# **How Changing Energy Markets
Affect Manufacturing**

**(Reprint from *Manufacturing
Consumption of Energy 1994*)**

|blueball.gif (210 bytes)**Natural Gas Markets**

blueball.gif (210 bytes)Impetus for Change

blueball.gif (210 bytes)Change in the Natural Gas   Market

blueball.gif (210 bytes)Natural Gas Usage

  
blueball.gif (210 bytes)Electricity Market

blueball.gif (210 bytes)Impetus
    for Change

blueball.gif (210 bytes)Change in the Electricity Market

blueball.gif (210 bytes)Electricity
    Usage

    blueball.gif (210 bytes)How Electricity Restructuring Might
Affect Manufacturingblueball.gif (210 bytes)Lessons From Natural Gas  Restructuringblueball.gif (210 bytes)End Notes |  | **Introduction**
    The market for
    natural gas has been changing for quite some time. As part of natural gas restructuring,
    gas pipelines were opened to multiple users. Manufacturers or their representatives could
    go directly to the wellhead to purchase their natural gas, arrange the transportation, and
    have the natural gas delivered either by the local distribution company or directly
    through a connecting pipeline.
 
   More recently,
    the electricity markets have been undergoing change. When Congress passed the Energy
    Policy Act of 1992, requirements were included not only to open access to the ownership of
    electricity generation, but also to open access to the transmission lines so that
    wholesale trade in electricity would be possible. Now several States, including California
    and Pennsylvania, have passed laws opening electricity markets to retail competition.
    Other States are considering similar laws while the U.S. Congress debates proposed Federal
    legislation.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Manufacturers spend a lot of their dollars on
energy--approximately $69.2 billion in 1994. Most of their energy expenditures were used to purchase electricity and natural gas (77 percent). What happens in those two energy markets affects the manufacturing sector. In turn, the manufacturing sector's high market
share for both energy sources affects the natural gas and electricity markets.

This chapter takes a brief look at the natural gas and electricity markets. It is organized into three sections with a view to answering the following questions.



Natural Gas Market. Why did the natural gas market undergo restructuring? How did the market change? Did natural gas restructuring affect the way manufacturers obtain their natural gas, the amount they purchase, or the prices they pay for their natural gas?



Electricity Market.
Why is the electricity market changing? How is it changing? How did manufacturers obtain their electricity in 1994? How much did they pay for electricity and how much did they use? What did they use the electricity for? What changes might take place in the
manufacturing sector in response to the present restructuring of the electricity market?



Lessons From Natural Gas Restructuring.
Will
manufacturers be able to look at how natural gas restructuring has affected them and
whether they can expect similar results in a restructured electricity market? What are the
implications of the restructured energy markets for Energy Information Administration
(EIA) data collections from manufacturing establishments?



Impetus for Change in the Natural Gas
Market

The natural gas market faced by manufacturers today is significantly
different from that of 20 years ago. At that time, rising natural gas prices and
difficulty in obtaining supplies gave the impression that natural gas had become a scarce
resource. Early Federal action to deal with those problems resulted in legislation in the
late 1970's. The legislation discouraged the use of natural gas (and petroleum products)
in large industrial boilers1 and established pricing
categories for wellhead gas production2 that
did not allow the sending of competitive price signals in the marketplace.

In the past, manufacturers had one source of natural gas supply, the
gas utility (local distribution company). Because gas distribution was such an expensive
effort, distribution companies were regulated monopolies with exclusive rights to provide
gas service in their franchise areas. Thus, there were few opportunities for manufacturers
to save on their gas bills by seeking out different sources of natural gas supply.

Change in the Natural Gas
Market

Market forces and a new regulatory initiative brought about significant
changes in the options manufacturers had for getting natural gas. In 1985, the Federal
Energy Regulatory Commission (FERC) issued Order 436, which allowed interstate pipeline
companies to become open-access transporters. A spot market in natural gas also developed
as producers made gas that was not already dedicated to the pipeline companies available
for purchase by any buyer.3

Prior to becoming open-access transporters, interstate pipeline
companies generally purchased natural gas from producers, transported it, and sold it to
local distribution companies (LDCs), who then sold and transported the gas to
manufacturers. An LDC's bill for a gas sale includes the cost of the natural gas itself
and the cost of transporting it to the manufacturer. The cost of the gas is the weighted
average cost of gas purchased by the LDC from all sources. This same average cost is
passed on to all of the LDC's sales customers manufacturers, commercial establishments,
residential users, and others.

When interstate pipeline companies became transporters, manufacturers
then had the option, with regulatory approval, of bypassing their gas utilities through a
direct connection with the pipeline company. Manufacturers could purchase natural gas at
the wellhead and become shippers on an interstate pipeline, paying to have the gas they
purchased transported on the pipeline and delivered to their site. Manufacturers must
compare the cost of constructing the pipeline connection and paying separately for
transportation on the pipeline with the savings they can achieve by purchasing gas at the
wellhead at a lower price than the weighted average price their LDCs would charge them.

Such arrangements are usually economical only for large-volume gas
users. However, even smaller manufacturers, or those at great distances from interstate
pipeline systems, generally benefit from this changed role of the pipeline companies. Gas
utilities themselves were able to contract independently for natural gas supplies and use
the pipeline company only for transportation. As a result, many LDCs were able to reduce
their weighted average cost of purchasing natural gas, benefiting all classes of LDC
customers.4

Many manufacturers have been able to use the threat of bypassing their
local distribution company to negotiate more favorable terms with the LDC. Some LDCs offer
large gas customers the option of purchasing only transportation service from the LDC.
This enables the manufacturer to make its own purchases of natural gas and have the gas
transported through the existing distribution network, rather than investing in a direct
connection with the interstate pipeline. The LDC benefits by maintaining the
transportation volume on its system and earning revenues from this service. This method of
obtaining natural gas has been used by an increasing number of manufacturers since the
late 1980's.

Most major interstate pipeline companies had become open-access
transporters by the late 1980's; FERC's Order 636, which became effective on November 1,
1993, made it mandatory for all of them.

Along with greater options for manufacturers in obtaining natural gas
came greater responsibilities related to transportation. When pipeline companies owned the
gas moving through their systems, they were able to use the gas as needed for operating
the pipeline system and to divert gas or make exchanges with other pipeline companies in
order to respond quickly to changing customer demand. Now, the transportation contracts
that manufacturers have with pipeline companies spell out the responsibilities the
manufacturer has as a shipper on the pipeline. Some examples of those responsibilities are
scheduling the amount of pipeline capacity required, balancing the flow of gas into and
out of the pipeline, and arranging for the use of storage. All of these details must be
agreed upon mutually between the manufacturer and the pipeline company so that the
pipeline system remains operationally sound.

These complicating factors, along with the effort needed to find and
negotiate for lower-cost supplies from producers, mean that it is usually only LDCs or
companies like the larger manufacturers that are able to complete all their own
arrangements to acquire natural gas today. These changes in the industry were one of the
moving forces behind the appearance of a new player in the mid-1980's, the natural gas
marketer.

Marketers may be independent or, as is increasingly the case, may be
affiliated with a traditional natural gas company, such as a producer or a pipeline
company. Marketers generally operate on low profit margins per unit of gas sold but make
money by aggregating the needs of many customers and moving large amounts of natural gas.
They enable smaller manufacturers (and even smaller LDCs, such as municipally owned
utilities) to benefit from restructuring in the natural gas industry.

Today, a manufacturer has several options for obtaining natural gas.
With a direct connection to a major pipeline, it may seek out the best purchase and
transportation arrangements from the production area to its delivery point on the
pipeline. It may continue to rely only on the LDC, but the LDC may, in turn, make all its
own arrangements or may rely on a marketer to do so. Also, a manufacturer may directly
contract with a marketer to make all arrangements from gas purchase to final delivery. The
manufacturer's decision depends on its experience in the new natural gas market and the
price and quality of service it can expect to receive from the many entities offering to
provide it with natural gas.

Natural Gas Usage in the
Manufacturing Sector

**How Much Natural Gas Did Manufacturers Use?**
Manufacturers consumed 6.6 trillion cubic feet of natural gas in 1994, providing 32 percent of
manufacturers' total first use of energy. Natural gas use by manufacturers increased an
average 3.9 percent per year from the 5.9 trillion cubic feet consumed in 1991.

How Did Manufacturers Use Natural Gas?
Manufacturers used natural gas in processes, in boilers, for nonprocess uses, and as
feedstock. In 1991 and 1994, the proportions of total gas used in each area were almost
identical (Figure 4.1).5

Process use, most of it in the
form of process heating, accounted for more manufacturing consumption of natural gas than
any other application. In 1994, process use accounted for 42 percent of natural gas
consumption. The second largest use was boiler fuel, which accounted for 35 percent of
natural gas consumption in 1994. The use of natural gas for boiler fuel increased 4.5
percent annually between 1991 and 1994, reaching 2.3 trillion cubic feet.

Nonprocess uses of natural gas, which
are split almost evenly between facility space heating and conventional electricity
generation, increased only slightly between 1991 and 1994, resulting in a smaller share of
total manufacturing consumption of gas in 1994, 11 percent. The use of natural gas as a
feedstock showed stronger growth, increasing 5.5 percent annually between 1991 and 1994,
and accounted for 10 percent of total consumption in both years.

Among the different types of
manufacturers, the chemical industry consumed more than triple the amount of natural gas
used by any other industry in 1994. The 2.5 trillion cubic feet of gas used by chemical
establishments accounted for 38 percent of 1994 consumption (Figure 4.2). The petroleum
and primary metal industries tied for second in 1994, each consuming 0.8 trillion cubic
feet of gas and accounting for 12 percent of manufacturing consumption. The same three
industries were the top consumers in 1991, when the shares of total consumption were 37
percent for the chemical industry, 14 percent for petroleum, and 12 percent for primary metal.

The increase in natural gas consumption
by the chemical industry between 1991 and 1994 drove the increase in consumption by
manufacturers as a whole. The chemical industry consumed 333 billion cubic feet more
natural gas in 1994 than in 1991, accounting for 46 percent of the increase by all
manufacturing. The second largest contributor was the primary metal industry, which
consumed 99 billion cubic feet more in 1994 than in 1991, or 14 percent of the total
manufacturing increase. These changes correspond to 4.9 percent and 4.6 percent annual
growth for these industries, respectively.

Does the EIA Manufacturing Energy
Consumption Survey (MECS) Show Changes in Manufacturers' Sources of Natural Gas? By
the early 1990's, manufacturers had many more ways of obtaining natural gas than they had
even a decade earlier. In an attempt to capture these changes, the MECS, in both 1991 and
1994, asked manufacturers to identify the source of their natural gas. In 1991, the
options were the utility, transmission pipelines, or other. In 1994, the options were the
utility or a nonutility (for example, a pipeline company or a marketer).

In 1991, manufacturers reported that they purchased 37 percent
of their natural gas from utilities. In the 1994 MECS, this share increased. The increase
was unexpected, given the variety of options that manufacturers now have for obtaining
natural gas. Marketers and other nonutility providers have been successful in luring
customers away from the natural gas utilities because, as traditional utility contracts
expire, they have been able to offer natural gas services at competitive prices. Large
manufacturers in particular have the resources to seek out the best deals for natural gas
from among their local distribution company and other natural gas providers.

After a preliminary investigation by EIA, there is evidence that
a misclassification might have taken place in the 1994 MECS. Natural gas that was
purchased from a source other than the LDC may have been classified as utility natural
gas. Under these circumstances, EIA has decided to withhold all data that show a
differentiation between utility and nonutility sources of gas, including quantities,
expenditures, and average prices. Because of the restructuring of the natural gas market,
the MECS is potentially the only source for nonutility expenditures and average prices.
The value of such data is recognized and EIA plans to study why the potential
misclassification may have taken place and what can be done to correct the situation
before the 1998 MECS is fielded.

Does the
EIA Supplier Survey Show Changes in Manufacturers' Sources of Natural Gas?
EIA conducts a separate, annual survey of natural gas suppliers 6that indirectly provides some insight into the
natural gas purchasing patterns of manufacturers. In the supplier survey, the respondents
are companies that physically deliver natural gas to the end user and are composed largely
of local distribution companies and natural gas pipeline companies. These companies report
the amount of gas they deliver by end-use sector: residential, commercial, industrial, and
electric utility. It is the industrial sector that is relevant here because manufacturers
are a subset of this sector and consume most of the natural gas that is delivered to the
sector. In both 1991 and 1994, natural gas purchases reported in the MECS were 79 percent
of the industrial deliveries reported in the supplier survey.

The MECS and the supplier survey differ in several important
ways (Table 4.1), one being how they reflect changes in natural gas purchasing patterns.7The MECS attempted to have manufacturers identify
the source of their natural gas (utility or nonutility). In the supplier survey, suppliers
separate total natural gas deliveries into the amount they sold to the end user (onsystem
gas) and the amount they simply transported for the end user (offsystem gas). The latter
case occurs when a manufacturer purchases gas from a source other than the delivering
company, for example, from a producer or a marketer.

Table 4.1. Comparing EIAs Surveys of Manufacturing Energy
Consumption and Natural Gas Suppliers

Item
    Manufacturing Survey
    Supplier SurveyRespondents
    Manufacturing establishments
    Companies that make final delivery of natural gas (LDCs and
    pipelines)End-User Classification
    Manufacturers by SIC code
    End-use sector: residential, commercial, industrial, and
    electric utilityDifferences in
    Manufacturing and Industrial Coverage
    Manufacturingonly nonutility generators of electricity at the manufacturing site
    Industrial Sectormanufacturing
      mining
      construction
      all nonutility generators of electricitySources of Natural Gas
    Utility/LDCNonutility/NonLDC
    Onsystem (respondent owned and sold the gas to the end user)Offsystem
    (respondent only transported the gas for the end user; did not own or sell the gas)


|SIC =
    Standard Industrial Classification.                                       
|-------------------------------------------------------------------------------------
|LDC = Local
    Distribution Company.                                               
|Source:
    Energy Information Administration, Office of Energy Markets and End Use.

The definition of utility and nonutility gas purchases in the MECS is
different from that of onsystem and offsystem gas deliveries in the industrial sector,8yet the purchasing and delivery trends
shown in the two surveys are expected to be similar. The same market forces that drive
manufacturers away from utility purchases are the ones that drive them and other
industrial consumers to offsystem suppliers, such as marketers. While the MECS results
show an increase in the proportion of natural gas purchased from utilities, the supplier
survey shows that the onsystem proportion of natural gas deliveries in the industrial
sector has declined, from 33 percent in 1991 to 26 percent in 1994 (Figure 4.3). In fact,
the supplier survey shows a continuous decline in the onsystem proportion of industrial
deliveries, from 85 percent in 1982 (the first year such data were available) to only 19
percent in 1996.9

How Much Did
Manufacturers Pay for Natural Gas? The average price of natural gas paid by
manufacturers was $2.65 per thousand cubic feet in 1994, a 1.1-percent real annual average
increase from the 1991 level. During the same period, the national average wellhead price
for natural gas showed 1.5 percent real annual growth, reaching $1.85 per thousand cubic
feet in 1994.10 The total growth in
wellhead prices during the 1991 to 1994 period would have been stronger had the price not
fallen by $0.24 per thousand cubic feet from 1993 to 1994. This drop at the end of the
period probably helped to moderate the price of natural gas to manufacturers in 1994.

Regionally, average natural gas prices paid
by manufacturers in 1994 were $2.40 per thousand cubic feet in the South, $2.64 in the
West, $2.91 in the Midwest, and $3.64 in the Northeast. It is not surprising that the
South had the lowest average price and the Northeast had the highest. Manufacturers in the
South are much closer to the major gas-producing areas of the United States, while the
Northeast is not only far from these areas, but also far from Canadian supplies, which are
located mainly in the province of Alberta. The regional price spread in 1994 is somewhat
more narrow than the one seen in 1991 when the prices per thousand cubic feet, in 1994
dollars, ranged from $2.20 in the South to $3.76 in the Northeast.

When considering regional
natural gas prices across the different types of manufacturers, the range of prices is
remarkably similar in 1991 and 1994, even after adjusting for inflation (Figure 4.4). In
all but one case, either the chemical industry or the petroleum refining industry has the
lowest price in the range, while the highest prices are accounted for by the furniture,
rubber, leather, and miscellaneous industries.

When only the top three gas-consuming industries are considered
(chemical, petroleum refining, and primary metal industries in Figure 4.5), the range of
prices seen in both 1991 and 1994 is much smaller than the range across all industries
(compare Figures 4.5 and 4.4). The highest prices in the range for the top three
industries are much lower than those for all industries, reflecting the ability of the
major consuming industries to make the best arrangements for obtaining natural gas. It
remains difficult, however, to discern any overall pattern in the price ranges between
1991 and 1994.

What Have Been the Effects of Restructuring on
Information on the Price of Natural Gas? Data on the price of natural gas from
utilities and nonutilities turned out to be difficult to obtain in the 1994 MECS. However,
the overall average price paid by manufacturers is still of value, considering that EIA's
supplier survey also lacks data on prices. As mentioned earlier, natural gas suppliers may
either sell or merely transport the gas that they deliver to industrial customers.
Suppliers have pricing information only for the onsystem portion of their deliveries, that
is, the gas that they actually sell to the end user. The average onsystem industrial price
for natural gas in 1994 was $3.05 per thousand cubic feet, yet this price applies to only
26 percent of all the natural gas delivered to industrial customers, leaving the average
price of the other 74 percent unknown (Figure 4.6). EIA analysts think that because lower
prices are often the motivating factor for an industrial customer to go offsystem, the
average price for all industrial natural gas is likely to be lower than the onsystem
price. The overall manufacturing price of natural gas in 1994 is lower, at $2.65 per
thousand cubic feet. It is the average price for 6.5 trillion cubic feet of natural gas
purchased by manufacturers, which is equivalent to 79 percent of industrial consumption.

Data collection and interpretation problems
with respect to natural gas in the 1994 MECS all revolve around the attempt to quantify
activities in the natural gas market place that have arisen as a result of restructuring.
The natural gas industry is more than a decade into this process, and with retail
activities being the next restructuring target, manufacturers can expect to have even more
options, and therefore more decision making, related to their natural gas purchases.

fig4.6_mecs94.gif (8139 bytes)

Electricity generation and transmission
are entering a new phase of federally mandated restructuring. This report providesthe most
detailed information available from EIA on how manufacturers used electricity before
implementation of the new structure. The next section reviews the highlights of these
data.



The electricity market has been commonly
referred to as a natural monopoly. Industries that are natural monopolies have
historically been those where they are only economically profitable if production is on a
large scale. Therefore, it is only natural that the industry would have only a few
establishments. Historically, those types of industries have been regulated. The natural
monopolies of industries, such as the airline, telecommunication, and natural gas markets,
have been challenged mostly because of changes in technology and competitive forces in the
market place. Regulators have responded by deregulating or restructuring those industries. Now, the electricity market
is undergoing restructuring. There are three main reasons for the restructuring:
technology improvements, price disparity, and changes in the belief that the industry can
be restructured to allow competitive forces to work towards lowering prices.11

Technology Improvements. Today, there
is less of a need to build large, expensive power stations when extra capacity is needed.
Smaller, inexpensive units can be built that can provide electricity at low cost.

Price Disparity. Customers, and
especially manufacturers, who use large amounts of electricity, have been pressuring their
legislative bodies and utilities to address the disparity in the prices of electricity.
Manufacturers in different parts of the country face varying prices. In 1994,
manufacturers in the New England Census Division paid on average almost 8 cents per
kilowatthour, whereas those in the East South Central Census Division paid on average 3.5
cents per kilowatthour (Figure 4.7). Within a region, prices can differ between
industries. For example, in 1994 manufacturers in the paper industry paid on average 2.9
cents per kilowatthour in the Mountain Census Division, whereas those in the chemical
industry in the same region paid 4 cents per kilowatthour.

Changes in Regulation.In general, manufacturers in the
Northeast face higher prices. That area seems to be moving faster towards electricity
restructuring than are other areas where the prices are lower. Some of the States in the
Northeast, such as Pennsylvania and Rhode Island, have actually passed legislation.
Another example of a State where electricity restructuring is on a fast track is
California. That State has passed restructuring legislation to begin retail competition in
1998. That legislation includes a 10-percent rate reduction for residential and small
commercial customers and authorizes retail competition for some customers, including
manufacturers, by January 1, 1998, and retail competition for all customers by 2002.12

In 1978, the Public Utility Regulations Policy Act of 1978 (PURPA), a Federal law, was
passed. One section of PURPA required utilities to buy electricity from independent power
suppliers who generated electricity using renewable energy or cogenerated the electricity.
These new suppliers had to meet certain qualifying criteria set by the Federal Energy
Regulatory Commission (FERC). PURPA and other legislation and regulatory policies started
affecting the market structure earlier on. The Energy Policy Act of 1992 (EPACT) changed
the market structure. No longer would the electricity market be looked upon as a natural
monopoly. The Federal legislation promoted the competitive wholesale market for
electricity and granted open access to the transmission lines similarly to what had
earlier taken place in the natural gas and telecommunications markets. In Order 888,
issued in April 1996, FERC carried out EPACT requirements by presenting the guidelines for
access to transmission lines to promote competition in the wholesale market for
electricity.

In 1994, less than 3 percent of the purchased electricity used in the
manufacturing sector came from a source other than the local utility. Now, retail
competition is coming to the electricity market. Manufacturers and other customers will be
able to choose their supplier of electricity.

As of July 7, 1997, Tennessee was the only State that had no activity
on the path to electricity restructuring.13 Restructuring bills
have been passed in seven States (California, Maine, Montana, New Hampshire, Pennsylvania,
Rhode Island, and Oklahoma). In 11 States, restructuring bills have been vetoed or have
failed in State legislatures. Thirty-eight States have held public forums on the
topic--most States have undertaken legislative study. Restructuring bills are still
pending in the following States: Alabama, Arkansas, Delaware, Georgia, Hawaii, Indiana,
Kansas, Kentucky, Louisiana, Massachusetts, Mississippi, New Mexico, New York, North
Dakota, Ohio, Oregon, South Carolina, Utah, Vermont, and Virginia.

Electricity Usage in the Manufacturing Sector

How Much Electricity Did Manufacturers Use and
Where Did They Get It? In 1994, manufacturers purchased 788 billion
kilowatthours of electricity, either from their local utility (97 percent) or from a
nonutility (i.e., independent power producer, small producer, or a cogenerator not at the
establishment). Another 143 billion kilowatthours (90 percent of which was cogenerated)
were generated on site. Only 2 percent of the generation was through the use of
renewables. The transfer of electricity from central company offices to establishments
added another 16 billion kilowatthours.

Manufacturers generated or purchased more electricity than they could
use, so they sold or transferred offsite 28 million kilowatthours. In sum, 918 billion
kilowatthours of electricity was actually used in the manufacturing sector in 1994, almost
the same amount used by all U.S. households in 1993.14

Another source of manufacturers' additional electricity is what is
commonly called negawatts--kilowatthours saved through the use of energy management
programs. In 1994, almost 45 thousand establishments participated in at least one energy
management program.

How Much Did Electricity Cost?15
Electricity expenditures, as other energy expenditures for the most part, are a small
amount of the cost of producing a product. Energy costs, though, are very important to
manufacturers. Although a company may incur only a small percentage of its total cost of
production as costs of electricity, a particular establishment in that company may have
electricity and other energy costs that are substantial, and the amount of expenditures
may determine whether or not the establishment makes a profit.16

Therefore, manufacturers do indeed pay attention to the price of
electricity. In 1994, manufacturers spent a total of $36 billion on electricity at an
average price of 4.6 cents per kilowatthours(Figure 4.7). Unlike an individual household,
a manufacturer may be the largest buyer of electricity from a local utility and may even
be able to generate its own electricity. This position is one factor leading to lower
electricity prices in the manufacturing sector than in the residential sector. In 1993, if
all U.S. households had been able to purchase electricity at 1994 manufacturing prices,
they would have paid $44.3 billion, instead of the $81.1 billion they actually paid.17

How Did
Manufacturers Use Electricity? Most of the electricity used in the
manufacturing sector is used in the process of manufacturing a product. Very little is
used for heating the buildings, air conditioning, office equipment, or other nonprocess
end uses. In fact, in 1994, 80 percent of all the electricity used in the
sector--including onsite generation--was used in the process itself. Of all of the
electricity used, 54 percent was used solely for machine drives (motors).

Similar statistics pertain to two of the
three largest users of electricity--the paper and chemical industries. In 1994, the paper
industry used 85 percent of its electricity in the manufacturing process (80 percent for
motors). The percentage was even higher for the chemical industry. That industry used 90
percent of its electricity for process usage, but only 62 percent for motors. Some of the
electricity is used for process heating and the electrochemical process. Although the
third largest user of electricity, the primary metal industries, also used most of its
electricity directly for the process (91 percent in 1994), only 29 percent of that amount
was for motors. That industry also used 24 percent for process heating and 36 percent for
the electrochemical process (Figure 4.8).

How Electricity
Restructuring Might Affect Manufacturing

In summary, most electricity used by manufactures is purchased. The two
exceptions are the paper and chemical industries, which produce a large portion of their
electricity onsite. Additionally, most of the electricity is used directly for the
manufacturing process, and mostly for motors. These characteristics need to be considered
in any discussion of potential effects that electricity restructuring may have on the
manufacturing sector. A few of the major areas that might be affected are: future prices,
participation in energy management programs, and onsite generation.

What Might Happen to Prices? At the
present time, as discussed earlier, manufacturers face variable pricing depending on a
number of factors such as location, amount, use, and even the manufacturing process
itself. Most studies show that electricity restructuring should bring about more uniform
pricing because manufacturers will be able to purchase electricity from many different
sellers of electricity. In 1994, manufacturers purchased less than 3 percent of their
electricity from a supplier other than a utility.

Whether the manufacturers will face lower prices will be limited by a
number of factors. One of these factors may be flexibility--do they need a constant supply
during peak times? Presently, the more flexible a manufacturer is in terms of time and
ability to switch to another energy source, the better the prices they face in the
electricity market.

Also, if a manufacturer is one of a utility's largest customers, this
manufacturer is in a good position to demand lower electricity prices. This might not be
the case under restructuring. The manufacturer's market power might not be as strong. The
local utility will have the option to sell its electricity to whomever it wishes.

Will Energy Management Programs Be Important?
Many large establishments use energy managers to monitor their energy usage. Some even
have the technology to control loads, use electricity during off-peak times of day, and
improve the technologies used in their processes, motors, lighting, etc. Many perform
their own energy audits.

In 1994, 54 percent of the electricity used by manufacturing
establishments was used to run motors. Fifteen percent of the establishments evaluated all
expected costs, including electricity, over the lifetime of the system before deciding on
new motor purchases or modifications to existing motors. The percentages climb to 27
percent, 27 percent, and 28 percent for the largest users of electricity, the paper,
chemical, and primary metal industries, respectively.

Under electricity industry restructuring, manufacturing energy
management programs might diminish or might even grow. In industries such as the chemical
industry that have cogeneration technologies similar to those used by independent power
producers, the market may be such that electricity savings may be important--excess
electricity could be sold in the market.

Electric utilities work with both large and small establishments by
offering such programs as audits, equipment rebates, assistance with special rate
schedules, and load controls. In 1994, over 29 thousand establishments participated in at
least one electric utility energy management program. Under restructuring, this will
change--energy management may become, in a competitive market, a commodity. Programs may
be sold by the utilities as they are today by the energy service companies or they may
become a product of good will to maintain customer relationships.

What Will Happen to Onsite Electricity
Generation? In 1994, manufacturers generated on site 142.5 billion
kilowatthours of electricity, 90 percent of which was cogenerated. Cogeneration was found
mainly in those industries that have large steam requirements for process heating. It is
economically more efficient to use the energy twice, mainly as a source of both thermal
heat and electricity. Additionally, many of the establishments that use cogeneration
technologies have a large supply of byproducts such as bark, wood chips, black liquor, or
different forms of gas. Those establishments usually use the most common technology,
boiler/steam turbines, because multiple kinds of energy inputs can be used with that
technology. Most cogeneration takes place in establishments located in the South Census Region (Figure 4.9).

In 1994, as in other years, the paper
industry had large amounts of usable byproducts, such as wood chips and black liquor.
Approximately 40 percent of all cogenerated electricity took place in the paper industry,
where 61 percent of the electricity was cogenerated using boiler/steam turbines. In 1994,
most of the paper industry's cogeneration took place in the South (62 percent).

The chemical industry was the next largest
cogenerator (35 percent). That industry also is located primarily in the South, where, in
1994, 90 percent of the industry's cogeneration took place. The MECS data show that the
industry used at least two different cogeneration technologies.18Because the chemical
industry is the largest user of natural gas as feedstock and for process heating, it would
be reasonable to assume that some of the 1994 cogenerated electricity came from the use of
combined-cycle turbine systems, which can burn both natural gas and byproduct gases.
Additionally, in 1994, the chemical industry was the second largest seller of electricity
(7.7 billion kilowatthours). It may be reasonable to assume that some of the electricity
was cogenerated using the conventional combustion turbine that also burns natural gas. The
conventional combustion system is the one used more frequently when there is excess
capacity and electricity is sold.

How cogenerating industries will change under electricity restructuring
is unknown at this time. Some industries might face lower market prices for electricity,
which would dampen the incentives for cogeneration. Other industries, especially smaller
establishments lacking large electricity loads and facing relatively high prices, might
have increased incentives to cogenerate. There are some industries that need a reliable
supply of electricity. Risk aversion might cause those industries to use the best
technology and to generate their own electricity, possibly through cogeneration.
Industries such as the chemical industry have the technology, and thus the ability, to
cogenerate excess electricity to sell if the price is right.



Historically, the natural gas and electricity markets have been
regulated by some of the same entities.19 At the Federal level,
that entity has been FERC. At the State level, the regulatory body has usually been the
public utility commission for each State. As mentioned in the beginning of this chapter,
the economic theory of natural monopoly was the justification for the regulation.
Developments such as new emphasis on the economic benefits of competition, price
differentials, emergence of new technologies, and the experiences obtained from the
deregulation of other industries, such as the telecommunication industry, has changed how
regulators, Congress, and customers look at energy markets.

How Long Will Electricity Restructuring Take?
The restructuring of the natural gas market has been going on for approximately 20
years and it is still undergoing changes. Although manufacturers have long been able to
benefit directly from restructuring, only recently have other market segments, such as
residential customers, been able to participate--on a limited basis and, for the most
part, as participants in pilot projects. There is no reason to believe that the
restructuring of the electricity market will be any faster. However, lessons that have
been learned from the restructuring of the natural gas market may assist in having a
faster transition to a competitive environment and a smoother one. As in the natural gas
market, the first participants to benefit from restructuring most likely will be
manufacturing establishments. As was noted earlier, manufacturers who use large amounts of
electricity already can and do receive rate concessions from their local utility. Reasons
include the potential competition of onsite-generated electricity and other factors such
as desirable load characteristics not present in other sectors.

Will the Structure of Electricity Markets Remain
the Same? Historically, the natural gas market had a structure where gas
owners, transporters, and distributors (the local utility) were different entities. Local
utilities purchased the gas at the city gate and then distributed the gas to their
customers. Under restructuring, however, gas utilities, manufacturers, and others may
purchase the gas at the wellhead.

In contrast, electric utilities had, for the most part, generated their
own electricity, transported it, and distributed it to customers, including manufacturing
establishments. The utility or its affliate owned all three stages--electricity
production, transportation, and delivery to the ultimate customer.20 Under restructuring, each of the three stages is
accomplished by independently owned units. Unlike natural gas, for which production points
are geologically fixed, electricity can be generated wherever facilities are put in place.
Thus, in the emerging competitive market, manufacturing establishments--especially
chemical or paper establishments, as noted earlier--could become generators of electricity
for the sole purpose of sales, including sales to customers other than electric utilities.

Will the Electricity Market Have New
Entrants--Brokers and Marketers? Manufacturing establishments may now go to the
wellhead to buy gas or hire gas brokers to buy it for them. Many of the gas marketers or
brokers are entering the electricity market. New entities are being created specifically
to market electricity. The new entities can also arrange for the purchase and delivery of
large quantities of gas for sale to each of the many small establishments located in the
same region. This strategy of combining small establishments to create market power could
take place for electricity as well. This strategy can, and likely will, be used in market
segments other than manufacturing.

Are There Energy-Plus Companies on the Horizon?
In the past, manufacturers in many of the regions of the country have been able to
purchase both gas and electricity from the same utility. In the future, manufacturers may
be buying their natural gas, electricity, energy-management, cable, internet, and
telecommunications services from the same company.21

How Will Restructuring Affect Data Collections?
In many States such as California, utilities have been required to collect data that
different States' public utility commissions used to support some of their regulatory
decisions. In a more competitive environment, these types of data might not be readily
available. Additionally, survey respondents may find it difficult to report information on
the supplies and prices for natural gas and electricity. The arrangements have become very
complex and the individuals responding to the surveys may not have been involved in the
actual purchases.

The misclassification of utility and nonutility natural gas quantities
and the consequent effect on the natural gas prices in the 1994 MECS may be just the
beginning in the difficulties data collectors such as EIA will face because of
restructured energy markets. As noted in this chapter, respondents to EIA's supplier
survey are able to report quantities but have not been able to report prices for offsystem
gas. This difficulty will only be compounded when consumer choice for electricity becomes
more than a pilot test. It is very important that EIA thoroughly examine the results of
the 1994 MECS before the 1998 MECS is fielded, at which time some manufacturers may be
purchasing electricity from several electricity providers.

Electric power analysts and data collectors at EIA have been engaging
in extensive redesign efforts for many of the electric power data collections. Changing
roles of electric utilities, direct consumer purchases from nonutility generators,
uncertainty in transmission maintenance and responsibility, and greater uncertainty in
electricity prices affect data collection. Some institutions will no longer exist, while
new ones will arise. Data traditionally found at electric utilities might be dispersed to
many different types of entities. Data once thought to be discloseable due to the
regulated nature of electric utilities might now be thought of as proprietary by the data
providers. EIA has been in contact with industry representatives, consumer groups, media,
government officials, and other potential EIA data customers to better understand the
implications that the restructuring of energy markets may have on data collections.

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