Gas utilities and state commissions must work together to help preserve rates of return, encourage conservation, and lower customers’ bills.
Gas Executives Forum: The New Downstream Dynamic
Gas distributors tell how their business strategies are changing in response to issues such as higher gas prices, electric M&A, LNG, and gas pipeline development.
We've signed 20-year, fixed-price capacity agreements with Shell at Costa Azul, and with BP and the Tanggu partners that will provide them with a proxy of the California border price. Shippers have alternatives today in this market. These agreements are all new, and are being developed as part of the LNG trade.
Contracts today are mostly point-to-point. But as more receipt facilities are built, we'll see arbitrage develop, where shippers will move LNG around to get better prices. They'll get diversion rights built into their contracts, and pay some amount for capacity not being used. This spot market will begin with very low numbers, around 2 or 3 percent of the market. But over time we expect that gas will follow the highest prices in the world, as oil does.
Fortnightly As the energy and utility industry has evolved over the past couple of years, how have the gas markets changed?
Fowler, Duke Energy: As we unbundled the markets, we thought electricity was moving toward unbundling. You saw LDCs signing over their pipeline capacity rights to large merchant companies who managed them in a big pool. The sophisticated merchant players were doing a good job of optimizing those resources. Now, with the consolidation of merchant players, LDCs are more involved in managing their supply, and this has resulted in a loss of efficiency. The net effect is a little less effective optimization, which means higher costs.
Over time this situation might change. Marketing players might get into the game of managing capacity rights, or a group of LDCs could get together and run them jointly. The gas market is not fully free, but it is pretty much allowed to work. If there is an opportunity, someone figures it out and goes for it.
Fortnightly Do you expect to see more consolidation in the downstream gas business?
Fowler, Duke Energy: With regard to pipelines, it would be difficult to imagine much more consolidation than we've already had. There may be some switching around of assets, but it would be hard for the major players to get past the Federal Trade Commission.
We've also seen a lot of consolidation among LDCs. We had 21 gas utilities in New England, and now we're down to four or five. We'll still see some consolidation, but the big moves have already happened.
It's difficult for a state-regulated utility to grow through acquisitions. A lot of what drives consolidation is cost synergies, and utilities usually have to cut deals with state regulators that limit those synergies. It makes it virtually impossible to pay a big premium to take someone over. That means we'll see more mergers of equals, where they don't pay a premium.
Bertasi, Southern Company Gas: I wouldn't be surprised to see consolidation in both LDC and marketing. The retail gas industry is still somewhat fragmented. On the LDC side, companies are greatly affected by regulatory posture. If state regulators don't favor consolidation, it will be harder to make it happen. But on the marketing side, you get the same synergies you get with other retail