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GA Bankruptcies, CA Woes Hinder Deregulation

GA Bankruptcies, CA Woes Hinder Deregulation

Two retail marketer bankruptcies in Georgia and the legislative and regulatory retrenchment in California should take most of the blame for the slowdown in gas deregulation nationwide, according to Marie Lihn, principal economic analysis manager for the Gas Technology Institute (GTI) (see related stories this issue). A nationwide preoccupation with electric restructuring has not helped the gas cause either, she said in an interview regarding a new GTI study on gas deregulation.

"I think we were surprised at how slowly things were moving in the gas industry," said Lihn. "A lot of states have put things on the back burner while they are concentrating on electric restructuring. They don't even want to consider gas restructuring when they are looking at electric." Illinois is one state that fits that characterization, she said.

The GTI report, titled "Restructuring Activity Of Natural Gas Local Distribution Companies," evaluates various factors influencing efforts to open regulated gas markets, including electric restructuring, consolidation, convergence of gas and electricity, the short-term focus of investors and the growth of information technology. The report analyzes current restructuring activity in every state.

"You think that the states would just follow along but they have really slowed down," said Lihn. "The electric industry is so much bigger and has a larger impact on consumers. Georgia's ongoing problems with gas deregulation and the shifting regulatory situation in California also are "making the other states a little wary," said Lihn.

"And I think that they are going very slowly to try and find out what to do about the merchant function. That's the big issue that no one has quite resolved. Should they make the LDCs exit the merchant function? The only state that has really tried it is Georgia, and they're the ones that have all the bankruptcies with their new marketers. It makes consumers a little concerned about how stable the market is and what the level of service is going to be."

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, said GTI in a statement. However, based on discussions with industry executives, it seems likely that the industry will evolve toward one of the following scenarios:

1. Energy Market Consolidation and Convergence --- Electric and gas utilities merge on a large scale, resulting in only 10-20 large combination utilities.

2. Household Retailing Convergence and Consolidation --- Retailing of all products, including all energy products, is fundamentally altered by the Internet.

3. Efficiency Through Outsourcing --- Local branding remains more important than national branding, so cost savings occur by spinning off utility functions to the most efficient provider.

4. Rebound of Regulation --- The utilities retain or reacquire traditional utility services and responsibilities.

"Of the four scenarios, the first (Energy Market Consolidation and Convergence) remains the most likely for the long term," said Lihn. "Recent mergers and acquisitions activity in the industry (listed in an appendix to the report) demonstrate the market momentum toward this result. However, the Household Retailing Convergence and Consolidation scenario represents a strong potential second scenario."

While state-specific factors influence decisions about the rate and degree of unbundling activity, the annual residential natural gas bill in any state was found to have a high correlation with the extent of unbundling activity. States with the most advanced unbundling programs are generally also the states with the highest residential gas bills, GTI said.

The current climate could change significantly because of soaring gas prices this winter, said Lihn. "If these gas prices stay firm, it could speed things up again. If they pass through prices at $3.50 to $4 this winter then customers are going to think that is way too high and are going to want some other way to get their gas supply."

Questions about the report or ordering should be addressed to Kelly Murray, GTI Baseline Center, Arlington, Va., at (703) 526-7832 or by e-mail: baseline@gri.org. The report is $250 for GTI members and $325 for nonmembers, plus shipping and handling.

GTI, based in the Chicago area, was formed in April by the combination of Gas Research Institute and the Institute of Gas Technology.

Rocco Canonica

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