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UWUA POSITION PAPER: NATURAL GAS DEREGULATION
Utility Workers Union of America, AFL-CIO
Position Paper
on
NATURAL GAS DEREGULATION
INTRODUCTION
Public regulation of the gas industry, which dates from the very inception of the industry in the United States, has been directed at three goals: (1) assuring reliable supplies and the widest possible access to this vital utility service; (2) protecting customers from monopoly pricing; and (3) maintaining safe conditions in the storage,
delivery and use of this necessary but potentially dangerous product.
Under this regulatory regime, natural gas has become the fuel of choice for domestic heating, cooking and for a wide variety of industrial and commercial uses as well. It is almost universally available to all classes of customers at stable, affordable prices. Supplies are reliable, and its safety record is remarkable given the inherent hazards of this highly flammable product.
Deregulating for higher profits
For more than two decades, however, the system which has brought such benefits to ordinary consumers has been under attack by corporate interests intent on extracting ever higher profits from the gas industry.
Under the banner of "free competition," big business has pushed to progressively deregulate natural gas with the intent of shifting costs from large users onto residential and small business consumers and opening customer service, commercial and safety-related utility functions to unregulated low-wage competition.
Congress began the process of natural gas deregulation in the Natural Gas Policy Act (NPGA) of 1978 when it removed all price controls off newly discovered gas from wells deeper than 15,000 feet and raised the ceiling price on other new gas. During the 1980s, the Federal Energy Regulatory Commission (FERC) raised ceiling prices on old gas and forced pipeline companies to rent excess capacity to producers, while allowing industrial customers to use that excess capacity and buy directly from those producers.
The restructuring process culminated in FERC Order 636 in 1992, which mandated that pipeline companies become common carriers of natural gas and give up all ability to be buyers and resellers. Order 636 also changed the pipeline's rate design to shift more pipeline costs into the fixed monthly payments made by firm shippers which serve primarily residential consumers.
Costs shifted to residential customers
This effectively forced residential customers to pay for pipeline capacity whether they used it or not. Since large industrial and commercial customers typically have steady consumption volume all year round, they effectively received a special price break.
In practical terms these large customers were the big winners. They experienced dramatic reductions in the cost of their delivered gas while residential and small business consumers did not. The shifting of costs for pipeline transmission is the greatest reason for this disparity. Pipeline transmission fees account for between 25% and 50% of the delivered fuel cost.
In Order 636, FERC also inaugurated a secondary market for pipeline capacity. Those buying a firm commitment to pipeline capacity could resell or "release" their capacity to others. This has resulted in industrial consumers gaining access to that capacity at greatly discounted rates.
Thus, although wellhead prices have dropped because of the collapse in oil prices (the fuel most competitive with natural gas), residential consumers have not benefited. FERC's unbundling of the pipeline and shift of transmission costs from large corporate customers to residential and small business customers has deprived small users of the benefit of the wellhead price reductions.
At the same time, the market has witnessed the creation of huge marketing conglomerates, which have little interest in selling to residential consumers at the traditionally low profit margins received by regulated utilities.
Although small customers were given access to the retail market through non-utility marketing aggregators, these have rarely been able to provide a better deal for consumers than the regulated bundled service provided by utilities. And the continued availability of this bundled service has assured homes and small businesses throughout the United States a safe, reliable and affordable supply of natural gas.
The drive to dismantle an industry
Now, encouraged by the advance of deregulation in the electric utility industry, certain corporate interests are pushing to unbundle and remove from regulation many of the remaining functions of gas utilities.
The affected functions run the full gamut: transmission and storage, procurement and retail sales, distribution, revenue cycle services (metering, billing and collection) and after-meter services (leak response, appliance inspection and repair, carbon monoxide checks and piping for new appliances).
Efforts to outsource some of these activities are not new. In some parts of the country, gas utilities, motivated by a desire to increase profits, contract out pipe maintenance, meter reading, billing and certain after-meter services, which end up being performed by poorly-paid, less qualified workers.
But the current deregulation drive, based on an ideology which places free market economics above consumer protection, threatens to dramatically degrade standards throughout the industry, seriously compromising public safety, reducing reliability and raising prices for residential and small business customers.
The Utility Workers Union of America represents 50,000 workers at gas, electric and water utilities located throughout the United States. UWUA members have an enormous interest in the debate over gas utility industry restructuring, since their jobs and lives are at stake.
At the same time, UWUA members are also consumers and citizens themselves, and they understand the importance to the economy of providing natural gas service at the lowest price reasonably possible in a safe and reliable fashion.
UWUA members support change in the utility industry only if it will result in customer benefits. At the same time, UWUA members believe that certain fundamental principles must be followed in any reform of the industry, so that ultimately all customers will benefit, and so that safety, reliability and price stability of the U.S. natural gas utility system are maintained and enhanced by such change.
SUMMARY - THE BASIC PRINCIPLES OF GAS UTILITY REFORM
The following tenets must be adhered to in any restructuring of the natural gas industry:
I. Provide Benefits for All. The further introduction of competition in the industry should proceed only upon a demonstration that all customers, including residential and small business customers, will benefit. Such benefits must include safety, reasonable rates, reliability, customer service and universal access.
II. Make Restructuring Policy a Legislative Matter. The deregulation of the natural gas utility industry represents a significant action with respect to a large and critical component of America's economy. Fundamental policy changes must be the subject of legislative deliberation and action with full public input, not the result of
actions by state regulatory commissions.
III. Protect Public and Worker Safety. Market reforms must not compromise safety. Public confidence in this potentially hazardous commodity is crucial to the economic viability of the natural gas industry. Appropriate structures and regulation must remain in place to assure that pressures to cut costs in a competitive market do not adversely affect public and worker safety.
IV. Preserve Reliability. Although it is now largely taken for granted, the social and economic value of the reliability of America's natural gas utility system should never be underestimated. No restructuring should go forward without assurances that the reliability of the gas utility will be unimpaired.
V. Maintain Bundled Gas Utility Service. The unbundling of present utility functions will result in higher prices and reduced customer service and safety for small consumers.
VI. Provide for Stranded Workers. Under any restructuring of the natural gas utility industry, provision must be made during the transition to protect the employees who have invested their working lives in justifiable reliance on the stability of the current regulatory system.
VII. Preserve Environmental and Social Protections. Environmental and social protections that have been provided through the natural gas utility industry must be protected. Because availability of gas heating can be a life and death matter in many parts of the country, it is critical that subsidy programs for low-income consumers be maintained.
VIII. Price Stability and Service Quality. It makes little sense to restructure the industry if customers are not going to receive benefits. Those benefits must include continued high quality service and low prices. Degrading service and safety in the name of "customer choice" (and higher corporate profits) is a poor bargain.
DISCUSSION
I. Provide Benefits For All. The natural gas industry was partly deregulated over the past two decades in response to demands by producers and large gas consumers. However, vertically-integrated regulated utilities continued to operate and maintain the transmission and distribution systems, and to provide comprehensive bundled service for residential and small business customers, as well as for some larger users.
Under this system, reliability and safety have been maintained at a high level, while small customers benefit from the ability of the utility to aggregate gas procurement on their behalf in the competitive wholesale market.
But this arrangement is blocking profit opportunities for the marketing companies which have emerged as a result of telecommunications and electric utility deregulation. These marketers have become the main advocates of gas deregulation.
The earlier phases of gas deregulation have already resulted in a shift of some costs to small customers. Now proposals to remove the utility from wholesale procurement and retail sales threaten to raise residential gas prices in the interests of allowing marketers to make profits in this currently low-margin business.
Furthermore, proposals to unbundle and separately price gas storage would create a cost shift from large customers to small, as well as a degradation of system reliability during periods of peak demand for natural gas.
II. Restructuring Policy is a Legislative Issue. The natural gas industry is a vital element in our nation's economic infrastructure, affecting electrical generation, industrial processes, and the comfort and physical well-being of millions of Americans. Gas service is simply too important to our economy and quality of life to make dramatic changes without full legislative and public debate and decision by elected officials.
Put simply, the state legislatures should be answerable for any deregulation and restructuring of this industry and the sorting out of the priority of interests which must be established. The role for regulators is to implement those legislative policies once enacted.
III. Public and Worker Safety Must Be Protected. The production, transmission, distribution and consumption of natural gas carry inherent risks, which must be minimized in order to make it an economically viable and socially useful product. The current system of regulation provides measures which protect workers and the public. Those protections must in no way be weakened in the future. It is in the area of safety that deregulation poses perhaps the greatest threat.
In transmission and distribution, increased out-sourcing of maintenance work has resulted in performance of this work by unregulated contractors often employing lower-paid, less qualified workers. To the extent these operations are exposed to competition, there will be pressure to cut costs at the expense of public and worker safety.
The performance of after-meter services by non-utility personnel already occurs in some states, with an attending degradation of service and safety. No further unbundling or contracting out should occur in this area before rigorous and objective studies are done of the actual consumer impacts of such changes.
Meanwhile, proposals to unbundle meter reading, customer call center and after-meter functions from the regulated utility service will cause customer confusion about who to contact to correct dangerous conditions, as well as create economic barriers to resolving such problems.
IV. Reliability of Gas Service Must Be Preserved. The existing system of natural gas regulation works so well that reliability is scarcely even a question. However, several of the "reforms" which are being considered would severely challenge the ability of the system to meet customer needs during periods of heavy demand or to respond quickly to disruptions caused by natural disasters.
V. Bundled Gas Utility Service Must Be Maintained. The service provided by a regulated gas utility includes more than simply the sale and delivery of a commodity. It includes both the physical product and the "bundle" of related or supporting services as well. To the extent this bundle is reduced, the level of service, especially to small customers who use and rely upon that bundle, is diminished. Substantial benefits accrue to small customers when the full range of utility services are provided at a single rate. For example, vital safety services must not be reserved only for those who can afford to pay extra for them.
Unbundling the gas storage function which the utility currently performs, and offering it as an optional service, would both undermine reliability and cause unfair price shifting between classes of customers.
Coupled with reducing or eliminating the utility's role as the main supplier for small customers, this would greatly increase the likelihood that gas service would actually be curtailed at those times that it is most needed.
VI. Affected Workers Must Be Provided For. American utility employees have devoted their careers to an industry in which they are responsible for building, maintaining and operating a regulated and integrated system to provide safe, reliable service to the public. In return, there has been a reasonable expectation of stable employment for those workers.
If a transition occurs to a competitive, disaggregated system where that expectation no longer applies, those who invested their working lives in an industry transformed by regulatory fiat are entitled to mitigation of their losses.
Simply buying out those workers is not in and of itself an adequate solution (a paycheck without work is a poor substitute for productive, well-compensated employment).
The profit motive that encourages wholesale downsizing must be removed from any restructuring process and replaced with rewards for companies
implementing employee retention and intra-industry retraining options.
Where job loss occurs, these concerns must be addressed by: funding for collectively bargained early retirement, severance and job retraining programs; extended unemployment benefits for affected workers; and priority hiring requirements for companies taking over unbundled utility functions.
VII. Environmental and Social Protections Must Be Preserved. Social protections are woven into the fabric of utility regulation. Replacing this regulation with market forces would inevitably lead to dangerous reductions in the protections available to the most vulnerable members of society, and to the public generally.
Low-income and elderly consumers are most dependent upon personal contact with the utility, to deal with payment problems, negotiate deferred payment plans, respond to shutoff notices, obtain information on federal fuel assistance programs, and the like.
To be meaningful, these critical services must be available, through neighborhood customer service offices and adequately staffed customer call centers. Unbundling customer contact services into a competitive environment will inevitably lead to severe degradation, if not virtual elimination, of these services.
Likewise, regulation has provided a framework for the implementation of environmental protections and energy conservation in this industry, reducing the financial incentives which exist in a competitive business environment for evasion of environmental and safety standards. Conversely, by creating incentives for selling greater volumes of natural gas, competition will undermine the goals of conservation programs.
VIII. Prices Must Be Kept Low and Service Quality High. The advocates of deregulation point to the "benefits of competition" as a justification for the industry restructure that they propose. The major benefit to which they point is "choice." It is axiomatic that, all other things being equal, customers will prefer having choices to not having them. However, if the price of choice is higher gas prices and lower quality of service, then the choice "benefit" will be no benefit at all.
In fact, the "choice" argument is a cipher for exposing small consumers to exploitation by competing marketers, without regard to the actual effects on those consumers or on society as a whole. Competitive markets should not be regarded as a goal in themselves, but as a tool to be applied only when they produce a benefit for people.
Every indication is that further deregulation, unbundling and retail competition in the natural gas utility industry will only result in higher prices for residential and small business customers, greater environmental risk, degraded customer service and higher incidence of customer and worker deaths and injuries.
State deregulation pilot programs have further demonstrated that the unbundling and outsourcing of utility inspection and repair functions expose customers to the predatory sales practices of unscrupulous contractors who use these services to gain entry to sell often unneeded but highly profitable "repairs" and new appliances.
CONCLUSION - A FIGHT FOR DEMOCRACY
Utility regulation is a historic democratic political legacy of the Progressive Era and the New Deal, like anti-trust, Social Security and other social programs, which can and must be defended. Public regulation of industry is under attack worldwide, and many U.S. politicians, both Republican and Democratic, have bought into the cult of the free market.
But there is nothing inevitable about this process. The appropriateness of regulation must be measured solely by the degree to which it contributes to human needs, not to corporate bottom lines. It is clear that in the natural gas industry, effective, fair and comprehensive regulation continues to be needed to protect small consumers, workers and society as a whole.
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