The Dollars & Sense of Deregulation: How businesses can improve the efficiency of their electricity spending
Until the 1990s, most commercial firms and large nonprofit organizations didn t evaluate the electricity consumption for their businesses or buildings. As regulated monopolies, utilities handled a business power and provided electricity at a fixed price. This meant consumers had no choice in where they purchased their energy, and were subject to the price the utility decided. One major driver for deregulation was large industrial users who felt a move toward a deregulated model would save them money. If you re using a lot of energy, you re more sensitive to a dip in price, said Jim Owen of Edison Electric Institute, an association of publicly-owned electric companies. The goals of deregulation were to lower prices, improve service, and encourage innovation in the utility industry. Congress laid the foundation for deregulation when it passed the Energy Policy Act of 1992, which created independent suppliers providing wholesale electricity. Starting in 1994, 22 states deregulated electricity, including New York, Texas, Connecticut, Massachusetts, and Illinois. Several years later, the telecommunication industry deregulated based on the 1996 Telecommunications Act, eliminating monopolies. As deregulation took effect, a series of energy service companies (ESCOs) emerged to assist consumers, such as small businesses and residential customers, allowing them to take advantage of the competitive market. There are now many different electricity service models offered by a variety of ESCOs, such as: independents, start-ups, subsidiaries of larger utilities, and well-established energy companies. Getting a handle on volatile electricity prices is critical, particularly for small businesses that require budget certainty. With energy usage accounting for 30% of an average small business operating costs, this is a major area of opportunity for savings. 2
How deregulation impacts the delivery of electricity Deregulation has presented businesses with a variety of options for purchasing their electricity, but the way electricity is delivered really hasn t changed. The energy industry still operates as a threepronged entity: Power plants generate the electricity The transmission lines convey high voltage electricity from the plant The distribution system lowers the voltage and delivers power to substations, and eventually to businesses and consumers Since the utility still delivers the power, a new supplier does not affect continuity of service. Deregulation only affects generation; utilities still handle transmission and distribution. Although deregulation has been in place for more than 10 years in some states, many businesses are still unaware of what ESCOs offer and fear that choosing a new supplier will cause interruptions in electric service. In fact, companies that have made the switch to an ESCO not only receive the same service and delivery, but they typically are able to better monitor and manage their electricity and see significant savings on their monthly bills. ESCOs enable businesses, particularly budget conscious small and midsize businesses, to choose customized flexible pricing and fixed rate plans that help save money. The business benefits of working with an ESCO By working with an ESCO, a business will have: More Choice by selecting a reliable, well-established ESCO, with the most competitive rates More Control by having greater budget certainty and the ability to better manage energy costs Greater Savings by taking advantage of various products not offered by the utility, such as fixed 12 or 24 month prices Same Service while still receiving energy through utility transmission, just as it always has. Remember, only the supplier and those who generate power change in deregulation 3
How businesses benefit financially from deregulation Most utilities are nonprofits and purchase electricity at the market price that day. As energy prices fluctuate, sometimes utilities buy at a low rate and sometimes at a much higher price, all dependent on the supply and demand balance in the market. There is no incentive to obtain the lowest price. Ultimately, utilities charge higher supplier prices because they pay more for energy on the open market. Alternatively, ESCOs employ a variety of different short-term and long-term trading strategies, monitoring the market closely to obtain the lowest rates for their customers. ESCOs that have the most scale and experience in the energy industry will be able to help businesses the most. Knowledge about the industry is invaluable to providing the best solutions for a particular business, and being able to leverage an ESCO s wholesale operations will ensure the most competitive price. Fixed Price Lock in the price over energy at a competitive rate over the term of the contract You Control: the price of energy, and you business energy consumption Benefits business owners who value budget certainty and cost control Indexed Price Purchase electricity at the market rate, often at a slight discount to that of the utility You Control: Your business energy consumption Benefits business owners who value monitoring energy markets and embracing market fluctuations Fixed price is a set price, such as at $0.06 per kilowatt hour, enabling growth-focused small and midsize firms to lock in their energy costs for a year, reducing volatility and price spikes. When a business buys electricity from an ESCO, the ESCO assess the customer s energy consumption pattern to recommend a solution that offers them the best solution in terms of budget certainty and cost. Ultimately, utilities can charge a higher supply price because they pay more for energy on the open market. 4
Key considerations and questions to ask The process of choosing an ESCO requires due diligence, supplier research, and asking the right questions. Before choosing a supplier, be aware of the following: Reliability: How reliable are they? Businesses should ensure that the ESCO is well financed, has a strong reputation, and won t vanish or declare bankruptcy, leaving the company without a power supplier. Look for ESCO s who are familiar with the energy business and have been in it for a while. Transparency: Are there any hidden costs? Ensure all cost components are included in your price. Some ESCOs may offer what appears to be a low price, but they may not be including all components that you ll see on the bill. Simply ask, what is included in that price? Variety: Does the ESCO offer a variety of pricing options including fixed, and customized pricing? Service: Though pricing is critical for most businesses, customer service also is a factor. Is there knowledgeable local representation that can answer questions when you need them? What is the ESCO s reputation for customer service? Value: Does it have a track record of success? Can you obtain referrals and talk with other small businesses about their energy savings? Visit their website. Do they specialize in service for small businesses? See if they re active in social media. Do they seem like a company you d like to partner with? Options: Does the ESCO provide both electricity and natural gas, which can provide convenience as a one-stop shop and offers potential bundling options? 5
Conclusion: Why businesses should consider their energy options Working with small businesses, ESCOs facilitate strategies to control costs, consider long-term contracts and find the right pricing models. Since a typical organization spends between 25% and 30% of its budget on energy expenses, the work of ESCOs can result in substantial savings. ESCOs employ several strategies to help a business reduce its energy costs, including: Enable businesses to measure and manage usage patterns, as well as billing history for budgeting and forecasting Arrange long-term purchasing opportunities, which help control costs Provide a full range of pricing models to suit various business needs Offer bundled pricing on both electricity and natural gas Advise clients on issues such as lowering consumption and implementing energy efficiency measures Enlisting an ESCO is like hiring an expert management consultant that specializes in energy. The service ESCOs provide result in tangible bottom-line savings for small businesses. 6
About Hess Small Business Services Hess Small Business Services is a wholly owned subsidiary of Hess Corporation. It is our mission to give small business owners more choice, more control, and greater savings on their electricity and natural gas supply. As your local partner and energy expert, we have the expertise and resources to help you manage your energy purchases. Hess Energy provides the industry insights, resources and tools that can help you make informed decisions regarding your business energy spend now, while still enabling growth into the future. We combine the electricity, natural gas, fuel oil and green energy solutions you need with the costsaving programs you want. Today, Hess Energy services over 22,000 customers in the 18 East Coast states, plus D.C., in which we operate. Hess Corportion is a Fortune 100 company with a history of leadership and service that extends over 75 years. We re committed to meeting the highest standards of corporate citizenship by protecting the health and safey of our employees and the environment, while having a positive impact on the communities in which we do business. To learn more about Hess Small Business Services: Visit: HessSmallBusiness.com Call: 1.888.494.HESS Email: smallbusiness@hess.com Follow