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Demystifying Deregulation

While the deregulation of electricity may not be the panacea commercial users had hoped, energy experts say there are other strategies retailers and shopping center owners can adopt immediately to take charge of their energy costs.

"The biggest misperception is that deregulation equals savings to all customers," says Kathleen Corbin Teora, director of Sempra Energy Solutions, an unregulated subsidiary of San Diego-based Sempra Energy. "You have to look at it on a case-by-case basis."

Electricity is the second largest cost of doing business, behind labor, for retailers, according to the ICSC, which has strongly supported deregulation.

Though not federally mandated, deregulation is being considered by all 50 states. States with the highest electricity costs - California and Northeast states - were the first to embrace the concept. Those with the lowest costs - such as those in the Northwest, which use hydropower - have been the most reluctant, fearing their electricity costs would actually increase.

Each state is enacting different laws and timetables, which poses a particular challenge for shopping centers and stores operating in numerous states. "The rules are different for every state," Teora says. "We understand the rules in California, but to enter the market in Pennsylvania is another story."

While deregulation of the telecommunications industry was controlled at the federal level, deregulation of electricity is controlled at the state level.

"At this point, it's difficult because states aren't in tune with each other," says Larry Denehy, a Boston Edison Co. account executive whose clients include malls.

Another obstacle to immediate savings are what the industry calls "stranded costs." These are the debts that utilities took on (with the approval of state regulatory agencies) under the assumption they would always be regulated monopolies. An example of stranded costs is the debt incurred by the construction of nuclear power plants.

To recover these costs, states are imposing competition transition charges (CTCs), some of which are being passed on to the end-user.

Deregulation eventually will produce savings, Teora says, "but the most important consideration is the elimination of the CTCs. Until those are paid off, it won't truly reflect a competitive marketplace."

Some observers refute the claim that there will be substantial immediate savings, that it will be a buyer's market. "Only one-third of the power chain is being deregulated," says Joseph T. Stolarski, senior vice president of Jones Lang LaSalle Energy Services, a division of Chicago- and London-based Jones Lang LaSalle.

Only the generation of electricity is being deregulated; the transmission and distribution of electricity will continue over lines owned by the utilities, creating an arrangement known as "retail wheeling."

Another concern for retailers is that only the largest electrical users - industrial businesses - will reap the benefits of deregulation because of their power to negotiate for better rates. However, deregulation may produce opportunities for aggregation, which will allow retailers within a mall and stores across the country to band together to increase their buying power - if a provider can be found that serves all the geographic areas.

Although opinions on deregulation are diverse, the one point everyone agrees on is that, in order to benefit from deregulation, owners and managers must become much more familiar with their own electric load profiles as well as the complex methods used to calculate electricity usage. And even if deregulation is not imminent in that state, knowing those patterns can lead to a more cost-effective use of electricity.

Denehy sums up the most important commandment for those who purchase electricity: "Know thy load profile."

Controlling costs now Purchasing energy in a deregulated marketplace may or may not save loads of money, but energy users can take action today to start saving immediately.

"For the foreseeable future for commercial customers, we believe it is more important how you use energy than who you buy it from," says Frank Cassidy, president and CEO of Edison, N.J.-based PSEG Energy Technologies, whose parent company is Public Service Enterprise Group, a public utility holding company.

For instance, he says, installing new, high-efficiency lighting - a major part of a mall's electric bill - could save as much as 25%. In contrast, commercial users in deregulated states may save "at most" 5% to 10% over the next few years. Cassidy is optimistic, however, that after stranded costs have been recovered and electrical systems have become even more efficient, commercial customers could realize savings of 20% to 30%.

Teora agrees that the first step is energy information and efficiency, which can reduce costs from 1% to 5%. Retailers must first understand their energy usage patterns, which is key to purchasing, she advises.

Retailers can contact their local utility for information or contract with one of the new breed of energy companies popping up to provide services in a deregulated market. Boston Edison, for example, supplies a company's first usage report on disk free of charge, but that practice varies by state.

"You need to become an attractive customer to get the benefits out of deregulation," recommends Steve Kiesner, manager of national accounts for Edison Electric Institute, which represents America's shareholder-owned electric utility companies. Edison Electric members generate and distribute more than 75% of the nation's electricity.

Becoming an attractive customer could mean changing usage patterns, aggregating several locations, or forming a purchasing pool with other businesses. Retailers also can take advantage of real-time pricing: If businesses know what their energy usage is on an hourly basis, they can shift some of the electricity demand back and forth to match the supplier's lowest-cost hours.

Shopping centers have a relatively better profile than many commercial customers because they are open at night. "The closer you get to usage around the clock, the better off you are," Cassidy says. "That ought to be part of negotiating the cost with the supplier."

Denehy agrees: "The real attractive customers will be the ones that have good loads consistent throughout the day and night because their loads are more predictable. A supplier might not see a strip mall as being an attractive account."

All malls use electricity essentially the same, in that they have similar load profiles. However, each presents a different scenario for negotiation. "A mall with 170 stores may have 170 or more meters," Denehy notes. "Or anchor stores will have their own meter and the rest of the mall has a master meter, which means the mall has a pretty big electricity bill. This would give them more leverage in negotiating rates."

Even if tenants are individually metered, they can still all be included in negotiations to get a better rate, he adds.

Pooling buying power Jones Lang LaSalle, which manages 40 shopping centers across the country, will be attempting to purchase electricity based on larger quantities as more states become deregulated, according to Jim Sorge, national operations manager for the company's Atlanta-based retail division. However, because Jones Lang LaSalle manages multiple properties for multiple owners, grouping together properties for preferred rates can be a challenge, Sorge says.

As Denehy advises, "The best thing for a mall to do is decide whether to take a regional or national approach as far as searching for a supplier."

Mall tenants should be discouraged from purchasing power on their own, says Stolarski, who recommends making that stipulation as part of the lease agreement. He acknowledges, however, that such a stipulation might be impossible because national chains could be combining stores to purchase power.

"Coordination can be pretty tough," agrees Kiesner. "Some would rather do their own thing."

On the other hand, retailers need not limit themselves to other retailers. Says Denehy, "It is conceivable that a retail store whose usage pattern is a bell curve could aggregate with an apartment building or hotel with a totally different usage pattern. The overall goal is to keep the load curve as flat and predictable as possible."

Adjusting to deregulation is going to be a time-consuming process for owners and managers. "Retailers can anticipate benefits from electricity competition, but they should also expect more work and risk," Kiesner says. "Like anything else, moving from one supplier to a host of suppliers will be more complex."

Deregulation has been the impetus for the birth of hundreds of new companies specializing in services to make the transition easier. Known as energy service providers, some of these companies are start-ups and others have been formed by regulated utilities.

Their services include: providing energy audits, offering load management strategies, researching other states and making recommendations, providing financing and equipment upgrades, actually buying the electricity, perusing electric bills for errors, combining expenses from all sites into a single summary, and even paying the bills. These companies are usually paid a fee per site to manage energy costs.

Sempra Energy Solutions was formed to provide such services. There already was a need for such services in the marketplace, but the importance was accelerated by deregulation, Teora says.

Sempra recently signed a $16 million contract with San Diego-based Foodmaker, parent company of the 1,100-store Jack in the Box restaurant chain, for a bundled package of services including discounted electricity, extensive retrofitting of existing equipment and information services. Initially, Sempra will provide electricity to 350 Jack in the Box locations in California.

Sempra also has signed an energy services contract with San Diego-based PETCO Animal Supplies to provide information services and competitively priced electricity to 115 PETCO locations in California. Sempra expects to reduce the stores' electric costs by 4%.

"Our agreement with Sempra Energy Solutions allows us to test the waters of deregulation with our California store locations and examine future opportunities in other states as they undergo deregulation," says Ken Moss, energy manager for PETCO.

The road to deregulation Efforts to deregulate electricity began in 1992 with passage of the National Energy Policy Act. Natural gas, which was deregulated in the 1980s, was much less complicated.

"Electricity is more complicated to measure, and usage includes peak and off-peak times," Teora says. "You buy at different times of the day and get different prices."

According to the Edison Institute, eight states are now either fully open to competition or have pilot programs in place. They are: Arizona, California, Illinois, Massachusetts, Montana, New York, Pennsylvania and Rhode Island. New Jersey begins deregulation in August.

Another 17 states have either passed deregulation bills or have introduced such legislation. They are: Arkansas, Connecticut, Delaware, Indiana, Maine, Maryland, Michigan, Nevada, New Hampshire, New Mexico, Ohio, Oklahoma, Texas, Oregon, South Carolina, Vermont and Virginia. All the remaining states are now considering deregulation.

Most states are first offering the option to businesses rather than residences. One state, Maine, has capped how large a share of the market the current utility can keep. Congress has not yet mandated that states adopt some kind of restructuring plan, but the issue is being discussed.

With deregulation a near certainty in almost all states, businesses must begin the education process. "You have to start thinking about electricity supply like you think about other key suppliers," Cassidy advises. "You have to determine what areas they serve and what services you need."

Sempra began educating California consumers two years ago, and Teora expects it to be an ongoing process. "We thought naively that it would take six months to educate," she says.

As users first begin to encounter deregulation, they probably will be inclined to sign short-term contracts to see how it pans out. "They might not yet be willing to jump into a multi-year contract," Kiesner says. "There could be a lot of switching around."

While deregulation hasn't caused a great deal of change yet, Sorge says, "the opportunities for taking advantage of deregulation are getting very close." He notes that some of the opportunities are coming through negotiating with the power companies prior to deregulation.

Although large companies were already able to negotiate their electricity costs, the advent of deregulation has opened up negotiations. "There weren't any options before, but there soon will be," Sorge says.

Other power options Those who considered thermal energy storage in the 1980s might want to revisit the idea. "You produce ice in the evening and then use it for air-conditioning during the day. That flattens the curve," Kiesner says.

One Florida shopping mall managed by Jones Lang LaSalle generates all its own power through a small, central utility plant. Generators at Merritt Square mall on Merritt Island, Fla., produce electricity, which is sold to tenants to power lights, run cash registers and cool the mall.

Merritt built the power plant out of necessity, Sorge says, because the local utility couldn't handle the load for the new mall. Even though the utility could now handle the mall, it continues to use its own generator.

The cost savings comes from using the steam from the heat generated to chill water for the mall. "We get nearly free chilled water as a byproduct of generators producing heat," Sorge says. "If you look at the combination of making electricity and producing chilled water, it makes it more efficient than buying from the local utility company."

Jones Lang LaSalle has considered the option for other centers where electricity is very expensive, but the large capital expense required for the initial investment has always been a stumbling block.

"But it could get to that point in certain areas of the country where electricity is higher," says Sorge, who thinks deregulation eventually will decrease the cost of electricity. "I'm not sure the savings will be as large as some people think or as some utility companies and consultants have suggested, but there should be some savings."

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