Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Gas Marketing Affiliates: Why Mandate a Corporate Separation?

Fortnightly Magazine - May 1 1997

by gas cost adjustment clauses and a uniform, weighted-average commodity price for all users, cannot compete in an increasingly segmented and unbundled

market. Although the utility's competitive position would be significantly improved if it offered a "repackaged," customized, gas-supply option with its affiliate, that activity would be barred by the model code of conduct. In other words, the utility will not be able to give customers what they want; therefore, it will not be a viable supply competitor in the emerging, unbundled market.

While there is a choice among deregulated suppliers, does it really matter if consumers will not have the option of buying gas from their traditional service provider, the local distribution company?

Looking to the federal model (em which ultimately eliminated pipeline merchant service as a part of Order 636 (em would suggest that getting rid of utility merchant sales is a nonevent. Except for the transition costs, the elimination of pipeline merchant service has occurred without incident. So why not follow the same model at the state level, starting with codes of conduct and organizational separation rules? The answer is simple. Most retail consumers are in a different market position than were wholesale consumers who had traditionally relied on pipeline sales service.

Residential and small-commercial users are not like LDCs or large industrials who were the primary merchant customers of pipelines. Unlike an LDC or an industrial customer, these small consumers clearly do not have the market power, sophistication or resources to deal directly with the competing alternatives that will replace bundled LDC merchant service. Therefore, even in an unbundled market, residential consumers and small-commercial users will be dependent upon a market intermediary, or aggregator, to arrange their natural gas supply and to manage their delivery services.

Traditionally, the only retail aggregator has been the local utility. As unbundling occurs, the same deregulated aggregators who currently sell to LDCs and industrials will compete to aggregate for residential consumers and small commercial users.

Giving consumers the option of buying gas supply (and related aggregation services) from a supplier other than the local utility is desirable. But, is it necessary, in the process of giving consumers the ability to buy from third parties, to eliminate their current aggregator (em the local distributor (em as an alternative supplier? Again, from a consumer perspective, the answer is "no."

LDC Merchant Sales (em

A Key Alternative

Having the option of choosing to buy aggregation service from an LDC (with whom the customer has a longstanding service relationship) or from a handful of well-established, national aggregators gives the consumer the advantage of choice. The more choices a consumer has, the better his or her bargaining position with potential sellers.

Forcing LDCs out of the merchant function, through restrictive affiliate conduct separation rules and outdated supply pricing mechanisms so that only deregulated supplier options remain, may also adversely affect consumer prices for natural gas service. In this regard, if utilities remain in the merchant function then there will be some level of regulatory review of prices charged for merchant service.

Even in those recent instances where