Daily Archives: August 10, 2009

Import? Export? Which way for LNG in North America?

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Michael Giberson

Another sign of change in the North American natural gas industry, the Wall Street Journal reports Apache Corp. has agreed to supply gas to the Kitimat LNG terminal in British Columbia for export into the Asian market.  The Kitimat facility was initially conceived of as an import terminal to tap Middle Eastern and Australian LNG supplies, but with the dramatic natural gas supply shift in North America the developers reversed plans.

It seems hard to believe that Russia would sell LNG into the United States if Canadian producers could profitably export LNG to Asia, so I’m discounting that suggestion. Could it possibly be cheaper to ship gas from British Columbia into California as LNG traveling through Mexico than via overland? Perhaps if the overland pipelines become capacity constrained due to increased gas production in Wyoming and other Rocky Mountain states.

Also, a hugely expensive and risky natural gas pipeline from Alaska into central Canada or the U.S. midwest seems much less likely in a world of LNG exports from the Canada. A few years ago the project appeared essential, but now I’d say the market won’t support it for at least another 10 years.  So there is plenty of time for Alaskan state politics to work things out (and plenty of reason to think it won’t be enough time for Alaskan state politics to work things out).  The question for pipeline supporters: how long before new gas supplies, from shale and other recently developed sources, become expensive enough to justify an Alaskan gas pipeline project?

(HT to a former student, thanks David.)

ADDED, from the Financial Times Energy Source blog, a story about the natural gas industry lobby in Washington, DC:

He says senators are listening, and he has hopes they will recognise the growing role natural gas could play in the US, given how new technology has opened unconventional shale gas projects across the country, making the potential role of natural gas far larger than anyone anticipated just three years ago.

The politically useful thing that shale gas technology has done, at least from the point of view of natural gas industry lobbyists, is move several states from the “net consuming” to the “net producing” column.

Vero Beach Florida could become a hothouse of dynamic competition in retail electric power

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Michael Giberson

Vero Beach, Florida, could become a hothouse of dynamic competition in retail electric power, if only the city would follow the recommendations of economist Dom Armentano.

According to the Vero Beach [Florida] Electric Utility, they aim to provide “reliable, cost competitive electrical energy and services to our customers in a manner that exceeds their expectations.”  They aren’t meeting this standard.  Dom Armentano reports that his local municipal power monopoly offers rates that are “an incredible 58 percent” higher than rates available from the state-regulated monopoly serving the surrounding area.

Most of this economic nonsense started back in 1979 when state and federal agencies stopped a referendum-authorized city sale of the electric utility to [Florida Power & Light]. Then in 1981 a notorious “territorial agreement” was crafted to divide up the electric grid between the city and FPL. Finally, in 1983, the state Legislature removed the bulk of the PSC’s regulation of Vero’s electric system, including rates.

Since then, customers of the city’s utility (61 percent of whom live outside the city) have been at the mercy of whatever service and price structure the utility determines is appropriate. As one could predict, this has proven to be a recipe for inefficiency and price gouging.

Armentano recommends several possible ways forward:

One way is to simply require that the city of Vero Beach sell its utility operations to any willing buyer. A second alternative would be to force the city utility to charge “competitive” rates or, third, allow customers to switch to a competitor. This latter proposal would create “competition” between utility providers and would tend over time to lead to lower rates generally.

In addition, in order to encourage non-traditional suppliers of electric power, any and all supply restrictions on the sale of electricity in Indian River County should be removed.

The first option would likely result in a sale of the utility to FPL and prices equal to that available in the surrounding area.

The second option would likely gain the same lower price level, but leaves the city with significant cost management issues.

The third option, depending upon just how it is implemented, could result in FPL competing for customers by building new distribution wires, eventually producing duopoly like Lubbock, Texas; or, by unbundling the city’s wires and power supply businesses, could allow for a “retail choice” environment.  I’m not aware that anyone has tried retail choice in such a small market.  Even many large states pursuing retail choice have had difficulty finding the right mix of policies. But the city’s current rates do offer a lot of “headroom” for potential competitors, so maybe this approach could work.

Armentano’s last suggestion is most radical and offers the most potential for consumer benefits.  Simply by removing “any and all supply restrictions on the sale of electricity,” Vero Beach would become a hothouse of dynamic competition in retail electric power. FPL could wire neighborhoods to offer duopoly distribution capability.  Retailers could negotiate for delivery of power over city or FPL wires (though negotiating with monopolies is fraught with dangers).  Most importantly, local businesses or real estate developers could invest in microgeneration and bypass the city grid, likely contracting with the city for backup power or building a wire out to FPL.  Likely, several distributed power businesses would link up to self-supply backup power capability.  Obviously, smart grid-based coordination would be vital to such an effort.

Even though these developments may take some time to emerge, the very possibility of competition emerging would motivate the city to reduce costs and cut rates.

Moves in this direction would be strongly opposed by both state-regulated and municipal power utilities.  The prospects of significant consumer value are likely no match for the status quo political interests that would rise up to defeat it.  Still, it would be interesting, even educational, to watch the parade of industry lobbyists pretending to be the consumer’s friend even as they argue against giving consumers the ability to escape monopoly suppliers.  I’m in favor.

Evolving competition: Whole Foods, Costco, Trader Joe’s

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Lynne Kiesling

I really appreciated this Wall Street Journal article on how Whole Foods is adapting its corporate strategy to the current economic downturn. Their direction: shift away from a gourmet/”Whole Paycheck” focus and toward “healthy eating”. Founder and CEO John Mackey sees this adaptation as a movement in focus back toward his original commercial impetus:

After 15 years as a gourmet destination selling prime beef, crusty white bread and rich chocolate cake, Whole Foods will re-embrace its original emphasis, mirroring Mr. Mackey’s personal conversion to healthier eating — and reflecting consumers’ reluctance to spend money on the company’s pricier foods. …

… The blunt-speaking Mr. Mackey said the company’s product selection had veered off-course.

“We sell a bunch of junk,” he said, vowing to promote healthier lifestyles for its customers and employees. “We’ve decided if Whole Foods doesn’t take a leadership role in educating people about a healthy diet, who the heck is going to do it?”

This tweak (and it does seem to be a tweak to me, not a major geologic shift) makes sense when the shopping population shifts toward being more cost-conscious. More interesting to me, though, were Mackey’s comments on the extent to which Whole Foods competes with both Trader Joe’s and Costco, and how the economic downturn has amplified that competition:

The company is also keeping a closer eye on low-cost rivals, such as Trader Joe’s and Costco Wholesale Corp.

“We have a policy that our 365 private label has to match Trader Joe’s prices, unless there is a significant difference in quality, in which case it probably shouldn’t be a 365 product,” he said.

Costco, which Whole Foods tended to ignore two years ago, is now considered an important competitor. The warehouse store is even tougher than Trader Joe’s, because it is “harder to match Costco without going bankrupt,” he said. In some regions, Whole Foods has started to bundle items — a dozen pork chops or several boxes of breakfast cereal — to offer volume discounts.

I have long seen this dynamic at work in my neighborhood between Trader Joe’s and Whole Foods, and the attention to Costco is also interesting. Mackey is right that they can’t compete with Costco by matching prices, but if they can find a way to combine volume discounts with product differentiation along quality dimensions, I can see that being effective. Extrapolating from my own experience, we go to Whole Foods once a week/every 10 days in the summer (we subscribe to a farm, so from June to October we don’t need to buy vegetables), but I only go to Costco 4 times a year, in large part because of the volume purchases, but also because it’s always so crowded and the parking lot is a nightmare. In other words, high transaction costs! If consumers with shopping patterns like that can get some volume discounts at Whole Foods, they should see some revenue effects.

Note also the antitrust implication of this rivalry. It implies that the market definition for evaluating the Whole Foods-Wild Oats merger in 2007 should not have been restricted to “natural” or organic stores, and thus reinforces the critique of the FTC’s challenge of that merger.