The big switch

Nation's Business, Sept, 1997 by James Worsham

Imagine Lorrie Carey's predicament: 29 companies bombarding her mailbox with high-powered pitches to sell electricity to her floral shop in Penacook, N.H., just outside Concord.

The claims certainly sounded tantalizing: Here's the deal you've been waiting for, pure and simple." "Only one supplier has the energy to cut your business's energy costs hundreds of dollars every year." "Your business can save money and make an environmentally sound choice."

Some companies promised rebates and cash payments; others threw in phone service. One offered a bird feeder, another a spruce sapling. "I didn't want phone service or a seedling," Carey says, "I just wanted power."

As the owner of Marshall's Flowers and Gift Studio, a third-generation family firm, Carey became a target of the power companies when she took part in a statewide pilot project in 1996 to assess the impact that competition could have on the electricity market. Ultimately, she made a choice and cut her power costs 15 percent; most of that savings had been guaranteed to the project's participants. Now, everything seems fine, she says. "I haven't noticed a change that is negative."

Marshall's Flowers is a bit player in the opening act of what may be the last great deregulation drama to grip the U.S. economy this century. Trucking, airlines, railroads, natural gas, financial services, and telecommunications have gone before -- all in just the past two decades. But none was larger or more pervasive at its time than the $210 billion-a-year electric-power business is today.

Deregulation of electricity means your local utility will lose its long-standing monopoly to light your office and power your equipment. Companies and individuals will be able to buy power from any supplier, other companies will be allowed to generate and transmit. And these changes are going to happen sooner than you might think.

As New Hampshire prepares for full-scale deregulation scheduled for Jan. 1, a number of other states are poised to begin deregulation in the next few years. Meanwhile, legislatures and public utility commissions in most other states are considering deregulation. (See "The States Take The Lead," on Page 22.)

I'm sort of surprised that it's going as quickly as it is," says Charles Gray, general counsel for the Washington, D.C.-based National Association of Regulatory Utility Commissioners.

The level of electricity deregulation that has already been ordered will affect about one-third of the U.S. population when it is implemented fully over the next several years. "You could see in the next 24 months another few states on board that would [bring the amount to] 50 percent of the population," Gray says.

The states furthest along in deregulation generally are those with the highest electricity rates, such as New Hampshire, which has the steepest in the country.

The push to deregulate has a powerful economic underpinning. Lowering rates is important for a state's economic-development efforts to retain its job-producing industries and to attract new businesses, says Dennis Buffington, a professor of agricultural engineering at Pennsylvania State University and an expert on electricity usage.

For example, a study by Richard Silkman, a private economist in Yarmouth, Maine, showed that a 10 perrent reduction in electricity rates in the five-county Philadelphia area of southeastern Pennsylvania, served by Peco Energy Co., would put $110 million in residential consumers' hands in one year, generating economic activity that would create 5,600 jobs. The study was done for several consumer groups and others that have taken issue with the utility's proposed charges under deregulation. Adds Silkman: "Rate reductions put money in consumers' pockets, so in that sense they act very much like a tax cut."

As regulators retreat from the electric-power market, more residential and small-business users will be able to shop for electric power just as they shop for long-distance phone service, air travel, or overnight delivery service.

Nonetheless, in dealing with electricity deregulation, small companies face certain risks, which include:

Being A Small Player. Individually, small firms lack the purchasing power of big companies to get volume discounts on power. So they may have to "aggregate" through ad hoc purchasing groups or trade associations to negotiate the best rates.

Confusing Choices: Small companies may find offers of electric service confusing and hard to compare, just as florist Carey did in New Hampshire.

Unknown Usage: Small firms may not know how to cut electricity costs unless they understand enough about their own power use to know, for example, how much electricity is used in the manufacturing of each product or the delivery of each service. (See "Coping Tips For Small Firms," on Page 21.)

Rate Increases: Small businesses in states where power is cheap might see some rate increases as a national market emerges and rates drift toward U.S. averages.