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Gas Marketing Affiliates: Why Mandate a Corporate Separation?

Fortnightly Magazine - May 1 1997

retain gas sales in markets open to competition.

As the market continues to move from monopoly to competition, LDCs are struggling to remain competitive selling supply under a traditional, weighted-average-cost pricing structure. Distributors offer unbundled transportation service for industrial customers in markets that have largely abandoned utility gas supply for gas from third-party marketers that can customize gas sales service. %n7%n The shift away from utility gas supply occurred because, on a comparative basis, utility bundled sales service (em made-up of a weighted-average-cost gas commodity plus full-margin delivery service (em is almost universally noncompetitive with alternative supplier prices.

As unbundling continues down to smaller customers, including residential customers, it is likely the same trend will emerge. That is, deregulated marketers, with unrestricted flexibility, can package customized gas delivery services to meet the varying needs of a segmented commercial and residential retail market. They will be able to "give the customer what he wants." Utilities that offer only a traditional merchant service with a commodity price based on a weighted-average cost will find it increasingly difficult to compete against these customized supply options.

The need to reevaluate purchased gas adjustment clauses at the retail level is obvious. In some jurisdictions, state regulators are taking steps to set up pricing models that are more consistent with the emerging market. Aside from these efforts, the transition from traditional pass-through, purchased gas adjustment clauses to a pricing structure that better

emulates pricing in a competitive market will take some time. If there is a lag between realignment of gas supply prices and distributor service unbundling, the utility will fall behind as a potential gas supplier to much of the newly unbundled market, except as a supplier of last resort.

On the other hand, a utility would at least have the opportunity to compete for gas supply sales to transport customers by offering a customized gas supply arranged through its marketing affiliate and delivered through an unbundled transportation service. However, conduct and separation rules will prohibit utilities and their marketing affiliates from providing "seamless" merchant services to consumers previously served through a bundled utility sales service.

Surely consumers will end up better off with more, rather than fewer, competitive options. Why not let customers have a choice of a bundled utility sales service, a repackaged gas commodity and delivery service offered jointly by the utility and its marketing affiliate, or a repackaged gas commodity and delivery service offered by third parties? If the services offered by the utility and/or its affiliate are not premised upon a preferential delivery service, then the consumer will benefit from aggressive competition among these service alternatives.

Residential Users (em

Not Like Industrials

If increased competition in the industry has done one thing, it has exposed all participants to the "the-customer-is-king" view. To stay in business, utilities need to give the customer what he or she wants. Services need to be "user friendly." Prices need to be competitive and flexible. Customers who want reliability should get reliability. Customers who want choices should get choices. These are all essential service elements.

Utilities, however, constrained