Natural Gas Distribution Companies at Risk of Losing Competitive Ground in Both Heating and Cooling Markets

Strategic Insights -

As electric industry restructuring continues, natural gas distribution companies (LDCs) in the Central and Mid-Atlantic regions of the U.S. are at the greatest risk of losing competitive ground in both their heating and cooling markets. A study released by Richard J. Rudden, President of R.J. Rudden Associates, Inc. (RJRA), at an American Gas Association conference warns that the risks are greatest in these markets, but electric restructuring poses a major competitive threat to gas utilities in the vast majority of markets. The study analyzed the price at which competitively marketed power could be delivered during the summer and winter seasons to end-use customers in each of three market segments (residential, commercial, and industrial), and within each of the nine North American Electric Reliability Council (NERC) regions.

Key Takeaways:

  • The Competitive Price Change Index (CPCI) measures the relative degree to which the present natural gas price advantage over electricity would be diminished (denoted by an index with a negative value) or improved (a positive CPCI).
  • The study found that both summer and winter natural gas markets are at risk in a number of regions, with the year-around residential gas markets most at risk contained within MAIN, MAAC, NPCC, and ERCOT.
  • The commercial sector's year-around markets most at risk are within the MAIN and MAAC regions, with MAIN and MAAC appearing to be the biggest potential losers within the combined residential and commercial sector.
  • Winter natural gas loads are threatened in the vast majority of market segments and regions, but a number of regions present distinct opportunities for hedging increased winter market risks through summertime natural gas cooling.
  • The summertime gas price advantage in SERC, ECAR, SPP, and MAPP could improve by between 12 to 30 percent, thereby substantially enhancing the energy cost component of the life cycle economics of gas air conditioning in these regions.
  • If gas companies could price their summertime rates closer to their marginal supply costs, their summertime price advantage could be improved even more.

Statistics:

  • The CPCI index shows the following relative degree of change in natural gas prices compared to electricity:

+ Residential customers: -0.60 to 0.30 (MAIN region)

+ Commercial customers: -0.48 to -0.05 (MAIN and SERC regions)

+ Industrial customers: -0.37 to 0.55 (SERC and MAAC regions)

  • The study found that the regions with the greatest risk of losing competitive ground are MAIN and MAAC, with a risk of losing 60-40 percent of the present natural gas price advantage over electricity.

Sources:

  • Richard J. Rudden, President of R.J. Rudden Associates, Inc. (RJRA)
  • American Gas Association conference
  • Business Wire article, October 25, 1995
  • R.J. Rudden Associates, Inc. (RJRA) press release