Since 1998, Massachusetts landlords have seen electric rates seesaw. Owners remember that in passing deregulation, lawmakers promised lower electricity bills. It seems that they forgot to leave instructions on where to find the savings.
State energy officials report that Massachusetts consumers pocketed $1.7 billion during the first three years of deregulation. Most of these savings came from mandatory rate reductions for “standard offer” customers: commercial, industrial and residential users who were being served by the major Massachusetts utilities as of March 1998. These savings are temporary: the Massachusetts deregulation act permits annual increases in standard-offer rates through March 2005, when the standard offer will end. The act also does not protect standard-offer customers from jumps in the price of oil and natural gas used to make electricity. Such increases caused standard-offer rates to spike in 2001.
Between now and March 2005 (and thereafter), building owners and managers will have to look for savings primarily in the “competitive market” for electricity supply. Owners historically have paid three kinds of charges for electricity: a per-kilowatt cost for having someone “generate” the electricity; an expense for transmitting it to the customer’s premises; and various taxes and administrative fees. As of March 1998, Massachusetts consumers have been permitted to bypass their local utility (now known as a “local distribution company,” or “LDC”) to buy the generation portion of their service. Lawmakers expected that by allowing consumers to buy electricity directly, consumers could get the best electricity deals.
In March 2002, competitive suppliers provided 19% of the electricity used in Massachusetts, up from 6% in March 2001. “Default service” -- a service for those who are not eligible for the standard offer, and who do not buy from a competitive supplier -- accounted for another 19% of Massachusetts electric consumption, down from 25% in March 2001. Standard-offer customers received the remaining 63% (69% in March 2001).
Competitive suppliers have gained market share primarily because they give customers the option to lock in mid- to long-term pricing. Commercial and industrial customers often find it attractive to buy long at the “bottom” of markets for oil and gas, and not chance the ups and downs of the short-term electricity market (the market that dictates default-service prices). The ability of competitive suppliers to provide the right mix of short-, mid- and long-term-priced power should give building owners opportunities for real savings over what the utilities otherwise would have provided.
While smart energy procurement can reduce energy costs, buyers in the competitive energy market must tread carefully. Unlike the LDCs, the new market participants – “power marketers,” brokers and aggregators -- are subject to minimal government oversight. Selecting an energy provider thus should depend upon a host of factors besides price. These factors include quality of service, dependability, track record, financial stability, and allocation of risks. Armed with a firm understanding of the opportunities available (and the risks present) in the competitive electricity market, building owners, developers and managers should be able to realize continued savings.
By Michael D. Vhay, Esq.
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