[BETA] Fortnightly

Gas utility executives never tire of telling how the regulators won't let them make money any money selling gas.

Interstate Power Co., which distributes both gas and electricity in Illinois, laments that no one understands: "Almost all small volume customers do not realize that their local distribution company does not make any money on the sale of gas¼ even large transportation customers have difficulty dealing with the concept."

So why would any LDC oppose retail gas competition?

For one, some gas utilities doubt that any further deregulation or unbundling will offer much in the way of cost savings. They believe that large-volume industrial customers squeezed out all the margin in the mid-1980s when they began buying gas directly and taking transportation only from pipelines and LDCs. Ameren merger partners Central Illinois Public Service Co., and Union Electric Co. sum up that view:

"The 1980s windfall for large customers cannot be extrapolated into the 1990s for residential customers¼ [B]e careful not to create unrealistic savings expectations for residential consumers. The gas now being consumed by residential customers is already being purchased on their behalf by LDCs in a deregulated and highly competitive market."

Interstate Power sees customers giving up: "[T]ransportation customers [are] coming back to sales service because marketers cannot beat the regulated price on a regular basis."

Union Electric and CIPS would put residential gas choice on the back burner: "[T]here is no compelling reason why residential unbundling should be placed on a fast track."

Meanwhile, other LDCs predict that electric restructuring may eclipse gas, gaining a price advantage. Mt. Carmel Public Utility Co. predicts just that:

"If one assumes the published claims for reduced cost-of-service and for reduced cost-of-delivered electrical energy come to fruition, electricity may well be more competitive than gas as an energy source for heating dwellings and other occupied structures¼ To that extent gas will be less competitive.

"The increased demand on gas for generation of electricity will [also] tend to absorb excess capacity in the natural gas industry, resulting in higher prices overall for gas going into the pipe. The two effects together, cheaper electricity on the one hand and more expensive gas on the other, will tend to decrease the size of the market for delivery of gas to customers in the Midwest."

This vision runs exactly opposite from what I (and others, apparently) have been taught. I recall how in October 1996, the Arthur D. Little consulting firm invited me to a conference to discuss how natural gas might use its head start in deregulation to consolidate a marketing advantage over electric utilities. Now one hears a combined utility like Central Illinois Light Co. predicting that gas will follow electricity: "There will be pressure to pattern the gas restructuring after the electric wherever feasible."

Puzzled over this turnabout, I spent a weekend (so you wouldn't have to) reading comments and reports on retail gas unbundling filed recently in Illinois, New York and Massachusetts. You've seen a flavor of that in the quotes I presented in the first several paragraphs. When I had finished the whole