Confronting Deregulation

May 1, 1997
In the near future, schools and universities will be able to purchase electrical power much the same way they purchase long-distance service--by choosing

In the near future, schools and universities will be able to purchase electrical power much the same way they purchase long-distance service--by choosing the company that offers the best price and the best service. The difference will be that the purchase of electrical power will require an understanding of many facts and variables. At stake is a potential reduction in energy-generation costs of 30 to 40 percent.

Deregulation of the electric utility industry was initiated by The Energy Policy Act of 1992. This act requires electric utilities to make transmission lines available (open access) for the wholesale transport of electrical power from power generator to power purchaser. This act made it possible, but not easy, for an independent, non-utility generator of power in one state to sell electrical power to a commercial consumer of electricity in another state. The electric utilities in between are required, by law, to transport that electrical power for a transportation fee.

This process is known as "wholesale wheeling." When all consumers of electrical power are permitted to purchase power from any and all generators, including electrical utilities, the strategy is called "retail wheeling."

Buying on the open market Several states are conducting retail-wheeling pilot programs; and all states will be required to permit and enable retail wheeling under federal legislation introduced by Rep. Dan Schaefer, R-Colo. Within the next two to four years, schools and universities should be able to purchase electrical power on the open market, and some already are under wholesale-wheeling agreements. For example, last October, a group of colleges in California--the Independent Colleges of Southern California--entered into an agreement with an energy company to collectively purchase electrical power from exempt wholesale generators.

There is much to be learned from these early efforts, but keep in mind that many basic and significant factors will vary from state to state. At this point, it would appear that states with high electricity costs, like New York and California, will gain more from deregulation than states such as Texas, which has relatively low electricity costs.

Retail wheeling is already having an impact on the utility industry as energy generators redesign in anticipation of deregulation. In 1996, utilities began acquiring complementing utilities, and electric utilities purchased or merged with gas pipelines and energy companies in order to expand service offerings to customers when retail wheeling becomes a reality. Additionally, several electrical utilities have announced rate reductions, most likely due to the approach of deregulation.

Retail wheeling also is having an impact on many school and university energy/utility cost-reduction plans. Performance-contracting strategies built around energy retrofits now must take into account the anticipated impact of retail wheeling.

At schools' front doors Schools and universities should begin developing the knowledge that will be required to purchase electrical power in a deregulated market. Contact your local electric utility representative and schedule a meeting. During this meeting, discuss the utility's rate structure. Many times, there are four or five different rates. If a school discovers it is purchasing electricity at a higher rate, the utility company usually will change the billing to reflect the proper rate.

With your utility bill and contract in hand, discuss with the representative every detail and code on both documents. Make certain that you understand all terminology, including: -Demand. -Taxes. -Tariffs. -Fuel-adjustment charges. -Penalties. -Peak and off-peak charges. -Transmission vs. transportation costs. -Power-factor penalties. Having mastered the rates, contracts and invoicing, ask the representative what services the utility offers. Generally, utilities offer several valuable services free, ranging from a simple audit of electricity usage to a preliminary proposal on how the school can reduce its electrical consumption.

In addition, ask your representative about billing, invoicing and contracting changes that are expected to occur in the future. Ask if the utility is pursuing a merger or acquisition that will impact your costs or expand the current service package. You also should ask about the current regulatory climate in your area and the status of deregulation. Find out if deregulation is imminent and what steps the utility has taken in anticipation of deregulation.

It is important to determine who in your area is influencing the deregulation debate. Every school and university has a vested interest in how deregulation is to be implemented, and administrators should have a say in shaping the plan. From the representative, find out which commercial consumers in your area are purchasing electrical power from other generators. Discuss the rates--including transportation fees--being quoted by various competing generators.

The utility regulatory authority in your state also can provide assistance or refer you to a coalition of energy users who share your concerns and needs. If you have received proposals or solicitations from other generators, discuss them with your representative, and give him the opportunity to review the proposals and offer comments.

Most importantly, do not sign any proposal until you are familiar with all aspects of energy usage and pricing. In the purchase of electrical power, a decision made prematurely could be very costly.

Impacting the tax base If you represent a tax-supported institution, you should broaden your view of deregulation to include its possible impact on the tax base in your district. For example, determine if deregulation will cause the closing of taxpaying facilities in your area. Also, if your local utility is a generous contributor to your fund drives, you may not want to look further.

If you are a consumer of natural gas, call the local gas utility and find out the same information. Remember, deregulation may turn these two competitors into partners. They may begin offering you a package of services that includes gas and electricity.

When examining the benefits of deregulation, do not focus exclusively on cost reduction. It may be your paramount consideration, but it shouldn't be your only consideration. Be innovative; examine even the most remote possibilities. Remember, deregulation means utilities will be competing for your business.

Explore performance contracting--where lighting and HVAC-system upgrades are paid for from savings in energy costs--with both utilities. Ask your local utility companies to fund such renovations and recover the costs from regular monthly billings.

If you haven't had a complete energy audit of your facilities in several years, now would be a good time to do it. A properly done audit will give you a current understanding of your school's energy consumption and the reductions that are possible through equipment upgrades and management practices.

Although you can depend on your utility company to provide your facility with services, it does not always provide you with the least-expensive rates available. Here are some steps to follow as a guideline to determine whether you are paying too much: Step 1: Gather your site's monthly electric, gas, oil, water, steam and telecommunications invoices for the past 12 months.

Step 2: Check for billing errors (double billing, incorrect multipliers or erroneous constants, computational mistakes, etc.). Call in a service technician to make sure that your facility's meters are functioning properly and are not being misread.

Step 3: Develop a profile of your facility's costs and usage patterns; identify the days and the times when usage is highest.

Step 4: Ask your state's public-service commission for copies of regulations, especially those that apply to commercial customers, that govern the utility suppliers in your area.

Step 5: Obtain full price schedules from each of your facility's utility suppliers. Also, look at these suppliers' contracts with other commercial users--not just plants. Note the rate schedules that are used and any special discounts that are applied.

Step 6: With competing utility companies, determine where lower per-unit costs can be obtained. Ask about discount programs that may fit your facility's usage profile.

Step 7: Write to your institution's utility suppliers, detailing any billing errors that you may discover during the auditing process. Ask for refunds. Next, apply for any appropriate discount programs and ask for rebates that may be due you for past billings at higher, non-discounted rates.

Step 8: Monitor your facility's monthly invoices to verify their mathematical accuracy and to determine that proper rate schedules are being applied.

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