Pipeline & Gas Journal
April issue 2000:

Industry Change 

Systems For LDC Operations

by Tom Chappell, President, INFOSYS Development Group Inc.,
Richard Sutton, Consultant, and
Carol Freedenthal, Principal, Jofree Energy Consulting   

Decontrol of natural gas was put into motion with passage of the Natural Gas Policy Act of 1978.  The Act changed two basic conditions in the industry.  No longer were the major interstate natural gas pipelines the marketers of gas from the wellhead to the city gate or to large end users inside the city gate.  Also, transportation was opened up so that any buyer or seller could make arrangements for the receipt or delivery of natural gas.  As a result, the greatest impact fell on the interstate pipelines, since they lost their marketing capability.  This made it necessary for pipelines to quickly develop affiliated non-regulated marketing companies in order to sell natural gas to LDCs at the city gate and to large commercial and industrial users.

For the producer, decontrol opened a new vista of marketing. The producer could develop its marketing operation and become a large-scale gas marketer.  Previously, the producer sold gas to an interstate pipeline under long-term contract.  Now, the producer had the flexibility of setting up its own gas marketing group to compete with the interstate pipeline affiliated gas marketers or any other independent gas marketing entity.  One of which was the Natural Gas Clearinghouse, now known as Dynegy.

As time passed and experience showed that profit margins above the gas marketer purchase price were actually quite small, many of the producers either scaled back or dropped out of the marketing game entirely.  Especially, with the potential risk for big money losses from playing the financial market, producer-marketing groups have scaled back to being company and field associates production sellers only.

Declining Market Share
Even though decontrol reduced the market share of the LDC, this group was the least directly impacted by decontrol driven changes. Prior to decontrol, the LDC made all the direct user sales except for a few exceptions where an interstate or intrastate pipeline directly supplied a large industrial or commercial customer.

After decontrol, marketers could sell gas to large users and have it delivered from interstate or intrastate pipelines directly to the consumer or the LDC for transportation purposes only.  This left the LDC with only regulated gas it could sell, which was priced higher than gas purchased from an unregulated source.

Recognizing a need for change and to stay competitive, LDCs began forming non-regulated marketing companies within their own business areas to compete with the outside or national marketers trying to penetrate the utilitie’s marketing area.

In the early days of the transition, there was some concern that national marketing companies would come into an area and take over the full transportation and distribution system. If this occurred, the LDC would be in jeopardy unless the state or a local Public Utilities Commission (PUC) took a stand to help the LDC retain its distributorship. Now, going into the new millennium and based on the failed efforts of some major natural gas marketing companies to get down to the residential and small commercial consumer, the LDC appears to have won the battle for these meters.  To some extent, one could say the control of natural gas was removed at the Federal level only to come alive again at the local distribution level.

Now, with LDC the obvious winner, it is time to gear up to manage the marketing and distribution of natural gas efficiently and safely.  Several states have already deregulated natural gas down to the homeowner.  The most notable of these—and the most highly publicized—is the state of Georgia. (See related story in this issue, pg. 26.) However, other states are following suit.  The LDC will continue to be the retail marketer and distributor in its market area except for maybe large commercial and industrial users. To maintain this victory, they too must change to ensure that gas is supplied more efficiently, safer, and cheaper. To meet these demands each LDC must evaluate and review the systems and programs they are currently using. Without new systems and management know-how, the LDC will be unable to capitalize on the meters it fought for and won.

Systems Needs
Table I lists the Information Technology (IT) infrastructure and LDC needs to meet today’s demands.  The “new” LDC could be a company with a regulated gas transportation business and non-regulated retail marketing operations. It might also have a gas-trading group with a strong play in the financial as well physical markets and could include power marketing in its portfolio. Many of the systems shown in Table I are considered a “must” in today’s business world, regardless of the business scope of the local marketing company.

Within IT, new systems and programs should be developed to increase the efficiency and profitability of the company using them. For the purposes of this article the systems needed are grouped by activities–back office function, buying and selling of gas, and customer care.  As the utility expands its operations to include other facets, risk management and programs become much more important.

Based on the needs shown in Table 1, system demands for a deregulated retail marketing company are significant. In addition, PUC or other regulatory guidelines may prohibit the use of existing systems for a regulated LDC by its unregulated marketing subsidiary if the systems were paid for with funds collected from regulated ratepayers.  Thus, the new business environment requires significant systems evaluation before marketing to deregulated customers actually goes into effect.

Other Important Decisions
Since appropriate IT investments can be costly, there are a number of decisions and choices the LDC can make to implement cost saving measures. These include software selection, the use of application service providers (ASPs), using e-commerce provided by Internet companies to help in business prospecting, and risk management.

For the most part, software is readily available for many of the functions performed by the LDC, including buying and selling of natural gas, billing, administrative operations, and risk management. The utility can develop the software itself or purchase it. They can “outsource” the IT for development, implementation and actual, operations. Table 2 is a good summary of major companies offering software, systems, and outsourcing. Some of the companies listed sell systems in all industrial areas, while others cater solely to the energy industry. Space limitations prevent a more rigorous analysis of each company and its available programs.

Risk Management
A key issue in marketing gas is risk management. Those companies who do not pay attention or control risk may be setting themselves up for significant losses. Systems are available to assist in the risk management of buying and selling gas and in managing the transportation of gas through third party pipeline distribution systems.

Gas marketers have long used interstate and intrastate gas pipeline transportation systems to move gas from producing areas to market.  Several systems were developed and sold to marketers to better control and expedite this transportation component. Risk management systems developed specifically for managing risk in the commodity market became prevalent as marketers became more sophisticated in hedging their gas purchases and sales.

Owing to recent consolidation in the risk management software industry, only a handful of viable companies remain. Table 3 lists the top five vendors in risk management software for the gas industry.  Of these, Altra, Caminus and Allegro also supply comprehensive solutions for managing the transportation of natural gas.  

Application Service Providers
Application Service Providers (ASP) is the new buzzword for outsourcing. It does include functions that were an extension to outsourcing.  For example, ASP includes applications run from the Internet so that the operator or utility can avoid having to buy and maintain the application. An example of this would be executing Microsoft Office® from the Internet instead of having it on a company’s local PC.  Some of the functions the ASP can handle are: Customer service, purchase orders, human resources, etc.  Some companies claim 30 to 50% savings using an ASP, compared to doing it in house. The ASP does take care of upgrades, virus detection and other “high-tech” headaches. Some of the companies offering ASP are Caminus (DC Systems) Gas Master, etc., EDS, and Perot Systems.

A careful evaluation of the benefits, costs and disadvantages associated with ASP must be weighed before making a decision. A key word searchable list for an ASP can be found at www.webharbor.com.

e-Commerce Solutions
Another relatively new trend in the gas industry is the use of the Internet by third party providers as an e-commerce solution. Many of these sites are used to provide trading opportunities.  Some, like Enron, are used to buy and sell energy. Still others, such as oilandgasonline, not only trade energy but allow users to bid on oil or gas drilling equipment and related products.  Many of the sites allow Request for Prices (RFPs) and Request for Quotes (RFQs) to be posted. 
Some of these sites, shown in Table 4, can be accessed to get a better feel of what’s happening on the Internet. Again, companies have the option of going it alone or teaming up with a service provider. 

Summary
This article outlines some of the issues and problems impacting LDCs facing natural gas decontrol and the resulting customer choice. While the solutions referred to in this article may not solve all of the problems for the LDC, most will find the information offers practical solutions and can serve as a guide to identify suppliers, products and services available. P&GJ

About The Authors
Tom Chappell has served as president of the INFOSYS Development Group Inc. for the past six year. Prior to joining INFOSYS, Chappell was employed by The Coastal Corporation for 11 years and has worked in the Information Technology (IT) and energy industries for more than 20 years. He is also well known for his energy marketing expertise. www.infosysdg.com, E-mail: tchappel@infosysdg.com.

Dick Sutton is a consultant with Jofree Energy Consulting and works in the sales efforts of INFOSYS Development Group Inc. His energy industry experience spans more than 30 years. Sutton was employed by Enron for 20 years and spent seven years with EDS in its Energy Division. He has considerable experience in the IT and management areas of the energy industry.
Carol Free-denthal is a principal of JOFREE Energy Consulting and a contributing editor to P&GJ. He has over 40 years of experience in the energy industries and has been employed by various oil, gas and chemical companies, including Superior Oil, and Mobil Oil, Monsanto Chemical and Allied Chemical. JOFREE Energy Consulting is a Houston-based consulting company specializing in information services to management in making marketing, operational, regulatory, and litigation decisions.