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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

plants, this assertion may become invalid. But that time likely is many decades in the future. In the meantime, state regulators can adjust gas utilities’ rate structures so shareholders financially benefit, both long-term and short-term, from expanding the use of natural gas in the residential, commercial, industrial and vehicle markets. Gas utility managers generally will not invest in marketing, advertising, sales and R&D when their shareholders are penalized for it, but they will if shareholders are rewarded.

Decoupled rates are not a problem in and of themselves, nor are incentives that encourage gas utilities to promote energy efficiency and conservation, through which customers use less energy to get the same amount of energy service. But rate structures also should encourage gas utilities successfully to promote more gas appliances and equipment to replace electric thermal equipment in residential, commercial and industrial facilities, and to promote natural gas use for vehicles to reduce petroleum consumption while reducing urban air pollution and greenhouse gas emissions.

Gas utilities will promote gas use if it’s in their shareholders’ interests to do so. It’s up to the state regulators to establish the rules that provide that incentive.

Gas Utilities: Gas utilities must again aggressively promote natural gas use, locally and nationally, and support natural gas appliance and equipment R&D. If regulators provide incentives to do that, so much the better. But even if they don’t, these programs are necessary investments in a strong future. It also would be useful if gas utility managers and their boards of directors fully understood the long-term financial implications for their shareholders of a continued slide in gas demand nationally and locally. The long-term decline of the industry as a whole could have dire consequences even for gas utilities that have service areas experiencing growth.

Gas Producers: For gas producers, natural gas is different from Coca-Cola, Chevrolet or Colgate toothpaste. It’s a commodity. Promoting Coca-Cola may benefit other soda manufacturers a little by raising the demand for all other sodas, but most of the benefits accrue to the Coca-Cola Company. Conversely, it’s difficult for gas producers that opt to promote natural gas to capture most of the demand growth that results from that promotion. This calls for a collective approach to funding a long-term national gas marketing initiative, including a national gas advertising program, as well as a GRI-type national R&D operation.

For an endeavor like this, free riders are always a problem. All gas producers would benefit from national advertising—whether they help fund it or not. One option for dealing with this problem is a national natural gas promotion check-off program. Such quasi-governmental programs have been used very successfully in commodity industries such as egg, beef, pork, milk and even propane. Such a program has been discussed for years in the natural gas industry but there never has been a consensus for it. With the situation for natural gas growing increasingly dire, now might be the time to successfully pursue such a program.

Increased natural gas use offers a host of benefits to the nation and to customers—including reduction in