SIC 4924 Natural Gas Distribution

 
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SIC 4924

This industry classification is comprised of establishments engaged in the distribution of natural gas to end users. Establishments involved in both the transmission and distribution of natural gas are classified in SIC 4923: Natural Gas Transmission and Distribution.

NAICS CODE(S)

221210

Natural Gas Distribution

INDUSTRY SNAPSHOT

The production segment of the natural gas industry in the United States in the mid-2000s was controlled by about 24 major operators, although there were over 8,000 natural gas producers from large, integrated companies to single owners with partial interest in a well. Once the natural gas was extracted, over 550 companies processed the 17 trillion cubic feet of natural gas and 720 million barrels of natural gas liquids produced annually in the United States. About 160 pipeline companies then transported the natural gas through 285,000 miles of pipeline, of which 185,000 was interstate pipeline. Storage facilities were provided by about 115 natural gas storage operators. The final step from producer to consumer was handled by local distribution companies (LDCs). In the mid-2000s the natural gas LDC segment remained highly fragmented with over 1,200 gas utility operators, despite deregulation in the 1990s. Although many LDCs retained monopolies over their local markets, some states offered consumers distribution choices.

The United States is the world's second largest producer and consumer of natural gas, with use of this cleaner-burning fuel expected to rise into the 2020s. U.S. consumption of natural gas totaled 22 trillion cubic feet annual during the mid-2000s, accounting for 24 percent of all energy needs. About 85 percent of all natural gas used in the United States is produced domestically, with most of the remainder coming from Canada. Industrial uses accounted for about 32 percent of natural gas demand, followed by electrical generators, 24 percent; residential, 22 percent; commercial, 14 percent; and other, 8 percent. Sustained high prices of natural gas during the mid-2000s were cause for concern in the industry.

ORGANIZATION AND STRUCTURE

Local distributing companies (LDCs) receive their supplies of gas from a transmission system at a transfer point called the "city gate." The utility then delivers the gas through mains and distribution lines to end users in a particular geographic area. There are four traditional classes of gas utility customers: individual residences, commercial establishments, industrial facilities, and electric utilities. There are two types of customers within these classes. "Core" customers require stable amounts of gas on demand because gas is their only source of fuel. "Non-core" gas customers can switch to other types of fuel when gas is unavailable or too expensive. Residential and commercial customers are typical core customers while industrial and electric-generating companies are examples of non-core customers.

LDCs are subject to regulation by state public utility commissions (PUCs). PUCs establish rates for different classes of customers. Prices per unit are typically lower for larger users. In setting rates, PUCs attempt to find an appropriate balance between the different interests of consumers, who want low rates, and company investors, who seek adequate returns on their investments.

In addition to state PUCs, federal regulations also influence the gas distribution industry. In 1992, the Federal Energy Regulatory Commission (FERC) issued its Order 636. Although the most direct impact of Order 636 was on the gas transmission industry, it also affected local distribution companies. The provisions of the order necessitated changes in the way distribution companies arranged for gas purchases, transportation, and storage. FERC's order also permitted pipelines to pass transition costs on to distribution companies.

The natural gas distribution system continues to "unbundle" in a deregulated industry, giving end users more choices than ever over who delivers their gas supplies. Many local distribution companies, which are often referred to as LDCs or gas utilities companies, saw their largest and most profitable customers switching to alternate gas sources. In some cases, industrial users and electric utilities contracted with pipeline companies to construct direct access to transmission systems and bypass the LDC altogether. In other instances, the customer purchased the actual gas from independent suppliers but continued to buy transmission services from the LDC.

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