ARE NATURAL GAS UTILITIES DIFFERENT FROM THEIR ELECtric counterparts? Now that customer choice has become available in a few spots on the East and West coasts, can we expect some of the same opportunities to open up for gas consumers? Or are the industries incomparable, without lessons to learn from each other?

For the Fortnightly's 1998 Gas Industry Executives' Forum, we asked key industry players (em three utility CEOs (one representing his industry association), plus a regulator, a consultant and a consumer advocate (em to share their views and shed some light on the future of the natural gas industry.

Overall, most agree the connection between electric industry restructuring and natural gas unbundling is more than just coincidence. As Craig G. Matthews, president of Brooklyn Union Gas puts it, the worldwide community is in the midst of the idea that "competition is better than trying to have regulators decide what the market wants."

However, choice won't happen overnight. A slow, deliberate move toward a single energy provider is envisioned by several respondents. Vinod Dar, managing director of Hagler Bailly Consultants, sees a time when natural gas will become more of an intermediate product than a final product.

To get a snapshot of the market, we posed these questions:

ELECTRIC DEREGULATION. How will electric deregulation affect the natural gas industry?

HOURLY PRICING. Will hourly pricing in electricity put pressure on gas to revamp its current practice of weekly or daily pricing?

CONSUMER SAVINGS? Can residential and small commercial customers really expect to see savings in gas prices? Or is customer choice more of a philosophical goal?

A PIPES COMPANY? What is the future for the gas utility as a local distribution company? Can LDCs survive as transporters only, without merchant sales?

TECHNOLOGY TRENDS. Where is natural gas technology headed?

David W. Biegler, chairman, American Gas Association, and president and COO of Texas Utilities

ELECTRIC DEREGULATION. Over the long term, electric deregulation should help feed increased demand for natural gas, particularly in utility and non-utility electric generation. However, it's easy for people to become too bullish.

Take a look at the A.G.A. statistics, [which show that] about 60 percent of the new capacity that's been added throughout the '90s will be fired by natural gas. Some of that new capacity will be highly efficient gas generation (em backing out old, inefficient gas generation with a net effect of reduced gas consumption. It's not a simple equation. Nevertheless, A.G.A. forecasts more growth for natural gas generation between 2005 and 2015, when more nuclear and coal-fired generating units will be retiring.

Another unknown factor is the [current] surplus of generation capacity. Some of the decisions to build new units may not come around until 2007 or later. Over time, however, the bottom line is that it's more economical to build and operate gas-fired plants. So, you'll see the proliferation of these kinds of facilities. There are new breeds of gas-based combined cycle and cogeneration plants being installed today that offer great advantages like short construction lead times, high efficiency and reliability, low pollution levels and modular construction opportunities. You just won't achieve this kind of improvement through other sources of electricity generation.

HOURLY PRICING. The electric generation market is moving to place high value on flexibility and response time. Semi-hourly pricing exists already in some markets worldwide. The gas-fired generators will succeed in this market, and the natural gas markets will adapt to these pricing periods, or [the] time and basis differentials in derivative markets will satisfy the need.

CONSUMER SAVINGS? The straightforward answer depends on whether marketers can do a better job of buying and storing natural gas than the local utility, and thereby offer a better price.

For residential customers, it remains to be seen what kind of savings will be available. Much depends on whether regulators choose to allow a level playing field for all competitors, including the utility, or whether they will force subsidization of some residential customers. If unregulated marketers can offer natural gas without the costs associated with these subsidies, the average residential customer can realize significant monthly savings. The question is, how will governments recoup those taxes and the other costs associated with guaranteed service to all residential customers?

Cost savings aren't the only attraction in customer choice. Some customers see benefits from programs that offer new services, such as fixed-price options, that the utility by regulation could not provide. There's a lot of brainstorming going on in marketing departments across the country to develop new products and packages of services that [will] appeal to customers. Americans like to have choice, even if most don't care to exercise their choice to change suppliers. Surveys show that most consumers think their local utility is doing a fine job (em but they'd still like to know there's an alternative.

A PIPES COMPANY? That's a business decision every utility will make individually. Does the utility serve an urban or rural area? Is it large or small? How many pipelines serve the area and how well are they integrated? Who else will be competing in this market? Will unregulated utility affiliates be allowed to compete? In a truly open and competitive market, utilities would be permitted to use their own names and logos when competing. And, will utilities be allowed to earn a profit on marketing?

Already, gas utilities are serving 18 percent more customers with 15 percent fewer employees than they did 10 years ago. Some utilities are seeking even greater efficiencies through mergers and consolidations. Obviously, I've voted with my feet on this one, because a merger seemed to make good business sense for my company. It shored up our weaknesses and strengthened our ability to achieve our long-range objectives.

In Texas, we had a fully competitive gas market at the large-customer level as early as 1985. That experience taught me you've got to stay focused on your core function and on your customers. Every utility by now should already have undertaken a brutally honest review of its strengths and weaknesses and be well on its way to implementing a long-range plan.

TECHNOLOGY TRENDS. Technology is advancing in any number of directions. First, there are significant advances in information technology: electronic bulletin boards, posting and dispatching of natural gas on an intra-day basis, utilities providing customer billing information interactively on the Internet [and] company intranet sites to keep employees up-to-date on corporate activities. In California, a Web site allows customers to request and receive gas supply proposals from marketers. The speed at which all of this information is becoming available is going to contribute to a faster market and a more competitive one.

Gains in technology continue in other areas: ultrasonic metering, advances in trenchless technology [and] improvements in plastic pipe and leak-detection.

Also, there's going to be a very strong emphasis on natural gas R&D. Thanks in part to the current administration's commitment to cutting emissions in line with global climate change initiatives. Research opportunities include natural gas combustion systems, natural gas cooling [and] natural gas vehicles and fuel cells. All of which will grow demand for natural gas, increase energy efficiency and reduce air emissions.

Ruth K. Kretschmer, chairman, Gas Committee, National Association of Regulatory Utility Commissioners, and member, Illinois Commerce Commission

ELECTRIC DEREGULATION. I think almost everyone in the industry agrees it will impact it very greatly. We see more and more companies talking about energy as one unit, and not as separate gas and electricity. I predict that you will find that even residential customers will deal with one energy company rather than two. That isn't going to happen for a couple of years, but I think it will happen.

HOURLY PRICING. The industries are going to have to accommodate each other. If the electricity industry is going to use more gas-fired generation, they will have to make some accommodations. I'm not sure they need 15-minute pricing, or half-hour pricing, so I would believe that they would use a longer pricing period and the gas industry will have to work toward accommodating that. I do think that new metering technology will be needed by both the gas and electric industries and there will be a meeting of the minds, so to speak, as to what exactly is necessary and what can be done¼ based on past usage.

CONSUMER SAVINGS? This past summer our legislature asked us to have a gas conference to talk about broad-scale issues in the natural gas industry. We had regulators, legislators, pipelines, and marketers and LDCs participating. And I could not get a definitive answer from anybody on whether there were real savings. What I was told was, don't look at percentages, don't say, "We can offer a 10 percent discount."

I do not envision great savings. There may be some, but I think that if the public is pushing for choice (em and you can get an argument there (em I think they may be disappointed to see that the savings are not what they anticipated. You know, there's still a great deal of discussion in the public about whether they're getting enough savings on the telecommunications side to justify what many see as an upheaval of reliable service. Five years from now¼ are they going to be able to say, "Well, I'm paying $2 now, but if we hadn't had choice I might be paying $3"?

It's always difficult, looking back, to say what the prices would have been with or without a so-called free market. So it's going to be very difficult for consumers to evaluate whether or not they saved what they expected to save.

However, I don't think we have a choice. Once you let that genie out of the bag, so to speak, and you offer people choice, everyone has great expectations. Whether those expectations are fulfilled or not, I think choice is going to happen. Just as when we started [changing] the telecommunications and airline industries, these things were promised, people wanted them. I don't believe that all the promises met the people's expectations.

A PIPES COMPANY? I think for the next five to seven years many states are going to require that LDCs stay in the merchant function. We will want to see how the market is working, who's going to be responsible for [the] customers who may not have a choice.

On the whole, I believe that unless LDCs are allowed to make a profit on the commodity, they're going to want to get out of the merchant function¼ because they see it as a no-win situation. They have to prove every purchase they make and they might be able to recover or they might not, depending on their state public utility commission. But at least in Illinois, at least for the next few years, I think they'll be mandated to stay. One of the big questions we're going to have as a public utility commission is to decide whether they should be allowed perhaps to eliminate their PGA and take their chances on either a loss or a gain in the commodity.

TECHNOLOGY TRENDS. I think one of the great markets the industry is overlooking is gas air conditioning. We built a new home a year ago and put in a unit that does both gas heating and cooling. My cost this past summer for cooling was so low (em I probably saved 50 to 60 percent by using gas air conditioning. The only drawback was the up-front cost (em it's very high but will drop as more units are built and sold.

Also, I think LDCs are going to look at this and say: "This is an area we can benefit from and customers can benefit from, because pipelines will be kept full in the off-season." It is an advantage to electric utilities in that their peak may be shaved so they won't need new generation.

I think the gas industry would like to have more gas-fired generation. A lot's going to depend in the next century upon how nuclear energy may be accepted, or not accepted, by the public and by the various governments. Certainly from my perspective, living in Illinois, nuclear is clean and reliable; I think it's safe. And I think if we were to go to a cookie-cutter approach as France has done, I think that would make it affordable. But gas¼ is clean, it's reliable and it's cheap. What the impact of pricing will be if we see a great deal of gas-fired generation (em that's a different issue. It may increase slightly because the more demand, the more the price.

Craig G. Matthews, president, Brooklyn Union Gas Co.

ELECTRIC DEREGULATION. I think it's going to be less than was anticipated at one point. I think people envisioned more dramatic reductions in electric rates resulting from unbundling or deregulation. I think¼ there's a good chance that the reductions and the electric prices will be somewhere between 5 and 10 percent, and of course that's going to be phased in over a period of generally five years. That kind of reduction is not enough to have any transfer in any variety of applications, whether it's electric heating or air conditioning versus gas heating or air conditioning or oil.

Gas air conditioning now has a lot more applications and it's become more competitive. So, you have electric deregulation and most people's reaction was electric rates will decrease across the board and that will make electric air conditioning more competitive with gas. Well, it might, except some of the ways that the public service commissions are applying these reductions would not have a reduction during peak periods.

CONSUMER SAVINGS? Yes, I think there are some savings, I think they are just less than originally anticipated. In our region, a gas customer can expect to save $50, $60 a year (em that's it. In New York state, utilities pay more taxes by far than the marketers, and we've been pushing very hard to have those taxes eliminated so we have the same playing field. The primary reason that marketers can save customers in the commercial sector a little bit more is because there's a sales tax that they don't pay, as well as gross receipts tax.

The gas industry in general is about two years ahead (em in some states maybe more than that (em than the electricity market on unbundling. We've seen the impact of unbundling in our commercial markets and what marketers have been able to do, but also what they've been unable or unwilling to do.

In the commercial market marketers have had reasonable success, but we're coming up on two years now where the whole market has been unbundled and yet marketers only have about 10 percent of our commercial customers. Other than our marketing affiliate, which has been going into the residential market, we have about 5,000 residential heating customers [out of 500,000] that have decided to switch. We can't get marketers interested in the residential market at all; it's too small a potential savings or margin for them.

I'll grant you that part of it is a timing issue, an education issue. We have a lot of customers [who] still are not aware of what's going on. We've had bill inserts, speeches, and some of this may take time. But even the educated are saying, "No, I don't know you, I don't know what your reliability is, I know what Brooklyn Union is and I'm going to stay there."

I think the answer [to value for consumers] lies in a national or international movement to give choice to customers (em [the idea] that competition is better than trying to have regulators decide what the market wants. And that trend is a broad, sweeping trend and it's certainly not just in our industry. Our own surveys indicate that customers do want choice¼ but don't force them to go there. Don't take away the choice that they have from the utility.

A PIPES COMPANY? One of the core competencies that Brooklyn Union felt it had was managing its supply portfolio. Therefore, why would we outsource that to Enron? Well, we were managing in a pretty good way. We made about $10 million a year on [sale of excess supply] and we shared that with our customers (em our customers got 80 percent of that, and our shareholders got 20 percent. When Enron came to us they had two things we didn't have: an enormous core competency in trading and arbitraging. We were not prepared to invest the hundreds of millions of dollars that Enron was to get that expertise. That enabled them to give us an offer that was much better than what we were doing ourselves, so that we could assure our customers that they would save more money by having Enron manage those assets and our shareholders would have an incremental benefit.

We position ourselves as a regional energy player (em [our territory] eventually will be all of Long Island after our merger with LILCO, and hopefully beyond that.

Some say, "Let the LDC be a pipes and wires company (em and the relationship with the customer we'll give to the marketer. Let the gas marketer send the customer bills and everything." I'm not in that camp. I don't know how these marketers will fare; some will fail, some will succeed. Not all of them have the customer relationship in mind like we do. We have an extremely high level of customer satisfaction, almost 95 percent. Before I'd willingly give it up because of any national trend to unbundle, I want to treat that like very precious cargo, making sure I'm still serving that customer in any way that I can as an LDC.

In fact, many utilities (em I will admit our own motives here as a corporation and a holding company (em want to provide a full range of services to our customers, but we can only offer some of those services as a regulated utility. Many marketers want to do the same thing (em to offer customers bundled services. But the way to get access is to unbundle the utility and then marketers get their foot in the door by selling just gas or electricity as a commodity; and then some of them want to bundle services. Now, not many want to do it the way we do. I don't know of a marketer, for example, that wants to go into the appliance repair service, like we offer. But our goals are the same.

Irwin A. "Sonny" Popowsky, consumer advocate of Pennsylvania and president, National Association of State Utility Consumer Advocates

ELECTRIC DEREGULATION. In Pennsylvania, I think there was a mistaken belief that the electric [restructuring] model could be applied to the gas companies. And what I've been finding is that this issue is even more difficult with respect to natural gas and even in some ways more contentious than the electric debates were.

For one thing, we have a different starting point for gas than we did for electric. In electric we started, at least in Pennsylvania, with a vertically integrated monopoly electric provider. I think there's been a consensus that the continued monopoly regulation of generation had led to bad results in Pennsylvania and should not be continued.

In gas, the comparable breakdown doesn't quite work. We already have competition in the supply function, so we're not starting with vertically integrated monopolies. We're starting out with monopolies at the distribution function, and the LDCs, unlike the electric companies, are already in the business of acquiring supplies for their customers at competitively based prices. The biggest hurdle in electric was to break the link between the monopoly supply and the monopoly distributor. In natural gas, at least in Pennsylvania, we've already broken that link. Now that¼ these LDCs are acquiring gas in a competitive supply market, are there additional benefits or savings that can be obtained by taking the competition even further (em allowing individual small customers to buy gas from other aggregators or other marketers? The remaining debate revolves around the issue of whether the residential customers are better off having their gas needs supplied by a regulated distributor or¼ [by a] competitive market.

Here in Pennsylvania¼ the demarcation between distribution and generation in the electric industry was clearer and cleaner than in the gas industry. The argument has been made that each LDC needs to maintain certain supply functions to maintain their system and¼ that makes it a little bit more difficult to turn over the entire function to a competitive market.

CONSUMER SAVINGS? Yes, there are potential savings. But you certainly don't want to do it just because you've done it in electric. As you unbundle and bring about more competition, you need to be very careful that you're not adding costs to the system that could then eat up those savings or end up increasing rates.

Pilots have shown, at least in the near term, that customers who participate have achieved some savings. Some of them have been 5 or 10 percent. In some respects you have to be careful, because in Pennsylvania, for example, one benefit for pilot participants was [that] they didn't have to pay the gross receipts tax, so that of course was an artificial savings. On the other hand, from what I can see in the Toledo, Ohio pilot, there are savings on the order of 10 or 15 percent.

I can see that there's a potential for savings. For example, for a marketer who could serve multiple areas. The coldest day of the year in Philadelphia might not be the coldest day in Chicago, or Buffalo or Washington, D.C. And a marketer who can take advantage of that fact in acquiring supplies can adequately produce some savings.

I think you have to show real care that you've actually produced benefits rather than simply provided a choice that's not very meaningful to consumers.

Initially, consumers are concerned that they won't have a clear understandable choice, that they'll just be deluged with offers, that they'll just throw up their hands and say, "Well, I'm just going to stay where I am." Certainly my main concern as we entered the electric debate was that small consumers would be made worse off (em that we would see cost-shifting and that the large customers who got the benefits of competition would do so at the expense of small customers. There are various ways to deal with that.

In Pennsylvania, for example, we established rate caps, so that existing customers, even if they didn't shop and get benefits of lower rates, at least would not see higher rates (em so they wouldn't be worse off. In addition, competition was opened up to all customers¼ and any stranded cost had to be recovered through a non-bypassable mechanism. A customer that left the system still had to pay his share of stranded costs.

It's true many consumers are rightfully wary of these changes; regulators and public policymakers should take that into account and try to make sure that even as you progress toward competition that you maintain consumer protections.

Here's the key: Determine what portions of these industries are natural monopolies and ought to be regulated very carefully in the public interest. Then try to figure out what portion of these industries would be better off with market forces. The tough question in natural gas is: Where will the benefits of competition outweigh the cost to society of losing the protection of regulation?

And even on the kind of proposals we're talking about, you still have things like supplier of last resort. On the coldest day in February, you need to have a supplier who's there. You can't have someone say, "We can't supply gas [now], but we'll bring you some extra gas in July." You need consumer education. You also need some method of uniform price disclosure.

People ought to be able to have the same information about how much the price is per kilowatt-hour, or the price per Mcf [thousand cubic feet of gas]. Uniform price disclosure doesn't mean uniform pricing, but you need to have some uniform disclosure so that people can make a reasonable choice without having to read a 50-page gas tariff.

Multiple parties are responsible for educating consumers. Certainly the various participants in the market are going to try to tell people what their products are; that's a form of education, but the truth is that's primarily marketing.

There is a government role to let people know what the basic rules are. Pennsylvania established a hotline to answer questions and they've received thousands and thousands of calls about the electric pilots. Our office has put out a brochure and met with a lot of consumers. I think people need to be able to call somebody who has no particular financial stake in whom you buy from.

Steven E. Winberg, director, energy policy, Consolidated Natural Gas Co.

ELECTRIC DEREGULATION. There are probably three effects. On the supply side, for electric generation, I think it's going to open opportunities for gas-fired, combined-cycle plants. As the industry starts to get a better handle on what the marginal cost is to generate power at a given station or at a given load at a particular station, I think that's where natural gas is going to come into it's own.

Also on the supply side, there are the environmental issues that we're looking at: the ozone issue in the Northeast; the reach of the Environmental Protection Agency further west to deal with NOx emissions; and global warming.

I think the combination of environmental issues and the deregulation of electricity potentially are two freight trains coming at each other. And natural gas can play a significant role there. There's an increased interest these days in distributed generation, in fuel cell technology, to get at the efficiency lost from a large coal-fired central generating station to the light socket. The closer you bring the generation source to the point of use, the less efficiency loss you're going to see. I think that when you're looking at global warming, efficiency is the major cure for CO2.

In addition, I think as power quality (em not just in terms of the power failure or loss of electricity but the actual quality of electricity (em becomes more and more important, and we get more sensitive equipment, there's going to be a need for high-quality power. And I think that's probably a role for natural gas either in distributed generation or fuel cell technology.

On the retail side, I think it's pretty obvious that gas deregulation is a lot further along than electricity deregulation. Industrials and commercials have been transporting gas for years [buying their own gas from marketers and obtaining transport-only service from LDCs]. A lot of states are moving into retail choice for their residential sector, both in electricity and gas. And the combination of those two services into the home or small business is going to become pretty important. It's clear that every marketer out there plans to be a marketer of both gas and electricity. [Because] a lot of states are looking at electric restructuring, gas will follow very shortly thereafter because customers are going to want that choice, and they're going to want to have that single energy provider.

HOURLY PRICING. Power will be priced on an hourly basis, no question. But I think that, at least relative to coal, gas probably is in a better position to match the hourly pricing structure that we're likely to see. Oil probably can as well, because there's a lot of liquidity in the oil market. So if the question is based on a comparison of fuels, I don't think that gas will be at a disadvantage. And then you get to the generation side (em by and large, natural gas is more efficient in the generation of electricity than either coal or oil, and operationally speaking, it has a lot more flexibility in terms of taking on load swings, peaking, that sort of thing.

CONSUMER SAVINGS? I think that there are savings out there and it really becomes a matter of not if, but when. It's pretty clear to me that we are going to see a transition period in just about all the states, [as there is] in electricity as well. That transition period usually deals with overcoming stranded or transition costs. For gas it's the capacity contracts that need to expire. To the extent that LDCs are held harmless for those contracts, we're looking at a perhaps three- to five-year period where they will be transitioning. And it's during this transition period that there may not be a whole lot of savings for customers.

Once we get beyond the transition period and LDCs are no longer in the long-term market for capacity (em they're either not buying as much or buying on a shorter-term basis (em I think that's where there will be opportunities for savings. The LDCs do a pretty good job of buying natural gas, so I don't think there's a lot of savings that can be extracted from the commodity portion. But I think there are savings that can be extracted on capacity, probably some savings that can be extracted if marketers have the opportunity to choose what services they want to purchase from the LDC to serve customers.

A PIPES COMPANY? I believe the LDCs eventually, by choice, will get out of the merchant function. We typically talk about the 'obligation to serve' and I believe there are two components: one is the obligation to deliver and the other is the obligation to supply. Right now LDCs are under the obligation to both deliver and supply.

I think what will happen over time is the LDCs certainly will keep the obligation to deliver (em they will be responsible for maintaining the distribution system, probably maintaining the meters, maybe even reading the meters. They will have the obligation to keep the pressure in the system. But they will not have the obligation to find the supply. That function will probably be bid on a competitive basis. The utilities will maintain a regulated function of delivering natural gas, but they won't be responsible for bringing that natural gas into the city gate.

The way that I envision this functioning, is that the LDC will be in close communication with whatever suppliers are serving customers on its system. When it's colder than normal and more gas is needed for the LDC to maintain system pressure, reliability and integrity, the LDC will go to the suppliers and tell them to bring more gas onto the system. If a supplier defaults, even for a short time, the LDC will go to the supplier of last resort¼ and say, "Supplier A defaulted or failed to deliver and I need more gas." It will be the SOLAR's function to deliver that gas. Then the SOLAR will seek compensation from the defaulting supplier. I think it's almost inevitable that the supplier of last resort will have some type of regulatory tie with the commission.

It gets [back] to an essential human needs function. I don't think people will be left without. I don't think commissions can or will allow that to occur. There has to be some sort of a safety net, but it makes just as much sense that the market may want to provide that function, and that's why I separate the obligation to deliver from the obligation to supply.

Vinod K. Dar, managing director and member of the board of directors, Hagler Bailly Consultants

ELECTRIC DEREGULATION. I see three impacts. First, natural gas consumption will go up because of the opportunity for both new merchant plants and repowering existing facilities using gas; and that means that more gas will flow through inter- and intrastate pipelines.

A second implication is that in the final consumer market, especially in residential and small business and some industrial applications, electric restructuring will make gas more of an intermediate product than a final product.

Electricity is both a customer and a competitor of the natural gas industry. The restructuring of the electric industry makes those relationships even more apparent. I think this is going to reorder the relationship of the gas industry to the electric industry.

The thing to remember is that natural gas per se will never be a consumer product in the real sense. From residential/small commercial customer's perspective, what they're really buying are devices and applications software that use gas, oil or electricity to deliver results. They don't view the molecules and electrons as consumer products.

The third impact I see is greater price pressure on gas, ironically. Because as gas gets pushed back in the value chain, the big buyers of gas will become increasingly important, and they will exert pressure on pricing. I can see gas volume going up, the margins of the gas industry going down somewhat, and total revenue stagnating as volume increases are offset by price pressure. I think that as bulk volume of gas goes up that will actually cause a further boost in capital spending for [exploration and production].

HOURLY PRICING. I think the price of gas will increasingly be driven by what happens in trading markets, not in generating markets. And because the response time for electricity is much faster than gas, it will cause the gas industry to start pricing on a much shorter time than it is pricing today. That will have the benefit of making gas prices more transparent and frequent to generators.

The issue with pricing really is measurement of information. I don't think there's anything inherent about gas that says you can't slice the gas into finer and finer intervals. I think contracts will be developed where the temporal unit for gas will be in hours and maybe even minutes. The gas industry will then have to make sure it adapts from an information technology perspective to be able to quote pricing on a much shorter temporal basis because the electricity industry will demand that.

There are two drivers in the timeframe. One is the pace of generation asset divestiture by electric utilities; that process will be mostly complete, in my view, in the next three years. The other driver is the pace of retail competition; retail unbundling is going to be a process that will occur over no less than five years. There has to be both gas and electric unbundling for there to be true competition. By choice I mean more than just buying the commodity.

CONSUMER SAVINGS? This is where people say, "Savings compared with what?" Look at other industries. Two things happen. First, customers look for getting the same thing they're getting cheaper. If the market is captured in the regulated transportation entities, then because the commodity is already deregulated there isn't much movement. So unless the distribution companies and the pipelines themselves are unbundled into many functions and each function is priced separately, the only room for savings is selling the commodity at cost. That's the first savings that will occur (em marketers will end up selling the commodity for no margin at all.

But the second big benefit comes from innovation and service. Consumers are better off in the second generation of competition, when people start focusing on non-commodity innovation; that also requires that there be enough unbundling of the conduit to permit some creative customized offerings.

What people have to bear in mind is that most customers don't want to pay for a commodity, no matter what your business is. They will essentially pay for attributes, features and results. Today if you tell a customer, "I can save you a little bit of money on the commodity," you will get a modest amount of attention. Tomorrow, when the marketers say, "We can come up with solutions for you in the areas of heat, light, humidity control, entertainment or liberating your time," there you get the customer's attention.

One of the mistakes the gas marketing industry has made is going to the customer and saying, "What do you want?" In a transforming market the customer can never articulate what he or she wants. But once they see it, they know it and they'll pay for it. No one knew customers wanted call waiting until the industry offered it to them in the telecom business, or that¼[customers] wanted Internet access, until someone gave it to them.

And the incumbents are always surprised, because they, like the customers, can never really imagine a world that is terribly different from today. So when a new entrant comes in and uses imagination as a competitive tool, that's when the game becomes interesting. And if the new entrants are going to be full of people recruited from the incumbents, it's hard to see where the imagination's going to come from. It's when the attackers start creating business models and marketing techniques completely divorced from the traditional gas industry, then there will be some real innovation. And I think when that happens total spending by consumers will actually go up.

A PIPES COMPANY? If by LDC you mean the regulated entity, I think its role will be to become a very efficient logistical company that provides access to the market and moves the molecules as cheaply and efficiently as possible¼ [making] its money by being efficient. I also think that the gas LDC, as such, is not really going to be an economic entity and eventually it will have to combine with other similar regulated entities such as electric and water distribution entities.

I can see the emergence of companies that say, when it comes to moving stuff that flows (em whether that's gas, electricity, water or bandwidth (em "We will be your provider of integrated logistical services, and we'll bundle it together, if you like, into a logistical service that moves all your content for you," but it won't provide the content. The content will come from someplace else.

The model here is, when you subscribe to different premium or pay cable channels, you don't go to different cable companies. The cable company offers the content to you; you the customer gets to decide what the content will be. If you're going to be in a capacity and logistics business, you might as well do it across scale and scope. In the world of [performance-based ratemaking], the way you make money is to become constantly more efficient.

Lori M. Rodgers is contributing editor to Public Utilities Fortnightly.

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