Bay State Gas Company

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Bay State Gas Company

300 Friberg Pkwy.
Westborough, Massachusetts 01581-5039
U.S.A.
Telephone: (508) 836-7000
Fax: (508) 836-7070
Web site: http://www.baystategas.com

Wholly Owned Subsidiary of NiSource, Inc.
Incorporated: 1914
Employees: 1,244
Sales: $450.0 million (1998)
NAIC: 221210 Natural Gas Distribution

Bay State Gas Company is a wholly owned subsidiary of NiSource, Inc., acquired in a 1999 merger that created the tenth largest U.S. natural gas distribution company. With headquarters located in Westborough, Bay State serves its home state of Massachusetts as well as New Hampshire and Maine. Although its primary business remains the distribution of natural gas to more than 300,000 customers, Bay State was making efforts even before the merger with NiSource to take advantage of the movement to deregulate utilities in order to create a new business model for the company. Bay State sees itself not so much as a gas company but as an evolving retail energy marketer, providing a variety of energy products and solutions.

The 19th Century and the Advent of Gas Lighting

The roots of Bay State reach back to the first half of the 19th century and the rise of the gas lighting industry. Scientists had experimented throughout the 1700s with the concept of creating an illuminant from gas distilled from coal that could potentially replace candles and oil lamps, but it was not until 1798 that the technology was ready to be applied in a commercial way. William Murdock distributed coal gas through pipes in the Boulton and Watt Soho Works in Birmingham, England. In 1807 Frederick Winsor used gas to light the Pall Mall section of London, and in 1812 he was granted a charter from Parliament to create The London and Westminster Chartered Gas Light and Coke Company. By 1823 some 23 English cities had gas street lighting. Paris had gas lights in 1816, and Vienna in 1818.

In Colonial America the lighting of city streets was the responsibility of citizens. In New York in 1697, every seven householders were required to share the expense of a candle to burn in a lantern suspended on a pole from the window of every seventh house. It was not until 1762 that New York erected wooden public lampposts from which oil lamps burned dimly. A small army of lamp lighters maintained the system. In the evening the lamps were lit by torch, and the next morning the flames would be blown out, the wicks trimmed, and the supply of oil replenished. Across the East River in Brooklyn, candles in the front windows of houses would serve as street lighting until 1820, when oil lamps on public lampposts were finally introduced. By then gas illumination was already making serious inroads in the United States.

The country’s first gas company to be chartered was located in Baltimore in 1817, followed by Boston in 1822, and New York a year later. New York replaced its wooden lampposts with cast-iron lamps in 1827, when in June of that year gas streetlights were first lit. Even then, for the next 30 years the lamps would be dark on nights when it was determined by the calendar that there should be sufficient moonlight, despite any overcast conditions that might arise.

One of the earliest companies created to provide street lighting in the United States was an ancestor of Bay State: the Springfield Gas Light Company, formed in 1847 and chartered in 1848. It is not known when the Massachusetts company moved beyond street lighting to begin providing residential service for illumination, but according to its records Springfield Gas ran steam lines in order to provide gas heat to buildings in 1878. The company began heating homes in 1916.

Although electric lighting was made practical by Thomas Edison in the early 1880s, gas lighting maintained its dominance for many more years to come. Electric lights with their intense white light were not as accommodating as gas lighting, and generally only appropriate for theaters, factories, stores, and other large settings. Competition from electric lights, however, forced gas to be innovative in order to maintain its position as a cheap alternative. The invention of the Auer or Welsbach lamp, using a process that involved bringing a mantle to incandescence with a non-luminous flame, provided softer illumination while providing three times the amount of light and consuming only half as much gas. One method to make gas affordable to customers that was employed by many companies, including Springfield Gas, was the “prepayment meter,” also known as the “quarter meter.” A meter with a coin slot allowed the customer to purchase a measured volume of gas. This pay-as-you-go system was used by Springfield Gas from 1893 to 1929.

It was not until the years following World War I that electric lighting finally superseded gas. The use of gas as a fuel for heating and cooking, however, remained quite viable. In the beginning of the 19th century, wood was the most common fuel used by households, replaced later by coal ranges. Early in the 20th century, gas ranges began superseding coal for a variety of reasons. In essence, gas was more efficient in cooking, with no wasted fuel, therefore making it cheaper; and unlike coal, gas required no hauling or cleanup. Gas heat enjoyed similar advantages: units were smaller, were quicker to heat a room, and required little maintenance.

The United States was served by a multitude of small companies such as Springfield Gas, that produced their product in local plants. Typically, gas was made by reducing coal to coke in a retort house, then piped to another facility where it was purified by lime. The gas was then piped to an immense tank called a gasholder or “gasometer.” This method of producing gas would remain essentially unchanged and predominant until the 1930s and the advent of natural gas, which is found, like other petroleum products, trapped within the Earth’s strata. Used for centuries, natural gas was not a widely available energy source until the improvement of pipeline technology. In the 1950s natural gas provided by wells in the southwestern United States began to be distributed throughout the country by thousands of miles of pipeline. Customers, thus, were gradually converted from “town gas” to natural gas.

Formation of Bay State Gas Company: 1974

Local gas plants were no longer necessary and gradually closed in the 1960s. (The property on which the plants were located, however, would remain a source of concern for gas companies for the next 30 years, as local governments forced them to clean up contaminated sites.) Gas companies were now essentially distributors only. It was not surprising when these small companies began to consolidate into regional concerns. In 1974 the Bay State Gas Company was formed when Springfield Gas merged with the Brockton Taunton Gas Company, the Northampton Gas Light Company, and the Lawrence Gas Company. Several of Bay State’s partners, like Springfield Gas, dated their origins back to the mid-19th century.

In 1979 Bay State acquired Northern Utilities, Inc., as well as Granite State Gas Transmission, Inc., an interstate natural gas pipeline company. In 1987 Bay State gained direct access to Canadian natural gas via the Portland Gas Pipeline Project. Granite State and Shell Canada worked together to convert a crude-oil pipeline to natural gas, primarily to serve customers in Maine and coastal New Hampshire.

Bay State operated as a public utility, because states assumed that creating a duplicate piping system in a local community was cost prohibitive. Since it was granted a partial monopoly, Bay State was subject to state regulation and control over the rates it could charge. In general, utilities can only charge customers operating costs plus a reasonable return to shareholders. In 1987 Massachusetts ordered Bay State and other utilities to lower their rates due to a cut in federal corporate tax rates. A year later the company requested a 7.6 percent rate increase, the first sought since 1983. Bay State cited the increase in its operating costs as a justification for the hike. The state Department of Public Utilities maintained that Bay State overstated its costs and finally settled on a 4.5 percent increase.

Bay State’s request for a 7.2 percent rate increase in 1992 was contested by the Massachusetts attorney general. The company maintained that the increase was justified by the expense incurred with the expansion and maintenance of its distribution system, as well as the effects of a recession and an increase in retiree benefit costs. The attorney general’s office asked that Bay State’s rates actually be reduced by one percent. A major area of contention was Bay State’s attempt to recover the costs of programs that tried to attract new customers, in particular through advertising. For years gas companies were the target of negative ads produced by oil dealers that insinuated that gas heating was dangerous. Bay State in Massachusetts and its subsidiary Northern Utilities in Maine fought back with their own ad campaign. According to Massachusetts law, however, gas and electric utilities were generally prohibited from recovering promotional advertising costs from its ratepayers.

In 1996 the trend of deregulation that changed the airline, trucking, and telephone industries came to electric and gas utilities. It was expected that consumers would eventually be given options on companies from which to buy power. Because of the complexity of such a fundamental shift in how energy was to be provided to people, only pilot programs were planned at first. Although unforeseen effects were anticipated, it was also widely assumed that the industry was likely to see consolidation and a possible spree of mergers similar to what occurred in other deregulated industries.

Company Perspectives:

Understanding customer needs has led to success in introducing energy products and services that provide value to our customers.

Under the leadership of a new CEO, Joel Singer, Bay State entered the new deregulated world. Singer had been involved with helping companies adapt to deregulation when he worked at Arthur D. Little, Inc., a management consultant firm. He was quick to impose a new vision: Bay State should become a retail energy marketer, essentially a consumer-product business, not merely a gas distributor. His priority was to acquire as many customers as quickly as possible and through low price and excellent customer service create brand loyalty, so that when electric power became open to competition in the future, customers would see no reason to change energy suppliers. Bay State, through its subsidiary EnergyUSA, was also becoming involved in a diversity of products that included water heater sales and rentals, insurance programs for heating system maintenance, energy-related project loans, carbon monoxide detectors, as well as home security systems and satellite television. To help make the transition to a new kind of business model, Singer felt the need to change the company culture. He instituted a three-month transition plan to involve key middle-management. In order to get the rank and file to buy into the program, he also introduced a “gain-sharing” plan that would reward workers for increases in productivity.

In July 1996 Massachusetts regulators approved a two-year Bay State pilot program called Pioneer Valley Customer Choice, the first of its kind in New England. On a first-come, first-serve basis, 83,000 residential gas customers in 16 western Massachusetts towns and cities would be eligible to enroll in the program that would allow them to buy gas from participating marketers other than Bay State, which would continue to maintain the delivery infrastructure. The purpose was to learn how competition could benefit customers, as well as helping utilities and marketers to determine what areas they would need to address in order to serve the customers and make a profit. Regulators would also be able to analyze the ramifications of allowing such freedom of choice. By the time the program was set to begin in November 1996, 6,300 residential customers had signed up, three times the number that Bay State had expected. Nine suppliers of gas also qualified for the program. One benefit immediately apparent to Singer was that allied marketers could help create new gas users. About 30 of the households that signed up for the program actually converted to gas heating from oil.

Merger with NIPSCO Industries: 1997-99

Industry consolidation—one of the anticipated effects of deregulation—would have a major impact on Bay State in December 1997 when the company announced a merger with Indiana-based NIPSCO Industries Inc, in a $780 million deal. NIPSCO would pay Bay State shareholders $40 per share and assume $240 million in Bay State debt and preferred stock under terms of the deal. NIPSCO had an ancestry similar to Bay State, its oldest component being the Fort Wayne Gas Light Company that was formed in 1853 and chartered in 1858. An 1886 discovery of natural gas in northern Indiana created an early market for that form of gas in the area. A number of small Indiana gas and electric companies were combined in 1926 under the name of Northern Indiana Public Service Company (NIPSCO).

It would take more than a year for the Bay State-NIPSCO transaction to be finalized. The Massachusetts attorney general voiced concerns that the terms of the deal could result in higher rates for customers. NIPSCO’s offer of $40 per share was higher than the book value of Bay State’s stock, the difference of which the attorney general feared would end up being financed by consumers. In response, Bay State proposed a rate freeze until 2005, as well as to share profits with customers if the company exceeded an authorized rate of return. In February 1999 the deal received final approval from the U.S. Securities and Exchange Commission. A month later NIPSCO changed its name to NiSource, Inc.

With the NiSource acquisition of Columbia Energy Group in 2000, Bay State found itself a part of a network of utility companies that spanned nine states, serving 3.6 million customers. In New England there remained considerable room for growth. Whereas gas supplied 24 percent of the nation’s energy needs, in New England that amount was only 17 percent. With increased pipeline capacity and the company positioned through its pilot program to take advantage of the deregulation of the electric industry, Bay State was ready to continue a business evolution that started with the simple task of lighting the streets of a quiet New England town.

Principal Competitors

KeySpan Corporation; National Grid USA; NSTAR.

Key Dates:

1847:: Springfield Gas Light Company is formed.
1916:: Heating is offered to residential customers.
1974:: Bay State Gas Company is formed.
1979:: Bay State acquires Northern Utilities, Inc. and Granite State Gas Transmission, Inc.
1987:: Bay State gains direct access to Canadian natural gas via the Portland Gas Pipeline Project.
1996:: Deregulation of gas industry allows Bay State to initiate pilot program to offer customers choice of gas suppliers.
1997:: NIPSCO Industries, Inc. announces that it will acquire Bay State.
1999:: NIPSCO changes its name to NiSource, Inc.