Turning Up the Gas.

NEW REGULATIONS BRINGING SURGE OF BUSINESS TO ALTERNATIVE-FUEL INDUSTRY

A small group of companies is expected to be the biggest winner in the area's war on dirty diesel, as a series of regulations force transit buses, refuse trucks and other public fleets to convert to clean-burning fuels.

The local market for these products is likely to become the most competitive in the United States.

Those jockeying for position under rules mandated by the South Coast Air Quality Management District include a firm owned by legendary Texas oil man T. Boone Pickens, best known from his 1980s-era, corporate-raider days.

Pickens Fuel Corp., based in Seal Beach, has its eye on both the market for compressed natural gas (CNG) and liquefied natural gas (LNG). Pickens will face tough competition from Pinnacle CNG, Trillium USA Inc. and Applied LNG Technologies USA LLC, among others. Most of these firms are small, with less than 40 employees each.

Also seeking to grab its share of the expanding market are propane suppliers, though air-quality officials expect natural gas will displace propane and become the fuel of choice for a majority of users.

"We've been feeding on a dead carcass for 10 years, and now there is going to be a tremendous amount of interest in the industry," said Drew Diggins, operations manager for Midland, Texas-based Pinnacle. "(And) anytime there is blood in the water, there is going to be a feeding frenzy."

The "blood in the water" is the AQMD's new regulations requiring the operators of public fleets -- including street sweepers, airport shuttles and limousines, as well as light-to heavy-duty municipal fleet vehicles -- to convert their vehicles to run on clean fuel in a phased-in program ending in 2003.

It's all part of the agency's battle against diesel, which not only is a contributor to smog but a leading cause of cancer, according to a district study.

In some cases, the public operators will be able to get by on new, super clean and efficient gasoline engines, but for the most part alternative fuels are the answer.

Pickens opened for business in 1996 after he beat out a host of other companies to take over the Southern California Gas Co.'s network of retail CNG dispensing stations, which the state Public Utilities Commission had ordered the company to largely divest itself of.

Pickens Fuel, which sold off some of the clean-fuel facilities, now operates 27 stations, the most of any company, including eight in Los Angeles County. It services Los Angeles International Airport, Waste Management Inc. in Palm Desert, and Sunline Transit in the Coachella Valley, among other sites.

The company has 12 more stations under construction, including facilities to service Waste Management in the San Gabriel Valley and in Carson. And now it expects to expand even more as public fleet operators face the conversion mandate.

Pickens said he is optimistic about the company's prospects, but was frankly surprised it took until this year for the air board to make the move to clean fuels.

"We believed you were going to go to a cleaner-burning fuel, but I thought it would happen a long time before it did," he said. "It's a domestic fuel, clean-burning and cheaper than diesel."

Despite the recent price spikes in natural gas, the company's selling point is that it builds and operates a natural-gas station for a customer and then enters into a longterm fueling contract that will beat the price of diesel.

Pickens has reportedly made more than $100 million this year by selling oil, and gas futures. But like others in this emerging market who don't want to divulge much to competitors, he is secretive about how much he expects to profit from it.

Competing companies

Trillium USA Inc., a Salt Lake City-based subsidiary of Westcoast Energy Inc., a Vancouver-based holding company, is a much smaller operator by station count in the Los Angeles area, with just three CNG stations.

But it won a grand prize of sorts when it beat out the competition three years ago to become the exclusive supplier of CNG for the Metropolitan Transportation Authority, which with more than 1,000 CNG buses, runs the largest clean-fuel bus fleet in the nation.

"The name of the game in this industry is volume, and each of these (MTA) bus sites will use an equivalent of 3 million gallons a year," said Jan Hull, president of the 6-year-old company. "Our main interest is in the heavy end of the market, bus operators, and there is now a lot of interest from other operators."

That's a market segment in which Applied LNG Technologies, a private company headquartered in Amarillo, Texas, has had great success. The company, less than 10 years old, is the area's largest supplier of LNG, a fuel that is aimed at the heavy-duty market.

Natural gas is chilled to hundreds of degrees below zero, at which point it is in liquid form, and thus it must be stored in special super-insulated tanks to keep heat out. But as a liquid, it is far denser than gas, enabling a greater volume to be stored. in a given area. That's a plus for heavy trucks with big fuel needs.

"The growth in the industry is going to be phenomenal over the next five years, and different companies are focusing on different segments of the market," said Patrick Hutson, a company sales manager. "Sure, you can run CNG on any vehicle, but LNG is better for the heavy-duty market. No one wants to carry seven or eight tanks on their vehicle."

Applied LNG Technologies is currently servicing the Vons Co. Inc. in Santa Fe Springs, where 30 big rigs run on the product. It has other stations at LAX, Ontario Airport, and in Orange County, where it services the Orange County Transportation Authority and a refuse company.

Pinnacle, meanwhile, counts just four CNG stations in the Los Angeles area, including one it is building for the city of Thousand Oaks. But it believes it will have an edge because, unlike Pickens or Trillium, it builds its own stations, rather than just operating them.

"It's important that we develop the industry in a reliable manner, so the vehicles we put on the road have the performance and the stations have the performance to meet (the needs of) those types of vehicles," said Diggins. "We have a proven track record. We have been manufacturing, installing and contracting to operate fueling facilities for 10 years."

Niche market

The air district estimates that, once all the regulations are adopted --and only those regarding school buses are still on the table -- some 15,000 vehicles in the region, and perhaps more, will be converted to clean fuels.

While that would be a big jump from the few thousand currently converted, Southern California Gas acknowledges that the clean-burning fuel market will remain nothing more than a niche market. Even after the conversions, such sales are expected to account for less than 0.5 percent of the Gas Co.'s total deliveries.

"What we are doing is the right thing for the community we serve," said Mitchell Pratt, general manager of the company's natural gas vehicle program. "Is it a barnstormer for the company? No, it's really not."

The company profits from the market by charging a distribution fee on the natural gas that CNG retailers buy on the open market. The retailers compress the gas after taking it from the gas company's pipeline. However, in the LNG sector, all of that gas is imported from out of state, where it is liquefied, pumped into tankers and trucked in.

The air district projects that propane, a petroleum-based fuel often associated with more-mundane uses like the family barbecue, will remain a player in the market, but only for lower-power vehicles such as street sweepers.

"Some cities that have gone to propane already might stay with it," said Henry Hogo, the air district's planning manager. "Natural gas is predominant, but propane is also out there."

The biggest supplier of vehicle-fuel propane in the region, according to the air district, is Mutual Propane, a small family owned company headquartered in Gardena that has been in business since 1933.

Steve Moore, the company's vice president of business development, disputes the assertions that propane, which now dominates the alternative-fuel market, will be fading from the scene.

"Propane is actually the most widely used alternative fuel in the world. It's just that we, as an industry, have not done as good a marketing job as we should. The utilities have done a better job marketing CNG and LNG," he said.

The company supplies some 50 customers within the air district with propane, including Sparkletts, which. operates propane-powered delivery trucks. A major constraint on propane is that there are currently no propane-powered engines available to run heavy-duty vehicles, Moore said.

"We can power anything under 33,000 pounds of gross vehicle 'weight. On the light and medium-duty side we are doing fine," he said.

Richard Kolodziej, president of the Natural Gas Vehicle Coalition, a national trade association based in Washington, D.C., said that while his association promotes natural gas, alternative-fuel competitors in Southern California should just be thankful that the air district is mandating use of such fuels at all, given the competition from gasoline and diesel.

"Any advance with any alternative fuel is a net gain for the alternative-fuel marketas a whole," he said. "No one should be fighting over 3 to 5 percent of the market."