A GUIDE TO FORMING AN ENERGY USERS GROUP

by Lindsay Audin, president, Energywiz, Inc.

INTRODUCTION

The technology, marketing, and regulation of energy is rapidly changing. Every day, customers are facing new opportunities - and new pitfalls. Those who previously focused only on energy conversion and distribution now need to know much more about purchasing and controlling their energy supplies. Staying current is hard enough; trying to influence or benefit from these options is often beyond the resources of the average customer.

To address these challenges, energy customers are pooling their talents through the creation of buyer forums, purchasing consortia, and industrial councils. Many are now working together to represent their common interests before public utility commissions, utilities, and energy providers. In the process, customers are looking beyond conservation and efficiency for new ways to cut operating costs. Forming such groups provides both hope and benefits to those feeling powerless in the face of utility monopolies and government bureaucracies. Many have found that joining forces can literally change the rules that previously constrained energy users. Many customers are also examining ways to move beyond the regulatory realm - into the courts, commodity markets, and statehouses. This guide focuses on ways to organize around and confront such difficulties.

WHY ORGANIZE?

Each of us is a single energy user with limited influence over the ways that energy is priced, regulated, and sold. Since many utilities have a virtual monopoly on major energy supplies, customers typically accept whatever rate increases are levied upon them. The deregulation of telephones, airlines, and natural gas have, however, demonstrated new methods to confront rising utility rates.

These lessons can now be applied more broadly to cut customers' energy costs. The key to success is to demonstrate that many customers want change, and will spend their time, funds, and attention to make it happen. When intervening before utility commissions, customers often have greater credibility than equipment vendors or utility competitors, especially if their group includes public agencies, nonprofit institutions, and well-known religious, health, or educational facilities.

A Short Case Study

As one of the largest users of electricity and natural gas in the New York City area, Columbia University has an ongoing interest in how these resources are priced and delivered. In 1989, it sought access to an economic development electric rate available for new construction projects, such as the new central plant it was constructing. After filing lengthy paperwork to secure it, an error by the power company in the way it connected an electric service to Columbia's new facility jeopardized obtaining the new rate. Since losing this benefit could cost over $6 million over the next decade, the University was justifiably concerned.

Lengthy correspondence and meetings produced no results, so the customer notified the power company that he had retained an attorney, well versed in utility case law, to bring an action on the matter. Suddenly, the utility "discovered" a way to reconfigure the electric service that would avoid the problems it had created. The threat of legal action was dropped without the University's incurring any fees.

Efforts to Extend the Success

Surprised by the ease of this success, Columbia began to investigate other ways in which legal action, or the threat of it, could help cut utility bills.

Discussions with several consultants on utility issues was not, however, very productive. Despite their often heated claims to the contrary, many were insufficiently knowledgeable (or did not fully understand) prevailing rate tariffs. Their guidance on how to change them was thus often quite limited. Others had become so closely involved with the regulatory process that they had gradually "bought into" the often dubious arguments of the utilities. They also had little incentive to alter the system because, win or lose, they collected their consulting fees, much as brokers collect a fee when stock is bought or sold, regardless of the profit or loss involved.

To put it bluntly, most were interested only in making money, not in making change. A different catalyst was needed to encourage action.

Seizing a New Opportunity

Over the next two years, Columbia's energy manager investigated ways to obtain the same reductions in gas rates as had been obtained with electric rates. In the late 1980s, a tariff had been created that allowed the local utility's gas lines to convey gas from other sources, but it had been used by only three large industrials with easily controlled, process-related loads. As a result of this deregulation, many gas marketers were offering new supply options, but all tried to tie the University to "take or pay" contracts, or other unwise maneuvers. When Columbia tried to get a more secure deal, the marketers strenuously avoided any contractual obligations. Only one was willing to enter into serious negotiations that took into account the nature of a large nonprofit institution (with a weather-sensitive load), furnishing the necessary safeguards and purchasing accountability. After six months of negotiations, a groundbreaking contract was developed.

Since the only other source of natural gas was the local utility, it was given an opportunity to compete with the marketer. This concept was (in early 1991) so foreign to the utility that it was unable to supply a coherent response, and instead offered veiled threats regarding supply security and its own displeasure. These threats carried little weight because Columbia's boilers all run on dual fuel (#6 oil or natural gas), so any gas supply problems could be handled via its stored oil supplies. The only leverage left to the utility was (as usual) to try frighten a customer with the uncertainties inherent in any new venture. Ignoring these baseless claims, Columbia plunged ahead - and now saves over $1,000 a day as a result.

Extending the Option

By exploiting this little-used tariff option, Columbia set an example for other institutions and large gas users in the area. Soon, hospitals, other universities, and even the City of New York, approached it for help in accessing cheaper gas. Within a year, over a dozen were buying their gas on the spot market. A close relationship formed between the marketer (which was doing quite well as a result of the customer's high profile) and the customer.

When those customers saw ways to improve the existing gas buying process, it became obvious that action before the state public utility commission (PUC) might be needed. Experience during the gas contract negotiations demonstrated the limitations of using one's own legal staff, most of whom are experienced in other aspects of law. Paying for outside legal help was also problematic due to budgetary restrictions on such expenses. To find other spot gas users with whom the cost of a rate intervention (and its benefits) could be shared, Columbia asked its gas marketer for names, with the promise that the list would be kept confidential. Those customers were called them to a meeting to discuss recent utility billing and customer service problems they had all been experiencing. From this first meeting emerged a new buyers' group.

To represent itself before the PUC, the group retained the services of the same firm used in the electric rate case. A dues structure was created that charged based on gas usage, with those benefitting the most from changes paying the most. Bylaws were written, officers elected, and meetings scheduled. The group was then ready to develop and pursue united actions to benefit its members.

During its first year, the group was instrumental in obtaining improvements to its members' billing, shared pricing and purchasing information, and was well situated to act when the utility offered its own version of spot gas, via a completely new tariff. Through its attorney, the group proposed changes to the proposed tariff and was successful in obtaining almost all of them, despite strenuous opposition from the utility. Most members now utilize this new tariff, choosing the cheapest fuel on a simplified monthly basis. When the utility later tried to complicate the process with daily balancing and other punitive measures, the group was successful in beating them back.

LESSONS LEARNED

Several lessons became obvious during struggles over proposed rate hikes, and are useful when approaching a public utility commission. Most proceedings involve the same few talking heads every year; simply raising a few key issues began new discussion because most of the usual parties did not want them even mentioned. Many commissions are already overburdened with cases involving non-energy issues such as telephones, trucking, and water. Unless prodded, they will continue with "business as usual."

When writing and interpreting tariffs, it pays to have many customers simulating in their minds what impact specific changes could have on their own facilities. Doing so uncovered a variety of otherwise hidden pitfalls (e.g., simultaneous changes to several parts of the rules can have unexpected effects when combined).

Rate tariffs are a maze of interlocking rules and legalisms; if you narrow your attention to only the options provided by others, you become just another "rat" in that maze. The ability to innovate is a key to making change.

When commission staffs get cut or reorganized, one can never be sure of the competency level that results: in one case, a water regulator (lacking any energy background) ended up overseeing changes to complex gas tariffs!

The bottom line here is simple: customers cannot depend on state agencies or the usual rate-setting processes to work in their best interests. Direct involvement is essential, especially during times of rapid change, such as the present climate of deregulation.

OPPORTUNITIES FOR CUSTOMER GROUPS

No More Mr. Nice Guy = Savings

Utilities have gradually become accustomed to customer grumbling, sniping by environmentalists, and the harangues of consumer protection boards. They know how to get what they need, be it through obfuscation, deal-making, or stretching out proceedings until their opposition runs out of resources. It is rare that a utility can be convinced that it is wrong: one must instead take a "gloves off" approach, tossing sand into the machine at every opportunity. The gradual deregulation of natural gas provided an excellent way to expose one utility's failure to deal with competition, and efforts to deregulate electricity will do the same for others.

Investment in such ventures is always speculative, but it compares very favorably to energy conservation and demand-side management measures: while such payback periods are typically measured in years, expenses incurred by groups for their rate interventions have sometimes paid back in days. Some groups have found that, on average, members are realizing over $10 in savings or avoided costs for every dollar of dues. Here are a few examples.

In 1994, the Big Three auto makers pressed Detroit Edison (DE) to provide a lower electric rate, but got only a sluggish response. Through various actions, they threatened DE with

• potential municipalization in one area, opening the door to wholesale wheeling from another utility
  
  
• expanded cogeneration, causing permanent loss of base load
  
  
• transferral of operations to other territories, resulting in reduction in its customer base.

  DE finally responded with a 10-20% cut in rates via a new tariff, provided the Big Three backed off of their plans for a 10-year period. This cut was worth millions of dollars and was obtained merely by "pushing paper": no new equipment or changes to facilities were required.

  In 1993, a Chicago users group was successful in pressing the local gas utility to allow aggregation of separate accounts into one unit to meet minimum quantity requirements of its transportation gas rules. Doing so was possible by improvements in metering technology, and it helped small users band together to get cheaper gas rates.

  In 1995, the California Public Utilities Commission (CPUC) stunned the country by beginning the process that created the first fully open retail purchasing of non-utility power. While the jury is still out whether the best method was followed, be assured that this action did not occur at the behest of the utilities.

  The 1992 National Energy Policy Act opened the door ever so slightly to retail wheeling by requiring utilities to allow their transmission systems to be used for transmitting power from other power suppliers. This effort was fostered by ELCON, the Electricity Consumers Resource Council, a national group of large industrial electricity users.

  

Responses by Utilities

FERC Orders 636, 888, and 2000 now require utilities to further unbundle their interstate gas and electric transmission systems, allowing trade in capacity, storage, and other services. States have now initiated deregulation of generation, in one form or another. Seeing the handwriting on the wall, many large utilities and holding companies have spun off unregulated subsidiaries, set up non-utility generating stations in other utility's territories, and have begun challenging their former brethren with more competitive electric rates.

On the other hand, some utilities are seeking to pre-empt efforts to obtain cheaper power through wheeling or cogeneration by juggling their present electric rates so that neither option will be cost-effective for customers. A new term, "refunctionalization," has been coined to describe other efforts to reclassify transmission systems (typically regulated by FERC) as distribution systems (that remain under PUC rules). Unless confronted in such early stages, such trickery could rule out access to lower utility costs in the future.

Customer groups have the necessary focus and position to expose such activities. Experience shows that regulatory agencies rarely take the time to look behind the curtain to see how such manipulation will eventually affect non-residential customers.

STEPS TO GETTING ORGANIZED

Finding Potential Members

As with most efforts, the first steps are often the toughest. Essential to creating any group is a list of customers having a common interest in changing "business as usual." While the customer in our case study had contacts at several other large facilities, asking his marketer for names of other spot gas users increased the pool of possible members. Since marketers guard such lists with their lives to avoid competition, some persuasion may be necessary. It pays to point out that a customer-based group would be working to improve market conditions, which would benefit the marketer at no cost to him. If the list is kept from his competition, only mutual advantage would be gained. By agreeing to limit access to the group's membership listing, the marketer's list was provided. When potential members later asked for a list of members, only a representative sampling of the best known large users is provided.

While a marketer's list may provide a core membership, ongoing recruiting is essential. One of the best places to look for new members is among professional societies and trade associations, especially those representing facility operations and real estate management. It is an axiom among professional organizers that groups never remain the same size: they either shrink or grow (and you don't want your group to shrink).

FERC also requires utilities to maintain lists of their largest electricity customers. Since FERC is a federal agency, its lists have long been available through a simple written request, and now can be searched on the internet. (Energybuyer's Tip of the Month for February 2000 (updated July 10, 2001) explains how.) Such lists have been used to expand the memberships of several groups.

Getting Them to the First Meeting

Summoning strangers to a meeting is easier when a near-term issue of common interest is the focus of the initial call. Few customers are willing to commit their time and attention to forming an organization, but most are willing to listen to a specific proposal for action. The topic at hand could be chronic billing problems created by the utility, a pending rate case, or a deregulation bill before the legislature. The focus of the first meeting should be some form of united action to make members' voices heard, such as a joint letter to the utility and PUC, accompanied by a press release. From such small first steps will come both new members and other successful efforts at change

Convincing People to Join

"Selling" membership can also be difficult. Some will come to a meeting and say that "you can't fight City Hall," so why waste time and money trying to do so. The key to overcoming such negativism is to realize that such people are really just looking for someone else to take the responsibility if an effort fails. They come to meetings to stay current on what other people are up to, just in case success is really possible. Understand that if they truly believed that all efforts were futile, they would not have come to your meeting! To handle naysayers, it's often best to acknowledge that there is always the risk of failure - but while doing nothing avoids failure, it also ensures there can never be a success. Sharing the risk among many limits the losses any one member will incur if an effort does fail.

It also pays to present the positive aspects of working together beyond rate interventions. Groups are, for example, instructive for customers new to the energy-buying game, and a good way to informally network with others in their industry. Several customers of the aforementioned New York group found better jobs as a result of this friendly communication.

Membership Issues

Credibility is essential to growing and maintaining a customer group. That means choosing wisely who may join and how they may participate.

Vendors, for examples, see any organization of customers as fertile territory to promote their products. Limiting their membership is necessary to prevent meetings from becoming a feeding ground for hungry consultants and contractors.

Since most groups are local or state-based, they typically see their utilities as their adversaries before PUCs and legislatures. As a result, credibility demands that utilities be barred from having membership in a customer-controlled group. Failing to follow this credo has resulted in several groups disbanding, making some utilities quite happy with the small investment they made in their dues.

Some customers (especially nonprofit organizations) may be reluctant to lend their names to a group that could pursue political action or controversy. Such organizations often depend on donations from utilities, and such funding could be jeopardized when actions displease a utility. Many nonprofits are, however, large energy consumers and benefit from controlling rate hikes. To allow access by seriously interested consultants and vendors, while not scaring away those who do wish to maintain a low profile, some groups have created different types of membership:

• full members represent energy-using organizations; their dues are based on annual energy consumption, they have full voting rights, can serve on the Steering Committee, and their organization's names may be used in group presentations (with their permission)
  
• associates are typically consultants and vendors who want to stay current and are supportive of the group's efforts; they may pay a flat annual fee or dues that are roughly proportional to their size, have no voting rights, and may be excluded from closed parts of a meeting (e.g., strategy discussions)
  
• paying guests represent facilities that are sympathetic to the group's goals but do not wish to be listed as members; they pay based on energy use, have no voting rights, and are invited to attend all meetings.

Members may be invited to bring guests to meetings but are expected to identify them during introductions. Limiting attendance creates a comfort level to other members during sensitive discussions, and demonstrates that the benefits of the group are not open to those who do not financially support the organization.

Structure and Financing

Many groups are constituted as non-profit organizations, but dues and contributions are typically not considered tax-deductible to avoid any conflict with the IRS over lobbying (though actions before public utility commissions alone are not considered lobbying). Some are registered with the IRS and many hold bank accounts and tax ID numbers in their names.

While structures often differ, some form of steering committee is typically elected by the voting membership and may in turn elect officers (Chair, Secretary, Treasurer) from its members. A typical group's bylaws are like those of most professional societies, and can be amended by the membership. While not essential, some rotate their presidents or chairmen each year or two to encourage sharing of responsibility and fresh approaches.

As with any organization, a great deal of attention is paid to collecting and disbursing funds. Various ways to raise funds exist. It is typical, however, for those with the larger energy bills to pay more than those who would benefit less from the group's activities. A typical group might follow this dues schedule:

• energy users pay a minimum annual amount plus a small percent (often 1-2% or less) of their annual energy bill, rounded to simple quantities (e.g., nearest thousand dollars); an "honor" system may be used regarding the size of the energy bill to avoid revealing competitive information
  
  
• when more money was needed for a specific rate case, a separate surcharge may be added, or a separate mailing done asking for additional contributions (typically accompanied by meetings to explain the need for funding and the impact on the customer if the case were not addressed)
  
  
• associate members may pay a flat annual rate ($500 to $2000 per company is not unusual), set purposely high to indicate that only the seriously interested should join
  
  
• because of the access to potential customers while at meetings, energy services vendors are charged dues equal to or higher than those of the biggest customers (one group's minimum dues for non-utility energy vendors is $10,000 per year)

Here are a few suggestions for handling the often sticky issue of money.

1. Set a realistic dues level, and then work hard to increase revenue by increasing membership, not by asking the same few to bear a greater burden.
   
2. Dues should equitably reflect the benefits members will obtain, both from controlling utility rates and from the educational aspects of the group. If, for example, the group holds educational events (e.g., panels), does attendance at such events constitute lower cost training than going to a costly seminar?
   
3. Industrial, commercial, and institutional facilities may use energy very differently; it pays to query how each facility is operated. Carefully consider, for example, how to bill cogenerators that turn gas into electricity (and thus have no electric bill) but may require more legal assistance (e.g., with backup/standby rates) than other members.
   
4. Get advice from an accountant when setting up your bank account and budget. Some tried to avoid IRS oversight by limiting the size of their accounts, only to later learn that doing so created other problems.
   
5. A potential member may ask why he should pay dues when the results could benefit other customers, including his competition. Focus on the benefit it will have for his rates, and point out how prior actions of the group may have already saved him money. Conclude by pointing out that, if you fail due to a lack of resources, neither he nor any other customer will get any benefits. It doesn't hurt to add that his small dues contribution may be the only way he will ever "get back at the utility" for the high bills he pays.

Organizational and Operating Resources

Most of the funds collected by customer groups are used for legal interventions and educational efforts; few have any paid staff (though many use consultants under contract). Work may also be distributed among steering committee and sub-committee members, who may in turn use their office staff or company resources to handle tasks (e.g., mailings, setting up meetings, etc.). The group's consultant and/or attorney usually keeps the group informed of PUC actions, and the steering committee sets policy, develops meeting agendas, and oversees finances.

Using members' corporate resources may be an excellent way to stretch a group's budget: members may be willing to "volunteer" their firm's legal staff to review bylaws, accounting to check IRS filings, and clericals to assemble mailings, for example. In some cases, support can be obtained from other organizations having an interest in the same goal, but whose primary focus is elsewhere (e.g., associations of health care facilities, or chambers of commerce). This also holds true for other customer groups in your state or area. When it comes to controlling costs, there is no room for pride; if another organization's members will benefit from your work, feel free to ask for its help.

Members need to know that their money is being spent wisely - but that it is being spent. The greatest expenses will typically be connected to interventions, which can be quite costly. Total budget for contesting a major rate case is typically measured in five or six figures. By comparison, however, members may save millions of dollars due to this effort. To properly share that burden, expanding membership is essential and should be every member's duty.

Keeping Membership/Attendance Attractive

Meetings should never be held simply because they are on a schedule. Many groups meet only quarterly or every other month, while their steering committees meet on a monthly or as-needed basis. Each members' meeting has either a speaker or an important item demanding membership attention. It's best to limit meeting length (especially during work hours) and keep them moving at a brisk pace.

A newsletter is also essential to keep members up-to-date and as a means to attract new members. When the group is small, faxing ensures prompt receipt and may be cheaper than mailing. E-mailing briefs is an excellent way to keep all members abreast of issues and fast-breaking events.

For customers new to buying energy, access to expertise may be more immediately important than involvement in interventions. To handle such requests, some groups maintain files of basic contracts and formats (such as for requests for proposals) for their members. Likewise, access to a qualified consultant paid by the group can often save a customer the cost of hiring one. In most cases, one good tip is worth several years' dues, making attendance a good investment of time. Keeping such communications closed to outsiders further enhances the value of membership.

Successful groups often invite speakers on energy-related topics to address them. Careful planning and publicizing can turn such events into fund-raising and membership growth activities. Discussions should be kept lively and informal in nature, with all attendees invited to participate. Time for networking over refreshments should be ensured by the agenda, as it often proves fruitful for members.

TIPS FOR "RATE WARRIORS"

Beware of focusing only on PUC proceedings. In some cases, the appropriate arena is not before a PUC but rather in a legislative committee hearing room where commission policy and actions are reviewed, or perhaps a governor's office where commissioners are chosen or reappointed.

Patience and persistence are very important to winning. Unlike most facility customers, whose focus is on daily building operations, utilities are well equipped to maneuver the often frustrating maze of utility commission proceedings. As a result, the process itself is sometimes the desired result: disarming a foe does not necessarily mean defeating him, when all one need do is to make him uninterested in the battle.

To successfully change an existing tariff or utility rule, it pays to always be looking into the future at the next rate proceeding and developing a plan on what needs to be changed. Doing so will direct you toward what documentation on past (or current) problems must be collected. In one case, a group won changes through a rate proceeding and then got them retroactively applied to an outstanding penalty case, saving nearly a million dollars for its members.

It never hurts to test your strength by being bolder. For example, utility commissioners are nominated for defined periods, usually by governors, so it pays to develop a dossier of commissioner actions your group considered unacceptable and then use it when the offending commissioner's term is up for renewal.

Don't limit your scope to only the purchasing of energy. Markets are rapidly emerging in pollution abatement credits that could create cash flows for those able to burn less polluting fuels. A customer group could serve as a clearinghouse for others seeking such credits, or trading among themselves without incurring brokerage fees.

Always be looking for other resources to expand your group's influence. Often forming liaisons with existing groups is better than duplicating their efforts, while in other cases absorbing a dormant or less active organization is beneficial to both groups.

The "devil is in the details" of tariffs. Whenever a member finds a problem with the way he is being served, it pays to identify the exact line in the tariff or procedure that creates the difficulty. One of the primary blocks to deregulation, for example, is the process of calculating "embedded costs" that are used to set base electric rates. Once that process is nailed down, many other desirable goals follow almost automatically. In another pending case, a utility incorrectly developed a maximum allowable quantity of gas a customer could take in one day, regardless of weather conditions. That quantity was then used to set penalty limits in an unrelated area. By successfully challenging the original error, the group was also able to lower the penalties.

Exercise control when using attorneys and consultants. In the middle of a case, some may lose sight of the limited resources of their clients. Others may see a way to gain professional standing from a decision and use the client more as a sponsor (instead of the beneficiary) of their services. Close financial control is difficult, but essential. Limiting the attorney or consultant to review, advisory and verbal presentation tasks - instead of the entire spectrum of writing, representing, and policymaking - can help to maintain the necessary control in an amicable fashion. In effect, it is as important to "unbundle" a professional's services and skills as it is to unbundle the utility's services. Otherwise, you may find it difficult to separate the work you really need from the totality for which you are charged. Merely setting a spending cap is poor practice and, in the thick of battle, is not enforceable. A specification of professional services will instead help ensure budgetary control.

CONCLUSION

Many organizations exist to help businesses and institutions, but few of them are focused on energy costs. As a result, opportunities for cutting such expenses are often lost. Establishing a forum for energy users that combines their interests and talents toward mutual benefit can be a powerful and rewarding venture for all involved.

Energywiz, Inc.
Adding New Dimensions to Energy Services ^SM