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Man vs. Machine: Can Utility Rate Optimization be Mechanized?

June 12, 2012

Rate optimization is dedicated to minimizing payments by customers for electric, gas, water and sewer services provided by utilities. It is sometimes postulated by those who are not practitioners that rate optimization can be mechanized. Specifically, it is sometimes assumed by laymen that a computerized “rate engine” can discern utility rate savings opportunities. This is an inappropriate supposition for numerous reasons.

Even if a rate engine could scan a utility’s tariff menu and apply the rates contained therein to a customer’s consumption characteristics in a computationally correct manner (dubious given the numerous rate forms in electric tariffs), the notion that this would constitute rate optimization is fallacious. Reasons include:

  •  A rate engine cannot be programmed to comprehend availability provisions contained in utility tariffs. Tariffs often contain rates that from a myopic computational perspective would yield lower costs relative to the current tariff under which a customer’s facility is billed. However, the facility may not qualify due to size, voltage level, customer type (e.g., commercial, industrial, municipal), and character of consumption such as an all-electric rate. Also, a superficially beneficial rate may be closed to additional customers. Furthermore, a rate engine cannot discern that charge levels are lower due to a lower quality of service (e.g., interruptible service) that a customer is unwilling to accept.
  •  A rate engine cannot discern how billing demands are determined. Quite often they do not simply equal the highest measured demand during a month. Rather, several factors can be employed to determine billing demands. These include tariff provisions pertaining to ratchets, minimum demand levels, the incorporation of contract demands, and seasonal factors.
  • Time-of-use rates are very common. A rate engine is incapable of properly assigning overall energy consumption to time-of-use periods to determine if such a rate is preferable vis-à-vis the non-time differentiated rate under which a facility is currently billed. Knowledge of a customer’s business operations is required for a proper analysis.
  • When negotiation opportunities are presented relating to rate levels and/or terms and conditions of service, a rate engine cannot represent a customer during negotiations with a utility.
  • A rate engine cannot discern savings opportunities from economic development riders, or tax avoidance.
  • A rate engine cannot provide customers with market intelligence pertaining to how rates may change due to regulatory actions, nor emerging savings opportunities associated with new programs.
  • A rate engine cannot provide guidance to a customer with regard to where a new or expanded facility should be located from a utility cost perspective.
  • A rate engine cannot interact with customers to learn if consumption characteristics at facilities will be changing, thereby impacting appropriate rate selection.
  • A rate engine is incapable of evaluating and giving guidance to customers about demand response programs.

Utility rates are multi-dimensional, and are infused with subtleties. In order to maximize results for customers, the rate optimization expert must be a highly dedicated professional with very extensive experience. Utilities Analyses’ personnel possesses these attributes, and as a result the firm has a very successful rate optimization practice, which spans the business spectrum.

Ken Eisdorfer

Since 1986, UAI has provided energy supply management services that reduce utility costs for multi-site industrial, commercial, and governmental customers.  UAI’s core team of unbiased utility rate analysts and deregulated energy procurement experts manage over $2 billion in annualized energy spend and are focused on lowering the cost of utilities for end-use customers. UAI’s comprehensive energy cost management services include deregulated energy procurement, utility rate analysis, utility bill auditing and overall utility bill processing services that result in reduced energy costs and measurable utility savings. For more information on Utilities Analyses, Inc., visit www.utilitiesanalyses.com

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