tariffs, such as physical flow interruption insurance, least-cost route scanning, or system balancing for private retail merchants, large-user shippers, or small-user buying cooperatives.

(v) Straddle the city gate. Offer services such as capacity acquisition for consumers behind the city gate (i.e., a gas travel agency service); storage capacity leasing outside the city gate, physical storage inside the city gate, or contract storage via gas banking programs.

(vi) Offer virtual pricing. Offer hedging for those who can't do it themselves. At regular intervals the LDC would receive from or pay to consumers the difference between (a) a prearranged price and (b) the sum of (1) the cash market city gate price as quoted by wholesalers, (2) a previously agreed upon retailing mark up, and (3) LDC transportation charges relevant to that consumer.

(vii) Upgrade billing. Develop next-generation systems: metering, acquisition of delivery data, billing and collection, and automated customer service and volume reconciliation. Take a look at natural gas credit cards for small business and residential users.

(viii) A lender be. Build rate base with a consumer financing service. Three options arise: (a) short-term collateral lending to smooth out cash flow; (b) seasonal financing of gas in storage or for large shippers; (c) long-term leasing and financing of gas-fueled projects for environmental compliance.At one extreme, the LDC can be satisfied as just a competent and courteous trucker for large users and shippers providing stripped down transportation from city gate to meter. At the other, the LDC can be a non-commodity