In less than a decade, three powerful trends will converge on gas distributors. These trends promise to transform local distribution companies (LDCs) beyond recognition, whether municipal or investor-owned.
Few LDC executives and Board members today care to acknowledge these trends. Many find it more comforting to ignore, deny, or misconstrue their impact. But LDCs, having led a sheltered life, now confront a truly defining moment. These trends represent threats to survival. Right or wrong choices can lead to assertive prosperity or befuddled extinction.Threat #1 - Electric Competition
The electric utility industry ($200 billion a year in sales) is restructuring from a lumbering, high-cost business into a competitive provider of electricity and regulated services. This transformation will create powerful unregulated merchants intent on unearthing every conceivable business opportunity among energy consumers. Transmission and distribution firms will maximize deliveries; commodity power generators operating at high capacity will pump electricity under an array of pricing arrangements tailored to capture market share.
Technological and service innovation will explode. Next-generation metering, billing, and customer service systems will accompany efficient electro-technologies-not just for large industrial customers, but also residential and commercial users as well. This potent combination of customer service and product innovation-anchored by steadily falling prices at the meter-will turn electricity into the energy form of choice. Gas distributors will face threats aimed both at industrial users and their core base of institutional, commercial, and residential consumers.
When the gas executives think of electricity, they tend to focus on independent power generation is an unalloyed opportunity. They overlook the transformation of the electricity industry-potentially an even bigger business hazard.Threat #2 - LDC Deregulation
The third wave of natural gas deregulation is now sweeping over LDCs from California to New Jersey. The first wave deregulated gas at the wellhead and in bulk sales. The second wave targeted pipelines: Ending their merchant role, unbundling their services, and creating property rights in transportation and storage capacity. The consolidation is by no means complete.
Natural gas distribution remains highly fragmented. Almost 2,000 distinct entities populate the business; about half are investor-owned and heavily regulated by state utility commissions (PUCs). The largest LDC accounts for less than 5.5 percent of deliveries to final consumers; the ten largest account for less than 20 percent. The vast majority of LDCs (investor-owned and municipal) deliver less gas than most unregulated gas marketers.
This third wave (deregulation of distribution) will wither away any regulated sales to the middle market (e.g., schools, hospitals, hotels, apartment complexes). The first two waves brought competition to over 80 percent of the components of delivered price paid by bulk users, but only 40 to 50 percent of the delivered middle market price (and, on average, less than 40 percent of the residential burnertip price). The third wave will attack the rest of the delivered price by supplying unregulated merchants with unprecedented access to the middle market meter (to be followed by the residential meter). Incipient unregulated retail merchants will campaign hard to unbundle LDC tariffs. The merchant will operate free from traditional administrative functions, exposing high cost structures of LDCs. These