High Voltage Chaos

The new marketplace in utilities may bedevil small business

Dr. Gerald Kline has seen the future of electricity deregulation, and he's not impressed. Orange & Rockland Utilities Inc. recruited the Middletown (N.Y.) dentist to participate in an experiment under which more than 400 customers buy electricity from a company other than O&R. Kline called several of the 22 companies on the list he was given--including some as far away as California--only to find that many had dropped out of the test. He eventually settled on one from nearby Goshen, N.Y. Kline says his savings will be "maybe a couple of bucks a month, not even worth my time. But if they're monkeying around, I might as well see what's going on."

"Monkeying around" seems a fair description of what the industry is doing at a time when shopping for utilities still seems remote to most people. But market forces and new regulations are bringing rapid change to the $210 billion industry. California will begin the transition to full retail competition next year; within five years, millions of small-business owners around the country will face choices similar to Kline's--and not just in short-term experiments. It's not too soon to think about what's in store.

For small business, customer choice in electricity is going to feel a lot like customer choice in long-distance telephone service. There will be dozens of sales calls, a proliferation of pricing plans, and perhaps multiple bills. To gain leverage, small businesses will begin to assemble themselves--or be assembled--into large buying groups that can demand favorable prices. Sorting out sales pitches from various "aggregators" promises to be a major headache.

What's not yet clear is how much small businesses will save in exchange for all the confusion. Scott Spiewak, vice-president and general counsel of CPM Energy Inc., an electricity and natural-gas retailer in Eatontown, N.J., says that in a fully open market, electricity rates for small business could fall as much as 20% in states with low-cost power now, and up to 60% in states with high-cost power.

A price drop that dramatic would likely drive some utilities with high rates into bankruptcy. So those utilities are battling in state legislatures for the right to levy a fee on customers that start buying electricity from another supplier. The fee would be in the form of a surcharge for carrying electricity to the consumer from the alternate supplier. The surcharge would help pay for the utility's "stranded assets"--mainly, inefficient or outmoded generating plants that can't survive in a competitive era. Led by California, states are giving utilities some or most of what they're asking for.

If regulators decide to protect utilities, savings for small business could be scant. Prices could even rise in parts of the country where rates are already low, such as the Pacific Northwest, says Jon Hockenyos, managing director of Texas Perspectives Inc., an Austin consulting firm. The savings of 10% and more reported by some customers in early tests in New Hampshire, Massachusetts, and elsewhere will shrink once suppliers stop testing and start focusing on their bottom lines, says Marvin A. Lauterbach, executive vice-president of National Utility Service Inc. in Park Ridge, N.J., which handles the utility needs of large companies.

DOUBLE BILL. Since all electricity is pretty much alike, sellers will struggle mightily to make themselves stand out from the crowd. In January, Pacificorp of Portland, Ore., and KN Energy Inc. of Lakewood, Colo., announced a joint venture to let customers buy electricity, natural gas, telephone, Internet, satellite TV, and other services on one bill.

Sellers of electricity will come in all varieties. One, of course, will be the local utility that owns the wires over which electricity travels. But customers can choose to get power from another nearby utility with lower prices. They can even buy from a company that doesn't generate a milliwatt of power but buys it on the growing wholesale market and retails it to homes and businesses.

If you do choose to get electricity from someone other than the local utility, you may get two bills: one from the power supplier and one from your local utility, which will charge a regulated fee for delivering to you over its lines. Most utilities want to sell new services, such as energy management, so they don't want to lose touch with customers by burying their carrying charge as a line item on some supplier's bill. "We want to have that customer contact," says Steven L. Kline, vice-president for regulation at giant Pacific Gas & Electric Co.

Small businesses are often the most lucrative customers for utilities, says Philip Giudice, a vice-president at Mercer Management Consulting Inc. in Lexington, Mass. Residential customers get subsidized, while big customers increasingly manage to get huge discounts off posted rates by threatening to take their business elsewhere. Realizing that, small-business groups are trying to be heard in Washington and state capitals. "In general our people like deregulation because ultimately, it delivers better service at lower cost," says William C. Dunkelberg, chief economist of the National Federation of Independent Business. "But the issue is how to handle the transition so it's not unduly burdensome for small business and others who don't have negotiating power."

Be prepared for a deluge of offers from aggregators to join a buyers' group. Some will step aside after assembling a group of small customers and delivering the list to a seller of electricity. Others will still serve as intermediaries, billing and collecting from customers, then passing the proceeds along to the energy supplier in a monthly lump sum.

Trade groups are exploring how to pool their members' electricity usage. Other aggregators will put together customers that already belong to a buyers' group for, say, natural gas or long distance. Some aggregators will shop around for sources, while others will represent a particular seller. The reliability of aggregators in other industries, such as long distance and natural gas, ranges from sterling to fly-by-night. It's best to ask for references, though they may be hard to come by with deregulation just beginning. "Once the market is normalized, it's not going to be hard to buy power. Right now, though, it's complicated," says CPM Energy's Spiewak.

In the best position to bargain will be small businesses that are able to shift their power consumption to off-peak hours--say, by running certain equipment only at night. For a machine shop, the drop in electricity rates overnight might be great enough to justify moving some work to a night shift. Aggregators will be on the prowl for such time-shifting opportunities. Make sure that you, not they, capture most of the savings from having a so-called balanced load.

Deregulation is so new regulators haven't resolved some big questions. Can a utility cut off a customer if someone else--the aggregator or power supplier--fails to meet its obligations? In a power failure, can a utility give faster service to a customer that buys power from it, vs. one that just uses its wires for transmission?

"We're in areas that are brand new for the industry," says Mercer's Giudice. The Consumer Energy Council of America Research Foundation, a lobbying group, wants a new form created that would make electricity sellers spell out prices, obligations, and conditions of service in a standardized, comparable way. Says Vice-President Jamie Wimberly: "Some people will oppose this because it adds cost to what they're doing. I think it's the price of admission, really."

Incumbents could benefit from the chaos if cautious customers decide to keep doing business with them the old way, just as many people overspend by sticking with AT&T's full-fare long-distance rates. But in electricity, as with long distance, a little judicious testing could pay off. Says consultant Hockenyos: "Beware of `this is easy' promises. Read the details. Pay attention." And shop around.