Wednesday, February 24, 2010

Snapshot: Energy Deregulation State of California

BOMA San Francisco Members:

Please take a moment to read the following article on energy deregulation in California produced
by Steven Ring, Director of Client Solutions with Cushman & Wakefield and a member of
BOMA San Francisco Board of Directors:

Background: California used to be an open electricity market whereby rate payers could
purchase their electric supply from providers other than the local investor owned utilities. This
program is known as Direct Access. Due to the power crisis in 2001, Direct Access was
suspended and customers not already on Direct Access were limited to buying power only from
their local utility (PGE, SCE, SDG&E).

In late 2009, Governor Schwarzenegger signed into law SB 695 that allows a minimal amount of
overall energy supply to be open to a deregulated market. Currently, past energy users that
utilized the deregulated markets will have priority to this limited amount of energy being open to
the market. The Dept of Water and Resources (DWR) has oversight of the deregulated energy
users that took advantage of deregulation in the past. These users, in general, consists
of manufacturers and large 24/7 energy users. On March 11th, a court ruling is being made if
these users should have priority. If the ruling is in their favor, then a vast majority of the open
market energy could be utilized by these users, allowing minimal or no energy for newly
interested users of the deregulated market. Leading up to the final CPUC decision, it is expected
that no preferential treatment will be given to former Direct Access customers.

Dates and Deadlines: The current target date for the opening of this market is April 11,2010.
All newly interested parties must produce an NOI no later than March 18, 2010. The rumor is
this may be pushed back till April 1, 2010.

As of today’s date, the NOI form is not available on-line but should be soon. It will be available
on the California Public Utility Commission (CPUC) site and the utility companies should be
able to direct a client to the form. Utility consultants and power brokers are designing their own
applications in anticipation of what the final NOI willlook like. A first come, first serve approach
will be utilized and parties that have submitted their NOI’s will be notified as accepted or not
within 20 days after the March 18th date. Uponacceptance, the party that submitted the NOI will
have 60 days to choose their Electricity Service Provider (ESP) and negotiate a contract with
them.  The goal of the energy deregulation market is to role out all available energy supplwithin
the next 4 years.

Benefit of Deregulation and Guaranteed Savings: There is no guaranteed savings utilizing

deregulation. Deregulation allows a user to “lock in” some or all of their energy supply cost for
a defined period of time (i.e. 1, 2 or 3 years). Utilizing historical data and making future
prognostications allows a user to control their energy costs for a fixed period of time. For
example, if a user “locks in” a price of 12 cents a kilowatt and the actual price if they did
not utilize deregulation is 13 cents per kilowatt, then the user benefited from the 1 cent
difference. The opposite can be true if the cost of energy ends up being less than 12 cents a
kilowatt. Obviously, good energy supply consulting is necessary for a user to make a good
decision. This is the role of the “power brokers.” Initially, many users may just negotiate a
contract that ties their cost of energy to an index and then develop a strategy that utilizes peak
and off peak rates and other combined techniques that include hedging of a portion of their
supply.

Power Broker’s Role: Typically, a power broker will identify the qualified ESPs in the market
and help negotiate a contract on behalf of the energy user. The power broker fee is, typically, an
“adder fee” that is calculated per Kwh of used energy and is paid directly by the ESP on a
monthly basis. The adder fee is  negotiated between the user of the energy and the power broker
and is based on the amount of energy the user is negotiating. Adder fees are, typically, less for
the larger amounts of energy being negotiated. Another not widely used fee structure for this
type of consulting is a monthly retainer.

Exit Fees and Other Costs: When a user decides to use an alternative ESP than what has been
provided in the past by the local utility company, then the local utility company has the ability to
charge an exit fee or “stranded cost.” This fee is amortized over the life of the contract and
deducted from the monthly use charge provided by the ESP. Although still pending CPUC
approval, Exit fees will are expected to increase year over year and each year will be assigned
a “vintage”. This vintage will stay with customers on-going.

Who is Best Suited to Utilize Initial Deregulation: Large buildings, portfolios, and users of
energy generally see the greatest benefit of a managed approach by layering in block purchases
of energy over time. Historically, this approach proves more cost effective than utility rates. The
exact level depends upon measurement period and market timing. The level of sophistication in
negotiating a contract with an ESP, forecasting future energy rate markets, and the
administration should be best done with the assistance of a third-party consultant or power
broker. Again, this is not a guaranteed savings so it requires dedication of time and resources to
make the best decisions. A user who wishes to manage their energy supply cost on a fixed term
is best suited for deregulation strategies.

The current high level of interest is due to pent up demand and many energy users believe the
price of energy is at a low level that has a high probability of increasing as the economy begins
to recover.

Submitting an NOI: Again, utilizing a consultant, an NOI must be submitted by March 18,
2010. Please note that it appears that this date will be moved to April 1, 2010. The NOI is non-
binding if you decide to withdrawal once approved by the CPUC. In essence submitting an NOI
is a free option to exercise or decline if accepted under the cap. No cost is associated with the
submittal of the NOI.

Posted by Ken Cleaveland and John Bozeman at 3:53 PM ShareThis

Labels: Energy Deregulation