March/April 1997
The current deregulation of the electric utility industry could give scrap recyclers more options, lower electric bills, better service, and more. Here’s a look at what’s happening and how to prepare for the impending changes.
By Paris Wolfe
Paris Wolfe is a writer based in Concord, Ohio.
It happened to the trucking, airline, telephone, and telecommunications industries. Now it’s happening to the $210-billion electric power business.
It is deregulation. And it could be very good news for scrap recyclers, giving them more electricity options, improved service, lower electric bills, and more, potentially as early as 1998 in vanguard states such as California, New York, Massachusetts, New Hampshire, Pennsylvania, and Rhode Island.
While the deregulation process is just beginning, it’s not too early for recyclers to begin preparing for what the future holds.
The Move Toward Deregulation
The push to deregulate the electric utility industry was initiated by large industrial and manufacturing concerns. Motivated in large part by disparities in prices across the country they wanted the flexibility to shop around for better power prices, says John Anderson, executive director of the Electricity Consumers Resource Council (Washington, D.C.). The bottom line was they wanted to have access to the same low prices their competitors enjoyed.
As Anderson notes, electricity costs vary considerably from region to region, state to state, even locality to locality, with the cheapest rates in the country being less than 2 cents per kilowatt hour and the highest soaring to 12 to 14 cents. In industry, it’s not unusual to find operators in one area paying 4 to 5 cents per kilowatt hour while nearby, a user pays 8 to 9 cents for the same service.
The goal of electric industry deregulation is “to promote greater competition among electric utilities,” says R. Michael Sweeney, an associate with Duncan, Weinberg, Miller & Pembroke P.C. (Washington, D.C.) and a specialist in energy and environmental law.
To grasp the need for such competition, it helps to understand the monopolistic structure of the electric power business. In general, it consists of three components:
- generators, or companies that produce power. Currently, 75 percent of the nation’s power is generated by 250 investor-owned utilities, while the remainder is generated by 2,000 municipal utilities and 1,000 co-ops in mostly rural areas, according to the Electricity Consumers Resource Council.
- transmitters, or companies that operate large power lines, and
- distributors, or operators of local wires that deliver electricity to homes and businesses.
Under the industry’s monopolistic structure, all three segments have largely been operated and controlled by the same company within a given area. “Traditionally, the electric utility industry has been a regulated monopoly,” says Sweeney, noting, “There’s been very little competition.”
While the monopolistic tendencies and extensive vertical integration in the industry have been largely invisible to electricity consumers, that is likely to change under deregulation.
In 1996, the Federal Energy Regulatory Commission ordered electric utilities to allow “open access”—that is, share their lines with each other—and prohibited preferential treatment. “The wires will stay monopolistic, but anybody can use them,” explains Anderson.
And now the commission is encouraging owners of transmission lines to turn them over to an independent system operator. It may even go a step further and prod utilities to move away from the vertical integration model and instead separate their generation and “wires” businesses.
Congress, meanwhile, has shown considerable interest in the deregulation process thus far. After reforming the telecommunications industry in 1996, it reportedly plans to make electric industry deregulation a priority this year.
States Charge Ahead
While almost every state is considering electric utility deregulation, California and New York are moving the fastest, Sweeney notes. Many other states and utilities are watching California’s progress because, he asserts, “as California goes, so goes the rest of the nation. Everyone is learning from California’s experience.”
Ohio, for its part, is taking a different approach and piloting a conjunctive electric service program that allows power consumers in a locale to pool their purchasing power. “Customers served by the same utility company can group together to be billed collectively and, together, could negotiate a better rate,” says Sherri Loscko, a principal of Commercial Rate Services Inc. (Grove City, Ohio).
In Wisconsin, an advisory board has been working on its own plan, drafting recommendations that include forming an independent system operator—a third party that would manage the transmission and distribution lines for 22 utilities in the area. This approach would provide “fair and open access,” and it meets the recommendation of the Federal Energy Regulatory Commission, says Robert Zahn, corporate information coordinator for Wisconsin Electric Power Co. (Milwaukee).
Plugging Into the Benefits
For electricity consumers, deregulation is expected to bring a handful of benefits, with the first being cost related. Not only could deregulation equalize electricity rates from state to state and region to region, but it could also drive prices down as utilities develop competitive rate structures to survive. “Competition generally means lower prices,” says Frank Bello, manager of communications at Southern California Edison Co. (Rosemead, Calif.). “If you have a lot of firms competing for generation, they may produce power more efficiently.”
In a more competitive electricity industry, power consumers—including scrap recyclers—would gain “an equal opportunity to purchase power from suppliers at the lowest cost,” says Sweeney. “Many seem to think the savings will be substantial.”
Though it’s difficult at this early stage to determine how much cheaper electricity will become, Anderson asserts that operations that are “captive to high-cost utilities could save 30 to 40 percent by buying from a competing utility company.” Even a 1 or 2 percent decline in rates on a $1-million annual electricity budget would make an impact on the bottom line, Bello notes. The biggest gainers as deregulation unfolds will be operators of power-hungry operations such as shredders, shears, balers, minimills, and smelters, while operators with big indoor facilities will save money on lighting, air purification systems, and more.
Deregulation may also make it easier for some big users of electricity to take matters into their own hands by setting up a neighborhood or on-site generation station. In the past, this was impractical because of the size of such facilities and the need to site additional transmission lines, something local residents often oppose.
Today, small fuel-cell or natural-gas-fired combustion turbine facilities are more economical to build, and open access deregulation makes existing wires available to everyone. In fact, small generators would now be free to sell excess electricity back into the open market without having to worry about who controls the wires.
Among other benefits of deregulation, energy consumers will reportedly gain additional options in how and from whom they buy their power. In particular, consumers will no longer have to buy their electricity from their local, state, or regional utility. Under deregulation, for example, an Ohio processor could opt to buy power from a low-cost supplier in Wisconsin, and their local, state, or regional utility would be required under open access to transmit that power at cost.
As for how they buy energy, consumers will be able to purchase their electricity through brokers. “Brokers will represent the customer in their dealings with the power seller to make sure the customer is getting the best deal,” says Loscko.
In addition, large electricity users or groups of consumers may sign long-term contracts for a guaranteed quantity of power, while others will buy electricity from the open market. The open market could function like a commodities market where a company has at least one full-time employee devoted to shopping around for the lowest rates.
Yet another benefit under deregulation, electricity consumers will likely enjoy improved service and increased service options from their chosen power supplier. “Competition will discipline the industry in a way it has never been disciplined before, and that will require suppliers to offer the quality of service desired by the customer,” Anderson says.
Currently, many utilities offer only one-size-fits-all service that doesn’t necessarily meet the particular needs of all customers, he notes. Under deregulation, customers will likely be able to choose between lower-cost, lower-reliability power and higher-cost, higher-reliability power, depending on their needs and preferences. “The possibilities are limitless on how you can gain an advantage,” says Zahn.
As a caveat to these benefits, Anderson notes, the deregulation process will be very complicated, especially as each state develops its own deregulation program and guidelines. That leaves the door open for states to address issues in different ways. These issues include who will pay “stranded” costs, which refer to the cost of paying for generating plants that are stranded—rendered obsolete—by cheaper power sources.
And there are issues related to transferring power across state lines, especially when Company A operates in a state with strict environmental standards and competes with Company B, which operates in a state with lower environmental standards. After all, generating “cleaner” power may cost more.
These issues and more are being considered by those guiding deregulation on both the state and federal levels, and all these issues will affect the final outcome of deregulation and influence the prices scrap recyclers will pay for electricity in the future. Pundits predict, however, that these issues will be resolved early in the 21st century, if not sooner.
Adding to the complications of deregulation are the efforts by some utilities and some consumers that already enjoy low-cost electricity to thwart or stall the process. For utilities, the explanation is simple: They want to hold on to monopolistic control of their market sector. On the consuming side, Anderson explains, “those who now buy the lowest-cost electricity may complain that they’ll lose their advantage when their competitors begin to get the same advantage.”
Self-serving concerns, to be sure. All Marty Kogon, chairman of Central Metals Co. (Atlanta), can say in response is, “I think any time you have competition, it’s better—even for the company or industry being deregulated.”
Preparing for Deregulation
Though electric power deregulation promises significant benefits, consumers can’t sit idly by if they wish to take best advantage of the situation, experts say. In general, “electricity consumers are going to have to be aggressive and participate in the competitive environment,” says Anderson. Or, as Sweeney adds, “Everyone is going to have to become more sophisticated about buying power.”
An essential first step is for energy consumers to “find out what’s going on in their state,” says Loscko, noting that “many states will experience rapid change within the next two years.” While some have plans, schedules, and pilot programs to deregulate the utilities under their jurisdiction, others have no plans to deregulate, she says, recommending that consumers check with their state public service commission to learn where things stand.
An equally important part of becoming informed is for consumers to meet with their utility and ask its representatives to explain its rates and billing practices. “Under deregulation, you’ll be facing multiple providers with multiple rate structures,” says Loscko. “It’s important that you understand how you’re billed and what your options are. Know that if you don’t do anything when deregulation happens, you’ll continue to be billed and served by the same supplier.”
To aid in these efforts, it may help to hire a rate consultant or designate a staff member to take responsibility for understanding and negotiating rates. “Rates are confusing even now,” says Loscko, noting that “a lot of customers have options and don’t even know it.” It’s not unusual, she offers, for two scrap processors served by the same utility to pay different rates. “We had one customer who was able to reduce their bill 20 to 25 percent just by taking advantage of a lower tariff rate that was available to them,” states Loscko.
Processors should also pursue the possibility of negotiating more favorable power rates with their utility, as many may be more willing to do so. “A lot of utility companies are negotiating rates right now to retain customers and stabilize revenues for the future,” Loscko notes. It’s especially important to negotiate if you’re considering relocating an existing operation or siting a new one, says Anderson.
When signing long-term supply agreements, however, recyclers should include a provision that allows for renegotiation or, if the price is incredibly low, the option to lock in the rate, Sweeney suggests. “If you’re already locked in at a good price, don’t put yourself in play,” he says.
As these impending changes indicate, electric industry deregulation has the potential to create a flexible market with new opportunities that go far beyond cost savings. And although the changes are promising, all electricity consumers, including scrap recyclers, must be prepared to adapt to the new, deregulated energy market. It will be a whole new ball game, with new players, new rules, new opportunities, and new challenges. “It’s changing every day,” Loscko says.
And as Sweeney adds, “There’s going to be a lot more that happens.” Part of the change will include divestitures, mergers, acquisitions, and other regrouping among electric utility players. “This is just to open the market up,” Sweeney states, concluding that the deregulation process “will go on for years.” •
The current deregulation of the electric utility industry could give scrap recyclers more options, lower electric bills, better service, and more. Here’s a look at what’s happening and how to prepare for the impending changes.