Does it make good business sense to offer a service that brings in considerable revenue but virtually no profit?
In the past, special circumstances explained why local distribution companies (LDCs) sold natural gas to customers without earning a profit. But circumstances have changed. With the advent and proliferation of gas transportation services, it is time to reassess the business.
Up a Tree
That LDCs sell as well as distribute gas stems from three historic elements: the obligation to serve; the notion of
bundled service; and cost-of-service regulation.
While the obligation to serve was rarely stated explicitly in statutes, over the years it became well-established in the regulatory compact. In essence, that compact granted the LDC an exclusive right to provide natural gas service within a defined territory. In exchange, the LDC complied with rates, terms, and conditions of service approved by a state public utility commission (PUC). As sole supplier of fuel and transportation, the LDC saw no compelling reason to unbundle the price into separate components.
Meanwhile, cost-of-service regulation guaranteed a reasonable opportunity to recover prudently incurred expenses, plus a reasonable return on capital investment. Rate design broke costs down into specific charges for each customer class, but treated the cost of gas as a simple expense. Thus, unless the LDC invested capital for items such as peak-shaving or storage facilities, its gas sales would normally have no direct tie to profitability. Since the price of gas often displayed greater short-term volatility than other expenses, many PUCs allowed monthly adjustments to gas prices to track