Unexpected price increases for natural gas during the past winter heating season have stimulated action by state regulators across the country. Most recently, North Carolina and New Mexico have...
Barbarians at the City Gate
gas marketer can assemble a package of unbundled services to undersell the utility.
Note the absence of any component suggesting that utilities and marketers compete, in any material respect, on pure efficiency. The commodity cost is essentially a given, pipeline rates are determined by federal regulators, rates for local distribution fall under the purview of state regulators, and taxes are set by state legislators. Marketers can repackage the components but, almost by definition, do not control them. Ergo, the relative competitiveness of utilities and marketers has little to do with efficiency and much to do with exogenous factors. Consider also that the marketer does not offer any innovative service; instead, the marketer claims to offer the same firm service traditionally provided by utilities (em but at lower cost.
The Price of Pipeline Capacity
The biggest economic opportunity for gas marketers lies in the price of pipeline capacity. The price of reserving 1,000 Mcf of capacity on an interstate pipeline runs between $15-$20 per month, or $180-$240 per year. Let's call it $200 to keep things simple.
For noncore large industrial consumers that operate at a high load factor (say 90 percent), the maximum price of pipeline capacity on a usage basis would be about 60 cents per Mcf ($200, divided by 90 percent of 365). Of course, these consumers generally are interruptible and don't pay peak capacity costs, owing to competition among sellers of nonpeak capacity (which includes gas utilities releasing capacity and pipelines selling interruptible transportation). So, for the large noncore user, the price is much less than 60 cents per Mcf (›/Mcf). In fact, it can be estimated at a third to a half of that amount (20 to 30›/Mcf).
Compare that situation to the core-market commercial class. These customers generally exhibit substantial space-heating re-quirements, which makes them
temperature-sensitive. Load factors may average 50 percent. The price of pipeline capacity is then $1.10/Mcf ($200, divided by 50 percent of 365).
If a marketer can avoid the full price of pipeline capacity, it can substantially undercut the utility's rate for firm service and make a generous profit. Let's say a marketer decides to use nonpeak capacity at 20 to 30›/Mcf. There's an 80- to 90-cent difference between that price and the price of pipeline peak capacity incurred by the utility. Plenty of profit margin there.
In addition, when a utility encounters a monthly instead of a daily balancing requirement, a marketer can profit again by taking advantage of the big difference between the average daily and peak-day loads. For example, in January 1994 the average temperature in PECO Energy Co.'s service territory was 25 degrees, and our average daily load was 380,000 Mcf. On the peak day, January 19, 1994, the temperature was 2 degrees and the load totaled some 598,000 Mcf. Since the average daily load for the month equaled only two-thirds of the peak-day load, a marketer entitled to monthly balancing would have needed capacity for only two-thirds of its customers' true peak-day consumption. The difference would be made up with deliveries on warmer days of the month. Since