Cheap power deals could spell trouble for buyers
By Staff -- Purchasing, 2/11/1999
U.S consumers have seen a slight 0.7% decline in the average cost of electricity, against an inflation rate of 1.4%, according to the 1998 National Utility Service International Electricity Price Survey. But even with the drop, NUS says the U.S. remains among the most expensive of sixteen countries surveyed (see table).Assuming no big increases in prices for natural gas or fossil fuels, NUS says the downward price trend is likely to continue as industry restructuring and deregulation progresses among the states. Still, NUS warns that: "Price is not the sole consideration in selecting whether a consumer should enter the deregulated marketplace. What may appear to be a good deal today could translate into a bad decision tomorrow." Without market intelligence, NUS says "a company could find itself not obtaining maximum savings, or worse, losing money in the process."
Examples of how this might occur--
* In California, NUS analysts observe that: "In consideration of long-term commitment, a marketer will offer an enticing pricing structure below current tariff pricing." The catch, according to NUS vice president of operations David Brown, is that "all electricity pricing today in California includes stranded costs or competitive transition costs (CTCs)." The CTCs, Brown says, can represent up to 50% of the total cost of electricity depending on rate classification. "As CTCs are phased out, customers who entered into long-term commitments based on discounting of the frozen price in 1997 could find themselves paying highly inflated prices in the years to come." To make matters worse, Brown notes, "the selling off of power plants by the utilities is generating more money than originally planned, potentially accelerating the disappearance of CTCs."
* In Michigan, the report points out that, instead of using a lottery system, the state "has decided to let customers submit bids for the supply of electricity based on stranded costs. Those customers who elect to pay for a larger portion of stranded costs will be allowed to purchase deregulated electricity first. Conversely, those consumers who bid low will not be allowed to enter the market until a later date." Says Brown: "This unique approach has created an interesting dilemma for companies. Should an uninformed customer bid too high, they increase their chances of being selected; however, it could minimize their savings or worse wipe it out. Should a company bid too low in an effort to maximize their savings, they may not be allowed to enter the deregulated marketplace for several years."
NUS warns that, "Supply contracts are designed by the marketers to work in their favor; without market intelligence companies could end up losing money." Upshot: "Where deregulation is available, consumers must not only choose a supplier with the best price, but also know the overall market conditions as well as terms and conditions that influence the price."
Headquartered in Park Ridge, N.J., National Utility Service analyzes, verifies, and validates electricity, gas, water, oil, steam, and telecommunications costs for industrial and commercial establishments worldwide.
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