Deregulated Energy Markets Raise Questions

Jan. 1, 2012
Should you stay with your utility or shop third-party suppliers?

When it comes to energy procurement, many facility owners and managers ask themselves, 'Should I stay (with the utility) or should I go?' Many are asking themselves this question, but the best answer won’t come without some research.

My last column, "Know Your Energy Procurement Options" (HPAC Engineering, November 2011,, drew some reader comments stating that, for a variety of reasons, a large number of energy purchasers would be better off staying with their incumbent utility.

It's true that the utility is a viable option for some, but before you make that choice, you'll want to be familiar with your utility, your local suppliers, and your own company's energy-use trends and appetite for risk regarding budget sensitivity.

When deciding whether or not to part ways with a natural-gas or electric utility, many of the deciding factors will be similar. If the utility is open to deregulation, most people in the energy industry consider the utility to be the supplier of last resort.

Still, although many businesses save money on their energy bills by shopping a third-party supplier, not everyone can benefit from leaving the utility. Each firm has to look at its business structure to find the best option.

It's important to keep in mind that the utility is not in the energy-sales business. Utilities are paid only to transport energy, so there's no incentive to competitively manage the price to compare (PTC) or keep you as a supply customer. Their cost to you is simply a pass-through cost.

What's Best for You?
The amount of energy a firm uses is one of the key factors when choosing between hanging tight or moving to a third-party supplier. If the company doesn't use a large amount of energy, the time spent researching and watching the market (or the money spent paying someone else to) may overcome the amount it can save.

Know your load profile. When looking to quote a buyer, suppliers look at two important factors: what time most energy is used and how consistent the volume of use is over the long run.

A customer that uses most of its power during peak hours usually is quoted a higher flat rate than a customer that uses roughly the same amount of energy around the clock.

Peaking-load customers also are at a disadvantage. If energy consumption fluctuates from day to day or month to month, the customer most likely will receive a higher price quote. Suppliers put a premium on erratic use.

On the other hand, there may be very good reasons to head out on your own. Some firms need to buy three years or more into the future for budgeting purposes. Apartment complexes, school districts, and government agencies are all budget-sensitive.

Apartment buildings and long-term-care facilities can't react quickly to market differentials. They can't raise prices in the middle of a lease, and school districts aren't able to pull additional funds from their tax base.

Manufacturers have a different problem. Input costs need to be nailed down before production can begin. Prices can’t be set without knowing what the variable costs will be.

Still on the Fence?
Third-party suppliers allow partial hedging of energy purchases. Buyers are given the option to buy a percentage of their energy. For some, it's a best-of-both-worlds option, a safety net.

If prices are looking good (for example, lower than they've been in several months), but you think they still have room to drop, it may be a good time to buy 50 percent of the energy your company will use in the next year. That 50 percent can insulate you from some of the impact if prices leap before you buy the remaining energy.

In the same context, if prices continue to fall, managers still have the option of fixing a price when they are confident about the market price. Sadly, partially hedging energy purchases is not an option when buying from a utility.

Not a Simple Process
Picking a third-party supplier is not a simple process, if done correctly. End users must invest time in choosing a qualified supplier by looking at the company's financial health and experience supplying energy to their utility. Most of all, an in-depth review of supply contracts needs to be done.

Often, companies have in-house staff or hire energy consultants to assist in the review process. Whoever conducts the review should have extensive knowledge of the energy-supplier chain and local utility rates.

All too often, the mistake of simply "price shopping" is made. Reputation of the firm isn't taken into account. Sometimes, the quoted price doesn't include all the charges, and the pricing point from quote to quote can change.

Rate caps remain for energy markets in many regions in the country, but that’s changing quickly. The overall trend is moving toward deregulation, and if business owners haven’t asked themselves these questions yet, they may in the near future.

Tod W. Sherman is president and CEO of Tybec Energy Management Specialists Inc. He has more than 15 years of energy-industry experience. He graduated from The Pennsylvania State University with a bachelor's degree in civil engineering. Prior to founding Tybec with partners Doug Snyder (CFO) and Mark Sahd (COO), he worked in the regulated energy industry for UGI Utilities Inc. as an industrial and commercial sales representative and a distribution engineer. He also worked as a resident engineer in construction management, as well as a consulting civil engineer in Pennsylvania and Alaska.