EDITOR'S NOTE: Natural gas utilities, like their electric utility sisters, are responding to shifting businesses opportunities. The Energy Times asked John Hester, president and chief executive officer of Southwest Gas, about the changes ahead. The company, headquartered in Las Vegas, provides natural gas service to more than 1.9 million customers in Arizona, Nevada, and California. This is the first 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?
Hester: Southwest Gas has decoupled rate structures in each of the states we serve; as a result, flat or declining sales do not generally adversely impact our business. In fact, the regulatory approval of these rate designs relies, in part, on Southwest Gas' commitment to energy efficiency and conservation programs that help our customers reduce usage and bills. At Southwest Gas, in part due to our desirable service territory in the desert, we added 26,000 new customers this past year; we anticipate continued customer growth of 1.5 percent for the foreseeable future. We're also excited about the growth prospects from new applications for natural gas, including compressed natural gas vehicles, combined heating and power, and distributed generation. We believe our current business model offers great opportunities for customers and shareholders alike.
Energy Times: For combined gas and electric utilities, what are the effects of electric side business transformation on the gas side?
Hester: We're solely a natural gas distributor, so we aren't impacted by these effects directly. That said, it does seem like combination utilities are increasingly valuing the growth prospects of the gas side of their businesses. The availability of domestically-produced, relatively carbon-friendly fuel, at low stable prices, in supplies projected to last over 100 years is really encouraging people to rethink the growing role that natural gas can play in our nation's energy future.
Energy Times: How is your company planning to expand to serve burgeoning demand for distributed generation?
Hester: We constantly reevaluate the capabilities of our distribution system to ensure reliability of service to our customers, and are enthusiastic about the growth prospects associated with increased interest in distributed generation. Recent examples of our preparedness include the starting of construction of a $35 million lateral on our Paiute Pipeline in northern Nevada to access increased supplies from Ruby Pipeline, or our recently-approved proposal to build a $55 million LNG plant to enhance reliability for our southern Arizona customers. As our customers increasingly explore distributed generation, Southwest Gas will have the supplies available to meet their needs.
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?
Hester: The proliferation of shale gas supplies has been a game-changer for natural gas. It has assured the availability of supplies at low stable prices. For example, at Southwest Gas, the cost of our purchased natural gas supplies is only two-thirds of what is was five years ago. Shale gas has been a great story for our national energy independence, and has made natural gas utility service a particularly compelling value for our customers. The natural gas value proposition is increasingly being realized by our customers in expanded applications like CNG vehicles and distributed generation.
Energy Times: Aging gas distribution lines in urban areas remains a concern in many regions. What are you plans and budgeted capital expenditures on that front?
Hester: Although Southwest Gas has a relatively young distribution system compared to systems in more mature markets, we have very aggressive distribution integrity management programs that seek to identify how our system can be further improved. Over the next three years, Southwest Gas plans to reinvest $1.3 billion in its distribution system, much of that investment directed toward enhancing pipeline safety. Our partnership with regulators has been crucial in successfully identifying areas for system improvement, and designing effective replacement programs to address those needs. We now have programs in each of our three states that facilitate Southwest Gas undertaking safety-related system improvements, and allow recovery of associated costs through small, gradual, adjustments to customer bills.
Energy Times: Is there any major issue you would like to address?
Hester: At Southwest Gas, we think that there has never been a better time to be a natural gas distribution company. Customers are increasingly turning to natural gas for exciting new applications with vehicles and small-scale power generation. The value natural gas offers is also leading to increased customer growth in our service territories.