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Fortnightly Magazine - February 15 1997

companies are the followers.

Then comes the third tier. These companies are idling, stuck in neutral. They insist on the status quo, yet will surely face difficulty convincing customers or anyone else that our industry can not or should not provide service in an unbundled, competitive, customer-choice climate.

Answering the Critics

While most free-market players enjoy competition, critics of deregulation remain. They are at government agencies, utilities (management and union), traditional energy competitors and customer advocates. They embrace the regulatory cocoon.

For these critics, competition poses risk. They worry about the risk of gas supply availability and the relative lack of sophistication among customers in making gas-purchase decisions. They're also concerned about unreliable marketers who might fail to deliver gas or simply abandon customers without the protection of the utility's traditional "obligation to serve."

How to answer these critics? Delineate between functions that are monopolistic and those that are not. Doing so will determine what needs regulating, while allowing the market to work to lessen risks and encourage new merchants.

Indeed, if we recognize that commercial and industrial managers often select unregulated suppliers (oil and coal, for example) over regulated gas and electric utilities, there is little reason to presume that limiting regulation to monopoly distribution service will introduce greater risk. Customers and utilities should be able to achieve the best risk-reward balance for their particular situations. In fact, opponents' concerns ignore evidence of the successes of other regulated industry transitions to market environments. More options, improved service and lower costs have proved the norm.

Disparate groups with conflicting interests make it difficult to reach consensus on utility deregulation. However, objective observers would likely agree on these five points:

• Gas distribution companies, traditional competitors and new entrants should be able to provide alternate services;

• Nondiscriminatory unbundled services (em with regulated prices, terms and conditions imposed only for true monopoly functions (em can benefit customers by introducing more competition;

• Residential (core), commercial and firm/

interruptible industrial (noncore) customers should still receive affordable, safe, secure, reliable service;

• Customers should not be required to pay for services they neither want, need, nor use; and

• Natural gas should gain market share as industrial and commercial customers gain confidence in the level of unbundled services provided to them and realize reduced costs.

How, then, should a natural gas distribution company organize to perform its regulated, non-competitive monopoly functions and competitive energy services? What level of regulatory oversight is adequate?

Some New Ventures

The traditional utility includes many administrative and professional services, relying on employee skills in many discrete areas: facilities design, engineering and drafting, construction and facilities management, information technology, customer service, billing and collections, materials acquisitions, marketing and fleet management. These services often mirror those offered by outside contractors. But these services, if restructured as unregulated services, not only could meet the needs of the utility, but also could become profit centers that compete outside the "utility," making a bottom-line contribution.

Tomorrow's virtual corporation will consist of related profit centers (independent and interdependent affiliates), which include the monopoly entity. The monopoly provides local, regulated gas distribution