Electricity Savings

August 27, 2004 -- When some New Jersey-based chemical manufacturers complained about their high energy costs, their trade association fought to reduce those expenses, which in some cases came to 80 percent of their operational overhead. The state's Chemical Industry Council decided its membership could save money if the companies were to pool their energy needs to achieve more buying power.

Of the council's 100 members, about 60 of them chose to participate in the aggregation program. With more than 200 megawatts put out for bid, it had become the largest manufacturer-based aggregation unit ever formed. Altogether, in the first six months that the strategy was implemented in 1998, those manufacturers that include Bristol-Meyers Squibb, Hoffman-LaRouche and Mobil Corp. saved $20 million, says Hal Bozarth, executive director of the council.

“In those states where you can shop, aggregation is a wonderful tool to allow you to get economies of scale,” says Bozarth. “It's bringing the Wal*Mart concept to energy buying.” The plan, however, had to disband a few years back because of regulatory constraints. Now that those constraints were lifted about a year ago, the association has resumed its pooling efforts. The idea is to avoid the volatile hourly markets by using third party suppliers for “basic generation service.”

Like a lot of states that had tried deregulating their electricity markets, New Jersey maintained its rate caps as a way to prevent price volatility in the marketplace. But the caps served as a deterrent to attracting alternative suppliers that could not beat the price offered by the incumbent utilities. Thus, competition stagnated. New Jersey, though, had committed itself to removal of rate caps. It then decided to create a model whereby it would identify groups of similar customers. That “load” was then put out to auction or bid, allowing customers the opportunity to pay a competitive rate for electricity.

Altogether, the New Jersey Board of Public Utilities says that commercial and industrial customers have saved 11 percent over what prices might have been since the rate caps were withdrawn a year ago. About 78 percent of the power load consumed by the state's largest users is now sold by alternative suppliers. There are about 30 such providers operating in the state that bid on commercial and industrial businesses only.

“Conceptually, this is a state sponsored 'aggregation' of customers,” says Branko Terzic, regulatory policy leader for energy for Deloitte Services in Washington, D.C.

Viable Markets

For the foreseeable future, the focus nationally is on creating a viable wholesale electricity market and not on trying to woo small business and residential customers from their native providers. While the choice movement says that reduced prices would be welcome, it is more important that such rates are a factor of supply and demand, or getting the price right. A marketplace that operates without subsidies for electrical suppliers is also one that would afford commercial and industrial users betters services and a well-rounded portfolio of new products.

According to Ken Malloy, head of the Center for Advancement of Competitive Markets, there is no stomach in the competitive energy movement to plow new ground. The focus is therefore on the 15 to 20 states with restructuring laws on the books and to look at ways to perfect those programs. It's been a tedious process, he admits, but the overall consensus is that the emphasis must be placed on the biggest users, although the most aggressive free marketers like Malloy want to see all customers including residential ones assigned to alternative providers.

If commercial and industrial users become the focal point, then Malloy and others say that there ought to be requirements to have real-time metering installed as a way to show such customers they can save money by running their key machinery at different times of the day. And, the bids must be targeted to customers of similar size and load patterns so to be sure one group does not subsidize another. The overall idea is to avoid any type of financial assistance that might creep into the rate.

At the same time, state regulators don't want to throw up barriers that would harm competition. That means allowing suppliers to enter the market without having to spend a fortune and without enacting onerous rules that make it troublesome to enroll new customers. Meantime, public utility commissions should enact standardized rules and approaches and employ fair consumer protection orders that don't strangle the suppliers.

“If utilities are going to offer a standard electric product, then it has to be priced as if it was an actual retail product,” says Cal Timmerman, chief economist for the Maryland Public Service Commission in Baltimore. Maryland also has a deregulated electric system, although it uses a system whereby all bids are “sealed” or filed electronically.

“Structured competitive markets are the trend of the future,” adds Timmerman, which refers to the holding of auctions or bids so that alternative suppliers can try and win the business of large users. The deals are not negotiated, he adds, but come with rules that all must live within. “The wholesale component of price is what the market says it is and not what the public service commission says. It's what people bid, and they stand by them.”

Bogus Formulas

To be sure, the deregulated markets in New Jersey and elsewhere still have many kinks to work out. Critics say that the hype surrounding their successes is just PR—not sound public policy. For example, such states use a dubious formula to determine any savings customers have realized, says Wende Nachman, with Citizen Action in New Jersey. They rely on a “magic number game” and say that rates would have risen had deregulation not been enacted, allowing them to boast of enormous comparative savings. Some have seen $300 jumps in their monthly bills, she adds.

The only fair way to evaluate the vitality of deregulation, says David Hughes, head of Pittsburgh-based Citizen Power, is by measuring the load switched and the number of suppliers offering services. It also involves looking at savings based on a comparison of what rates were when choice began and what they are now as well as how much new generation capacity has been constructed. “Even where there is some wholesale competition, the savings have not been passed on to retail customers.

“The savings that have occurred have not come from competition but from regulatory impositions,” says Hughes.

Indeed, the differences between the free marketers and its critics remain sharp. But, the trend toward competition in the wholesale markets is inexorable. Now regulators are paving the way for alternative suppliers to sell to commercial and industrial customers. Toward that end, New Jersey will now become a model for other states.

by Ken Silverstein