Nowhere are the failings of traditional utility regulation more evident than on Long Island. The New York Public Service Commission (PSC) has raised rates for the Long Island Lighting Co. (LILCO)...
Fossil in Your Future? A Survival Plan for the Local Gas Distributor
is well aware that this is a strictly one-way street.
The Standards go on to establish additional reporting responsibilities for the LDC and an ever-expanding area subject to audit and review. LDC Minimus has not only given up a significant portion of its market, but now has surrounded itself with additional regulatory fences and risk. I suggest that regulatory risk is the single most deleterious factor in establishing the market value of an LDC's common stock. Some investors may be inclined to reevaluate their holdings in LDCs that needlessly build any new regulatory fences.
The resulting LDC marketing affiliate is literally impotent. Even the Majors know that only a few giants will survive, as evidenced by the recent proposed merger of Natural Gas Clearing House and Chevron. Which traditional LDC thinks that, without any local competitive advantage of any kind, it can effectively compete with the likes of Enron, Amoco, or any of the other Majors? Even if it makes a little money, who's to say that the LDC won't see its profit offset by a reduction in allowed return on equity for the regulated side? As LDCs embark on this course, the Majors are cheering them on. They can foresee that the "nonregulated LDC marketing affiliate" will likely remain a mirage, and that LDC Minimus will prove ripe for "cherry picking."
Evolution. Traditional LDCs all embrace the same ultimate goal: "Build the business" through marketing skill and regulatory insight so as to emerge healthy, vigorous, and subject to minimal regulatory constraint (em in other words, LDC Robustus. Unlike Insipidus or Minimus, this LDC is larger in scope and vision. LDC Robustus strives to become a "full service" utility, both unbundled and rebundled, by focusing on economies of scale and scope to generate synergies for the benefit of stockholders and customers as well as the community in which it exists. Through
its demonstrated sense of
"community," in fact, this LDC will evoke the "trust" that will lighten the heavy hand of regulation, thus ensuring its own evolution.
LDC Robustus currently exists throughout much of the world, except North America. Discussions with foreign clients, both LDCs and regulators, uncover a unanimous and undisguised distaste for the U.S. form of heavy-handed utility regulation. Some U.S. LDCs have embarked upon the path of "degeneration" as a means to "bypass" or "short-circuit" burdensome regulation and directly bring sales margins to the bottom line. This path is often falsely perceived as easier than confronting the inconsistencies between current regulation and the new, competitive marketing environment. I believe the ultimately more effective evolutionary path is to establish a partnership with state regulators and legislators to trim specific regulations and statutes, as is happening in Georgia (see sidebar).
Gas distributors must evolve or become extinct. True evolution must combine concrete regulatory reform with a vision for a brighter and more robust future. t
Vincent Esposito is an executive consultant with Stone & Webster Management Consultants. He leads the firm's natural gas utility consulting practice in Washington, DC. Mr. Esposito specializes in rate, regulatory, and competitive issues for local distribution