Jana Price-Davis says deregulation could bring about lower prices and less hassle for the furniture retailer Heilig-Meyers, which pays $17.5 million annually for electricity. Photo by Mark Rhodes

No More Monopolies
Regulators are fine-tuning programs that will allow businesses to put all their energy needs out for bid. Gas is getting there; electricity is just getting started.

By Kathryn N. Davis
Suppose someone gave you a 24,000-piece jigsaw puzzle in a plain, white box. How long would it take you to put it together, or at least enough of it so you could get a good feel for what it depicts?

That’s the challenge Heilig-Meyers faces each year with its electricity bill. The Richmond-based furniture retailer has 816 stores across the country and pays $17.5 million a year for electricity. But because a store may have multiple meters and a bill is generated for each meter, the charges are received in 2,000 separate bills each month.

"It creates a great deal of paperwork on our end," says Jana Price-Davis, assistant vice president for government affairs. It’s also hard to develop an accurate profile of when and how the company is using electricity. She believes opening up electricity metering and billing to competition would lead to innovations that could streamline the process and provide usage information to help isolate problems more quickly.

Competitive metering and billing is just one issue the Virginia State Corporation Commission must handle before companies can accurately assess the benefits of electricity deregulation. The General Assembly set the policy direction with the Virginia Electric Utility Restructuring Act, which deregulates electric power generation in the state. The act stipulates that, by 2004, all consumers should have the ability to choose their electricity supplier. The commission is charged with carrying out the act in a way that fosters competition and ensures reliable service. That means the commission’s plate is pretty full — addressing competitive metering and billing, evaluating and approving pilot programs, determining the charges incumbent utilities can collect, and ensuring all suppliers have access to transmission lines.

Retail competition will come in phases, with statewide consumer choice becoming effective in 2004. As a low-cost state, Virginia doesn’t have the same pressures as high-cost states. "The devil is in the details," says Ken Schrad, commission spokesman. "The phase-in approach gives us a chance to learn from these states’ experiences."

Ralph L. "Bill" Axselle Jr. agrees. A partner in the Richmond-based law firm of Williams Mullen Christian & Dobbins, he serves as co-counsel for the Alliance for Lower Electric Rates Today in Virginia, a coalition of industrial, commercial and residential customers. "We wanted to see retail competition as soon as practical," he says. "We want our Virginia utilities to be solid companies when this is all over."

Bob Fallon, manager of facilities engineering at Newport News Shipbuilding Inc., is glad Virginia is not leading the pack and can benefit from the learning curve of others. Having a more competitive market will be good, he says, but "the transition to getting there, I think, is going to be tough."

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Not everyone is happy with the delay. Price-Davis thinks it could weaken competition because suppliers will focus their efforts on more aggressive states, like Maryland, instead of coming to Virginia.

Charles Strickler, director of sourcing and logistics for Rocco Inc., a Harrisonburg-based poultry company, is concerned Virginia’s delay could put his company at a competitive disadvantage. Electricity is a large expense for Rocco, particularly in its feed mills and processing plants. Competitors in other states could win an edge on pricing if their electricity costs are lower.

Not all consumers will have to wait until 2004 for competing electricity suppliers. Two major players, Virginia Power and American Electric Power Co., are developing pilot programs that are expected to kick off in the summer of 2000 for select industrial, commercial and residential clients. Virginia Power will try to sign up about 35,000 of its 370,000 customers in the greater Richmond area, says Jim Norvelle, manager of corporate communications. American Electric Power wants to start with 3,200 customers in its Western Virginia service area, says Tom Ayres, manager of corporate communications for AEP-Virginia. It would increase participation to 16,000 customers in March 2001.

Gary Groner, director of energy supply and policy for AlliedSignal Inc., thinks competition will be limited. Competitive suppliers will have a hard time justifying the expense of entering a new market for a pilot. He’s also concerned the market price new entrants will have to beat will be set too low to stimulate competition.

The commission will establish the market price when it calculates the charges each incumbent utility will collect until 2007 to help recoup "stranded costs," the portion of capital investments that have not been recovered by the time complete deregulation occurs. The monopoly providers argue that under the regulated environment, they built generation capacity needed to serve their constituents. Prices were set by the state to guarantee a rate of return over the life of the plant. With deregulation, utilities lose both their guaranteed return and the guarantee of recovering capital investments.

The wire charge is one mechanism Virginia is using to ease the transition. Here’s how it works: The wire charge represents the difference between an incumbent utility’s cost of electricity generation and what the commission determines to be the market price for generation. If a consumer chooses a new supplier, he will pay the generation charge to the new supplier plus a wire charge to the incumbent utility. In order for the consumer to realize any savings and be motivated to make the switch, the new supplier must come in below the established market price for generation.

Bob Kwartin, Alexandria-based Statoil Energy’s director of retail electricity, points to Massachusetts as an example of what not to do. That state set the market price too low for new suppliers to penetrate the market. After more than 18 months of statewide deregulation, less than 2 percent of the electrical load is served by competitive suppliers.

The commission is working to make sure that doesn’t happen in Virginia. Schrad, the SCC spokesman, says AEP’s generation rate in Virginia is so low that it probably will be below the market rate. As a result, the commission is considering a negative wire charge in order to encourage competition in AEP’s service area. With the credit from the negative wire charge, the consumer could have lower bills with a new electricity supplier even though that supplier’s generation rates are higher than AEP’s.

Another issue is transmission capacity. Utilities like Virginia Power own the transmission lines that move electrical power across their service areas. The new legislation calls for control and management of the lines to be transferred to an independent regional transmission entity by 2001 to ensure that new generation plants have reasonable access at a fair price.

According to Norvelle, Virginia Power and AEP are considering a regional transmission entity that would include five companies covering nine states. "Under our proposal," he says, "nobody pays any more on transmission than they do today." And in some cases, he adds, they may even pay less.

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While they wait for regulators to tie up loose ends, suppliers and customers could learn a few lessons from gas deregulation. Industrial customers have been able to purchase gas competitively since the 1980s. In January 1998, Columbia Gas of Virginia started a pilot in Northern Virginia offering commercial and residential customers the same opportunity. It hopes to take the program statewide this year.

Close to 30 percent of the eligible customers in Columbia’s Northern Virginia territory participate in the pilot, and during the first 20 months of the program, those customers saved an aggregate $1.1 million. Dave Bowman, manager of the Virginia Customer Choice Program, is disappointed more haven’t signed up. He believes one reason is the negative experiences many have had with the marketing tactics that came out of telephone deregulation. Consumers are worried they will be inundated with calls from gas suppliers. But that’s not happening, he says. "We haven’t given customer names to any of our suppliers." Instead, Columbia gives customers a list of approved suppliers with contact numbers and comparative price information.

Shirley Roth, owner of A Taste of the World restaurant in Herndon, checked out two of the suppliers on the list and went with the best price. She estimates she has saved about 3 percent on her bills through the Choice program.

Customers that have aggregated their loads with other users have realized even greater savings. In Culpeper County, the county government, the school system and the town of Culpeper put their combined gas business out to bid and saved about $30,000, a 15 percent reduction. There was another plus, says Tom Lovett, the county’s purchasing manager. "We had a guaranteed price for two years regardless of fluctuations in the market." By locking in a rate, the three entities were able to flat-line their gas cost projections over the two-year period.

Eva Teig, senior vice president for Dominion Resources Inc., the parent company of Virginia Power, says the opportunity for customers to test aggregation — pool their energy needs and purchasing power — is an important part of the Virginia legislation.

Price-Davis agrees. Heilig-Meyers will aggregate loads among its stores as well as explore teaming up with other buyers. Since Heilig-Meyers’ heaviest power use is during the day, the best match will be entities that use electricity primarily in the evening and overnight. Such partnerships, could help balance out the load, creating a constant need for power throughout the day. Price-Davis has seen this work as an effective negotiating tool in other states. "When [energy users] build a more constant profile, they’re able to get lower prices on the commodity."

Reliability is also important. Donald Fehrs owns Insty-Prints of Manassas. On cold winter nights, he depends on gas to keep an even temperature for the paper in his printing shop. When he signed up for the Choice program, he checked around to see what experiences others had had with some of the suppliers on Columbia’s list. "I’m a firm believer that price isn’t always the biggest factor," he explains. "If you can’t rely on them, price doesn’t mean too much."

Fallon says reliability will be a key issue for Newport News Shipbuilding in choosing an electricity supplier. "You don’t want to be three or four decks down on a ship under construction and have the lights go out."

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It may be slow in coming, but businesses welcome the change. "Electricity is the last dinosaur," says Statoil’s Kwartin. "It’s the deregulation of the last great monopoly in the country."

The new environment offers companies a lot more potential to manage their electrical expenses. "Currently we have no say in what we pay for electricity," explains Price-Davis. "Every other aspect of a business you can negotiate." But it also means utility companies must figure out how to navigate the sea change.

Success depends on educating utility employees as well as customers. "Competition brings out innovation and new technologies and the opportunities to offer them to customers," says Teig. She notes new products that came out of telephone deregulation, such as call waiting, caller ID and voice mail. Shifting from a monopolistic to an entrepreneurial mind-set is a big step for utility employees accustomed to working in a regulated environment.

Virginia Power has been preparing its employees for competition since 1994, educating them on how and why competition is coming. To help bring about the necessary cultural change, the utility also has recruited people who have been in the competitive world.

Bowman says the Choice program showed him how important it is to listen to customers. When Columbia first provided pilot participants with a list of gas suppliers, participants were expected to call the suppliers to get pricing. But customers in the Herndon and Reston areas responded that they were too busy. So Columbia created an "apples to apples" sheet, adding comparative price information to the supplier list in order to motivate customers to make selections. As Bowman sums up his experience: "You’ve got to listen and you’ve got to adapt."