Gas
Executives' Forum
April 15, 2000
By Richard Stavros
Experts discuss
which strategies offer hope for cutting costs, creating a competitive
edge, and meeting exploding demand. This article contains interviews
with: Thomas J. Aruffo; Edward M. Kelly; and Michael Rutkowski
and Chuck Beaver.
Gas.Com Inc? A Smokestack Industry Faces
the E-Future
Natural gas executives,
according to analysts,
are in a phase that Enron chairman Ken Lay described as the fifth of five
stages of Internet awareness - beginning with ridicule and evolving to
panic.
In late February, at Cambridge
Energy Research Associates' annual conference in Houston, natural gas
executives were openly concerned about being left behind by competitors
who successfully adapt e-commerce to their businesses first. Industry
analysts chalk up recent interest to several large e-commerce initiatives
announced by energy companies last year.
For example, last year's rollout
of EnronOnline, an Internet-based transaction system to buy from or sell
to Enron energy-related products and other commodities, was an alarm that
awakened many natural gas executives to the e-commerce revolution, say
analysts. Furthermore, many big name oil majors such as ExxonMobil, Chevron,
and Shell, and oil pipeline companies such as Colonial Pipeline, are developing
vertical e-commerce markets and energy portals, each one a community of
customers and suppliers brought together under one virtual roof.
Chances are where oil companies
go, natural gas companies will follow, say experts. They say many of the
commercial pipeline and exploration and production (E&P) e-commerce strategies
adopted by oil majors can be easily adapted to natural gas. In the distribution
sector, local distribution companies are weighing e-commerce options as
they exit the merchant function and seek ways to cut costs as they become
pipes companies.
Dean Liollio, president and
chief operating officer at Entex - Reliant Energy's local gas distribution
company - has another plan in mind. He intends to retain customers for
a potential retail affiliate should competition heat up in Entex service
territories of Texas, Louisiana, and Mississippi.
Customer retention in the future
will depend on the proper combination of technology and human contact,
according to Liollio.
"The key is using technologies
such as e-commerce to enhance customer convenience and lower LDC operating
costs, while maintaining human touch, with a storefront and a real person
to talk to when a customer needs service or has a problem," he says.
"At the end of the day, LDCs
that have this proper blend will develop customer appeal and be the supplier
of choice."
To those ends, Reliant Energy
in early March announced it had signed a three-year agreement with billserv.com
Inc. to develop an electronic bill presentment and payment (EBP&P) system
for the company's 1.6 million customers in the Houston area.
But beyond technology, Liollio
believes it will be difficult for competitors to break past the strong
relationship his company has built over the years with customers.
"In the natural gas business,
we go into a customer's home. There is more emphasis on human touch. The
customer is there and we interface with them. There is a certain comfort
in knowing that your gas company employees are the people that have been
taking care of my home, my needs and my wants for the last 60 years,"
he says.
As for their interactions with
regulators, natural gas utilities are looking for ways to cut costs through
investments in businesses that interface electronically with government
regulators.
For example, Exelon Infrastructure
Services, a subsidiary of PECO Energy, has invested in permitsNOW.com,
developed by SoftComp. The portal provides the aggregated permits and
licenses businesses, contractors, developers, and private citizens need
to apply for approval for government-regulated activities and to request
publicly available information.
John W. Webster III, chief
executive officer at SoftComp, explains that as utilities undertake complex
infrastructure construction projects such as laying pipeline or fiber-optic
cable, wiring a sub-division, or building a power substation, they need
various permits to secure rights of way, zoning, land use, construction,
and other rights.
PermitsNOW.com fills the need
for rapid turnaround in the permit application process, he says. Most
permitting currently occurs at the local government level, says Webster,
but some projects need review by state and federal agencies. The permitsNOW.com
site now has no affiliation with any state or federal commission, but
it was designed to facilitate interface with those bodies, according to
Webster.
But even while gas executives
seem long on enthusiasm for e-commerce, which is advancing as never before,
few examples exist for adapting e-commerce strategies beyond well-known
options for wholesale trading, customer relationship management, and retail
EBP&P, such as GISBAgent, newly certified by the Gas Industry Standards
Board.
Michael Rutkowski, senior manager
of Arthur Andersen's energy industry business consulting practice, says
most energy clients want his company to help them do what others do now,
while at the same time devising an e-commerce strategy that will distinguish
them from the competition.
But he warns that a heavy Web
presence or flashy Internet site may not be necessary for all companies
in supporting their overall strategies. For example, no-frills e-commerce
sites for procurement or to share reliability standards on equipment monitoring
can be an advantage because fewer graphics and less information to download
means increased speed of use, says Rutkowski.
E-commerce isn't the only thing
on the minds of gas executives.
The Federal Energy Regulatory
Commission's rulings on short-term capacity auctions and the price competitiveness
of liquefied natural gas imports are other hot issues gas executives are
pondering. In this gas industry forum, top executives at local distribution
companies, pipelines, and marketers, as well as consultants, share their
insights on the issues.
The Utility
Perspective - Interview With
Thomas J. Aruffo
Aruffo is vice president
and chief information officer at NiSource Inc.
What is the state
of the natural gas industry as it relates to e-commerce?
When I look at information
technology and look at spending on e-anything, whether it is infrastructure
or dot.com ventures, our industry appears to be taking a lag strategy.
We are not spending at the same levels as other information-intensive,
e-centric businesses. We are a bit slower to get to this click-and-mortar
world....
I can't give you the
exact numbers, but for those leading-edge financial services heavily
leveraged through the use of Internet or the e-domain, they are
spending upwards of 20 to 30 percent in investments, when expressed
as a percentage of total revenues, on information technology infrastructure
and application.
When you look at what
average natural gas or electric-combination utilities spend, it
is somewhere in the neighborhood between 2.5 and 3.5 percent. So
there is a huge gap there.
We do have the Enrons
out there, we do have the Utility.coms, Energy.com, but we don't
appear to have the right product mix and strategies that have really
fundamentally shifted or changed the way we do business.
What e-commerce strategies
will you implement at NiSource?
We are moving forward
in a couple different sectors. We were one of the first to move
trading in gas nomination processes out to the Web through our Energy
Access System online product.
We have a focus at NiSource
on full life-cycle customer relationship management. We are a development
partner with Seibel Systems to take advantage of all of the sales
channels that we have and all of the customer contacts that we have,
and link those together.
For example, it allows
us to surround many of our other stand-alone applications and provide
Web-based interfaces to self-service information as well as proactive
management of our customer acquisition, sales, marketing, cross-sale,
up-sale, and service strategy. We will be rolling that out this
year. Again, [we have set] aggressive timeframes around that and
getting things out there in 30 to 60 to 90 days as opposed to multi-year
engagements for major systems.
Is the natural gas
industry's interest in e-commerce strategies greater than it has
ever been?
Absolutely; I think we
are in a transition period. I don't know whether it will be weeks,
months or years, but all of our customers, whether they be on the
business-to-business side or whether on the retail side, all of
them experience participation in the e-economy now. So the expectations
that they have for customer service, for supply-chain and vendor
management is all being set in that e-environment.
Since we also participate
in that, their expectations are that we would be able to do the
same things and they would enjoy the same types of customer care
as they enjoy in financial services or in some aggressive supply
chain strategy.
[For example], as we
have moved from a small regional to a super-regional operation,
from Texas to Maine, we have to take full advantage of our skill.
Part of that is to go out and implement an aggressive vendor management
supply chain initiative, heavily dependent on the Internet and Intranet
for connectivity linking us to some e-malls and buying opportunities.
We are using Oracle as the backbone for that.
How much of this e-commerce
strategy is designed for the regulated side vs. the unregulated
side?
We have approached it
as a whole at the holding company or enterprise level.
What e-commerce solutions
could maximize the potential of fuel cells and microturbines?
We are 60 days away from
moving out some energy portals where we become the aggregator of
solutions and services and market access for fuel cells and distributed
generation. We have gone as far as reserving our domain names and
locking those down to be one of the premier sites of managing the
market space and information around fuel cell solution services,
as well as distributed generation.
NiSource has its own
play in the research and development of hardware that allows fuel
cells to move forward. Furthermore, we have even talked about moving
fuel cell services over to online-auction capabilities.
How will LDCs fare
in an e-commerce environment?
It depends [on whether
they] maintain that link to the customer. NiSource is going to be
a distribution company as well, and will try to preserve our links
with our customers.
Self-service, bill presentment
and payment, and energy management solutions, have been launched
this year and will be in production in the next two months of what
we have termed "an industrial gateway." Although our large commercial
and industrial customers have choice today, we are able to come
in and provide them with near real-time metering, demand management,
and profiling, so that they can have more control across an entire
enterprise, as opposed to just a local plant or a single building
in operation.
It is one of those things
that we can value-add to our customer in the hopes that we will
retain that customer even when they are faced with choice.
|
The Outside
View - Interview With Michael Rutkowski and Chuck Beaver
Rutkowski is senior manager
of Arthur Andersen's energy industry business
consulting practice.
Beaver is an industry consultant
for Proxicom's energy practice.
Is e-commerce a large-account
solution?
It can be, depending on the
strategy. Some of the things I can see utilities doing are for their very
large, multi-site key accounts - steel mills or large industrial customers
that may have several hundred meters. [An example of this strategy is]
basically building them a customized customer interface where they can
manage their entire customer billing information in one spot in addition
to having a direct account rep.
I do see it as a way to enhance
the customer relationship. Right now in the area of electronic bill presentment
and payment, it's really not a cost-savings measure until X percent of
utilities' customers adopt it and they can actually get rid of their paper
process. [E-commerce] in the near term will be a customer-satisfaction
tool.
What is your definition
of e-commerce?
We usually call it e-business.
The way we define it is improving the exchange of goods, information,
or services through the use of network-enabled technologies to remove
barriers of time, geography, and physical product form.
What are the biggest risks
in adopting an e-commerce strategy?
- When companies don't have
a coordinated firm-wide approach and look at [e-commerce] as a series
of point solutions, they are not going to get the promised returns because
they may be focusing on the wrong places.
- There is this e-commerce,
e-business hype out there and they may risk over-applying it if they
don't have a process where they can evaluate the application across
the corporation.
- [Energy companies] cannot
view e-business as a panacea for a customer-satisfaction problem. It
may be one component of the solution.
- The risk is your competitors
will not only make their businesses better, faster, and cheaper, but
also reinvent themselves using e-commerce technology.
What e-commerce strategies
are available?
Procurement is the kind of
no-brainer for e-business. Business-to-business transactions such as procurement
of supplies, equipment, and managing inventory are just a few examples.
We are starting to see vertical
marketplaces pop up such as Shell, [which] has all these suppliers and
they are trying to exploit those relationships by managing that vertical
marketplace. [Shell has partnered with Commerce One, which helps companies
establish Internet portals, to host portals for others, and to develop
comprehensive e-procurement plans.]
Chevron and Ariba [whose software
helps companies track and manage supply purchases over the Internet and
corporate Intranets] unveiled a Web site, Petrocosm Marketplace for energy-related
goods. [The Petrocosm Marketplace procurement Web site will enable companies
to buy and sell products and services in the oil and gas industry, ranging
from pipes and valves to engineering and construction services.]
[Moreover], eNersection.com,
an online Web-based service, will allow E&P oil and gas companies to purchase
a wide range of products on the Internet.
What are the most promising
e-commerce strategies?
There are probably some quick
wins with e-procurement because efficiency gains in the procurement process
are quickly realized. In general, it reduces the friction in the supply
chain.
If you look at the vertical
marketplaces, there is an opportunity there. I haven't seen anyone go
after that market yet in energy as in other businesses. It hasn't really
materialized. I think on the wholesale side, most of that is being done
through intermediaries. They are basically running commodity markets for
LDCs, utilities, and marketers.
Customer relationship management
can be successful. That gets into the sophisticated portal idea for retail
customers.
How can e-commerce help
the gas industry be responsive to increased demand levels that may grow
to 30 trillion cubic feet? Could e-commerce facilitate an hourly market
for natural gas?
While revolutions are occurring
in most industries, the energy industry has been slower to respond. A
number of factors contribute to this, and for the Internet to really begin
transforming the natural gas industry, many fundamental changes would
need to occur. [Such] options assume a great deal of infrastructure change,
the likes of which the industry continually resists.
Hourly scheduling assumes a
seamless grid of nominations and confirmations have been accomplished,
that can be transacted and scheduled in a few minutes every hour on a
24/7 basis. Hourly also assumes that transportation of gas, and the gas
itself, has been nearly commoditized.
Let's address these [matters]
backwards, since accomplishing the second one would force the existence
of the first one.
The Internet is especially
good at commoditizing things that might not be traded efficiently currently.
Transportation capacity and the gas itself are good examples. While there
are underlying physical and operational limitations against how completely
similar you could consider all natural gas or transport capacity to be,
you could still move these markets into a commodity model and substantially
get away with it.
Using typical Internet exchange
forum initiatives, you could develop a site where all the producers sought
out all the end-users, and the price of gas immediately settles to market
value without any influence of the inefficiencies of the traditional networks
on which the price currently rides.
As is also typical with such
an Internet influence, the middlemen's existence is immediately banished.
This means all the marketers could go away, since they no longer have
a function in a perfectly efficient Internet-based market. However, they
are not going to go away without a serious fight! This is the most powerful
segment in the industry.
[Moreover], the Gas Industry
Standards Board's first goal was to head [toward an hourly market], to
make the nominations and scheduling of transactions seamless to the point
of enabling such a quick market. GISB's goal amounted to trying to streamline
a vast enterprise supply chain. However, what GISB experienced is that
the suppliers view each other as fierce competitors and were unable to
work cooperatively. It is doubtful that any meaningful streamlining of
the grid will take place until or unless the customer segment of the industry
makes roaring sounds like what we've seen in other markets.
What would happen to pipeline
transportation capacity if gas is further commoditized on the Internet?
If transportation capacity
is further commoditized [from] its current state and across the whole
pipeline grid, then the pipelines lose their monopoly status, and the
price of their capacity is settled in the market by buyers and sellers
only, eliminating pipelines as middlemen (along with their fees based
on market inefficiencies).
They get relegated to bit players
in the schema, only useful for physically moving gas. (However, the transportation
of gas and transportation capacity are limited more by their physical
connection to the pipe in the ground, which sours some of the commoditization
efficiencies).
Nonetheless, this threatens
a cherished role of the second-most powerful segment in the industry -
that of the capacity market on the pipelines. They would fiercely resist
a market scenario that relegated a return to a utility status, with no
real need for contact with customers. This lack of contact with their
customers would come about because the auction sites that conducted the
gas trades would become the only interaction their former customers would
need. This single site would then provide the necessary nomination information
to all pipelines.
This is a fundamental part
of the puzzle, since the pipeline differentiation we see today is mutually
exclusive of a commoditized gas market (and, to a lesser extent, the capacity
auction market). With pipeline differentiation no longer included in the
gas "product" like it is today, the need for a customer to interact with
the different pipelines vanishes, perhaps resulting in happy customers,
but unhappy pipelines.
How do natural gas industry
initiatives relate to other industries?
The Internet can easily enable
exchanges on each pipeline so buyers and sellers of gas and capacity can
trade and compete in a definable market space. However, this is short
of the full empowerment other markets in other industries have achieved.
In other industries, the power
of the consumer has been so vast (due to vast numbers) that the manufacturers
or retailers had to cede control to the customer base. The newly empowered
masses forced the changes in power and caused explosive growth on customer-driven
Internet sites - most notably Amazon and E-bay.
The end-users, both wholesale
and retail, are the weakest segments within the gas value chain. Wholesale
end-users are small in number and therefore lack a power base.
The retail end-users, household
customers, while large in numbers, are difficult to energize because buying
utility services is not seen as exciting, glamorous, or even fun to do.
Consumers are unlikely to initiate change for a service or adopt additional
purchasing effort for a service or benefit that they view as transparent.
What are the most successful
e-commerce strategies for the natural gas industry?
I'm not aware of any companies
in the natural gas industry that have anything approaching a real e-commerce
strategy. Most are busy trying desperately to not join the Internet revolution.
On the
Physical Side: An Interview with Edward M. Kelly on Global Markets
for Gas
U.S. LDCs may be at
a disadvantage with imported liquefied natural gas, says Kelly,
director of research, North American natural gas, at Cambridge Energy
Research Associates.
Will overseas liquefied
natural gas imports play a role in North American markets?
The need is there. The
demand potential is real and the cost of supply has come down.
The amount of distressed
methane [distributors] that would not have the market other than
liquefied [natural gas] or [to] pipe to some difficult local market
situations is growing. In addition, there are two written-down,
inactive import and regasification facilities in North America,
and the cost of liquefaction has come down. We are looking at an
LNG value chain that is very competitive into the East Coast in
the U.S. The range is in the low- to high-$2.00 range, [with] a
flexible service capability.
I think there has been
a lot of recent interest in LNG because of all of the pools of natural
gas that don't have an alternative home and the cost reductions
to the new technologies in building liquefaction and export facilities.
What are the risks
for U.S. natural gas companies if a world market for natural gas
emerges?
The risks are probably
somewhat limited by the availability of import capacity....So we
are really talking about an important marginal source of supply
but not a source of supply that is likely to threaten the underlying
price structure available to U.S. producers.
What will LNG mean
for LDCs?
More LDCs will face the
challenge and opportunity of what to do with their existing LNG
liquefaction and regasification facilities - by that I mean the
pipeline. Many LDCs have their own LNG facilities that liquefy,
store and revaporize gas from the pipeline system.
The larger issue for
LDCs is the value of those facilities in an increasingly competitive
marketplace, and to have rights to that value. We are talking about
two types of LNG and two types of uses that are possible.
In a conceptual free-market
environment, if those facilities got their cost structure lowered,
[they] could begin to compete for peaking services with LNG imports.
There is a certain regasification capability, but over time, to
be competitive is not likely.
The LNG imports have
significant advantages in the economics. One, they are not liquefying
pipeline gas as they are importing gas that was distressed from
somewhere else in the world. They are importing at whatever the
market price is. Second, the LDC book cost, on a per-BTU basis,
on average, is higher than the import facilities that were built
in the '70s.
What does world natural
gas competition mean for pipelines, E&Ps, and marketers?
For marketers, the development
of a worldwide market would open up a new level of opportunity for
arbitrage and trade.
For pipeline companies,
the development of a world market opens up challenges in terms of
value of existing infrastructure. If there were a functional world
market, [in] some areas of the world the value of existing infrastructure
would be challenged.
For E&Ps, a world market
for gas will have quicker monetization in gas reserves - in general,
an opportunity where they have large associated gas reserves.
Is siting still an
obstacle for LNG? What other hurdles exist?
Certainly in the U.S.,
environmental hurdles, siting hurdles, and community relations are
not getting any easier. Opponents will use every argument against
something, including the danger aspect. Environmental compliance
and siting regulations have gotten more onerous.
How long before natural
gas imports become competitive with U.S. natural gas?
It's there now. It is
the reason for resumed and very active interest in activating two
remaining LNG and port terminals.
What would a world
market for natural gas do to prices?
In the U.S., [imports
are] an important marginal source of supply. It would add a needed
increment of service in the eastern seaboard, such as 2 bcf into
a 60 bcf per [day market]. In terms of pricing, it might dampen
volatility in certain East Coast markets. Most of the LNG would
come to the U.S. from Latin America, Africa, and spot cargoes from
the Middle East and Asia.
|
Richard Stavros is Senior
Editor for Public Utilities Fortnightly.
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