The Electric and Gas Industries are Converging: What Does it Mean?
A TRANSFORMING EVENT
Retail sales of gas and electricity run about $300 billion a year. The deregulation of energy production, wholesale logistics, and bulk consumption has brought competition to about 40 to 45 percent of the value chain from wellhead and busbar to the retail meter. Thus, 15 years of fitful deregulation has brought competition to less than half the final price paid by middle-market and residential gas and electric consumers. Moreover, gas and electric final markets are extraordinarily balkanized; each is circumscribed by the geographic boundaries and regulatory confines of thousands of franchised and municipal firms engaged in distribution.
Retail deregulation will compress industry margins from existing lines of business (while creating enormous new business opportunities), transform energy selling into a cyberspace retailing enterprise, and eventually cause the gas and electric industries to converge (see figure on p. 22). Convergent evolution promises significant business consequences for the production, merchant, local logistics, and network (that is, gas and electricity long-haul transportation, balancing, and system control activities) segments of the emerging and essentially integrated U.S. gas/electric industry. For the next 10 to 15 years, this convergence will affect consumers, investors, executives, regulators, legislators, and of course, business and government advisors/counselors. Neither private strategy nor public policy can succeed if it ignores or denies the rules of this new energy game.
COMPETITION AND COLLABORATION
Industries converge at the level of the consumer and then at the level of collaboration. First, different industries seek to maximize their share of the consumer's spending to satisfy a set of cognate needs or buy a class of related services (such as financial products or information, entertainment, and communications). At the level of the consumer, converging industries compete until they erase market boundaries.
At the second level the converging industries become collaborators or mutual customers. For example, investment banks and commercial banks, while increasingly battling for corporate finance clients, are also each other's good customers. Similarly, the telephone, television, and computer industries buy large amounts of goods and services from each other. As inter-industry trading increases, the industries begin to overlap. The boundaries of their delivery systems begin to blur, paving the way for an eventual reordering and integration.
Energy markets exist because consumers seek to gratify their wants and needs for heat, light, and motive force (including propulsive force) in the most satisfactory way. Currently, energy consumers meet their needs rather awkwardly by purchasing combinations of final fuels and appliances. A particular fuel and appliance combination, such as a gas furnace or electric heat pump, leads to a given price/performance result. In a free market, consumers will gravitate toward the best price/performance combination, as long as they have choice and information, and are courted by merchants eager for their business. Today, of course, consumer decisions are severely circumscribed by an energy delivery system in which gas and electric retail distribution operate as compartmentalized monopolies. But as monopoly eventually vanishes, choices and the ability to exercise choice will proliferate and empower all consumers. Then, gas and gas-using technologies and electricity and electrotechnologies will strive vigorously