Utilities are good at providing service, Littlefair says, but not so good at entrepreneurship. Andrew Littlefair is the CEO and co-founder of Clean Energy Fuels (NASDAQ:CLNE), the leading provider of natural gas for transportation in North America. Clean Energy provides CNG and LNG fuels to solid waste, trucking, and transit fleets, among others, and currently operates some 500 fueling stations in the United States and Canada, as well as manufacturing related equipment and technologies.
In this video segment Littlefair looks back at the participation of utilities in the natural gas industry and how it has affected Clean Energy over the years. The only issue he sees today is when regulators allow utilities to use ratepayer money to try to compete with private sector companies. However, Questar Corporation's (NYSE:STR) Questar Fueling, and Integrys Energy Group (NYSE:TEG) subsidiary Trillium CNG are operating separately from their utility owners, and expanding. Still Littlefair doesn't seem concerned that they will take market share away from his company. To date, Questar Gas operates less than 30 public stations, making it a tiny part of the $5.6 billion total enterprise that is Questar. Integrys' Trillium operates just over 50 public and private stations -- almost exclusively in large metropolitan areas -- with plans to build another nine this year. Clean Energy Fuels expects to open several dozen in 2014.
Jason Hall: Let's shift over to talk a little bit about competition, especially domestically. One area of competition that seems to be getting a lot more traction is CNG competition, especially from utilities -- like Questar is making some serious moves, Integrys through their Trillium CNG.
What's your view on the competitive landscape against utilities expanding into this? It's a new market for them.
Andrew Littlefair: They were in it, once upon a time. If you roll back to the late '80s -- and in fact, Warren Mitchell our Chairman, who was Chairman of the Southern California Gas Company -- they did their first natural gas vehicle business in the '60s, so this isn't completely unheard-of.
All America's utilities were in this business in the '80s. In that day it was Lone Star Gas in Texas, and Brooklyn Union Gas, and Southern California Gas, and they were building stations. But they were early and they were thinking light duty, so it didn't work.
Hall: Like you said before, the economics were very different.
Littlefair: Very different. People forget, though, we had a war in there -- so you did have a fly up in oil prices in 1990. The OEMs were making cars. Ford, GM, they were all in the business, and Chrysler.
Then oil prices went down, the pressure came off. The Clean Air Act got passed in there, so there was pressure. But then things settled down. We went through a deregulation period and electric companies bought gas utilities, and a lot of them got out of the business.
We were a beneficiary of that. We bought 30 some-odd stations that Southern California Gas had. We acquired the ones in Colorado. We bought the ones in Texas, the ones in New York, as they left the business.
Now, fast forward to today, they're looking for business. Things have gotten more efficient in terms of things that use natural gas and electricity, so they're looking at this as a market.
I buy a lot of gas from these guys, but I don't mind competing with utilities. Utilities are really good at providing service. They're not so good at being entrepreneurial, so I have a little bit of heartburn when utilities are wanting to use ratepayer money to get in this business and compete.
Look, I just told you there's 90-some-odd companies -- I'd probably have to back out 10 utilities, so let's call it 80-some-odd. Normally, utilities aren't allowed to compete. They're a monopoly. They're not usually allowed to compete when you have private sector companies in the business. They don't do plumbing; they hire plumbers.
But some of the regulators have allowed them, in some of these instances across the country -- there's a handful of them -- where they're allowing them to do test programs using ratepayer money. I'm not a big fan of that.
What that means is, a particular utility is going to use their customers' money and get a return on it to get into this business and compete with the private sector.
I have no problem with utilities doing what they ought to do, and what my friends at Questar have done, and Integrys, where they've set up an unregulated subsidiary. Typically -- and it's always a little different -- but typically that subsidiary is responsible to their shareholders, not their ratepayers.
They're taking shareholder money and they're putting it in there, and now they're competing with us and I think that's fine. We've competed with Trillium for 15 years. Now they're owned by Integrys.
Hall: Before they were acquired by Integrys.
Littlefair: They used to be owned by Wagner & Brown, Boone Pickens' old friends from Midlands. We used to compete with them in the transit business, and they tried it in the refuse business, so we know them. They're a good competitor. They're doing CNG.
I don't really have a problem with that. Now, we have Southern California Gas that's trying to use ratepayer money in a way that they're trying to get in it. I think what happens often with utilities is they don't really have a sales force, the regulators aren't going to let them go unrestricted on use of ratepayer money.
So, what you often hear is they're going to do things like spend $5 million or build 8 stations or 12 stations, and a lot of times I think what happens is it confuses the market. Look, utilities are using ratepayer money, they have (unclear) compete with, and they can bury stuff -- and those are big companies.
I'm not too worried about it. They're regional. The unregulated guys -- the guys out of Utah, Questar and Integrys -- they're trying to be more national. You don't have many examples of that.
I'm not too worried about it. I guess if you were to look at competition, when we start talking about heavy-duty trucking fleets, some of them want to do LNG. Most of the utilities don't do that. Most of them have a hard time if now you're talking about doing it in multiple states.
There's room. It's a big, huge market. We'll compete fine with them, so I don't see that as some big threat. But there are a lot more competitors in the business today than there once were.
Hall: You think when it comes to utilities, your core strengths -- especially in terms of your larger scope and size, and being able to go in different places ...
Littlefair: In many different places, answer a fleet that is maybe in multiple states. Utilities can't really do that. Do LNG; they can't really do that. They don't have a compressor company like we do. They don't have a sales force. We have 100 sales people. They don't have that.
What they rely back on is getting the cheap money from the ratepayer, and perhaps cross-subsidizing that. You know what? That will be successful for a little bit, but I don't think that's typically sustainable.
Hall: Sustainability is a big concern there. That makes sense.
Jason Hall owns shares of Clean Energy Fuels. The Motley Fool recommends Clean Energy Fuels. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.