The electric utility industry is changing -- are you ready?

The suspense has been building for months. The electric utility industry is being deregulated. In fact, as you read this, deregulation has already begun in California where open competition was rung in with the new year and will be phased in until 2002.

State   Cents/kWhAlabama 3.8Alaska 8.3Arizona 5.3Arkansas 4.5California 7.0Colorado 4.5Connecticut 7.9Delaware 4.7Dist of Columbia 4.4Florida 5.2Georgia 4.3Hawaii10.0Idaho 2.7Illinois 5.3Indiana 3.9Iowa 3.9Kansas 4.7Kentucky 2.9Louisiana 4.3Maine 6.4Maryland 4.2Massachusetts 8.6Michigan 5.2Minnesota 4.3Mississippi 4.3Missouri 4.5Montana 3.6Nebraska 3.7Nevada 4.8New Hampshire 9.2New Jersey 8.2New Mexico 4.3New York 5.3North Carolina 4.8North Dakota 4.5Ohio 4.2Oklahoma 3.7Oregon 3.4Pennsylvania 5.9Rhode Island 8.6South Carolina 3.9South Dakota 4.5Tennessee 4.3Texas 4.0Utah 3.6Vermont 7.6Virginia 4.0Washington 2.9West Virginia 3.9Wisconsin 3.7Wyoming 3.4U.S. Average 4.6 

During the next several years, state after state will restructure the way utilities sell, and customers buy, electricity. As large consumers of electricity, molders should be attentive, cautious, and well-educated to cope with the monumental shift that is under way. Says Nino Amato, senior vice president at Wisconsin Power & Light in Madison, "Deregulation is not a question of whether or not it's inevitable. It's how soon will it change?"

What is Deregulation?
Call it deregulation, re-regulation, restructuring, open competition, or retail competition. The bottom line is the same. State legislatures and state utility commissions are quickly taking electric utilities to the open market, away from the managed monopolies you've come to know and love. You will soon be able to choose from whom you buy your electricity, most likely at a lower price. The umbilical cord that has permanently tied a molding plant to the local utility will be replaced by an array of utilities, brokers, and other free-market energy providers looking for a niche in this huge market. As with deregulation of the airline, natural gas, and long-distance phone industries before it, deregulation of the electric utilities means greater choice. It also means you could get burned. There is $215 billion at stake in the electric industry, more than twice the local telephone industry, and three times the long-distance telephone industry. In fact, the $62 billion industrial electric energy market alone almost equals the $70 million long-distance phone market. Those hoping to take advantage will be numerous.

There are four types of utilities in the U.S.: Investor-owned, federally owned, publicly owned, and cooperatively owned. Each is subject to regulation by state energy commissions that oversee rates, power plant construction, and scads of other details. In return, each utility is guaranteed a return on its assets. It's called asset- or rate-based regulation. Simply put, the more money a utility spends, the more money it makes. Incentives for being efficient or cost-conscious are nonexistent. "It is counter to what we know in the private sector of economies of scale and performance," Amato says.

With deregulation of the industry, utilities will switch to performance-based regulation. Theoretically, states would still regulate and manage the transmission and distribution lines that move electricity. But the generation of electricity would move to the open market, where competition would force prices down-optimistic projections hope for savings of 20 to 30 percent.

The concept, on a simplistic level, is this: Electric energy costs in California, New York, New Hampshire, Connecticut, and New Jersey are among the highest in the country. Energy costs in Washington, Idaho, Wyoming, and Kentucky average less than half as much. Why not take some of that cheap power and make it available to customers in those expensive states? That is the ideal. It will take some years, however, before the industry gets there.

The Road and RoadblocksUntil then, the industry is in a state of transition and flux. Six states-California, Nevada, Pennsylvania, New Hampshire, Maine, and Rhode Island-have passed legislation mandating retail competition by certain dates, most of which fall between Jan. 1, 1998, and Jan. 1, 2001. Almost every other state in the union is currently assessing deregulation with a smattering of pilot programs, studies, investigations, and commissions trying to find the best way to move the electricity to the open market.

The biggest stumbling block for most states is how to cope with the issue of "stranded costs." This is the loss an electric utility incurs when, under open competition, it loses customers to competing suppliers. That old and beleaguered generator that used to make money no matter what in a regulated environment, could succumb to cheaper and more efficient competitors under restructuring. Who picks up the tab? Stockholders? Customers?

States have to decide what stranded costs are "reasonable," which are just a result of inefficient operations, who will pay, and over what period of time. Proposals vary, but most call for stranded costs to be paid by the customer, usually in the form of an exit fee extracted if and when a customer changes to another supplier. Most states are proposing to offer full recovery of stranded costs, usually collected over a period of years. In California, stranded costs will be covered by a competition transition charge, to be paid by all customers whether they change suppliers or not.

Jumping into the fray is the federal government. There are several bills pending in the current legislative session mandating nationwide deregulation by certain dates. Nothing has been passed yet, but some within the electric utility industry would like to see the federal government implement a bill that standardizes restructuring and moderates the state-to-state variations that are already creeping up. For instance, if Illinois decides new transmission lines are needed to move electricity from Wisconsin, who's to say Wisconsin has to agree? Says Dave Osterland, senior information representative at FirstEnergy (formerly Ohio Edison) in Akron, "I can't speak on behalf of the government, but I think what the Federal Government could provide is some consistency and a level playing field."

What a Molder Should DoIn a competitive environment, you will most likely have a variety of electric suppliers from which to choose. Many suppliers will take the form of brokers, or energy service providers (ESPs), companies and organizations that buy and sell electricity, but don't actually control the generation of that electricity. There are already 170 ESPs registered to sell energy in California. A broker or ESP might be able to sell you energy at a cheaper price, but as with the long-distance telephone industry, plans could be wildly intricate, complicated, and loaded with fine print where rates change by the hour.

Patrick Mueller, major account manager at Wisconsin Power & Light, says right now most utilities "average in" or "spread out" the costs incurred by the peaks and valleys of varying electrical demand by an industrial customer. Under deregulation, a power broker might offer greatly reduced rates for off-peak hours, but jack up the price enormously during peak hours, especially in the summer when demand nationwide is at its highest. "Prices could get so high that a molder might consider actually shutting down during some peak hours," says Mueller.

The key, he says, is to learn as much as you can about how much energy you use in your plant, and when. "I find that most molders know how their machines work. They know what part of their machines use energy," he says. "But they don't know a lot about rates." He strongly recommends that molders call their utility and see if they offer an energy audit. For a fee, the utility will come to your plant and use power monitoring equipment on your lights, presses, and auxiliary equipment to build a energy-use profile. The more data you can get over a longer period of time (several days, if not weeks) the more prepared you will be to cope in a competitive environment when brokers come knocking. "Molders are going to have to know more about how they use energy," he says. Learn what your power factor and load factor is. Know when your peak demand is and how much energy you use at that time.

Robert Stager, coordinator of major accounts rubber/plastics at FirstEnergy in Akron, agrees. In his territory, he says, molders spend about 3.5 percent of sales dollars on energy. For highly automated companies that percentage can jump to 10 or 11. "A lot of molders seem confused about what parts of their plant consume the most energy," he says. Number one on the list is the press, which he says accounts for about 70 percent of energy consumed. Next comes heating, venting, lights, chillers, and dryers, at about 20 percent. The remaining 10 percent is typically consumed by material handling equipment and granulators.

Stager says FirstEnergy will not only audit electrical use, but help its customers devise a plan to reduce energy use. Part of that service is the Polymer Growth Fund, a strategy that allows molders to accumulate funds for growth projects that meet FirstEnergy's criteria for technical and economic feasibility. Projects could include adjustable-speed drive retrofits, new presses, and thermal insulating blankets, to name a few. Customers can get funds representing 5 or 10 percent of the annual electricity revenue paid to FirstEnergy.

How the "new" electric utility industry will shape up remains to be seen. Although competition in the general sense is inevitable, the details have yet to emerge. It appears, however, that the term "deregulation" may be an understatement that does not adequately describe the metamorphasis the electric supply industry will experience. As Stager says, "It seems that cost tracking is becoming more and more important to plastics processors." Electricity is no exception. Brace yourself and be prepared.