Energy Information Administration/Manufacturing Consumption of Energy 1994 11

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?
 Powerplant and Industrial Fuel Use Act of 1978 (PIFUA). 5

 Natural Gas Policy Act of 1978 (NGPA). 6

 See the Glossary for definitions of open-access transportation service and spot market. 7

 Energy Information Administration (EIA), Natural Gas 1992: Issues and Trends, DOE/EIA-0560(92) (Washington, DC, March 1993), Chapter 5, 8

“Trends in End-Use Prices.”

12 Energy Information Administration/Manufacturing Consumption of Energy 1994

Natural Gas Market

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 boilers and established pricing categories for wellhead gas 5

production that did not allow the sending of competitive price signals in the marketplace. 6

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.7

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.8
 For natural gas, the total quantity shown in Table A1, Total First Use of Energy for All Purposes, is equal to the sum of natural gas in Table A3, Total 9

First Use of Combustible Energy for Nonfuel Purposes (i.e., feedstocks), and in Table A10 (A39 in 1991), Selected Combustible Inputs of Energy for Heat,

Power, and Electricity Generation and Net Demand for Electricity. The percentage for each type of natural gas use is the result of dividing the quantity

for the type of use by total natural gas used, from Table A1.

Energy Information Administration/Manufacturing Consumption of Energy 1994 13

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).9
14 Energy Information Administration/Manufacturing Consumption of Energy 1994

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.
 Energy Information Administration (EIA), Form EIA-176, “Annual Report of Natural and Supplemental Gas Supply and Disposition.” Data appear 10

in EIA’s Natural Gas Annual, DOE/EIA-0131.

 Further details can be found in EIA, Manufacturing Consumption of Energy 1991, DOE/EIA-0512(91) (Washington, DC, December 1994), Appendix 11

D and EIA, Natural Gas Monthly, DOE/EIA 0130(94/11) (Washington, DC, November 1994), “Highlights: Comparability of Supply- and ConsumptionDerived Estimates of Manufacturing Consumption of Natural Gas,” pp. vii-ix.

 Consider the case of a pipeline company selling natural gas to a manufacturer. The pipeline company would report the sale as an onsystem delivery 12

in the supplier survey, but that manufacturer would report its purchase as coming from a nonutility source in the MECS because the pipeline company is

not the local gas utility.

Energy Information Administration/Manufacturing Consumption of Energy 1994 15

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 that indirectly provides some insight into the natural gas purchasing patterns of 10

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. The MECS attempted to have manufacturers identify the source of their natural gas (utility 11

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.

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, yet the purchasing and delivery trends shown in the two surveys are expected to be 12

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 

Table 4.1. Comparing EIA’s Surveys of Manufacturing Energy Consumption and Natural Gas Suppliers
 Energy Information Administration (EIA), Natural Gas Annual, 1982-1996, DOE/EIA-0131 (Washington, DC). 13

 Natural gas wellhead price data are found in EIA, Natural Gas Annual 1995, DOE/EIA-0131(95) (Washington, DC, November 1996), Table 1. Data 14

from the same source show that onsystem industrial prices also increased in real terms between 1991 and 1994, by 1.7 percent annually.

16 Energy Information Administration/Manufacturing Consumption of Energy 1994

Item Manufacturing Survey Supplier Survey

Respondents 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

utility

Differences in Manufacturing Industrial Sector

Manufacturing and & only nonutility generators of & manufacturing

Industrial Coverage electricity at the manufacturing & mining

site & construction

& all nonutility generators of

electricity

Sources of Natural Gas Utility/LDC Onsystem (respondent owned and

Nonutility/NonLDC 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.

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 1996.13

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. The total growth in wellhead prices during the 1991 to 1994 period would have been stronger had the 14

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.
Energy Information Administration/Manufacturing Consumption of Energy 1994 17

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.
18 Energy Information Administration/Manufacturing Consumption of Energy 1994

What Have Been the Effects of Restruc-turing 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
 For an in-depth discussion of electricity restructuring, refer to Energy Information Administration, The Changing Structure of the Electric Power 15

Industry: An Update, DOE/EIA-0562(6) (Washington, DC, December 1996).

 See “What is it and Will it Affect Me?” for a complete description of California’s restructuring Plans on the Internet at http://energy.ca.gov/energy/ 16

restructuring/restructure_FAQ.html.

Energy Information Administration/Manufacturing Consumption of Energy 1994 19

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.

Electricity generation and transmission are entering a new phase of federally mandated restructuring. This report provides

the 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.

Electricity Market

Impetus for Change in the Electricity Market

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.15

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. 16
 National Regulatory Research Institute. Online (http://www.nrri.ohio-state.edu/restruct/summary.txt) (July 7, 1997). 17

 Energy Information Administration, Household Energy Consumption and Expenditures 1993, DOE/EIA-0321(93) (Washington, DC, October 1995), 18

Tables 5.2 and 5.4. 

20 Energy Information Administration/Manufacturing Consumption of Energy 1994

Change in the Electricity Market 

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. Restructuring 17

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 1993.18
 In August 1997, the Energy Information Administration published the report Electricity Prices in a Competitive Environment, DOE/EIA-0614 19

(Washington, DC, August 1997). The report “. . . provides price projections as ‘illustrations’ of the potential effects of changes in certain parameters on

the price of electricity that may emerge under competition,” p. iii.

 Based on the author’s conversations with various manufacturers and various manufacturing seminar discussions. 20

 Energy Information Administration, Household Energy Consumption and Expenditures 1993, DOE/EIA-0321(93) (Washington, DC, October 1995), 21

Tables 5.2 and 5.4.

Energy Information Administration/Manufacturing Consumption of Energy 1994 21

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? Electricity expenditures, as other energy expenditures for the most part, are a small 19

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. 20

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. 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.21

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.
22 Energy Information Administration/Manufacturing Consumption of Energy 1994

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
 This paragraph includes cogeneration technology information from the Gas Research Institute, Current Status and Projected Trends in Industrial 22

Cogeneration (GRI-93/0467) (Washington, DC, December 1993), pp. 2.1 - 2.12. The cogeneration technology data used are from Table A13 in this

report.

Energy Information Administration/Manufacturing Consumption of Energy 1994 23

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. Because the chemical industry is the largest user of natural gas as feedstock and 22

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.
 For a discussion of the similarities of and differences between the natural gas and electricity markets, see Energy Information Administration, Natural 23

Gas Monthly, “Restructuring Energy Markets: Lessons from Natural Gas,” DOE/EIA-013(97/05) (Washington, DC, May 1997). 

 There are some exceptions, most notably are cooperatives or municipal utilities that purchase most, some, or all of the electricity they sell. Also, some 24

utilities purchase electricity from entities such as independent power producers.

24 Energy Information Administration/Manufacturing Consumption of Energy 1994

Lessons From Natural Gas Restructuring

Historically, the natural gas and electricity markets have been regulated by some of the same entities. At the Federal level, 23

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. Under restructuring, each of the three stages is accomplished by 24

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.
 Electricity and natural gas markets are merging their resources with nontraditional entities. UtiliCorp United Inc. and Peco Energy Company recently 25

formed a partnership with AT&T and ADT Security Services. The Oil Daily Company, Natural Gas Week, July 14, 1997, p. 1.

Energy Information Administration/Manufacturing Consumption of Energy 1994 25

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. 25

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.