Magazine article Journal of Property Management

Cheap Power

Magazine article Journal of Property Management

Cheap Power

Article excerpt

Separating the Hype from the Savings

Approximately 18 months ago, one of the hottest topics in real estate management was the tremendous savings that buildings could realize by buying electricity on the open market. Gas deregulation had resulted in substantial savings for many properties, and some were sure that power buying would do the same. But has that dream become a reality? The answer is a generally lukewarm "maybe."

"In California, we didn't anticipate a whole lot of savings, and our research mirrors what has happened," says Joe Stolarski, senior vice president with Jones Lang LaSalle. The company, which manages office, retail, and industrial properties in several other deregulated states, has seen some savings, especially where "aggressive marketers have offered 'loss-leader' pricing," says Srolarski. But he is concerned that these great deals may not be available when first-year contracts are up for renegotiation.

"We told the members [of the San Francisco BOMA power buying group] that they should not expect significant savings, and our average savings has been about 1.5 percent, with some buildings achieving savings of 4 percent," says Fred Smothers, technical coordinator for Kennedy Wilson and one of the leaders of the consortium. While many of the original 138 buildings that participated in phase one of the electricity buying are now signing on for phase two, Smothers notes that "there are a lot fewer suppliers in the market, and it is harder to strike a deal that it was a year ago. Major vendors want to cherry pick."

"There is still a viable market for deregulated power, but not every industrial and commercial user will benefit from the same level of savings. Savings depend on the inefficiencies of the current market and on the legislation and regulation within each stare," says Martin Wenzel, vice president of energy sales for Enron. Wenzel acknowledges that saving money is "more of a challenge for smaller buildings," but expects that further development of Internet-based products will increase future savings.

Barriers to Savings

Because the conditions under which power sales are deregulated vary from state to state, the potential for actual savings in any one portfolio are tough to determine. But certain common issues emerge.

The amount and payment schedule for stranded costs, the money allocated to compensate utilities for previous capital expenditures, has a significant impact on current savings. For example, a short payment horizon of 2002 in California has cur into potential savings in many parts of the state. Conversely, a longer payout in Pennsylvania has lowered the yearly bite. Yet, stranded costs can vary among different utilities within a state and may be reduced further as utilities sell off generation capacity.

"In Pennsylvania, the stranded costs for each rate class are applied as a straight percentage for that class, so you can factor that cost out of the equation when comparing power costs from the utility with that of outside providers; everyone pays the same," says Bob Sprinker, vice president and director of engineering--East, for Grubb and Ellis.

State-mandated rate reductions also may influence potential savings from independent power buying. "In Massachusetts, the cost from the market is not cheaper than from the utility, so there is not much advantage yet to buying independent power," says John Scopelleti, CPM(r), vice president of physical operations for Corcoran Management, a manager of 6,600 residential units.

Mandated, across-the-board rate increases in states such as Massachussetts, which offers a mandated 10-percent rate cur, are another reason for not jumping into the free market.

Nevertheless, Scopelleti continues to research his usage and monitor pricing for a time when market costs may be more attractive. "When gas was deregulated, it took two or three years for the market to shake down and for strong marketers to emerge. …

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