|Cheryl Coward is a freelance writer based in Chicago. She has also written articles for Black Enterprise, the Village Voice and Essence.|
he specter of deregulation of the electric utility industry has been looming for the past several years—and now the reality has arrived. The question isn’t if your state will deregulate, but when. Within 10 years businesses all over the country will have to decide for the first time who is going to provide their electricity. That means companies will be forced to deal with yet another complex vendor-selection screening as they are solicited by power suppliers hawking their wares in the open energy marketplace. CPAs and other financial managers may find themselves on the front lines in the decision-making process. They will want to know the right questions to ask when deregulation comes to their states.
The electric power industry is one of the last great monopolies. For over 75 years, strict regulations divided states into regions, with one utility granted exclusivity over the generation, transmission and distribution of electricity in a designated area. The local utility, along with state regulators, decided what to offer, and businesses had no choice but to get bundled services. However, state legislators, federal agencies and energy suppliers have pushed to dismantle the industry’s vertical integration structure and let consumers choose their power supplier.
States whose energy prices have traditionally been above the national average have been leading the charge to deregulation. California, New Hampshire, Rhode Island and Massachusetts already have full-scale competition among energy providers. Houston-based Enron and San Franciscobased Pacific Gas and Electric Energy Services (PGEES) have lobbied on both the state and national level to speed up deregulation, and they have marketed their offerings to customers across state lines.
Most states have at least one deregulation bill moving through the legislature. On the national level, several legislative proposals in Congress relate directly or indirectly to the restructuring of the industry. In the face of this momentum, the sooner a business starts to deal with the decision-making process the better, especially if the business has locations in several different states.
States moving toward deregulation have generally taken one of the following approaches:
- Implementing pilot programs to test the effects of deregulation.
- Devising a phase-in strategy whereby deregulation takes place in stages over the course of several years.
- Plunging right into full-scale competition (as California did).
The amount of time that a company will have in which to make its choice will be determined by how its state decides to deregulate. CPAs and other financial advisers will need to keep track of changeover deadlines.
NOT JUST A COMMODITY
With the advent of deregulation comes a new model of supplying energy. Making the decision involves more than just shopping around for the supplier who provides a commodity for the lowest price per kilowatt-hour. In addition to generating energy, suppliers now offer an array of value-added services, such as energy audits, billing, metering, infrastructure maintenance and information technology development.
Information technology ties many of the value-added services together in providing and improving real-time energy management and consolidated billing across multiple sites. These services make up a large part of a comprehensive energy management plan to offer businesses the opportunity to be cost effective across the board. “It is a mistake to think of energy as solely a commodity,” says Tony DiStefano, CFO of Pacific Gas and Electric Energy Services.
“Most companies are not complacent just to lower rates but are trying to solve the problem of total costs of energy,” says Marty Sunde, a vice-president at Enron.
There are many different approaches to pricing, since companies have different needs depending on the number, size and purpose of their facilities. Large businesses have more leverage. In states that have deregulated or are close to doing so, large businesses have lobbied vigorously to protect their interests.
WHAT TO LOOK FOR
No matter what the size of the company, though, there are several tips and key points that all businesses should consider when choosing a supplier.
- Perform an energy audit to see where and how energy is consumed. This involves determining the scope of energy costs per day, week and year. An energy audit can help in deciding long-term energy usage goals.
- Form an energy task force once the company has gathered usage data that includes representatives from a variety of departments, from facilities management to accounting. Task force members should collect information on deregulation from the state public utilities commission and the U.S. Department of Energy (for more information, see sidebar). In addition, assign a task force member to track state, federal and congressional developments in deregulation.
- Build trade group partnerships or form alliances. For a small or midsize business, forming or joining a trade group alliance for energy negotiation might be the best bet for maximizing savings while obtaining the greatest selection of energy management options. An alliance or trade group aggregation program gives small and midsize businesses the leverage that larger companies have in negotiations.
The Massachusetts High Technology Council, a trade group of technology companies, orchestrated the first commercial-load aggregation program in the state for its members. Companies such as ADL, Allegro Microsystems, Bay Networks, GTE Internetworking and Hewlett-Packard have benefited from recommendations generated by MHTC’s advisory group and meetings with facilities managers from over 60 companies. (To contact the council: Massachusetts High-Tech Council, Reservoir Place, 1601 Trapelo Road, Waltham, Massachusetts 02451; phone, 781-890-6482; www.mhtc.org. )
“When smaller or midsize companies work with a group like ours,” says MHTC General Counsel Chris Anderson, “it protects each company’s interests on a lot of different fronts, including ongoing legislative changes.” MHTC participated in Massachusetts’s 18-month pilot program and was a vocal and influential element in shaping the state’s legislation. Based on its participation, MHTC members were able to address the particular issues of technology companies as well as subjects such as price per kilowatt-hour. “We were in the trenches, and we know exactly what works and what doesn’t,” says Anderson.
AN ENERGY ALLIANCE
For Sydran Services, owner of a California-based chain of Burger King and Chili’s restaurants, becoming informed about energy deregulation required a long and steep learning curve. Stumped, several other Burger King franchises in the state ended up contacting Sydran through their trade associations to ask for help in navigating the process. Ultimately, the franchises joined together to negotiate new terms with energy suppliers.
Steve Grossman, Sydran’s vice-president of finance, who initiated the process for the restaurants, admits that it was not an easy task. He assembled an energy task force from his various restaurants. “We did our homework,” he says. Grossman initiated intense research on deregulation and compiled his findings from the Internet, the California Public Utilities Commission and energy suppliers for the task force. Getting up to speed on such a complicated subject “was a painful process, but the group is now very knowledgeable.”
When Grossman first began questioning energy suppliers about their offerings, he found that there was strength in numbers in the bargaining process. “These companies gave us the hint that the bigger the buyer was, the better your rates would be.”
That’s when an alliance began to look more appealing. Sydran, along with the Burger King Northern and Southern California Franchise Associations, joined the mailing list of the California Public Utilities Commission to gain information about the process. As a group, they then began taking bids from several companies, four of which no longer exist. According to Grossman, when deregulation first passed in California, there were more than 225 companies offering energy services. “Now there are only about 20 left,” Grossman says.
In the first round of negotiations with suppliers, the group focused on commodity pricing, and then it began to deal with the energy-management services such as metering, infrastructure development and maintenance. Along with getting a good price, group members wanted to learn how to make their stores more efficient and to tackle issues such as lighting, air conditioning economizers and electric monitors.
As a result, today air conditioning units in every store are monitored and usage is tracked instantly via technology that allows the stores and their energy supplier, Pacific Gas and Electric Energy Services (PGEES), to manage usage from the Internet. PGEES also provides maintenance and financing for equipment at the franchises. Sydran, which owns franchises in Louisiana, is looking to PGEES for advice in tackling regulation there.
Sydran is monitoring the changes in energy costs. It compares pre-deregulation costs to the new fees to reach a final conclusion about savings. The value-added services have made it possible for the company to monitor energy usage for every store at any moment.
Information is the cornerstone of a sound energy decision. Many new companies have entered the energy marketplace, some with little experience in supplying services in large quantities. Deregulation has also prompted a series of mergers and acquisitions in the industry. Companies choosing a provider should know its corporate and financial history as well as what technology it uses. The questions below should help ease the burden of choice.
- Does the power supplier have an industry track record? Is it financially sound? Rapid change has caused tremendous price volatility in the industry. In picking a provider, find out if it can offer a contract with a guaranteed energy rate.
- What is the source of the energy supply? Many companies not only want to know the source of their electricity but also are interested in renewable and environmentally friendly sources. Patagonia, an outdoor clothing company well known for its eco-friendly products and awareness, chose a supplier that would meet all its energy needs using renewable sources. It was the first business in California to purchase 100% new incremental wind energy from Enron’s wind farms.
- How active is the utility provider in lobbying to shape deregulation legislation? Your supplier should be able to keep your company abreast of evolving legislation and elicit feedback from you about your concerns on the changing picture of deregulation.
- How flexible is the utility provider in meeting precise needs? Does the company offer a variety of energy options and pricing structures? Does the utility’s solution allow customers to concentrate on their core businesses without having to become energy managers?
- What is the scope of the utility provider’s ancillary services? Does the company offer a contingency plan in the event of a service disruption?
- What are the penalties for breaking the contract?
THE RIGHT CHOICE
These guidelines can help in making an informed decision, or evaluating a vendor if a choice already has been made. Although no one knows what the industry will look like in 10 years, it is clear that change is happening and businesses should be ready to embrace it without being blindsided. And the work isn’t over once a utility provider has been selected: Financial managers need to plan regular updates to analyze the quality of service and evaluate contracts.