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What utility companies don't always tell you.

Overhead costs should always be watch closely because costs that are not analyzed properly and controlled can rise dramatically. industry, overhead costs can mean the difference between profit and loss.

Although companies may try to control overhead costs for raw materials, labor, maintenance and other expenses, energy costs rarely receive the same intensive scrutiny. Ignoring these costs is a mistake. In fact, it makes good financial sense to monitor energy bills constantly.

Most corporations are unaware that utility companies are under no obligation to notify customers when they might be eligible for special rates. Utility companies - suppliers of electricity, gas, oil, steam and water - offer various rate schedules to their customers. If customers pay their bills without question or scrutiny, it is possible that they are paying more than they should.

A multitude of factors, including term discounts, rider applications and reactive charges, can enter into establishing utility rates. Any one factor, if calculated incorrectly or misapplied, can add as much as 25 percent in unnecessary charges to a company's monthly utility bill.

Many companies could realize substantial cost savings if they were able to analyze their utility bills effectively. For example, National Utility Service (NUS) examined a particular company's electricity invoices and determined it was receiving its electricity through a municipal utility system rather than the major public utility. The municipality system, not a self-generating utility, was buying electricity at a wholesale rate from the public utility and charging the company the same rate as the more expensive public utility. In addition, the rate schedule was not suitable to the organization's type of operation.

Unknown to the company, the major public utility offered additional rate schedules that were more applicable and economical for its operation. They petitioned the local supplier to incorporate additional rates into their system, structured in accordance with the rates offered by the public utility.

The utility company's response was positive. After the appropriate paperwork was submitted and follow-up calls were made by the analysts and the client, the utility restructured its rate schedules.

The change resulted in substantial savings for the company, totaling approximately $21,000 per year or 17 percent of its annual utility costs. In addition, they received a refund from the municipality for the period of time during the investigation.

Situations like this are not uncommon. Most utility companies state clearly that the selection of rates is the customer's responsibility. The prevailing attitude is "let the buyer beware."

An energy management firm that offers long-term protection instead of a one-shot analysis is the best bet. Typically, analysts charge an initial fee that varies depending on a client's annual utility costs. This fee is usually recovered through subsequent refunds or savings. Thereafter, the management firm shares equally with the client in any refunds or savings that are generated over a period of time.

It is important for the company's representatives to visit the office of the consulting firm under consideration. There, potential customers should find a database containing up-to-date rates and contracts of all energy utilities; current federal, state or local regulations governing energy suppliers; and experienced rate analysts.

Most industries can benefit from employing effective energy management programs. Such programs represent the most crucial function of a successful business operation - effective control over energy costs and elimination of wasted profits.

In recessionary times, looking for longterm solutions to reduce major overhead costs is a good solution. A good analysis firm acts as a "management intelligence" agency, saving businesses time, worry and lots of money.
COPYRIGHT 1992 Institute of Industrial Engineers, Inc. (IIE)
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:controlling overhead costs
Author:Soultanian, Sarkis
Publication:Industrial Management
Date:May 1, 1992
Previous Article:Time-based competition: challenges for industrial purchasing.
Next Article:Prepare your company for the perils of rapid growth.

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