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Energy Services

Despite recent record-high prices for natural gas and gasoline, a recent survey revealed that energy buyers at Texas commercial and industrial facilities are still relatively unaware of energy issues and how to make better energy decisions that affect the bottom line.

The survey, covering 476 energy, facilities, purchasing, and financial leaders in the deregulated zones of the Electric Reliability Council of Texas, was commissioned by Tractebel Energy Services and conducted by an independent research firm between August 6 and September 15, 2004.

Results show that many Texas companies could be saving money on their energy costs but lack the knowledge to make an informed choice in a deregulated market. Overall, large commercial and industrial customers have embraced competition, but even they may not be taking full advantage because of a limited knowledge base.

Texas ranks first overall in the United States in electricity consumption per capita, so Texas businesses have as much incentive as any to moderate their energy bills. If other states are similarly uninformed about energy issues, then many U.S. businesses are not yet realizing the full benefits of deregulation in states that are open to competition.

In fact, preliminary findings from a similar study of New England and New York markets show about the same lack of awareness. This is significant: In Massachusetts, for example, the standard-offer service, provided by local distribution companies, expired on March 1. Customers who did not chose a competitive generation service by then reverted to the default service, losing a 15-percent transition discount and becoming exposed to volatile market rates. That may prove to be costly, considering that while some organizations understand the options, risks, and rewards, many do not.

The Dedicated Energy Manager

Few Texas survey respondents see energy as a strategic or "core" initiative, although the cost of energy often represents a considerable percentage of their companies' overall operating budgets. Nearly 75 percent of the respondents said that their company operated at more than one site. More than 80 percent of businesses did not employ a dedicated energy manager, yet more than 70 percent handle their energy procurement directly with their supplier. (A good proportion-15 percent-didn't know who handled procurement.) In addition, most (57 percent) have never purchased energy from anyone other than their local utility. Large companies that consume large amounts of energy, such as industrial manufacturers, typically will have a dedicated employee to manage both demandside programs and supplier relationships. An employee costs more in overhead, but having someone inhouse may be required due to the business' size or complexity. Also, inhouse personnel may be privy to plans about business strategy that could shape energy decisions. Sharing such competitive information with any outside resource may not be acceptable.

There are also energy consulting services available from specialty companies. These can bring experience from other industries to help companies reduce energy costs, but their fees may offset their benefit. Brokers, who focus on smaller customers, are another option. They typically gather competitive bids and charge a fee per megawatt-hour (MWH).

A third option is to rely upon the energy service provider itself to serve as both an energy advisor and supplier. Some large energy service providers include this expertise as part of their package. If taking energy advice from an energy vendor seems like a conflict of interest, consider that many energy providers are essentially supplier-neutral-that is, they procure power from beyond their own organization's generation capacity to provide the best value for the customer.

Price of Energy

I Many factors affect the volatility of natural gas prices-anything that has the potential or the perception of increasing demand or disrupting supply of natural gas can affect the price.

Yet, despite all the volatility factors of the past decade, comparatively few companies have changed their fundamental processes for procuring energy (although many have changed processes in other areas such as payroll, security, information technology, etc.). There is a perception that energy is a constant, and nothing can be done to change the price of it. However, with the right information, better energy decisions can result in substantial savings over the long run.

Even energy contracts are not constant. When market prices decline in the middle of an existing contract, inhouse managers may feel as if an opportunity has passed them by. "Blend and extend" contracts, where the contract term is extended and the price is blended, can help. A customer takes advantage of new, lower prices now by locking into a lower rate now and beyond their current contract with a weighted average rate.

Conversely, customers who face an extension price higher than their current rate may choose to extend their contract for a short period using the same, weighted average rate approach.

Both approaches enable buyers to make a positive impact on their budgets, but both require market knowledge.

Other Areas

Another hidden opportunity in energy management is opportunity costs. While electricity is a commodity, 79 percent of the survey respondents rated service as very important; 66 percent rated lowest price as very important. An energy service provider that can't supply good service can cause difficulties that require internal resources to mitigate and ultimately affect the price paid for energy. If a company can't submit an accurate and timely invoice, quickly add or delete meters, or resolve a billing dispute in a timely manner, it requires someone to spend more time managing the supplier, affecting overall productivity.

A supplier's credit rating is another critical component to making the right choice. Nearly 70 percent of survey respondents rated the stability of their supplier to be of paramount concern. When energy companies see a shrinking pool of willing lenders and higher costs of capital from lenders, these costs are typically passed on to customers. In the retail energy marketplace, it is not uncommon to see liquidity costs of up to $1 per MWH (for a standard fixed-price contract) passed on to customers from suppliers with credit that is below investment grade. So contrary to what customers might expect, buying power from a high-risk supplier might actually cost more than from a more stable competitor.

As these few points illustrate, buying energy in a deregulated area has become much more complex and strategic than prior to deregulation. While managing this process requires expertise and resources, such as those provided by a dedicated energy manager, the rewards can be a significant reduction in energy costs. If companies don't think energy is a strategic initiative, they should consider how much energy is costing them and imagine their competition paying a few percentage points less and devoting less time to manage it.

Edison Electric Institute

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