My business, the natural gas industry, stands at a crossroads. Unbundling and deregulation permeate the market. The next three years will see the end of many fixed, long-term supply and transportation service contracts (em the closing of an era.
In fact, natural gas marks perhaps the last commodity traded on a major exchange that remains captive to such long-term contracts. The demise of such contracts will add flexibility to gas pricing and supply management.
This evolution will accelerate with a host of changes in the way gas moves in wholesale markets. Open access has focused our attention on new fronts: secondary markets; front-, middle- and back-end storage on interstate pipelines; transportation switch points; imbalance workouts; short-term parking; and hubs and market centers at pipelines and local distributions companies. Improvements in information processing promise greater efficiency in matching supply and capacity with buyer and seller. All these changes will vie for attention (em remaking the local distribution company, or "LDC."
Nevertheless, even the most forward-looking LDC will face a difficult balancing act, as it attempts to keep one foot ahead of the market, with the other taking care of monopoly services that remain subject to regulation. This awkward transition creates a new type of "virtual" company (em one that owns some traditional regulatory assets, but one that deals head-on with competition by outsourcing competitive enterprises, through unregulated affiliates or unrelated third parties.
Traditional relationships already have fallen by the wayside. New alliances emerge daily. Roles appear less clearly defined (em for producers, pipelines and distributors. Pipelines no longer serve as merchants. Distributors no longer provide customers merely with bundled service and a clean, dependable, abundant energy product. The evolution has promoted a wave of gas industry enterprises (em new players that already have retooled to respond to new customer-driven market dynamics.
Distributors, like my company, Southern Connecticut Gas, must now tailor products and services to individual customers. In the ideal case, the LDC will retain fixed-rate, class-specific pricing only for distribution (em the monopoly function. It will transfer other services to affiliates that offer competitive, unregulated services. Competition will force better cost controls and enhance service quality. By isolating the activities of the regulated monopoly and outsourcing others to third parties (whether or not affiliated), the business improves performance. Overall, the LDC should be able to:
• Reduce subsidies among rate classes;
• Eliminate excess costs (incurred to guarantee service as a sole supplier);
• Limit hidden taxes in utility rates;
• Widen service options (via unregulated affiliates);
• Differentiate services among customers; and
• Trim regulated costs (by outsourcing).
In spite of these opportunities, utilities can be seen responding on three different levels: Leading, following or just plain idling.
The leaders are "market driven." These companies have re-engineered to provide customized, unbundled, deregulated, and repackaged service combinations. They are interacting with regulators, legislators, customers and competitors. Quite simply, they are working to set the industry standard.
Second-level utilities are looking on cautiously (em they recognize the coming change, but are weighing options and will choose a path based on the successes or failures of others. These companies are the followers.
Then comes the third tier. These companies are idling, stuck in neutral. They insist on the status quo, yet will surely face difficulty convincing customers or anyone else that our industry can not or should not provide service in an unbundled, competitive, customer-choice climate.
Answering the Critics
While most free-market players enjoy competition, critics of deregulation remain. They are at government agencies, utilities (management and union), traditional energy competitors and customer advocates. They embrace the regulatory cocoon.
For these critics, competition poses risk. They worry about the risk of gas supply availability and the relative lack of sophistication among customers in making gas-purchase decisions. They're also concerned about unreliable marketers who might fail to deliver gas or simply abandon customers without the protection of the utility's traditional "obligation to serve."
How to answer these critics? Delineate between functions that are monopolistic and those that are not. Doing so will determine what needs regulating, while allowing the market to work to lessen risks and encourage new merchants.
Indeed, if we recognize that commercial and industrial managers often select unregulated suppliers (oil and coal, for example) over regulated gas and electric utilities, there is little reason to presume that limiting regulation to monopoly distribution service will introduce greater risk. Customers and utilities should be able to achieve the best risk-reward balance for their particular situations. In fact, opponents' concerns ignore evidence of the successes of other regulated industry transitions to market environments. More options, improved service and lower costs have proved the norm.
Disparate groups with conflicting interests make it difficult to reach consensus on utility deregulation. However, objective observers would likely agree on these five points:
• Gas distribution companies, traditional competitors and new entrants should be able to provide alternate services;
• Nondiscriminatory unbundled services (em with regulated prices, terms and conditions imposed only for true monopoly functions (em can benefit customers by introducing more competition;
• Residential (core), commercial and firm/
interruptible industrial (noncore) customers should still receive affordable, safe, secure, reliable service;
• Customers should not be required to pay for services they neither want, need, nor use; and
• Natural gas should gain market share as industrial and commercial customers gain confidence in the level of unbundled services provided to them and realize reduced costs.
How, then, should a natural gas distribution company organize to perform its regulated, non-competitive monopoly functions and competitive energy services? What level of regulatory oversight is adequate?
Some New Ventures
The traditional utility includes many administrative and professional services, relying on employee skills in many discrete areas: facilities design, engineering and drafting, construction and facilities management, information technology, customer service, billing and collections, materials acquisitions, marketing and fleet management. These services often mirror those offered by outside contractors. But these services, if restructured as unregulated services, not only could meet the needs of the utility, but also could become profit centers that compete outside the "utility," making a bottom-line contribution.
Tomorrow's virtual corporation will consist of related profit centers (independent and interdependent affiliates), which include the monopoly entity. The monopoly provides local, regulated gas distribution service. Setting up unregulated subsidiaries as joint ventures with qualified partners can create a dynamic organization capable of adding real value. This virtual corporation will provide a range of energy industry products and services to customers on a one-contract, customized basis.
Several good examples highlight utilities already making such bold moves.
In Wisconsin, "Custometrics" was formed as an information-system services company through a joint venture with an experienced service provider. This new entity serves its affiliate, Wisconsin Gas. It sells services to other companies.
In New York, Niagara Mohawk moved to spin off its gas supply and power sales to an existing independent marketing affiliate. It has, however, been confronted by regulatory constraints. The New York Public Service Commission's code of conduct disallows its plan to execute business transactions among affiliates. Only tariffed (regulated) services may be bought and sold between regulated company affiliates. This example illustrates excessive regulatory concern over unregulated affiliates.
In Indiana, where legislation has allows regulated companies to file alternative regulatory plans (ARP), there's also a spinoff of supply functions. Proliance Energy, for example, was formed as a joint venture between Indiana Gas and Citizens Gas & Coke. Proliance will assume responsibility for gas supply portfolios, and sell to other companies.
Northern Indiana Public Service started negotiating its ARP filing before submitting it. This process is more likely to produce a pro-consumer, flexible program with consensus than the traditional adversarial regulatory proceeding.
In Massachusetts, Boston Gas filed to exit the merchant function by transferring gas supply assets to an affiliate marketing company, AllEnergy Marketing Co. Inc. Later, AllEnergy announced plans to merge with NEES Energy Inc., a marketing affiliate of New England Electric System, an electric utility operating in its franchise area.
Boston Edison and Williams Companies have also established a joint-venture marketing company to serve New England energy markets.
The lengthy regulatory process (em even in states where progressive support for transition to
competition (em demonstrates that proponents will continue to tout regulation, especially to influence the activities of these new competitive affiliates. They will push for "regulated competition" (em that is, the rules, regulations, and rate conditions traditionally imposed on the monopoly business.
Nonetheless, the best hope for all stakeholders still lies in a network of independent or interdependent affiliates (em separate profit centers designed to complement the regulated electric or natural gas distribution company, providing a full range of products and services on a "one-contact, one-contract" basis.
And after all, from the customer's perspective, the ability to choose and buy at the lowest cost will always make for an attractive combination. t
James P. Healy is vice president of energy services planning for The Southern Connecticut Gas Co., a subsidiary of Connecticut Energy Corp. Other CE subsidiaries include CNE Energy Services Group, Inc. (providing energy commodities and services to commercial and industrial customers), CNE Development Corp. (part of a gas purchasing cooperative), and CNE Venture Tech, Inc. (providing information technology to utility companies).
Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.