GAS INDUSTRY
     

Tony Trubisz Jr., CEO of Columbia Gas of Virginia, (left) with a pilot program customer, pizza man Tony D'Agostino.

photo by Mark Rhodes

Keeping the flames blazing round the clock in his two Manassas locations means that D'Agostino's gas bills can add up. That's why this restaurateur was among the 5,329 small business and residential customers who have signed up for a pilot program that lets Columbia Gas customers select their own natural gas supplier. Although D'Agostino doesn't yet have any hard numbers on savings, he's optimistic.

"We're using the gas anyway, and if our bill can go down a little, that's good."

The pizza man ought to notice a difference, says Columbia Gas of Virginia President and CEO Tony Trubisz Jr. The product will taste the same, but the gas used to bake the crust and melt the cheese will cost less. "We've seen an average savings of 8 percent for residential customers and nearly 12 percent for small, commercial customers like pizza places and laundromats," he says.

Typically, smaller customers are the last to enjoy the fruits of deregulation. And the delivery of natural gas is still regulated, but soon the commodity could be available to all consumers at market-driven rates.

Interruptible customers, defined as large users that have backup fuel sources, have been able to contract directly with suppliers for some time. But only in the past year have Virginia small-business owners like D'Agostino gotten to sample their own slice of savings.

The powers that be in Richmond approved limited pilot programs for Columbia Gas and Washington Gas. Those programs -- both in Northern Virginia -- have only just begun, but they mark a significant step toward bringing the benefits of deregulation to every consumer in the commonwealth.

In 1978 Congress passed the Natural Gas Policy Act that ended federal control over natural gas prices at the wellhead. By the 1980s prices started to fall, partly because of a drop in the global oil market, but also because of increasing competition. The big consumers of natural gas were more than ready to buy the resource directly from producers, marketers or suppliers. Since about 1988, some industrial customers in Virginia have been able to negotiate their own deals for natural gas.

In 1992, the Federal Energy Regulatory Commission, the agency that regulates interstate pipelines, issued Order 636, which let gas shippers negotiate for storage and transportation capacity on natural gas pipelines. That and other actions by the commission forced the unbundling of the gas industry.

It wasn't until recently that smaller customers got in on the action. They are what the industry terms "uninterruptible" or "firm customers," those that don't have a backup fuel source. Trubisz says state utility commissions have been cautious about complete deregulation because of concern for firm customers. That's why Virginia's State Corporation Commission has only approved pilot programs.

The pilot programs are an exception to Virginia law that allows only one company -- the regulated utility in each jurisdiction -- to sell natural gas. Pilot programs by Columbia Gas and Washington Gas won the commission's approval. Both were signing up a limited number of customers for their pilots in late 1998. Roanoke Gas and Virginia Natural Gas in Norfolk are considering their own programs, but haven't yet made firm plans.

Dave Bowman was put in charge of the Northern Virginia pilot program for Columbia Gas soon after its inception. The manager of Columbia Gas' Virginia Customer Choice program says his work is mostly about education.

Under the pilots, Columbia Gas and Washington Gas will still install and maintain gas lines, read the meters, answer service calls and send out bills. They are considered local distribution companies, and the cost of their services continues to be regulated by the State Corporation Commission. They are the safety net, in case the new gas suppliers -- who must meet financial and performance requirements -- don't deliver.

Gas utilities make money on delivery, not on the sale of gas. Under the current system, they negotiate a price for the fuel and give it to customers at cost. Under the deregulated program, customers buy gas directly from their chosen supplier. "We have different supply options than the utility, and we buy gas differently," says Harry Warren, president of Washington Gas Energy Services, a Washington Gas subsidiary that competes as a supplier. Because the suppliers aren't regulated, deals on the wholesale and retail end are more likely. Financial instruments like futures and the New York Mercantile Exchange can also give suppliers an edge.

Bowman's company gives customers a list of approved suppliers and questions they can ask to be sure they're making the right comparisons. "We encourage our customers to call everyone," he says. "Some might offer free gas in the summer, and for most people this is not a great deal. But if the customer has a pool heater, it might be great."

Columbia Gas customer Mike Corbin, the owner of Culpeper-based Corbin Home Builders, signed up for the pilot program about three months ago. "At first it was a little confusing. We called all of [the participating suppliers] and their prices were all within two to three cents of each other," he says. "I looked at everything and I made my decision because I could sign up for a two-year contract." Corbin's contract offers him what the utility can't: The same price for the contract's duration.

"The gas market is very volatile. Some months it will be 33 cents and other months it will be over 50 cents," Warren says. "That is why a majority choose a fixed price. They can control and predict energy prices. It is a huge draw." Under the current system, the only option that resembles a fixed rate is a budget plan that estimates the annual cost and bills in equal installments. But at the end of the year the customer still has to pay the difference between the estimate and the actual cost.

Columbia Gas of Virginia had gas flowing to customers in its pilot program late last year. Company officials plan to ask the SCC to authorize extending the program to all of the commonwealth's natural gas customers. "We feel very comfortable that our pilot is working, and we are ready to move forward to offer it to our other existing 175,000 customers," Trubisz says. The utility needs to jump through a number of regulatory hoops before that can happen.

Washington Gas plans to have gas flowing in a pilot program this month. The program was limited to the first 1,700 commercial and 29,000 residential participants. "We've had very healthy subscription," says Adrian Chapman, director of regulatory affairs for Washington Gas. The commercial program is almost full, and the residential program is quickly gaining converts.

Gas companies say that if deregulation is successful in driving down costs and keeping customers happy, natural gas will be more competitive with electricity, oil and other power sources. "We're very conscious of price comparisons between fuels," Chapman says. "This provides an opportunity to lower gas bills. Natural gas will be an even more attractive option."

Deregulation is also attractive to local distribution companies because they will be able to make money in an area where they once could not. "We have created a subsidiary to be an active competitor in that marketplace," Chapman says of Washington Gas Energy Services. Columbia Gas sells natural gas through Herndon-based Columbia Energy Services. In fact, those subsidiaries are competitive suppliers in each other's pilot programs.

Ken Schrad, a spokesman for the State Corporation Commission, says all this hoopla about the final phase of natural gas deregulation is really about electricity. "There has been competition in the natural gas industry for a long time," he says. "What they want is to be marketers of electricity."

Eventually, some gas companies do want to get in on the electric business. Just as telecommunications companies want to offer one-stop shopping for your Internet connection, phone lines, cellular needs and cable service, power companies want to provide one-stop shopping for energy needs. "To do the electricity component we need to see what's happening for gas happen for electricity," Chapman says. "That is evolving in Virginia."

Following a recent SCC ruling, the state's largest electric utilities -- Virginia Power and American Electric Power -- have to start planning pilot programs. According to James W. Norvelle, a spokesman for Virginia Power, the electric utility will begin enrolling its first customers in late 1999.

"If there's one picture we'd like to paint, it is the consumer in control of a package of services," Chapman says. "Perhaps they'll pay one price and receive all their energy-related products. ... We will compete strongly with electricity with this approach."