Dealing With Deregulation
Jul 1, 1999 12:00 PM, Ronald W. Mineo and John L. Stehn
School administrators dealing with the economic effects of deregulation will have to grapple with a complex set of issues. As they do, officials should keep in mindthe following points:
-Real-time pricing will be a reality sooner than you think. With a few states and regions leading the way-notably California and the New England area-electrical-industry deregulation is picking up momentum and expected to reach most of the country within three years. In order to be able to make sound decisions about what equipment can be run economically, it is important to be aware long before then of the timing and other issues that will affect market value of electricity, gas and fuel oil.
-Understand your present utility's restructuring plan. Deregulation is causing the old-line utilities to break up into smaller units-generators, transmission companies and service providers of various types. While this process is going on over the next few years, it will be a good idea to follow the status of the local power utility's restructuring plans. These plans are public information and can be obtained from the public utility commission in each state.
-There is no single "best" approach. The effects of deregulation of the electric power industry will vary widely over time, as well as by state and the providers concerned. Be wary of any "national" expert who offers a "works-anywhere" solution. A strategy that has produced dramatic savings for another institution may not work for your facility-even if the model is situated nearby and similar to your own. Small differences, such as the age of equipment, the layout of the heating infrastructure, extent of equipment centralization, etc., can have large cost impacts.
-Learn how the commodity markets work. In the future, electricity will be bought and sold like any other commodity-with the added challenge that you will not be able to buy it cheap and store it for later use or sale, like crude oil or soybeans. Action on the trading floors will determine prices. Electric-power buyers will need to decide how much of a buffer they require between their operations and the market's volatility, and how much they are willing to pay for that insulation.
As the market evolves, a wise facility manager will become familiar with at least some of the concepts and forces in order to arrive at the best answers. You also should know about your power generator's fuel situation. Fluctuations in oil and gas prices (and in some cases, the lack of movement in coal prices) will affect the volatility of the generation portion of your electric costs.
-Be familiar with equipment. In most institutions, there has been little reason for management to be concerned with the technical details of most equipment. In the deregulated environment, the differences between various chiller technologies, for example, take on new importance.
-Your facility will need a detailed, real-time energy profile. It is no longer enough simply to know what your typical monthly energy usage is. Effective management practices will need to include a mechanism for obtaining and analyzing detailed, real-time data on your daily consumption profile. This information will make it possible to decide which energy sources to utilize in order to take advantage of attractive spot prices or to protect yourself from high market prices in times of high demand.
