Gas Deregulation Will Your Building Reap the Benefits?

Gas Deregulation

In Spring, 1996 New York State made it legal for small-volume users in the metropolitan area to purchase natural gas from

sources other than the major utility companies such as Consolidated Edison (Con Ed) and Brooklyn Union Gas (BUG). However, despite the fact that gas deregulation has received tremendous publicity in recent months, it is a subject few New Yorkers understand. Since neither Con Ed nor BUG have made a concerted effort to inform the public about the ramifications of gas deregulation, most small-volume usersmulti-family housing and small businesseshave little knowledge of what to expect.

Even the experts strongly disagree with each other. At the center of the controversy is the question of savings. Public utility spokespeople site the immediate benefits, while private consultants and real estate industry representatives believe the small-volume user is being misled. Who's right? And what does it all mean to your co-op or condo building? The final verdict is yet to be delivered.

The Genesis of Gas Deregulation

In the mid-1980s large volume users, such as industrial customers, were allowed to purchase natural gas from outside sources if they used interruptible service (dual-fuel burners or burners that can switch from natural gas to oil during the heaviest usage months in the winter). In December 1994 New York State extended this option to large-volume, firm customers (those that use only natural gas).

In May 1996, small-volume customersboth interruptible and firm userswere offered this choice, meaning that multi-family dwellings such as co-ops and condos now have the ability to buy natural gas from outside sources, known as marketers, at great potential savings on the commodity.

For BUG customers, this can make a big difference. BUG's natural gas prices are comparable to fuel oil. But in those areas serviced by Con Ed, the natural gas prices have traditionally been much higher than fuel oil. Many Manhattan buildings use oil burners, albeit gas-ignited, for heating. Conversion to dual-fuel in these buildings only makes sense if Con Ed's rates for natural gas and transportation reflect the rest of the market.

Experts advise that the only true savings potential is for the interruptible or dual-fuel user because the utilities allocate the transportation of a specific amount of gas seasonally. In the event of a harsh winter, when a building often exceeds its natural gas allotment, penalties can raise the fuel cost by as much as 50 percent. Dual-fuel users will have the advantage because they can switch to oil and stay within the terms of the allotment with no extra charges.

Converting to Dual-Fuel Units

Since the majority of the New York area's multi-family units are firm users rather than interruptible users, the utility companies, in an effort to compete for future business, have added service and marketing divisions to assist in the conversion to dual-fuel units. Bill Feraudo, senior vice president of BUG, is directly responsible for two divisions that provide these services. The first, Keyspan Energy Services, buys the actual commodity and competes with out-of-state marketers. The second, Keyspan Energy Management, is the service arm preparing to convert burners in designated New York areas. The counterpart for these divisions in Con Ed territory is ProMark.

According to ffb Feraudo, Keyspan Energy Maintenance will go into a building and convert it to dual-fuel capacity. Keyspan provides the equipment, the fuel (gas and oil) and the maintenance for a monthly fee. The building pays a fixed rate for these services the first year. Brooklyn Union Gas is paid separately for the transportation and use of their underground pipeline system. Feraudo believes the consumer will see a marked savings immediately. In a five- to six-family unit building currently using firm gas, the savings will be in the neighborhood of ten percent.

Trouble with Tariffs

Despite assurances by public utilities, the question remains: Can the public really expect to get a much better deal on the gas it buys? Ultimately, gas deregulation is the wave of the future, but for now, it is only cost-effective for large users, says co-op consultant Herb Rose, president of Herb Rose, Inc., located in Mount Vernon, New York. Rose points out that about 40 percent of the actual cost is for the gas itself. Then there are two levels of transportation: interstate, which is regulated by the Federal government; and local pipelines, which are serviced by the local utility companies and are taxable. Local transportation accounts for another 40 percent of the cost. The final 20 percent goes to the local utility for ancillary services. This means that approximately 60 percent of the overall costs are subject to local tariffs.

The only part that is completely deregulated is the commodity itself, the natural gas. At this point, even if independent marketers offer better prices for the gas, the local utilities' tariffs and charges nullify the savings to the consumer. Another contributing factor to the uneven rate base is the five percent credit the utilities offer to their dedicated customers. However, the Public Service Commission (PSC) has determined that as of the second quarter of 1997, all consumers will be offered these credits, whether the commodity provider is the utility or an independent marketer.

According to Lindsay Audin, president of EnergyWiz, Inc, an Ossining, New York-based consultant to a number of large energy users including Columbia University, the savings will depend upon location, as well as the volume of gas being used. No matter which company the gas is purchased from, whether it is an independent marketer or a local utility, the consumer is charged by Con Ed or BUG for transporting the gas through local pipelines. The moment the gas is brought to the city gate, even if a building has purchased the commodity at an optimal rate, additional tariffs on the transportation and ancillary services, such as meter readings, are added.

Two years ago, Audin explains, when gas was deregulated in New York State for the firm customer, it was done very poorly. The PSC and marketers did a bad job and the utilities got away with murder. Now, the PSC must try to ameliorate a bad decision. Audin is referring to the fact that because of the initial guidelines set by the PSC with the utilities, there is no clear breakdown on the actual costs. The utilities bundle the costs or combine them in the billing. It is not a level playing field, adds Catherine Luthin, executive director of the New York Energy Buyers Forum and a principal of J.C. Associates, an Ocean, New Jersey-based energy consulting firm. The residential market is not yet working and only public sentiment will produce a thorough examination in order to ensure all costs are justifiable.

According to Michael Printz, director of marketing and sales for the Rent Stabilization Association of New York City, Inc. (RSA), a Manhattan-based trade association representing 25,000 property owners and agents, The market needs to de-monopolize, not deregulate. RSA has made great efforts to sort out the deregulation morass and it recently joined forces with the Community Housing Improvement Program (CHIP), the Small Property Owners of New York (SPONY) and the Council of New York Cooperatives (CNYC) to form the Apartment Coalition whose goal is to represent the industry b ffb efore the PSC. The Apartment Coalition has been submitting recommendations on ways to improve rate competition on behalf of the multi-family housing industry.

Gearing Up For Change

Property managers are gearing up for deregulation, since co-op boards and condo associations will be relying upon them for recommendations. Edward Kalikow, president of Kaled Management, a property management firm based in Queens, has been researching opportunities for aggregation, in which several buildings are joined together to create a larger threshold of usage in order to procure better rates. I don't think the savings are going to be that dramatic immediately. But when the dollars and cents, plus service, all meet our standards, we will be prepared with the most cost-effective options for our buildings, he says.

Mark Moskowitz, president of The Argo Corporation, a Manhattan-based property management firm, says, we started converting our Queens and Brooklyn properties to dual-fuel last year in anticipation of the gas deregulation benefits. Also, because Brooklyn Union Gas's favorable gas rates were comparable to Number Six oil. Jeffrey Levy, Argo's vice president and director of management, has been negotiating with brokers representing various gas marketers for some time on behalf of the Manhattan properties. Levy says, Natural gas brokers who offer us great prices are coming up against the wall with Con Ed and its red tape. Until Con Ed agrees to unbundle the costs, the actual price break for the end-user cannot be determined.

For the moment New York City is experiencing a small-volume, natural gas user conundrum. Property managers are frustrated, consultants are cautious, marketers are stymied and consumers are confused. In fact, the only positive projections concerning gas deregulation seem to be coming from the utilities.

New Yorkers lived through a deregulation ten years ago (of the telephone industry) and they can still phone home. So, gas deregulationand, coming soon, electricity deregulationwill inevitably be worked out. Perhaps some day the small-volume users will feel the impact of smart shopping, good choices and a little extra savings.

Ms. Alexander is a real estate copywriter and cookbook author.

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2 Comments

  • im interested in gas deregulation. Im currently with PSE&G I live in NJ. can you forward some info. to me as far as who sells the gas. I can be reached via e-mail salbrancato@aol.com thanx
  • using more spceistioathd modeling and markets where generators are paid for providing valuable grid services other than just a flat rate per kilowatt hour generated, load following does not kill capital recovery.