April 2009 Vol. 236 No. 4

Features

New AGA Chairman Not Lacking For Issues

It stands to reason that Thomas E. Skains literally needs to be two people this year. First, he is chairman, president and CEO of Piedmont Natural Gas, a large successfully managed utility based in Charlotte, NC that serves more than a million customers in the Carolinas and Tennessee. This year, he’s taken on the added role of chairman of the American Gas Association.

As the nominal leader of the natural gas distribution sector, he is responsible for pushing the agenda of the AGA’s nearly 200 member companies forward at a time when the collapse of the economy and the energy commodity markets leaves many questions in the air with few certain answers. This is especially true in dealing with a new administration that on the one hand professes its love of natural gas, on the other wants to diminish the need for oil and gas drilling.

Skains was elected chairman by Piedmont’s Board of Directors in December 2003, CEO in February 2003 and President and Chief Operating Officer in February 2002. Previously, he was Senior Vice President – Marketing and Supply Services and directed Piedmont’s commercial natural gas activities after joining the company in April 1995. Prior to joining Piedmont, Skains was an executive for Transcontinental Gas Pipe Line Corp. where he began work in 1981 as an attorney. He has a Bachelor of Business Administration degree from Sam Houston State University and a Doctorate of Jurisprudence degree from the University of Houston Law School.

P&GJ: What are your major priorities for 2009 as AGA chairman?

Skains: Let me begin with the theme I have chosen for my chairmanship of the AGA: “Natural Gas: America’s Responsible Energy Choice.” At the very heart of this theme is the fundamental truth that we deliver a clean, efficient, abundant and largely domestic fuel to our customers. Natural gas is uniquely positioned to play a vital role in our nation’s energy future by providing both near-term and long-term solutions to America’s energy and environmental goals. For customers, for the economy and for our energy security, natural gas is truly the responsible energy choice.

As far as our priorities for 2009, my first priority is promoting the direct use of natural gas in homes and businesses as its best and most efficient use. Increased direct use of natural gas will reduce greenhouse gas emissions, energy consumption and overall energy costs.

My second priority is ensuring that we gain greater access to our abundant domestic natural gas supplies. We have domestic supplies of natural gas that have been off limits for decades and that can be explored and developed in an environmentally safe and responsible manner. The best way to keep natural gas affordable is to match its increased demand with increased supply.

Another key priority of mine is to work with AGA to enhance and expand our nation’s pipeline and storage infrastructure. Increasing the direct use of natural gas will necessitate that we also increase our delivery infrastructure to meet that demand, while ensuring that our delivery system remains the safest, most efficient and most reliable in the world.

Two other priorities for this year that I think are particularly important involve extending or making permanent the current 15% maximum tax rate on dividend income and working with regulators at all levels on rate-design reform and rate stabilization that align the interests of energy utilities with their customers.

We must work to ensure that the 15% maximum tax rate on dividend income is extended beyond its expiration in 2010. The extension of this tax rate is important for utility shareholders and customers alike. Lower dividend tax rates since May 2003 have obviously made our companies more attractive to investors and allowed us to raise cost-effective capital for critical infrastructure investments to meet our nation’s future energy needs.

Of course, critical to our financial performance and to our operational success is the regulatory environment in which we operate, which is why I also plan to turn my attention to regulatory reform and rate stabilization. Traditional volumetric rate designs that provide incentives for utilities to seek increased usage are no longer appropriate in an era when policy objectives are focused on energy efficiency, climate change and carbon emissions. In such an environment, we should be encouraged, not penalized, for helping our customers use energy more efficiently and wisely.

To make a long story short, my plate is full of important priorities for the coming year. I believe that, working closely with AGA staff and other industry leaders, we can make solid headway on these vital issues.

P&GJ: How would you define AGA’s legislative strategy this year?

Skains: In a word – education. Our focus will be on educating the new Congress and administration about the many positive attributes of natural gas and the vital role it can play in meeting our nation’s energy and environmental challenges. I’m committed to working with AGA’s staff and member companies along with other industry associations to make this message heard. Together, we must take the steps necessary to ensure that the potential benefits of our clean, efficient fuel are fully realized.

P&GJ: What does AGA expect from the new administration, which has touted natural gas as a strategically important fuel?

Skains: We are eager to work with the new administration on energy policies that will help our nation meet its short- and long-term energy and environmental goals. Certainly, those goals include a more diverse energy portfolio, increased energy security, and energy efficiency and conservation. In that regard, we feel that natural gas is in a unique position among all energy sources to help our country meet those goals.

To that point, President Obama has indicated he believes natural gas is an integral part of our country’s energy security. Because natural gas is a domestic resource, is highly efficient and helps reduce greenhouse gas emissions, the demand for natural gas continues to grow as does its importance in our nation’s energy portfolio. I think President Obama understands that and recognizes the strategic role for natural gas in helping our economy to grow while also meeting the environmental challenges we face as a nation.

P&GJ: What challenges from a regulatory perspective do you expect to be dealing with?

Skains: America is facing a dual challenge – meeting an increasing demand for energy while at the same time seeking dramatic reductions in greenhouse gas emissions. In this new era of energy efficiency, climate change and carbon emissions, traditional rate structures that provide incentives for utilities to seek increased usage are no longer appropriate. Instead, we urge the creation of incentives for energy efficiency and conservation programs, including those that promote the efficient use of gas in direct-use applications.

So, we’re working on promoting new innovative regulations, including rate decoupling, at the state level. Currently, 15 states have some kind of decoupling mechanism in place. Decoupling the collection of the utility’s margins from the consumption patterns of residential and commercial customers frees natural gas utilities to actively promote efficiency and conservation measures without adversely impacting their financial interests.

P&GJ: What are members telling you about their concerns with the distribution integrity mandate requirements?

Skains: Due to the advocacy efforts of AGA and other key industry representatives, AGA member companies are optimistic that the final rule for distribution integrity management will be reasonable, flexible and cost-effective for the natural gas utility industry. Based upon the discussions with PHMSA and the recommendations expressed at the Technical Advisory Committee meeting in December, AGA and its member companies believe there will be improvements and significant changes made to the proposed rulemaking. 

In today’s environment, it’s more important than ever for utilities to devote their resources to initiatives that have a true impact on enhancing the overall safety of our systems. We feel that when the rule is issued in 2009, it will be a performance-based rule that allows utilities the flexibility to identify risks and properly align their resources to better implement practices in reducing those risks.

P&GJ: In what ways is the financial crisis impacting distribution companies? Did the suddenness of the crisis surprise the industry?

Skains: The natural gas distribution industry is a very capital-intensive business. We project that our industry will need to build new distribution infrastructure over the next 20 years at a cost of about $100 billion to serve current and new customers. That means raising capital at a time when it is more expensive to raise than ever, as more and more industries compete for less and less available capital.

That said, our industry has always been — and still is — an industry of solid fundamentals and good business practices. Our core business is transparent. It is asset based and, though customer growth will certainly be impacted by the current economic downturn, we still have good customer growth opportunities. And we are emphasizing what we do best — providing our customers the inherent comfort and lifestyle advantages of a domestic fuel that is delivered through a safe and reliable delivery infrastructure.

P&GJ: Similarly, how is the crisis expected to affect AGA’s operations?

Skains: AGA is aware of the difficult economic environment facing our member companies and has taken a number of recent steps to control and/or reduce expenses where possible. A line-by-line review of the entire budget was conducted and adjustments were made to ensure AGA’s key objectives for 2009 were properly supported. Despite these challenges, AGA is focused on protecting its members’ interests and aggressively promoting natural gas as a part of the solution to our energy issues.

P&GJ: Do you anticipate any staff cutbacks?

Skains: The AGA does not currently anticipate any staff cutbacks. All positions, however, are routinely evaluated to ensure they support membership priorities.

P&GJ: What is the outlook for natural gas supply and demand for 2009? Has LNG been much of a factor?

Skains: In 2008, natural gas supply was relatively constant and stable — except for dips in August and September when Hurricanes Gustav and Ike hit the Louisiana and Texas coasts. Overall, about 63 Bcf/d came from domestic producers, Canadian imports and LNG. In fact, thanks to more domestic unconventional production, in particular shale plays, our supply portfolio in 2008 was more home-grown — about 3 Bcf/d more domestic production.

Going forward, in 2009, we would expect that supply will remain steady or increase, continuing the trend of increased production from unconventional domestic sources such as shale gas.

On the demand side, we expect that consumption will be down in 2009 due to the economic recession, yielding lower prices in 2009 than 2008, somewhere in the range they have been in over the past several months. Of course, weather and weather events are always a wild card.

Relative to LNG and as I mentioned above, there is a growing trend toward meeting demand with domestic supplies. While the conventional wisdom of the past was that LNG imports would supply our future growth, the EIA projects LNG supplies peaking in the year 2025 and declining thereafter.

Of course, as a recent American Gas Foundation study showed, there will be significant growth in LNG liquefaction capacity worldwide, which will allow for more imports of LNG later this year and in the future — if and when we need them.

P&GJ: The fallback in natural gas prices obviously has hurt the producers, but is it benefiting the local natural gas utilities?

Skains: Certainly, the reduction in wholesale natural gas costs does ultimately find its way to natural gas consumers in the form of lower billing rates and, depending on weather conditions, lower monthly heating bills for residential and commercial customers. That is, of course, welcome relief for our customers, especially during these economic times. At the same time, AGA supports a strong natural gas industry from wellhead to burnertip and recognizes that producers need prices high enough to be able to explore and produce with a reasonable expectation of economic return on their investment.

P&GJ: What should we look forward to from AGA in 2009?

Skains: More and more, we’re going to be stressing the energy efficiency and environmental advantages of our product. Volatile energy prices and growing concern about the environmental impact of energy use have increased customer interest in being more energy efficient while raising customer awareness about the impact of energy usage on greenhouse gas emissions. We can mitigate some of those concerns by illustrating that natural gas truly is our nation’s most responsible energy choice.

Also, lawmakers want to deliver on campaign pledges they made concerning energy security. We will continue to emphasize the message that abundant, domestically produced natural gas needs to be a key part of any energy plan going forward, and that natural gas can be integral in creating green jobs and green technologies.

P&GJ: In your years in the industry, have you ever faced a time filled with such uncertainty? And what advice would you give to companies in confronting these difficult challenges?

Skains: These are unprecedented times in our industry, to be sure. Our economy faces significant challenges that may well take an extended period of time to recover from. Our customers face their own economic and financial issues. And within our own industry we face challenges around customer growth and competition for capital resources. Yet I am confident and optimistic that our industry will meet these problems head-on and will play a vital role in our nation’s economic recovery.

By staying focused on our customers, working closely with our regulatory agencies, and educating our elected officials at the state and federal levels as to the important role that natural gas can play in meeting our energy and environmental goals, we will come out of this environment stronger and more well-equipped to meet our nation’s energy needs.

P&GJ: How did you get into the industry?

Skains: Believe it or not, I studied music my early years in college. I played the trumpet in a few bands to make money. My older brother convinced me that I could keep music as a hobby, while pursuing something a bit more conventional – business administration. From there, I applied to law school and was able to use the money I made playing in bands to help pay for school.

After graduation, I joined the Transco Energy legal department, and have been in the energy world ever since. I’ve spent my career touting this wonderful fuel that, I believe, holds the key to our country’s energy future.