Gas unbundling most advanced in high-cost states

Most large-volume natural gas customers can choose a natural gas supplier, and increasingly residential and commercial customers have begun to participate in programs that allow a choice of natural gas distribution suppliers, says the Gas Technology Institute. States in which natural gas prices were high have pursued deregulation and unbundling more aggressively than states in which prices were relatively low, says Marie Lihn, GTI principal economic analysis manager.


Most large-volume natural gas customers can choose a natural gas supplier and increasingly residential and commercial customers have begun to participate in programs that allow a choice of natural gas distribution suppliers, says the Gas Technology Institute (GTI)

States in which natural gas prices were high have pursued deregulation and unbundling more aggressively than states in which prices were relatively low, says Marie Lihn, GTI principal economic analysis manager, in a new study of restructuring activity among local distribution companies (LDCs).

Among the study's findings:

� Consolidation is creating economies of scale and also offers an LDC a method of acquiring skills it may lack.

� Natural gas companies are facing intense competition from other energy sources. In particular, competition with electricity is likely to intensify dramatically as the electric industry continues to restructure.

� Companies, including nonutility energy companies, are positioning themselves to become total energy providers, involved in all aspects of energy acquisition, management, and use.

� Management is focusing on short-term results to show growth in the near term. Objectives can be either revenue growth or earnings growth. Given the nature of energy as a mature industry, top-line growth requires expansion of an LDC's service territory. Bottom-line growth requires a reduction in unit costs.

� Computers and communication technology are allowing companies to employ data management techniques in every LDC functional area, from customer billing to gas supply management. With such technology, a company can offer metering, billing call centers, and other services, either selling the services to the utility in an outsourcing arrangement or selling the service directly to the customer.

While some LDCs have taken initiatives to open residential and commercial market and to meet competitive threats, it is too early to determine how most LDCs will respond to existing market forces and how the market will look in the long term, says Lihn.

However, based on discussions with industry executives, she says, it seems four potential paths are the most probable:

� Electric and gas utilities will merge on a large scale, resulting in only 10-20 large combination utilities.

� Product sales, including energy products, will be fundamentally altered by the internet.

� Local brands will remain more important than national brands; therefore, cost savings will occur by spinning off utility functions to the most efficient provider.

� Utilities will retain or reacquire traditional utility services and responsibilities.

Of the four scenarios, energy market consolidation and convergence remains the most likely for the long term, says Lihn. Recent merger and acquisition activity in the industry demonstrates the market momentum toward this result, she explains. However, she says, the household retailing convergence and consolidation scenario represents a strong potential second scenario.

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