The deregulation and re-regulation of utilities

Property owners face powerful opportunities as utilities deregulate. Deregulation and the resulting competition within the energy industry have energy utility firms, their customers and energy service companies taking a new and enlightened look at each other, and at the tremendous possibilities of doing business in new and different ways. Today, large customers in about one-third of the nation are no longer tied to their municipalities' energy companies, but are purchasing electric, natural gas and related services from a variety of competing sources. Free to select from a new choice of suppliers clamoring for their business, today's property owners face new and electrifying opportunities, and are wielding a tremendous power never enjoyed in a regulated environment.

Utility companies must now work harder to compete for and retain customers within their defined territories; they can no longer just sit back, watch customers use power, then send out some bills. Energy service providers - with no bias as to the type of energy their customers use, and no territorial restrictions - are actively seeking the best energy buys for clients on a national basis, and providing an extended array of related products and services designed to maintain control over cost and usage.

Opportunities abound For commercial and industrial property owners, all this activity and opportunity translate into an extraordinary savings on utility expenditures, and a new ability to control and reduce their facilities' energy-related operating costs.

However, only the most well-prepared companies will be in a position to take advantage of all the opportunities presented by deregulation, says George Owens of Columbia, Md.-based Energy and Engineering Solutions Inc., a consulting firm backed by Owens' almost 30 years experience in the energy industry. &Building owners and managers should now be in the position to actively participate in the first group of states to deregulate. To be prepared, they must be able to answer these questions: Will we participate in the deregulated electric market? Should the supply arrangement be on a national basis, or divided by region or building type? How will our tenant relationship be affected? Should we purchase power on our own? Should we analyze and operate our efforts in-house, hire a consultant, or do both? How do we select an energy supplier when the future is uncertain?"

Help is out there EnerShop Inc. of Dallas is an energy services firm specializing in energy management solutions designed to reduce facility operating costs in the commercial office building sector. A subsidiary of Central and Southwest Corp. (CSW), one of the largest utility companies in the United States, EnerShop's strategies help enhance operating efficiencies, increase productivity and product quality, improve comfort and safety for building occupants and advance energy value, reports David Pickles, vice president of marketing and development for EnerShop.

"Operating expenses are a facility's single largest component, bigger than payroll and taxes. Given that the deregulated energy market will permit office building owners to buy power from someone other than their traditional supplier, it's a good time to look at those operating expenses and take action," maintains Pickles. &There is comparatively little due diligence done on the operating expenses of a property: The building engineer in charge typically is not given the financial tools required to manage the property and has no idea what changing energy strategies or technologies will do to the building's expenses and asset management over time. Owners should be taking a good, hard look at these energy activities now.

"In addition, the REITs that manage their properties with one or more owners should establish a consistent energy strategy across their entire portfolios. They need to prioritize opportunities across their properties in a structured way, using the same decision-making criteria and the same group of vendors. A large energy services company can develop an information set on all the properties and identify the ones offering the greatest opportunities," reports Pickles.

Powerful choices PG&E Energy Services of San Francisco, an unregulated, national provider of energy portfolio management services, offers a complete menu of energy services that help manage and reduce costs. Examples of service offerings include discounted electricity and natural gas, regulatory and tariff consultation, site audits, energy efficiency retrofits, power quality solutions, billing options and other energy information management programs.

According to Allan Schurr, the company's director of news and public affairs, PG&E Energy Services also provides services tailored specifically to commercial and industrial real estate owners. &We develop customized, turnkey solutions that include design, installation, construction and ongoing operations and maintenance of commercial and industrial buildings," he states.

In April 1998, PG&E Energy Services and Atlantic Richfield Co. (ARCO) announced they had formed a California energy alliance providing power and energy management services to ARCO facilities throughout the state. Under the multi-year contract, PG&E Energy Services will supply more than $60 million in electricity to hundreds of ARCO-owned and operated sites.

In February 1998, PG&E Energy Services announced it had entered into a multi-year contract with Blockbuster Videos Inc. to supply electricity to about 530 non-franchised Blockbuster stores then being served by investor-owned utilities.

At Philadelphia-based PECO Energy Co., Greg Byrnes, director of economic development, reports that because of deregulation in Pennsylvania and eventually nationwide, PECO has revisited its strategies and implemented a new strategic architecture, which is &infrastructure excellence, energy logistics and customized energy solutions," he says. &We have developed an expertise in the informational aspects of buying, selling and delivering energy projects anytime and anywhere. We have expanded our sources of electric generation through partnerships, acquisitions and marketing agreements. As deregulation of electric generation accelerates, PECO Energy is poised to pursue retail sales directly to large customers. As an offshoot, our customized energy solutions will enable us to offer services to large industrial and national commercial accounts." Byrnes reveals.

At Dallas-based TU Electric, an investor-owned electric and gas utility and supplier of related energy services, Ray Granado, media spokesperson, says his company has been functionally realigned to provide the people, equipment and reliable, competitively priced electric at various pricing structures for all types of customers. "We can provide the generation, transmission and distribution equipment needed to expand a customer's facilities. We can control the voltage and frequency levels to ensure the customer's equipment operates reliably. Finally, we have the financial strength to stay in business, and that's important for customers to know. We are full service, competitive and have a fierce customer loyalty; we are ready for deregulation."

States Lewis Tagliaferre, speaking on behalf of the National Electrical Contractors Association of Bethesda, Md., &As deregulation progresses and competition pushes prices down, power providers will find there won't be much money in selling power, and will bundle the power with services. In California, some service companies have given the power away for free.

"Energy providers now being formed can provide power and services in three ways: 1) with its own forces, which is costly to establish; 2) acquire contractors to establish a nationwide network; or 3) outsource through a virtual network, which NECA thinks is the most cost-efficient."

Williams Energy of Tulsa, Okla., is one of the largest energy trading houses in the country. Says Gary Rehms, the company's director of retail ventures, &The equation today is, 'How much will we use, what's the price and how much risk do we want to take?' Until now customers have been precluded from the equation, but in the new order customers will be able to evaluate their risk and choose either to buy energy at floating market prices or fix the price .... It's all so simple, and yet so complicated."

1992 - Passage of EPACT; Start of debate

1995 " 1996 - First pilot projects; Start of special deals, i.e., automakers in Detroit

1997 " 1998 - Nearly every state has deregulation on its agenda; Full deregulation in a few

2000 - 2002 - Deregulation common for most commercial users; Residential telemarketing

Provided by George Owens, Energy and Engineering Solutions Inc., Columbia, Md.

Step 1 - Know Thyself How much power do you use, and when?

Step 2 - Keep Informed Read, read, read - and network.

Step 3 - Talk to Your Utilities Renegotiate contract terms.

Step 4 - Talk to Future Utilities Find out who's active in your market.

Step 5 - Explore Services Now Consider outsourcing.

Step 6 - Understand the Risks Do you want a flat price?

Step 7 - Solicit Proposals Prepare a request for proposal.

Step 8 - Evaluate Options Remember: Least first cost may not be the best value.

Step 9 - Negotiate Contracts Include monitoring and evaluation.

Step 10 - Sit Back and Reap the Rewards Monitor, measure and compare.

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