EDITOR'S NOTE: Natural gas utilities, like their electric utility sisters, are responding to shifting businesses opportunities. The Energy Times asked Michael P. McMasters, president and chief executive officer of Chesapeake Utilities, about the changes ahead. The company’s regulated business includes gas operations in Florida, Delaware, Maryland and Virginia.
This is part of a series of conversations with gas utility executives.
Energy Times: Electric utilities are pursuing a new business model as many experience flat or declining sales. Are there any forces now compelling gas utilities to develop new business models?
McMasters: One of the forces that could impair both gas and electric utilities from growing is the potential regulatory limitations placed upon territories that could otherwise be served but are limited in order to avoid duplication of facilities. While all gas utilities experience this to some degree, some experience it to a much larger degree than others. In addition, rate of return regulation can limit a utility’s earnings potential and therefore the level of investment growth in the utility. Aging infrastructure coupled with increased reliability and safety concerns have been encouraging the development of new business models in the gas industry. Lower natural gas prices driven by the shale revolution are creating opportunities for some gas utilities to expand their service territory. Our strategic plan incorporates these market drivers into our business and risk management plans.
Energy Times: For combined gas and electric utilities, what are the effects of electric side business transformation on the gas side?
McMasters: Electric utilities have been investing in smart meter technology thereby providing them with the opportunity to increase their customer engagement while increasing their earnings potential as a result of the inclusion of the investment in determining the electric utility’s rates. Electric utilities with regulated generation assets may choose to invest in the pipeline infrastructure to enhance their growth thereby reducing the natural gas pipeline’s and/or the LDC’s growth opportunities. With the relatively low natural gas prices, gas utilities will continue to look for opportunities to expand their service territories to areas currently not served or not adequately served. Gas utilities are looking for new ways to serve their customers including the offering of natural gas for vehicles and distributed generation. Power plant conversions from coal and oil may also provide opportunities for natural gas utilities to grow.
Energy Times: How is your company planning to expand to serve burgeoning demand for distributed generation?
McMasters: We have a 20 megawatt combined heat and power plant currently under construction to serve a customer in Florida. Our intrastate transmission company and gas utility will transport gas to the plant. Our electric utility will take delivery of the power generated by the CHP plant. We believe there are similar projects in our strategic growth markets and have a development team pursuing these opportunities.
Energy Times: As the shale revolution continues and gas pipeline assets get built out, how is that affected your wholesale and retail costs – and your overall business?
McMasters: Overall the rapid growth in domestic shale production over the past several years has lowered energy costs for all consumers, saving the customers across our territories millions annually. Shale gas production has also directly contributed to the stabilization of natural gas prices, reducing volatility and enhancing consumer confidence in natural gas as their fuel choice. The United States is the leading producer of natural gas in the world, largely as a result of the shale boom. For our company, the fuel savings and price stability have led to above average customer growth; organic, expansion into new territories; and new technologies such as CHP plants.
Energy Times: Aging gas distribution lines in urban areas remains a concern in many regions. What are your plans and budgeted capital expenditures on that front?
McMasters: We have almost completely eliminated cast iron mains from our distribution systems and we are systematically replacing bare steel mains and services from these systems. Our current projects have us virtually replacing all of these facilities with new plastic or coated steel within the next five years. Safe and reliable operations are a key a driver in our integrity management program in which we will continue to invest.
Energy Times: Is there any major issue you would like to address?
McMasters: One of the threats that the gas industry faces is the concern with the potential impact that carbon emissions have on our environment. It is important that we as an industry continue to improve our delivery systems to reduce our carbon emissions. In addition, we must communicate effectively with the public about the economic and environmental benefits of natural gas and our track record of safely and efficiently delivering it to millions of consumers across our country. As an industry, an emphasis on cybersecurity to effectively protect, detect, mitigate, respond to and, if necessary, recover from cyber attacks continues to be a focus.