In October AGL Resources will become the first gas utility in the U.S. to completely exit the gas merchant function, but its transformation is far from over, AGL CEO Walter Higgins said last week. Higgins expects his company to be snatched up like the first pie out of the oven, probably by some hungry electric firm eager to get its hands on a utility that has emerged from deregulation relatively well done.

“I’d be very surprised if we’re not consolidated somehow,” Higgins told NGI, following a speech at the Natural Gas Roundtable in Washington, D.C. “There are so many different people that call me all the time about [merging]: foreign companies, electrics, other gas companies. Everybody sees what’s going on, and nobody is missing the point that you need to get bigger if you want to be competitive.

“I’d say we won’t look like we do in two years. That doesn’t mean we’re going to announce a merger tomorrow,” he said. “But I wouldn’t be surprised if we’re not in some sort of alliance, whether strategic or not, or some sort of a merger, or somebody just plain acquires us within the next couple years.” The latter is probably most likely to happen. “There’s no way we could ever buy-unless we suddenly declared ourselves AGL.com and created some phantom revenues and got a 100-to-1 P/E ratio. Any electric company that you can imagine, even the smallest of them like Scana or Tampa Electric, are huge by comparison to us,” he noted.

But AGL is used to change. It’s a far different company today that it was only 12 short months ago. Last November, systemwide customer choice began behind AGL’s citygate, and earlier this year the Georgia Public Service Commission and the state legislature ordered that all of AGL’s 1.4 million gas customers switch or be assigned to marketers by October. So far, 850,000 customers have switched to buy gas from the 20 or so marketers operating in the state.

“The journey has been observed by all…judged by some…and misunderstood by as many,” Higgins said. “It is a road that has taken us – and perhaps our industry – farther and faster than we ever could have imagined. In just the span of twelve months, we will have helped almost one-and-a-half-million customers move from a completely regulated structure to one that offers them an endless array of choices in supply, terms, pricing and packaging. It took the telecommunications industry a decade to do the same – and many electric choice pilots are still analyzing the data from market tests. By October, our market transformation will be complete… The experiences we have gained at AGL have been unique in the industry.”

Higgins urged other LDCs to use AGL’s experience as a map of the road to deregulation. The road has “its share of hazards, unexpected turns and even accidents. We had a few incidents along the way that were accidents waiting to happen – and there are signs that can alert you to them: such as ‘Check gas – next service station 50 miles.’

“We did not anticipate that the process would generate a lot more phone calls and requests for information by our customers,” he said. Most LDCs expect some increase in customer calls, but Higgins said calls to AGL more than doubled.

Another sign AGL encountered read “‘Watch for Ice on Bridges.’ We made some changes to our rate structure that had good strategic intent but were not well-explained in advance to our customers.” That turned out to be a costly mistake. AGL put in a purchased gas rate structure last winter that separated commodity charges from fixed pipeline and storage costs. Rapid customer migrations triggered accounting changes, however, that sent customer bills higher at a time when warm winter weather was expected to reduce customer payments. As a result AGL was ordered to switch back to volumetric rates and ended up having to refund customers $14.5 million (see NGI Feb. 1).

AGL still is encountering hazards on this last stretch of road to complete deregulation. “The pace of customer migration has been so rapid, much faster than anyone planned during the unbundling hearings and the rate-setting process, that AGL actually is not keeping pace with the change,” Higgins added. Although he didn’t provide any figures, he said the transformation is costing AGL a bundle this year because the regulatory mechanisms set up to reduce AGL’s revenue as merchant customers depart are “not in sync with the reality of the market. We’ll file with the commission for some way of mitigating that problem because right now we’re sustaining costs that are not covered in our rates and that’s not right,” he said.

Some of these hazards could have been avoided, he said, if “everyone involved had just taken some scheduled time-outs to get our bearings, assess progress and identify problems.” This includes the marketers, the regulators and AGL, he said.

But the lessons AGL has learned will be put to use in shaping its future. One discovery that’s still yielding dividends was the important realization that there’s a significant market for top-of-the-line distribution services to other LDCs that are facing deregulation. AGL’s new affiliate, UtiliPro, was created to provide back-office services to utilities, but already it is becoming a leader in providing those types of services to marketers in Georgia and Canada.

The scale of the Georgia program also allowed AGL to evaluate a variety of promotional and merchandising ideas. “From where I sit, it was apparent that customers paid a lot of attention to price and promotion, but not exclusively. In fact, the program was an exercise of all the different attributes or product packages that motivate customers – security, stability, price, incentives and more.” He said Scana’s $50 grocery certificate, presence at community events and multiple local offices were particularly effective in attracting customers. Shell made effective use of its brand name. And AGL’s affiliate SouthStar Energy Services LLC, a joint venture with Dynegy and Piedmont Natural Gas, made good use of its local market presence and track record of performance.

SouthStar, which sells gas in Georgia under the name Georgia Natural Gas, began marketing in the state during the first quarter of this year and currently holds a 35% market share. Higgins said the company learned valuable lessons in Georgia and plans to target Virginia next and possibly other states in the region. He said SouthStar probably will attempt to form alliances with other local or regional retail marketing operations in an effort to capture that local appeal and performance track record.

With the knowledge gained in Georgia AGL believes it can become a significant force in the growing retail market. It is de-emphasizing wholesale marketing by exiting its wholesale energy marketing joint venture with Sonat. The venture lost AGL money in the first two quarters of its current fiscal year and will have a negative impact on total earnings for the year.

“We’re certainly behind the eight ball in Sonat Marketing because we lost money, as was reported in the first and the second quarter. On the other hand, the Street has us earning in the $1.30/share range this year and that’s probably possible.”

“For our part, I am satisfied we made the right decisions and we are on the right course,” Higgins said. “We are now free of many artificial constraints or influences that can clutter a market-based strategy. We are in a relentless quest to develop our distributions and marketing businesses separately and identify the real value of those businesses on their own merits.”

Rocco Canonica

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