Electric Deregulation: Look at the Options
(from Maine Townsman, January 2000)
by Mark Federle, National Energy Choice
Maine is on the threshold of joining a handful of other states in the deregulation of its electric utility industry. Starting March 1, 2000 all of Maine’s electricity consumers, including cities and towns across the state, will have the choice of staying with their local distribution company’s standard offer service or finding a competitive supplier with a lower price for their generation services. Deregulation of the states three major utilities is really more of a restructuring. Central Maine Power, Bangor Hydro and Maine Public Service will continue to be the sole local distribution company (LDC) in their respective territories and will continue to be regulated by the Maine Public Utilities Commission (MPUC). The LDCs will continue to have responsibility for the "poles and wires" business and be responsible for maintenance and repairs to the distribution system. The portion of the industry that has been restructured is the generation of the electricity. The electricity commodity portion of your bill represents roughly 35 to 40 percent of your current monthly invoice.
The primary rationale behind deregulation is that by allowing competition in the generation of electricity market forces will take hold driving the cost of electricity down. Competition will also encourage the development of new, more efficient, gas fired power plants that will have less of an environmental impact on the state than the older, oil fired plants currently operating in Maine. Whether all Mainers will be able to take advantage of reduced utility rates remains to be seen, however cities and towns have a better chance than most consumers to be early beneficiaries of the competitive market.
The source of cities and towns’ advantage in the competitive market can be described in your municipal load’s balance of day and night time needs. Competitive suppliers generate electricity 24 hours a day, 7 days a week. Furthermore, electricity cannot be stored. As a result, suppliers are looking for users who they can sell electricity to at not only the peak demand hours of day time usage but who will also take their supply during the night time. The combination of day time usage at the town hall, schools and other municipal facilities, coupled with the night time usage of street lights, waste water treatment plants and other off peak uses makes municipalities attractive to aggregators and suppliers.
Municipalities have essentially four options available to them as they decide how to participate in the newly deregulated market place, they are:
Do nothing. You can choose not to seek better pricing in the competitive market and stay on your LDC’s standard offer service.
Negotiate a supply contract directly. Issue an RFP to multiple suppliers and negotiate a contract with the winning bidder. This requires a strong working knowledge of energy supply and contracts.
Hire a consultant. There are many consultants in the market who will conduct the RFP process and negotiate a contract for a fee. Because of the thin margins of savings available in the deregulating markets be careful not to spend all of your potential savings on consulting fees.
Join an aggregation. The aggregator essentially acts as your consultant/agent to secure the lowest priced contract in the market. The cost of the aggregator’s services is defrayed by the multiple entities participating in the aggregation.
As a leading aggregator in the New England market, our recommendation of which of these options to choose is probably obvious to you by now. National Energy Choice (NEC) has aggregated over 150 cities and towns in the deregulated markets of Massachusetts and Rhode Island helping them save up to 15 percent off the commodity portion of their electricity bills. Furthermore, we have several hundred other customers across a wide spectrum of industries that we currently serve. The role of the aggregator is to act as the buyer’s agent in the transaction. Effective aggregators will search all potential sources of supply in the marketplace and negotiate a contract on behalf of their clients for the lowest priced most reliable supply of energy.
Regardless of which option you determine to be best for your municipality there are a number of fundamental issues and risks you need to consider as you proceed. They are, in no particular order:
Price. In most cases you do not want to leave your utility unless you can beat their standard offer price. Pricing from competitive suppliers can be either fixed over the term of the contract or variable depending on certain criteria negotiated with the supplier. In most cases you will want to negotiate a firm, full requirements contract so that you pay for only the energy you consume and you are not exposed to market risks. Also, remember that your savings will only be on roughly 35 to 45 percent of your electricity bill.
Reliability and financial stability of supplier. These issues are of equal importance to the issue of price. You do not want to sacrifice reliability solely for a rock bottom price. You need to do your due diligence and understand your provider’s track record, reputation in the industry, years in service, generation sources and transmission path constraints. If any of these issues raises a red flag look very carefully and demand answers from the prospective supplier.
Service. You will want a supplier who is responsive to your customer service needs. Some things to look for include, does the supplier have a local presence with account representatives nearby to service your account, and does the supplier have the ability to bill you in a timely and understandable manner. You might also want to look at whether the supplier has other value-added services and products that can help you achieve even greater savings on your utility bills. The bundling of commodity savings and energy efficiency is an example of how you might achieve additional savings for your municipality through supplier offered value-added services.
Experience. Whether you are working directly with a supplier or an aggregator/consultant make sure you are working with an organization that has experience in the energy field and preferably in deregulated markets. The issues are complex, the learning curve is steep and the potential for getting into trouble great.
Contract terms and conditions. In negotiating contract terms and conditions be aware of where costs and penalties can be passed on to you. Again, an experienced negotiator familiar with the energy industry should be driving this process.
The restructuring of the utility industry introduces new and potentially exciting options to municipalities in Maine. The combination of municipal facilities electric loads and street light loads position cities and towns well in the eyes of energy service providers to be one of the early benefactors of deregulation. Do your homework, ask tough questions and most likely you can start saving your municipality money starting March 1, 2000. National Energy Choice is available to serve as a resource to your community in this complex and important set of decisions.