Commercial utilities are a major expense for all businesses, yet, it’s difficult to understand how these utilities are actually priced and if you’re overpaying.
In many cases, companies think their utility rates are good or average, when in fact, they’re being overcharged for a number of possible reasons.
Though it takes expert-level insight and a thorough utility audit to truly uncover where you may be overpaying on utilities, it’s helpful to explore how utilities are priced in order to gain a better understanding of the utility industry as a whole.
In this article, we will give a brief overview of how these utilities are priced so you can start to take more control and have more awareness of your own spending.
Let’s begin our analysis.
A business utility expense can be considered any cost incurred over a reporting period that relates to the use of utilities.
Generally speaking, these include:
In most cases, there is a fixed portion of your utility expenses and a variable portion. Fixed expenses cover the infrastructure and services needed to deliver the given utilities, and variable expenses are based on your actual consumption of the utility.
Taxes and other miscellaneous charges also play a role in your utility expenses and will vary from state to state.
Your utility costs per square foot are determined by your industry, utility usage, size of business, and location. Since these factors vary widely from business to business, it’s difficult to provide exact data on average utility costs across industries. But, by diving into how utilities are priced, we can start to uncover where you can find savings in these categories.
Electric utility companies place their customers in different pricing tiers that correspond to their unique energy demand (the total amount of energy you need on hand during a reporting period).
You pay a percentage of this energy demand each month even if you don’t use all the energy. You also then have to pay additional fees based on your actual energy consumption.
The utility companies create these pricing tiers and other regulations based on energy tariffs that they compose and submit to the government for approval. There are many different types of tariffs, and depending on your industry and usage, you will qualify for some and not others.
Tariff documents are complex and hard to understand, which is why many companies unknowingly function under the wrong tariffs and spend more than they have to.
The price you pay for gas is also governed by tariffs and varies depending on the size of your business, usage, and location.
Your usage is found by first taking your previous bill’s meter reading and subtracting it from the current reading. This will give you the volume of gas you used in CCFs. The CCFs then need to be multiplied by the BTU Factor which will give you the total amount of billable therms used.
The number of therms used plus your fixed costs will give you your total gas bill.
Errors in gas billing typically occur due to a vendor not following their own contractual terms or if there is an issue with an automatic tariff change.
As with electricity and gas, the cost of water depends on the tariffs you have to follow.
However, measuring usage is quite easy compared to the other utilities.
Water companies simply take a meter reading of how many CCFs you used in a given reporting period and add it to your fixed costs.
Overcharges with water can occur if the meter data is incorrectly entered into a municipality’s computer or if an error occurs with the computer itself.
Sewage billing is based on a percentage of your water use since a lot of water does in fact flow back into the sewer system. Oftentimes, this percentage is 100%.
However, if you’re a business that uses high volumes of water and that water doesn’t go back into the sewer, you may be overspending.
A good example of this would be breweries since a large portion of their water use leaves their facilities in cans and kegs.
The pricing for these services is quite different from the utilities above. About 90% of the U.S. has ‘open’ commercial waste and recycling markets. Meaning the government does not mandate the pricing the companies can charge. The other 10% reside in ‘franchised’ markets, where the rates are set by the government.
So, instead of pricing being regulated by government-approved tariffs, waste management companies are able to write their contracts in a way that benefits themselves and can add additional fees at their discretion. In the open markets, the lack of regulation does lead to lower prices vs franchised markets, but the difference is you must work to make sure your contract terms and conditions are well structured you know for certain you are paying market rates.
As a result, there’s no uniformity in pricing even from the same company. Customers that sign up for the same services will pay different prices depending on the sales rep they interact with. There are incentives for sales reps to charge higher rates, thus, if a customer doesn’t know what the true market rates are, how to obtain those, or how the vendors price their services, then customers will almost always overpay.
It’s also common for these companies to change pricing throughout your contractual period, regardless of the contracted price. Monitoring these expenses each month is crucial as a result.
Telecom pricing and fees typically follow tariffs approved by the government which regulates how much the telecom companies can charge their customers. Tariffs will govern much of the rates (but not all), fees, and outline any recourse for billing errors.
Telecom pricing is complex and working through all the line items on invoices is quite a task. You will want to get copies of your customer service records to understand exactly what you are paying for. It’s not as easy as just looking at the bill.
In simple terms, telecom pricing typically includes:
When there are overcharges with telecom, it’s usually due to misapplied tariffs, taxes, or extra fees.
Considering how complex utility pricing is, it’s not until you take a look under the hood of your invoices that you’ll be able to know if you’re overpaying.
Without expert-level knowledge around utilities, you’re probably overpaying or have overpaid in the past for a variety of different reasons.
This is why P3 Cost Analysts exists. We help you reduce your utility spending in a variety of different ways.
We have the expertise needed to uncover errors in utility billing and also know how to negotiate with utility companies to get the best rates possible for our clients.
In fact, we are able to find savings for 9 out of 10 clients.
A great part about our service is that you don’t pay a dime until you see real savings.
If you’re ready to start saving on utility costs in a risk-free way, reach out to P3 Cost Analysts today.