Gas utility executives never tire of telling how the regulators won't let them make money any money selling gas.
Interstate Power Co., which distributes both gas and electricity in Illinois, laments that no one understands: "Almost all small volume customers do not realize that their local distribution company does not make any money on the sale of gas¼ even large transportation customers have difficulty dealing with the concept."
So why would any LDC oppose retail gas competition?
For one, some gas utilities doubt that any further deregulation or unbundling will offer much in the way of cost savings. They believe that large-volume industrial customers squeezed out all the margin in the mid-1980s when they began buying gas directly and taking transportation only from pipelines and LDCs. Ameren merger partners Central Illinois Public Service Co., and Union Electric Co. sum up that view:
"The 1980s windfall for large customers cannot be extrapolated into the 1990s for residential customers¼ [B]e careful not to create unrealistic savings expectations for residential consumers. The gas now being consumed by residential customers is already being purchased on their behalf by LDCs in a deregulated and highly competitive market."
Interstate Power sees customers giving up: "[T]ransportation customers [are] coming back to sales service because marketers cannot beat the regulated price on a regular basis."
Union Electric and CIPS would put residential gas choice on the back burner: "[T]here is no compelling reason why residential unbundling should be placed on a fast track."
Meanwhile, other LDCs predict that electric restructuring may eclipse gas, gaining a price advantage. Mt. Carmel Public Utility Co. predicts just that:
"If one assumes the published claims for reduced cost-of-service and for reduced cost-of-delivered electrical energy come to fruition, electricity may well be more competitive than gas as an energy source for heating dwellings and other occupied structures¼ To that extent gas will be less competitive.
"The increased demand on gas for generation of electricity will [also] tend to absorb excess capacity in the natural gas industry, resulting in higher prices overall for gas going into the pipe. The two effects together, cheaper electricity on the one hand and more expensive gas on the other, will tend to decrease the size of the market for delivery of gas to customers in the Midwest."
This vision runs exactly opposite from what I (and others, apparently) have been taught. I recall how in October 1996, the Arthur D. Little consulting firm invited me to a conference to discuss how natural gas might use its head start in deregulation to consolidate a marketing advantage over electric utilities. Now one hears a combined utility like Central Illinois Light Co. predicting that gas will follow electricity: "There will be pressure to pattern the gas restructuring after the electric wherever feasible."
Puzzled over this turnabout, I spent a weekend (so you wouldn't have to) reading comments and reports on retail gas unbundling filed recently in Illinois, New York and Massachusetts. You've seen a flavor of that in the quotes I presented in the first several paragraphs. When I had finished the whole exercise, however, I was struck by anonymous comments from LDCs in New York, which seem to tell the whole story:
"Price is driving electric competition, [but] it isn't driving gas. Electric restructuring will blow right by gas."
Three States, Three Paths
The current policy debates over retail gas unbundling in Illinois, New York and Massachusetts show the extent of both issues and positions. In fact, the three states show very little consensus on the one key issue in gas restructuring: Should LDCs exit the merchant business? Should they abandon the idea of selling gas, in favor of marketers, who will remain largely unregulated? What about reliability?
Many issues have emerged, running the gamut from stranded costs to low-income subsidies to taxes:
• Can LDCs offer sales service after retail unbundling?
• If marketers take over merchant sales, how is reliability maintained?
• Who serves as supplier of last resort?
• What happens to the LDC's obligation to serve?
• Should unbundled LDCs operate as a sort of independent system operator, controlling gas pipes?
• If LDCs exit merchant sales, how should they assign their unused pipeline capacity?
• Must marketers accept such capacity?
• Would performance-based regulation work better than a deregulated merchant function?
Take the question of unused pipeline capacity. LDCs claim it's a question of reliability (em that firm capacity must stay tied to customers when they leave the regulated distribution system and migrate to unbundled service and unregulated merchant sales. Pipelines say much the same thing. In reality, however, the question isn't reliability, but the fate of stranded costs. LDCs want marketers to pick up their firm capacity rights. Marketers say they don't need all that steel to fashion reliable commodity service.
In late July, six days apart, the Illinois Commerce Commission and the staff of the New York Public Service Commission mailed requests for comments on gas restructuring to LDCs, marketers, pipelines and other stakeholders. Armed with replies, the New York PSC staff filed a position paper on Sept. 4, 1997, recommending in the strongest terms that LDCs should exit the merchant business entirely. In Illinois, having concluded a series of workshops in August, the commission followed up on Oct. 22 with its formal report to Gov. Edgar and the Illinois General Assembly. By contrast however, the Illinois report fails to provide much guidance. Rather than offer any concrete policy direction, it cites a lack of consensus among stakeholders on nearly every issue and simply throws the whole question in the lap of the governor and the state Legislature.
Massachusetts presents a somewhat different case. There, the Department of Telecommunications and Energy has formed a working group known as the Massachusetts Gas Unbundling Collaborative, chaired by facilitator John B. Howe, the former chairman of the commission. The collaborative submits periodic status reports to the DTE, identifying key issues and positions. A calendar of "milestones" has the collaborative filing a final report with the DTE by March 15, to guide regulators in deciding on the nature and extent of any formal investigation.
George Yiankos, gas division director at the DTE told me that the most difficult question under consideration is how to assign upstream pipeline capacity after unbundling.One "conceptual proposal" would envision a new agency, the "Capacity Management Authority," that would be chartered to handle the allocation of capacity rights. The CMA would offer to sell upstream capacity to merchants, and then auction off any unsold capacity. It would pool any profits and return them to the utilities.
In New York, the staff report is squarely before the commission for further action. But when I called spokesman Brian Pinkerton at Peoples Gas Light and Coke Co. to ask about follow through on the Illinois report, there wasn't much he could say.
"We're waiting to hear," Pinkerton advised. There aren't any fixed deadlines. We have an open time frame."
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.