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First is the issue of stranded costs. The debate over stranded costs is so contentious that even the definition of the term is up for debate. For those in favor of recovery, stranded costs are those investments made by electric utilities under the old regulatory regime that cannot be recovered in the new competitive market, and therefore must be paid by consumers. For opponents of recovery, stranded costs are the result of poor business planning by the electric utilities, and not the customer's responsibility.

The decision whether to pay stranded costs to the utilities is a difficult one, with the potential to seriously impact the newly deregulated market. If stranded costs are allowed to be recovered, consumers would pay a surcharge to the regional utility, which could at least partially offset the savings from deregulation. On the other hand, if stranded costs are not paid, the regional utilities would face a large liability they may not be able to pay off, which could result in bankruptcy. Because the regional utilities are needed to maintain the electric distribution system, any regional utility bankruptcy would seriously jeopardize the survival of the deregulated market.

The second issue that has arisen as electric deregulation has become a reality is the danger of the current monopoly system being replaced by an equally inefficient oligopoly of electric providers. Electric generation plants represent a huge capital investment that few firms are capable of making. If only a small number of companies are interested in purchasing these generating assets, the envisioned fervent competition between electric providers may not materialize, and the resulting cartel of electric producers would be free to set prices at any level, which could quickly doom deregulation.

Deregulation and the Hospitality Industry

So what does all of this mean for the hospitality industry? As a large consumer of electricity, the industry will see potentially substantial benefits from deregulation. If estimates by the United States Department of Energy's Energy Information Agency are correct, retail prices for electricity will fall between 6 and 13 percent within two years of deregulation, and could drop by as much as 24 percent in intensely competitive markets. However, to enjoy the full benefits of these price drops, the hospitality industry must start preparing now for the new world of deregulated electric power.

The most important decision that must be made in the deregulated electric market is the choice of which aggregation group to join. Aggregation is the process by which many electricity consumers band together to purchase electricity in bulk. Because electric providers offer discounts based on the amount of electricity purchased, aggregation will make sense for all but the very largest of electricity consumers.

Currently, aggregation policies vary widely by state. For instance, in Massachusetts, cities and towns are empowered to automatically include every residential and small commercial customer in their aggregation group unless individual consumers elect to opt-out. While in Pennsylvania and California, cities and towns must get opt-in approval from each customer before they can negotiate rates on their behalf.

The diversity of aggregation rules between states requires that customers educate themselves on the law in their jurisdiction. Upon understanding the aggregation rules, consumers then must investigate the various aggregation groups, and attempt to find the organization that can negotiate the best deal. Although this research can be time consuming, the resulting energy savings make it well worth while. In the hospitality industry there is also the potential for aggregation by just one or two companies that own or control significant assets. Economies of scale are already well recognized in many aspects of the industry. Electricity purchasing power might be the next addition to the list.

Holland & Knight