Saving in the Deregulated Market

March 14, 2010

The Deregulated Electricity Market will SAVE your company money…but only if YOU act.

Just as deregulating the airline industry resulted in more competition and lower airfares, and the deregulation of the telephone industry resulted in slashing service costs, the deregulation of the nation’s electric utilities will result in utility companies competing for your business with better service and lower prices. While it’s not yet truly practical for the average household to utilize this deregulated environment, the “mid-size” to “large” electricity consumers (small to large businesses) are now able to drastically cut their electricity costs through “aggregators” (companies that buy large volumes of electricity at wholesale rates on behalf of their clients).

A Brief History of
Utility Deregulation

Before deregulation, you were ‘held hostage’ by one telephone company monopoly. You had to pay the rates that they decided were ‘fair’ (though they had to receive approval from the government). The phone company owned the wires, switches, even your actual phone which you had to rent from the phone company (you were not allowed to own a phone of your choice and connect it to “their” system.

Then the phone company monopoly was broken up by the U.S. Justice Department and the FTC, and allowed the entry of competition. The competition began with long distance phone calls, and companies like MCI and Sprint set up their own switching systems and wires and leased the use of the old phone company’s lines (this latter part was mandated by government decree to insure competition). Long distance rates started dropping, first by a little, then drastically. Today a long-distance call can cost as little as a penny (sometimes even less), whereas that same phone call 30 years ago would have cost 20 or 30 cents (or more) per minute. The End Result? Consumers of telephone service now have multiple choices for service providers, and the cost of telephone services (especially long distance, but also local service) have dropped dramatically, saving consumers tens of millions of dollars.

THE SAME SITUATION IS OCCURING TODAY WITH
ANOTHER UTILITY: THE ELECTRIC COMPANY.

In the interest of providing the public with the lowest possible rates and a selection of service options, the U.S. electric utility industry is now in the process of being deregulated. This allows power plants to compete for your business, and as we all know, competition breeds savings for consumers. It also changes the electrical utility industry into two distinct types of services: The companies that transmit power from the electrical generating station to your home or business (they own the poles, transformers, wires, etc…these are called “the distributors”); and the companies who actually operate power plants (“the generators”) and feed electricity into the distributors’ power grids. Of course, some companies are both generators and distributors. Still, deregulation allows you to choose who actually generates the power you consume, and you are free to choose the company that generates electricity in the most cost-effective manner and therefore can sell it to you at the best price.

In 1978, Congress passed the Public Utility Regulatory Policies Act which laid the groundwork for deregulation and competition by opening wholesale power markets to nonutility producers of electricity. Congress voted to promote greater competition in the bulk power market with the passage of the Energy Policy Act of 1992. The Federal Energy Regulatory Commission (FERC) implemented the intent of the Act in 1996 with Orders 888 and 889, with the stated objective to “remove impediments to competition in wholesale trade and to bring more efficient, lower cost power to the Nation’s electricity customers.” The FERC orders required open and equal access to jurisdictional utilities’ transmission lines for all electricity producers, thus facilitating the States’ restructuring of the electric power industry to allow customers direct access to retail power generation.

As a result of the Federal and State initiatives, the electric power industry is transitioning from highly regulated, local monopolies which provided their customers with a total package of all electric services and moving towards competitive companies that provide the electricity while utilities continue to provide transmission or distribution services. States are moving away from regulations that set rates for electricity and toward oversight of an increasingly deregulated industry in which prices are determined by competitive markets. (source: United States Department of Energy)

So how do you get electricity from “Power Company A” when your existing power company is “Power Company Z”?  Envision this example: Suppose your town is served by “Power Company Z”…this is the company that owns and maintains all the wires in your town, and they also happen to have a power generating station as well. This power company also is connected via larger regional or national power grids to 3 other power generating companies (let’s call them “Generator A, B, and C”). 25% of the power users in your town buy their power from Generator A, 25% from Generator B, 25% from Generator C, and the remaining 25% continue to buy from the distributing company “Power Company Z”. If you are one of the 25% that decides to buy your power from “Generator A”, then your distributor “Power Company Z” is required to buy 25% of their overall power from Generator A, 25% from Generator B, and 25% from Generator C. That means that the actual “juice” delivered to your business at any given moment could actually be a combination of electricity from up to 4 different providers, but the end result is the same…YOU, the CONSUMER, dictates which power company provides your share of the total power distributed and used, and you pay for your energy at Power Company A’s rates.

Of course it’s entirely possible that a power distributor has no actual power generating facility, OR that everybody in their service area chooses to buy their power from a source OTHER than the distributing company. The distributing company can not be expected to maintain the poles, towers, lines, transformers, etc. for nothing. Under the new deregulated industry, you will in effect receive two bills: One to pay for the actual amount of electricity used, and another for the delivery of the energy to your business. In actuality, your monthly power bill is consolidated into one payment, but it’s easy to see how much you are paying for electricity and how much for delivery.

In the end the competition between power generating companies will lower your bill by 15 to 20%, based on the experience of electricity users in states where deregulation has already been in place for several years. In the near future this competition will also allow you to make significant social and environmental choices. You may choose, for example, to obtain your electricity from a generating company that produces electricity at a slightly lower level of savings, but uses a cleaner fuel source than another generating company. You might even choose to take a firm environmental stand of receiving very little in savings but purchasing your electricity only from a very “green” power source, such as a producer who uses hydro, solar or wind turbines to generate electricity.

In the past, you could only buy electricity from your local utility, at the rates they set. Today, you have the freedom to buy from a variety of utilities that compete on price and quality for your business.

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