Cropsey Commercial Waterfronts
Making Money while Reducing Costs
Real estate ownership and management is constantly changing and it is important to be continually learning and adapting in this environment. The specific issue presented here is the concept of reducing costs or increasing income from owned or leased facilities with an analysis of the impact of energy deregulation.
The situation before deregulation was that both the energy supplier and provider were utilities, usually the same utility with a monopoly, with the prices charged for the service regulated by the government through a public utilities commission (PUC). Each state determined what each company could charge based upon that firm's cost structure alone. So, for example, an electric company within a certain state would apply for a rate adjustment and that electric company would then open their books for a state audit. The electric company would present it's cost per kilowatt hour including both production costs and transmission costs for review and the state would then allow the entire portion of the rate adjustment, a portion of the adjustment or none of the adjustment. The state might also exempt certain costs from consideration, like right of way preventative maintenance (of all things) essentially resulting in a zero adjustment.
In this type of monopoly situation with many PUC's analysing just the costs of production and transmission within their own state boundaries, the utility had little to no incentive to cut actual costs, so long as the utility could demonstrate that the bidding on contracts was open and competitive with at least three bidders. Qualifications to bid usually set the stage so that the number of qualified bidders would be few. The relationships between utilities and subcontractors was often cozy in part because the utility was often a large portion of the revenue received annually by the subcontractor, which would ensure that the subcontractor would strive very hard to keep the business by fulfilling the quality specifications demanded by the utility. Often the portion of the business provided by the utility to the subcontractor was so large and often marginally profitable that the subcontractor would not bother to submit a reasonable bid on work with any utility with the monopoly in an adjoining state or jurisdiction.
Once successful on one low bid, the subcontractor would then submit a higher or more profitable bid for the subcontractor in the bidding for the business of neighboring utilities. Over time, any individual subcontractor would learn just how low they would have to go to secure the work in their favored territory. In this way the desire to continually do a better job for less money so as to drive down the costs for the end consumer became subverted to fulfilling contract specifications and not invading another subcontractor's favored area so as not to engender competition within the individual subcontractor's preferred region.
Moreover, one of the ways PUC's regulated the utilities within their jurisdiction was with return on equity. If market corporate interest rates (the prime rate plus some market rate for the bsiness risk in that industry) were a certain percent, then the PUC – or perhaps even a state legislature- allowed the utility to achieve at least a benchmark premium above that return on the capital investment of the utility. That capital investment is further defined as property, plant and equipment in as far as assets are concerned. The capital to buy the property, plant & equipment is either debt or equity. The debt portion of capital is fixed for a period of time and deducted from revenues and approximately represented by the market corporate interest rate. The equity portion receives that higher benchmark rate.
In effect, so long as the utility was able to raise capital, in this simple example, to build property, plant & equipment, the shareholders would achieve the benchmark rate. Up to a point, there was no incentive to buy, build or lease productive assets at the lowest possible cost. A lower cost produces less capital investment and a commensatory lower total return. Of course the publicly stated modus opperendi was to replace aged, inefficient operations with new, modern, efficient, or even cleaner more green ones.
To sum up the situation before the deregulation, the utilities were local monopolies. They operated like monopolies usually do. The incentive was not to be the low cost producer, or to have the most efficient transmission system. Rather it was to maximize shareholder value under a cozy regulatory system.
A lot changed with deregulation. Essentially, the production and transmission segments of the utility were split. Low cost producers would be able to sell outside their markets for once. That's an incentive to be a low cost producer. The local, inefficient, monopolistic utility now had competition with its production side. Only if regulators were astute would the utility have competition with the transmission side of the equation though. Then there were still some arcane rules that would prevent, for instance in some locales, cogeneration of, perhaps, electricity from a small natural gas powered electric plant owned by the end user (perhaps an office campus development) or a single story retail complex with the perfect roof tp mount solar panels that produced more electricity than the complex used. Essentially rules that would prevent a user from making their own energy. Of course these rules stifled competition. The result though was that the monopolistic local utility still had a decent revenue stream through the transmission side of the business.
The trend from these high cost of production monopolistic local utilities, is that, as more and more customers switch to a lower cost producer, the remaining customer base is charged more and more for the higher cost of energy as granted by the PUC for the utility to maintain it's benchmark return. The specific utility had to have had both transmission and production segments, though.
Even if the utility in question is transmission only, there may be other factors that drive selecting another supplier than that offered by the monopolistic local utility. Perhaps you are committed to going green with renewable resources. There are energy suppliers that meet that requirement.
Often the local utility is concerned with meeting peak demands during certain seasons, which would require that utility to select a supplier able to meet those demands. This may not be the lowest cost supplier, though. So the consumer may be able to get a lower cost deal by not accepting the default energy provider.
Remember that the utility is regulated? One of those arcane rules is that a consumer may not be turned off for non payment under certain circumstances. The cost of these non payers is then split over the entire customer base. The utility has to achieve that benchmark rate after all. Therefore, the consumer who pays all their bills is the one that subsidizes those that don't pay. Unless, of course, your supplier is not that local utility. So a consumer obtaining energy not provided by default by the local utility will usually find lower cost alternatives – if they have good credit and pay their invoices promptly.
Particularly, I prefer a provider of lower cost energy that bills on the same invoice as my transmission company. That way I don't have two distinct bills and it's easier on the accounting staff with data entry.
How do you go about lowering these energy costs for heat and electricity in particular? The consumer should contact an energy broker. I've used one for years. His name is Adam Mailloux. His email is:
So how much might you save? At one complex I have a 'delivery services provider' whose default rate is 11.17 cents per KWH. My cost is 8.3 cents per KWH. That rate does not change regardless of how much or little energy I use. So I am saving 2.87 cents per KWH. That doesn't sound like much. But it adds up. That complex uses 77,952 KWH per year for a total savings of $2,237.22 per year. I could get an even lower rate, but I like the billing options and the rate is green, but reasonably so, since the energy doesn't include the highest cost green production methodologies.
Adam Mailloux has been in the energy brokerage business for years, so he has learned a few strategies that will aid in reducing your energy costs even further. His email is: