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The Future of the Local Gas Distributor

Fortnightly Magazine - February 1 1995

merchant of a full-service package of transportation, insurance, financing, technology and knowledge. Repositioning can make the LDC the energy company with a thousand faces and a million profit opportunities. The obligation to serve will evolve into the obligation and the desire to be of service. There will then be no captive consumers, only satisfied customers. The rate base will become a very attractive portfolio of physical, financial and intellectual assets. The return on this rate base will combine a utility annuity with enterprise rewards.Response #3 - Diversify Outside

As with all strategies, diversification outside the rate base and the regulated service territory works best if done selectively but leads to woe if performed carelessly. The best opportunities for most LDCs reside in niches lying in and around the energy industry, because LDC executives can either readily learn about these businesses or grasp them intuitively. LDCs have not done well in areas unrelated to energy, such as real estate, or in capital-intensive commodity plays such as coal mining, timber, oil and gas exploration, or hard rock mining. They have written off hundreds of millions in such forays-unable to add executive or entrepreneurial value to upstream energy production or non-energy commodity businesses. This problem will carry over to independent power production during the 1990s, when the numbers will change and dozens of independent power projects could wind up stranded like so many shut-in gas wells.

The most successful diversification opportunities will fall within the range of $5 to $25 million of equity per transaction. This range affords incremental investment, permits the creation of a portfolio of related opportunities and avoids the historical error of exposing capital to one or two large business bets. The investment vehicles will vary widely: internal startups and spin offs, second-stage investments in young niche companies, taking over a small- to medium-sized private company whose growth is limited by inadequate capital or management, or acquiring a friendly controlling interest in a "small-cap" public company (capitalization less the $50 million) that operates in an appropriate business segment.Response #4 - Build a Fortress

Many LDCs will find it tempting to rely on rate design to thwart competition and frustrate customer choice. While conceding the public policy issues of open access and comparability of service, LDCs understand the devil in the details. Property structured, tariffs can deny real choice to consumers in the residential and middle market segments and genuine access to non-regulated competitors.

As a strategic option, fortress rate design was tried unsuccessfully by certain interstate natural gas pipelines during the late 1980s and early 1990s, but that failure might not deter some LDC executives. Rate design tinkering can fight off competition when the state PUC is understaffed or distracted by other issues (e.g., telecommunications and electricity restructuring). Or when residential, institutional, and small commercial customers account for over 50 percent of system deliveries. When the LDC serves few large industrials (and those it does have already negotiated special treatment on transportation and storage). When middle market consumers lack an organized voice (almost always true). When unregulated wholesalers and retailers haven't yet