CHANGING FORTUNES 1997

MARTY SONNENFELD

NEW YORK -- Deregulation of the $208 billion electric power industry is on the way, and the impact on the supermarket industry will be significant.

Beyond these two consensus points, however, opinions diverge, sometimes wildly, about the pace, type, costs and benefits of utility deregulation.

While several different federal mandates are being considered, a patchwork quilt of state-level deregulation efforts is already under way. The quickest action is expected where electric rates are currently highest: New England, New York, California and parts of the upper Midwest.

California, New York and Massachusetts, which have average kilowatt-per-hour rates of 11.5 cents, have all taken action toward deregulation. Ken Hopwood, director of store engineering for Los Angeles-based Certified Grocers of California, said that state legislation known as AB 1890 "will enable some customers to choose their providers as early as 1998.

Some retailers interviewed by SN, while in favor of the deregulation process, are skeptical about its ability to deliver promised savings.

"We support deregulation because we think it should be run on a competitive market basis. We just don't expect to see any radical rate reduction," said Tom Mathews, director of mechanical and energy services for Hannaford Bros., Scarborough, Maine.

As for anticipated savings, Mathews said "the extremist wing of the deregulation business keeps dangling numbers of 35% to 40%. That's impossible. Even 20% to 25% is unlikely. Savings of 5% to 15% are more rational and realistic, unless someone gets extremely creative."

Mathews feels that most of the Northeast will be deregulated "by around the year 2000. States are moving so fast that federal action will be largely irrelevant."

Many supermarket companies whose primary operations are in states with kilowatt-per-hour rates ranging from 4.5 cents to 7.5 cents, the middle of the national range, are adopting a wait-and-see attitude toward deregulation.

Doug Latulippe, maintenance manager and engineer for Lowes Food Stores, Winston-Salem, N.C., believes reform is still about five years away. "We're keeping a watchful eye on it. Everyone's really waiting to see what happens in California," said Latulippe. He added that in North Carolina, no one's expecting a major boon from deregulation. Lowes is not involved in lobbying efforts on either side of the issue because it's too early to tell how this may affect the retailer.

"We don't see things being rushed to the point that we don't have sufficient time to react," said Latulippe.

Marsh Supermarkets, Indianapolis, shares the middle-of-the-road view. Dick Clevenger, Marsh's director of facilities management and mechanical design, said, "Corporately, we realize that Indiana will be involved late in the program -- probably not until after federal action." He estimates that even though local utility companies tout savings of 5% to 10%, "more realistic savings for Marsh Supermarkets will probably be in the range of 3% to 5%."

Still, Clevenger describes deregulation as a "high priority issue" for Marsh. "What we're primarily doing now is fact-finding -- looking at what impact reform is having on other companies."

Jim Riley, senior vice president of engineering for Jitney Jungle Stores of America, Jackson, Miss., sees some slowing down of the deregulation pace.

He is nonetheless excited about the potential benefit.

"We estimate that the long-term impact for us will be a reduction in electric costs of at least 20%, and probably closer to 40%," Riley asserted. Although he doesn't see any quick movement in Washington, Riley does believe that deregulation is inevitable.

Some executives are worried that deregulation may eventually raise their electric rates. Electricity is already the industry's second-largest expense, after labor.

"I'm very cautiously negative about the whole thing," said Jim Ingles, director of store planning and engineering for Associated Food Stores, Salt Lake City. "Associated now pays an average of 3.6 cents per kilowatt-hour," Ingles said. The rates are among the lowest in the nation.

Ingles anticipates rates in Associated Food Stores' region to ultimately rise by 2 to 4 cents per kilowatt-hour, "resulting in an increase of at least 50% to more than 100% in power costs." Associated is setting up its lobbying team, hoping to have some influence on "making a more fair power allocation system, ideally with uniform rates nationwide," according to Ingles.

Jitney Jungle's Riley, however, doesn't envision that kind of rate correction. "I think the individual states will control their own destiny -- they won't let their home turf get hurt."

The jury is also still out on how the industry can best take advantage of utility reform. Ken Hopwood, director of store engineering at Certified Grocers of California believes that "A key to reaping the benefit of deregulation will be in how well we can aggregate our membership into the largest buying blocks. A large group of buyers coordinated by CGC as a single buyer will get the lowest possible rates for the stores."

Many other concerns abound about deregulation. "Buying electricity in a deregulated world will be a tremendous burden for retailers, because what is now a relatively simple task will require several people," declared Hannaford's Mathews. "We'll need to buy electricity on a commodity basis -- daily, weekly, sometimes hourly. We'll need to be in constant sync with when the costs are lowest."