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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

of fuel and purchased-power prices. But there are no slam-dunks in a rising-price environment. I don’t think it’s easy for anyone.

Xcel Energy

Serving 10 states in the Midwest and Western regions exposes Xcel Energy to a variety of market and regulatory environments. Xcel provides gas to 1.8 million customers, and electricity to 3.3 million. But one thing that is fairly consistent is that customers are driving the company toward a new business model—a model that values conservation in the same way the old business model valued Btus and kilowatts.

Paul Bonavia, president of Xcel Energy’s Utilities Group, explains how gas-price volatilities are changing the utility landscape in America’s heartland.

Fortnightly: How has gas-price volatility affected Xcel’s strategic outlook?

Paul Bonavia: High prices and volatility trigger a lot of rethinking in our business. As an LDC, we invest in infrastructure that is heavily weighted toward fixed costs. But elasticity of demand is real. Usage goes down when prices go up, and that makes it harder for us to recover the fixed costs of running a utility. 

People used to say, “We are not in the business of selling less of our product.” But as a company, we are beyond that. We are in the business of conservation, and we are happy to be here. But it changes the economic equation for us, and the capital markets are watching. We will find out how investors like the regulatory structures in which we operate, by how they value our company’s stock.

Having accepted that conservation is part of our business, our task is to put together alternatives that people will value. If people want something, they will pay for it if it meets their needs. So we are working to determine what customers want. If we don’t have a competitive advantage in providing it, then someone else should provide it. But where we do have an advantage, we have to figure out how to price it. In our business that means working through regulatory bodies to get pricing and terms on what’s being offered. 

Fortnightly: What kind of offerings are you talking about?

Bonavia: We are trying to offer customers a bigger range of alternatives, more ways to control their usage and costs, and ways to budget more effectively. 

It’s things like levelized billing, which is nothing new, but with higher natural-gas prices we see a lot of demand for it. There are challenges around that, including hedging issues and complexities in a regulated business. Then there are all the various conservation plans, home audits, and weatherization services. More people want these products, so we are giving them options they will value and that will allow us to succeed in our business plan. 

High gas prices affect no one more fundamentally than low-income residential customers. They feel a tremendous burden, and it’s not tolerable to us as a company or the community in which we operate. We don’t think we can be a successful gas utility without advocating and doing our part to provide effective relief for those people. We offer all sorts of