Gas Travelling under “Choice” Reflects Increasing Competition

Bruce McDowell

ompetition is increasing in the natural gas C industry, as evidenced by the fact that more than three-fourths (77 percent) of the natural gas consumed in the United States can be purchased from sources other than the local natural gas utility, under current and proposed programs. In 1997, the most recent year for which com- plete data are available, 58 percent of all gas consumed in the United States actually was bought under a “customer choice” option.

Competition is increasing in the natural gas industry - . .

“Customer choice volumes” are defined as the amounts of natural gas purchased by end- use customers from sources other than tradi- tional natural gas utilities. These alternative supply sources include marketers, producers, pipelines, gatherers, industrial corporations, and other nonutility organizations. Gas is trans- ported to these end-use customers through gas- utility systems that offer transportation services, through interstate and intrastate pipelines, gathering systems, and private distribution/ pipeline systems.

Natural gas. utilities and/or state officials have implemented customer choice programs in virtually all states, including programs down to the residential level in 23 states and the District of Columbia.

Not surprisingly, customers who buy the largest volumes of natural gas have the greatest opportunities to purchase their supplies from

Bruce McDowell is director of policy analysis for the American Gas Association. His previous experience includes positions at Washington Gas Co. and the Federal Energy Regulatory Commission.

someone other than the local utility. Customer choice is available for 97 percent of electric- utility gas volumes and 92 percent of industrial volumes (see Exhibit 1). In 1997,88 percent of all gas consumed by electric utilities was pur- chased under this option, as compared with 89 percent of all industrial gas consumed.

Natural gas utilities and/or state officials have

implemented customer choice programs in virtually

all states. - . In the commercial sector, the customer

choice option is, or soon will be, available for two-thirds (66 percent) of all commercial gas volumes. One-third of the natural gas consumed by commercial customers was actually pur- chased under a choice option in 1997.

At the residential level, 44 percent of the natural gas consumed in households is available for purchase from a nonutility supplier. In 1997, residential programs were just getting started, and slightly more than 1 percent of residential gas was purchased through choice programs. However, it is worth noting that the proportion of residential customers who actually switched natural gas suppliers rose to 19 percent of those eligible by mid-1999.

Competition Evolves in the Natural Gas Industry

Government officials, many businesses, and some consumers have asked that customer purchase options increase, particularly in those industries in which government regulation has historically limited competition. Recent regulatory changes in the airline, trucking, inter- state natural gas pipeline, and long-distance

NATURAL GAS OCTOBER 1999 0 1999 John Wiley & Sons, Inc.

telephone industries have increased customer choice options. Efforts to deregulate services at the local level are now being promoted in the electric, telephone, and natu- ral gas utility industries.

While competition among local electric and telephone companies is relatively lim- ited, the customer service op- tions offered by local natural gas utilities have increased dramatically during the past 16 years. The competitive pace picked up in 1985, after FERC implemented regulations that promoted open access to transportation on the inter- state natural gas pipeline system for all gas buyers.

. . . customer service options offered by local naturai gas

u t i I i t ies have in creased dramatically during the past

16 years.

Current Customer Choice Purchases In 1997 (the most recent year for which

complete data are available), customer choice volumes accounted for 58 percent of end-use customers’ natural gas purchases (see Exhibit 1). The majority of these purchases were made by electric-utility and industrial concerns that consume large volumes of gas. Many gas utili- ties have a minimum volume requirement for customers to qualify for transportation service, which these larger customers can meet. In addition, some large-volume customers have developed in-house expertise required to pur- chase and manage their energy needs, or they have hired a third party to handle these func- tions. Industrial customers purchased 89 per- cent, or 7,827 billion cubic feet (Bcf), of their total gas consumed from third parties in 1997. Electric utilities purchased 88 percent (2,622 Bcf) of their gas from nongas-utility sources.

To date, commercial customers have been less likely to use gas-utility transportation ser- vices or to purchase gas directly from nongas- utility sources. Limited expected savings, low consumption levels, lack of gas purchase exper-

tise, and overall satisfaction with gas-utility services are some of the factors that inhibit customers from using these nontraditional op- tions. However, purchase options for these customers are increasing, and in 1997 33 percent of all commercial gas was purchased from nongas-utility sources.

Potential Customer Choice Purchases The American Gas Association (AGA) esti-

mates that as of August 1999, at a minimum, 77 percent of natural gas volumes consumed annually could be purchased from nongas- utility sources. It is worth noting that many customers opt to continue purchasing their natural gas supplies from their local utility, often because the utility offers competitive prices and/or services.

- . many customers opt to continue purchasing their

natural gas supplies from their local utility - . .

Many small-volume customer transporta- tion pilot programs are not fully subscribed despite only allowing a limited number of participants. A recent report from the National Regulatory Research Institute (NRRI) indicated that low participation rates during the initial

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years of these programs is typical for industries undergoing restructuring. The NRRI report said in part:

The inception of choice for small customers inevitably requires a transition during which the immaturity of a market effectuates out- comes that should not be expected to reflect long-term customer behavior. The fact that customer participation may be feeble over the initial years of a program should not necessarily be interpreted as disappointing. Experiences with other sectors undergoing transformation toward competition custom- arily show that residential and other small customers, while not inert, require time, perhaps several years, to accept and take advantage of new market opportunities.'

A portion of the estimate of potential cus- tomer choice that is as yet unused results from programs that are proposed or not yet fully implemented. Many gas utilities are expanding their service options to offer transportation services to smaller commercial and residential customers. In states such as Iowa, New York, New Jersey, and Pennsylvania, regulations were enacted to extend customer choice to all cus- tomers of major gas utilities. In addition, selected gas utilities in California, Georgia, Mas- sachusetts, New Mexico, Ohio, and Oklahoma have extended, or have proposed extending, customer choice to all customer classes.2

as Utilities are expanding their service

options to offer transportation services to smaller

commercial and residential customers.

Based on programs that are currently opera- tional or announced, 97 percent of all electric- utility customers and 92 percent of all industrial customers will have customer choice. Addition- ally, at least 66 percent of all commercial customers and 44 percent of all residential customers also will have the option to choose their gas supplier.

Customer Profile Larger-volume natural gas customers in each

sector are most likely to exercise customer choice. Annual customer choice volumes per customer average 7 to 32 times that of the comparable customer sector that purchases gas from gas utilities.

Larger-volume natural gas customers in each sector are

most I i kely to exercise customer choice.

The commercial class had about 313,000 end-users that purchased gas from nongas-utility

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sources compared with 4.7 million traditional gas-utility customers in 1997. The average an- nual use per customer choice end-user was 3,323 thousand cubic feet, compared with 461 thousand cubic feet for traditional gas- utility customers.

More than 45,000 end-users in the industrial sector purchased gas from nongas-utility sources compared with 193,000 traditional gas-utility customers. Average use in 1997 for customer choice patrons was 169,000 thousand cubic feet compared with 5,260 thousand cubic feet for traditional gas-utility customers. Customer choice patrons in the West South Central (WSC) region had the largest average use per industrial cus- tomer in 1995 (1.1 Bcf), and also accounted for almost half of the total customer choice volumes (see Exhibit 2). Large gas-consuming indus- tries (e.g., chemical, refining) locate in that region, in part, due to the availability and price of natural gas.

An equal number of electric utilities pur- chased customer choice gas compared to those that purchased gas from gas utilities (484) in 1997. The use per customer was more than seven times higher for customer choice patrons (5.3 Bcf) compared with traditional gas-utility purchasers (0.7 billion cubic feet).

Larger gas consumers are more likely to use customer-choice options for several reasons. Their gas purchases account for a larger per- centage of overall expenditures, so they are motivated to seek out multiple supply options or locate in producing regions to obtain a competitive gas price. These customers are more likely to devote the time and resources required to assume gas purchase responsibility. Larger gas consumers also are more likely to meet minimum thresholds of some gas-utility transportation programs.

Regional Profile Exhibit 2 illustrates the proportions of com-

mercial customer choice volumes by census region. Customer choice volumes ranged from 17 percent (Mountain) to 50 percent (West South Central). Commercial gas customers in four regions (New England, Middle Atlantic, East North Central, and Pacific) purchased more than a quarter of their gas from nongas- utility sources.

The West South Central region (Arkansas, Louisiana, Oklahoma, and Texas) exhibited the

highest ratio of natural gas volumes available for choice by industrial customers in 1997. This high ratio resulted from the massive volumes of natural gas consumed by large industrial cus- tomers in this energy-producing area and from the well-established interstate and intrastate pipeline systems. The lowest relative customer choice ratio, 68 percent, was found in New England (Connecticut, Maine, Massachusetts, New Hampshire, &ode Island, and Vermont), due in part to the limited number of pipelines serving the region. The remaining regions aver- aged customer choice ratios between 70 and 90 percent.

. . . West South Central region (Arkansas, Louisiana, Oklahoma, and Texas)

exhibited the highest ratio of natural gas volumes available

for choice - . -

For customer choice programs for electric utilities, the Middle Atlantic region exhibited the lowest customer choice ratio of 20 percent. In this region (New Jersey, New York, and Pennsylvania), most of the traditional gas-utility sales to electric utilities were made by combina- tion gas and electric companies. The rest of the regions exhibited ratios from 84 to 99 percent. Electric utilities in four regions (Mountain, West South Central, East South Central, and South Atlantic) purchased almost all of the natural gas from nonutility sources.

ustomers have increased tural gas purchases from nongas-utility sources substantially since the

early 1980s.

A snapshot of all three sectors (electric utility, industrial, and commercial) finds that most of the ratios ranged from 55 percent (Middle Atlantic) to 70 percent (Mountain and East South Central). The West South Central exhibited the largest ratio (94 percent) due to its high proportion of industrial and electric- utility volumes relative to its commercial and

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residential gas use. The Pacific region exhib- ited the next-highest ratio (79 percent) because of its high customer choice gas pur- chases in the commercial, industrial, and electric-utility sectors.

Trends in Customer Choice Purchases Customers have increased natural gas

purchases from nongas-utility sources substantially since the early 1980s. While his- torical customer choice volumes are not avail- able, natural gas transportation volumes can act as a surrogate for determining trends. Transportation volumes, which are defined as deliveries of gas for the account of others, comprised 88 percent of customer choice vol- umes in 1997. Although most of these deliver- ies were made by gas utilities and pipelines, gatherers, private companies, and others also transport gas to end-users.

. . . gatherers, private companies, and others also transport gas to end-users.

Exhibit 3 illustrates the growth in trans- portation volumes from 1982 to 1997. These volumes increased roughly sixfold in that period. Growth has been relatively steady over the period, but the greatest increases

occurred after 1985, when FERC issued Order 436, promoting transportation of gas pur- chased by sources other than the interstate natural gas pipelines. FERC later issued Order 636, requiring interstate pipelines to “un- bundle” their gas sales, transportation, and storage services. Both orders stimulated cus- tomer choice natural gas purchases.

Comparison to AGA’s 1998 Report Overall, the proportional levels of cus-

tomer choice volumes remained relatively constant over the past two years. The indus- trial 1997 customer choice level increased one percentage point relative to 1996 levels, while the electric-utility value fell one percentage point. The commercial choice levels increased substantially in both volumetric (an addi- tional 313 Bcf) and percentage terms (an increase of 10 percentage points), most likely due to increased number of utilities’ choice programs in 1996 and 1997. Overall, the proportion of total customer choice volumes increased 1 percent.

- . . increased number of utilities’ choice programs in

1996 and 1997.

The proportional levels of potential cus- tomer choice volumes increased since last

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year’s report because of the announcements of additional choice programs by utilities. The minimum level of potential customer choice available stayed the same for both the electric- utility sector (97 percent) and the industrial sector (92 percent) compared to 1996 levels. The opportunity to choose a supplier ex- panded in both the commercial sector (from 57 percent to 66 percent) and the residential sector (from 31 percent to 44 percent). Overall, the customer choice proportion for all custom- ers rose from 71 percent to 77 percent during the year.

Notes 1. Costello, Ken, Household Participation in Gas Cus-

tomer Choice Programs: Some Facts, Explanations, and Lessons Learned p. 45 (National Regulatory Re- search Institute, Columbus, OH, January 1997).

2. American Gas Association, Providing New Services to Residential Natural Gas Customers: A Summary of Customer Choice Pilot Programs and Initiatives, 1998 Update p. 2 (American Gas Association, Arlington, VA, May 7, 1998).

Appendix-Methodology for Customer Choice Data

This article relies primarily on data from the Energy Information Administration’s (EIA) Form 176, “Annual Report of Natural and Supple- mental Gas Supply and Disposition,” 1997 data. All receivers (except end-users), trans- porters, and sellers of natural gas must com- plete this form. Information was accessed through EIA’s query system for this data.

Traditional sales by gas utilities included companies self-identified as investor-owned distributors and municipally owned distribu- tors. For this analysis, sales by survey re- spondents that are cooperatives, districts, authorities, or otherwise classified as local distribution companies in Brown’s Directory’ were also included in the traditional gas- utility sales category. Part of the customer choice volumes were composed of gas sales and deliveries to end-users by nongas utili- ties (pipelines, producers, gatherers, inte- grated oil and gas companies, substitute natural gas plant and storage operators, and other companies). The remainder of cus- tomer choice volumes was composed of deliveries to end-users by all company types for the account of others.

The volume estimate for minimum poten- tial customer choice was based on recent unbundling activities by gas utilities and states. The residential estimate was calculated in AGA Issue Brief 1999-5. Estimates for the commercial, industrial, and electric-utility sec- tors were determined by identifying gas utili- ties or states that had recently announced or implemented transportation programs or poli- cies. The appropriate volume of sales by sector for the affected gas utilities were then summed to obtain a potential customer choice number. For example, Connecticut, New Jer- sey, and New York recently implemented policies that require gas utilities in those states to offer transportation services to commercial and larger customers, and the 1997 direct sales by gas utilities in those states to those sectors were included in the potential cus- tomer choice number. In some instances, unbundling efforts are being implemented by specific gas utilities, so the affected 1997 sales for those gas utilities were included in the potential number.

The minimum estimate does not include all potential customer choice volumes. Most gas-utility transportation programs require that customers meet or exceed a specified con- sumption level, either on a monthly or annual basis. Many customers that qualify for that service elect to purchase gas from their gas utilities, but this amount could not be calcu- lated with the information on hand. Thus more customers are eligible for, but do not use, customer choice volumes than are estimated herein.

Multiyear trends were approximated us- ing data from EIA’s Natural Gas AnnuaL2 EIA reports natural gas transported and delivered to consumers for the account of others, which is the major component of customer choice gas (88 percent in 1997). This information is broken out by sector. The industrial and electric-utility sector’s numbers have been reported since 1982. The commercial sector numbers have been reported since 1987.

Notes 1. Brown’s Directory of North American and Interna-

tional Gas Companies, (Advanstar Communications, Cleveland, OH, 1997).

2. Energy Information Administration, Natural Gas An- nual, (Department of Energy, Washington, D.C., vari- ous years).

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