Two retail marketer bankruptcies in Georgia and the legislativeand regulatory retrenchment in California should take most of theblame for the slowdown in gas deregulation nationwide, according toMarie Lihn, principal economic analysis manager for the GasTechnology Institute (GTI) (see related stories this issue). Anationwide preoccupation with electric restructuring has not helpedthe gas cause either, she said in an interview regarding a new GTIstudy on gas deregulation.

“I think we were surprised at how slowly things were moving inthe gas industry,” said Lihn. “A lot of states have put things onthe back burner while they are concentrating on electricrestructuring. They don’t even want to consider gas restructuringwhen they are looking at electric.” Illinois is one state that fitsthat characterization, she said.

The GTI report, titled “Restructuring Activity Of Natural GasLocal Distribution Companies,” evaluates various factorsinfluencing efforts to open regulated gas markets, includingelectric restructuring, consolidation, convergence of gas andelectricity, the short-term focus of investors and the growth ofinformation technology. The report analyzes current restructuringactivity in every state.

“You think that the states would just follow along but they havereally slowed down,” said Lihn. “The electric industry is so muchbigger and has a larger impact on consumers. Georgia’s ongoingproblems with gas deregulation and the shifting regulatorysituation in California also are “making the other states a littlewary,” said Lihn.

“And I think that they are going very slowly to try and find outwhat to do about the merchant function. That’s the big issue thatno one has quite resolved. Should they make the LDCs exit themerchant function? The only state that has really tried it isGeorgia, and they’re the ones that have all the bankruptcies withtheir new marketers. It makes consumers a little concerned abouthow stable the market is and what the level of service is going tobe.”

While some LDCs have taken initiatives to open residential andcommercial market and to meet competitive threats, it is too earlyto determine how most LDCs will respond to existing market forcesand how the market will look in the long term, said GTI in astatement. However, based on discussions with industry executives,it seems likely that the industry will evolve toward one of thefollowing scenarios:

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

2. Household Retailing Convergence and Consolidation —Retailing of all products, including all energy products, isfundamentally altered by the Internet.

3. Efficiency Through Outsourcing — Local branding remainsmore important than national branding, so cost savings occur byspinning off utility functions to the most efficient provider.

4. Rebound of Regulation — The utilities retain or reacquiretraditional utility services and responsibilities.

“Of the four scenarios, the first (Energy Market Consolidationand Convergence) remains the most likely for the long term,” saidLihn. “Recent mergers and acquisitions activity in the industry(listed in an appendix to the report) demonstrate the marketmomentum toward this result. However, the Household RetailingConvergence and Consolidation scenario represents a strongpotential second scenario.”

While state-specific factors influence decisions about the rateand degree of unbundling activity, the annual residential naturalgas bill in any state was found to have a high correlation with theextent of unbundling activity. States with the most advancedunbundling programs are generally also the states with the highestresidential gas bills, GTI said.

The current climate could change significantly because ofsoaring gas prices this winter, said Lihn. “If these gas pricesstay firm, it could speed things up again. If they pass throughprices at $3.50 to $4 this winter then customers are going to thinkthat is way too high and are going to want some other way to gettheir gas supply.”

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

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

Rocco Canonica

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