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Topic: Energy Outlook 2007
February 2007
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Independent Energy Consultants, is committed to helping its clients make well-informed and cost-effective decisions regarding their energy supply and consumption. We are sending you this newsletter to help you understand how energy decisions that are made, or not made, effect your company's bottom line.

With each new year there comes a new wave of legislation, legislators and state utility commissioners. Let's take a look at the electric markets in some states making news and how it affects the climate for businesses operating in those states.

Illinois: January marked the transition from capped rates to market-based rates for Illinois electric users. Major utilities, Commonwealth Edison and Ameren are now setting default rates based on annual auctions conducted each September. The rate structure has been simplified and customers now fall into one of three categories with their default Bundled Electric Service (BES) price determined as shown below.
  • Customers > 3 MW; prices set by the hourly PJM markets
  • Customers 3 MW < 400 kW; annual fixed price set by the auction results. ComEd customers will see a 47% increase in 2007.
  • Customers < 400kW; blended price that changes annually based on 1, 2, & 3 year auction terms. ComEd customers will see a 32% increase in 2007.
The 2007 rates increased dramatically because rates had been frozen for nearly a decade. There are opportunities to save for anyone currently supplied by their regulated utility.

Texas:The lone-star state continues to be the leader in deregulation of electric markets and fostering a competitive environment. With over 50 suppliers, transparent pricing, and the removal of the price-to-beat mechanism in 2007, anyone operating in Texas would be wise to seek alternate supplier offers. For customers not choosing a supplier, they default to the rate offered by the utility’s Affiliate Retail Energy Provider (AREP). Savings compared to the AREPs are attainable now, and should increase when the AREPS seek fuel cost increases that they have voluntarily delayed.

Maryland: New Governor Martin O’Malley has altered the makeup of the state’s Public Service Commission (PSC), but the move will do little in the short-term to ease the pain of another whopping rate increase for customers served by Baltimore Gas and Electric (BG&E). In June 2007, BG&E customers could find themselves paying 68% more than they did last year, and last year brought a 72% rate increase! (The legislature subsequently capped the rate increase at 15%). Delmarva could see a rise in bills of 4.4% and Pepco customers could pay 5.9% more. Maryland’s utilities place customers in one of four categories based on size, and use periodic auctions to set the default Standard Offer Service (SOS) pricing. The largest customers (>600 kW) receive hourly rates that reflect the PJM markets and the rules are designed to move smaller customers there as well. Each of the state’s four utilities (BG&E, Pepco, Delmarva and Allegheny Power) has an active market for customer switching. According to the January 2007 statistics released by the PSC, statewide switching percentages are 22.3% for small C&I, 51.2% for medium C&I and 87.9% for large C&I customers.

Ohio: The states major electric utilities all ended their market development periods by 2006. With competition weak or non-existent in most of the state, the Public Utilities Commission (PUC) approved utility Rate Stabilization Plans through 2008 - to give extra time for the markets to develop. That has not happened and free market supporters continue to call the RSPs a violation of the law that deregulated Ohio’s electric supply. That law requires utilities to offer a competitively bid option as well as market-based standard service after their market development periods ended. The Ohio Supreme Court has heard arguments and ruled that a market-based competitive bid price option should be sought. Previous auctions in the FirstEnergy service territory failed to beat the utility’s regulated rates, and few are optimistic that savings will result from a new round of bidding in any utility service territory. Ohio’s experiment with deregulation is in jeopardy of failure, as its PUC is reluctant to allow true competition and groups representing large industrial customers are now questioning its value.

Connecticut: Competition in Connecticut’s electric market has heated up now that the restructuring transition period has ended and United Illuminating and Connecticut Power and Light are now charging market-based rates. Commercial and Industrial customers have responded to rate increases of 60-90% by seeking supply elsewhere. In January 2006 less than 3% of the C&I customers were shopping, this year the number has jumped to more than 20%. New suppliers have entered the Connecticut market and savings are available for customers willing to shop.

Electric market prices are volatile and utility rates and regulations change frequently. Therefore, it is always good policy to have your energy consumption tracked and to have a procurement strategy in place before opportunities arise. At the present time opportunities to save exist in a number of other states such as, New York, New Jersey, Maine, Massachusetts, and Delaware. Contact Independent Energy Consultants for a free assessment of your electric sourcing opportunities.
Now that natural gas prices and production have returned to pre hurricane Katrina levels, it is noteworthy to mention that they have tripled in price in just 3 years. Is this an aberration or a harbinger of things to come? An argument can easily be made that today’s high prices might seem like a bargain in another 3 years if meaningful action is not taken soon. Let’s examine some of the factors in play.

Demand for natural gas continues to grow, particularly as a fuel source used to meet growing electric demand. Also not widely known, is the impact of the recent ramp-up in the production of ethanol. This alternate fuel, which has environmentalist's cheering and corn growers profiting, consumes a tremendous amount of natural gas to produce.

Lately it seems you cannot turn on your television without seeing a news story, based on fact or fiction, about green house gases (GHG). Regardless of your thought about man’s ability to impact our environment and whether or not it creates a problem, costly regulations limiting emissions are making their way through a number of state houses. This will continue to drive electric producers to use, and even increase, their consumption of clean burning natural gas.

Liquid natural gas (LNG) is being imported and helping to control spot market prices, but reliance on another energy import (like crude oil) does not contribute to a sound U.S. energy strategy. Furthermore, it contributes less than 3% of our needs and the terminals and pipeline infrastructure needed to support LNG at strategic locations is receiving strong opposition from local residents. The not-in-my-backyard (NIMBY) thinking continues to rule the day when it comes to siting new power plants, the use of coal, nuclear plants, transmission lines, gas pipelines, etc. Until our elected officials, industry leaders, financial institutions and consumer advocate groups all come together to solve the siting problems; we will remain just one natural or man-made disaster away from major disruptions in our energy delivery systems.

In response to rising prices, the exploration and production activity in the U.S. has grown at a rapid pace over the past five years. In 2002, we saw 15,000 new gas wells drilled and in 2006 the number grew to more than 32,000. This impressive growth, however, is not keeping pace with declining output from aging wells and wells being removed from service. In the U.S. our production ability peaked at 19.1 Tcf/year in 2001. Since then it has been declining at a rate of 1.3 Tcf/year.

If prior voting records mean anything, the new congress is not likely to favor supply-side solutions to our growing energy needs. Demand-side reductions and the use of alternative fuels will be supported and need to be part of any domestic energy policy, but they alone will only slow the growing gap between supply and demand. Whether it is the constant threat of supply disruptions and/or price manipulation from OPEC, or the nationalization of production facilities in Venezuela, our continued reliance on imports, coupled with the domestic challenges mentioned above, all point toward higher natural gas prices.  Contact Independent Energy Consultants for a free assessment of your natural gas sourcing opportunities.

Contact us for your energy management needs.

email: info@naturalgas-electric.com
phone: (330) 995-2675

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