Let There Be Light

Why California's electricity problem may leave you in the dark.

“Of course, evaluating energy costs, hedging, turning on standby power, and regulating lighting are all a real headache,” notes Pearl Street’s Makansi. “Most CFOs just want predictable costs in an area that is frankly very difficult to understand.”

It’s not surprising, therefore, that outsourcing energy management and procurement is another booming business. For example, Boeing, Eastman Chemical, and Bank of America all have outsourced elements of their energy management or procurement to DukeSolutions–an unregulated affiliate of Duke Energy. And energy giant Enron’s Energy Service Group provides similar services for Quaker Oats Co., Eli Lilly, and Simon Property Group. Jack Jenkins-Stark, CFO of Silicon Energy, which helps companies procure and manage their energy, says his company’s target market includes “enterprises that are spending $3 million or more on energy [gas and electricity].” E Source energy analyst Barry Friedman says there’s a unique niche called “total energy outsourcing,” in which such companies as Sempra Energy Solutions assume complete ownership of the equipment at a company’s site, and simply sell back desired levels of lighting and temperature.

There are even companies happy to assume responsibility for the complex issues surrounding backup power. Rodney Strong Vineyards’s Bielenberg began evaluating generators when PG&E moved the company off a “favorable grid” (a section of the transmission system protected because of sensitive users such as hospitals), guaranteeing that the winery will be exposed to rolling blackouts this summer. But generators cost about $300,000, and come with a blizzard of regulatory and environmental headaches. More attractive, he says, is a proposal from Power Innovators to install and operate a cogeneration plant on Rodney Strong’s property, providing the winery with power and giving Power Innovators the right to sell the excess capacity back to utilities at market rates. “We are very interested in this option,” says Bielenberg, though it looks like Power Innovators will not be able to get through the regulatory hoops in time for this year’s harvest.

That means Bielenberg still must make the final decisions when it comes to energy risk. And he’s not alone. Power outages and volatile energy prices are a risk-management issue–even outside of California. Nstar’s May recalls a customer visit he made 10 years ago to the patrician Edward C. “Ned” Johnson III, chairman of Fidelity Investments. “It amazed me that he knew more about the power grid than I did,” recalls May. “He knew where the transformers were that fed his business, and he understood what was under the sidewalks outside the buildings where his computers were housed–because it was critical to his business.” That, says May, is the right attitude for any executive.

Tim Reason (timreason@cfo.com) is a staff writer at CFO.

Darkness on the Edge of Town

It has been an uncertain year for workers at the Chino and Tyrone copper mines in New Mexico. In January, executives at Phelps Dodge Corp., the Phoenix, Arizona-based owner of the mines, weren’t sure the company could afford the mines’ electric bills this summer, when market prices are sure to rise dramatically in response to chronic power shortages in the West. To comply with the Worker Adjustment and Retraining Notification Act (WARN), the executives told 2,400 workers that they might have no choice but to halt production and lay them off by March.

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