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Fishing the Headwaters of the Emerging Btu Stream

Issue 10 and Volume 102.

Fishing the Headwaters of the Emerging Btu Stream

By J.C. Whorton Jr. and Paulette Whitcomb

The United States is the Most Advanced Industrialized Country on the Planet and its Citizens

view energy, generically speaking, not only as a birthright but almost as a benevolent natural force about which they need not concern themselves. Natural gas and electricity have been tightly regulated for so long that, again, the typical American figures that agency bureaucrats have got any potential problems covered. It`s a big country with so much going on and nobody has enough time and things always work themselves out. And anyway, energy is considered highly technical and totally boring.

The new energy value stream, the so-called Btu Value Stream, is central to our national security, our economy and the very nature of our industrial infrastructure. Every man, woman and child in North America is a participant in this stream. Our world is constantly being remade by innovation and technology, and there are just so many issues the mind can absorb, so we tend to lose sight of the interrelationships and the consequences. But if you don`t understand the issues, you can`t pick a side–and a side picks you, because in a revolution, not playing is not an option. Everyone has a part to play in this $300 billion war. This is not Monopoly money we`re playing with here.

Those consumers who have given some thought to the energy world on the 1990s tend to view its changing simply as the breaking up of energy monopolies and the opening up of choices and falling of prices that accompany free-market competition. That is part of the picture, but only a part. The reason that the changes in the world of energy spell revolution, despite the lack of bloodshed and chaos, is that their effects on today`s America–industrial, commercial, residential, social, and political, from Wall Street to Main Street–are causing a paradigm shift as radical as if armed bands roamed residential neighborhoods. The end result will be one of the most radical transformations of the industrial-commercial economic base and regulatory infrastructure this country has ever seen.

The regulated monopolies were put in place not to restrict competition, but to protect the resources and the process, from producer through to end user and investor, from the robber barons. Energy is today the ultimate source of all power–physical, economic and political. The revolution has been shifting the controls of this enormous engine away from traditional hands to a new set of hands. The new marketers believe it`s their hands, but the controls are actually in the hands of the consumers and taxpayers if they choose to exercise them.

Natural Gas

Once upon a time, not very long ago, natural gas was a tightly regulated field, and the pipelines held sway. As we all know, as long as a monopoly exists, those outside the monopoly are outside the money machine. The only way to get at it is to convince the government to break up the monopoly, and to convince the customer he needs the choices and the less expensive goods allegedly always born out of competition.

In natural gas, those at the wrong end of the food chain–the producers–and those totally outside the food chain–the would-be gas marketers–wanted a crack at the money-making game that the pipelines controlled absolutely. They lobbied. The slogan was competition–opening up the markets and offering everybody the lower prices that competing in an open market would naturally bring. It worked, but most Americans did not notice because as long as their gas is there when they turn it on, the process per se does not hold their attention.

The first big step came in 1985, when the Federal Energy Regulatory Commission (FERC) issued Order 436, which required pipeline companies to open access to the pipes. The next big step was Order 636, in 1992, and it was momentous. Pivotally, 636 reduced the pipelines to mere carriers, and basically said that anybody anywhere could sell natural gas to anybody–producer directly to end user, producer to marketer, producer or marketer to pipeline. The FERC is not quite done; the deregulation of natural gas at the local distribution level is still on the table, but the final order is expected this year.

Electricity

Those who had agitated for the deregulation of natural gas moved quietly but very quickly. Remember, it was the FERC that guided the process of deregulating the natural gas industry–paradoxically, a governmental body and its various commissioners through the years gave away most of their authority and replaced it with market forces, a uniquely unusual act for a bureaucratic body. Only in America. And a uniquely American type of hard-driving entrepreneur seized the opportunity to turnthe once shackled molecule into profit.

Executives in the boardrooms did not just sit back and admire their newfound natural gas markets. They went for the big one: Electricity.

Back in 1978, in an initial step, the U.S. Congress had passed the Public Utility Regulatory Policy Act, which created the non-utility generating industry, that is, the independent power producers (IPPs). The IPPs generated electricity, primarily through cogeneration and in regional pockets; still, they had become a competitor for the established utility monopolies. The perpetrators brought increasing pressure to bear. The federal government was a willing listener, until in 1992–not coincidentally, the same year as Order 636–came the Energy Policy Act (EPACT). This authorized the FERC to permit bulk power trading of electricity at the wholesale level. The drumbeat of pressure intensified. In 1995, the FERC issued its outline for restructuring the whole power industry. The final order came in the spring of 1996.

The revolution had started, and the states, led by California, grabbed the steering wheel. In California, by order of Assembly Bill 1890, full competition in electricity supply was scheduled to begin on Jan. 1, 1998. The deadline had to be scooted back to March, but California pushed the envelope, leading the states toward deregulation. Arizona, Illinois, Mass achusetts, New Hampshire, New York, Penn sylvania, Rhode Island and Wisconsin have also changed the face of their retail electric business, either by passing laws or approving action plans whose common denominator is open supply competition and customer choice.

The movers and shakers in these states suffer from one common ailment: high electricity prices. The cost of 1 kWh of electricity in the U.S. averaged 6.9 cents in 1996, but it was very unevenly spread. In Kentucky, for example, the cost was a tad above 4 cents; in Idaho, it was 3.9 cents. In the New England states, the kWh cost averaged out to 10.3 cents; New York, Illinois and Michigan averages were also considerably over the national average at 8.0, 7.8 and 7.2, respectively, but California`s 9.4 cents had those beat. Nevada, Utah and Wyoming? Respectively, 5.8, 5.3 and 4.3. Alaska was at 10.2 and Hawaii led all the states with 12 cents even.

In the states leading the deregulatory charge, the legislatures acted in response to the relentless pressure of the industrials and larger municipalities aggressively chasing lower energy bills–not of the residential customers.

Predictably the U.S. congress moved into the battleground, and big money fired its big guns. According to congressional disclosure reports and the non-partisan Center for Responsive Interest in Washington, D.C., by year-end 1996 special-interest groups on all sides of the electric-deregulation issue had already spent $37 million to lobby Congress and funneled an additional $11.7 million into PAC contributions.

A marketer either takes to the market what the market wants, or makes the market want what he has. Today`s Btu marketer is largely dealing with a consumer with the following characteristics: He prizes convenience above all else and is willing to pay for it; he`s always running out of time and is willing to pay quite handsomely to get some; he has no brand or corporate loyalty; his me-too and right-now acquisitiveness make the Sun King at Versailles look like a monk in a cell. This consumer thinks he knows the score, but in reality he can be easily seduced through his weak spot, which is his visual orientation and Pavlovian reaction to slick packaging and hip presentations. He lives in a society of buzzwords, depends on sound bites for much of his information, and believes CNN is in-depth, hard news. As a result, this pseudo-sophisticate never really knows what he`s getting, but if it`s packaged slick enough, he`ll go for it.

When it comes to energy savings, the first question we all have to ask is: Am I a large industrial end user? This is the category of energy consumer, after all, who has been footing the big bills to lobby his state legislators in favor of deregulation. He has been shelling out good money for some time now. He wants to be rewarded. And he will be. In an example that is being quoted by consumer groups nationwide, the large industrial end user (in New York) is looking at a cost reduction of 25 percent within five years, thanks to an agreement between the state`s Public Service Commission and the state`s largest utility, Consolidated Edison.

If industrials` costs decrease that much, the consumer may well see lower-priced goods, right? Very possible, but beside the point–the point being that, according to this commission-utility agreement, it looks as if the residential consumer`s bill will probably see a reduction of only 3.3 percent.

Energy is the biggest marketing game the American consumer has ever seen–the biggest deregulation the Baby Boomers have witnessed, and the very first for Generation X. Generations aside, every person who consumes energy, votes, invests, or has an environmental concern is interconnected with the accelerating Btu revolution. Decisions have been and continue to be made with an impact greater than ever before on all Americans` lives and futures, and Americans need to know what indifference will cost them, their communities and their children.

Part of the price consumers will pay for their future freedom of choice in the power field is to exercise the controls necessary to keep a $300 billion industry operating on a truly level playing field. Energy is too basic to consumers` life for them to continue ignoring the people responsible for providing it; consumers must start taking an intelligently responsible interest in understanding this breed of people. p

Editor`s note: This is a petroleum insider`s frank view of the ongoing energy revolution that has progressed from natural gas to electricity, creating a $300 billion energy market.

This article is an excerpt from Power Play: The Convergence of Electric and Natural Gas, published in August by PennWell, (800) 752-9764. J.C. Whorton is a career petroleum consultant and Paulette Whitcomb is a veteran energy journalist.