Recent changes in the market have led us to change our long standing view favoring shorter-term fixed-rate energy agreements, in favor now of longer-term fixed-rates. Although the market is bearish short-term, we feel that the very small premium between a 12 month term and a 60 month term is justified by the risk of price increases going forward. We believe the upside to be in the 3-cent/kWh range. Upward movement in short-term pricing will largely be based on weather (if it gets cold suddenly, prices will go up). So, a strategy to pay 1/2–cent/kWh more long-term to avoid a potential 3 cents/kWh of upside risk both short and long term seems prudent. Conversely, the downside opportunity in the current bearish market is ½-1 cent/kWh at best. That is, we feel prices are near the floor and could fall no more than 1 cent, in a best case scenario.

The chart below will help you visualize how significantly the price of natural gas generated electricity for a 5-year term has fallen in the last 12 months.

Summary – Electricity prices are currently very low, upside-risk is medium, downside opportunity is very low. The conclusion to be drawn is that it is advantageous to now lock-in energy prices for a long term (four to five years). Price certainty through 2016 is currently available at a very slight premium to short-term prices.

Factors

• Prices near record lows for calendar year 2012 – 2016
• EPA and other regulatory factors loom and could change prices significantly as regulatory pressures on the market mount. The EPA has delayed it’s cross-states air pollution rule, which has helped prices come down, but as soon as an announcement is made about when this rule will be implemented, prices could rebound.
• Winter weather – to this point forecasts continue to predict a mild winter.  Colder winters cut into reserves driving prices up.
• As of December 23, domestic inventories are at 3,848 Bcf, which is 9.1% above the same time a year ago and 13.7% above the 5-year average. It’s hard to imagine it getting much better (limited downside opportunity).
• Wednesday, January 19, 2012, natural gas closed at a 10 year low settle price of $2.32.

Monopolies are notoriously inefficient because there is no incentive to improve productivity and reduce costs. Electricity monopolies are no exception to the rule. Allowing monopoly utilities to thwart competition, whether by imposing unreasonable costs on customers who shop for electric suppliers or negotiate bilateral agreements with favored suppliers, needlessly increases costs for businesses and slows economic growth.
Electric competition also offers transparent pricing, providing a measure of certainty, something that is sorely lacking in our economy today. Certainty is essential for capital-intensive, long-lived investments like power plants.

Additionally, lower energy costs have a positive ripple effect throughout the economy. Every business uses electricity, some more than others, making energy costs a key part of any budget and therefore a factor in a business’s ability to maintain employees and expand.

Some government agencies understand the relationship between energy prices and job creation. The Rhode Island Public Utilities Commission rejected a proposed power purchase contract between Deepwater Wind (a small offshore wind development) and National Grid in April 2010, because of the job?killing effects of higher electric prices. The Rhode Island PUC was not rejecting all wind generation, but rather a specific project that was far more expensive than other wind generation alternatives.

However, other government organizations still choose to ignore the benefits of market competition and risk losing jobs. The Massachusetts Department of Public Utilities approved a contract between National Grid and Cape Wind with a cost of over $250 per MWh. This despite lower contract bids from several companies. One offer was half the cost of Cape Wind’s bid.

Interventions in the market, like state policies that create subsidies for politically favored generators or mandate uneconomic investments, send a powerful do-not-invest signal to developers and drive out real competitors along with their job opportunities.

Regulators should not be fooled by promises of new jobs from these interventionist policies. The now well-known Solyndra debacle is a perfect example of how manipulating the market is detrimental to long-term job creation.  Such policies lead to higher long-term electric prices, slowing all parts of the economy.

By itself, electric competition cannot rescue a languishing economy, but combined with non-interventionist policies, electric competition can be a catalyst for economic growth throughout the nation.

ABACCUS ranks commercial and industrial markets as well as residential markets in North America. Illinois ranks second most competitive in the commercial market and seventh in the residential market. Pennsylvania ranks fourth in the commercial market and third in the residential market with an excellent rating, the same rating given to Texas and New York.

In Pennsylvania’s first full year of residential competition, 1.4 million customers began shopping for electricity. As of November, 92.3 percent of industrial customers are exercising electric choice with 33 providers. Almost 20 percent of residents in the Keystone state are shopping from the same 33 electricity suppliers with 55 different product offerings.

In Illinois, 94.4 percent of industrial customers are shopping from 26 suppliers. The residential market has lagged the success of Pennsylvania’s because of the state’s highly subsidized residential rates before rate caps expired. Today, real-time pricing is slowly strengthening competition.

Product differentiation in residential markets is beginning in Illinois and Pennsylvania. Constellation Energy, which Exelon is in the process of taking over, offers Consert a user-friendly residential energy management solution that allows consumers to conserve energy and offer it back as additional capacity. Direct Energy offers Comfort Club to residential Pennsylvanians to bundle electricity with heating and air conditioning tune ups and safety checks. And PPL EnergyPlus offers an online billing platform that puts customer hourly load and pricing information at the fingertips of its commercial and industrial customers.

Innovation in the electricity market isn’t just reserved for the most improved markets. New consumer products and services are a constant feature of the most competitive markets. Energy suppliers in Texas have developed prepay offerings coupled with the use of advanced meters and mobile communications. Direct Energy’s Power-To-Go offers prepaid electricity to residential Texans with a new payment channel, pay as you wish, and daily text updates. In New York, consumers can select fixed-price contracts with periods of two to 60 months and green content at levels of 25, 50 or 100 percent renewable content. Improvements in advanced metering, transmission system upgrades and continued innovation in internet and telecommunications products ensures consumers will continue to see steady stream of new products and services.

To continue improving the electricity marketplace in Illinois and Pennsylvania, the ABACCUS report recommends phasing out default electricity. Not surprisingly, the Pennsylvania PUC is already investigating the possibility of phasing out default service. If the PUC decides to pursue this policy Pennsylvania could be the most improved market again in the 2012 ABACCUS report.

A few months before rate caps expired, the Lancaster-Lebanon Intermediate Unit began searching for a way to lower electric bills for schools. They decided to form the Electricity Procurement Program and selected Direct Energy as their alternative supplier. Direct Energy was able to capitalize on their experience with schools and their unique needs; schools use little electricity during summer months when demand is high. Unfortunately, the majority of schools have not taken advantage of the available savings from electric choice in Pennsylvania.

Switching to a competitive electricity supplier has been a slow but steady process across Pennsylvania. Currently, the majority of industrial consumers are shopping, but the number of resident and business consumers remains in the 20 to 30 percent range. The worse shopping rates come from the Met-Ed utility region, where less than three percent of residential consumers are shopping.

Why the slow pace in Pennsylvania? That’s a question Public Utility Commission is trying to answer. Some of the sluggish growth may be due to slowly emerging competition. Beginning in November, Con Edison Solutions began serving Met-Ed residential customers with an offer of 8.05 cents per kilowatt-hour, a 11.5 percent savings compared with the current Met-Ed Price to Compare.

When polled about electric shopping, the vast majority of Pennsylvania residents know they have a choice when it comes to electricity generation, yet they still have not switched. When asked why they are not shopping, many said they didn’t think the amount of savings was worth the hassle. Others reported the switching process was overwhelming or too complicated with so many choices.

While there is little the Pennsylvania Public Utility Commission (PUC) can or should do about the low amount of savings in some areas, websites like ElectricChoice.com specialize in making the shopping process for homes and businesses simple and effective. The PUC will continue to work on other ways to facilitate easy shopping.

One suggestion is to change the frequency of rate recalculations. Instead of utility companies adjusting rates to reflect market prices every quarter, the PUC is considering limiting rate adjustments to twice a year. This policy could induce more shopping by giving consumers less data to consume, but it could also backfire.

Decreasing the amount of price adjustments could make electricity prices less reflective of the marketplace and prevent switching, or make it less likely consumers will be aware of lower rates since their utility bills will rarely change.

The PUC will continue to study this and other recommendations for improving the state’s electricity market, a process that won’t be completed anytime soon. Meanwhile, the electricity market will continue to grow and expand as new suppliers enter the marketplace.

The utilities involved, Pennsylvania Power and Light (PPL) and New Jersey’s Public Service Enterprise Group (PSEG), claim the line will relieve congestion in New Jersey. Congestion occurs when there are not enough lines to deliver the cheap power to areas where the electricity demand is high. This forces more expensive local electricity to meet the demand and customers end up paying higher rates.

In addition to lowering electric rates in New Jersey, the Susquehanna-Roseland line will improve the reliability of the grid. Reliability means fewer opportunities for brown outs as electricity use continues to surge. Reliability is something we take for granted today, but it is serious concerns as electricity usage continues to increase while many power plants near retirement and others may be forced into early retirement to comply with new EPA regulations. Transmission projects like the Susquehanna-Roseland line are critical to ensuring low-cost power in the future.

President Obama has designated the line as one of seven transmission projects that will receive special assistance from the “Rapid Response Team for Transmission.” The special designation is designed to expedite the permit process that can take years or even a decade to complete. The construction of the new line is expected to create 2,000 construction jobs and is the only project with a special federal designation in the heavily populated northeast.

Of the many state and federal agencies required to sign-off on the construction, only the National Park Service has not approved the Susquehanna-Roseland line. The line crosses about four miles of the Delaware Water Gap National Recreation Area, the Appalachian National Scenic Trail and the Middle Delaware National Scenic and Recreational River. The park service is expected to release a draft impact study this fall and give a final decision next fall.

Environmental groups are against the new transmission line, voicing concerns about land disturbance and aesthetics. For example, the new transmission towers will rise from the current 56-80 feet to 165-190 feet tall.

The reason for the current path through the park service lands, according to the utilities, is that the companies already have the right away as the existing line was in place before the area was designated public land. Currently, the only additional right-of-way needed on any park service lands is an additional 50 feet of right-of-way that PPL has requested on a 0.8 mile segment in Pennsylvania.

Yet, environmental groups respond that renewable energy could replace the needed additional capacity. In contrast, the regional transmission organization (PJM) maintains that the project is essential to reliability in the future.

PPL and PSEG hope to have the line in service by 2015.

Existing customers can receive a discount off the incumbent electric distribution utility’s tariff rate. The discount to electric rates would occur at varying levels for a 5-year period. The more hiring or investment a company makes the greater the discount. For example, ac company hiring seven workers with a payroll of at least $5 million would receive the minimum discount of two percent. The same discount could be earned by making at least $50 million in investments on buildings and equipment. At the top of the scale, electricity would be discounted by 20 percent for firms hiring 125 workers with a payroll minimum of $17 million. Companies must also receive funding or incentives from local, state or economic development agencies to be eligible for any discount.

For new customers to receive a discount they must add at least 75 permanent Ohio employees, have a minimum monthly demand of at least 5 MW and meet a variety of other requirements that determine the extent of their discount.

Of course the question on everyone’s mind is who is going to pay extra to offset these discounts. The answer is ratepayers across the state. The proposal assumes consumers would pay the difference between the discounted rates and the otherwise applicable rates (called “Delta Revenue”) on a 20 to 80 split.

Ohio isn’t the first state to attempt this type of electricity economic development, but normally this type of corporate welfare deal is worked out on a case-by-case basis with the local utility. A statewide policy would obviously limit any flexibility within the utility to negotiate the best arrangement for the business and ratepayers.

Nearly two million customers throughout Ohio are already benefiting from lower electricity prices thanks to the competitive market. Overall, retail prices for states with electricity markets have increased at a slower rate than those in non-market states, and commercial customers have seen a two percent decrease while non-market commercial consumers have weathered a three percent increase.

Subsidies to promote economic development distort the Ohio electricity market and encourage large industrial consumers to use more power while regular small business and residential customers pay for electricity they do not use. The PUCO should continue to pursue policies that enhance competition among electricity providers and continue to draw down electricity rates.

Businesses that qualify for these energy discounts may contact Eisenbach Consulting, LLC for assistance in applying for the decreases.

In a hearing conducted by the state House Committee on Consumer Affairs, David Ciarlone, Vice President of the Industrial Energy Consumers of Pennsylvania (IECPA), testified on rising industrial rates. In one year, from 2009 to 2010, rates for industrial customers increased $6 million or 72 percent. Such volatility could lead to more manufacturing fleeing the state.

In one example, a manufacturer located in Lancaster County calculated that for every dollar spent on electricity their competitor was paying $0.78 in 2009. By 2010 the gulf had widened significantly with the competitor paying between $0.53 and $0.63 on every dollar.

Mr. Ciarlone recommended following Ohio’s lead. The Buckeye state charges a one dollar surcharge dedicated to an economic development tariff for job retention and creation. The fund offsets manufacturer’s high electric bills. Other states offer direct concessions to industrial consumers.

But not all parties at the hearing agreed with Mr. Ciarlone, “Deregulation has worked across the board, except for large manufacturers,” said state Rep. Bob Godshall, the committee chairman. “Residential prices have come down. I’m not willing to go back to the regulated market where manufacturers were heavily subsidized.”

Pennsylvania’s electricity rates were lower than the rates of all other Northeastern states in 2010. And 40 percent of customers, representing 68 percent of load, have chosen an alternative electric generation supplier.

So what is the market solution for industrial customers? That remains to be seen. While demand-response programs that curtail electricity based on high prices or emergency needs can lower industrial rates, their affect thus far appears limited. Likewise, Pennsylvania’s new wealth of natural gas has caused some to speculate that the wealth of cheap in-state generation could help lower electricity rates in the future.

While the electricity market will not benefit all residents equally, there can be no doubt that more control and choice for customers is a good thing for the majority of Pennsylvanians.

In a July letter SPP wrote, “EPA regulations could prevent reliable operation of the SPP RTO.” The Texas RTO, ERCOT, expressed similar concerns over the finalization of EPA’s Cross-State Air Pollution Rule (CSAPR) rule, “We fear that many of the coal plants in ERCOT will be forced to limit or shut down operations in order to maintain compliance with the new rule, possibly leading to inadequate operating reserve margins.”

It’s difficult to predict what will ensue if the roughly 30 major regulations are adopted by EPA in their current form so let’s take the ruling most prevalent to electricity rates—the Utility Maximum Achieveable Control Technology (MACT) standards. This ruling is supposed to set emission control technology standards. In other words, the regulation would ensure power plants use the best available technology to reduce hazardous air pollutants (HAP).

The problem is, the proposed standards cannot be met. This isn’t because coal plants are outdated. Since 2001, about 40 generation units have been commissioned or are undergoing construction, yet none of these plants can live up to the proposed MACT rule. In fact, none of the new state of the art coal plants currently under construction will live up to the MACT standards.

Even more disconcerting is the timeline placed on utilities. Electricity companies only have three years to come into compliance with these standards once the rule is finalized. Three years may sound like a long time, but on average it takes four years to retrofit a coal plant with scrubbers and other emission reducing technology.

Not surprisingly, the stringent regulation will result in thousands of megawatts going off the grid as old plants will be decommissioned. Even those with useable life left will be decommissioned simply to meet EPA rules. Overall about 433 units are in danger of being closed. That’s 56 GW or 18 percent of America’s total coal capacity.

Closures and mothballing will cost 54,151 direct jobs at a cost of about $17.8 billion annually. Overall, analysts predict an average rate hike of about 11.5 percent by 2016 depending on the region. Likewise, natural gas prices will surge by 17 percent that same year.

What will Americans gain from these higher electricity prices and loss of jobs? Almost nothing as the health benefits from the MACT rule are statistically undetectable, with cancer risk from exposure to HAPs increasing by .00001 percent.

The MACT rule is just one of the many regulations coming down the pipeline that will severly impair the ability of utilities to keep the lights on at a reasonable cost. If these EPA regulations stand everyone will be paying for it in the form of higher electricity prices and rolling blackouts, regardless of electric choice.

The recent acquisition of Startex Power by Constellation New Energy further demonstrates that competition in Texas appears to be consolidating. Time will tell whether this is good for consumers or not.

When a vast number of customers (830,000 in Texas by Centrica companies) are served by only a handful of suppliers, consumers rarely benefit. Time will be the test and, consumers hope, the Public Utility Commission of Texas will be the judge.

In Pennsylvania, grassroots groups known as the “Tea Party” are voicing their concerns over smart meters stemming from their distrust of state government. Group members in Duquesne Light’s territory, around Pittsburgh, sent around emails encouraging others to respond negatively to a survey asking residents for information to aid in the installation of smart meters. Specifically, the survey asks consumers for usage information to help determine time-of-use rates.

In response, grassroots members expressed worries about invasion of privacy and government being able to shut-off their power. But these fears stem from smart meter debacles in other states and are in fact the opposite of how consumers should view smart meters.

Competitive Enterprise Institute’s William Yeatmen explains that while the idea of smart meters is a win-win, the implementation is often botched by state government, rendering the new technology useless to the consumer.

In Maryland, the Public Service Commission denied Baltimore Gas & Electric’s smart grid proposal, which included the installation of a smart meter that did not allow the customer to see changes in electricity prices. True transparency of pricing signals is the whole point of any grid modernization plan. But when the incentives for a utility are to reap large rewards by promoting vague principles like efficient use and conservation of energy, regardless of their actual success, companies concentrate on the most costly improvements that need continual upgrades. Often times, those improvements do not result in increased consumer control.

As a result of this rent-seeking policy, a July heat wave inconvenienced thousands of customers in the Chesapeake Bay State. With record breaking temperatures, Baltimore Gas & Electric Co. resorted to turning off air conditioners at businesses and homes, which agreed to give the utility control over their thermostats at peak periods in return for cash, to avoid rolling blackouts. Not surprisingly, many Marylanders were upset and blamed the utility for the shortage of cool air.

If true two-way smart meters had been installed, customers would have turned the air down themselves as they watched the price of electricity soar. In other words, peak demand would flatten naturally.

Unfortunately, Maryland public officials don’t believe that ratepayers are fit to manage their electricity use. In contrast, Pennsylvania’s smart meter law places a cap on how much utilities can spend to install the two-way system that will give Pennsylvanians a window into the true price of their electricity.

Transparent smart meter technology allows all consumers to see that the price of electricity is not the same at 4:00 am and 4:00 pm, essential information if we are to keep up with surging energy demands of the future. For many years, the price of electricity has been largely set by elected officials, but controlling any commodity is a privilege and far too important to leave to anyone but energy users. The proper installation of smart meters along with market competition will ensure electricity rates continue to be set by consumers.

ElectricChoice.com helps homes and businesses navigate the choices offered from competing electricity companies by comparing offers side by side in a easy to read format. Compare electricity prices now from trusted, reliable companies.