Gas and Other Services Combined

SIC 4932

Industry report:

This industry classification consists of companies primarily providing gas distribution services, but also supplying other utility services. Companies in which natural gas distribution accounts for 95 percent or more of revenues are classified in SIC 4924: Natural Gas Distribution.

Organization and Structure

Gas utilities, called local distribution companies (LDCs), provide customers with two services: gas transportation, or moving the gas from the pipeline to the customer, and supply, whereby the LDC buys the gas and resells it to the customer. The LDC transports gas for all its customers and supplies gas to other suppliers. The utility earns a rate of return for transporting gas but receives nothing for supplying it to those other than end-use customers. The LDC earns the same fee for transporting gas, regardless of who supplies the gas.

Gas utilities had several competitive advantages over electric utilities. While electric utilities were just beginning to experiment during the mid-1990s with allowing customers to choose among energy suppliers, large gas customers had already been extending the freedom to choose their gas supplier to the smallest of customers, including homeowners. Both industries are deregulated.

By the end of the 1990s, natural gas supplied about half of the nation's energy needs. When electric utilities providers began to use natural gas for electric power generation, a new utilities superpower appeared on the horizon. Instead of natural gas companies buying out their smaller natural gas competitors, they began aligning with electric utilities companies to provide multiple services to end-users. Thus, by the millennium some of the largest utilities providers were in fact "hybrid" entities offering electricity and natural gas services to their customers. Industry leader NiSource, for example, had 3.3 million natural gas customers and 440,000 electric customers in the late 2000s. These "cogeneration" facilities appeared to be on the rise nationally and internationally. Another spin-off industry from these consolidations was the combination of gas pipelines and fiber-optic networks, thus servicing the energy and communications businesses.

Background and Development

While state governments began to regulate the venting of natural gas in the late 1920s, federal government regulation of interstate sales of natural gas was a product of already existing federal regulations governing interstate sales of electricity. The same public outcry that led to passage of the Federal Power Act and the Public Utilities Holding Company Act in 1935 led Congress to create regulations for natural gas. (See SIC 4931: Electric and Other Services Combined.)
The Natural Gas Act, passed in 1938, was even more stringent than its electricity counterpart, giving the Federal Power Commission (now the Federal Energy Regulatory Commission, or FERC) explicit authorization to fix "just and reasonable" pipeline rates, ban discriminatory tariff practices, and determine legitimate costs. In 1942, the act was amended to require interstate sales of gas for resale elsewhere to be at the lowest possible rate.

Historically, the same type of regulation used for electric utilities has been applied to interstate natural gas pipelines. Tariffs were set to recover the costs of operation and gas purchases and depreciation of investments in facilities and to provide a regulated rate of return on business assets.

In 1954, the Supreme Court of the United States decided the Federal Power Commission had the authority to regulate prices all the way back to the well. After delaying its response to the court's mandate for several years, the commission began regulating wellhead gas prices on a case-by-case basis, then experimented with setting "area rates" based on broad geographic regions. There were higher rates for "new gas," or newer discoveries, and lower rates for "old gas," or existing production.

During the late 1960s, regulated prices for interstate pipelines were relatively cheap compared with prices in intrastate markets. Within higher intrastate market prices, interstate pipelines, which could pay only the low regulated prices, were unable to meet growing demand for gas supplies. Burgeoning demand for natural gas forced pipelines and LDCs to allocate demand. The imbalance between demand and supply brought increasing pressure on Congress to deregulate wellhead prices.

In 1978, Congress passed the Natural Gas Policy Act, an extremely complex law with more than 20 different categories of gas and prices ranging from $0.30 per thousand cubic feet (mcf) to $10/mcf. But by the early 1980s, gas demand dropped due to a recession, and improved production technologies made gas available in almost unprecedented volumes. The supply and demand equilibrium was again out of synch. In 1989, Congress passed legislation phasing out price controls on most types of natural gas.

In 1992, the Federal Energy Regulatory Commission issued Order 636, which forced gas transmission companies to become common carriers of natural gas and ordered them to redesign their rate structures, essentially changing the way local gas distribution utilities obtain their natural gas. That same year, Congress passed the Energy Policy Act, which increased competition within the electricity industry. In 1996, FERC issued Orders 888 and 889, final rules governing access to utility power lines.

According to the 1997 Economic Census, 119 establishments reported combined services, with their primary service being gas distribution. The industry was worth $2.85 billion. These figures did not include another 145 establishments of combined service (electricity-gas) where the primary service was electricity. In comparison, that industry was worth $28 billion in 1997.

By 1999 the gap had significantly decreased, due in large part to advanced technology for shared trenches between natural gas distribution and fiber-optic networking. Using thousands of miles of pipeline routes, pipeline companies had coupled with communications companies to create dual-service routes, making pipeline assets much more profitable and cutting costs for laying communications cable lines. In 1999, about 200,000 miles of fiber-optic line existed in the United States. Because of increased need for Internet and telecommunication lines, that figure grew exponentially throughout the 2000s.

In the mid-2000s, the FERC was granted additional responsibilities in the Energy Policy Act of 2005. Additional legislation affecting the industry included the American Recovery and Reinvestment Act of 2009, which provided federal funding and tax credits to stimulate investments in energy-efficiency and renewable energy.

Current Conditions

According to Dun & Bradstreet, 341 establishments employed 7,273 workers in the gas and other services combined industry in 2009. About 60 percent of employees worked for companies that employed 100 or more people. Total industry revenues were almost $3.7 billion in 2009.

Statistics from the Energy Information Administration showed that U.S. consumption of natural gas dropped 2 percent in 2009, due partially to the down economy. Consumption totaled 62.6 billion cubic feet (Bcf) per day, whereas production rose to about 60 Bcf per day. Prices for natural gas fell to their lowest in seven years, with the wellhead price averaging $3.71 per thousand cubic feet.

Of the 14.19 quadrillion Btu (British thermal units) of natural gas consumed in the United States in 2009, the industrial sector accounted for the most (43 percent of the total), followed by residential sector (35 percent) and the commercial sector (22 percent). Prices in 2010 varied among sectors, ranging from $14.24 per thousand cubic feet for the residential sector, to $9.39 per thousand cubic feet for the commercial sector, to $4.96 for the industrial sector, as of June 2010.

Demand for natural gas was expected to increase annually into 2025. Both the commercial and residential sectors were projected to increase demand by 2 percent annually. The electric power sector was expected to continue to be one of the larger consumers of natural gas, as coal would be used less as a power source; demand from this sector was expected to grow to 29 percent by 2025. The industrial segment was expected to increase its consumption from 6.1 trillion cubic feet in 2009 to 10.3 trillion cubic feet in 2025.

Industry Leaders

One of the industry leaders in 2009 was NiSource Inc. of Merrillville, Indiana, with $6.6 billion in revenue and 7,616 employees. NiSource's customer base exceeded 3.3 million in 2009. The company boasted one of the country's largest natural gas transmission and underground storage systems. Its interstate pipeline system alone stretched 15,000 miles.

Other notable companies in the gas and combined services industry were San Diego-based Sempra Energy, with $8.0 billion in revenue and 13,839 employees; UGI Corp. of King of Prussia, Pennsylvania, with $5.7 billion in revenue and 9,700 employees; MDU Resources Group Inc. of Bismarck, North Dakota, with $4.1 billion in revenue and 8,081 employees; and Vectren Corp. of Evansville, Indiana, with $2.0 billion in revenue and 3,700 employees.

Research and Technology

The deregulation of the utilities industries opened the door for significant cross-mergers between gas and electric companies. By the end of the twentieth century, shared technologies enhanced the profitability of both industries: pipeline companies, which traditionally held rights-of-way over miles of lines, could now have a financial stake in sharing those routes and passageways with other industries. Moreover, the growing technology created a form of commodity trading: fiber-optic bandwidth futures.

Within the natural gas supply market, progress in technologies associated with exploration and development of gas reduced costs and expanded the amount of gas that could be economically recovered from a well. Some examples included the use of advanced computer-imaging technologies to explore underground reserves, offshore drilling deep in the Gulf of Mexico, and unconventional recovery techniques for getting more gas from reserve wells.

Technological advances in generation technologies also were important. For example, 60 percent of all additions to electric generating capacity in the last decade of the twentieth century were natural gas, and state-of-the-art gas turbines were increasingly used in electricity production in the 2000s. Also, a significant opportunity existed in distributed power generation--modular electrical generators ranging in size up to 50 megawatts. These new turbines were easy to site and build, allowing them to serve one large customer or several large customers in one area. They also made maximum use of the gas distribution network already built to accommodate the customer's needs.

The Energy Information Administration predicted that alternative sources for natural gas would increase throughout the 2010s due to improved technology. Such alternative sources included shale, tight sand, and coalbed methane.

© COPYRIGHT 2018 The Gale Group, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. For permission to reuse this article, contact the Copyright Clearance Center.

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