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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

would be terrible national energy policy for these thermal applications to shift to electricity, but this is exactly what is happening.

No one group is at fault for the gas industry’s decline. There’s plenty of blame to go around—starting with the regulators.

Beginning in the 1990s, state public utility commissions began adopting a more market-oriented regulatory philosophy. This shifted the risk-reward equation for gas utilities, making near-term financial implications far more critical. At one time, gas utilities had planning windows of 20 years or more. Today, those planning windows have collapsed to a handful of quarters. At one time, gas utilities’ senior managers often were drawn from the ranks of engineers and marketers. Because of the regulatory philosophy change, the backgrounds of the senior managers are now predominantly law, finance and accounting. This is not to say that gas utilities were just pawns in the regulatory process. They often pushed for these changes. Once implemented, however, gas utility managers had a fiduciary responsibility to act in the best interest of their shareholders, and they acted accordingly.

Another trend that has undermined gas marketing has been the merger of the gas and electric utility companies in many parts of the country. While this has provided efficiencies, in general, most of these companies have opted not to market one of their products (natural gas) against another (electricity), and instead let the market decide which energy would be used. This has had some perverse effects for the country. For example, electric water heaters tend to cost more to operate than gas water heaters and consume far more energy, on a full-cycle basis, but electric water heaters cost less to buy and install. Since gas utilities no longer are informing homebuyers of the economic benefits of gas water heating, home builders increasingly install electric water heaters instead of gas. As a result, in 2006 electric water heaters outsold gas water heaters for the first time. 6

Another segment of the gas industry that deserves some blame is the gas producers. It’s difficult to think of an industry where the producer of the product is not involved in its promotion and marketing. But that has been the situation in the U.S. natural gas business. In general, producers were happy to leave the promotion of gas to utilities.

Road to Recovery

There is nothing magic about how to remedy the situation. In one sense, natural gas is no different from Coca-Cola, Chevrolet or Colgate toothpaste. The only way to turn around declining demand is for the industry to get behind natural gas end-use marketing, advertising, sales and R&D. And the term “get behind” means fund. This can happen if regulators, utilities and producers take steps in the right direction:

State Regulators: Since direct use of natural gas improves energy efficiency, reduces greenhouse gases and saves customers money, it would be enlightened public policy for state public utility regulators to heavily favor the use of natural gas for thermal applications in lieu of electricity. When renewable-based electricity begins displacing a significant amount of fossil fuel for existing power