The squeeze is on - Deregulation has left firms at the mercy of volatile energy markets

www.nj.com Sunday, March 09, 2003 BY TOM JOHNSON Star-Ledger Staff

Natural gas prices have doubled in the past year. Caps on electric bills will be lifted this August. A possible war in Iraq and a strike in Venezuela have pushed the price of oil to nearly $40 a barrel.

If businesses are not yet feeling the pinch from soaring energy costs, they soon will, experts warn. Businesses that in the past paid little attention to the cost of energy no longer can afford to ignore it.

"For most people, the energy portion of the business is not something they normally focus on, but now you see consumers are really getting hammered right now," said Richard Soultanian, co-president of NUS Consulting Group in Park Ridge, which helps companies manage utility bills. "Saving money on energy expenses without significant modifications in your operations is at a premium right now."

Businesses have always had to deal with contingencies like oil shortages and unusually cold winters, and the effect they can have on energy costs. But until recent years, that effect was often small because energy markets were tightly regulated.

"In the past, you had utilities act as the shock absorber for energy crises, at least in the short term," said R. Scott Helm, president of American PowerNet, an electric management and procurement company based in Wyomissing, Pa.

Over the past several years, New Jersey has taken steps to deregulate the sale of natural gas and electricity, the two main sources of energy for most companies. As a result, experts say, businesses are more vulnerable to market forces when it comes to purchasing energy.

"The landscape in energy has changed dramatically," Soultanian said. "With deregulation, with the opening up of markets, one of the side effects is volatility. Now, it is a true supply and demand market."

For most companies, energy is the second-largest cost after labor.

Deregulation was going to lead to more competition and lower prices. At least that is what state officials thought when they decided to break up New Jersey's gas and electric monopolies beginning in 1999.

In fact, there has been little savings for business, other than a one-time statewide discount. Few companies have bothered switching suppliers, either for electricity or gas.

A new wrinkle in the energy equation will come this summer, when the state lifts caps on electric bills for businesses as well as consumers. The move is expected to lead to rate increases of up to 13 percent.

"Unfortunately, I believe the way the system was set up, there's going to be sticker shock," Helms said.

Most at risk are 1,700 of the state's largest industrial customers. Beginning in August, their electricity rates will fluctuate not by the month or week or day -- but by the hour.

During peak usage, Soultanian said, some businesses could see electricity prices triple within the span of an hour.

Unless companies more aggressively manage their energy costs -- seeking new suppliers, switching usage to off-peak hours -- they could see their August electric bill jump by 50 percent over the July bill, Helms said.

Indeed, some experts see the new pricing system as an opportunity for larger users to better manage their energy costs.

"This type of pricing is going to give them a big inducement to shift their energy use to off-peak periods and to conserve energy," predicted Steve Gabel, president of Gabel Associates in Highland Park, an energy consulting firm.

Small and medium-sized businesses, as well as residential customers, will have some protection from the lifting of price caps this summer. For these customers, the state has locked in electricity prices, though at a level about 6 percent higher than they are now, Gabel said.

Ratepayers face still other increases on the electric side. The utilities are seeking to recover $1 billion in costs they incurred in buying power at prices they could not pass on to customers because of rate caps. Customers also face rate increases from the utilities on expenses they incurred in upgrading the lines and poles that deliver power to homes and businesses.

Just how large the final bill is will not be determined until later this year during proceedings before the state Board of Public Utilities.

"It's a historical accident that all these things are kicking in at the same time," said Steven Goldenberg, a lawyer representing big energy users in the New Jersey Large Industrial Users Association. "It's kind of pancaked on top of each other."

No wonder some businesses are already looking to cut energy costs any way they can.

At Archive System Inc. in Franklin Township, Ed Vogelson, its chief operating officer, decided to invest in $38,000 in retrofitting a 200,000-square-foot warehouse that stores business records and files with more energy-efficient lighting fixtures to reduce his electric bill.

The project, undertaken in conjunction with Jersey Central Power & Light Co. and the New Jersey Clean Energy Program, has reduced the facility's monthly electric bill from an average of $4,300 last year to about $1,900, Vogelson said.

"I knew the prices were going to go up in August," said Vogelson. "My energy bills are a significant part of my business."

Tom Johnson can be reached at tjohnson@starledger.com or at (973) 392-5972.