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SHOPPING FOR POWER

October 2, 2014

Presented By:

Mark J. La Fratta, Partner Samuel F. Kettering, Associate

McGuireWoods LLP

www.mcguirewoods.com

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Shopping for Power: An Introduction Ø  The ability to shop for power means your state’s

energy regulations have been de-regulated and thus a monopoly system of electric utilities has been replaced with competing sellers.

Ø  This gives a business entity the ability to browse suppliers to determine the right source for its electricity requirements while weighing several market factors.

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Why Shop for Power? Ø Save on energy costs

o Reduced Prices, Reduced Consumption Ø Consumer Savings

o  Lower rates or peak shaving Ø Green image

o Buy (or produce) green energy rather than brown Ø Environmental Effects

o  “Save the world”

PERHAPS IT IS JUST THE RIGHT THING TO DO! 4

Freedom of Choice: State-by-State

Ø Deregulation has eliminated old monopolies in many states

o  Theory that competition will drive down prices

Ø  Trend toward de-regulation tends to have occurred in places where power has been expensive historically o New England, Mid-Atlantic, Midwest, Southwest,

California •  Exceptions à Texas/ERCOT (Despite not being as

expensive historically) 5

Electricity Restructuring By State

http://www.eia.gov/electricity/policies/restructuring/restructure_elect.html

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Governing Law: State v. Federal

Ø General Rules of Thumb:

o  Federal law governs wholesale electricity and electric transmission

o State law governs retail electricity and electric distribution

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A Little History: So Just How Did We Get Here?

Ø Regulation, then attempts at Deregulation, and finally back to Re-regulation

Ø Electric Generation v. Transmission/Distribution o Similar to telecom: long distance v. local

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Deregulation

Ø Many state legislatures and utility commissions passed laws deregulating generation: basically the wholesale market

Ø Began during the Jimmy Carter era. o PURPA.

Ø  This led to competition in wholesale generation o Utilities were required to purchase power at

“avoided costs”

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Downsides to Deregulation

Ø Aggressive targeted marketing from electric suppliers

Ø Savings have not materialized in all states where deregulation has occurred

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Possible Myths to Deregulation

Ø You are getting something different from the new energy supplier

Ø Green energy suppliers are actually using ‘green’ energy alternatives

Ø Alternative is always much cheaper Ø No additional cost to switch energy suppliers Ø Buyer’s Remorse: You can just switch back to your

previous supplier

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Shopping for Power: Where to Begin Ø State Utility Commissions

o  For example: PUC, PSC, SCC o Websites and staff personnel who will help you get

started

Ø  Local Utility Companies o State laws generally require the utility to meet with

you, review your facilities and help you find the best tariff from which you can choose

Ø  Individual consultants offer their services in most states as well. 12

Main Questions to Ask Suppliers Ø  Is the supplier licensed by the state’s public utility

commission (PUC)? Ø What steps must be taken to switch suppliers? Ø Does the supplier offer a choice of energy sources,

such as renewable energy? Ø What is the length of the agreement? Can the price

change in that time? Ø What is the price per kilowatt hour (kWh)? Ø  Is the price fixed, variable or does it depend on time

of day or usage? 13

Informative Websites

Ø U.S. Energy Information Administration o www.eia.gov

Ø State Websites: o  http://webapp.psc.state.md.us/ecm/home.cfm o  http://www.nj.gov/bpu/commercial/shopping.html o  http://www.newyorkpowertochoose.com/ o  http://www.papowerswitch.com/shop-for-electricity/

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Terminology of Purchasing Electricity

Ø  Terms: o  kWh (the commodity)

•  Demand or capacity kW: Concept of demand “ratchet” o Real time rates, time of use rates, peak shaving o Net metering, virtual net metering o  Inside the fence/behind the meter

Ø Acronyms: o PJM, MISO, NE-ISO, NY-ISO, ERCOT, CAISO o OATT, LGIA, SGIA

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Pricing

Ø Bundled fixed rate per kwh Ø Bundled variable rate

o Pricing is oftentimes indexed to inflation and/or indexed to fuel costs (i.e., “Heat Rate Call”)

o  Floating LMP (i.e., “real time pricing”)

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Pricing: Fixed v. Variable

Ø  Fixed Price Contract o All-inclusive or “bundled” per kWh pricing model o Remains constant for the billing cycle or length of

the contract term, whichever is longer Ø Variable Price Contract:

o All-inclusive bundled per kWh price o Subject to change by the hour, day, month, etc.

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Fixed Pricing Model Ø Benefits:

o Pricing stability o Extreme weather will not change your rates

Ø Costs: o Certainty of a fixed price may cost more o  If market prices drop you may have to wait until

your contract ends to get a lower price o High cancellation fees

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Variable Pricing Model Ø Benefits:

o  If market prices drop, your rate may decrease o Rewards those who follow energy market prices

closely o  Likely no cancellation fee

Ø Costs: o  If Market prices increase, your rate may increase o Unpredictability in monthly charges o Extreme weather may significantly affect rates

Note: The terms and conditions for variable pricing are often-times buried in the supplier’s disclosure statement.

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Pricing Components: Delivery or Grid Charges

Ø  Transmission and distribution charges

Ø Ancillary services

Ø Capacity charges

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Pricing Components: Energy

Ø  The number of metered kwhs

Ø  Fuel costs

Ø Heat Rate Call: o Efficiency or HR is contractually fixed

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Heat Rate Call Ø A conversion factor (heat rate) required to turn an

input fuel (i.e., natural gas) into electricity. Ø  This is most common in regions where natural gas

generation plays a more significant role in the mix of generation resources.

Ø  The energy component cost is computed by multiplying two factors: the heat rate and price of natural gas.

Ø  The other non-energy delivery components are either fixed in the retail adder or floated on the market at your option. 22

When is a Heat Rate Call the Right Choice?

Ø Your company has the risk tolerance for fluctuations

in power prices and natural gas prices

Ø Your company prefers a high level of price transparency

Ø Your company’s procurement personnel are familiar with the natural gas market and are accustomed to regularly monitoring of natural gas prices

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Inside the Fence Generation

Ø Self-generation

Ø Behind the meter sale / PPA model

Ø Getting credit for back-up generators

Ø Sell excess electricity into the market

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PPA Model v. Lease Model

Ø PPA Model o Third-party owned “self generation”/behind the meter o Direct connection o Not legal in many states to “sell” electricity at retail

Ø Lease Model o  If the retail sale of power is not permitted, then

§  Lease the equipment §  Rent looks similar to the price that would have been paid

for power

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Net Metering

Ø Self-generator o Spin the meter backwards

Ø Time of use rates

Ø Virtual net metering

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Landlords: Selling or Supplying Power to Tenants

Ø Reselling or supplying power to tenants as part of rent

Ø “Submetering” for tenants

Ø Some states allow little or no markup

Ø Self-generation vs. bought from market

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Electricity Credits

Ø Green Credits o State-by-State o State mandated renewable portfolios

Ø  Tax Credits o State and Federal

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Purchasing from a Competitive Supplier

Ø Generally these are: o Affiliates of energy companies o Electric utilities o Gas utilities o Energy start-ups o Oil and gas companies

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Contract Language and Issues

Ø Contracts are typically form agreements

Ø There is generally little or no negotiation for residential customers o Larger customers have more leverage

Ø See form agreement attached to materials o This is an actual form in use in PJM

•  Disclaimer: This is not a client of ours o This agreement, though, demonstrates several of the

problems in the slides to follow 30

Contract Issues: Change in Law

Ø Typical one-way clause o Passes through only new “increases in supplier’s costs”

o Change in law during term increases costs

Ø Recommendation: o Negotiate a two-way clause, at the very least

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Contract Issues: Length of Term

Ø  Forms typically do not state a term

Ø Most competitive suppliers try to get several years

Ø  The term length is part of a transaction sheet that typically becomes an exhibit to the contract

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Contract Issues: Delivery Point

Ø  Typically where your facilities connect to the grid

Ø Near but not necessarily at the meter

Ø Risk of loss considerations

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Contract Issues: Credit History and Support

Ø Competitive suppliers may require credit support in several forms. The credit support may be tied to ratings.

Ø Examples include: o Parent guarantee o  Letter of Credit o Cash deposit

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Contract Issues: Termination by Customer

Ø  Large payment based on remaining value of term

Ø Significant notice period

Ø  Termination Fee/Cost of Cover

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Contract Issues: Termination by Supplier

Ø Suppliers frequently give themselves a free pass on

termination

Ø  Termination for nonpayment o No notice and cure period

•  For example, sample agreement only provides for a cure period for failure to post security

Ø Same termination fee as termination by customer (i.e., cost of cover)

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Contract Issues: Limit of Liability

Ø Damages limited to direct and actual

Ø Sole and exclusive remedy o Without regard to cause

Ø Waiver of consequential damages

Ø One-way Indemnity: Customer à Supplier

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Contract Issues: Assignment

Ø  Free rights to assign by supplier

Ø  Limitation on customer rights

Ø Recommendations: o Customer should insist on right to assign to a

buyer of the facility o Customer should insist on supplier’s assignee

having technical and financial capability

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