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The Late Great Gas Utility

By abandoning R&D and marketing, the gas industry may have sealed its own fate.

Fortnightly Magazine - April 2008

are investing heavily in resolving the largest barrier impeding coal-use growth—namely, how to sequester the carbon dioxide produced from burning or processing coal. If and when this technical problem is solved, cheap, abundant coal likely will capture most of the new power plants.

Therefore, it is in the economic interest of all segments of the natural gas industry to stop and reverse the slide in gas use in the residential, commercial and industrial markets, and further accelerate growth in the natural gas vehicle market.

What Happened and Why

According to the U.S. Energy Information Administration (EIA), from a high of 22.39 trillion cubic feet (Tcf) in 2000, annual natural gas consumption in the U.S. has declined to 21.72 Tcf in 2006—about a 3 percent drop. But when electricity generation is excluded, gas consumption has fallen almost 19 percent. In the past seven years, while the demand for natural gas to fuel electricity production has increased (over 93 percent), demand for natural gas in all other major markets has declined—residential (10 percent), commercial (9 percent) and industrial (26 percent).

Part of the explanation for these declines is price-induced energy efficiency and conservation, and, in the industrial market, the loss of industrial customers to other countries. During that period, the real price of natural gas at the wellhead almost doubled. But most of the decline arguably can be attributed to the fact that the natural gas industry, primarily the natural gas utilities, simply stopped marketing their product. Except for a few exceptions, 3 most utilities drastically have reduced their efforts on research and development (R&D), advertising, promotion and sales.

Product R&D: Every industry must invest in R&D to continue to improve products and keep up with the competition, but the natural gas industry virtually has stopped doing so. The gas industry once had in place a national R&D organization—the Gas Research Institute (GRI)—funded at up to $300 million a year. The funding was provided voluntarily by natural gas pipelines (with oversight by FERC) and by co-funding from R&D sponsors. Up to $85 million a year was directed at “energy utilization,” i.e., for developing gas appliances and equipment for new uses, and making existing gas products more energy efficient, less polluting or otherwise better. Many gas utilities also conducted their own well-funded gas utilization R&D programs. In 1998, the natural gas industry voted to phase out GRI and its funding mechanism, and, with a few exceptions, the gas utilities’ energy-utilization R&D programs now are gone too. Further, only a tiny amount of money is being invested by the gas appliance and equipment manufacturers in making their natural gas products more economically or environmentally competitive. As a result, the evolution of natural gas appliances and equipment virtually has stopped.

Marketing and Advertising: Some industries grow through word-of-mouth communications, but that’s unlikely for a mundane commodity like natural gas. If its sales people are to be successful, the gas industry continuously must remind their existing and potential customers about the economic, environmental and other benefits of natural gas. At one time, gas utilities did