Case Study: Shipley Energy

Diversification is often considered a strength in business, and it is an approach taken by Shipley Energy, a family-owned company in York, Pa. The 80-year-old company had a long history in fuel oil before branching out to propane and heating, ventilation and air conditioning. About 15 years ago it ventured into selling natural gas. More recently ‘ some 18 months ago ‘ the company went into another new line: brokering sales of electricity.

Shipley also operates more than 25 Tom’s Convenience Stores in Pennsylvania, and markets Yowza Coffee & Water. In addition to its headquarters, Shipley operates about a half-dozen satellite locations in Pennsylvania, and all told it employs approximately 750 people.

Fuel oil and the convenience stores still account for much of the business today, but Matt Sommer, vice president of natural gas and electricity, said, ‘We never viewed ourselves as an oil company.” Shipley Energy’s mission is to provide ‘convenience and energy solutions,” Sommer said. To better reflect its diverse offerings, Shipley Energy in January introduced a new company logo, new graphics on its service vehicles, and was updating its website.

Shipley’s wholesale fuels and propane business extend to Maryland, New Jersey, Virginia and West Virginia, but the balance of the company’s business activities, including electricity, are centered in Pennsylvania.

The venture into brokering electricity sales was prompted by a change in the regulation of the industry in Pennsylvania, Sommer said. While the state de-regulated the electricity industry about 15 years ago, it set price caps as a consumer protection measure. The effect of the caps, however, was to undermine competition in the market, Sommer said, once oil prices started their climb from about $18 a barrel in the late 1990s. As those prices climbed, the price caps set by the state’s Public Utility Commission quickly fell below wholesale prices. But at the end of 2009 the price caps expired. ‘That’s what created the opportunity for us to jump in,” Sommer said.

Shipley Energy brokers the sale of electricity by some 20 electricity companies in Pennsylvania to commercial and industrial customers, though not to residential consumers ‘at present,” Sommer said.

Like electricity, natural gas was de-regulated in Pennsylvania some 15 years ago, but Sommer said it would be more accurate to say natural gas was ‘re-regulated.”

Historically, Sommer said, utilities had a natural monopoly in natural gas. ‘Geography determined your natural gas company,” he said. The company with a pipeline in your community was your natural gas company. With the change in regulations in Pennsylvania, Shipley Energy was allowed to buy natural gas wholesale and sell it to industrial, commercial and residential customers.

The utility still owns the pipeline, and it bills the customers, collects payment, and forwards a share of the proceeds to sellers such as Shipley. The customers’ bills have three components: a monthly flat rate; a distribution charge, regulated by the state, for delivery through the pipeline; and a commodity charge. Customers can choose who they buy the commodity from ‘ the utility, Shipley Energy, or another company that does what Shipley does: buying natural gas and reselling it.

‘We buy gas on the wholesale market ‘ not dissimilar from the way we purchase oil,” Sommer said.

The natural gas that Shipley sells is distributed through lines owned by one of three utility companies: Columbia Gas of Pennsylvania; Peco Energy; and UGI Energy. Each charges Shipley Energy a tariff, approved by the state Public Utility Commission, for the use of its lines.There has been some friction over the way utilities set their prices and change their prices, Sommer said, the upshot being that Shipley Energy and others who have ventured into the natural gas business now devote some of their time and energy to lobbying at the state legislature in Harrisburg, for changes that would allow them to be more competitive with the utilities.

‘The vast majority of customers still buy from the utilities,” Sommer said.

The natural gas business has some similarity to the fuel oil business and some contrasts to it. ‘The volatility in natural gas pricing is considerably higher than in oil,” Sommer said, fluctuating sharply day-to-day based on weather. Natural gas prices can double or triple overnight, he said. Another reason for the volatility is that natural gas is not stored in tanks in customers’ basements.

The volume of natural gas flowing to a utility is crucial, and if Shipley or any other reseller schedules less volume than customers demand or need, the utility company has to make it up ‘ and it charges Shipley a tariff or penalty, ‘which can pretty quickly mount up,” Sommer said.

If, conversely, Shipley Energy schedules more fuel than is needed, the utility will typically offer to purchase the excess from Shipley, Sommer said, ‘but not for a price you’d want to sell it for.”

Six people, including Sommer, work in the natural gas business at Shipley. ‘You have to make sure you’re hedged,” Sommer said. ‘You have to know what the risks are.” The natural gas business accounts for roughly 15 percent of Shipley Energy’s revenues, Sommer said.

‘We view our role as helping customers understand the market,” he said. Well-informed customers can lock in at a fixed price. ‘There can be really good opportunities,” Sommer said, recounting that 12,000 commercial and residential customers saved $1.25 million in one year buying natural gas from Shipley rather than a utility.

‘Our focus is not on getting people to convert to natural gas,” Sommer emphasized. ‘That’s not what we’re trying to do.” Rather, he said, by offering natural gas Shipley Energy is aiming to market to those who currently purchase natural gas elsewhere. Further, the goal is to retain Shipley customers who are decided on switching from fuel oil to natural gas, Sommer said.