Erroll B. Davis, Jr.President & CEO
Wisconsin Power & Light Co.
Gas distribution will continue to be a monopoly for most customers and will continue to operate in the regulated environment. Thus, there is no direct threat from marketers and brokers for most of the distribution business.
With respect to the traditional merchant role of LDCs, current regulatory statutes ensure that most utilities find little money to be made in the merchant function. WP&L happens to be an exception because of the performance-based rates we implemented on January 1, 1995. There is nothing in the future that gives LDCs a lock on the merchant function within their jurisdictions, and those not in a position to profit from their merchant activity should probably seek to exit this role. Gross receipts taxes, utility taxes, and other vestiges of a prior regulatory regime must eventually wither and die away if true competition and attendant customer benefits are to be realized.
Although WP&L still maintains a merchant function within its gas business, we have also realized the difficulty of competing with independent brokers and merchants outside of the utility framework. To address this market, Heartland Energy Services, we formed an unregulated subsidiary, under WPL Holdings, Inc., our parent company. HES now offers both gas and electricity brokering services.
James A. Carrigg
Chairman, President, & CEO
New York State Electric & Gas Corp.
Marketers/brokers do not pose a threat to LDCs. They compete for certain aspects of the retail gas business, specifically gas-supply management. Some distributors will compete with the marketers for this business; others will gradually abandon this function. LDC's face one major competitive disadvantage competing against marketers: state and local taxes. Legislation may be needed to correct this situation.
Patrick J. Maher
Chairman & CEO
Washington Gas Light Co.
Marketers and brokers are
competitors. They compete with one another and with LDCs.
Distributors are changing and seek to compete in markets in and beyond their traditional service areas on a brand-name basis. They are also forming strategic alliances and joining the competition for gas and capacity transactions. This is good news for customers.
Public policy should encourage distributors to compete, not attempt to limit their ability to deliver a broad array of gas and other energy-service products. Consumers stand to gain if distributors are added to the mix of full-service providers. After all, we can deliver streamed supplies, fixed-price deals, caps, collars, or anything customers want. Regulators, advocates, and distributors need to work together on rules that permit distributors or affiliates to market everywhere.
Chairman, President, & CEO
Connecticut Energy Corp.
Restructuring of the natural gas industry and recent legislative initiatives are presenting LDCs with significant challenges, not least of which is maintaining a competitive edge while shouldering the societal costs that other energy suppliers do not bear.
Societal costs come in a variety of guises: millions of dollars spent annually on conservation and economic development advertising programs, arrearage forgiveness, gross receipts taxes. These costs distort the market and skew the price of our service in favor of marketers who have been able to avoid paying their fair share.
How can LDCs cope with this dilemma?
We must let our customers know how much it costs them to absorb these obligations.
We must end the situation by arguing strongly against our customers bearing a disproportionate share of our state's social engineering programs.
We must oppose using customer bills to pass through societal or business taxes.
We must back away from programs that have not been proven appropriate for our business and cost our customers real money.
We must listen when our customers tell us that the high cost of energy is putting them out of business or forcing them to relocate out of state.
Finally, we must encourage legislators and regulators to address the competitive imbalance between LDCs and unregulated suppliers that results from utilities' obligation to serve even those who cannot or will not pay their bills. The significant and inequitable costs associated with this obligation can be modified by requiring all competitors to share the burden, placing the funds received in a special pool to support public policy programs.
Are we threatened by competition? No! We welcome it. Competition is the foundation of our economic system. We are threatened by being forced to play when the deck is stacked against us. It is our job to even up the odds.
Beverly A. Wharton
President, Gas Division
MidAmerican Energy Co.
Marketers and brokers do not pose a threat to gas distribution utilities except in the case of
physical bypass. Even then, flex pricing on the utility's part can be an effective deterrent and a proper recognition of the competitive situation.
Gas utilities generally earn their profits from transporting gas on their system (em not from the sale of natural gas. With transportation, gas utilities have the opportunity to sell balancing and unregulated gas-sales services to further enhance their bottom line. And if marketers and brokers are able to provide gas supply with the same reliability but at a lower price, gas utilities will benefit from the increased throughput on their
system (em with resulting greater earnings. For these reasons, marketers and brokers should be viewed as partners.
However, in the case of residential and other smaller firm customers, a level playing field will require resolution of the "obligation to serve" issue, which currently rests with the gas distribution utility. To ensure balanced competition, the party with the obligation must be appropriately compensated for all cost incurred. Resolution of the "obligation to serve" issue can generally be addressed through regulatory action; legislative fixes may not be needed. Mandated social programs also create artificial incentives for end users to switch to alternative fuels (em to the detriment of the gas distribution utility.
Bernard J. Kennedy
Chairman, President, & CEO
National Fuel Gas Corp.
The emergence of gas marketing and brokering companies has been an important element in the development of today's competitive natural gas market. We embraced the concept of end-user transportation over a decade ago; without the services offered by marketers and brokers, it would have been difficult to retain as much industrial load as we have through transportation transactions. More recently, FERC Order 636 caused our traditional pipeline suppliers to exit the merchant function, and the aggregation function assumed by many marketers has been indispensable in the transition to unbundled pipeline services.
Given their contributions to the marketplace, we do not view the gas marketing and brokering companies as threats to LDCs. However, it is certainly true that the LDC gas-merchant function faces a competitive threat from marketers and brokers that is magnified by various factors that place utilities at a disadvantage. Foremost among these is the utility's obligation to provide gas service to all customers. The marketing companies are free to enter or exit the market at will, and are naturally attracted to the largest volume, highest load factor, and most creditworthy customers on a utility's system. As long as the utility remains the supplier of last resort, further retail unbundling will make gas-supply planning increasingly difficult, and impose increasing costs on a utility's remaining gas-supply customers.
A second disadvantage is that utility rates and services are regulated, while marketers are free to contract with customers at individualized rates, terms, and conditions. A third disadvantage is
that utility customers have been able to avoid certain taxes by buying gas from marketers rather than their gas utility. In our service area, this tax disparity can exceed $0.80 per Mcf.
With respect to all three of these factors, legislation will be needed to level the playing field in the retail gas market. We believe that competition in this market has developed to a point where there is no longer a need to regulate the sale of gas at the retail level.
Senior Vice President
C.C. Pace Resources, Inc.
Gas LDCs have a unique competitive advantage in that they can choose to use or let wither. With proven performance and customer relations, gas LDCs can choose to be arrogant and unresponsive to their customers, or they can choose to be proactive and represent their customers' interests. Their choice will determine the effectiveness of gas marketers and brokers. In effect, well-run gas LDCs represent the biggest threat to gas marketers and brokers. A highly customer-responsive LDC, with substantial gas transportation and purchasing power, can excel against many potential competitors.
Alternatively, LDCs that lack economies of scale, are not customer oriented, and approach business in terms of what they are owed instead of what they justifiably earn are vulnerable. Where this is the case, gas marketers and brokers should play a vital part in working to lower customers' cost of gas supply. The broader economies of scale are attractive to customers.
To prevent unfair competition, state commissions need to implement marketing affiliate rules and other regulations similar to federal regulations for the interstate pipeline system. In this way, customers will have fair choices and be able to choose the supplier that clearly has their best interests at heart.
Gary G. Ely
Vice President, Natural Gas
Washington Water Power Co.
Certainly marketers and brokers create additional opportunities for customers. However, gas distribution customers have always had alternative forms of fuel from which to choose. In large part, gas distribution companies are in a position to provide "hassle-free" services that will allow customers to focus on their primary business or interests, rather than on the complex issues of the natural gas industry.
In my opinion, the greatest challenge facing distributors is building trust and sustaining relationships with state regulators. In an increasingly competitive
market, this must occur if distributors are to compete effectively in the various market sectors. Additional legislation would probably create more bureaucracy and is not necessary if state regulators permit such flexibility.
B. Jeanine Hull
Vice President &
Assistant General Counsel
LG&E Power, Inc.
Not only are marketers and brokers not a threat to gas distribution utilities, they are a resource for such utilities. Marketers and brokers can and will provide a valuable service to LDCs and utilities by allowing them to hedge and mitigate risks they are unaccustomed to facing. New risks require new approaches.
The factors that stand in the way of full and fair competition are well recognized. Customers will be best served when all suppliers compete under the same set of rules. Putting all parties on such an even legal keel means requiring nondiscrimination and comparability in purchasing decisions (as well as nondiscrimination in selling, which is already required) and repealing any state or federal laws that prohibit one class of supplier from competing in a market open to other competitors. For example, if states decide to permit retail competition, all suppliers need to be free from laws and regulations limiting their participation in that market.
Chairman & CEO
The Peoples Gas Light and Coke Co.
Marketers pose a threat to distributors because they are free to compete for end-user sales on an unregulated basis. Unlike marketers, the regulated distributor has an obligation to serve all customers within its service territory, on a nondiscriminatory basis, at regulated rates. Marketers, in addition to being unregulated as to price as well as terms and conditions of service, can target select groups of end users. However, the distributor effectively remains the supplier of last resort, even for customers that do not contract for standby service, when marketers' deliveries fall short. Moreover, marketers are able, in some cases, to use regulation to create an unfair competitive advantage (e.g., by forcing access to below-cost utility services (em like rights to backup deliveries where the discount is not market-justified), making the marketers' sales service more attractive than the utility's.
Consumers would benefit from fair competition, and distributors are capable of competing with marketers for sales to all market segments. However, regulatory or legislative initiatives may be needed. To compete on an equal footing, distributors require 1) an opportunity to profit on the sale of gas, currently denied in most jurisdictions; 2) flexible (yet not unduly discriminatory) pricing power to meet the market; 3) regulatory requirements that do not subsidize business opportunities for marketers (e.g., by allowing sales customers to subsidize transportation rates); and 4) the ability to meet their obligation to maintain system integrity even when marketers' supply commitments to end users fail.
D. Louis Peoples
Vice Chairman & CEO
Orange and Rockland Utilities, Inc.
Gas marketers and brokers pose a threat to gas distribution utilities only to the extent that utilities may be unable to compete due to regulatory and legislative restrictions. Unencumbered by regulation, and without having to absorb capital costs, marketers and brokers operate in a true free market. Programs for customers with special needs or service standards are not mandated. In effect, they are allowed to cherry-pick only those customers, in any geographic market, that will return a suitable profit.
Utilities have an obligation, by law, to provide safe and reliable service to all customers within a franchised service territory. Also, utilities are charged with the duty of making such services available regardless of financial risk or potential profit from doing business with a particular customer or groups of customers.
A utility's obligation to serve, especially on peak days, and current significant tax inequities are two principal "level playing field" concerns. Another is our belief that firm customers should not be able to avoid paying a portion of the capacity costs that were incurred to provide them service. Nonetheless, once the playing field is leveled, gas distribution by marketers and brokers can serve as a competitive catalyst (em not as a threat (em to gas distribution utilities. Their involvement will push LDCs to raise their own levels of performance, and help supplement supply for our fixed contracts.
Eugene R. McGrath
Consolidated Edison Co. of New York, Inc.
Marketers and brokers have been a part of our supply portfolio since the mid-1980s when the
unbundling process began. Like many local distributors, as well as producers and pipeline companies, Con Edison has an unregulated gas marketing subsidiary that competes in the national market. We have used the availability of competitively priced spot gas as an incentive to convert large commercial and industrial customers from oil to gas, by allowing them to use our transportation service and purchase their gas in the open market. At the same time, we've been competing with marketers for these large customers while growing our market by developing attractive ancillary services such as balancing, storage, and tailored pricing.
However, inequities occur when gas from marketers is taxed at a lower rate than utility gas. Significant equity considerations attach to making transportation services (or "open access") available to small residential customers. Putting marketers, brokers, and LDCs on an equal footing would require marketers to shoulder their share of environmental and other social costs. In addition, they would have to provide the same level of reliability that LDCs have historically provided to small, low-load-factor customers.
George A. Davidson, Jr.
Chairman & CEO
Consolidated Natural Gas Co.
I look at this issue from both sides of the fence, because CNG is both a regulated gas distributor and an unregulated energy
marketer. Our five LDCs collectively make up the nation's fifth largest distribution system, while our CNG Energy Services subsidiary markets natural gas, electricity, and related services throughout the East Coast.
Unquestionably, local utilities are facing intense new challenges from unregulated competitors. As this occurs, some aspects of the traditional utility franchise are
unraveling. I'm confident that there are "win-win" solutions for both marketers and LDCs. And I think those solutions can (em and must (em encompass customers as well. But before that can happen, LDCs and their state regulators and legislators are going to have to sit down together and do some long, hard thinking about some fundamental issues. We're all going to have to carefully reexamine the concepts that have traditionally geverned the distribution sector in this country.
For instance, how do we define a local utility's obligation to serve in an era when an increasing number of customers (em including such weather-sensitive customers as hospitals and schools (em are buying supplies directly from independent marketers, brokers, and producers that have no such obligation? How should the utility be compensated for maintaining the facilities necessary to a supplier of last resort? What about the cost of programs that assist low-income customers and provide residential service during the winter even to nonpaying customers?
Let me be clear: LDCs aren't looking for protection from competition. Many gas distributors, including CNG's, have faced gas-on-gas competition for years and years, and we all expect that the coming restructuring of the electric industry will result in an integrated energy marketplace that is more competitive than anything we've experienced yet. But LDCs should not be forced to compete while hobbled by restrictions designed to govern a monopoly. Legislators and regulators and LDCs are going to have to work together to find new and innovative ways to fairly spread the costs of social and tax obligations to all the providers in the energy marketplace. That way they can help the LDCs stay competitive, without shifting the cost of social programs to customers. For instance, distribution companies ought to be free to set up marketing affiliates of their own; regulatory barriers inhibiting such actions should be reconsidered. Other potential solutions are
performance-based rates in core markets and improvements in the traditional cost-of-service ratesetting mechanism.
President & CEO
American Gas Association
Marketers and brokers are an important segment of the competitive natural gas industry. Clearly they compete with local distribution companies for retail sales and are trying to capture market share, but describing them as a threat misses the point. LDCs are marketers of gas in today's environment, participating both as traditional regulated merchants as well as through unregulated subsidiaries.
The threat to regulated LDC sales comes from state regulation and taxation that, in some instances, prevents the utility from competing on an equal footing. Utilities must be able to deliver gas supplies to customers just as unregulated marketers do. They must be able to adjust their prices to respond to changing market conditions. They must not be placed at a price disadvantage by being subject to gross receipt and sales taxes that are not imposed on marketers selling gas. Perhaps most important, LDCs must not bear the cost of social programs and backup services that are recovered in sales rates and not in the rates for transportation service. Under fair regulatory treatment, LDCs are eager and able to compete.
Dean T. Casaday
President & CEO
Pennsylvania Gas and Water Co.
Certainly marketers and brokers have added another dimension to the future of LDCs. They have no responsibility to the core customers being served by the utility; their objective is moving gas. If gas does not move, revenues are not generated. Therefore, some marketers and brokers will flow gas whether or not the market is taking it and, in some cases, rely upon the utility to balance the distribution system at the expense of core customers.
To compete on an even footing, the utility must have parity with marketers and brokers relative
to the Gross Receipts Tax,
preferential gas distribution rates for natural gas produced within the regulatory agency's jurisdiction, certain sales taxes, and social responsibility for the customers (em not to mention an opportunity to receive better prices for the release of firm interstate transportation capacity into the secondary market and exemption from the FERC maximum rate cap on released capacity.
Legislation must be enacted to classify brokers and marketers as suppliers of natural gas and related services and subject them to the same rules as the utility. Alternatively, the utility should be exempted from the regulatory constraints. Also, the cost of the gas should be deregulated (em as it is the case in the federal domain (em and exempt from prudence review since the actual cost is always reflected in an unrecovered purchased-gas cost account and the utility pays interest to retail customers on overcollections.
Jerald V. Halvorsen
President, Interstate Natural Gas Association of America
Marketers are not a threat to gas distribution companies. They share, in fact, an important synergy. Marketers provide LDCs and retail customers with choices for supply purchases and offer efficient services to help manage supply and arrange for transportation. However, distributors and marketers do operate on different footings, and perhaps the regulatory scheme needs a second look.
Many industry participants, including INGAA, have questioned whether the current rules setting price caps for secondary capacity and prohibiting direct assignment of capacity by LDCs and other capacity holders are now necessary for the second market. The FERC is currently reviewing these very policies on capacity release and trading on the interstate system. The state commissions can address service obligation issues on a case-by-case basis, if need be.
Glenn R. Jennings
President & CEO
Delta Natural Gas Co., Inc.
If LDCs expect to continue to provide sales service to all their customers without any competition, marketers and brokers might pose a threat. LDCs can be hindered by traditional regulation in competing with marketers and brokers. Historically, LDCs calculated their sales prices (tariffs) including their weighted average cost of gas and could not easily vary their sales prices. Changes in regulation to allow more pricing flexibility could help LDCs compete since marketers and brokers are not so hindered.
We view marketers and brokers as customers and work with them in any ways possible. We began transporting gas in the early 1980s to meet the market requirements of our customers. Because our sales prices included our weighted average cost of gas, we formed subsidiaries to purchase and resell gas supplies and provide sales service to larger customers.
Our approach with subsidiaries has provided an effective way to meet our customers' needs while retaining most of them as sales customers. Our LDC tariffs provide for sales and transportation service, and most of our larger customers have switched to transportation service. At times we have provided standby or backup service from our LDC to certain of these customers, depending upon their needs. We have provided benefits to our LDC and our customers by using our approach to obtain lower-cost gas supplies. Marketers and brokers have continued to play a role in that supply mix.
We are in business to produce, transport, distribute, and sell natural gas. As long as our system is used to deliver the gas, we will not be unduly concerned with sales competitors. We are opposed to system bypass and duplication of our facilities by others and will continue to oppose such efforts.
William J. Grealis
Gas Business Unit, Cinergy Corp.
Marketers and brokers are becoming customers of gas LDCs. In the long run, the greatest threat to gas LDCs will come from deregulated electric utilities. One simple reason is that competition in the electric utility industry will drive down the relative price of electricity. A second reason is that deregulated electric utilities will reshape themselves as energy services companies that will package various fuels together with services to meet the specific needs of the customer. Services will include maintenance and even ownership of in-plant distribution equipment, and multi-facility energy management contracts will provide customers with energy expertise while permitting them to outsource their energy operations.
The move to a true energy services industry spells consolidation. Stand-alone electric companies have no choice but to expand their portfolio of available commodities and services. While the end result may indeed be the disappearance of gas LDCs, the worst-case scenario for the energy industry would be the regulated competition that would result from a misguided attempt to hold a place for each of the current segments of the business. The best solution is the elimination of anticompetitive laws and regulations that restrict the full participation of any player in the marketplace.
Robert B. Catell
President & CEO, Brooklyn Union Gas Co.
Chairman, American Gas Association
Marketers and brokers can provide additional competitive options so that LDCs can no longer assume a steady, captive, and growing customer base. With the unbundling process initiated by FERC Order 636 moving downstream, LDCs are facing stiff competition from rival gas sellers in the retail marketplace. For the most part, LDCs are dealing with many of the challenges of this new business environment with a range of new alliances and business arrangements.
However, in New York, LDCs are at a severe competitive disadvantage with respect to third-party gas suppliers as a result of the tax burden placed on their direct sales customers. Third-party suppliers, however, can often avoid the imposition of state and local taxes on their sales transactions by transferring title to gas outside the state, while gas customers of LDCs are required to pay state and local gross receipts taxes on their purchases from LDCs. This burden of state and local taxes, more than any other factor, prevents New York's LDCs from competing against unregulated gas suppliers, and legislation is required to level the playing field. LDCs are quite willing to participate in the competitive battles, but they must be given a fair opportunity to do so through pricing flexibility as well as the elimination of many of the social burdens imposed by local regulators and elected officials.
Charles E. Zeigler, Jr.
Chairman, President, & CEO
Public Service Co. of North Carolina, Inc.
We do not see marketers or brokers as a threat any more than we see fuel oil or the electric heat pump as a threat in competing for existing or new business. If more competition can provide the services our customers want at lower prices, the whole natural gas industry will win. We welcome the opportunity to participate in such a business environment. The real threat materializes if a market
participant is unwilling or unable to compete due to regulation or legislation. Existing factors that limit LDCs' ability to compete vary from state to state based on their respective regulatory environments. What we most need is a comprehensive look at what our customers need and want. We are concerned that the natural gas industry is forgetting this step. Once customer needs are truly understood, our industry must work to create an environment and establish rules that will allow these needs to be satisfied at the lowest possible cost.
William E. Davis
Chairman and CEO
Niagara Mohawk Power Corp.
Nearly one-half of Niagara Mohawk's annual throughput is derived from the transportation of customer-owned gas, which is purchased from marketers and brokers. The shift from sales to transportation volumes has increased steadily since 1986, when we began open access on our system. So rather than view marketers and brokers as threats, we instead see them as partners.
Niagara Mohawk will continue to embrace the idea of competition with marketers and brokers as long as we remain on an even footing. Two issues could be a barrier, however. First, there can be no stranded costs as a result of the unbundling of LDCs. Also, to be competitive, Niagara Mohawk Gas must be able to "stream" gas prices to individual customers. Through streaming, we can sell a package of gas to a particular customer for a set period of time. We are currently awaiting a final order from the New York State Public Service Commission on this issue. However, we must be
allowed to earn a reasonable return for this effort and not saddle our shareholders with all of the risk and none of the rewards.
Also, for our company to be competitive with marketers and brokers, we need equal footing when it comes to taxes. And yes, legislation is needed to even up the odds in that regard.
Corbin A. McNeill, Jr.
President & CEO, PECO Energy Co.
Marketers do not threaten gas utilities unless utilities and regulators respond inappropriately to the new environment. On the PECO Energy system, marketers supply gas to our largest 400 customers, which generally have alternate fuel capability. Our residential and commercial customers, however, generally do not have alternate fuel capability and are dependent on an absolutely continuous and reliable natural gas stream. I should say interdependent; supply/demand problems cannot be isolated to a single customer due to the commingled nature of the gas distribution system.
PECO Energy does not perceive major benefits to core customers from turning the merchant function over to marketers. We competitively source all gas supplies and all pipeline capacity. Marketers can underprice PECO Energy sales service to core market customers, but only because they do not pay the full cost of firm pipeline capacity, do not pay gross receipts tax, do not have an obligation to serve, and do not incur social program costs. These are artificial advantages, not efficiency advantages.
It is reasonable to believe that marketers do not weigh reliability as heavily as utilities, and consequently seek to reduce costs by taking greater risks. Risk to utilities and customers would come from a new environment that does not recognize the difference between real efficiency and artificial gains to some at the expense and risk of others. It will be up to utilities and regulators to ensure that any restructuring promotes the former and not the latter.
Michael G. Morris
President & CEO, Consumers Power Co.
I do not believe that marketers and/or brokers (em I never have
really been able to tell the
difference (em pose any threat to natural gas distribution utilities. Quite the contrary, I believe that they have added greatly to the choices that customers have,
saving them literally millions of dollars over the last 10 years.
The roadblock that prevents LDCs from s
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