DEREGULATION OF NATURAL GAS

Did you know your municipality will soon be able to save money on your purchase of natural gas? Under a new set of federal regulations, after April 1, 1993 your community will buy natural gas from sources which will be competing for the first time. Unlike telephone industry deregulation, natural gas deregulation will provide cost effective alternatives to explore. For the last half century, the purchase of natural gas was much like the purchase of other utilities: you bought from the only available source whether that was a pipeline or local distribution company (local utility). Natural gas is the next industry to be deregulated with electricity not far behind. If you have not yet, now is the time to consider the cost saving potential of this deregulation.

Unbundling of Services to Create Competition

The Federal Energy Regulatory Commission (FERC) has been looking out for your interests. Vested with the authority which Congress gave it, the FERC has forced the gas industry to "unbundle" charges for the many separate services which the various companies in the industry compiled into what you are used to referring to as your "gas bill". Some of these charges are:

1. the commodity itself, natural gas which is mined and processed for shipment

2. the transportation rate which is assessed by each pipeline through which your gas may be moved. There are several charges within this rate. These include:

a. the commodity charge for transporting the gas itself.

b. the reservation charge for space reserved to transport gas.

c. the ACA (Annual Cost Adjustment) charge.

d. the GRI (Gas Research Institute) charge; and

e. the Excess/Overrun charge.

3. the local distribution company (LDC, also known as the local utility) charge:

a. the transportation charge for moving gas through their lines.

b. any metering charges.

c. the addition of their overhead and profit margin.

As an end-user of natural gas, you are accustomed to seeing a cumulative bill broken down by rate category only, i.e., the cost of gas at a specific usage quantity and time category. The other charge categories such as the commodity, pipeline and LDC charges are never broken out unless you buy your own gas and happen to have a transportation contract with a pipeline and/or LDC. The FERC has mandated that, for the sake of increasing competition and lowering cost, you have a right to know who is charging how much for what service. Knowing that information, you are better able to shop for both the commodity and services.

Shopping for Natural Gas in 1993

Before January 1, 1993, when deregulation became the law, competition was non-existent unless you were one of the fortunate few who independently knew a producer from whom you could purchase cheap gas and knew how to contract for transportation services with a pipeline. By the way, few pipelines would contract with independent, small end users. You had few real choices. In many of your communities, if the large LDC's such as NI-Gas or CIPSCO didn't run a line to you, a broker was required to make arrangements for you.

With the dawn of the new year, the Federal Energy Regulatory Commission and the Congress are allowing end-users of natural gas such as your communities to buy gas directly from the producers or marketers who own it. Pipelines can still sell 10% of their line capacity, but only ten percent. LDC's can still sell gas; however, they will for the first time have to buy the supply and resell it in competition with myriad producers, marketers and pipelines. Early discussions with representatives of these LDC's indicate that they may elect not to compete with other marketers for sales to many end users. These various marketers, each of whom owns their own gas supply, will compete with each other for the first time on an even playing field. The marketers will sell to you at various "spot market" prices which are based upon the competitive daily trading which occurs at the futures market, at market "hubs" into which producers transport gas, and at prices negotiated with producers by marketers who buy directly at the wellhead.

Beginning on April 1, 1993, all pipelines nationwide

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are being required to implement new Tariffs previously filed with and approved by the FERC to demonstrate how they are going to "unbundle" their services, thus coming into compliance with new laws. Throughout 1993, on individually specified compliance dates, each pipeline in the United States will cease to sell 90% of the gas they have previously transported and sold. How will a small/medium/large community such as yours shop for natural gas then? If you are a large enough community, chances are that you may have in-house someone with natural gas buying experience who will call producers in search of supply, figure out routing and purchase transportation on the various pipeline and LDC lines... if the pipeline will lease you space. If you lack the expertise, can afford to pay for it and would like to pursue hiring, there are gas industry employment agencies (two we know of in Texas) you can call. However, in all likelihood, you will use one of two other alternatives: either (a) buy from a marketer who buys gas to resell to you or (b) work with a broker who will, for a fee, make arrangements for you to contract for gas and transportation services. Buying from a marketer saves you the cost of the brokering fees.

What advantage does one have over the other?

*Supply: Keep in mind that the marketer owns his own gas while the broker does not. The marketer, because he buys his supply, is motivated to find the least expensive source of supply. The broker makes no profit on the commodity, thus having no motivation to call very many producers in search of inexpensive gas. In any case, the broker gets paid the same amount.

*Pipelines: A marketer has his own contract with the pipeline and can buy at various points along the pipeline to lower his cost. The broker's income is not affected by searching for the least-cost receipt point for you.

*Nomination: The marketer nominates (specifies the quantity) to the pipeline the aggregate amount of gas you and his other customers will move. By daily communication, the marketer "balances" with the pipelines and LDC's the quantities nominated versus amounts actually used each month. You "nominate" to the marketer each month how much gas you expect to use based upon your usage during similar months in previous years.

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The functions of nomination and balancing will now be facilitated at no extra cost by your marketer who has a vested interest in seeing to it that your nominations come to him with no great difficulty on your part. Nominations are not the result of some mysterious method formulated through an esoteric process learned in a college science class. They are nothing more than estimates of your expected usage based upon the last one to three years of billing history. That is the same process of reasoning you use when you buy groceries, not a terribly complex matter. In general, one Winter resembles another, as do Spring, Summer and Fall. The cost of performing nomination and balancing with the pipeline is included in a marketer's gas price. In many small to medium sized communities under the old way of doing business with the monopolies, the broker was paid over and above all other costs to look at previous bills and pass along nominations to the pipeline that sold gas. Any marketer worth its salt will take a few minutes and show you how to perform this simple task.

At the natural gas industry Seminar on Electronic Bulletin Boards and Electronic Data Interchange held by Gas Daily, the leading industry publication, in Houston, Texas on January 13-14, 1993, the consensus among executives was that the old way of doing business is already dead, prices would remain low for the foreseeable future, and end users (such as your communities) are going to be the winners. FERC Commissioner Jerry Langdon indicated that the FERC intends to advance the gas industry beyond the stone age and will mandate later this Spring that the functions of gas marketing, delivery and payment be performed on a "real time" basis through electronic data interchange. Billing for actual deliveries, a process that at some points in the past took several years, will be performed in "real time", computer industry jargon for "on a timely basis." The new breed of marketers from whom you will buy gas will operate on a real time basis, simplifying both nominating and balancing for you.

For municipalities, the prospects for less expensive natural gas are better than excellent. If you compare the bids you will be receiving in the near future, your prospects for reducing your community's gas bill are a certainty. •

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