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Gas Marketing Affiliates: Why Mandate a Corporate Separation?

Fortnightly Magazine - May 1 1997

Competitors would have LDCs quit the merchant function and restrict

their dealings with affiliated marketers. But is that really good for consumers?

Those who would restrict business dealings between natural gas local distribution companies and their marketing affiliates (em going so far as to ban LDCs from the merchant function (em often overlook one critical downside: what those rules would mean for the small gas customer.

A regulatory policy for a code of conduct and LDC merchant service must improve the position of consumers. A regulatory structure that ultimately prevents utilities from staying in the merchant business and forces all consumers to buy gas from deregulated sellers may not provide the best answer, particularly for small consumers. Likewise, codes of conduct and separation rules that significantly burden the competitive position of utility marketing affiliates may hurt the consumer.

Such regulation will reduce, rather than increase, consumer choices if utilities and their marketing affiliates cannot compete for gas sales. In the short term, gas supply prices for residential and small-commercial users (em set by a market that is somewhere between monopoly and true competition (em may still require some level of regulatory oversight. But that oversight should be more "light-handed" than today's gas cost pass-through mechanisms.

At the end of the day, the market should allow natural gas consumers to choose the products and services they want from a broad range of competitors. It is up to regulators and state legislatures to balance the conflicting competitive interests of all of the market players (em both regulated and deregulated (em in moving the retail natural gas business toward a more competitive model. Importantly, the parochial interests of a particular industry segment (em whether utility or deregulated marketers (em in preventing others from offering competitive alternatives to their own services should not overshadow the real objective. That objective is meaningful consumer choice.

Unbundling (em What Competitors Want

Unbundling %n1%n of local distribution company services for all customers (em including small-commercial and residential consumers (em is among the most discussed issues in the natural gas industry today. New orders emerge from various state regulatory commissions on a regular basis. They tend to: 1) initiate a generic inquiry; 2) establish generic unbundling guidelines; or 3) docket a proceeding in which an LDC has filed for approval of an "experimental" residential unbundling pilot program. %n2%n

In anticipation of retail service unbundling, many distributors have announced the formation of marketing affiliates and energy service companies. %n3%n These new, deregulated companies offer a range of supply and supply-management services both inside and outside the affiliated utility's traditional market area. As the number of utility marketing affiliates has grown, so have the concerns among certain segments of the industry (em particularly other competing marketers. %n4%n They claim that an LDC can use its monopoly position to favor its marketing affiliates.

The regulatory solutions urged upon state utility commissions by these companies include: 1) organizational separation of LDCs and their marketing affiliates; 2) a standardized code of conduct to govern the relationship and business dealings between LDCs and their marketing affiliates; and