Position Paper: Unbundling Local Distribution Company Services

NATURAL GAS SUPPLY ASSOCIATION

805 15th Street N.W., Suite 510
Washington, D.C. 20005

POSITION PAPER: UNBUNDLING
LOCAL DISTRIBUTION COMPANY SERVICES

Introduction

The Federal Energy Regulatory Commission (FERC), through Order No. 636, set the stage for all natural gas consumers to benefit from competition. Order 636 mandated direct access to gas supplies and provided an entirely new menu of "unbundled" interstate pipeline services. State public utility commissions (PUC's) now have the opportunity of assuring that these benefits are passed on to consumers of natural gas at the retail level. The obvious question becomes, if unbundling of interstate pipeline services benefits the gas industry, would unbundling of local distribution companies (LDCs) also provide an improvement?

NGSA Position

NGSA fully supports the unbundling of the services of local distribution companies. We believe this step is necessary in order to continue bringing the benefits of competition and economic efficiency to all segments of the natural gas industry and its customers.

Benefits of Unbundling

Below are some of the specific benefits NGSA believes will occur if LDCs are unbundled:

Unbundling expands consumer choice. Each customer will be allowed to choose from a variety of new services and pay only for specific services that are needed. Customers will be able to select the most economical source of gas supply, and as existing services are unbundled, competitors will strive to develop new services tailored to market needs.
Competition will assure the best consumer prices. Competition is the best means of assuring adequate supplies of goods and services at the best price to all consumers. When the benefits of competition are extended from the wellhead to the customer, state regulators will be able to rely on the market to ensure that the price of gas and other services will be competitively priced. Of course, certain monopoly services, such as transportation service, will need continued PUC oversight.
Increased access can lower all consumer costs. Unbundling will make gas available at the burner tip at the best possible price, creating economics that could result in increased gas consumption. If gas use increases, the potential exists to reduce rates to all consumers by spreading fixed costs over increased throughput.
Increased use of gas will generally provide environmental benefits from an overall emissions perspective. Where specific environmental compliance issues are pertinent, such as mandates for NOX and S02 reduction, decreased costs from access to gas may lower the cost of compliance, where use of gas is part of the compliance strategy.
The "obligation to serve" concept can be updated. Under unbundling a utility will only have an obligation to provide gas to those who contract and pay for it. The "obligation to serve," for transportation customers, can be redefined under unbundling to be an obligation to redeliver to the end user gas that the customer has purchased and had delivered to the citygate. This redefinition of responsibility could allow the LDC to reduce personnel, planning and administration costs, as well as direct external costs for gas, transportation and storage. Currently, some of these costs are incurred to be prepared to provide a "last resort" sales service that may never be called upon.
State regulation can streamline its focus. Under unbundling, the regulator can focus on oversight of the monopoly functions of an LDC, leaving the non-monopoly segments of the industry to compete on the basis of price and service quality. This more precise regulatory focus, combined with vigorous competition, should provide the maximum possible benefits to all classes of customers.
Cross-subsidies will become more apparent. This simplification of regulation under unbundling should increase the ability of PUCs to identify and eliminate cross-subsidies. Actual cost causation and alignment of rates and charges will flow from this new process, whether the issue is cross-subsidization between services, customer classes, or even between the LDC and its affiliates.

Practical Issues to be Addressed in Individual LDC Unbundling Proceedings

The PUC and the LDC, with the involvement of other interested parties, should strive to develop rates, tariffs, and operating practices that optimize the number of customers who are able to take advantage of the unbundling of the LDC's system. Experience has shown that there are many issues that will have to be addressed in the process of unbundling each LDC's system. Among the important issues that NGSA has identified are:

Appropriateness of exit fees and/or transition costs;
Requirements for installation of additional equipment, such as telemetry on meters;
Requirements for changing from one service to another;
Appropriateness of the unbundled rates;
Appropriateness of alternate fuel requirements;
Availability and price of ancillary services such as stand-by or backup gas commodity;
Minimum volume requirements;
Appropriateness of current curtailment procedures;
Access to upstream firm transportation capacity;
Balancing issues such as cashouts and imbalance trading.

Conclusion

NGSA believes that LDC services should be unbundled. Recognizing that each state, municipality and utility will have unique circumstances that may require a custom-tailored transition plan, NGSA urges all relevant jurisdictional bodies to hold proceedings as quickly as feasible, to determine what that plan should be. Delays only prevent consumers from realizing the full benefits of competition and choice, and postpone the realization of an efficient gas market.

March 1996

This page was last updated August 31, 1997.

NATURAL GAS SUPPLY ASSOCIATION

POSITION PAPER: UNBUNDLING LOCAL DISTRIBUTION COMPANY SERVICES

POSITION PAPER: UNBUNDLING
LOCAL DISTRIBUTION COMPANY SERVICES