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Utility Industry Deregulation Stimulates New Product and Service Offerings for the Healthcare Industry

Deregulation of the electric and gas utility industry is creating new opportunities for the healthcare industry to manage and reduce costs. As traditional monopoly suppliers of gas and electricity become "unplugged" from state and federal restrictions on geographic service territories and retail gas and electric commodity charges, energy industry executives are implementing new product and service offerings to retain and attract customers, as well as to maintain overall profit margins.

As a traditional intensive user of electric, gas, and other utility services, the healthcare industry is positioned to become a prime beneficiary of utility restructuring initiatives. Large consumers like the healthcare industry can now aggregate loads across multiple subsidiaries and facility sites, consolidate electric, gas and other utility purchases, and take advantage of equipment financing options which energy service companies are offering to attract and lock in commodity supply customers.

Many energy consumers have achieved savings of 5 percent to 20 percent, depending on the nature of the transaction, energy usage and historic utility costs. Additional benefits have been realized through off-balance sheet financing of energy related capital improvements.

While many new products and services appear attractive, each presents its own unique set of risks and costs. Large energy consumers need to evaluate carefully alternatives, risks and benefits of long term arrangements involving multiple energy related products and services in exchange for expected levels of cost savings. Follow several simple, common sense steps to determine and implement the right strategy for your healthcare system.

First, gather information on your utility costs, including historic energy cost and billing information (gas, electric and fuel oil). Where possible, this information should be for a complete calendar year and, where applicable, organized by subsidiary and facility location. Also inventory, by type, age and location, major energy end-use equipment and delivery systems (boilers, heating equipment, chillers, compressed air, lighting, meters, substations, emerging generators, chilled water and/or air distribution systems), including proposed additions or retirements of this equipment associated with facility expansions, renovations or shutdowns. Review proposed capital expansion programs and long term financing plans to identify equipment and facilities which could be candidates for outsourcing to a competitive service company, which would undertake the responsibility for their design, construction, financing and maintenance. This may permit you to focus more capital on core healthcare operations and requirements.

If an immediate cash infusion is required together with a planned replacement of heating and/or cooling facilities in the near future, consider a sale-leaseback (or sale/service agreement) or license of your existing boiler and chiller facilities to a service company, which will assume ownership and/or control of these facilities and responsibility for their operation and maintenance, including fuel and electricity purchasing during a transition period until the new equipment can be installed. The service company also will design, engineer, finance, construct, operate and maintain the equipment. Many service companies are willing to negotiate an upfront cash payment for the purchase or exclusive license of this equipment based upon its appraised or net book value.

Carefully evaluate and negotiate interim purchase/license arrangements, since any costs expended by the service company in acquiring this equipment or license rights will be passed back to you (with interest) via service fees. Structure service payments to minimize increases in overall utility operating costs. In many circumstances, these arrangements serve legitimate objectives of both parties, can be negotiated on fair and open terms and can serve as a good transition to a broader and more comprehensive utility outsourcing arrangement.

Second, contact your local utility to obtain up-to-date information on the status of utility rate tariffs and programs, including requirements associated with off-tariff gas and electricity purchase options, energy conservation incentives and rebates. This will provide the facts concerning the mechanics, risks and benefits of many programs competitive third party energy suppliers will take advantage of and some risks, responsibilities and costs their customers will be expected to assume.

Third, identify major local competitive energy suppliers. A list is available from the state's utility commission. Consider contacting several to discuss and solicit proposals. If your energy bills and/or energy related equipment needs are large enough, consider issuing a request for qualifications to screen potential service providers based upon experience, financial and technical qualifications. If your aggregate utility costs are not significant enough to give bargaining leverage, consider a cooperative joint purchasing arrangement through a trade association or local ad hoc group of companies.

Fourth, once a shortlist is prepared, consider issuing a detailed request for proposals to supply companies. The RFP should provide bidders with the utility usage data and equipment information, provide interested companies with an opportunity to conduct energy audits of your facilities, and solicit responses to specific information concerning their pricing proposal and detailed terms and conditions of any product or service offering made in response to the RFP. The RFP should include a specific timetable for each stage of the process, from RFP release, through energy audits, firm selection and contract negotiation. Consider creating a special review committee of individuals with the expertise (financial, engineering, legal and accounting) to review and evaluate the proposals.

For more complicated or comprehensive projects, consider hiring an independent consultant. Many consultants will provide this service for a small retainer or free of upfront charges in exchange for a percentage of any energy savings realized. These arrangements, while sometimes attractive, need to be evaluated carefully to ensure that your and the consultant's interests are aligned and that any potential fees paid are proportionate to the actual, after the fact, savings realized. Where possible, pay consultants on a time and materials basis, with a defined scope of work and budget.

These are exciting times in the industry for consumers. Deregulation is still in its infancy, with the true benefits of competition and innovation ahead. Systems which plan now will be positioned to maximize the benefits of the sweeping changes and, above all, reduce their utility capital and operating costs and improve profits.

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