Imagine yourself at a dinner party when the topic of conversation shifts to electricity deregulation. Do you share a laugh with friends about the latest deregulation info-mercial? Or do you roll your eyes and predict the inevitable assault of telemarketers waiting to interrupt your next staff meeting or family dinner?

If you are like most small business owners, these scenarios just begin to exemplify concerns about the dramatic changes occurring in the electric power industry.

While small business owners have definite opinions about deregulation, many aspects of this major change remain unclear. Most people are intrigued by the possibility of lower electricity rates in the future but know from experience to question the lofty promises being made by the hundreds of companies that have jumped on the electricity-selling bandwagon.

Increased competition in the electricity industry could offer a big advantage. Specifically, it will likely foster better service, reliability and responsiveness. And, of course, rate reduction is an eagerly anticipated component. (The U.S. Department of Energy forecasts that electricity rates nationwide will eventually drop 20 percent because of deregulation.)

However, this optimism is tempered by a number of concerns. The electricity industry is composed of three parts: generation, transmission and distribution. Because these last two components are still monopolized by major utilities, the potential impact rate reductions could have is diminished.

Experience with deregulation in the telephone, airline, banking, shipping, trucking and natural gas industries also raises a red flag, given the mixed results.

For while consumers have seen cheaper air fares and lower long-distance telephone bills, thousands of workers have been laid off through downsizings, bankruptcies and buyouts. Moreover, taxpayers have paid $300 billion for a savings-and-loan bailout whose cause can be traced back in part to inept deregulation.

Some small business owners fear that in the future, only a few electricity providers will survive competition. These companies, by virtue of their domination, could then be free to "call the shots." Because entrepreneurs lack the market leverage of large companies, they worry about potentially being stuck with increased overall costs.

Some power consumers are concerned about confusing or multiple electric bills. Others fear they will make the wrong choice among electric companies before knowing enough to evaluate the differences between them.

At this point, you may well ask why, if so much uncertainty and anxiety exist about the restructuring of the electricity industry, it’s necessary to go through the process of change at all?

What we face today was set in motion 20 years ago with passage of the 1978 federal Public Utilities Regulatory Act that required utilities to buy power from unregulated generators. This subsequently encouraged the development of smaller facilities and the use of alternative fuels in electricity generation. Not only is the policy environmentally friendly, but it has reduced U.S. reliance on imported fossil fuels.

Since that time, the electricity generation market has continued to open up, allowing for increased industry innovation. Fuel cells, micro-generation plants and photovoltaic systems are among the technologies that have allowed business and factory users to either buy from local producers or build their own small plants.

In April 1996, the Federal Energy Regulatory Commission ordered utilities to open their lines to the use of independent electricity providers. Legislation to allow consumers this same competitive advantage is in various stages in different parts of the country. Prices will drop—so the theory goes—as a new era of competitive restructuring enables consumers to buy electricity from the lowest bidder.

"Competitive restructuring of power companies means the ‘unbundling’ of their services into three categories: generation, transmission and distribution," explains Jere Glover, director of the U.S. Small Business Administration’s Office of Advocacy. "In terms of generation, utilities in deregulated states will no longer have a monopoly, so small businesses will be free to contract for power from the cheapest source."

According to Glover, utilities will be relegated the role of delivering electricity from the generation source to the customer. Power generators will then be charged for the cost of this service, known as "wheeling." Predicts Glover, "This fee should be the same as delivering the utility’s own power, but without the power production cost."

Real savings have already resulted from utilities being given a choice of power generation sources. Many state legislatures are now debating whether to make this same competitive advantage available to businesses and consumers as well.

California has already committed to a new era of unbundled electric service. Bill Schulte, director of the Consumer Services Division of the California Public Utilities Commission, says, "If you want a taste of things to come, California is the state to watch."

When California’s five-point plan for electricity restructuring took full effect, the way Californians thought about electricity changed forever.

Point 1: Electricity generation, which accounts for a significant portion of small business electricity costs, is now an open-market commodity. The two remaining components, distribution and transmission (or getting the electricity from the power plant to the home or business), remain in the hands of the regulated utilities.

Point 2: Consumers are now able to choose their electricity generation company—in much the same way they shop for the best deal in picking their long-distance telephone provider—without having to change equipment, wires or meters. (However, it’s important to note that the selection of a new electric company is not mandatory; people can remain with their previous supplier if desired.)

Point 3: An independent organization, the Power Exchange (PX), is responsible for setting a fair market wholesale price for electricity. While the state’s three investor-owned utilities are required to buy and sell their power through the PX (which works a little like a stock market), other electric power companies can go directly to businesses or consumers with offers. This strategy’s central value is that competitive bidding through the PX will drive prices down.

Point 4: An Independent System Operator (ISO) runs the long-distance transmission infrastructure—the system of large power lines, towers and transformers that connects light bulbs in California to the power generation facility. It is charged with making sure the state’s power grid can reliably handle the electricity that now comes from a variety of sources.

Point 5: To make deregulation more palatable, California’s legislature mandated a 10 percent reduction in electric rates for residential and small commercial customers. This reduction lasts until the year 2002. "If your facility uses less than 20 kilowatt hours (kWh) of electricity, you save money right off the bat," reports Mark Hooper, vice president of public relations for Southern California Edison.

There was a time when phone bills, like your present utility bill, were one page and easy to understand. Today, phone bills are many pages in length and far more complicated than they were pre-deregulation.

Similar changes are expected in your electricity bill. Currently, your electric utility manages the four main components of your bill: power generation, transmission, a public goods charge and distribution. The public goods portion covers things like energy-efficiency service, research and development, and low-income programs.

In the future it is less likely that your utility will be generating your power. California electricity customers will pay a fee to the people maintaining the infrastructure (ISO), as well as paying "stranded costs." Also referred to in California as the "competitive transition charge," these stranded costs help reimburse utilities for an estimated $28 billion in debts incurred from ill-fated investments in nuclear power plants and locked-in, long-term contracts to buy power from alternative energy sources like wind and solar.

(In other states such as Pennsylvania, both ratepayers and utilities are being asked to split the stranded cost debt. The California Legislature, however, let the burden fall entirely on ratepayers—even if they decide to switch to another electricity company.)

The truly revolutionary aspect of unbundled electricity services is that the rate paid for electricity will vary depending on the time of day you flip the switch. "This could greatly influence how people think about running their business," says Bob Foster, senior vice president of Edison International. "Companies might decide to radically shift their hours of operation to get the best energy rates." New metering systems are sure to follow.

In an effort to lower overhead, businesses will likely pursue innovative means of getting the best rate. "Say the best rates available are from 11 p.m. to 7 a.m.," Foster explains. "There’s a world of new energy storage technology just waiting to be developed."

With the freedom to choose electricity providers, small businesses will have an array of new options when considering how and from whom to purchase electricity.

Power providers will generally fall into one of three categories when deregulation hits: those offering lowest rates; those generating electricity from environmentally friendly sources or "green power," and those offering value-added options.

Green power sources include wind, geothermal, biomass, hydroelectric and solar power—all of which are renewable and better for local air quality. When deciding whether to choose alternative source electricity, keep in mind that coal and gas fuel-generated electricity usually costs less—one to four cents per kilowatt hour.

The most important option that small businesses need to consider as deregulation approaches is aggregation—the process in which an electric company combines the power loads of a number of customers. The theory behind aggregation is that buying power in bulk will result in lower energy costs over the long haul. The old adage "the more you buy, the more you save" definitely applies to deregulation.

Enter the aggregators. These are either private or government entities that arrange for—or provide—electricity to groups of customers who choose to combine their energy needs and, therefore, leverage their purchasing power to obtain less expensive rates.

For example, the San Francisco-based Wine Institute, whose members represent more than 75 percent of California’s wine production, is acting as an aggregator—and hired a Los Angeles broker to find the cheapest bulk power for its wineries.

David Goodreau, president of the California Small Manufacturers Association, argues that the bottom line for entrepreneurs depends on how they play their cards. "The object of deregulation is to keep California’s small business sector competitive," he comments. "But without aggregating, they won’t get the benefit.

"Leading economists estimate that, with their bargaining power, large businesses will probably pay about three cents per kilowatt hour," continues Goodreau. "Lacking this economic clout, smaller firms will pay between eight and nine cents for the same unit of energy."

Goodreau goes on to say that small businesses need to fight this inequity in two ways: "First, entrepreneurs must unite and demand the benefits and pricing they deserve, and second, they must learn to use less energy. By combining sound aggregation strategy with energy efficiency, small operations will be able to make the most of electric restructuring."

Consider the fact that a lighting retrofit can reduce your firm’s electricity bill by about 25 percent. With more extensive upgrades including new high efficiency heating and air conditioning, the bottom line boost can be even greater. By taking this information to heart, the small business segment will be poised for success and ready for the competitive advantage offered by electricity industry restructuring.

Because of electricity deregulation competition, utilities are providing their customers with more services. Small businesses are being offered energy efficiency incentives, energy audits, equipment replacement and financing. Berney-Karp, Inc., a custom ceramic pieces and mugs manufacturer in Los Angeles, California, is one company that has reaped significant benefits as a result.

Owner Morry Karp’s decision to add energy efficiency technologies translated to real bottom-line improvement. "When we decided to give Southern California Gas Company a call, we had no idea what a difference it would make," he recalls. "We ended up rebuilding all the burners and rewiring them for firing efficiency to cut down the consumption of gas. Rebuilding the kiln helped us save 25 percent in energy costs."

In addition, Karp replaced an electric kiln that cost $5000 a month with a gas-powered Lehr tunnel kiln. "We’ll see a 30 to 50 percent energy savings on that."

According to Karp, "If you have a need but are not financially prepared to make the move to new equipment, utility companies such as mine can help. The company allowed us six months to make the changes, then sent us the rebate. It was a great deal."

The Printing Industries Association Inc. of Southern California (PIASC) made a precedent-setting deal that utilizes its leveraged buying power to provide members with energy at discounts of 10 to 15 percent.

"With profit margins for California printers averaging three percent in 1996, savings like these should translate into profit increases of almost 10 percent," explains George Kinney, president of Castle Press and a PIASC member.

Although the benefits accompanying energy pools seem clear, small businesses should consider a number of issues before choosing to start their own electricity buyers’ club. The tasks of organizing a large group of smaller buyers and negotiating with various sellers to secure the lowest possible prices require significant effort. The PIASC, for example, spent more than a year and a half negotiating the terms of its agreement to buy power.

Q: Are all electric utilities participating in restructuring?

A: At least 15 states have approved deregulation, while dozens of others have study commissions or pilot programs going. In 1998, Congress may consider whether the federal government ought to set a deadline for all states to open their electricity markets. California, where consumers and businesses pay $20 billion a year for electric power, and where rates are as much as 50 percent higher than most of the nation, is the first to undertake the restructuring of the electric utility industry on a statewide basis.

Q: It seemed to me as if things were working fine—why change the system?

A: The electric utility industry is being opened up to competition in order to offer consumers greater choice in purchasing energy services, lower rates, stimulate technological advances through competition, and introduce performance-based rates for the remaining monopoly services. In California’s case, the state legislature made this decision after a thorough review of all the issues involved.

Q: What’s in it for me?

A: You will be able to choose the company from whom you buy electricity, similar to the way long distance telephone service works. However, under deregulation, only the selling of electricity—not the way it gets to homes and businesses—has been opened up to new competition. Utilities will still own the transmission wires and poles. The new companies are electricity retailers who will pay to use that equipment and pass the cost along to consumers. Utilities will continue to bill for distribution of electricity.

Q: How will my bill change?

A: Just as your telephone bill shows charges for local and long distance phone service, your new electricity bill will separately break out the amounts for electric generation, delivery and other charges. All charges will be on one bill and sent by your energy provider.

Q: Do I have to do any rewiring or get a new meter?

A: No, all equipment remains the same. However, in the future, you may want special meters that show the time of day electricity is the cheapest so you can adjust electricity usage to get the lowest rates.

Q: Is it possible my business may receive power from one source while those adjacent to me get power from another source?

A: Not only possible, but quite likely. Again, think of long distance telephone service wherein some consumers go with Sprint, while others select AT&T or MCI.

Q: Who will fix power lines after an outage?

A: That’s still the responsibility of the local utility company, which will take care of repairs and maintenance.

Sources: California Public Utilities Commission, San Francisco Chronicle research, Pacific Gas & Electric

Just as electricity deregulation is poised to become a reality in states across the country, consumer groups and some legislatures are voicing concern that it won’t do enough to protect consumers, won’t significantly lower rates for businesses and consumers for several years, and amounts to what they call a bailout for existing utility companies.

That sentiment has prompted a measure in Massachusetts on the November ballot that would repeal the state’s deregulation laws that went into effect on March 1, 1998. "The reason so much opposition exists is that the promises were so exaggerated compared with what’s being delivered," says the associate director of the Campaign for Fair Electric Rates that has gathered the necessary 60,000 signatures for the measure.

In New York, a legislator is trying to block a state commission’s deregulation plan because it doesn’t offer enough benefits. Other states that were once on a fast track to deregulation—such as Florida, Idaho, North Carolina, Ohio, Utah and Vermont—have slowed considerably.

At the federal level, a nationwide effort to deregulate the $208 billion power market—which was a top priority of Congress in 1997—has been stalled over issues of consumer costs and states’ rights.

A central sticking point for those opposing deregulation is the issue of "stranded costs," which are debts or overpriced assets that the utilities haven’t paid off or written down.

Businesses and residential ratepayers have been saddled with the responsibility of paying off stranded costs. For consumers in California, it amounts to about 45 cents out of every dollar they pay monthly for electricity.

Electric utilities in most states have demanded that 113 percent of their stranded costs be paid off by ratepayers as the price of agreeing to deregulation. Now consumer groups and, increasingly, some legislators, say utility shareholders should share the burden.

Excerpted with permission from Small Business Success, Volume XI, produced by Pacific Bell Directory in partnership with the U.S. Small Business Administration.