More than 20 years have passed since the first U.S. states began to deregulate their energy markets. This was a milestone that gave energy consumers an opportunity to reduce electricity costs by shopping for the provider with the most competitive rates, rather than simply relying on their local utility company.
Currently, more than 15 states have deregulated their electricity markets. Natural gas is deregulated in nearly all states. And while deregulation has created opportunities for savings and reduced electricity costs, it has also created conflicts between those who procure energy and those who manage it.
In this article, we’ll examine a few key issues and conflicts surrounding energy deregulation – and a few solutions that can pave the way to more successful partnerships between energy procurement and facility management departments and reduced energy costs for their organizations.
Key Conflict: Not All States Are Created Equal
Because energy deregulation is a state issue, discussions, decisions, and methods for implementing it can greatly vary from state to state. This means that navigating the energy procurement process in a deregulated market can be a challenge – and there is no national standard that determines procurement codes.
An energy buyer working in a deregulated energy market faces the arduous task of interpreting his or her state’s procurement codes, and tariffs on energy products are subject to change and vary widely from one source of energy to another – and even from one city to another. This makes effective management of an organization’s energy budget a very difficult task at the least.
Meeting the Challenge: The “Four Ws”
Before deregulation, it made perfect sense for an organization’s facilities department to coordinate the supply of energy commodities. There was no procurement function, and energy management was simply one more task under the more general heading of “facilities management.” But today, as energy markets continue to deregulate and evolve, organizations are experiencing confusion between what the facilities department should handle and what procurement should be doing.
The best way to handle buying energy in a deregulated market is to employ a dedicated procurement staff that has a deep understanding of how to navigate the wholesale energy markets.
Of course, this is not always how organizations handle procurement: Solutions run the gamut from electricity procurement being done entirely by facilities, entirely by procurement professionals, or, occasionally, by both departments at the same time – an approach that can lead to costly, counter-productive efforts.
In a situation where both departments are handling energy procurement, it’s not uncommon for antagonistic relationships to develop. I like to call this type of conflict the “Four Ws” – as in, “Who does What, When, and Why?”
In a “Four Ws” conflict, both departments feel strongly that energy acquisition is their territory. The procurement department believes that unless they have control there is no way to ensure that sound procurement policies are properly followed. The facilities department, on the other hand, feels that without their coordination the real needs and goals of the organization will not be met. Other internal, operational conflicts include lack of information sharing between departments regarding their processes, as well as the inability to access accurate, up-to-date wholesale market information and capture data to evaluate program performance.
There is No “I” In Team – But There is a 3!
So, how do you put an end to cross-departmental bickering and power struggles in a deregulated energy market? The most effective and efficient energy procurement organizational models tend to be those where there is a strong relationship among three key groups:
- The end-user department or facilities
- The organization’s legal department
With these three groups working as a team – and with clearly defined energy needs and access to market-based information – organizations have the best chance of formulating a successful business strategy and developing a process that conforms to all necessary energy procurement guidelines. This team-based model also helps organizations get the energy products they need at rates that fit their budgets. The key is a healthy partnership between the procurement department and the end-user department.
A Long-Term, Team-Based Strategy
Once an electricity procurement team is in place, the next step should be to search for an energy supplier with the best prices and the most favorable contract terms. This search should be based on the clearly defined needs and requirements of the organization.
A formal energy strategy will help the team direct a process to find the supplier who can provide the organization’s energy needs at the best rate. The procurement process and defining the needs are interdependent and the success of each depends on the team’s ability to understand volatile wholesale energy markets, which can often wreak havoc on budgets.
By considering market dynamics and treating energy purchases as strategic acquisitions, the organization can work together as a team to minimize the impact of market volatility.