Detangling the Deregulation Web

If there?s one sure thing that you can say about utility
deregulation, it?s that it?s complicated. Some states are deregulated, some aren?t,
and some are in the process of deregulating. New services and products are
coming online regularly, and new terms in the energy-shopping arena are popping
up everyday — so many things to learn, and now so little time to learn them.

Nationwide deregulation is well on its way, with international deregulation
nipping at its heels. Since California deregulated its utility system in 1996, other
states have taken steps toward that same goal, but often in slightly different
directions. As more states deregulate, it is important to keep up to date on the ins
and outs of the changing market.

“Transition from a regulated system to a deregulated system involves a lot of
change and a lot of education,” says Donna S. Buchheit, manager, economic
development at Allentown, Pa.-based PP&L and vice president of the Investor
Owned Utility — Economic Development Association.

If the corporate/industrial consumer does a thorough job, then major savings can
result. In New York, for example, 81 companies decided to extend their electricity
contracts with the New York Power Authority in return for rate cuts that will total
nearly US$54 million. Among those 81 companies were Playtex Family Products,
IBM, Republic Bank, Diemolding Corp., American Broadcasting Co.,
Metropolitan Life Insurance and Ciba Specialty Chemicals. “By using Power
Authority electricity, these customers will increase their total savings over the next
seven years to more than $500 million,” says C. D. Rappleyea, chairman and CEO
of the Power Authority.

Competition Heats Up

Now that several states have deregulated, the competition
isn?t just between in-state energy suppliers. Utilities are competing on an
interstate basis, and many of the out-of-state utilities are winning.

Case in point, the United Nations and several federal government agencies
joined under the U.S. General Services Administration?s (GSA) power
procurement contract to purchase electricity for their facilities in New York City
from Los Angeles-based New Energy Ventures. Marking the first deregulated
energy contract for GSA, which provides realty management services for federal
government agencies, the 13-month contract includes 57 federally owned or leased
properties in the city.

In Pennsylvania, Tenet?s Philadelphia hospitals have also chosen New Energy
Ventures to supply electricity for its eight acute care hospitals and other health-
care facilities in the region. “In today?s highly competitive market, we are exploring every avenue available to reduce overhead costs that do not adversely impact patient care,” says Lee
Domanico, senior vice president for Tenet?s Pennsylvania region. “This new
contract allows us to save money on electricity while still focusing on our
mission.”

Pennsylvania Learns From California

With these kinds of savings resulting from the deregulated utility
market, it is becoming crucial for the corporate/industrial user to keep up with the
market. That means not only knowing which states are deregulated, but how each
state sets up shop. The latest entry to the market is Pennsylvania.

Learning from its West Coast counterpart, Pennsylvania took a slightly different
route through deregulation than did California. Using a slower approach,
Pennsylvania began its deregulation on Jan. 1, allowing one-third of all customer
classes (residential, commercial and industrial) to choose their electricity provider.
On Jan. 2, another third was given the choice, and by Jan. 2, 2000, all of
Pennsylvania?s customers will have the right to choose.

“We took a little more time than California did, because we felt that having the
pilot a little longer would allow us to try some things, to test some things and see
what worked and didn?t work,” says Buchheit. “That worked well for us, and
deregulation has gone remarkably smoothly in Pennsylvania. We?re having a
significant number of customers choosing an energy provider, and that is very
different from the California market.”

In fact, a survey conducted by Pennsylvania?s Electric Choice Program found
that approximately 1.2 million, or 21.9 percent, of the state?s 5.4 million electric
customers are actively shopping for new electricity suppliers, and as many as
475,000, or 8.8 percent, said they have already switched to a competitive supplier.
In comparison, California has seen approximately 1 percent of its residential
customers switch since deregulation began in 1996 and approximately 5 percent of
commercial and industrial users, says Grant F. Thomas, manager of
communications at Southern California Edison.

Another difference in how Pennsylvania set up shop is its shopping credits (the
portion of the bill that can actually be shopped for). California allowed for small
shopping credits that fluctuated with the market. “So whenever the [California]market is
cheap, the shopping credit goes down,” says John Molinda, director of market
development and strategy with Strategic Energy Ltd., a retail aggregator, or
buyer?s agent, based in Pittsburgh. “So they can?t save a lot. In Pennsylvania, they
have a fixed shopping credit that is bigger than California?s; that allowed
competition to happen more in Pennsylvania.”

There are, however, some similarities between California?s and Pennsylvania?s
restructuring process. The primary example is the way stranded costs were
handled. Stranded costs are investments made by utility companies that cannot be
recovered in the deregulated environment, and like California, Pennsylvania?s
system covers these costs by adding a competitive transition charge.

Keeping Tabs on Deregulation

Pennsylvania and California are only two of several states to
enact utility deregulation. There are currently 19 states active in the deregulated
market, with another three having issued Comprehensive Regulatory Orders,
according to the U.S. Energy Information Administration. Four more states have
legislation or orders pending as of June 1, and the other 26 states have ongoing
legislative investigations (see map).

For the corporate/industrial user, it is important to know exactly where a state is
in the deregulation process. If a state in which a company operates is still in the
planning stages, then that corporation can make a difference in how deregulation
shapes up, says Molinda.

He suggests that corporate/industrial users attend legislative deregulation
discussions. That way, the corporate consumer can help advocate the kind of
business rules and changes to make the market most favorable for the large
industrial users. “They have a chance to do that now,” says Molinda. “The markets
are being restructured slowly all across the country, and it?s their one time chance
to get their two cents in about how

should be restructured.”

Getting the Biggest Bang for Your Buck

Once the basic terminology and processes of the deregulated
market is understood, the corporate/industrial user needs to learn how to buy
power in the free market. First and foremost, says Molinda, the
corporate/industrial user must understand its load, or the amount of electrical
power being used at one time.

When it comes time to shop for power, the corporate/industrial user should talk
to as many different energy providers as possible to get the full range of options
available. Instead of receiving a request for proposal from a single supplier,
consumers need to understand how to purchase power on a real-time, or an hour-
by-hour, basis (a.k.a. spot market). ?The price changes by the hour, but what most
customers don?t know is how to operate in that market,? says Molinda. ?The
marketer [or single supplier] is giving the customer a request for proposal for the
price of power for the year. The industrial customer thinks that

is
responsible for everything and basically the customer walks away. They don?t get
involved any more; they think they got the lowest price.

?But the marketers are going to take advantage of the dynamics of the market —
buy when the spot market is low or off-peak — and they?re going to keep the
money,? he continues.

Another option that corporate/industrial customers should consider is
aggregating. This is particularly useful for groups of small companies. By
allowing several electric consumers to group into a larger purchasing unit, the
aggregated group gains more bargaining power with the energy supplier.

For example, more than 200 Massachusetts nonprofits have signed contracts
with PECO Energy Co. of Philadelphia through the Massachusetts Health and
Educational Facilities Authority?s (HEFA) PowerOptions program. The nonprofits
are expected to save a combined total of at least $10 million during the next five
years beyond the ?standard offer? discounts mandated under electricity
deregulation. ?PowerOptions is leading the way with the most attractive deal on
the market,? says HEFA Executive Director Robert Ciolek. ?This success is an
indication of the opportunities that consumers and businesses will have in a
competitive market.?

Products and Programs

As deregulation moves forward, the choices will continue to
grow. Not only will electricity rates be competing for the corporate/industrial
user?s money, but so will energy packages. New products and programs are being
developed constantly, and shopping around is crucial to finding the best deal, says
PP&L?s Buchheit.

Southern California Edison (SCE), for example, offers a product called
economic development rates, or EDRs for short. These are geared toward
attracting and retaining companies as well as encouraging existing firms to grow.
?They can be very effective tools in reducing energy costs over an extended period
of time,? says Thomas of SCE. In fact, EDRs helped retain and expand Foster Farms, the largest poultry producer in the western United States, in the Southern California market. SCE
provided an expansion EDR to Foster Farms, allowing the company to expand its
production capacity and add another 300 jobs. ?We were able to save Foster over
$300,000 in their costs annually for energy, and that was significant enough for
them to decide to expand their plant here in California, rather than moving into
another state,? says Thomas.

Understanding all the options can take some time, says
Buchheit. Packages can be very complicated, depending on what the consumer
wants, but choosing the appropriate energy supplier and the right package are a
very important decisions. ?It?s just like when you live at home, you were used to
opening up the cupboard, and there were all the groceries that your parents had
shopped for,? Buchheit says. ?But when you moved out on your own, you had to
educate yourself about how to go to the grocery store, how to do the shopping for
yourself. It?s the same type of thing; somebody isn?t just automatically providing
the product one way.? SS

Canada’s Electric Competition Fires Up

As deregulation picks up steam in the United States, neighboring Canada prepares itself for competition among both Canadian and U.S. utilities. Quebec and Alberta, for example, have set forth rules for deregulation. And Alberta will begin a pilot project where eligible users with time-of-use meters will be able to purchase electricity directly through the Power Pool. On Jan. 1, 2001, all of Alberta?s electricity customers will be able to choose between competing electricity retailers and related services. Ontario, however, is probably the Canadian province furthest along the route of electricity deregulation. In November 1998, the Ontario government passed the Energy Competition Act, which will establish a competitive marketplace for all customers in the year 2000. ?And the Ontario market, at least today, is the only one that has taken the former integrated utility that served the province and actually split it up into separate companies and established a completely independent system operator,? says Bruce Boland, vice president of regulatory affairs with Ontario Power Generation (OPG). ?Alberta has pieces of that. In Quebec, Hydro Quebec is still very much intact, although they have adopted the separation rules that FERC 88 requires in order to introduce wholesale access.? Ontario Hydro, Ontario?s integrated utility since 1906, was split apart on April 1 into five successor companies. Included among those five are OPG, which operates the generating assets, and Ontario Hydro Services Corp., the transmission and transmission wire company. A third company is an IMO (independent market operator), which is similar in terms of structure and purpose to the U.S. ISO (independent systems operator). One issue that the Ontario Hydro split introduced was the fact that OPG owned a lot of the generating capacity within the province, creating a generation power market problem. The solution was to have OPG ?decontrol? (divest or sell) a minimum of 4,000 megawatts of generating capacity within the 10 years following the onset of deregulation. After that 10 years, OPG?s serving capacity can be no greater than 35 percent of the Ontario market. OPG may have the ability, however, to conduct asset swaps like many U.S. utilities are doing to achieve the same results. Although the restructuring of Ontario?s and much of Canada?s electricity market is similar to that taking place in the United States, there are differences. The most discernible difference is the deregulation of the wholesale electric market. ?In the U.S., you?ve got FERC (Federal Energy Regulatory Commission) setting the rules with respect to the wholesale issues,? says Boland. ?We don?t have that same kind of governing structure here in Canada; we don?t have anything equivalent to FERC, so it?s much more of a provincial issue. The Ontario government is going ahead and making this decision to introduce retail and wholesale competition at the same time in the year 2000 so that all customers can benefit at once, whereas in the states, you are definitely seeing this sort of two-staged, two-tiered approach.? Another part of the U.S. process includes retail pilots and retail phasing. Ontario will not phase in its deregulation. ?The expectation here is it?s much more a big-bang type thing,? says Boland.