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EIA: LDCs Losing Market Share to Pipelines

The local distribution company (LDC) continues to be the "backbone of the natural gas distribution network" in the United States, although the level of natural gas deliveries by LDCs has dropped by 15% since 2000 as large-volume customers, particularly power generation facilities, have switched to mainline pipeline systems for their natural gas supplies, the Energy Information Administration (EIA) said in a new report.

LDC operations in 2006 accounted for approximately 60% of the nearly 20 Tcf of natural gas delivered to four principal customers groups: residential, commercial, industrial and electric power generation, while the remaining 40% was delivered to end-users via mainline pipeline systems, according to the EIA report, which was issued in late June.

The EIA reported that pipelines supply about 98% of the natural gas volumes consumed by electric power generation facilities, which currently account for about 6.2 Tcf, or 31% of all end-use gas consumption. Pipelines also provide about 55% of the natural gas consumed by industrial users, although they account for only 2% of commercial customer deliveries.

More than 1,500 companies are involved in the natural gas distribution process, and they come in all forms -- investor-owned utilities, privately owned LDCs, municipal utilities and cooperatives, as well as intrastate and interstate pipelines. Pipelines provide direct service mostly to large-volume end-users, but the bulk of the natural gas transported by pipes usually reaches end-users via LDCs.

"Although LDCs still account for almost two-thirds of all the natural gas delivered to end-users, over the past 10 years their portion of the market has declined as the natural gas end-use market and its operating environment have changed under the influence of market restructuring. In 1996 LDCs accounted for 71% of the deliveries of natural gas to end-users; by the close of 2006 that had fallen to 60%. Moreover, volumes delivered by LDCs declined by 16% despite the fact that the number of customers served by LDCs increased by eight million, or about 14%, during the [10-year] period," the EIA report said.

The changes were precipitated by the increased competition between LDCs and gas pipeline companies as a result of market restructuring and open-access transportation, as well as the greater opportunities for large-volume natural gas users to contract directly with mainline pipeline companies, the agency noted.

"The natural gas end-use market looks quite different than it did 10 years ago. During that time natural gas as a fuel for electric power generation increased significantly while its use in all other sectors decreased. In 2006 the total volume of natural gas delivered to electric power generation users was on the verge of overtaking industrial end-use for the first time," the report said.

"Between 2000 and 2006, deliveries of natural gas to ultimate end-users declined by 6% from 21.2 Tcf to 19.9 Tcf. This decline occurred even as the number of natural gas end-users increased by almost six million, or 9%, during the period, as residential, commercial and industrial users responded to higher natural gas prices by using less natural gas."

For instance, per-customer use in the residential sector in 2000 was an estimated 84 Mcf annually, down 12% from 95 Mcf in 1996, the agency said. By 2006 that average had fallen to 68 Mcf, for an overall decline of 28% since 1996. Similarly, average commercial customer use dipped by 20% between 1996 and 2006, with 15% of this decline [occurring] between 2000 and 2006.

Average industrial use decreased by 25% between 1996 and 2006, with a decline of 20% occurring between 2000 and 2006, according to the EIA. During that same decade, the demand for natural gas as a fuel for electric power generation rose 130%, from 2.7 Tcf to 6.2 Tcf a year. The electric power generation sector was the only end-use sector to see an overall increase in gas deliveries since 2000.

Because electric power plants have built their facilities to link to pipelines, the percentage of all gas deliveries to power generation plants via pipeline systems grew to 98% in 2006, compared with 80% in 2000, the EIA said. The share of deliveries to electric power plants via interstate pipelines alone (excludes intrastate pipes and others) rose to 43% in 2006 from 27% in 2000, while the percentage of deliveries to power plants by LDCs dropped to 25% from 42%.

The EIA said intrastate gas pipeline companies increased their share of total deliveries to industrial users by 6%, although overall deliveries of natural gas to industrial customers fell by more than 20%, or 1.6 Tcf, between 2000 and 2006. "Intrastate pipeline deliveries to industrial customers stood at 33% in 2006, up from 27% in 2000. This increase was partly because intrastate pipeline companies in some states successfully mimicked their interstate counterparts and became full or partial open-access transporters in an effort to stay competitive and attract these large-volume customers. Investor-owned LDCs, however, continue to account for the largest portion of natural gas deliveries in the industrial market, at about 48%."

But the share of total natural gas deliveries by investor-owned LDCs fell to 55% from 62% between 2000 and 2006, according to the EIA. "Loss of market share to, and competition from, pipeline companies in supplying large-volume natural gas customers accounted for a sizable portion of this drop-off. Nevertheless, natural gas deliveries by investor-owned LDCs still accounted for 92% of the total volumes delivered to end-users by LDCs in 2006, an average of about 181 Mcf per customers, compared with 167 Mcf per customer by other types of LDCs."

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