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Gas Marketing Affiliates: Why Mandate a Corporate Separation?

Fortnightly Magazine - May 1 1997

state commissions have approved gas cost incentive mechanisms, as an alternative to the traditional gas cost recovery clause, LDC supply prices are still subject to regulatory review compared with established benchmark prices that are subject to periodic adjustment. Thus, regulators have a continuing role in regulating utility merchant gas prices.

From a consumer perspective, regulatory oversight of gas commodity sales by utilities provides an important check on all supply prices, beyond the check provided by price competition among alternative suppliers. As a practical matter, by overseeing the prices that a utility can charge for gas supply, state regulation impacts (perhaps as a cap) the prices that third-party competitors can charge to residential and small-commercial users for substitute services. %n8%n

Similarly, if a utility is allowed to provide a "repackaged" supply-delivery service using gas supplies provided by its marketing affiliate, presumably state regulators would have review authority over the transactions between the affiliate and the utility. Although the gas commodity sales would not be price regulated per se, the aggregate transaction would be subject to some level of regulatory review to insure, at a minimum, that inappropriate service cross subsidies had not occurred. t

Pamela L. Prairie provides consulting services to a variety of energy companies through P.L. Prairie, Ltd., an independent consulting firm. Prairie works with the Institute of Public Utilities on a project basis. She has worked in the energy industry for more than eighteen years (including stints at ANR Pipeline and Michigan Consolidated Gas), holding positions in marketing, gas supply, planning, business development, legal and regulatory relations.

1Unbundling, per se, appears to aid consumers. In fact, unbundling of gas LDCs will probably lead to the same kind of competitive benefits (lower prices greater range of choices) that have followed from pipeline service unbundling.

2See, e.g., Case No. PUD 960000133, filed May 17, 1996 (Okla.Corp.Comm'n); Dkt. No. 6355-U, filed May 21, 1996 (Ga.P.S.C.); Case No. 8683, filed June 28, 1996 (Md.P.S.C.).

3While some utilities have long-standing marketing affiliates (e.g. Michigan Consolidated Gas Company set up its marketing affiliate, CoEnergy Trading Co., in 1986), many distributors set up affiliated marketing companies after Order 636 was introduced.

4Especially Enron Capital and Trade Resources, Tenneco Gas Marketing and MidCon Energy Services.

5Arkansas, Georgia, Maryland, Ohio, New Jersey, New York and Wisconsin are among the states that have or are considering organizational separation and affiliate codes of conduct.

6Among the largest national marketing companies are: NGC-Chevron (1995 average 9.6 Bcf/day); Enron (1995 average 7.8 Bcf/day); PanEnergy (1995 average 7 Bcf/day); Coastal Gas Marketing-West Coast Energy Services (combined 1995 average 6.8 Bcf/day); and Amoco (1995 average 5.6 Bcf/day). The combined volumes of these five companies (37 Bcf/day) represent a substantial portion of the total natural gas market.

7See "Fossil in Your Future? A Survival Plan for the Local Gas Distributor," by Vincent J. Esposito, III, PUBLIC UTILITIES FORTNIGHTLY, Apr. 1, 1996, p. 18, which discusses the decline in LDC sales. According to the author, in 1984, one-hundred percent of utility deliveries were sales gas; by 1994 sales throughput was less than half of the aggregate deliveries