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Consumer Choice in Natural Gas: A Hard Look at Savings

Fortnightly Magazine - October 1 1998

come from more efficient use of the interstate pipeline, the local distribution pipeline and storage assets, as well as in lower customer acquisition and maintenance costs by regulated and non-regulated companies. Until rates are reformed to eliminate artificial impediments such as excessive administrative charges and allow for (even encourage) creative reconfigurations of the transportation and supply functions, marketers and others have little incentive to sustain their investments in the retail business.

The disparity between sales and transportation rates within states and regions suggests opportunities for creative and aggressive utilities. From a customer standpoint, it is difficult to understand why one New York LDC charges $16,994 annually to transport 20,000 therms for a commercial customer, but another LDC in the same state, with the same general upstream linkages charges $12,057 for the exact same service. This disparity surely reflects the lack of competition of the kind that disciplines other markets. In time, the utilities that can offer such services as standby, balancing and storage at relatively low costs will learn how to package and market their services to the customers behind the higher cost utilities, thereby creating market discipline. Those utilities that determine early that in the new unbundled world their business is transportation and learn how to be high quality, low-cost transporters will eventually reach a position from which to acquire the weaker LDCs. New information technologies create opportunities to manage the retail gas business with much larger economies of scale than have been possible up to now. While regulators could do more to question the underlying cost structures of the utilities that they regulate, they should make sure that tariffs hasten the restructuring, rather than impede it.

The non-regulated marketers must also recognize that in all likelihood the retail gas business will never have the large margins that once were possible at wholesale. Barriers to entry are relatively low, which explains why over 1,000 companies, most of which are very small, call themselves gas marketers. Also, natural gas supplies are relatively abundant. Service offerings are remarkably homogenous. Until the industry learns how to compete on some basis other than price, the bulk of any improved savings that arise from rate reform will go to customers in the form of greater savings, not suppliers.

Accordingly, marketers must become far more efficient in transacting their business. Processes and systems - billing, customer care, customer acquisition and volume management - are uniformly weak. Data from transactions are frequently entered multiple times. Sales processes and relationships with customers are rarely institutionalized as the industry continues to use relationship based sales techniques that are common among wholesale marketers. Marketers must invest in new business practices and the associated systems so that they can improve their own margins and competitive positions. Again, until tariff rate reform proceeds, the needed investments cannot be sustained. Profit margins are simply too low.

Certainly, regulators must become more aggressive in monitoring transportation tariff rates. The most egregious examples of counter-productive tariffs should be targeted for review, including examples where the charges are significantly higher than those of other similarly situated utilities.