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The Gas Executives Forum: Gas Pains

Commodity price upheavals are energizing gas utilities to evolve their business models.

Fortnightly Magazine - May 2006

and costs.

After the commercial sector, it would be natural for sophisticated energy management products to trickle down to residential customers, particularly as we develop real-time pricing products that work best. Particularly in a more active emissions-trading environment, rollouts of real-time metering and DSM programs will drive products into the commercial sector and ultimately the residential sector.

Geographical growth would most likely arise in the Northeast, the Midwest, and Texas, because they have the best-developed regulatory arrangements. It’s possible for a retailer like us to participate in a liquid and responsive wholesale market.

We expect a blend of organic and M&A growth. It’s opportunity driven. In Texas, for example, pursuing the opportunities might require expansion on a larger scale that M&A would enable.

Fortnightly: How is a retailer like Direct Energy affected by regulatory pressures and trends?

Fulford: In every state where we operate there are quite significant regulatory demands around the retail provider. Typically they don’t include price, but they include just about everything else—standards for service, sales practices, verification processes, etc. We have an interest in LDC rate regulation, because the competitiveness of our product offering is dictated more by the actions of regulators and LDCs than by the cost of energy in the wholesale market. 

Rate regulation affects us particularly when we are looking at new markets and territories, for example. Some states claim to have moved to a competitive model and they have facilitated customer choice, but there is not a single retail provider operating there. The nitty-gritty details of regulatory regimes determine whether a market is pro-competition or anti-competition.

Fortnightly: Retail market restructuring has faltered in recent years. What does that mean for competitive providers?

Fulford: After the many earth-shattering events of the last few years, naturally there has been a regulatory shift toward issues that are seen as more pressing than creating competitive markets. But if you look at the numbers, there has been substantial growth in gas and power loads served by competitive energy providers, especially in the Northeast, Midwest, and Texas. 

What we are seeing is perhaps a move toward customer-driven, innovative products as opposed to regulatory driven structures. It may be a switch from regulatory push to customer pull. I think the genie of competition is out of the bottle.

Sierra Pacific Resources 

As gas utilities go, Sierra Pacific is small, serving about 150,000 gas customers in the Reno/Sparks area of Nevada. But the company is a sizeable electric utility, with a heavy dependence on natural-gas fired power generation. As such, Sierra Pacific views natural-gas trends in a broad context of energy supply alternatives.

Walt Higgins, chairman, president, and CEO of Sierra Pacific Resources, says the solution for gas-price volatility is not just to source new gas supplies, but also to clear the path for other energy resources to take pressure off gas markets.

Fortnightly: What are the big-picture implications of gas-price volatility?

Higgins: Public policy makers presented customers with the false idea that competition only meant prices would go down. No one took volatility into account. 

The result is that some users