Solid Energy Advice for Uncertain Times

California isn’t the only place where engineers must make informed energy decisions on behalf of their clients. In fact, the 1998 deregulation of Massachusetts’ electric industry—preceded by the deregulation of natural gas—offers some food for thought.

A new energy-marketing industry sprang up almost overnight, with promises of saving 20 percent or more on the cost of electricity and natural gas. Many commercial and industrial building owners received proposals from competitive energy suppliers. These contracts merit serious and careful scrutiny; engineers should be ready to recommend the best course of action to their clients.

A modest proposal

Consider a very real proposal from a fictitious natural gas marketer, SuperSupplier, promising 15-percent savings to a large commercial customer. A review of that proposal by Energy Economics led to the following observations:

The promise of 15-percent savings is somewhat misleading, because it does not reduce the local distribution charge, the local-distribution adjustment factor (LDAF) or the monthly customer charge.

The quoted prices are lower than the latest current summer rates and projected winter rates from the competitor, Local GasCo, but they are not bargain-basement rates. SuperSupplier would provide minuscule savings in the summer and about $0.10 per therm in winter. Gas prices typically come down in the spring, when the move to a “transportation rate” for the following heating season would be more favorable.

Once an end-user switches from being a regular Local GasCo customer to a transportation customer, the end-user must remain a transportation customer. One can change suppliers, but it is impractical to go back to being a regular Local GasCo customer.

Be a pioneer?

As of last October, Local GasCo had 41,000 commercial and industrial customers. Of those, only 1,600 were purchasing gas from 20 alternate suppliers. By choosing SuperSupplier now, the end-user would be a bit of a pioneer.

The terms of contracts negotiated with gas suppliers can range from a month to a year or more. SuperSupplier proposed a 1- or 2-year term in a contract that would renew automatically unless the end-user gave timely notice of intent to cancel. An automatic renewal can be helpful because it prevents the end-user from having to find a new supplier at the last minute when the contract has expired and prices might be high.

SuperSupplier agrees to give 15 days notice if they want to change their prices upon renewal. This forces the end-user to quickly check prices to avoid getting stuck with a high price in a renewal contract. Still, monitoring and renegotiating a gas contract is no more burdensome than shopping for fuel oil, and the end-user might be able to negotiate more lenient renewal-notice provisions.

Any contract with a gas supplier should obligate the supplier to provide “firm gas” and makes them responsible for all charges related to underdelivery, exceeding their maximum daily quantities or “take-or-pay” clauses. SuperSupplier’s contract meets this requirement.

It’s a good idea to perform a credit check on SuperSupplier to verify that they have the financial means to absorb any unanticipated charges for exceeding their maximum daily quantities and other penalties. Otherwise, if SuperSupplier defaults on the contract, the end-user would be forced to find another supplier with short notice and may end up purchasing gas at inflated prices.

On a transportation rate, Local GasCo bills for the gas are based on meter readings at the building. Other suppliers, however, bill based on the amount of gas delivered to the city gate. In that case, the customer is responsible for line losses —evaporation and leaks—and differences due to metering tolerances, which can amount to 1 percent of supplied gas.

The force majeure clause of the agreement needs careful review. For example, if “acts of God” include unusually cold winters that leave SuperSupplier unable to obtain the gas it needs, its customers are at risk for penalty charges from Local GasCo. In states where the retail gas-transportation business is new, this issue remains untested.

Electricity, too

Building owners can also expect to receive proposals from competitive electricity suppliers. As with the gas proposals, it is important to question what the claimed savings actually mean. Quoted savings percentages only apply to the cost of electrical generation, not to the local-distribution portion of the bill, which can approach two-thirds of the utility cost.

Another trap for the unwary is a common contract provision that obligates the customer to buy both electricity and gas from the same supplier. An attractive deal on electricity can be more than offset by gas charges. Also, any savings this year offer no guarantee on next year.

People have been understandably cautious about switching to alternate suppliers. In April 1999, when the program was new, just over 5,000 of some 2.5 million electricity customers in Massachusetts had switched to alternate suppliers; by September 2000, the numbers were still about the same. That month, the electricity purchased from alternate suppliers was about 220 million kWh out of the almost 4 billion kWh delivered in the state.

On the other hand, more than 90 percent of the electricity purchased from alternative suppliers was sold to large commercial and industrial users. These are consulting engineers’ clients—those that need effective and forward-looking counsel on any savings available from moving to a transportation rate.

The biggest savings—and the biggest risks—occur in the early years. But there may be no benefit in rushing in. The train has definitely not left the station, and it may actually be smarter to invest in using energy wisely—as in making building systems work more effectively—than to shop for a low-cost supplier.

Design-Build and M/E Systems: Some Legal Concerns

Most studies of design-build project delivery have focused on entire projects, but even in traditional projects there are specialty subcontractors who deliver portions of projects via design-build. This practice is increasingly common in the mechanical, electrical, plumbing and fire-protection trades.

There are advantages: Construction of the system can be fast-tracked because procurement and initial construction can overlap final detailing. The specialty subcontractor is a single point of responsibility and may even offer to warrant system performance. Also, there are fewer opportunities for claims or change orders. Lastly, the end-result is likely to be cost-effective, as the subcontractor tailors the materials and methods to its preferences.

However, design delegation is a major regulatory issue emerging from the use of design-build by specialty subcontractors. The concern is the degree to which the architect or engineer of record can properly delegate responsibility for elements of the design to the construction team.

A recent, major controversy ( General Building Contractors of New York State Inc. v. New York State Education Department, 1997 ) was initiated by an organization of contractors that did not want professional design liability imposed upon them, nor did they want to bear the costs of hiring licensed architects and engineers to complete unfinished elements of the design. The contractors claimed that it was illegal for architects of record to delegate design responsibility to entities that are not licensed to perform the work.

The law regarding the propriety of such design delegation is still developing. The emerging rule seems to permit design professionals to delegate certain aspects of designs, provided that the contractors engage properly licensed design professionals who stamp, seal and take responsibility for the delegated design. This rule has been codified in the American Institute of Architects’ standard contract for architectural services.

There is no reason why an engineer working for a specialty subcontractor cannot complete the details of the design as appropriately and accurately as a subconsultant to the architect. In fact, the engineer’s access to pricing, availability and other detailed information may place the contractor’s engineer in a superior position to complete the details of the design.

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