In his recent article, "The Future of Local Gas Distributors" (Feb 1, 1995, p. 20), Vinod Dar presents a vision of executives at the local distribution company (LDC) lining up to buy cemetery plots (em even as the gas marketers, charging on horseback, seize the high ground of "middle" and
core-markets.
That sort of bravado cannot substitute for an in-depth knowledge of gas distribution. Mr. Dar in fact distorts or ignores many realities of the gas business. Let's look at some of the threats and responses he identifies for LDCs.
Threat (em Electric Competition. Electric-based equipment cannot approach the full-cycle fuel efficiency of gas-based equipment for water heating and steam boilers. And while electric heat pumps can compete effectively for space heating in some southern regions, they are increasingly unable to perform efficiently as one travels north. Moreover, even as heat pump technology advances, there is no reason to think that electric prime movers for such equipment cannot be replaced by gas powered prime movers.
As for space cooling, large-tonnage, multistage absorption equipment continues to gain both technological sophistication and market share. A.G.A. recently reported that the natural gas
market share of new single-family homes last year reached a record 67 percent.
Threat (em Deregulation.
Mr. Dar's assertion that middle- and residential market meters will bend to a "third wave" attack of crusaders wielding cellular phones and laptops, as full retail open access is imposed on LDCs, is a hallucination. Experience in Ontario should be ample proof. (Example: "Door-to-Door Marketers Get Slammed," by Shawn McCarthy, Gas Daily's NG, Aug/Sep '94). And why should anyone expect a marketer who is targeting low-load-factor, customers with a high daily swing to provide both reliable service and savings at the city gate, when LDCs and LDC buying coalitions possess significantly more market power and are already buying a large part of their requirements on the spot market?
Threat (em Info Technology. Billing and related information systems are no obstacle for LDCs, but rather an opportunity to reduce overhead and develop non-regulated activities. Nothing prevents LDCs, consortiums of LDCs, or pipelines from developing cross-territorial, regional information technology systems to serve gas customers.
Response (em Merge. Mergers and acquisitions take place in the gas industry for various reasons. That's not news. What is news is that smaller LDCs have been developing gas-purchasing coalitions to reduce gas costs, gain market power, and improve returns in the capacity-release market. Purchasing groups such as the Mansfield Consortium in New England have proven particularly successful. Where state commissions have allowed a premium over book value, it has usually been to recognize an explicitly identified reduction of gas costs. The success of LDC cooperative efforts should mitigate any regulatory induced "urge to merge."
Response (em Reposition Inside. Mr. Dar's "take the money and run" approach to the public utility business will surely raise the hackles of utility managers and regulators. True, as he indicates, utilities must learn more about customer wants and needs. Nevertheless, various LDCs already offer many of the services mentioned in his article, and the scope of gas management service offerings by LDCs grows daily.
And what about the "public" in public utility? The abandonment of service areas with less-than-desirable rates of return does not serve the public interest. As an essential component of regional infrastructure, the LDC works as a partner with government in developing and maintaining the economic welfare of its service territory. Mr. Dar's arguments for unbundling would open up the LDC franchise to wanton "cherry picking" by marketers who bear no responsibility or accountability to the franchise area, thereby leaving captive customers with increased transaction costs, an ever-increasing percentage of fixed costs, and another totally unfathomable "phone bill."
Response (em Diversify Outside. External diversification is an existing option for any business. Diversification into nonregulated or nonutility-related businesses is not specifically a public utility issue, but diversification of a public utility into such areas may have rate of return implications that are unique to the regulated utility industry and may vary from one regulatory jurisdiction to another.
Response (em Build a Fortress.
Mr. Dar coins the term "fortress rate design" to describe the LDC response to open access.
Many industrial customers and all gas marketers would have LDC rates designed on their perception of marginal costs (zero), and have all fixed costs borne by core or captive customers. But some type of contribution to fixed costs or operational cost savings is required. Otherwise, why should an LDC serve such a customer?
Mr. Dar protests exorbitant
balancing, storage, and backup service charges. LDCs make no margin on such services, but merely pass through pipeline tariff charges. What logic would have LDCs provide firm services at interruptible rates?
Vince Esposito
Vice President
AUS Consultants
Moorestown, NJ
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.