Taking Care of Large Customers, Public Power, May-June 1997 Rates: Taking Care of Large Customers Lakeland shows its large customers it has their interests in mind as the industry restructures. By Danialle Weaver Will a 20 percent tariff discount and the flexibility to negotiate future rate reductions be enough enticement to prevent a public power system's choicest customers from switching electricity suppliers if retail competition ever arrives alive in the Sunshine State? Rolando Sanz-Guerrero certainly hopes so. Sanz-Guerrero, manager of business development and fuels for Lakeland, Florida, spent 18 months--and a lot of sleepness nights--trying to turn what he worried was a losing game plan into a win-win situation for the utility and 13 of its largest customers. So he tweaked the tariff schedules and devised a plan acceptable to his boss, state regulators and most importantly, his customers, who are being courted by energy services companies and investor-owned utilities intent on using the siren's song of lower rates to ensnare as many of Lakeland's customers as possible. There is one hitch that could scare off the faint-hearted, however: To be eligible for the tariff, customers must sign 10-year power supply agreements with the city. It will be a while before the final outcome makes itself evident, since even the most optimistic scenarios expect it will take another three to five years before retail wheeling is in place here. But one thing is already evident: the customers like it. As of mid-February 1997, eight of the 13 customers eligible to receive service under the large high load factor power service tariff rate had either signed up or indicated their intention to do so. Calculations indicate those customers will realize a combined savings of $2.3 million per year. And state regulators from as far away as New Mexico, Missouri and Kansas have called, wondering how Lakeland did it. The new tariff "was a reaction to what I saw the market would eventually become, and I didn't like it," Sanz-Guerrero says. "We have had some instances where ESCOs or other utilities have come to our customers and said, 'hey, man, just wait three more years, because then I'll be able to give you this rate that is amazing.' And I was afraid we would find out, gee, they didn't even come to us and say, wait a minute, we have this offer from somebody else." Guerrero's plan, approved by state regulators last August, allows Lakeland to offer a large high load factor power service tariff rate, schedule GSX-6, to new or existing customers with demand exceeding 1 MW and a 12-month average load factor of 60 percent or more. The tariff consists of an energy charge, a demand charge and a reservation charge, which also includes a customer charge. The energy and demand charges are established at the same level as Lakeland's interruptible rate, except that customers receiving the GSX-6 rate are not subject to interruptions. The customer pays any fuel costs and all applicable taxes, and must sign a 10-year agreement. Under Lakeland's tariff, customers can opt for one of three reservation charges. Under option one, customers pay a reservation charge of $3.70/kilowatt. If the total price is more than 10 percent greater than the average of similar rates charged by Florida Power Corp., Tampa Electric Co. and Orlando Utilities Commission, customers can request that Lakeland reduce its rate. If Lakeland fails or refuses to reduce the rate, customers may terminate the agreement. Under option two, the reservation charge is $5.004/KW. If retail wheeling occurs, customers may terminate the agreement if Lakeland cannot adjust its rate to within 5 percent of the alternate suppliers' bid price.Under option three, the reservation charge is $5.704/KW, and customers can terminate the contract if retail wheeling has taken effect and Lakeland cannot match the bid price the customer receives. Options two and three were designed to allow customers the flexibility to get any bids from whomever they want, but they were also designed to help Lakeland make sure customers know exactly what they're getting when they sign up for a cheaper rate offered by someone else. "In other words, if someone from Georgia tells you, 'We can deliver power to you or we cal sell you the energy at $30 per megawatt hour,' and doesn't tell them there are going to be two or three wheels involved, then that's something we're going to check," Sanz-Guerrero says. "My big fear was, there are all of these new players, there's a million new options that come up that the customer does not have the time to perhaps look at everything. And I'm afraid that I'm not going to be able to offer the same options because I won't know what their offers said. The only thing we really want is an opportunity to play in the market, and that's it. It doesn't guarantee us that we're going to keep the customers--we still have to be competitive. It doesn't guarantee us anything except having the ability to say, yes, we can compete or no, I'm sorry, we can't compete, go ahead and take it." Total charges paid under the tariff will be adjusted at the beginning of each year under one of four adjustment options. Under option one, the charge will adjust in the same amount as the change in Lakeland's generation costs.Under option two, the charge will be the same as the change in Lakeland's applicable rate, while under option three, the charge will adjust in the same amount as the change in the applicable rate for Florida Power, Tampa Electric and OUC. A fourth option allows for further negotiation.. The Lakeland muni will serve the load out of its own generation or will use purchased power, whichever is cheaper. Using the most economical generation benefits both GSX-6 customers and the general body of ratepayers. If Lakeland can avoid running its high cost units in favor of cheaper alternatives, then total power costs to all customers will be reduced. Lakeland has purchased 20 MW of firm capacity from Enron and an additional 10 MW of capacity from Tampa Electric. The Tampa contract allows for an additional 10 to 20 MW of firm capacity. More will be secured as needed. The utility will recover the cost of purchasing the firm capacity, plus about 20 percent, through the reservation charge. Any profits the utility receives from the reservation charge will flow back to the utility and will benefit all customers.. "Lakeland's general body of ratepayers will be held harmless by the addition of this new rate schedule," the PSC order says. "Lakeland's costs will be no higher than they would be in the absence of the GSX-6 rate offering and could be lower." In many respects, the rate isn't all that different from rates charged historically. "Like the rest of Florida's utilities, we have run through a cost-of-service study, and we came out fairly equal between rate classes," Sanz-Guerrero explains. "The residential customers were actually being subsidized by the industrials, but the amount was very small. The PSC doesn't want you to be out of cost-of-service by more than 3 percent, and our percentage was about 1 percent." In 1996, the Lakeland utility peaked at around 600 MW, Sanz-Guerrero says. Out of that, the top 15 industrials totaled about 50 MW, while the remainder of the utility's commercial and industrial customers account for about 250 MW. Historically, residential customers represent about 52 percent, slightly more than half the utility's load. The list of eligible customers includes Polk County's major employer, Publix Super Markets; the hospital, Lakeland Regional Medical Center; a major medical center, the Watson Clinic; and Florida Southern College. Manufacturers include Florida Tile Industries, Owens Brockway Glass Container, airbag manufacturer Breed Technologies and Juice Bowl, a citrus juice producer owned by Tropicana. Bee Gee Shrimp, which recently changed hands, also is expected to sign. So far, only bakery products giant Pepperidge Farms has stayed with its current interruptible rate. There are other customers who like the new tariff but who do not qualify. "The rate was really tailor-made to big users," Sanz-Guerrero says. "They have to have over 60 percent load factor, therefore we are really compensating the customers who use the electricity more efficiently. But each one has a 10-year contract of sorts, so you can secure capacity within that time without having to define the risk of, 'OK, what happens if we lose this customer?' " But Sanz-Guerrero also knew customers would not sign 10-year contracts without any outs. "Trying to guess what the market was going to be--it's a tough sell, and we knew that wasn't going to fly. I came up with three options because not every customer is alike and there will be some customers who will want a lot more flexibility. I just wanted to make sure we offered everyone competition of sorts, and the three options were just...how you defined competition." What he did not expect was that all eight customers would opt for greater savings and less flexibility to negotiate a lower rate in the future. So what if a customer picked the wrong option and wants to switch? "It behooves us to be flexible," Sanz-Guerrero says. Sanz-Guerrero fielded calls from Kansas, Missouri and New Mexico, among other states, but was surprised that not a single inquiry came from other Florida munis. The neighboring IOUs called, however. "I wasn't sure whether the purpose was to do something similar or whether they were simply trying to fish out exactly what we were proposing," he says. Industrial customers outside Lakeland's service territory also called, "saying this was pretty neat and how did you do it." The entire process had three phases and took about 18 months. The first phase, which took about a year, was convincing his boss that the plan was necessary and that it would not work to the utility's detriment. The second phase, which took about four months, was talking to customers individually to ascertain their needs. "Before we put this rate together, we worked with the customers to make sure they were all okay with doing this." The third phase was the approval process, which took about five months. Once the utility received approvals from the Lakeland City Commission and the Florida Public Service Commission, it took an average of about three months per customer to work through the remaining concerns. "It took quite a bit of education for each of those customers to fully understand what they were signing." But educating the client was one thing; educating the lawyers was quite another. "If we're talking about 10 industrials, then it's 10 different lawyers that have their own way of doing contracts and it's only now... that they would have to take the contract as-is, and they were very curious about that and wondering, what are you guys trying to do, and are you trying to screw us? I had questions from corporate attorneys all over the United States." --END-- Lakeland's decision to offer the special rate won high praise from David G. Cesio, director of energy services for Xenergy, an energy services company based in Burlington, Mass. Cesio is based in Xenergy's Oakland, Calif., office and oversees the corporate energy account for one of Lakeland's largest industrial clients, Owens Brockway, which has 58 plants throughout the United States. Owens Brockway has a drink bottling plant in Lakeland that is one of the area's top employers. Lakeland's executives "have realized they're entering into a world of deregulation and they have decided to take a very aggressive position with their customers to provide the highest possible level of service," Cesio explains. "Owens decided to stay with them and work with them because they have done everything to make doing business with them a real pleasure. They have tried to be creative in undestanding what the customer's issues are. Large customers are going to have choices, and if they're going to keep their clients, they have to recognize what the future looks like. Cesio's comments are high praise, indeed. He is based in Xenergy's Oakland, Calif., office, and oversees the corporate energy account for one of Lakeland's largest industrial clients, Owens Brockway. Xenergy's other energy services clients include Sony Pictures, World Color Press, General Motors and Northrop Grumman. "In today's environment, I'd rather do business with a supplier who wants to work with me and has the intention of keeping my business--that's way different than the majority of utilities," Cesio says. "The others say, 'take it or leave it. This is the price--we'll charge you as much as we can. When we get finished paying off our stranded asset, we will have very low-cost generation. And you'll come back and buy from us because we will be the low-cost provider. And we don't have to treat you nicely.' Trust me, they're out there. And I will make some very heavy bets that there are some utilities like that out there who will struggle, because customers will not forget those things." Cesio says most industrial customers expect a big price drop once retail wheeling occurs. Average industrial electricity prices are today less than four cents per kilowatt hour. Most industrial customers expect retail wheeling to drive that price down to about 2.5 cents/kwh. "Utilities have two choices," he says. "They can wait til retail wheeling hits and then compete, or they can have an alliance of customers now, when they don't have to comete, and the utilities who care are doing a good job--when they didn't have to make those investments, they're doing it anyway. Unless you have that customer alliance, you will have nothing in the future." Cesio said he did not shy away from a 10-year contract because "there has never been a contract written that couldn't be broken." He also noted that Lakeland's offer contains sufficient reassurances and off-ramps. Xenergy was also confident Lakeland would negotiate should any of the clauses become untenable in the future.