Shopping for electricity: will you be ready?

Deregulation of the electric utility industry is around the corner. Following are some hints to prepare your foundry for its new choices.

The wheels are in motion for the deregulation of the electric utility industry in the U.S. At both the federal and state levels, changes are being proposed in the laws governing electric suppliers in hopes that by deregulating the industry, companies will offer lower prices. This is important to many large industries - especially those that have multiple plants - who see differing prices for utility use in different states. The era of the regulated monopoly is about to be replaced with an era of re-regulated and unregulated competitive marketing.

At the federal level, the Federal Energy Regulatory Commission (FERC) has issued rules that are converting the generation and transmission of electricity to an open market. At the state level, the changes in public utility law necessary to implement open access to electricity generation by all customers are being studied. In several states, pilot projects are already allowing some customers to gain experience in purchasing electricity.

How will this affect your foundry? Will you be able to reduce your electric bill? Will your level of interruptions change? Will you need to contract with several firms to buy your electricity?

Unfortunately, many of the answers are unknown at this time. What is known is that you will have more opportunities to obtain the electric service you need for your plant. If price is most important, you will be able to shop for a better price. If reliability is the most important, you will be able to shop for the supplier with the most reliable supply. The customer will be better able to determine the level of service that it needs.

Of course, coupled with increased choice will be increased responsibility. Your foundry must decide what priority you place on various electric issues - price, interruptions, aggregated bills, rate structure, power quality, cogeneration or other issues. Your electric supplier may be able to design a service that matches your needs - at a price.

This implies that you know what you want. At many foundries, energy matters are handled by either the plant engineer or by the purchasing agent. In either case, energy is a part-time job that tends to take a back seat to other, more pressing, subjects. If your foundry is to be prepared to negotiate successfully for electricity, you will need to know your electric requirements and your priorities for service.

For example, in a foundry with induction melting, short-term outages (several seconds or less) may only be an aggravation, but long-term outages (one hour or more) may be disastrous. Your priority may be to find a supplier who can guarantee the elimination of long outages. Obviously, this will come at a price, but perhaps it would be worth it to avoid the cost of freezing up furnaces.

Old Utility System vs. New

Under the existing monopoly delivery system, a vertically integrated utility generates, transmits and delivers electricity all the way from the generating plant to your meter. The bill includes all of the costs incurred by the utility plus a profit. Since it has not been practical to design a rate for each industry, billing has been based on average costs to provide service to a "class of customer." This class may be Small Industrial or Large Industrial. In some cases, metal melting rates have been designed to better match the electric rate to the needs of foundries. These rates often were available only to foundries with electric melting, and sometimes only applied to the energy used by the melting units, not the remainder of the plant.

Under the proposed system, electricity generation would be deregulated. An open market would exist where utilities, power marketers, or customers could negotiate to find the lowest cost electricity. The transmission of this electricity from the generating plant to your foundry will probably still be a regulated business. Open access to this "system of wires" will be guaranteed to all purchasers.

You will probably purchase the electricity from some kind of power marketing organization. This may be an affiliate of your existing utility; a firm that will aggregate load and negotiate for the best price for a group of customers, or some other organization. Your own staff could "make a deal" on their own.

The marketing company will "bundle" a variety of services for your use. They will secure generation capacity and capacity in the "wires" between the generating plant and your foundry. They will also secure other services that you request.

All of these services will be bundled into a billing tariff and presented, in a contract, for your consideration.

Be Ready

When the deregulation door swings open, your phone will begin to ring (if it hasn't already). You will be wooed by your utility and by others soliciting your business. These vendors will use a "lingo" that may not be familiar to you (see sidebar). Will you be able to tell these potential vendors the level of service you want? Do you know the load characteristics of your plant? Or how these can be changed to get a reduced price? Do you have any in-plant meters so you know the electric use of different processes? Have you set priorities on other supply issues? Is your legal counsel familiar with electric service contracts? Will you be a good customer? Do you have a good "load factor?"

Load factor is the percentage of energy used during a period of time compared to the maximum that could have been used based on the peak demand during the period. For example, if your plant has a peak demand of 1000 kilowatts (kW) for one month, and if you used exactly 1000 kW for each hour of the month, you would have a load factor of 100%. In other words, your electric supplier could dedicate a generating unit of 1000 kW for your use and it would be used continuously for each hour of the month. Almost no industry has such a constant operation.

Unfortunately, many foundries have very poor load factors - in the neighborhood of 15-40%. This means that your electric supplier must find another use for that capacity during many hours of the month. Do you think that this will raise your price? You bet! Can you do anything to improve your lead factor? It may be worth shifting some lead to obtain a better price.

Who is your best customer - the firm that takes one truckload of castings every day, or the firm that only wants 15 truckloads the last week of the month (with no advance notice)? If your foundry has enough notice, you probably have the ability to make parts all month long for shipment during the last week of the month. Electricity must be used at the time it is generated - it cannot be stored in the warehouse.

Being ready for negotiations is extremely important to your ability to improve your electric contract. Would you enter into labor negotiations without a plan and goals? No - and you shouldn't approach electricity negotiations without the same level of planning. Electricity is probably your third largest operating expense. You will have the potential to reduce this expense significantly - be ready.

Getting Ready

Increase your chances of obtaining a favorable electric supply contract by:

* Learning the language of the power industry. Be sure you know the difference between megawatt-hour (mWh), kilowatt-hour (kWh) and kW. Know about commodity charges, demand charges and customer charges. Don't be confused by terminology.

* Having a negotiating plan. Know your lead characteristics and how you can change those characteristics to attract a better price. Know your priorities on other issues. Be willing to raise the cost to obtain other required services.

* Comparing vendor proposals. You will receive offers that differ widely in structure. Develop a way to compare these. You will need to evaluate the value of services and what price you are willing to pay.

* Understanding your existing contract with your utility. What are the cancellation provisions?

* Securing the services of legal counsel that understands the issues in the new contract. You will have the opportunity to negotiate some service provisions at the time a new contract is signed. Be sure you understand the implications of the contract details.

* Allowing your staff the time to be trained in the issues to prepare your strategy. Secure additional technical expertise as required to assist your staff.

The New Delivery System

Deregulation is not a question of "if," but of "when." The answer depends on what state you are in. Nothing is likely to happen before 1998, and most states will do something between 1998-2000. Massachusetts has passed a law stating all customers will have a choice of electric companies in 1988. Other states may be more conservative with their laws, limiting the choice originally to large industry.

The new electric delivery system is expected to look similar to the delivery systems for natural gas and telecommunications. There will be differences based on the different technologies. As we have seen in telecommunications, new technologies will be developed to take advantage of the open market. Be ready to take advantage of potential reduced costs or better service to your foundry.

Just as your natural gas and telecommunications contracts take additional time to manage, so will your electric contract. This increased time and dedication may well be justified considering the potential benefits to your foundry.

A Foundry's Guide to Electricity Lingo

To obtain the best possible contract for your foundry, you need to be informed. Following are some terms that you should be familiar with before negotiating a contract:

Aggregated Billing - For firms with multiple plant locations, aggregated billing allows all billing to be done on one bill from one electric supplier, regardless of plant locations.

Aggregator - An organization that will aggregate a group of customers and negotiate electric service for the group. The group hopes to attract a lower price with bulk purchasing.

Ancillary Services - Other utility services that may be necessary to provide quality service to the customer. Under deregulation, the customer will be able to choose which services to purchase, and who will supply those services. Under regulated utility services, these services were "bundled" into the standard tariff, giving the customer little choice.

Bilateral Contract - Contracts will be required and will be crucial to the settlement of future disagreements.

Customer Charge - Normally a fixed charge each month based on the nature of the service provided. These charges represent the fixed costs of providing service even if no energy is consumed.

Demand - A measure of peak power consumed over a period of time, normally 15-30 min. Demand is normally measured in kW or mW. Peak demand usually determines the demand charge in the tariff.

Energy - The standard unit of electric energy is the kWh. The commodity charge in the tariff is generally the energy charge.

Firm Service - Electric service free from intentional interruption. Service has priority over all non-firm service. This doesn't mean service that is free from interruption.

Interruptible (or Curtailable) Service - Electric service where customer agrees to interrupt, or curtail, some load upon notification by the utility. This agreement generally results in lower electric costs to the customer.

Non-Firm Service - Ranks below firm service in priority for both scheduling and curtailment. May be offered on an hourly, daily, weekly or monthly basis.

ISO - Independent System Operator. A proposed independent organization that will oversee the operation of the interconnected electric transmission system. There may be several regional ISOs.

Obligation to Serve - Under current regulation, a public utility has the obligation to serve all customers within its service territory. They cannot refuse service.

Open Access - The customer's ability, or right, to transport its electricity over the wires of the local utility.

Power Marketer - An organization that is paid a fee to provide electric energy to a customer. It arranges for the generation capacity and the transportation of the energy from the generating plant to the customer's meter. It can also arrange for ancillary services, as required, by the customer.

Power Value - New measure of performance. Must include factors in addition to price. Power quality, energy availability, rate structure, billing and contract issues must be considered in addition to price to provide the highest power value to the customer.

Real Time Pricing - An electric tariff in which the energy price changes as the cost to produce that energy changes on a real-time basis.

Retail Wheeling - Electricity purchased by a retail customer from a third party and transported, or "wheeled," by the local utility to the customer.

Stranded Investment (Stranded Costs) - Utility investments in facilities, normally power plants, which will be "stranded," or unused, because of high costs after deregulation.

Stranded Investment Recovery - Some method allowing utilities to recover the cost of "stranded investment" after deregulation. This may take the form of a customer charge until the investments are recovered.

"Unbundled" Electric Service - A tariff where the customer can choose the energy services that are important, enabling the customer to contract with a third party for some services. Previously, under regulated service, the customer was presented with a "bundled" tariff that contained certain energy services whether or not they were needed.