Utility deregulation holds opportunities and pitfalls

Real Estate Weekly, Oct 21, 1998 by Frank J. Lorenz

For one, utility deregulation is not the same as telephone deregulation. Unlike telephone service, which was supplier specific, there is no way to know where power comes from after it enters the system. Under deregulation, we can expect a system of service interruptions based on supplier generator station operations and/or a high cost standby source availability.

Power distribution systems more closely approximate the natural gas delivery networks, with multiple suppliers feeding into a common distribution grid. The complexity of the power grid, however, will be substantially greater, and the amount of electricity poured into it may fluctuate depending on the amount of power available from numerous local generators. Unlike gas pressure. which can sustain variations, power quality must be consistent. Computers and other electronic equipment require it. While shifts in frequency or voltage were very tightly controlled by the traditional utilities, this may not always be the case in the new world of deregulation.

Careful Cost Analysis

When contracting for new service, customers will have to make a very careful cost analysis. Power brokers will quote costs at the source generating station. There will be an additional and often substantial "wheeling" cost for bringing the power from the source to the user through intervening utilities.

The final cost of buying power from a generator in Colorado selling hydroelectric power at $0.05/KWH could be higher than buying from a local supplier selling at $.08/KWH. Wheeling costs will vary from utility to utility, and may include demand energy charges and power factor charges. Some utilities may impose a fixed, minimum cost, whether capacity is carried or not. To understand the true costs, users will have to sit down and do the math very carefully, and often, for several differing load conditions such as summer/winter peak, day/night use.

Recently, local power utilities have been preparing for deregulation by adjusting their rate structures to the extent permitted under their tariffs. Many are now tracking and separating the cost of power generation from the cost of power distribution. Savvy customers can use this information to compare what they are now paying to other offers.

In most cases, the change will initially favor large users. As before, the large consistent users with some control over their demand and hours of energy usage will benefit most. Smaller or more inconsistent users (those with high peak demand but lower usage overall) will not benefit much, and may even end up worse off than before if they don't fully understand the terms of the contract.

Cost Versus Reliability

Real estate owners contemplating a change in service should consider two main points when they talk with prospective energy providers. First, they should make sure they have accounted for all applicable costs, including wheeling costs, taxes, instrumentation fees and so forth. Second, they should consider the reliability of the service in question.

They should find out, for example, what will happen in the event their provider goes off-line. Currently, local utilities pick up the service as back-up power, but this may change over time. If such back-up power will be provided, determine what the premium will be. Evolving rate structures for this item promise to make it increasingly expensive in the future.

Certainly, users with open agendas will have some intriguing opportunities to consider. Some may opt to build on-site energy plants that can meet all of their facility's needs, with no reliance on outside sources. Others may choose to rely on a previous provider for back-up, paying related carrying costs and activation premiums,

To avoid such costs, still others may decide to build auxiliary back-up facilities of their own. When not in use, their standby generators could be made available to other users whose suppliers have failed. Similarly, a facility with on-site generating capacity might agree to reduce its own consumption upon notice, in exchange for providing capability to others.

Yet another possibility is to generate power at one location and export it to remote branch sites using existing utility transmission systems. The owner of multiple buildings in New York could, for instance, build one large generating plant and feed power to all of its properties over Con Ed's distribution network, paying Con Ed for the use of its lines.

There are, of course, trade-offs for the independence gained in these scenarios.

One is the substantial capital investment required to achieve them. In most cases, existing infrastructure was not built with deregulation in mind, and alterations required for attractive energy options may be too costly or disruptive to implement. On-site generation, moreover, may take up space that could be more productively used for other purposes, and will impose significant maintenance and code compliance responsibilities on the operator.

Utility deregulation, therefore, is a two-edged sword. On the one hand, utility spinoffs can bring capital to the table to encourage conservation programs and can create real savings for the "right" user. On the other hand, utility providers of the future will not be like the Con Ed of the past: reliability, responsibility and responsiveness will vary.