Ask AGA: Home Improvement

Residential customers bring home the bacon for natural gas distribution utilities, accounting for about 65 percent of local distribution company (LDC) revenues. Growing this market has proved challenging, however. The national average of natural gas use per residential customer has declined steadily over the past decades. From 1980 to 1997, natural gas use per residential customer fell 16 percent from 106 thousand cubic feet per year (Mcf/year) to 89 Mcf/year (numbers have been adjusted to reflect normal winter weather).

Why the Downturn?
A recent AGA analysis found that several factors are contributing to the declining-use trend in the residential natural gas marketplace (see chart). Ironically, just as improved technology has enabled the natural gas industry to recover previously unreachable gas reserves, it also has greatly improved the efficiency of appliances, significantly cutting the amount of energy consumed.

Appliance efficiency gains contributed to more than half of the residential average-use decline. In 1980, the average furnace efficiency was slightly higher than 65 percent while the typical water heater energy factor (EF) was 0.50. Since then, federal regulations designed to save energy have set the minimum gas space heating efficiency at 78 percent and the minimum gas water heater EF at 0.54. Conservation-minded consumers are going beyond these thresholds, buying appliances with ratings that exceed minimum standards.

Appliance saturation loss accounted for about 12 percent of the overall decrease in gas use per residential customer. While the proportion of homes with natural gas service increased slightly since 1980 (with market share in new single-family homes now at 70 percent), overall, the number of gas appliances per customer declined for space heating, water heating and cooking. Traditionally, if a home had gas service, all of these appliances would be gas-fueled, but recently electric appliances have increased their market share.

Changing housing characteristics also played a part in the decline. Newer homes with improved thermal envelope characteristics, as well as older homes adding insulation and storm windows/doors, reduced the typical amount of gas needed for space heating. In addition, the amount of heated floor space per residence declined.

Finally, demographic changes rounded out the decline, reducing typical residential gas use by about 12 percent. Population shifts of gas customers to warmer climates since 1980, a slight decline in the average number of people per residence and an increase in the number of households setting back their thermostats at night all cut the typical household's energy needs.

Stemming the Flow
To find out how to curb continued declines in residential natural gas use, AGA hired Navigant Consulting Inc. to analyze residential market strategies, which included interviews with LDCs that have implemented programs to increase sales and margins in that sector. About 25 LDCs dispersed throughout the United States and Canada participated in the process.

Many of the marketing and sales managers at these LDCs felt that there are significant opportunities to improve throughput and develop new markets. While distributed generation and fuel cells offer great opportunities for tomorrow, gas utilities are implementing programs and technologies today that enhance residential markets.

The Navigant study found that successful LDC marketing initiatives often

 

 

 

 

are based on good market information;

 

 

 

offer simplicity and convenience;

 

 

 

allow the field sales force to focus on marketing tasks;

 

 

 

are supported by senior management;

 

 

 

segment markets and provide focused efforts directed at targeted markets;

 

 

 

encourage "buy" decisions to be influenced "upstream";

 

 

 

understand the needs of trade allies;

 

 

 

demonstrate long-term value to customers;

 

 

 

recognize that the rules continually change;

 

 

 

harness the power of e-commerce to reduce costs, increase marketing and customer service

 

 

 

productivity and provide new revenue streams;

 

 

 

publicize the things done well and the value provided; and

 

 

 

use employees for leads.

Further, the Navigant study identified several areas that could enhance gas companies' residential marketing efforts. For example, companies can use their rate structure to improve the revenue stream. By shifting more of the costs to fixed monthly customer charges, companies can reduce revenue volatility, increase throughput and increase gas penetration. Another strategy calls for LDCs to develop off-season rate promotion programs as a cost-effective way to increase throughput for appliances such as pool heaters, barbecues and perhaps air conditioning.

Opportunities exist within traditional marketing efforts as well. Companies can use database marketing, which can significantly improve the effectiveness of marketing and sales initiatives. Marketing managers can look to e-commerce to capitalize on numerous opportunities to expand service offerings, reduce costs and obtain new revenue streams-for example, by selling appliances and services over the Internet and using e-mail or a web site for customer service interactions. LDCs also could negotiate special rates with selected contractors and suppliers for referrals to reduce customer conversion costs.

Employees also can serve to shore up a company's bottom line. Increasingly, utilities are using employees outside the traditional sales department to increase throughput. Customers who contact a utility's call center and customer care employees learn about new ways to use natural gas and special promotions. All employees, particularly on-site service personnel, can participate in lead generation programs that offer personal rewards while benefiting employers.

Some utilities are looking beyond traditional sales and revenue programs by creating repetitive non-energy programs. Examples of these initiatives include aggressive water and space heater leasing programs, warranty and maintenance plans, and weatherproof bill programs.

Home at Last
Gas utilities will continue to face challenges in their efforts to improve residential throughput: Appliance efficiency will continue to improve as old units are replaced and technology improves. Homes will continue to become more energy-efficient.

Competition from other energy sources will not go away. While new products and technologies such as fuel cells and distributed generation may be future solutions, today natural gas companies can implement strategies to enhance their residential market and brainstorm new ideas to bring home more revenues.

Editor's Note: For more information on brainstorming new revenue producers, see "Thinking Outside the Box" October1999.

Bruce McDowell is AGA's director of policy analysis. He may be reached at bmcdowell@aga.org [1].

Also See:

Bringing Home More Natural Gas: What Your Peers Say

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