Mr. Kiesner

Eco-Friendly Practices

The Nation's Electric Power Industry-What's Next?

By Steve Kiesner, Director of National Accounts, Edison Electric Institute

Electricity Competition

In the late '90s, enthusiasm for electricity competition was sweeping the nation. Twenty-three states and the District of Columbia had opened their retail electricity markets to competition or were planning to do so. Several other states were planning to follow suit.

Then came the California electricity crisis. Competition took the rap, but a flawed market design, compounded by an inadequate number of power plants and transmission wires, was the real bad guy behind the news making power shortages and exorbitant energy contracts. After all was said and done, many states were thinking twice about whether or not they should open up their market to competition.

This past January, however, Texas, as Texas often does, pushed ahead with its own vision of how a state should restructure its retail electricity market. Texas put together a market that it believes will avoid the problems that plagued California and deliver more choices and lower prices for consumers and businesses alike. The early results are positive. Other states are now eyeing the Texas experiment to see if it might be safe to get back into the competitive waters again.

Unrelated to electricity competition, but just as newsworthy, was the Enron collapse. The energy giant's trading schemes and accounting practices have dominated the headlines this year. Concern over Enron's bankruptcy has undermined investor confidence in the nation's energy industry. A number of companies, especially energy traders, are now regrouping and trying to win back consumer and investor confidence.

With these events serving as a backdrop, the U.S. Congress is now defining a national energy policy. The House and the Senate have each worked out their own vision for the country's energy future. Improving energy security, along with consumer and environmental protection, is paramount. A Congressional conference is expected to be held this summer to reach agreement on a final bill. However, the two bills differ in many ways and an agreement could take some time.

Finally, the Federal Energy Regulatory Commission has issued a plan to standardize the country's wholesale electricity markets. Included in this Standard Market Design is the requirement that some commercial and industrial customers pay real-time pricing. FERC hopes that by getting some price-responsive demand, it will be able to temper wholesale prices during peak demand periods. This will also help to improve system reliability. The FERC plan is expected to become final at the end of this year.

With everything that has transpired, what can hotel executives expect in tomorrow's energy markets?

The Resiliency of a Competitive Market

Despite all of the problems in the energy industry, competitive electricity markets will persist. This is not to say that the future of electricity competition doesn't face hurdles. So far, the results of competition in other parts of the country, Pennsylvania, New England, and New York, have been mixed at best. As was mentioned, regulators in other states are rethinking their plans to open a competitive market. And the U.S. Congress has focused less on electric market restructuring in its energy bills, and more on the supply of energy, the fuels used to generate it, and transportation issues.

The Standard Market Design being proposed by FERC is expected to add some clarity to the confusion and uncertainty that exists today. There will be some controversial issues that will need to be worked out, but overall the nation's electric power companies believe it is step in the right direction for establishing a competitive wholesale electricity market.

Significantly, the business fundamentals that drive the nation's power markets have not changed in the wake of Enron's fall. Power contracts are being written, other suppliers are taking over, and there have been no price spikes or supply interruptions to customers. Instead, Enron's collapse suggests the need for more transparent financial disclosure for all publicly owned companies. Such changes must be much broader in application than just the energy industry. The fact that a company the size of Enron could vanish without disrupting energy markets is actually a tribute to the resiliency of electricity competition.

The nation's electric power companies believe that power markets are strong, vibrant, and ready to grow. Policymakers and regulators should seek to encourage -not discourage-more electricity competition. Continued development of competitive wholesale markets can offer the hotel industry and other consumers meaningful choices among power providers, help promote new services and products, and make our nation's economy more efficient and productive.

How Hotels Can Benefit

Competition gives hotels the option to negotiate with and choose their electricity providers. In the past, companies purchased power from the electric company in whose service territory the hotel was located. Today, in many states, hotels can benefit by allowing energy providers to compete based on price, services, and programs. This is especially beneficial to large chains that can now have one energy supplier for several locations and in many cases one point of contact for all of their hotels in a state and even across states.

Several new products and services have been spurred or expanded by electricity competition. The details of these programs will be analyzed further in a future issue, but they are worth mentioning here. They include:

Overall, managing energy in a hotel is just another way of controlling costs. On average, the cost of energy accounts for three percent to five percent of a hotel's total operating expense. Controlling the cost of energy will help to improve the bottom line, or enable management to spend more on amenities, energy-efficiency improvements, and other expenses. And as an added benefit to everyone, using energy efficiently helps to improve system reliability and protect the environment.

Like any industry that goes through a significant change, there are going to be some bumps in the road. But eventually this road will be paved, a competitive electricity industry will thrive, and all those who participate in it will benefit.

Steve Kiesner is Director of the Edison Electric Institute’s National Accounts Program. Based in Washington, D.C., Edison Electric Institute (EEI) is the association of United States shareholder-owned electric companies, international affiliates and industry associates worldwide. Our U.S. members serve approximately 90 percent of the ultimate customers in the shareholder-owned segment of the industry, and nearly 70 percent of all electric utility ultimate customers in the nation. They generated almost 70 percent of the electricity generated by U.S. electric utilities. Mr. Kiesner can be contacted at 202-508-5000 or skiesner@eei.org Extended Bio...

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