Podcast

Transcript

Ben Parker: Currently, most of the Northeast and Mid-Atlantic states have deregulated their markets. Texas is deregulated. California has had experience with deregulation. About two years ago most of the other states across the country either stopped their deregulation process, or in instances like Virginia, have reversed slightly. Some customers across the country have the opportunity to choose, and others do not at this point.

Denis: When we talk about deregulating power, we're not really talking about pulling out all the stops. Deregulated energy is still regulated. So what does deregulation really mean to utility customers?

Ben Parker: Under the regulated model the local utility provides both electricity supply, and delivers that supply to the end user, the ultimate consumer. In the deregulated model, the local utility continues to deliver the electricity to the consumer, but that consumer is now free to choose the company that he would like to buy the electricity supply from; the commodity itself. The consumer has a choice at that point to go out into the market and make its own price decisions.

Denis: In deregulated markets, then, what are the major factors that affect electric energy costs?

Ben Parker: Well the factors that affect electricity costs are the same whether you’re in a regulated or deregulated market. You’ve got the cost of service, which is the cost of delivering the electricity to the end user. The delivery charges are determined by the local utility, and that portion is still regulated in all the markets; for the most part, that’s based on a cost of service. The utility determines what it costs to deliver the electricity locally, and submits that to their public utility control commission, and then the fairness of that is ruled upon. Certainly in that instance the utilities obtain a guaranteed rate of return, and the return of the cost of service.

The differences in the way the commodity is purchased: in a deregulated market the end user, the consumer, has the option to go out and make his own decision with respect to the purchase of electricity. In a regulated market, that decision is made by the utility, with consultation or review by the public utility commission.

Denis: Green power is an option in almost every utility territory now; and it’s almost always priced at a premium. Does deregulation affect green power costs differently?

Ben Parker: It does across the country because it affects who makes the decision as to how green power will be integrated into the supply portfolio. In markets that are regulated, that decision is made by the public utility commission and the utility; in many cases it’s a public policy set by the state.

In markets that are deregulated, that decision, in many instances, is made by the end user themselves. The end user will make a decision to buy green power and will contact the supplier and make arrangements for that power to be delivered to their facility. So it’s truly a matter of choice. Does the consumer want to use green power; and then makes the choice to pay the extra amount for it? Or does the utility, in conjunction with the state reviewing authority, make that decision for the consumer?

Denis: Are regulated markets more likely to be more insulated from cost increases associated with carbon caps?

Ben Parker: I think it may be a little early to say, but if you step back from that, much of the electric costs in many parts of the country have been affected by decisions regarding clean air. For example: in the Northeast there is a huge emphasis on gas-fired generation which of course produces less pollutants than coal fired. So you have the benefit of clean air in that area, but on the other hand, it’s more costly. The electric supply cost is higher.

Denis: Now we’re certainly not the first country to deregulate power. Energy isn’t even the first industry to be deregulated. So what can history teach us?

Ben Parker: I guess it’s a matter of perspective. From my perspective I think it’s always best when the end user, the consumer, has choice. I think that in other deregulated industries you’ve seen the market sort out who the winners and losers will be. I think you’ll see the same thing from the electric market. Decisions will be made that will result in certain suppliers being successful and other suppliers not being successful based upon on how they respond to the demands of the consumers.

Denis: What can business do to control their energy costs in the midst of deregulation?

Ben Parker: There are a number of things they can do. Internally they can do projects that affect the way the electricity is used at the facility. The easiest example is using more off-peak power than on-peak power; so you shift your loads to the evening or night hours instead of the day hours.

Other things you can do would be items that would reduce your peak demand while not reducing your overall power consumption. If you can reduce your demand through capacitor banks, installing variable speed motors, those sorts of things, that will reduce your demand.

Whether you’re in a regulated or deregulated market, anything that results in a reduction of demand will reduce your electric bill overall, even though your consumption may not go down.

In a deregulated market, it’s very important to understand the factors that affect the cost of supply and be able to take advantage of the volatility that you see out in the market place. It revolves around having a consistent plan, an appropriate risk management plan, for the acquisition of the commodity. If you do that, or work with someone who does that on a full-time basis, it will result in lower costs for you over time.

Denis: It’s an intricate and ever-changing situation, and it’ll be with us for quite awhile. Thank you for sharing your insights with us today.

Ben Parker: Thank you.

Denis: Ben Parker leads the Boston office of Tradition Energy.