Unbundling of small-customer gas services: New challenges for state public utility commissions

The evolution of competition in the US natural gas industry has followed a predictable course. Wellhead deregulation stimulated pipeline restructuring, which in turn has provoked a debate over gas-service restructuring at the retail level. Over the last several years, almost all local gas distribution companies (LDCs) in the US have established stand-alone transportation service allowing industrial customers to purchase gas supplies in the open market. By all accounts, service unbundling to large retail customers has achieved significant cost savings to these customers. The current focus in the retail gas sector is on small customers-namely, small commercial and residential customers. To many observers, service unbundling to small customers, especially residential customers, is not as clear cut in terms of yielding economic benefits as it was for large customers. For example, they question whether residential customers or their agents can procure gas supplies and interstate pipeline services at a lower cost than an LDC. They also argue that the transaction cost for small customers, in terms of per-unit of gas purchased, may be much greater than for large customers. Finally, they believe the high cost of unreliable service to small customers may preclude reliance on market forces and contracts, to assure thesemore » customers the high level of reliable service that they demand. Comprehensive service unbundling with the correct regulatory rules in place should further enhance competition in the natural gas industry. If past trends in the natural gas industry continue, service unbundling will ultimately be available to all retail customers. This article examines the many regulatory-policy questions relating to the unbundling of services to small retail gas customers. It argues that widespread service unbundling is an inherent feature of a competitive natural gas industry and will likely benefit gas customers and society at large. 61 refs.« less