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Thursday, September 20, 2012

LoweringYour Utility Bills Part 2: Procurement


The Practical Matter of Controlling the Operating Costs of Your Utility Bills Part 2: Procurement

Understanding the alternative procurement options in front of rate-payers requires an explanation of the three parts of an electricity bill. One of those sections, the supply of electricity, has a complex retail marketplace that many consumers do not fully understand, despite the potential advantages of participation for your business or home.  Like any marketplace, however, risks of participation are inherent.

The rate-payer's electricity bill can be divided into three parts, supply charges, delivery charges and tariffs. Supply charges are the fees that the end-user pays for the generation of electricity. In New England, these charges have tended to be extremely volatile and historically the most expensive part of the rate-payer’s bill. Delivery charges are the fees the utility company receives for maintaining and repairing the transmission and distribution lines of the electrical grid. Tariffs are charges that the end-user pays for legislated utility upgrades and investments.

In 1998, the electricity markets in New England were restructured. Until that time, utility companies had complete vertical control of the rate-payer’s utility bill. These utility monopolies owned entire regional power grids from power plants to transmission lines to distribution lines. In 1998 utilities were required to sell most power plants to private companies, but maintained ownership of transmission and distribution power lines and the obligation to service and repair those lines. Legislation also obligated the utilities to the open transmission of power for generation plants (roughly 350 in New England alone).

For large end-users of electricity there are a number of private companies who own diversified types of power plants that may be willing to offer a variety of products, prices and terms on the supply portion of the rate-payer’s electricity bill. The utility company’s limited options of 3-6 month supply terms can create difficult budgeting challenges for large end-users of power. Planning a budget a year in advance for one of the largest expenses many businesses have using the utility companies short terms and sometimes volatile pricing is daunting for the best number crunchers to face.

Fortunately, since 1998 the utility supply charge is not the only option for large end-users. For most large end-users of power, terms of up to three years are available, locking down budget certainty for a considerable period. 

There is also a retail marketplace starting to emerge in Massachusetts for residential end-users. Currently this marketplace can best be described as “immature”.  Although customer choice is a positive development for residential end-users, participation is best for consumers who understand the specifics of the marketplace and willing to keep track of supply charges on their electricity bills. Compelling “teaser rates” can quickly sour if the residential end-user does not monitor their bills carefully.  Many Massachusetts residential end-users may be wise to have the market mature a bit before participating.

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